U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from __________ to ____________
Commission file number 0-22464
-------
KOALA CORPORATION
-----------------
(Exact name of small business issuer
as specified in its charter)
Colorado 84-1238908
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11600 E 53rd Ave. Unit D, Denver, CO 80239
------------------------------------------
(Address of principal executive offices)
(303) 574-1000
--------------
(Issuer's telephone number)
______________________________________________
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ...X... No......
The number of shares outstanding of the issuer's common stock, $.10 par value as
of September 30, 1997 was 2,525,328 shares.
Transitional Small Business Disclosure Format (Check one):
Yes..... No...X...
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash ................................................................. $ 637,591 $ 3,442,601
Accounts receivable, net of allowance
for doubtful accounts ............................................. 2,417,495 1,656,515
Refundable income taxes .............................................. 0 338,200
Inventory ............................................................ 1,010,028 443,680
Prepaid expenses ..................................................... 503,703 82,460
Deferred income taxes ................................................ 10,900 10,900
----------- -----------
Total current assets ................................................... 4,579,717 5,974,356
----------- -----------
Equipment, net of accumulated depreciation ............................. 1,191,280 697,789
----------- -----------
Other Assets
Intangibles and patents, net of accumulated
amortization ....................................................... 8,102,735 3,679,057
----------- -----------
Total other assets ..................................................... 8,102,735 3,679,057
----------- -----------
$13,873,732 $10,351,202
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities
Current Liabilities
Accounts payable ..................................................... $ 1,121,575 $ 273,511
Accrued expenses ..................................................... 60,670 56,921
Accrued income taxes ................................................. 213,937 0
----------- -----------
Total current liabilities .............................................. 1,396,182 330,432
----------- -----------
Long-Term Liabilities .................................................. 0 0
----------- -----------
Deferred Income Taxes .................................................. 242,200 242,200
----------- -----------
Shareholders' Equity
Preferred stock, no par value, authorized 1,000,000
shares; none issued and outstanding ............................... 0 0
Common stock, $.10 par value, authorized 10,000,000 ------------------ --
shares; issued and outstanding 2,525,328 .......................... 252,533 248,126
Additional paid in capital ........................................... 5,278,340 4,651,884
Retained earnings .................................................... 6,704,477 4,878,560
----------- -----------
Total shareholders' equity ............................................ 12,235,350 9,778,570
----------- -----------
$13,873,732 $10,351,202
=========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales ................................. $ 4,048,932 $ 2,433,048 $ 9,340,926 $ 6,739,073
Cost of sales .............................. 1,700,986 894,253 3,615,529 2,519,194
----------- ----------- ----------- -----------
Gross profit ............................... 2,347,946 1,538,795 5,725,397 4,219,879
----------- ----------- ----------- -----------
Selling, general and administrative expenses 1,260,246 681,308 2,857,808 1,871,272
----------- ----------- ----------- -----------
Operating Income ........................... 1,087,700 857,487 2,867,589 2,348,607
----------- ----------- ----------- -----------
Other (income) expenses .................... (19,314) (47,014) (97,541) (113,973)
Amortization of intangibles and patents .... 71,625 27,900 134,251 77,199
----------- ----------- ----------- -----------
Income before provision
for income taxes ........................ 1,035,389 876,601 2,830,879 2,385,381
Provision for income taxes ................. 367,563 319,959 1,004,962 870,664
----------- ----------- ----------- -----------
Net Income ................................ $ 667,826 $ 556,642 $ 1,825,917 $ 1,514,717
=========== =========== =========== ===========
Net Income per Share ...................... $ 0.26 $ 0.22 $ 0.72 $ 0.59
=========== =========== =========== ===========
Weighted average shares outstanding ........ 2,607,061 2,571,490 2,547,628 2,569,408
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
Increase (Decrease) in Cash September 30,
1997 1996
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 1,825,917 $ 1,514,717
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ................................. 92,287 55,584
Amortization ................................. 134,251 77,199
