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 JUNE 30, 1999
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission file number 0-22464
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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 Avenue, 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 August 12, 1999 was 3,133,786 shares.
Transitional Small Business Disclosure Format (Check one):
Yes..... No...X..
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents ....................................... $ 83,083 $ 6,493,570
Accounts receivable ( less allowance for doubtful accounts
of $78,394 in 1999 and $111,444 in 1998) ..................... 6,658,238 5,781,256
Inventories ..................................................... 4,231,936 3,581,137
Prepaid expenses and other ...................................... 1,369,037 838,109
------------ ------------
Total current assets .............................................. 12,342,294 16,694,072
------------ ------------
Property and Equipment: ........................................... 3,695,380 2,991,182
Less accumulated depreciation .................................... 806,539 559,068
------------ ------------
2,888,841 2,432,114
------------ ------------
Other Assets:
Intangibles (net of accumulated amortization of $1,307,900
in 1999 and $793,821 in 1998) ................................. 28,891,465 22,479,014
------------ ------------
Total Assets ..................................................... $ 44,122,600 $ 41,605,200
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
-----------------------------------
Current Liabilities:
Accounts payable ................................................ $ 1,876,319 $ 1,721,886
Accrued expenses and income taxes ............................... 648,762 375,219
Current portion of long-term debt ............................... -- 5,865,043
------------ ------------
Total current liabilities .................................... 2,525,081 7,962,148
------------ ------------
Long Term Liabilities:
Deferred income taxes ........................................... 645,000 645,000
Long-term debt, net of current portion .......................... 13,748,818 11,502,271
------------ ------------
Total long-term liabilities .................................. 14,393,818 12,147,271
------------ ------------
Total Liabilities ................................................. 16,918,899 20,109,419
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized;
issued and outstanding - none ................................ -- --
Common stock, $.10 par value, 10,000,000 shared authorized;
issued and outstanding - 3,109,836 in 1999 - 2,847,362 in 1998 310,984 284,736
Common stock to be issued, 47,900 in 1999 and 77,118 in 1998 .... 1,000,000 1,297,903
Additional paid in capital ...................................... 13,573,182 9,620,174
Other comprehensive loss (see Note 7) ........................... (309,133) (121,160)
Retained earnings ............................................... 12,628,668 10,414,128
------------ ------------
Total shareholders' equity ....................................... 27,203,701 21,495,781
------------ ------------
Total Liabilities and Shareholders' Equity ........................ $ 44,122,600 $ 41,605,200
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE>
KOALA CORPORATION
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ....................................... $ 9,150,995 $ 4,429,581 $16,450,422 $ 8,443,575
Cost of sales ............................... 4,397,635 1,888,057 8,003,610 3,629,980
----------- ----------- ----------- -----------
Gross profit ................................ 4,753,360 2,541,524 8,446,812 4,813,595
Selling, general and administrative expenses 2,315,261 1,309,598 4,137,097 2,538,619
Amortization of intangibles ................. 255,549 65,379 514,079 130,758
----------- ----------- ----------- -----------
Income from operations ...................... 2,182,550 1,166,547 3,795,636 2,144,218
----------- ----------- ----------- -----------
Other (income) expense:
Interest expense .......................... 245,920 -- 354,479 --
Other (income) expense, net ............... (25,949) (33,377) 7,763 (40,184)
----------- ----------- ----------- -----------
Income before income taxes .................. 1,962,579 1,199,924 3,433,394 2,184,402
Provision for income taxes .................. 696,716 425,974 1,218,854 775,463
----------- ----------- ----------- -----------
Net income .................................. $ 1,265,863 $ 773,950 $ 2,214,540 $ 1,408,939
=========== =========== =========== ===========
Net income per share - basic ................ $ 0.40 $ 0.31 $ 0.72 $ 0.56
=========== =========== =========== ===========
Weighted average shares outstanding - basic . 3,155,149 2,527,362 3,073,255 2,527,362
=========== =========== =========== ===========
Net income per share - diluted .............. $ 0.39 $ 0.30 $ 0.69 $ 0.54
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 3,284,658 2,603,447 3,190,656 2,596,394
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
KOALA CORPORATION
