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, 1998
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _________ to __________
Commission file number 0-22464
-------
KOALA CORPORATION
-----------------------------------
(Exact name of small business issuer
as specified in its charter)
Colorado 84-1238908
- ------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5031 So. Ulster Street, Suite 300, Denver, CO 80237
---------------------------------------------------
(Address of principal executive offices)
(303) 770-3500
---------------------------
(Issuer's telephone number)
----------------------------------------------
(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 June 30, 1998 was 2,527,362 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
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,841,825 $ 1,832,677
Accounts receivable, trade (less allowance for doubtful accounts
of $45,187 in 1998 and $45,703 in 1997) 2,216,219 2,212,802
Refundable income taxes - 74,523
Inventories 1,433,994 1,103,355
Prepaid expenses 838,805 416,120
Deferred income taxes 14,314 14,314
------------ ------------
Total current assets 6,345,157 5,653,791
PROPERTY AND EQUIPMENT 1,857,263 1,561,324
Less accumulated depreciation and amortization 438,991 322,616
------------ ------------
1,418,272 1,238,708
------------ ------------
OTHER ASSETS:
Intangibles (net of accumulated amortization
of $626,979 in 1998, and $496,221 in 1997). 8,627,364 8,064,301
------------ ------------
$ 16,390,793 $ 14,956,800
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,642,556 $ 1,312,518
Accrued expenses and income taxes 115,240 396,163
------------ ------------
Total current liabilities 1,757,796 1,708,681
------------ ------------
DEFERRED INCOME TAXES 398,047 398,047
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.10 par value; 10,000,000 shares authorized;
issued and outstanding 2,527,362 in 1998 and 1997 252,736 252,736
Additional paid-in capital 5,307,988 5,307,988
Other comprehensive income (49,185) (25,124)
Retained earnings 8,723,411 7,314,472
------------ ------------
Total shareholders' equity 14,234,950 12,850,072
------------ ------------
$ 16,390,793 $ 14,956,800
============ ============
See notes to consolidated financial statements
2
KOALA CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
SALES $ 4,429,581 3,040,822 $ 8,443,575 $ 5,291,994
Cost of sales 1,888,057 1,191,429 3,629,980 1,914,543
---------------- ---------------- ---------------- ----------------
Gross profit 2,541,524 1,849,393 4,813,595 3,377,451
Selling, general and administrative expenses 1,309,598 876,776 2,538,619 1,597,562
Amortization of intangibles 65,379 36,313 130,758 62,626
---------------- ---------------- ---------------- ----------------
INCOME FROM OPERATIONS 1,166,547 936,304 2,144,218 1,717,263
---------------- ---------------- ---------------- ----------------
OTHER (INCOME) EXPENSE:
Interest income (33,377) (36,875) (40,184) (78,227)
---------------- ---------------- ---------------- ----------------
Income before income taxes 1,199,924 973,179 2,184,402 1,795,490
Provision for income taxes 425,974 345,478 775,463 637,399
---------------- ---------------- ---------------- ----------------
NET INCOME $ 773,950 $ 627,701 $ 1,408,939 $ 1,158,091
================ ================ ================ ================
Other comprehensive income (32,730) - (24,061) -
---------------- ---------------- ---------------- ----------------
COMPREHENSIVE INCOME $ 741,220 $ 627,701 $ 1,384,878 $ 1,158,091
================ ================ ================ ================
NET INCOME PER SHARE $ 0.31 $ 0.25 $ 0.56 $ 0.47
================ ================ ================ ================
Weighted average shares outstanding 2,527,362 2,484,337 2,527,362 2,482,799
================ ================ ================ ================
NET INCOME PER SHARE - DILUTED $ 0.30 $ 0.25 $ 0.54 $ 0.46
================ ================ ================ ================
Weighted average shares outstanding - diluted 2,603,447 2,513,428 2,596,394 2,510,951
================ ================ ================ ================
See notes to consolidated financial statements
3
KOALA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
- --------------------------------------------------------------------------------
Six months ended June 30,
-----------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,408,939 $ 1,158,091
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 116,375 43,026
Amortization 130,758 62,626
(Increase) decrease in assets:
Accounts receivable, trade (3,417) (339,663)
Refundable income taxes 74,523 338,200
Inventories (330,639) (159,307)
Prepaid expenses (422,685) (196,441)
Increase (decrease) in liabilities:
Accounts payable (444,337) 359,392
Accrued expenses 54,509 351,266
Accrued income taxes (201,057) 70,788
----------- -----------
Net cash provided by operating activities 382,969 1,687,978
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for capital expenditures (295,939) (271,433)
Purchase of Delta Play, Ltd., net of cash acquired - (4,592,219)
Payments for patents and intangibles (53,821) (13,151)
----------- -----------
Net cash used by investing activities (349,760) (4,876,803)
----------- -----------
Effect of exchange rate changes on cash (24,061) -
NET INCREASE (DECREASE) IN CASH 9,148 (3,188,825)
Cash at beginning of period 1,832,677 3,442,601
----------- -----------
Cash at end of period $ 1,841,825 $ 253,776
=========== ===========
See notes to consolidated financial statements
4
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1. Description of business and principles of consolidation:
Nature of operations:
Koala Corporation and its wholly owned subsidiaries ( the "Company") 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
indoor and outdoor modular play equipment.
