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 March 31, 1998
[ ] 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)
5031 So. Ulster Street, Suite 300, Denver, CO 80237
---------------------------------------------------
(Address of principal executive offices)
(303) 770-3500
--------------
(Issuer's telephone number)
11600 E. 53rd Avenue, Unit D, Denver, CO 80239
----------------------------------------------
(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 March 31, 1998 was 2,527,362 shares.
Transitional Small Business Disclosure Format (Check one):
Yes..... No...X...
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ....................................... $ 1,685,057 $ 1,832,677
Accounts receivable, trade ( less allowance for doubtful accounts
of $50,862 in 1998 and $45,703 in 1997) ...................... 2,105,252 2,212,802
Refundable income taxes ......................................... 74,523 74,523
Inventories ..................................................... 1,322,231 1,103,355
Prepaid expenses ................................................ 681,649 416,120
Deferred income taxes ........................................... 14,314 14,314
------------ ------------
Total current assets .............................................. 5,883,026 5,653,791
------------ ------------
Property and equipment ............................................ 1,713,268 1,561,324
Less accumulated depreciation and amortization ................... 390,081 322,616
------------ ------------
1,323,187 1,238,708
------------ ------------
Other Assets:
Intangibles (net of accumulated amortization
of $561,600 in 1998 and 496,221 in 1997) ...................... 8,001,878 8,064,301
------------ ------------
8,001,878 8,064,301
------------ ------------
$ 15,208,091 $ 14,956,800
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................ $ 992,117 $ 1,312,518
Accrued expenses and income taxes ............................... 324,197 396,163
------------ ------------
Total current liabilities .................................... 1,316,314 1,708,681
------------ ------------
Deferred income taxes ............................................. 398,047 398,047
----------- ------------
Shareholders' Equity:
Preferred stock, no par value; 1,000,000 shares authorized;
issued and outstanding 0 in 1998 and 0 in 1997 ............... 0 0
Common stock, $.10 par value; 10,000,000 shares authorized;
issued and outstanding 2,527,362 in 1998 and 1997 ............ 252,736 252,736
Additional paid-in capital ...................................... 5,307,988 5,307,988
Accumulated other comprehensive income .......................... (16,455) (25,124)
Retained earnings ............................................... 7,949,461 7,314,472
============ ============
13,493,730 12,850,072
============ ============
$ 15,208,091 $ 14,956,800
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Sales ................................................. $ 4,013,994 $ 2,251,172
Cost of sales ......................................... 1,741,923 723,114
----------- -----------
Gross profit .......................................... 2,272,071 1,528,058
Selling, general and administrative expenses .......... 1,229,021 720,786
----------- -----------
Income from operations ................................ 1,043,050 807,272
----------- -----------
Other (income) expense:
Interest income ..................................... (6,807) (41,352)
Amortization of intangibles ......................... 65,379 26,313
----------- -----------
58,572 (15,039)
----------- -----------
Income before income taxes ............................ 984,478 822,311
Provision for income taxes ............................ 349,489 291,921
----------- -----------
Net income ............................................ 634,989 530,390
Other comprehensive income (Note 8) ................... 8,669 --
- ----------- -----------
Comprehensive income .................................. $ 643,658 $ 530,390
=========== ===========
Net income per share .................................. $ 0.25 $ 0.21
=========== ===========
Weighted average shares outstanding ................... 2,527,362 2,481,260
=========== ===========
Net income per share - assuming dilution .............. $ 0.25 $ 0.21
=========== ===========
Weighted average shares outstanding - assuming dilution 2,589,341 2,508,473
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................... $ 634,989 $ 530,390
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................... 67,465 20,780
Amortization ............................... 65,379 26,313
(Increase) decrease in assets:
Accounts receivable, trade .............. 107,550 110,868
Refundable income taxes ................. -- 291,921
Inventories ............................. (218,876) (67,412)
Prepaid expenses ........................ (265,529) (149,479)
Increase (decrease) in liabilities:
Accounts payable ........................ (320,401) 134,273
Accrued expenses and income taxes ....... (71,966) (11,920)
----------- -----------
Net cash (used) provided by operations ........... (1,389) 885,734
----------- -----------
Cash flows used by investing activities:
Payments for capital expenditures .............. (151,944) (172,783)
Payments for patents and intangibles ........... (2,956) --
----------- -----------
Net cash used by investing activities ............ (154,900) (172,783)
----------- -----------
Effect of exchange rate changes on cash .......... 8,669 --
Net (decrease) increase in cash .................. (147,620) 712,951
Cash at beginning of period ...................... 1,832,677 3,442,601
----------- -----------
Cash at end of period ............................ $ 1,685,057 $ 4,155,552
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(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, 1997 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 March 31, 1998 are not necessarily indicative
of the results for a full year.
