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, 1997
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[ ] 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
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(Exact name of small business issuer
as specified in its charter)
Colorado 84-1238908
- ------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11600 E 53rd Ave. Unit D, Denver, CO 80239
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(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 1, 1997 was 2,481,260 shares.
Transitional Small Business Disclosure Format (Check one):
Yes..... No...X...
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KOALA CORPORATION
- ------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED DECEMBER 31,
JUNE 30, 1997 1996
------------- -----------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 253,776 $ 3,442,601
Accounts receivable, net of allowance
for doubtful accounts 2,151,665 1,656,515
Refundable income taxes 0 338,200
Inventory 1,171,450 443,680
Prepaid expenses 304,861 82,460
Deferred income taxes 10,900 10,900
----------- -----------
Total current assets 3,892,652 5,974,356
----------- -----------
EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 1,107,405 697,789
----------- -----------
OTHER ASSETS
Intangibles and patents, net of accumulated
amortization 8,156,928 3,679,057
----------- -----------
Total other assets 8,156,928 3,679,057
----------- -----------
$13,156,985 $10,351,202
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 772,139 $ 273,511
Accrued expenses 535,197 56,921
Accrued income taxes 70,788 0
----------- -----------
Total current liabilities 1,378,124 330,432
----------- -----------
LONG-TERM LIABILITIES 0 0
----------- -----------
DEFERRED INCOME TAXES 242,200 242,200
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized 1,000,000
shares; none issued and outstanding 0 0
Common stock, $.10 par value, authorized 10,000,000
shares; issued and outstanding 2,481,260 248,126 248,126
Common stock to be issued, 40,000 shares 4,000 0
Additional paid in capital 5,247,884 4,651,884
Retained earnings 6,036,651 4,878,560
----------- -----------
Total shareholders' equity 11,536,661 9,778,570
----------- -----------
$13,156,985 $10,351,202
=========== ===========
See notes to consolidated financial statements
2
KOALA CORPORATION
- -------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED CONSOLIDATED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 3,040,822 $ 2,435,219 $ 5,291,994 $ 4,306,025
Cost of sales 1,191,429 902,362 1,914,543 1,624,941
----------- ----------- ----------- -----------
Gross profit 1,849,393 1,532,857 3,377,451 2,681,084
----------- ----------- ----------- -----------
Selling, general and administrative expenses 876,776 696,444 1,597,562 1,189,964
----------- ----------- ----------- -----------
OPERATING INCOME 972,617 836,413 1,779,889 1,491,120
----------- ----------- ----------- -----------
Other (income) expenses (36,875) (26,438) (78,227) (66,959)
Amortization of intangibles and patents 36,313 27,687 62,626 49,299
----------- ----------- ----------- -----------
Income before provision
for income taxes 973,179 835,164 1,795,490 1,508,780
Provision for income taxes 345,478 304,835 637,399 550,705
----------- ----------- ----------- -----------
NET INCOME $ 627,701 $ 530,329 $ 1,158,091 $ 958,075
=========== =========== =========== ===========
NET INCOME PER SHARE $ 0.25 $ 0.21 $ 0.46 $ 0.37
=========== =========== =========== ===========
Weighted average shares outstanding 2,520,737 2,577,426 2,517,912 2,574,303
=========== =========== =========== ===========
See notes to consolidated financial statements
3
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
INCREASE (DECREASE) IN CASH JUNE 30,
1997 1996
----------------- -------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,158,091 $ 958,075
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 43,026 35,484
Amortization 62,626 49,299
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable, trade (339,663) (327,101)
Refundable income taxes 338,200 0
Inventory (159,307) (571,850)
Prepaid expenses (196,441) (176,281)
Increase (decrease) in liabilities:
Accounts payable 359,392 82,399
Accrued expenses 351,266 (21,951)
Accrued income taxes 70,788 88,771
----------------- -------------------
Net cash provided by operations 1,687,978 116,845
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for capital expenditures (271,433) (94,118)
Payments for deposits 0 (5,791)
Purchase of Activities Unlimited, LLC 0 (500,000)
Purchase of Delta Play, Ltd., net of cash acquired (4,592,219) 0
Payments for patents and intangibles (13,151) (15,448)
----------------- -------------------
Net cash used by investing activities (4,876,803) (615,357)
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NET (DECREASE) IN CASH (3,188,825) (498,512)
Cash at beginning of period 3,442,601 2,994,130
----------------- -------------------
Cash at end of period $ 253,776 $ 2,495,618
================= ===================
See notes to consolidated financial statements
4
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1. Description of business and principles of consolidation:
The Company and its subsidiaries ("the Company") are engaged in developing,
designing, manufacturing, and marketing infant and child protection products
and children's activity equipment for commercial, institutional and
recreational establishments. The consolidated financial statements include
the accounts of the Company and all subsidiaries. All significant inter-
company accounts and transactions have been eliminated in consolidation. The
operations of Delta Play, Ltd. are included in the accompanying financial
statements from June 1, 1997, the effective date of its acquisition. See note
6 below.