Principles of consolidation:
The consolidated financial statements include the accounts of Koala
Corporation and all subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation. The operations of
Delta Play, Ltd. are included in the accompanying financial statements from
June 1, 1997, the effective date of its acquisition. See Note 6 below.
2. Unaudited information:
The accompanying financial statements are presented in accordance with the
requirements of Form 10-QSB and consequently do not include all of the
disclosures normally required by generally accepted accounting principles
or those normally made in the Company's annual Form 10-KSB filing.
Accordingly, the reader of this Form 10-QSB may wish to refer to the
Company's 10-KSB for the year ended December 31, 1997 for further
information.
The quarterly financial information has been prepared in accordance with
the Company's customary accounting practices and has not been audited. In
the opinion of management, the information presented reflects all
adjustments necessary for a fair statement of interim results. All such
adjustments are of a normal and recurring nature. The results of operation
for the interim period ended June 30, 1998 are not necessarily indicative
of the results for a full year.
3. Inventory:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory as of June 30, 1998 and December 31, 1997, consists of
the following:
June 30,1998 December 31, 1997
------------ -----------------
Raw materials $ 822,279 $ 605,066
Finished goods 611,715 498,289
---------- ----------
$1,433,994 $1,103,355
========== ==========
5
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
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, 1999. There were no amounts
outstanding under the credit facility as of June 30, 1998.
5. Earnings per share:
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all periods have been restated to conform to the Statement 128
requirements.
There is no difference between after tax earnings for calculation of basic
earnings per share versus diluted earnings per share. The reconciliation of
the weighted average shares outstanding for purposes of calculating basic
earnings per share versus diluted earnings per share is as follows:
June 30,1998 June 30, 1997
------------ -------------
Weighted average shares
outstanding for basic EPS 2,527,362 2,482,799
Effect of dilutive securities:
Employee Stock Options 69,032 26,244
Warrants 0 1,908
--------- ---------
Dilutive potential common shares 69,032 28,152
--------- ---------
Weighted average shares
outstanding for diluted EPS 2,596,394 2,510,951
========= =========
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.
6
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
6. Acquisition of Delta Play, Ltd.: (Continued)
As initial consideration, the Company paid $4,180,609 cash and issued
40,000 shares of the Company's common stock valued at $600,000. In
addition, costs related to the acquisition of approximately $456,000 were
incurred and capitalized as goodwill. 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.
The pro forma unaudited results of operations for the six months ended June
30, 1997, assuming consummation of the purchase as of January 1, 1997, are
as follows:
Net sales $7,170,000
Net income $1,256,000
Net income per share $ .49
7. Foreign Currency Translation:
The financial statements of the Company's subsidiary located outside the
United States are measured using the local currency as the functional
currency. Assets and liabilities of this subsidiary are translated at the
rates of exchange at the balance sheet date. The resultant translation
adjustments are included in other comprehensive income, a separate
component of shareholders' equity. Income and expense items are translated
at average rates of exchange. Gains and losses on foreign currency
transactions of these subsidiaries are included in net earnings.
8. Comprehensive Income:
As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of Statement 130.
7
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
9. Subsequent events:
On August 14, 1998, the Company entered into an agreement to purchase the
combined assets of Park Structures, Inc. and Park Structures Sales, Inc.
("Park Structures") in consideration for up to $18.7 million in cash and
common stock of Koala Corporation. Park Structures produces and markets
children's outdoor modular play systems for municipalities, parks, public
and private schools, day care centers and private developers. Closing of
the Park Structures acquisition will occur simultaneously with closing of a
secondary public offering of the Company's common stock. The Company plans
to issue approximately 1,000,000 shares of common stock pursuant to the
proposed secondary offering.