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
June 30
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 2,214,540 $ 1,408,939
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ......................................... 248,407 116,375
Amortization ......................................... 514,079 130,758
(Increase) decrease in operating assets:
Accounts receivable and other receivables ......... (490,792) 71,106
Inventories ....................................... (530,799) (330,639)
Prepaid expenses and other ........................ (591,512) (422,685)
Increase (decrease) in operating liabilities:
Accounts payable .................................. (74,453) (444,337)
Accrued expenses and income taxes ................. 391,308 (146,548)
------------ ------------
Net cash provided by operating activities .................. 1,680,778 382,969
------------ ------------
Cash flows from investing activities:
Payments for capital expenditures ........................ (627,146) (295,939)
Purchase of Superior Foam, net of cash acquired .......... (4,983,010) --
Purchase of Park Structures, net of cash acquired ........ (16,282,982) --
Payments for patents and intangibles ..................... (14,364) (53,821)
------------ ------------
Net cash used by investing activities ...................... (21,907,502) (349,760)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings ....................... 14,885,000 --
Payments on long-term borrowings ......................... (3,556,798) --
Sale of common stock, net of expenses .................... 2,676,008 --
------------ ------------
Net cash provided by financing activities .................. 14,004,210 --
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (187,973) (24,061)
Net increase (decrease) in cash and cash equivalents ....... (6,410,487) 9,148
Cash and cash equivalents at beginning of period ........... 6,493,570 1,832,677
------------ ------------
Cash and cash equivalents at end of period ................. $ 83,083 $ 1,841,825
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
1. 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, 1998 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 June 30, 1999 are not necessarily indicative
of the results for a full year.
2. Inventory:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory as of June 30, 1999 and December 31, 1998, consists of
the following:
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials and component parts $ 3,640,741 $ 2,832,314
Finished goods 591,195 748,823
------------ ------------
$ 4,231,936 $ 3,581,137
============ ============
3. Credit Facility:
The Company obtained a $15.0 million secured line of credit on December 16,
1998. The line of credit is secured by substantially all of the assets of
the Company. 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 and is payable in full on
December 16, 2001. Interest payments are required at least every three
months at a fluctuating rate per annum equal to the applicable "Reserve
Adjusted LIBOR Rate, 7.39%" at June 30, 1999. A commitment fee in the
amount of .25% is payable quarterly in arrears based on the average daily
unused portion of the line. There was a balance outstanding of $12,730,000
as of June 30, 1999.
4. Earnings Per Share:
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:
5
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
4. Earnings Per Share: (continued):
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average
shares outstanding
for basic EPS .............. 3,107,249 2,527,362 3,049,305 2,527,362
Common stock
to be issued .............. 47,900 -- 23,950 --
Common stock
equivalents for
unexercised stock
options .................... 129,509 76,085 117,401 69,032
Weighted average
shares outstanding
for diluted EPS ............ 3,284,658 2,603,447 3,190,656 2,596,394
</TABLE>
5. Acquisitions:
Acquisition of Superior Foam:
On March 26, 1999 the Company acquired substantially all the assets of
Superior Foam & Polymers, Inc., a provider of children's foam activities
products located near Austin, Texas. The acquisition was effective March 1,
1999 and was accounted for as a purchase. Results of operations of Superior
Foam were included in the Company's consolidated statements of income
beginning on the effective date.
As initial consideration, the Company paid $5.0 million cash, net of a
$200,000 holdback, and will issue 47,900 shares of Koala Corporation common
stock valued at $1.0 million on the effective date. The Company paid the
cash portion of the purchase price with cash generated from both internal
operations and an advance on the Company's Line of Credit in the amount of
$4.6 million. In addition, estimated acquisition costs of $50,000 were paid
or accrued. The initial consideration and acquisition costs were allocated
to tangible assets based on relative fair value, with the remaining balance
allocated to proprietary trade secrets, trade names, trade marks and
goodwill and recorded as intangible assets. The acquisition intangible
costs will be amortized using the straight-line method using estimated
useful lives ranging from 5 to 30 years.