3. Inventory:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory as of March 31, 1998 and December 31, 1997, consists of
the following:
March 31, 1998 December 31, 1997
-------------- -----------------
Raw materials and component parts $ 701,908 $ 605,066
Finished goods 620,323 498,289
------------ -----------
$ 1,322,231 $ 1,103,355
============ ============
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 March 31, 1998.
5
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
5. Earnings per share:
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all periods have been restated to conform to the Statement 128
requirements.
There is no difference between after tax earnings for calculation of basic
earnings per share versus diluted earnings per share. The reconciliation of
the weighted average shares outstanding for purposes of calculating basic
earnings per share versus diluted earnings per share is as follows:
March 31,1998 March 31, 1997
------------- --------------
Weighted average shares
outstanding for basic EPS 2,527,362 2,481,260
Common stock equivalents for
unexercised stock options 61,979 27,213
--------- ---------
Weighted average shares
outstanding for diluted EPS 2,589,341 2,508,473
========= =========
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 and consolidated statements of cash flows 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 $455,559 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.
6
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
6. Acquisition of Delta Play, Ltd. (continued):
The pro forma unaudited results of operations for the three months ended
March 31, 1997, assuming consummation of the purchase as of January 1,
1997, are as follows:
Three Months Ended March 31, 1997
---------------------------------
Net sales $2,703,163
Net income $560,815
Net income per share $0.22
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.
8. Comprehensive Income:
As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. The
prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
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. All
statements, other than statements of historical facts, included in this
report that address activities, events or developments that the Company
expects, believes, intends or anticipates will or may occur in the future,
are forward-looking statements. Forward-looking statements are inherently
subject to risks and uncertainties, many of which cannot be predicted with
accuracy and some of which might not even be anticipated. Future events and
actual results, financial and otherwise, could differ materially from those
set forth in or contemplated by the forward-looking statements herein.
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(R) 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 Kare 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 product liability risk
associated with its existing and future products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Components of Revenues 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 Kare" 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. Revenues from
these acquired product lines have reduced the Company's dependency on
revenues from 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. Beginning 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, 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. In addition,
because the Delta acquisition was effective June 1, 1997, the Company's
first quarter of 1998 includes the results of operations from Delta, while
the first quarter of 1997 does not.
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 Kare" 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 March 31, 1998 Compared to Three Months Ended March 31,
1997
Sales increased 78% to $ 4,013,994 for the first quarter of 1998 compared
to $2,251,172 for the first quarter of 1997. A portion of the sales revenue
increase resulted from sales by Delta. In addition, the sales and marketing
strategy implemented by the Company for the Koala product lines contributed
to the additional sales revenue. The Company continued to increase sales
and marketing efforts through focused marketing programs.
Gross profit for the first quarter of 1998 was $2,272,071 (57% of sales)
compared with $1,528,058 (68% of sales) for the first quarter of 1997. The
gross profit percentage for the first quarter 1998 decreased from the gross
profit achieved for first quarter 1997 primarily because of the lower
margins achieved on Delta's sales along with a higher proportion of sales
of Koala products into distribution channels, where reduced margins are
realized.