The Company has determined the additional consideration pursuant to the
Delta purchase agreement will be paid August 1998. The Company estimated
additional consideration totaling approximately $640,000 will be payable,
and accordingly, has recorded $640,000 to intangibles and accounts payable
at June 30, 1998.
In January 1998, the Company authorized the amendment and restatement of
the 1995 Koala Corporation Stock Option Plan to grant an additional 250,000
shares and allow the transfer of non-qualified stock options to family
members without Board of Directors approval or to non-employees with Board
of Directors approval. The amendment and restatement was approved by the
Company's shareholders' at its annual shareholders meeting in May 1998.
8
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 potential that the proposed
acquisition of Park Structures discussed below does not close; 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.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPONENTS OF SALES AND EXPENSE
The Company's revenues are derived primarily from the sale of Baby Changing
Stations, disposable sanitary liners for the Baby Changing Stations, Child
Protection Seats, Infant Seat Kradles, and Booster Buddy seats which are sold
primarily to commercial, institutional, and recreational facilities such as
shopping centers, retail establishments, restaurants, sports and recreational
facilities, and other public buildings. In addition, in furtherance of the
Company's "Koala Kare" strategy discussed below, the Company acquired certain
assets of Activities Unlimited, a developer and distributor of commercial-use
children's activities products at the end of first quarter 1996, and Delta Play,
Ltd. ("Delta"), a leading provider of custom indoor modular play systems, in
June 1997. Revenues from these acquired product lines have reduced the Company's
dependency on revenues from Baby Changing Stations.
Cost of sales consists of components manufactured for the Company and direct
labor and manufacturing overhead incurred by the Company. All major components
are manufactured by outside vendors. Direct labor and manufacturing overhead
relate to the assembly of the products. Beginning in September 1996, the
Company sub-contracted out the assembly operations for the Baby Changing
Stations, Child Protection Seats and Infant Seat Kradles.
Selling, general, and administrative expenses consist primarily of executive and
office salaries, payroll taxes, advertising expenses, and other miscellaneous
selling expenses.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPONENTS OF REVENUE AND EXPENSES (CONTINUED)
The Company's quarterly revenues and net income are subject to fluctuation based
on customer order patterns and Company shipping activity. Because of these
fluctuations, comparisons of operating results from quarter to quarter for the
current year or for comparable quarters of the prior year may be difficult.
Except as set forth below, these fluctuations are not expected to be significant
when considered on an annual basis. In addition, because the Delta acquisition
was effective June 1, 1997, the Company's second quarter of 1998 includes the
results of three months of operations from Delta, while the second quarter of
1997 includes only the results one month of operations.
RECENT ACQUISITION
In June 1997, the Company acquired substantially all of the assets of Delta for
cash and stock totaling $4,780,609. Based in Vancouver, British Columbia, Delta
and its affiliates generated operating income before taxes of approximately $1.1
million (U.S.) on sales of $4.5 million (U.S.) for its fiscal year ended March
31, 1997.
Primary customers for Delta's play systems include family entertainment centers,
quick service restaurants, shopping centers and theme parks. Delta's markets
are global in nature, with over one-half of sales occurring outside of North
America during the fiscal year ended March 31, 1997. The Delta acquisition is
intended to add to Koala's expanding umbrella of product lines under its "Koala
Kare" 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.
Recent Developments
On August 14, 1998, the Company entered into an agreement to purchase the
combined assets of Park Structures, Inc. and Park Structures Sales, Inc. ("Park
Structures") in consideration for up to $18.7 million. Park Structures produces
and markets children's outdoor modular play systems for municipalities, parks,
public and private schools, day care centers and private developers. Closing of
the Park Structures acquisition will occur simultaneously with closing of a
proposed secondary offering.
The Park Structures acquisition is the Company's third business acquisition in
three years and further broadens the Company's product lines. The acquisition
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 will receive $12.7 million in cash at closing and is entitled to
receive up to an additional $6.0 million, of which $4.5 million is payable in
cash and $1.5 million is payable in common stock of the Company, if certain
earnings targets are met. Over the four years ended December 31, 1997, Park
Structures' sales have grown at a compound average rate of 34%.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Sales increased 46% to $4,429,581 for the second quarter of 1998 compared to
$3,040,822 for the second quarter of 1997. Sales from Delta following the Delta
acquisition and the sales and marketing strategy implemented by the Company
contributed to the additional sales revenue for 1998. As noted above, sales for
the three months ended June 30, 1998 reflect three months contribution from
Delta, while sales for the three months ended June 30, 1997 reflect only one
month.