2. Unaudited information:
The accompanying financial statements are presented in accordance with the
requirements of Form 10-QSB and consequently do not include all of the
disclosures normally required by generally accepted accounting principles or
those normally made in the Company's annual Form 10-KSB filing. Accordingly,
the reader of this Form 10-QSB may wish to refer to the Company's 10-KSB for
the year ended December 31, 1996 for further information.
The quarterly financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair statement of interim results. All such adjustments are
of a normal and recurring nature. The results of operation for the interim
period ended June 30, 1997 are not necessarily indicative of the results for
a full year.
3. Inventory:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory as of June 30, 1997 and December 31, 1996, consists of the
following:
June 30, 1997 December 31, 1996
------------- -----------------
Raw materials and component parts $ 676,045 $ 62,879
Finished goods 495,405 380,801
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$1,171,450 $443,680
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4. Credit Facility:
The Company obtained a $2.0 million unsecured line of credit in June, 1997.
The line of credit may be used for short-term working capital needs and future
acquisitions. There are no compensating balance requirements and the credit
facility requires compliance with financial loan covenants related to debt
levels compared to annualized cash flows from operations. The credit facility
terminates on June 24, 1998. The Company had not utilized the credit facility
through June 30, 1997.
5
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
5. Earnings per share:
Net income per share is computed based upon the weighted average number of
common shares and dilutive common equivalent shares outstanding during the
period using the treasury stock method. Dilutive common equivalent shares
consist of stock options and warrants. Fully diluted and primary earnings per
share are the same amounts for all periods presented.
In February 1997, the Financial Accounting Standards Boards issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. For the second
quarter ended June 30, 1997 and June 30, 1996 and the six months ended on the
same dates, the impact of Statement 128 on the calculation of primary and
fully diluted earnings per share is not expected to be material.
6. Acquisition of Delta Play, Ltd.:
On June 23, 1997, the Company acquired substantially all of the assets of
Delta Play, Ltd.(Delta), a leading provider of custom indoor and outdoor
modular play systems based in Vancouver, British Columbia. The acquisition
was effective June 1, 1997 and was accounted for as a purchase. Results of
operations of Delta were included in the Company's consolidated statements of
income beginning on the effective date.
As initial consideration, the Company paid $4,159,682 cash and will issue
40,000 shares of Koala Corporation common stock valued at $600,000. In
addition, costs related to the acquisition of approximately $433,904 were
incurred. The purchase agreement also provides for additional consideration
in the form of cash payments if certain operating performance criteria are
met by Delta over the twelve month period from June 1, 1997 to May 31, 1998.
The range of additional consideration is C$900,000 (US$648,000) to
C$1,500,000 (US$1,080,000) and if minimum performance is not achieved, no
additional consideration will be payable. Any subsequent payment will be
allocated to cost in excess of the fair value of assets acquired.
7. Foreign Currency Translation:
Foreign currency transactions and financial statements of foreign
subsidiaries are translated into U.S. dollars at prevailing or current rates
respectively, except for revenue, costs and expenses which are translated at
average current rates during each reporting period. Gains and losses
resulting from foreign currency transactions are included in income
currently.
6
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that describe the Company's
business and the expectations of the Company and management. These statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those set forth. These risks and uncertainties
include, but are not limited to, the Company's reliance on the revenues from a
major product, the Koala Bear Kare(TM) Changing Station, which has generated a
substantial amount of the Company's revenues; the uncertainties associated with
the introduction of new products; management of growth, including the ability to
attract and retain qualified employees; the ability to integrate its Delta Play
acquisition and any other acquisition that the Company may make and the costs
associated with such acquisitions; dependence on Mark Betker, its chief
executive officer; substantial competition from larger companies with greater
financial and other resources than the Company; the success of its Koala Kids
marketing strategy; its dependence on suppliers for manufacture of some of its
products; currency fluctuations and other risks associated with foreign sales
and foreign operations; quarterly fluctuations in revenues, income and overhead
expense; and potential products liability risk associated with its existing and
future products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPONENTS OF REVENUE AND EXPENSES
The Company's revenues are derived primarily from the sale of Baby Changing
Stations, disposable sanitary liners for the Baby Changing Stations, Child
Protection Seats, Infant Seat Kradles, and Booster Buddy seats which are sold
primarily to commercial, institutional, and recreational facilities such as
shopping centers, retail establishments, restaurants, sports and recreational
facilities, and other public buildings. In addition, in furtherance of the
Company's "Koala Kids" strategy discussed below, the Company acquired certain
assets of Activities Unlimited, a developer and distributor of commercial-use
children's activities products at the end of first quarter 1996 and Delta Play,
Ltd. (Delta), a leading provider of custom indoor and outdoor modular play
systems, in June 1997. It is anticipated that revenues from these companies
will reduce the Company's dependency on the sale of Baby Changing Stations.