Acquisition of Park Structures:
On December 16, 1998, the Company acquired substantially all of the assets
of Park Structures, Inc., a provider of children's outdoor modular play
systems based in Coral Springs, Florida. The acquisition was effective
December 16, 1998 and was accounted for as a purchase. Results of
operations of Park Structures were included in the Company's consolidated
statements of income beginning on the effective date. The initial
consideration paid for Park Structures was $13,865,043, for which the
Company issued a promissory note, net of a $400,000 holdback, for
$13,465,043. Such promissory note was paid on January 4, 1999 using
proceeds of the secondary public offering and an advance of $7,600,000 on
the
6
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
5. Acquisitions (continued):
Acquisition of Park Structures (continued):
line of credit. In addition, preliminary acquisition costs of $131,479 were
incurred and asset adjustments of $1,001,798 were incurred and paid with
cash from operations and an advance on the company's Line of Credit in the
amount of $1,000,000. The financial statements reflect a preliminary
allocation of purchase price, to be finalized upon evaluation of certain
intangibles acquired. The initial consideration, acquisition costs and
asset adjustments were allocated to tangible assets based on relative fair
value, with the remaining balance allocated to trade names, trade marks and
goodwill and recorded as intangible assets.
The purchase agreement also provides for additional consideration in the
form of cash and Company common stock if certain operating performance
criteria were met by Park Structures for the year ending December 31, 1998
and for the rolling twelve-month period ending June 30, 1999. For the
December 31, 1998 earnout period, the additional consideration amounted to
77,118 shares of common stock valued at $1,297,903 and cash of $2,703,829.
For the June 30, 1999 earnout period, the additional consideration amounted
to $1.0 million cash. The additional consideration incurred for the 1998
and 1999 earnouts has been treated as goodwill and recorded to intangibles
on the balance sheet.
6. Business Segments:
The Company operates two business segments: (1) Family Convenience and
Children's Activity Products, and (2) Children's Modular Play Equipment.
The Company's reportable segments are strategic business units that offer
different products. They are managed separately based on the fundamental
differences in the operations.
The Company's convenience and activity products include the flagship
product, the baby changing station ("BCS"). Other significant products in
this segment are the sanitary paper liners for the BCS, the child
protection seat, the infant seat kradle, the high chair, activity products
and foam products. All of these products, except the foam products, are
manufactured by sub-contractors. These products are sold direct and through
distribution.
The Company's modular play equipment includes both indoor and outdoor
equipment. The indoor play equipment is custom designed for the customer. A
catalog is used to promote and advertise the outdoor play equipment,
however, custom modifications are often made to accommodate the customers
needs and desires. These products are manufactured by the Company at its
facilities located in Delta, British Columbia and Coral Springs, Florida.
These products are sold direct and through manufacturer
representatives/dealers.
The Company evaluates the performance of its segments based primarily on
operating profit before acquisition intangible amortization, corporate
expenses and interest income and expense. The Company allocates corporate
expenses to individual segments based on segment sales. Corporate expenses
are primarily labor costs of executive management and shareholders'
relations costs. The following table presents sales and other financial
information by business segment:
7
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
6. Business Segments (continued):
-------------------------------------------------------------------
Three Months Ended June 30, 1999
-------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
----------- ----------- -----------
Sales .............. $ 3,975,144 $ 5,175,851 $ 9,150,995
Operating income ... 1,233,349 949,201 2,182,550
Capital expenditures 98,391 83,971 182,362
Total assets ....... $15,492,591 $28,630,009 $44,122,600
-------------------------------------------------------------------
Three Months Ended June 30, 1998
-------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
----------- ----------- -----------
Sales .............. $ 2,944,808 $ 1,484,773 $ 4,429,581
Operating income ... 947,856 218,691 1,166,547
Capital expenditures 135,324 16,620 151,944
Total assets ....... $ 9,386,139 $ 7,004,654 $16,390,793
-------------------------------------------------------------------
Six Months Ended June 30, 1999
-------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
----------- ----------- -----------
Sales .............. $ 7,153,576 $ 9,296,846 $16,450,422
Operating income ... 2,210,707 1,584,929 3,795,636
Capital expenditures 514,427 112,719 627,146
Total assets ....... $15,492,591 $28,630,009 $44,122,600
-------------------------------------------------------------------
Six Months Ended June 30, 1998
-------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
----------- ----------- -----------
Sales .............. $ 5,397,359 $ 3,046,216 $ 8,443,575
Operating income ... 1,619,552 524,666 2,144,218
Capital expenditures 188,109 117,390 295,939
Total assets ....... $ 9,386,139 $ 7,004,654 $16,390,793
8
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
7. Comprehensive Income or Loss:
Comprehensive income or loss relates to foreign exchange rate translation
differences. The following table represents comprehensive income or loss
for the three and six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Comprehensive
Income (Loss) ($255,108) ($32,730) ($187,973) $24,061
</TABLE>
9
<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 acquisitions made by the Company
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
Overview
Koala Corporation is a leading designer, producer and worldwide marketer of
innovative commercial products, systems and solutions that create attractive
family-friendly environments for businesses and other public venues. The Company
produces family convenience products, children's activity products and
children's modular play equipment. The Koala Bear Kare Baby Changing Station,
the Company's initial product, has been installed in hundreds of thousands of
public restrooms worldwide. The Baby Changing Station has provided the
foundation for the Company's growth and brand name recognition.