Gross profit for the second quarter of 1998 was $2,541,524 (57% of sales)
compared with $1,849,393 (61% of sales) for the second quarter of 1997. The
gross profit percentage for the second quarter 1998 decreased from the gross
profit achieved for second quarter 1997 primarily because of the lower margins
achieved on Delta's sales along with a higher proportion of sales of Koala
products into distribution channels, where reduced margins are realized.
Selling, general, and administrative expenses increased for the second quarter
of 1998 to $1,309,598 (30% of sales) from $876,776 (29% of sales) for the same
period in 1997. Sales and marketing expenses increased $292,522 for the second
quarter of 1998 compared to second quarter of 1997. These cost increases were
due to the inclusion of Delta and a higher level of sales achieved, and included
costs for various marketing programs, commissions paid to manufacturers sales
representatives and salaries of the sales and marketing personnel added in the
second quarter of 1998. These costs were incurred in furtherance of the
Company's sales and marketing strategies.
General and administrative expenses increased $140,300 for the second quarter of
1998 compared to the second quarter of 1997. The increase in general and
administrative expenses was primarily the result of the inclusion of Delta and
the addition of a General Manager and Controller to Koala's administrative
staff.
Net income for the second quarter of 1998 was $773,590 (17% of sales) compared
with $627,701 (21% of sales) for the second quarter of 1997. This represents a
23% increase in net income. The lower margins obtained from Delta's sales
contributed to the decrease in net income as a percentage of sales. Net income
per share (assuming dilution) for the second quarter of 1998 increased 19%
compared to the second quarter of 1997. The percentage increase in net income
per share (assuming dilution) was lower than the percentage increase in net
income primarily as a result of an increase in the weighted average number of
shares outstanding of approximately 90,000 shares.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Sales increased 59.6% to $8,443,575 for the six months ended June 30, 1998
compared to $5,291,994 for the six months ended June 30, 1997. A majority of
the increase resulted from sales of children's indoor modular play equipment, a
product line acquired effective June 1, 1997. Focused sales and marketing
programs that the Company implemented for the family convenience and children's
activity product lines also contributed to the increased sales.
Gross profit increased 42.5% to $4,813,595 for the six months ended June 30,
1998 compared to $3,377,451 for the six months ended June 30, 1997. As a
percentage of sales, gross profit decreased in the 1998 period compared to the
1997 period primarily because of a change in product mix that included sales of
children's indoor modular play equipment along with a higher proportion of sales
of family convenience and children's activity products through dealer channels,
where lower gross profit margins are realized. Gross profit was also impacted
by higher depreciation charges arising from capitalized tooling expenditures
from new products added in 1997.
Selling, general and administrative expense increased 58.9% to $2,538,619 for
the six months ended June 30, 1998 compared to $1,597,562 for the six months
ended June 30, 1997. Sales and marketing expense increased 60.3% to $1,652,309
for the six months ended June 30, 1998 compared to $1,030,759 for the six months
ended June 30, 1997. These cost increases were due to the inclusion of the
children's indoor modular play equipment line and the higher level of sales
achieved and included costs for various marketing programs, commissions paid to
manufacturer's sales representatives and salaries of sales and marketing
personnel added subsequent to the 1997 period. General and administrative
expense increased 56.4% to $886,310 for the six months ended June 30, 1998
compared to $566,803 for the six months ended June 30, 1997. The increase in
general and administrative expense was primarily the result of the inclusion of
the children's indoor modular play equipment line and the addition of a general
manager and controller to Koala's administrative staff as well as increased
depreciation charges for new products implemented in 1997.
The Company's effective tax rates were 35.5% for both the six months ended June
30, 1998 and 1997.
Net income increased 21.7% to $1,408,939 for the six months ended June 30, 1998
compared to $1,158,091 for the six months ended June 30, 1997. As a percentage
of sales, net income declined during the 1998 period compared to the 1997 period
primarily due to the inclusion of the children's modular play equipment line in
the product mix. Net income per share (diluted) increased 17.4%, or $.08, to
$.54 for the six months ended June 30, 1998 compared to $.46 for the six months
ended June 30, 1997. The percentage increase in net income per share was lower
than the percentage increase in net income as a result of an increase of 85,000
shares in the weighted average number of shares outstanding.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 1998 and 1997 was $382,969 and $1,687,978, respectively. The
decrease in cash provided by operating activities for the six months ended June
30, 1998 compared to the six months ended June 30, 1997 is due primarily to a
combination of an increase in inventories of raw materials and finished goods
during the six months ended June 30, 1998, a decrease in accounts payable and
increases in prepaid expenses during the 1998 period and the receipt of a large
tax refund in March 1997.