Selling, general and administrative expenses increased for the first
quarter of 1998 to $1,229,021 (31% of sales) from $720,786 (32% of sales)
for the same period in 1997. Sales and marketing expenses increased
$329,028 for the first quarter of 1998 compared to first quarter of 1997.
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 subsequent to the first quarter of
1997. These costs were incurred in furtherance of the Company's sales and
marketing strategies discussed above. General and administrative expenses
increased $179,207 for the first quarter of 1998 compared to the first
quarter of 1997. The increase in general and administrative expense was
primarily the result of the inclusion of Delta, the addition of a General
Manager and Controller to Koala's administrative staff and higher
depreciation charges arising from capitalized tooling expenditures from new
products added in 1997.
Net income for the first quarter of 1998 was $634,989 (16% of sales)
compared with $530,390 (24% of sales) for the first quarter of 1997. 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 (assuming dilution) for the first quarter of
1998 increased 19% compared to the first quarter of 1997. The percentage
increase in net income per share (assuming dilution) was lower than the
percentage increase in net income primarily as a result of an increase in
the weighted average number of shares outstanding of 80,868 shares.
Liquidity and Capital Resources
The Company finances its business activities primarily from cash provided
by operating activities. Cash provided (used) by operating activities for
the three months ended March 31, 1998 and 1997 was $ ($1,389) and $885,734,
respectively. Working capital as of March 31, 1998 and December 31, 1997
was $4,566,712 and $3,945,110, respectively, and cash balances were
$1,685,057 and $1,832,677 for the same periods, respectively. The decrease
in cash provided by operating activities for the first quarter of 1998
compared to the first quarter of 1997 is due primarily to a combination of
an increase in inventories of raw materials and finished goods during the
quarter ended March 31, 1998, large payments of accounts payable in March
1998 and the receipt of a large tax refund in March 1997.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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.
The Company obtained a $2.0 million unsecured line of credit from a bank in
June 1997. 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
amounts outstanding under the credit facility as of March 31, 1998.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1 - 5. None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27.1 March 31, 1998 Financial Data Schedule.
Exhibit 27.2 March 31, 1997 Financial Data Schedule, restated.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
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
May 14, 1998 /s/Mark A. Betker
- ------------ -----------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
May 14, 1998 /s/Jeffrey L. Vigil
- ------------ -------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,685,057
<SECURITIES> 0
<RECEIVABLES> 2,156,114
<ALLOWANCES> (50,862)
<INVENTORY> 1,322,231
<CURRENT-ASSETS> 5,883,026
<PP&E> 1,713,268
<DEPRECIATION> (390,081)
<TOTAL-ASSETS> 15,208,091
<CURRENT-LIABILITIES> 1,316,314
<BONDS> 0
0
0
<COMMON> 252,736
<OTHER-SE> 13,240,994
<TOTAL-LIABILITY-AND-EQUITY> 15,208,091
<SALES> 4,013,994
<TOTAL-REVENUES> 4,013,994
<CGS> 1,741,923
<TOTAL-COSTS> 1,741,923
<OTHER-EXPENSES> 1,287,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 984,478
<INCOME-TAX> 349,489
<INCOME-CONTINUING> 634,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 634,989
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,155,552
<SECURITIES> 0
<RECEIVABLES> 1,587,973
<ALLOWANCES> (42,326)
<INVENTORY> 511,092
<CURRENT-ASSETS> 6,501,409
<PP&E> 1,036,057
<DEPRECIATION> (186,276)
<TOTAL-ASSETS> 11,003,945
<CURRENT-LIABILITIES> 452,785
<BONDS> 0
0
0
<COMMON> 248,126
<OTHER-SE> 10,060,834
<TOTAL-LIABILITY-AND-EQUITY> 11,003,945
<SALES> 2,251,172
<TOTAL-REVENUES> 2,251,172
<CGS> 723,114
<TOTAL-COSTS> 723,114
<OTHER-EXPENSES> 705,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 822,311
<INCOME-TAX> 291,921
<INCOME-CONTINUING> 530,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 530,390
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