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable, trade ................ (604,481) (545,266)
Refundable income taxes ................... 338,200 0
Inventory ................................. 2,115 (636,114)
Prepaid expenses .......................... (395,283) (318,021)
Increase (decrease) in liabilities:
Accounts payable .......................... 706,829 54,549
Accrued expenses .......................... (102,742) (24,811)
Accrued income taxes ...................... 213,937 169,430
----------- -----------
Net cash provided by operations .................... 2,211,030 347,267
----------- -----------
Cash flows from investing activities:
Payments for capital expenditures ................ (401,124) (272,907)
Payments for deposits ............................ 0 (9,895)
Purchase of Activities Unlimited, LLC ............ 0 (500,000)
Purchase of Delta Play, Ltd., net of cash acquired (4,594,455) 0
Payments for patents and intangibles ............. (20,461) (15,448)
----------- -----------
Net cash used by investing activities .............. (5,016,040) (798,250)
----------- -----------
Net (decrease) in cash ............................. (2,805,010) (450,983)
Cash at beginning of period ........................ 3,442,601 2,994,130
=========== ===========
Cash at end of period .............................. $ 637,591 $ 2,543,147
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1. Description of business and principles of consolidation:
Koala Corporation and its subsidiaries (the "Company") is engaged in
developing, designing, distributing, and marketing infant and child
protection products and children's activity equipment for commercial,
institutional and recreational establishments. The consolidated financial
statements include the accounts of Koala Corporation and all subsidiaries.
All significant inter-company accounts and transactions have been
eliminated in consolidation. The operations of Delta Play, Ltd. are
included in the accompanying financial statements from June 1, 1997, the
effective date of its acquisition. See note 6 below.
2. Unaudited information:
The accompanying financial statements are presented in accordance with the
requirements of Form 10-QSB and consequently do not include all of the
disclosures normally required by generally accepted accounting principles
or those normally made in the Company's annual Form 10-KSB filing.
Accordingly, the reader of this Form 10-QSB should refer to the Company's
10-KSB for the year ended December 31, 1996 for further information.
The quarterly financial information has been prepared in accordance with
the Company's customary accounting practices and has not been audited. In
the opinion of management, the information presented reflects all
adjustments necessary for a fair statement of interim results. All such
adjustments are of a normal and recurring nature. The results of operations
for the interim period ended September 30, 1997 are not necessarily
indicative of the results for a full year.
3. Inventory:
<TABLE>
<CAPTION>
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory as of September 30, 1997 and December 31, 1996, consists
of the following:
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Raw materials and component parts $ 572,133 $ 62,879
Finished goods 437,895 380,801
------------ ------------
$1,010,028 $ 443,680
========== ============
</TABLE>
4. Credit Facility:
The Company obtained a $2.0 million unsecured line of credit in June 1997.
The line of credit may be used for short-term working capital needs and
future acquisitions. There are no compensating balance requirements and the
credit facility requires compliance with financial loan covenants related
to debt levels compared to annualized cash flows from operations. The
credit facility terminates on June 24, 1998. There were no amounts
outstanding under the credit facility as of September 30, 1997.
5
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
5. Earnings per share:
Net income per share is computed based upon the weighted average number of
common shares and dilutive common equivalent shares outstanding during the
period using the treasury stock method. Dilutive common equivalent shares
consist of stock options and warrants. Fully diluted and primary earnings
per share are the same amounts for all periods presented.
In February 1997, the Financial Accounting Standards Boards issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. For the
three months ended September 30, 1997 and September 30, 1996 and the nine
months ended on the same dates, the impact of Statement 128 on the
calculation of primary and fully diluted earnings per share is not expected
to be material.
6. Acquisition of Delta Play, Ltd.:
On June 23, 1997, the Company acquired substantially all of the assets of
Delta Play, Ltd.(Delta), a leading provider of custom indoor and outdoor
modular play systems based in Vancouver, British Columbia. The acquisition
was effective June 1, 1997 and was accounted for as a purchase. Results of
operations of Delta were included in the Company's consolidated statements
of income beginning on the effective date.
