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, 1999
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from_____________ to ________________
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 November 12, 1999 was 6,329,356 shares.*
Transitional Small Business Disclosure Format (Check one):
Yes..... No...X..
* Gives effect to a two-for-one stock split effected as a stock dividend on
October 28, 1999. See Item 5.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
<TABLE>
<CAPTION>
==================================================================================================
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents ....................................... $ 326,081 $ 6,493,570
Accounts receivable (less allowance for doubtful accounts
of $82,451 in 1999 and $111,444 in 1998) ..................... 7,880,885 5,781,256
Inventories ..................................................... 5,059,500 3,581,137
Prepaid expenses and other ...................................... 1,344,284 838,109
---------- ----------
Total current assets .............................................. 14,610,750 16,694,072
---------- ----------
Property and Equipment: ........................................... 3,973,027 2,991,182
Less accumulated depreciation .................................... 943,250 559,068
---------- ----------
3,029,777 2,432,114
---------- ----------
Other Assets:
Intangibles (net of accumulated amortization of $1,538,235
in 1999 and $793,821 in 1998) ................................. 29,347,023 22,479,014
---------- ----------
Total Assets ..................................................... $ 46,987,550 $ 41,605,200
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable ................................................ $ 2,110,847 $ 1,721,886
Accrued expenses and income taxes ............................... 971,802 375,219
Current portion of long-term debt ............................... -- 5,865,043
---------- ----------
Total current liabilities .................................... 3,082,649 7,962,148
---------- ----------
Long Term Liabilities:
Deferred income taxes ........................................... 645,000 645,000
Long-term debt, net of current portion .......................... 14,572,818 11,502,271
---------- ----------
Total long-term liabilities .................................. 15,217,818 12,147,271
---------- ----------
Total Liabilities ................................................. 18,300,467 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 shares authorized;
issued and outstanding - 3,164,678 in 1999 - 2,847,362 in 1998 316,468 284,736
Common stock to be issued, 23,950 in 1999 and 77,118 in 1998 .... 500,000 1,297,903
Note receivable from Officer (see Note 8) ....................... (280,500) --
Additional paid in capital ...................................... 14,345,198 9,620,174
Other comprehensive loss (see Note 7) ........................... (299,641) (121,160)
Retained earnings ............................................... 14,105,558 10,414,128
---------- ----------
Total shareholders' equity ....................................... 28,687,083 21,495,781
---------- ----------
Total Liabilities and Shareholders' Equity ........................ $ 46,987,550 $ 41,605,200
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
=========================================================================================================
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ....................................... $ 10,544,330 $ 5,048,932 $ 26,994,752 $ 13,492,507
Cost of sales ............................... 5,243,362 2,347,158 13,246,972 5,977,138
------------ ------------ ------------ ------------
Gross profit ................................ 5,300,968 2,701,774 13,747,780 7,515,369
Selling, general and administrative expenses 2,528,448 1,356,002 6,665,545 3,894,621
Amortization of intangibles ................. 230,335 65,379 744,414 196,137
------------ ------------ ------------ ------------
Income from operations ...................... 2,542,185 1,280,393 6,337,821 3,424,611
------------ ------------ ------------ ------------
Other (income) expense:
Interest expense .......................... 250,280 -- 499,200 --
Other (income) expense, net ............... 2,153 20,244 115,475 (19,940)
------------ ------------ ------------ ------------
Income before income taxes .................. 2,289,752 1,260,149 5,723,146 3,444,551
Provision for income taxes .................. 812,861 447,352 2,031,715 1,222,815
------------ ------------ ------------ ------------
Net income .................................. $ 1,476,891 $ 812,797 $ 3,691,431 $ 2,221,736
============ ============ ============ ============
Net income per share - basic ................ $ 0.47 $ 0.32 $ 1.19 $ 0.88
============ ============ ============ ============
Weighted average shares outstanding - basic . 3,172,658 2,527,362 3,106,389 2,527,362
============ ============ ============ ============
Net income per share - diluted .............. $ 0.45 $ 0.32 $ 1.14 $ 0.86
============ ============ ============ ============
Weighted average shares outstanding - diluted 3,317,516 2,571,265 3,232,942 2,588,018
============ ============ ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
===========================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
September 30
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities: ................. $ 2,731,193 $ 564,182
------------ ------------
Cash flows from investing activities:
Capital expenditures ..................................... (820,165) (430,479)
Acquisitions, net of cash acquired ....................... (23,664,419) (610,160)
Patents and intangibles .................................. (63,827) (65,851)
------------ ------------
Net cash used by investing activities ...................... (24,548,411) (1,106,490)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings, net of repayments .... 13,152,202 --
Sale of common stock, net of expenses .................... 2,676,008 --
------------ ------------
Net cash provided by financing activities .................. 15,828,210 --
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (178,481) (102,847)
Net decrease in cash and cash equivalents .................. (6,167,489) (645,155)