Working capital as of June 30, 1998 and December 31, 1997 was $4,587,361 and
$3,945,110 respectively, and cash balances were $1,841,825 and $1,832,677 for
the same periods, respectively.
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 $4,876,807 and $349,760 for the six months ended June 30, 1997
and 1998, respectively. In 1997, substantially all of the cash was used to
purchase the children's modular play equipment assets, with the balance
primarily devoted to capital expenditures. Net cash used by investing activities
for the six months ended June 30, 1998 relate to capital expenditures for
leasehold improvements on a new facility in British Columbia, tooling and
computer hardware and software and patents and intangibles. The Company does
not anticipate any extraordinary capital expenditures in the near future.
The Company obtained a $2.0 million unsecured line of credit from a bank in June
1997. The Company borrowed $500,000 on the line to fund operations after the
acquisition of the children's modular play equipment line in July 1997 and
repaid the loan from cash flow later in the same month. Management expects to
use the credit facility periodically for short-term working capital needs and
for short-term financing of future acquisitions. The interest rate on amounts
borrowed under the line of credit ranges from LIBOR plus 2.25% to LIBOR plus
2.75%. There were no amounts outstanding under the credit facility as of June
30, 1998.
YEAR 2000
The Company has developed a plan to make its information technology ready for
the year 2000 and believes that its critical data processing systems are
currently ready for the year 2000. The Company has initiated communications
with all of its significant suppliers and customers to determine the extent to
which the Company's operations are vulnerable to those third parties' failure to
make their own systems Year 2000 compliant. Although the Company has not
received responses from all of these suppliers and customers, it does not
foresee any significant problems with this issue, and is developing contingency
plans to mitigate any possible disruptions.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
13
PART II - OTHER INFORMATION
ITEM 1 - 3. NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On May 19, 1998, 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, ( ii ) amended and
restated the Koala Corporation 1995 Stock Option Plan, and ( iii )
approved the appointment of Ernst & Young LLP to serve as the Company's
independent auditors for the year ended December 31, 1998. The number of
votes cast in matters is set forth below:
1. Election of Directors
VOTES AGAINST OR BROKER
---------------- ------
NAME VOTES FOR WITHHELD ABSTENTIONS NON-VOTES
- ---- --------- -------- ----------- ---------
Mark A. Betker 2,231,155 8,351 0 0
Michael C. 2,230,905 8,601 0 0
Franson
Thomas W. Gamel 2,231,155 8,351 0 0
John T. Pfannenstein 2,231,155 8,351 0 0
Ellen S. Robinson 2,230,605 8,901 0 0
2. Amend and Restate the Koala Corporation 1995 Stock Option Plan (the "Plan")
Votes For Votes Against or Withheld Abstentions Broker Non-Votes
--------- ------------------------- ------------ ----------------
1,158,687 99,855 13,722 544,242
3. Approval of Appointment of Ernst & Young LLP
Votes For Votes Against or Withheld Abstentions Broker Non-Votes
--------- ------------------------- ----------- ----------------
2,229,611 4,896 4,999 0
ITEM 5. OTHER
SUBMISSION OF SHAREHOLDER PROPOSALS
Proposals by Shareholders of the Company to be presented at the next Annual
Meeting of Shareholders must be received by the Company on or before December
20, 1998 to be included in the Company's Proxy Statement and proxy for that
meeting. If a Shareholder intends to submit a proposal at the meeting that is
not included in the Company's proxy statement, and the Shareholder fails to
notify the Company prior to March
14
ITEM 5. SUBMISSION OF SHAREHOLDER PROPOSALS (CONTINUED)
9, 1999 of such proposal, then the proxies appointed by the Company's management
would be allowed to use their discretionary voting authority when the proposal
is raised at the annual meeting, without any discussion of the matter in the
proxy statement. The proponent must be a record or beneficial owner entitled to
vote on his or her proposal at the next Annual Meeting and must continue to own
such security entitling him or her to vote through that date on which the
Meeting is held. The proponent must own 1% or more of the outstanding shares,
or $1,000.00 in market value, of the Company's common stock and must have owned
such shares for one year in order to present a shareholder proposal to the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
Exhibit 27.2 Financial Data Schedule, restated.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June
30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
KOALA CORPORATION
August 12, 1998 /s/Mark A. Betker
- ---------------------- ---------------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
August 12, 1998 /s/Jeffrey L. Vigil
- ---------------------- ---------------------------------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
15