As initial consideration, the Company paid $4,180,609 cash and issued
40,000 shares of Koala Corporation common stock valued at $600,000. In
addition, costs related to the acquisition of approximately $446,076 were
incurred. The purchase agreement also provides for additional consideration
in the form of cash payments if certain operating performance criteria are
met by Delta over the twelve-month period from June 1, 1997 to May 31,
1998. The range of additional consideration is C$900,000 (US$648,000) to
C$1,500,000 (US$1,080,000). If minimum performance is not achieved, no
additional consideration will be payable. Any subsequent payment will be
allocated to cost in excess of the fair value of assets acquired.
<TABLE>
<CAPTION>
The pro forma unaudited results of operations for the nine months ended
September 30, 1996 and 1997, assuming consummation of the purchase as of
January 1, 1996 and 1997, are as follows:
Nine Months Ended September 30
------------------------------
1997 1996
---- ----
<S> <C> <C>
Net sales .......... $11,119,400 $ 9,650,900
Net income ......... 1,929,200 1,637,276
Net income per share 0.74 0.63
</TABLE>
6
<PAGE>
7. Foreign Currency Translation:
Foreign currency transactions and financial statements of foreign
subsidiaries are translated into U.S. dollars at prevailing or current
rates respectively, except for revenue, costs and expenses which are
translated at average current rates during each reporting period. Gains and
losses resulting from foreign currency transactions are included in income
currently.
7
<PAGE>
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that describe the Company's
business and the expectations of the Company and management. These statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those set forth. These risks and uncertainties
include, but are not limited to, the Company's reliance on the revenues from a
major product, the Koala Bear Kare(TM) Baby Changing Station, which has
generated a substantial amount of the Company's revenues; the uncertainties
associated with the introduction of new products; management of growth,
including the ability to attract and retain qualified employees; the ability to
integrate its Delta Play acquisition and any other acquisition that the Company
may make and the costs associated with such acquisitions; dependence on Mark
Betker, its chief executive officer; substantial competition from larger
companies with greater financial and other resources than the Company; the
success of its Koala Kids marketing strategy; its dependence on suppliers for
manufacture of some of its products; currency fluctuations and other risks
associated with foreign sales and foreign operations; quarterly fluctuations in
revenues, income and overhead expense; and potential products liability risk
associated with its existing and future products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Components of Revenue and Expenses
The Company's revenues are derived primarily from the sale of Baby Changing
Stations, disposable sanitary liners for the Baby Changing Stations, Child
Protection Seats, Infant Seat Kradles, and Booster Buddy seats which are sold
primarily to commercial, institutional, and recreational facilities such as
shopping centers, retail establishments, restaurants, sports and recreational
facilities, and other public buildings. In addition, in furtherance of the
Company's "Koala Kids" strategy discussed below, the Company acquired certain
assets of Activities Unlimited, a developer and distributor of commercial-use
children's activities products at the end of first quarter 1996 and Delta Play,
Ltd. ("Delta"), a leading provider of custom indoor and outdoor modular play
systems, in June 1997. It is anticipated that revenues from these companies will
reduce the Company's dependency on the sale of Baby Changing Stations.
Cost of sales consists of components manufactured for the Company and direct
labor and manufacturing overhead incurred by the Company. All major components
are manufactured by outside vendors. Direct labor and manufacturing overhead
relate to the assembly of the products. In September 1996, the Company
sub-contracted out the assembly operations for the Baby Changing Stations, Child
Protection Seats and Infant Seat Kradles.
Selling, general, and administrative expenses consist primarily of executive and
office salaries, related payroll taxes, advertising expenses, and other
miscellaneous selling expenses.
The Company's quarterly revenues and net income are subject to fluctuation based
on customer order patterns and Company shipping activity. Because of these
fluctuations, comparisons of operating results from quarter to quarter for the
current year or for comparable quarters of the prior year may be difficult.