Cost of sales consists of components manufactured for the Company and direct
labor and manufacturing overhead incurred by the Company. All major components
are manufactured by outside vendors. Direct labor and manufacturing overhead
relate to the assembly of the products. In September 1996, the Company sub-
contracted out the assembly operations for the Baby Changing Stations, Child
Protection Seats and Infant Seat Kradles.
Selling, general, and administrative expenses consist primarily of executive and
office salaries, related payroll taxes, advertising expenses, and other
miscellaneous selling expenses.
The Company's quarterly revenues and net income are subject to fluctuation based
on customer order patterns and Company shipping activity. Because of these
fluctuations, comparisons of operating results from quarter to quarter for the
current year or for comparable quarters of the prior year may be difficult.
Except as set forth below, these fluctuations are not expected to be significant
when considered on an annual basis.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT ACQUISITION
In June 1997, the Company acquired substantially all of the assets of Delta for
cash and stock totaling $4,759,682. Based in Vancouver, British Columbia, Delta
and its affiliates generated operating income before taxes of approximately $1.1
million (U.S.) on sales of $4.5 million (U.S.) for its fiscal year ended March
31, 1997.
Primary customers for Delta's play systems include family entertainment centers,
quick service restaurants, shopping centers and theme parks. Delta's markets
are global in nature, with over one-half of sales occurring outside of North
America during the fiscal year ended March 31, 1997. The Delta acquisition is
intended to add to Koala's expanding umbrella of product lines under its "Koala
Kids" marketing strategy. This strategy is intended to allow Koala to target a
much broader age group within the commercial child protection and activities
market and to help further establish Koala as a leading provider of products
that help commercial organizations create "family friendly" atmospheres for
their patrons.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Sales increased 25% to $3,040,822 for the second quarter of 1997 compared to
$2,435,219 for the second quarter of 1996. Sales from Delta following the Delta
acquisition and the sales and marketing strategy implemented by the Company
contributed to the additional sales revenue for 1997. The Company continued to
increase sales and marketing efforts through focused marketing programs, and the
addition of sales personnel during 1997 and 1996.
Gross profit for the second quarter of 1997 was $1,849,393 (61% of sales)
compared with $1,532,857 (63% of sales) for the second quarter of 1996. The
gross profit percentage for the second quarter 1997 decreased from the gross
profit achieved for second quarter 1996 due to lower margins achieved on Delta's
sales as well as higher sales to distributors. These gross profit reductions
were offset somewhat by gross margin improvements from price reductions achieved
in the cost of raw materials and component parts and the change to sub-
contracted assembly in September 1996. The Company no longer maintains a
manufacturing facility for assembling its Baby Changing Stations, thus reducing
overhead costs.
Selling, general, and administrative expenses increased for the second quarter
of 1997 to $876,776 (29% of sales) from $696,444 (29% of sales) for the same
period in 1996. Sales and marketing expenses increased $263,036 for the second
quarter of 1997 compared to second quarter of 1996. These cost increases were
due to the higher level of sales, and included costs for various marketing
programs, commissions paid to manufacturers sales representatives and salaries
of the sales and marketing personnel added in the second quarter of 1997. These
costs were incurred in furtherance of the Company's sales and marketing
strategies discussed above.
General and administrative expenses decreased $82,704 for the second quarter of
1997 compared to the second quarter of 1996. The decreases in general and
administrative expenses were primarily realized from cost reductions obtained by
more efficient management of collections, accounting, and investor relations
activities.
Because the dollar amount of selling, general and administrative expenses are
relatively low, overhead expense patterns, which vary from quarter to quarter,
may cause fluctuations in total selling, general, and administrative expenses as
a percent of sales. Management expects that these fluctuations will not be
significant on an annual basis.
Net income for the second quarter of 1997 was $627,701 (21% of sales) compared
with $530,329 (22% of sales) for the second quarter of 1996. This represents an
18% increase in net income. Earnings per share for the second quarter of 1997
increased 19% compared to the second quarter of 1996. The Company believes that
the lower margins obtained from Delta's sales and the continued expenditures to
expand sales and marketing resulted in net income rising 18% over net income for
the second quarter of 1996 while sales rose 25% over that same period.