The Company markets its products, systems and custom solutions to a wide range
of businesses and public facilities that serve customers and visitors who bring
children to their establishments. Koala markets its products through an
integrated program of direct sales and distribution through a network of
independent manufacturer's sales representatives and dealers. Since 1995, the
Company has increased its sales and marketing efforts through the addition of
manufacturer's sales representatives, dealers and Company sales representatives.
Components of Sales and Expenses
The Company's sales are derived from two business segments: (1) Family
Convenience and Children's Activity Products, and (2) Children's Modular Play
Equipment.
The Company's convenience and activity products include the flagship product,
the baby changing station ("BCS"). Other significant products in this segment
are the sanitary paper liners for the BCS, the child protection seat, the infant
seat kradle, the high chair, activity products and foam products. These products
are sold direct and through distribution. The Company recognizes sales of
products from this business segment at the time the products are shipped.
The Company's modular play equipment includes both indoor and outdoor equipment.
The indoor play equipment is custom designed for the customer. A catalog is used
to promote and advertise the outdoor play equipment, however, custom
modifications are often made to
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Components of Sales and Expenses (continued):
accommodate the customers needs and desires. These products are manufactured by
the Company at its facilities located in Delta, British Columbia and Coral
Springs, Florida. These products are sold direct and through manufacturer
representatives/dealers. The Company recognizes sales of products from this
business segment at the time the products are shipped.
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 fabrication of components and assembly of the products.
Selling, general, and administrative expenses consist primarily of executive and
office salaries, related payroll taxes, advertising expenses, commissions paid
to manufacturers' sales representatives and other miscellaneous selling
expenses.
The Company provides limited warranties for its products. The Company has
experienced minimal returns and warranty claims, and therefore no accrual has
been made for future claims.
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.
Recent Acquisitions
Acquisition of Park Structures:
In December 1998, the Company acquired substantially all of the assets of Park
Structures, Inc.("Park Structures"), a provider of children's outdoor modular
play systems based in Coral Springs, Florida for cash and stock consideration up
to $18.7 million and subject to an asset adjustment.
Park Structures products are marketed and sold to municipalities, parks, public
and private schools, day care centers and private developers. The Park
Structures acquisition further broadens the Company's product lines and
complements the Company's June 1997 acquisition of a line of children's indoor
modular play systems and also affords the Company an opportunity to sell its
family convenience and children's activity products into new markets. Park
Structures product line is included in the children's modular play equipment
business segment.
Acquisition of Superior Foam:
In March 1999, the Company acquired substantially all the assets of Superior
Foam & Polymers, Inc. ("Superior"), for cash and stock totaling $6.0 million.
Located near Austin, Texas, Superior is a manufacturer of commercial activity
products.