Cash and cash equivalents at beginning of period ........... 6,493,570 1,832,677
------------ ------------
Cash and cash equivalents at end of period ................. $ 326,081 $ 1,187,522
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 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 September 30, 1999 and December 31, 1998, consists
of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials and component parts $4,021,356 $ 2,832,314
Finished goods 1,038,144 748,823
------------ -----------
$5,059,500 $ 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" (7.55% at September 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 $14,554,000
as of September 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 NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
4. Earnings Per Share: (continued):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average
shares outstanding
for basic EPS .............. 3,172,658 2,527,362 3,106,389 2,527,362
Common stock
equivalents for
unexercised stock
options .................... 144,858 43,903 126,553 60,656
--------- --------- --------- ---------
Weighted average
shares outstanding
for diluted EPS ............ 3,317,516 2,571,265 3,232,942 2,588,018
========= ========= ========= =========
</TABLE>
5. Acquisitions:
Acquisition of Smart Products:
On September 24, 1999 the Company acquired substantially all the assets of
Smart Products, Inc., a provider of child safety and parental convenience
products located in Charlotte, North Carolina. The acquisition was
effective September 1, 1999 and was accounted for as a purchase. Results of
operations of Smart Products were included in the Company's consolidated
statements of income beginning on the effective date.
The Company paid the cash purchase price with cash generated from both
internal operations and an advance on the Company's line of credit in the
amount of approximately $800,000. In addition, estimated acquisition costs
of $30,000 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 are being amortized using the straight-line method using
estimated useful lives ranging from 5 to 30 years.
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. As of September 30,
1999, 23,950 shares had been issued. 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 $4.6 million. In
addition, estimated acquisition costs of $150,000 were paid or accrued. The
initial consideration and
6
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
5. Acquisitions (continued):
Acquisition of Superior Foam (continued):
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 are being 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 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 acquisition intangible
costs are being amortized using the straight-line method using estimated
useful lives ranging from 5 to 30 years.
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
80,977 shares of common stock valued at $1,362,842 and cash of $2,789,925.
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
7
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
6. Business Segments (continued):
products, foam products and other parental convenience 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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Three Months Ended September 30, 1999
-------------------------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
---------------- ---------------- ------------
<S> <C> <C> <C>
Sales ....................... $ 4,198,132 $ 6,346,198 $10,544,330
Operating income ............ 1,249,131 1,293,054 2,542,185
Capital expenditures ........ 126,849 66,170 193,019
Total assets ................ 17,454,506 29,533,044 46,987,550
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Three Months Ended September 30, 1998
---------------------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
---------------- ---------------- ------------
<S> <C> <C> <C>
Sales ....................... $ 3,214,863 $ 1,834,069 $ 5,048,932
Operating income ............ 933,858 346,535 1,280,393
Capital expenditures ........ 46,567 87,973 134,540
Total assets ................ 9,017,644 8,066,502 17,084,146
</TABLE>
8
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
6. Business Segments (continued):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999
-------------------------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
---------------- ---------------- ------------
<S> <C> <C> <C>
Sales ....................... $11,351,708 $15,643,044 $26,994,752
Operating income ............ 3,479,838 2,857,983 6,337,821
Capital expenditures ........ 641,276 178,889 820,165
Total assets ................ 17,454,506 29,533,044 46,987,550
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Nine Months Ended September 30, 1998
-------------------------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
---------------- ---------------- ------------
<S> <C> <C> <C>
Sales ....................... $ 8,612,222 $ 4,880,285 $13,492,507
Operating income ............ 2,553,410 871,201 3,424,611
Capital expenditures ........ 234,676 195,803 430,479
Total assets ................ 9,017,644 8,066,502 17,084,146
</TABLE>
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 nine months ended September 30, 1999 and 1998.
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Comprehensive
Income $1,486,383 $734,011 $3,512,950 $2,118,889
8. Note Receivable from Officer:
During the third quarter of 1999, the Company made a secured loan to an
Officer of the Company in the amount of $277,500 for the purpose of the
Officer's exercise of vested stock options. The note is full recourse, is
secured by marketable securities of the Officer, is interest bearing at an
adjustable rate equal to a commercial bank's prime rate and is due on
February 12, 2001. The note has been recorded as a reduction of
shareholders' equity in the Company's balance sheet at September 30, 1999.
9
<PAGE>
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
9. Subsequent Event - Stock Split:
On October 8, 1999, the Company's Board of Directors approved a two-for-one
stock split effected as a 100% stock dividend. The record date of the stock
dividend was October 18, 1999 and the distribution date was October 28,
1999.