9
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Sales increased 23% to $5,291,994 for the six months ended June 30, 1997
compared to $4,306,025 for the same period of 1996. The increased sales are the
result of sales from Delta following the Delta acquisition and continued
expenditures made to expand sales and marketing efforts.
Gross profit for the six months ended June 30, 1997 was $3,377,451 (64% of
sales) compared with $2,681,084 (62% of sales) in 1996. The Company continued
to benefit from efforts to reduce product costs during the first half of 1997.
At the same time, the savings from these product cost reductions were re-
invested in expansion of dealer/distribution markets which the Company
anticipates will result in higher sales volume at lower margins.
Selling, general, and administrative expenses for the six months ended June 30,
1997 increased to $1,597,562 (30% of sales) from $1,189,964 (28% of sales) for
the same period in 1996. Sales and marketing expenses increased by $400,984 for
the six months ended June 30, 1997. This increase is directly attributable to
the growth in sales over this period as well as the continued expansion of new
sales and marketing strategies.
General and administrative expenses increased $6,614 for the six months ended
June 30, 1997 compared to 1996. As noted above, the relatively small increase
in general and administrative expense compared to the sales increase was
primarily realized from cost reductions obtained by more efficient management of
collections, accounting, and investor relations activities.
Net income for the six months ended June 30, 1997 was $1,158,091 (22% of sales)
compared with $958,075 (22% of sales) for 1996. This represents a 21% increase
in net income. Earnings per share for the six months ended June 30, 1997
increased 24% to $0.46 per share compared to $0.37 per share for the six months
ended June 30, 1997. The percentage increase in earnings per share was higher
than the percentage increase in net income primarily as a result of a decrease
in common stock equivalents of 56,391 shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its business activities primarily from cash provided by
operating activities. Cash provided by operating activities for the six months
ended June 30, 1997 and 1996 was $1,687,978 and $116,845, respectively. Working
capital as of June 30, 1997 and December 31, 1996 was $2,514,528 and $5,643,924,
respectively, and cash balances were $253,776 and $3,442,601 for the same
periods, respectively.
The Company has historically utilized the operating cash flow to expand the
Company's marketing activities, for product development, and acquisitions of new
products and companies as well as for working capital purposes. As discussed
above, in June 1997 the Company utilized $4,159,682 in cash generated during the
first six months of 1997 and existing cash reserves to purchase certain assets
of Delta.
In anticipation of the impact of this acquisition on cash reserves and working
capital, the Company obtained a $2.0 million line of credit from a bank.
Management expects to utilize the credit facility periodically for short-term
working capital needs and for short-term financing of future acquisitions. The
interest rate on amounts borrowed under the line of credit ranges from LIBOR
plus 2.25% to LIBOR plus 2.75%. There were no borrowings under the line of
credit as of June 30, 1997.
The Company uses United Parcel Service (UPS) to ship a significant amount of
products ordered by its customers. On August 4, 1997, UPS employees belonging to
the Teamsters Union began a nationwide work stoppage. If the work stoppage is
prolonged, it could have an impact on the Company's cash flow from operations.
The Company will utilize the line of credit to supplement any short-term cash
requirements.
10
PART II - OTHER INFORMATION
ITEM 1 - 3. NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On May 30, 1997, the Company held its Annual Meeting of Shareholders. At
such meeting, the Company's shareholders ( i ) elected five directors to
serve until the Company's next annual meeting and ( ii ) approved the
appointment of Ernst & Young LLP to serve as the Company's independent
auditors. The number of votes cast in matters is set forth below:
Election of Directors
VOTES AGAINST OR BROKER
NAME VOTES FOR WITHHELD ABSTENTIONS NON-VOTES
- ---- --------- ---------------- ----------- ---------
Mark A. Betker 2,299,524 2,500 0 0
Michael C. Franson 2,299,524 2,500 0 0
Thomas W. Gamel 2,299,524 2,500 0 0
John T. Pfannenstein 2,299,524 2,500 0 0
Ellen S. Robinson 2,299,524 2,500 0 0
Approval of Appointment of Ernst & Young LLP
Votes For Votes Against or Withheld Abstentions Broker Non-Votes
----------------------------------------------------------------------------
2,293,782 3,200 5,042 0
ITEM 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 10.1 Revolving Credit Agreement dated June 24, 1997,
by and between the Company and Colorado National
Bank.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On April 30, 1997, the Company filed a Form 8-K to report a change
in the Company's certifying accountant which was effective as of
April 24, 1997.
11
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, 1997 /s/ Mark A. Betker
- ---------------- ----------------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
August 13, 1997 /s/ Jeffrey L. Vigil
- ---------------- ----------------------------------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
12