The primary market for Superior's products are retail stores, shopping malls,
amusement parks and water parks. Superior's products come in a variety of
themes, shapes, colors and sizes. The products are suitable for both indoor and
outdoor use. Superior manufactures a line of off-the-shelf models for customers
to consider, as well as custom designed products
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Acquisitions (continued):
Acquisition of Superior Foam: (continued):
to meet a customer's theme specification. Superior's product line will be folded
into Koala's existing line of children's activity products and included in the
family convenience and children's activity products business segment.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Sales increased 107% to $9,150,995 for the second quarter of 1999 compared to
$4,429,581 for the second quarter of 1998. Convenience and activity product
segment sales increased 35% to $3,975,144 for the three months ended June 30,
1999 compared to $2,944,808, for the three months ended June 30, 1998. Modular
play equipment segment sales increased 249% to $5,175,851 for the second quarter
of 1999 compared to $1,484,773,for the second quarter of 1998. The inclusion of
Park Structures in the Modular Play segment and Superior Foam in the Convenience
and Activity segment for the entire second quarter of 1999 contributed
significantly to the segment revenue increases.
Gross profit for the second quarter of 1999 was $4,753,360 (52% of sales)
compared with $2,541,524 (57% of sales) for the second quarter of 1998. The
gross profit percentage for the second quarter 1999 decreased from the gross
profit achieved for second quarter 1998 primarily because of the increase in the
proportional mix of modular play equipment sales, which historically have lower
margins than the convenience and activity products.
Selling, general and administrative expenses increased for the second quarter of
1999 to $2,315,261 (25% of sales) from $1,309,598 (30% of sales) for the same
period in 1998. Sales and marketing expenses increased $314,555 to $1,180,447
for the second quarter of 1999 compared to $865,892 for the second quarter of
1998. This increase was due primarily to the inclusion of Park Structures and
Superior Foam and the higher level of sales achieved. General and administrative
expenses increased $691,108 to $1,134,814 for the second quarter of 1999
compared to $443,706 for the second quarter of 1998. The increase in general and
administrative expense was primarily the result of the inclusion of Park
Structures and Superior Foam and higher depreciation charges arising from the
addition of office equipment for the companies new tele-sales facility added in
January 1999.
Net income for the second quarter of 1999 was $1,265,863 (14% of sales) compared
with $773,950 (18% of sales) for the second quarter of 1998. This represents a
64% increase in net income. The historically lower margins from Park Structures
and Delta's sales contributed to the decrease in net income as a percentage of
sales. Net income per share (assuming dilution) for the second quarter of 1999
increased 30% compared to the second quarter of 1998. 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 681,211 shares.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Sales increased 95% to $16,450,422 for the six months ended June 30, 1999
compared to $8,443,575 for the six months ended June 30, 1998. Convenience and
activity product segment sales increased 33% to $7,153,576 for the six months
ended June 30, 1999 compared to $5,397,359 for the six months ended June 30,
1998. Modular play equipment segment sales increased 205% to $9,296,846 for the
six months ended June 30, 1999 compared to $3,046,216 for the six months ended
June 30, 1998. The inclusion of Park Structures in Modular Play and Superior
Foam in Convenience and Activity for the six months ended June 30, 1999
contributed significantly to the segment revenue increase.
Gross profit for the six months ended June 30, 1999 was $8,446,812 (51% of
sales) compared with $4,813,595 (57% of sales) for the six months ended June 30,
1998. The gross profit percentage for the six months ending June 30, 1999
decreased from the gross profit achieved for six months ending June 30, 1998
primarily because of the increase in the proportional mix of modular play
equipment sales, which historically have lower margins than the convenience and
activity products.
Selling, general and administrative expenses increased for the six months ending
June 30, 1999 to $4,137,097 (25% of sales) from $2,538,619 (30% of sales) for
the same period in 1998. Sales and marketing expenses increased $584,414 to
$2,236,723 for the six months ending June 30, 1999 compared to $1,652,309 for
the six months ending June 30, 1998. This increase was due primarily to the
inclusion of Park Structures and Superior Foam and the higher level of sales
achieved. General and administrative expenses increased $1,014,064 to $1,900,374
for the six months ending June 30, 1999 compared to $886,310 for the six months
ending June 30, 1998. The increase in general and administrative expense was
primarily the result of the inclusion of Park Structures and Superior Foam and
higher depreciation charges arising from the addition of office equipment for
the companies new Tele-sales facility added in January 1999.
Net income for the six months ending June 30, 1999 was $2,214,540 (14% of sales)
compared with $1,408,939 (17% of sales) for the six months ending June 30, 1998.
