U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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[ ] 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
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(Exact name of 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
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(Address of principal executive offices)
(303) 574-1000
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(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 May 15, 2000 was 6,422,676 shares
1
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
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CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
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ASSETS
Current Assets
Cash and cash equivalents $ 30,271 $ 173,936
Accounts receivable, trade (less allowance for doubtful accounts
of $155,443 in 2000 and $131,030 in 1999) 9,657,921 9,234,685
Income tax refund receivable 1,466,980 --
Inventories 8,118,697 5,137,791
Prepaid expenses and other 2,383,278 1,249,384
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Total current assets 21,657,147 15,795,796
Property and equipment, net 4,362,763 3,213,980
Identifiable intangible assets (net of accumulated amortization
of $1,603,113 in 2000 and $1,371,326 in 1999) 28,317,490 18,709,242
Goodwill (net of accumulated amortization
of $502,543 in 2000 and $381,019 in 1999) 23,385,610 10,839,282
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$ 77,723,010 $ 48,558,300
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,182,473 $ 2,210,583
Accrued expenses 4,214,107 955,731
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Total current liabilities 8,396,580 3,166,314
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Long Term Liabilities:
Deferred income taxes and other 1,210,110 1,086,270
Credit facility 31,487,000 13,979,000
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Total long term liabilities 32,697,110 15,065,270
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Total liabilities 41,093,690 18,231,584
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Commitments and contingencies
Shareholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.10 par value, 10,000,000 shares authorized;
issued and outstanding (6,397,128 in 2000 and 6,397,128 in 1999) 639,713 639,713
Common stock to be issued (425,758 shares in 2000) 5,058,000 --
Note receivable from officer (383,505) (383,505)
Additional paid-in capital 14,596,294 14,596,294
Accumulated other comprehensive income (loss) (49,307) (31,038)
Retained earnings 16,768,125 15,505,252
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Total shareholders' equity 36,629,320 30,326,716
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$ 77,723,010 $ 48,558,300
============ ============
See Notes to Condensed Consolidated Financial Statements
2
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
2000 1999
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Sales $ 11,479,707 $ 7,299,427
Cost of sales 5,774,786 3,605,975
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Gross profit 5,704,921 3,693,452
Selling, general and administrative expenses 2,971,928 1,852,239
Amortization of intangibles 351,611 228,127
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Income from operations 2,381,382 1,613,086
Other (income) expense:
Interest expense 431,223 108,559
Other income and expense (70,860) 33,712
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Income before income taxes 2,021,019 1,470,815
Provision for income taxes 757,882 522,138
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Net income $ 1,263,137 $ 948,677
============ ============
Net income per share - basic $ 0.19 $ 0.16
============ ============
Net income per share - diluted $ 0.19 $ 0.15
============ ============
Weighted average shares outstanding - basic 6,539,047 5,982,720
============ ============
Weighted average shares outstanding - diluted 6,774,282 6,193,306
============ ============
See Notes to Condensed Consolidated Financial Statements
3
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
2000 1999
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Cash flows from operating activities:
Net income $ 1,263,137 $ 948,677
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 193,158 118,619
Amortization 351,611 228,127
Increase in operating assets:
Accounts receivable, trade 101,538 529,446
Inventories (1,170,421) (725,169)
Prepaid expenses and other (1,052,750) (510,001)
Increase in operating liabilities:
Accounts payable 1,221,336 625,964
Accrued expenses and income taxes (698,011) 540,001
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Net cash provided by operations 209,598 1,755,664
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Cash flows from investing activities:
Capital expenditures (108,717) (447,045)
Acquisitions, net of cash acquired (17,685,226) (21,034,379)
Patents and intangibles (19,051) (5,506)
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Net cash used by investing activities (17,812,994) (21,486,930)
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Cash flows from financing activities:
Sale of common stock, net of expenses 0 2,680,450
Net proceeds from (payments on) credit facility 17,478,000 11,350,800
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Net cash provided by financing activities 17,478,000 14,031,250
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Effect of exchange rate changes on cash and cash equivalents (18,269) (18,835)
Net decrease in cash and cash equivalents (143,665) (5,718,851)
Cash and cash equivalents at beginning of period 173,936 6,493,570
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Cash and cash equivalents at end of period $ 30,271 $ 774,719
============ ============
See Notes to Condensed Consolidated Financial Statements
4
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
1. Unaudited information:
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q 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-Q should refer to the Company's
10-KSB for the year ended December 31, 1999 for further information.
The quarterly financial information has been prepared in accordance with
the Company's customary accounting practices and has not been audited. In
the opinion of management, the information presented reflects all
adjustments necessary for a fair statement of interim results. All such
adjustments are of a normal and recurring nature. The results of operations
for the interim period ended March 31, 2000 are not necessarily indicative
of the results for a full year.
2. Revenue Recognition
The company recognizes revenue at the time its products are shipped, or by
the percentage of completion method of accounting for those projects where
the build to install timeline is of longer duration.
3. Inventory:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory as of March 31, 2000 and December 31, 1999, consists of
the following:
March 31, 2000 December 31, 1999
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Raw materials and component parts $3,484,931 $2,116,864
Work in progress 3,925,601 2,187,413
Finished goods 708,165 833,514
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$8,118,697 $5,137,791
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4. Credit Facility:
On March 1, 2000, the Company increased its secured line of credit to $40.0
million from $15.0 million. 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 March 1, 2003. Interest payments are required at
least every three months at a fluctuating rate per annum equal to the
applicable "Reserve Adjusted LIBOR Rate" (8.47% at March 31, 2000). 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 $31,487,000 as of March 31, 2000.