10
<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, foam products and other parental
convenience 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 accommodate the
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Components of Sales and Expenses (continued):
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 September 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 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Acquisitions (continued):
Acquisition of Smart Products:
In September 1999, the Company acquired substantially all the assets of Smart
Products, Inc. ("Smart"). Located in Charlotte, North Carolina, Smart is a
manufacturer and distributor of child safety and parental convenience products.
The primary market for Superior's products are grocery stores, retailers and
restaurants. Smart's product line will be folded into Koala's existing line of
children's safety and convenience products and included in the family
convenience and children's activity products business segment.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Sales increased 109% to $10,544,330 for the third quarter of 1999 compared to
$5,048,932 for the third quarter of 1998. Convenience and activity product
segment sales increased 31% to $4,198,132 for the three months ended September
30, 1999 compared to $3,214,863, for the three months ended September 30, 1998.
Modular play equipment segment sales increased 246% to $6,346,198 for the third
quarter of 1999 compared to $1,834,069,for the third quarter of 1998. The
inclusion of Park Structures in the Modular Play segment and Superior Foam and
Smart Products in the Convenience and Activity segment for the third quarter of
1999 contributed significantly to the segment revenue increases.
Gross profit for the third quarter of 1999 was $5,300,968 (50% of sales)
compared with $2,701,774 (54% of sales) for the third quarter of 1998. The gross
profit percentage for the third quarter 1999 decreased from the gross profit
achieved for third 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 third quarter of
1999 to $2,528,448 (24% of sales) from $1,356,002 (27% of sales) for the same
period in 1998. The selling, general and administrative expenses decreased as a
percentage of sales because of the more efficient absorption of fixed costs by
the higher level of sales during the third quarter of 1999. Sales and marketing
expenses increased $413,765 to $1,316,808 for the third quarter of 1999 compared
to $903,043 for the third 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 $758,681 to $1,211,640
for the third quarter of 1999 compared to $452,959 for the third 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
Company's new tele-sales facility added in January 1999.
Net income for the third quarter of 1999 was $1,476,891 (14% of sales) compared
with $812,797 (16% of sales) for the third quarter of 1998. This represents a
82% 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 third quarter of 1999
increased 41% to $0.45 per share compared to $0.32 per share for the third
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
746,251 shares.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Sales increased 100% to $26,994,752 for the nine months ended September 30, 1999
compared to $13,492,507 for the nine months ended September 30, 1998.
Convenience and activity product segment sales increased 32% to $11,351,708 for
the nine months ended September 30, 1999 compared to $8,612,222 for the nine
months ended September 30, 1998. Modular play equipment segment sales increased
221% to $15,643,044 for the nine months ended September 30, 1999 compared to
$4,880,285 for the nine months ended September 30, 1998. The inclusion of Park
Structures in Modular Play and Superior Foam and Smart Products in Convenience
and Activity for the nine months ended September 30, 1999 contributed
significantly to the segment revenue increase.
Gross profit for the nine months ended September 30, 1999 was $13,747,780 (51%
of sales) compared with $7,515,369 (56% of sales) for the nine months ended
September 30, 1998. The gross profit percentage for the nine months ending
September 30, 1999 decreased from the gross profit achieved for nine months
ending September 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 nine months
ending September 30, 1999 to $6,665,545 (25% of sales) from $3,894,621 (29% of
sales) for the same period in 1998. The selling, general and administrative
expenses decreased as a percentage of sales because of the more efficient
absorption of fixed costs by the higher level of sales during 1999. Sales and
marketing expenses increased $998,179 to $3,553,531 for the nine months ending
September 30, 1999 compared to $2,555,352 for the nine months ending September
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 $1,772,745 to $3,112,014 for the nine months
ending September 30, 1999 compared to $1,339,269 for the nine months ending
September 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 Company's new Tele-sales facility added in January 1999.
Net income for the nine months ending September 30, 1999 was $3,691,431 (14% of
sales) compared with $2,221,736 (17% of sales) for the nine months ending
September 30, 1998. This represents a 66% 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 nine months ending September 30, 1999 increased 33%
to $1.14 per share compared to $0.86 per share for the nine months ending
September 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
644,924 shares.
Liquidity and Capital Resources
The Company's free cash flow, defined as net income plus non-cash items,
increased by $2,213,429 to $4,818,228 for the nine months ended September 30,
1999 from $2,604,799 for the nine months ended September 30, 1998. 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, 1999 and 1998 was $2,731,193 and $564,182, respectively. The
increase in cash provided by operating activities for the nine months ended
September 30, 1999 compared to the
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued):
nine months ended September 30, 1998 is due primarily to the increase in free
cash flow as described above. The Company utilized operating cash during the
first nine months of 1999 to support sales growth and the resultant increases in
inventory and accounts receivable and investment in advertising and other
promotional programs.