This represents a 57% increase in net income. The historically lower margins
from Park Structures and Delta's sales contributed to the decrease in net income
as a percentage of sales. Net income per share (assuming dilution) for the six
months ending June 30, 1999 increased 28% compared to the six months ending June
30, 1998. 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 594,262 shares.
Liquidity and Capital Resources
The Company's free cash flow, defined as net income plus non-cash items,
increased by $1,320,955 to $2,977,026 for the six months ended June 30, 1999
from $1,656,072 for the six months ended June 30, 1998. The Company finances its
business activities primarily from cash provided by operating activities. Cash
provided by operating activities for the six months ended June 30, 1999 and 1998
was $1,679,761 and $382,969, respectively. The increase in cash provided by
operating activities for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998 is due primarily to the increase in free cash flow as
described above. The Company utilized operating cash during the first six months
of 1999 to support sales growth and the resultant increases in inventory and
accounts receivable and investment in advertising and other promotional
programs.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued):
Working capital as of June 30, 1999 and December 31, 1998 was $9,817,213 and
$8,731,924, respectively, and cash balances were $83,083 and $6,493,570 at the
same dates. The cash balance at December 31, 1998 included most of the proceeds
of the secondary public offering completed in December 1998. Cash balances
decreased in 1999 due to the use of internal cash balances for payment against
the note payable incurred in connection with the Park Structures acquisition.
The Company has used its operating cash flow primarily to expand sales and
marketing activities, for acquisition and development of new products, for
capital expenditures and for working capital. Net cash used by investing
activities was $(21,907,502) and $(349,760) for the six months ended June 30,
1999 and 1998, respectively. In 1999, the Company utilized all of its cash on
hand and the credit facility to pay the note payable related to the purchase of
the children's modular play equipment assets and the commercial foam product
assets. The Company also invested approximately $400,000 in the first quarter of
1999 for the data and telecommunications infrastructure utilized in the new
KoalaTel tele-sales facility. The Company does not anticipate any extraordinary
capital expenditures in the near future.
As discussed above, the Company has accrued an additional $1.0 million to be
paid in August 1999 to the former owners of Park Structures pursuant to the
earnout provisions of the Purchase Agreement. The Company anticipates that such
payments will be funded from existing cash balances, cash flow from operations
and borrowings under the line of credit. The Company believes that cash flow
from operations will be sufficient to fund its operations for the foreseeable
future, and repay the borrowings under the credit facility.
The Company obtained a $15.0 million secured line of credit on December 16,
1998. The line of credit is secured by substantially all of the assets of the
Company. 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 and is payable in full on December 16, 2001. Interest
payments are required at least every three months at a fluctuating rate per
annum equal to the applicable "Reserve Adjusted LIBOR Rate". A commitment fee in
the amount of .25% is payable quarterly in arrears based on the average daily
unused portion of the line. There was $12,730,000 outstanding under the credit
facility as of June 30, 1999.
Year 2000
Historically, certain computerized systems have used two digits rather than four
to identify the year. Computer equipment and software, as well as devices with
imbedded technology, that are dependent on time or date information may
recognize a date using "00" as the year 1900 rather than the year 2000, possibly
resulting in range of problems, from simple miscalculations to total system
failures. This problem is generally referred to as the "Year 2000" issue.
The Company has assessed its exposure to risks associated with the Year 2000
issue in terms of "internal" issues (systems and equipment which the Company
owns or controls), and "external" issues (systems and equipment of third parties
with whom the Company does business).
The Company has initiated Year 2000 compliance evaluations of Park Structures
and Superior Foam (collectively "the New Divisions") however, because the
acquisitions were only recently completed (December 16, 1998 and March 26, 1999,
respectively), the Company has not completed its evaluation of their Year 2000
issues. The New Divisions have informed the Company that they estimate the cost
to modify their computer systems to address Year 2000 issues will be less than
$5,000 and that such remediation will be completed prior to the Year 2000.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 (continued):
The New Divisions have informed the Company that they do not anticipate any
material disruption in their operations as a result of any Year 2000 issues. The
New Divisions do not have any information concerning the potential impact of
Year 2000 issues on any of its suppliers or customers. The Company plans to
further evaluate the potential impact of Year 2000 issues on the New Divisions'
suppliers and customers. The Year 2000 issue could have a material adverse
effect on New Divisions' operations and on the Company.