Except as set forth below, these fluctuations are not expected to be significant
when considered on an annual basis.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Acquisition
In June 1997, the Company acquired substantially all of the assets of Delta for
cash and stock totaling $4,780,609. Based in Vancouver, British Columbia, Delta
and its affiliates generated operating income before taxes of approximately $1.1
million (U.S.) on sales of $4.5 million (U.S.)
for its fiscal year ended March 31, 1997.
Primary customers for Delta's play systems include family entertainment centers,
quick service restaurants, shopping centers and theme parks. Delta's markets are
global in nature, with over one-half of sales occurring outside of North America
during the fiscal year ended March 31, 1997. The Delta acquisition is intended
to add to the Company's expanding umbrella of product lines under its "Koala
Kids" marketing strategy. This strategy is intended to allow the Company to
target a much broader age group within the commercial child protection and
activities market and to help further establish the Company as a leading
provider of products that help commercial organizations create "family friendly"
atmospheres for their patrons.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Sales increased 66% to $ 4,048,932 for the third quarter of 1997 compared to
$2,433,048 for the third quarter of 1996. The majority of the sales revenue
increase resulted from sales by Delta, reflecting the first full quarter of
operating activities since the Delta acquisition. In addition, the sales and
marketing strategy implemented by the Company for the Koala product lines
contributed to the additional sales revenue for 1997. The Company continued to
increase sales and marketing efforts through focused marketing programs, and the
addition of sales personnel during 1997 and 1996.
Gross profit for the third quarter of 1997 was $2,347,946 (58% of sales)
compared with $1,538,795 (63% of sales) for the third quarter of 1996. The gross
profit percentage for the third quarter 1997 decreased from the gross profit
achieved for third quarter 1996 primarily because of the lower margins achieved
on Delta's sales along with higher sales of Koala products to distributors at
reduced margins. These gross profit reductions were offset somewhat by gross
margin improvements from price reductions achieved in the cost of raw materials
and component parts and the change to sub-contracted assembly in September 1996.
Selling, general and administrative expense increased for the third quarter of
1997 to $1,260,246 (31% of sales) from $681,308 (28% of sales) for the same
period in 1996. Sales and marketing expense increased $536,234 for the third
quarter of 1997 compared to third quarter of 1996. These cost increases were due
to the inclusion of Delta and the higher level of sales achieved and included
costs for various marketing programs, commissions paid to manufacturers sales
representatives and salaries of the sales and marketing personnel added in the
third quarter of 1997. These costs were incurred in furtherance of the Company's
sales and marketing strategies discussed above.
General and administrative expense increased $42,704 for the third quarter of
1997 compared to the third quarter of 1996. The increase in general and
administrative expense was primarily the result of the addition of a General
Manager to Koala's administrative staff as well as Controllers at both Koala and
Delta. These cost increases were offset by cost reductions obtained by more
efficient management of collections, accounting, and investor relations
activities.
Net income for the third quarter of 1997 was $667,826 (16% of sales) compared
with $556,642 (23% of sales) for the third quarter of 1996. This represents a
20% increase in net income. The lower margins obtained from Delta's sales
contributed to the decrease in net income as a percentage of sales. Net income
per share for the third quarter of 1997 increased 18% compared to the third
quarter of 1996. The percentage increase in net income per share was lower than
the percentage increase in net income primarily as a result of an increase in
common stock equivalents of 35,571 shares.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Sales increased 39% to $9,340,926 for the nine months ended September 30, 1997
compared to $6,739,073 for the same period of 1996. The increased sales were
equally provided by sales from Delta for the four months following the Delta
acquisition and the results from continued expenditures made to expand sales and
marketing efforts of Koala products.
10
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996 (continued)
Gross profit for the nine months ended September 30, 1997 was $5,725,397 (61% of
sales) compared with $4,219,879 (63% of sales) in 1996. The gross profit
percentage for the nine months in 1997 was lower than the 1996 period due
primarily to the lower margins achieved from Delta's sales as well as higher
sales of Koala products to distributors at reduced margins. The Company
continued to benefit from efforts to reduce product costs during 1997. At the
same time, the savings from these product cost reductions were re-invested in
expansion of dealer/distribution markets which the Company anticipates will
result in higher sales volume.