Working capital as of September 30, 1999 and December 31, 1998 was $11,528,101
and $8,731,924, respectively, and cash balances were $326,081 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 line of credit for advances used in connection with the Park
Structures, Superior Foam and Smart Products acquisitions.
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 $(24,548,411) and $(1,106,490) for the nine months ended
September 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
further significant non-recurring capital expenditures in the near future.
As discussed above, the Company paid $1.0 million in August 1999 to the former
owners of Park Structures pursuant to the earnout provisions of the Purchase
Agreement. There are no further contingent payments payable by the Company for
its recently completed acquisitions and 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", which was 7.55% at
September 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
$14,554,000 outstanding under the credit facility as of September 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).
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 (continued):
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. Smart
Products accounting and administrative functions will be performed by Koala in
Denver.
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
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 (continued):
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.
PART II - OTHER INFORMATION
Item 1-4.
None
Item 5.
On October 8, 1999, the Company's Board of Directors approved a
two-for-one stock split effected as a 100% stock dividend. The record
date of the stock dividend was October 18, 1999 and the distribution
date was October 28, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - September 30, 1999 Financial Data Schedule.
Exhibit 99 - Press release dated October 8, 1999.
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 15, 1999 /s/Mark A. Betker
- ----------------- ------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
November 15, 1999 /s/Jeffrey L. Vigil
- ----------------- ------------------------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
17
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<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 326,081
<SECURITIES> 0
<RECEIVABLES> 7,963,336
<ALLOWANCES> (82,451)
<INVENTORY> 5,059,500
<CURRENT-ASSETS> 14,610,750
<PP&E> 3,973,027
<DEPRECIATION> (943,250)
<TOTAL-ASSETS> 46,987,550
<CURRENT-LIABILITIES> 3,082,649
<BONDS> 0
0
0
<COMMON> 316,468
<OTHER-SE> 28,370,615
<TOTAL-LIABILITY-AND-EQUITY> 46,987,550
<SALES> 10,544,330
<TOTAL-REVENUES> 10,544,330
<CGS> 5,243,362
<TOTAL-COSTS> 5,243,362
<OTHER-EXPENSES> 2,758,783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,280
<INCOME-PRETAX> 2,289,752
<INCOME-TAX> 812,861
<INCOME-CONTINUING> 1,476,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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</TABLE>
EXHIBIT 99
FOR IMMEDIATE RELEASE
- --------------------- NEWS
October 8, 1999 Nasdaq National Market-KARE
KOALA CORPORATION ANNOUNCES 2-FOR-1 STOCK SPLIT
DENVER, Colorado - Koala Corporation (Nasdaq National Market-KARE), a
diversified provider of commercial play systems for children and other
"family-friendly" products for businesses, today announced a board approved
2-for-1 stock split to be effected as a stock dividend.
One additional share of stock will be distributed for each share of stock held
by stockholders of record as of October 18, 1999. Koala's transfer agent,
American Securities and Transfer & Trust, Inc. will distribute the additional
shares to shareholders on October 28, 1999. Koala currently has 3.16 million
shares of common stock outstanding. Upon completion of the split, the number of
outstanding shares will increase to approximately 6.32 million.
"Koala Corporation is pleased that our continued growth has enabled our board to
take this action," said Mark Betker, chairman and CEO of Koala Corporation, "We
believe that this split will benefit our shareholders by increasing trading
activity of our stock as well as improving the liquidity of Koala's stock."
Founded in 1986, Koala Corporation is an integrated provider of products and
solutions designed to help business become "family friendly" and allow children
to play safely in public. The Company develops and markets a wide variety of
infant and child protection and activities products, which are marketed under
the Company's recognizable "Koala Bear Kare" brand name. Koala's strategic
objective is to address the growing commercial demand for safe, public play
environments for children, as well as products and solutions that help
businesses create family-friendly atmospheres for their patrons.
Statements made in this news release that are not historical facts may be
forward looking statements. Actual results may differ materially from those
projected in any forward-looking statement. There are a number of important
factors that could cause actual results to differ materially from those
anticipated by any forward-looking information. A description of risks and
uncertainties attendant to Koala Corporation and its industry and other factors
which could affect the Company's financial results are included in the Company's
Securities and Exchange Commission Annual Report on Form 10-KSB.
###
CONTACTS:
Koala Corporation
303.574.3423
www.koalabear.com
Mark A. Betker Jeff Vigil
Chairman and Chief Executive Officer Chief Financial Officer