The Company's other operations have only limited information technology systems,
consisting of separate local area networks at its headquarters and Vancouver
locations. These networks run accounting software at both locations and design
software at the Vancouver location. The Company has completed assessment,
remediation through the installation of Year 2000 compliant software and
independent testing of all application software and the operating systems at
both locations, and believes that its information technology systems are Year
2000 compliant. The cost to the Company to achieve this compliance was
approximately $40,000, which was used to purchase software and hardware and to
pay independent consultants. The Company funded these costs from available cash.
The Company believes such remediation is complete, and expects that no further
costs of remediation will be required. Should such remediation prove inadequate,
the most likely worst case scenario would be a failure of the Company's computer
systems, which would likely cause significant delays in order taking, receiving,
order fulfillment and other core functions which would have a material adverse
affect on the Company. However, because the Company believes its remediation of
its computer systems will allow the Company to avoid the risks associated with
the Year 2000 issues, it has not developed a separate contingency plan for a
scenario in which the Company's remedial measures fail. The Company does not
believe that it has any systems or equipment other than its information
technology systems that would have a material adverse effect on the Company if
such systems were not Year 2000 compliant.
The Company is also evaluating whether there may be third parties that could
materially adversely affect the Company through non-compliance. The Company has
identified the New Divisions, suppliers, customers, its bank and national
delivery services as the parties most likely to materially adversely affect the
Company through such non-compliance. The risks include the failure of suppliers
to timely deliver materials and finished products, the failure of customers to
remit payments timely, the failure of its bank to process its funds or loss of
data relating to the Company's funds and delays by national delivery services in
shipments of the Company's products. The most likely worst case scenario for the
Company would be a confluence of these events coupled with other adverse effects
on the economy generally that would impact sales of the Company's products. The
Company has contacted its ten largest suppliers and customers, its bank and
national delivery services to ascertain their Year 2000 readiness. To date, the
Company has received responses from all of the suppliers and customers, the bank
and some of the national delivery services. The respondents have indicated that
they are at various stages of assessment, remediation or testing of their
systems relative to Year 2000 compliance. Based on the responses, the Company
does not foresee significant problems with the Year 2000 issue and has not
developed a contingency plan to deal with non-compliance issues. Nevertheless,
the Company will continue to monitor the responses from third parties as well as
the Year 2000 issue in general to ascertain whether additional actions or
contingency plans may be necessary. In addition, despite its efforts to address
Year 2000 issues, the Company could potentially experience disruptions to its
operations, including those related to non-compliant systems used by third
parties. Such disruptions could have a material adverse effect on the Company.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1-3
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 21, 1999, the Company held its Annual Meeting of Shareholders.
At such meeting, The Company's shareholders ( i ) elected four
directors to serve until the Company's next annual meeting; ( ii )
approved the appointment of Ernst & Young LLP to serve as the Company's
independent auditors for the year ended December 31, 1999. The number
of votes cast in matters is set forth below:
1. Election of Directors
VOTES AGAINST BROKER
NAME VOTES FOR OR WITHHELD ABSTENTIONS NON-VOTES
- --------------------------------------------------------------------------------
Mark Betker ..... 2,174,273 2,507 0 0
Michael C.
Franson ......... 2,174,373 2,407 0 0
John T.
Pfannenstein .... 2,174,373 2,407 0 0
Ellen S.
Robinson ........ 2,174,373 2,407 0 0
2. Approval of Appointment of Ernst & Young LLP
Votes For Votes Against or Withheld Abstentions Broker Non-Votes
--------- ------------------------- ----------- ----------------
2,168,773 4,467 3,540 0
Item 5. Other Information
------------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27.1 June 30, 1999 Financial Data Schedule.
(b) Reports on Form 8-K
On April 2, 1999, the Company filed a Form 8-K to report under
Item 2 and Item 7 the acquisition of the assets of Superior Foam
& Polymers, Inc.
16
<PAGE>
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
August 13, 1999 /s/Mark A. Betker
- --------------- -----------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
August 13, 1999 /s/Jeffrey L. Vigil
- --------------- -------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
17
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