Selling, general and administrative expenses for the nine months ended September
30, 1997 increased to $2,857,808 (31% of sales) from $1,871,272 (28% of sales)
for the same period in 1996. Sales and marketing expenses increased by $891,979
for the nine months ended September 30, 1997. This increase is directly
attributable to the inclusion of Delta and the growth in sales over this period
as well as the continued expansion of new sales and marketing strategies.
General and administrative expenses increased $94,557 for the nine months ended
September 30, 1997 compared to 1996. As noted above, the relatively small
increase in general and administrative expense compared to the sales increase
was primarily the result of the inclusion of Delta and from cost reductions
obtained by more efficient management of collections, accounting, and investor
relations activities.
Net income for the nine months ended September 30, 1997 was $1,825,917 (20% of
sales) compared with $1,514,717 (22% of sales) for 1996. This represents a 21%
increase in net income. The lower margins obtained from Delta's sales
contributed to the decrease in net income as a percentage of sales. Net income
per share for the nine months ended September 30, 1997 increased 22% to $0.72
per share compared to $0.59 per share for the nine months ended September 30,
1997. The percentage increase in net income per share was higher than the
percentage increase in net income primarily as a result of a decrease in common
stock equivalents of 21,780 shares.
Liquidity and Capital Resources
The Company finances its business activities primarily from cash provided by
operating activities. Cash provided by operating activities for the nine months
ended September 30, 1997 and 1996 was $2,211,030 and $347,267, respectively.
Working capital as of September 30, 1997 and December 31, 1996 was $3,183,535
and $5,643,924, respectively, and cash balances were $637,591 and $3,442,601 for
the same periods, respectively.
The Company has historically utilized its operating cash flow to expand the
Company's marketing activities, for product development, and acquisitions of new
products and companies as well as for working capital purposes. As discussed
above, in June 1997 the Company utilized $4,180,609 in cash generated during the
first six months of 1997 and existing cash reserves to purchase certain assets
of Delta. This is the principal reason for the decrease in working capital and
cash balances at September 30, 1997.
In anticipation of the impact of the Delta acquisition on cash reserves and
working capital, the Company obtained a $2.0 million line of credit from a bank.
Management expects to utilize the credit facility periodically for short-term
working capital needs and for short-term financing of future acquisitions. The
interest rate on amounts borrowed under the line of credit ranges from LIBOR
plus 2.25% to LIBOR plus 2.75%. There were no borrowings against the line of
credit as of September 30, 1997.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1 - 5. None
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On July 8, 1997, the Company filed a Form 8-K to report the
acquisition of Delta Play, Ltd. The Company filed Form 8-K/A on
September 8, 1997 as an amendment to the July 8, 1997 8-K.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
KOALA CORPORATION
November 13, 1997 /s/Mark A. Betker
- ----------------- -----------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
November 13, 1997 /s/Jeffrey L. Vigil
- ----------------- -------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 637,591
<SECURITIES> 0
<RECEIVABLES> 2,464,953
<ALLOWANCES> 47,458
<INVENTORY> 1,010,028
<CURRENT-ASSETS> 4,579,717
<PP&E> 1,441,475
<DEPRECIATION> 250,195
<TOTAL-ASSETS> 13,873,732
<CURRENT-LIABILITIES> 1,396,182
<BONDS> 0
0
0
<COMMON> 252,533
<OTHER-SE> 11,982,817
<TOTAL-LIABILITY-AND-EQUITY> 13,873,732
<SALES> 9,340,926
<TOTAL-REVENUES> 9,340,926
<CGS> 3,615,529
<TOTAL-COSTS> 3,615,529
<OTHER-EXPENSES> 2,854,808
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,830,879
<INCOME-TAX> 1,004,962
<INCOME-CONTINUING> 1,825,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,825,917
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