5
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
5. Acquisitions:
Acquisition of SCS Interactive:
Effective March 1, 2000, the Company purchased 100% of the common stock of
SCS Interactive, Inc., ("SCS"), a provider of interactive water play
products located in Tillamook, Oregon. Results of operations of SCS were
included in the Company's consolidated statement of income beginning on the
effective date of the transaction.
The purchase price consisted of cash and Koala Corporation common stock. A
cash payment of $18,052,903 was made at closing, which was based on the
cash component of the purchase price less holdbacks equal to $2,181,097.
The cash component was financed primarily from an advance on the Company's
line of credit in the amount of approximately $18,000,000. The stock
component will result in the issuance of 425,758 shares of Koala common
stock. In addition, costs of approximately $400,000 were incurred in
connection with this acquisition. Initial consideration and acquisition
costs were allocated to tangible assets based on relative fair value, with
the remaining balance allocated to patents, other intellectual property and
goodwill.
The pro forma unaudited results of operations of the Company for the three
months ended March 31, 2000 and 1999 assuming consummation of the purchase
of SCS as of January 1, 2000 and 1999 are as follows:
March 31,
2000 1999
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Sales $14,816,476 $11,707,429
Net income $1,327,518 $1,004,929
Net income per share - diluted $0.19 $0.15
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 and activity
products. All of these products are manufactured by sub-contractors, except
for Superior Foam, whose products are manufactured by the Company at its
facility located in Texas. All products are sold either direct to the
customer or through distributors.
6
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
6. Business Segments: (Continued)
The Company's modular play equipment includes both indoor, outdoor and
water play equipment. The indoor play equipment is custom designed for the
customer. A catalog is used to promote and advertise the outdoor and water
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 British Columbia, Florida, Oregon and
New York. These products are sold direct to the customer and through
manufacturers' representatives/dealers.
The Company evaluates the performance of its segments based primarily on
operating profit before amortization of acquisition intangibles, 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:
------------------------------------------------------------------------
March 31, 2000
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Convenience Modular
and Activity Play Total
Products Equipment
---------------------------------------------
Sales $ 4,251,853 $ 7,227,854 $11,479,707
Operating income 1,302,196 1,079,186 2,381,382
Capital expenditures 42,384 66,333 108,717
Total assets 18,933,401 58,789,609 77,723,010
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March 31, 2000
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Convenience Modular
and Activity Play Total
Products Equipment
---------------------------------------------
Sales $ 3,178,432 $ 4,120,995 $ 7,299,427
Operating income 997,358 615,728 1,613,086
Capital expenditures 418,300 28,745 447,045
Total assets 15,352,931 27,831,269 43,184,200
7
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; 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; 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;
government regulations including those promulgated by the consumer products
safety commission; 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
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 flagship product, has been installed in 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.
Business Segments
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 and activity 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, or by the percentage
of completion method of accounting for those projects where the build to install
timeline is of longer duration.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Segments (continued)
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
British Columbia, Florida, Oregon and New York. These products are sold direct
and through manufacturers' representatives/dealers. The company recognizes
revenue at the time its products are shipped, or by the percentage of completion
method of accounting for those projects where the build to install timeline is
of longer duration.
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 Acquisition
Acquisition of SCS Interactive:
Effective March 1, 2000, the Company purchased 100% of the common stock of SCS
Interactive, Inc., a provider of interactive and modular water play products
located in Tillamook, Oregon for cash and stock consideration of $25.7 million.
SCS products are primarily marketed and sold to amusement and water parks. The
SCS acquisition further broadens the Company's product lines and complements the
Company's 1998 and 1999 acquisitions of Park Structures and Superior Foam. The
acquisition also affords the Company an opportunity to sell its convenience and
children's activity products into new markets. SCS product line is included in
the children's modular play equipment business segment.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 2000 compared to Three Months Ended March 31, 1999
Sales increased 57% to $ 11,479,707 for the first quarter of 2000 compared to
$7,299,427 for the first quarter of 1999. Convenience and activity product
segment sales increased 34% to $4,251,853 for the three months ended March 31,
2000 compared to $3,178,432 for the three months ended March 31, 1999. Sales by
Smart Products and Superior Foam were included in this segment as of September
1, 1999, and March 1, 1999, respectively, the effective date of each purchase.
Modular play equipment segment sales increased 75% to $7,227,854 for the first
quarter of 2000 compared to $4,120,995 for the first quarter of 1999. The
inclusion of SCS Interactive for one month in the first quarter of 2000
contributed to the increase.
Gross profit for the first quarter of 2000 was $5,704,921 (50% of sales)
compared with $3,693,452 (51% of sales) for the first quarter of 1999. The gross
profit percentage for the first quarter 2000 decreased from the gross profit
achieved for first quarter 1999 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 first quarter of
2000 to $2,971,928 (26% of sales) from $1,852,239 (25% of sales) for the same
period in 1999. Sales and marketing expenses increased $591,062 to $1,647,338
for the first quarter of 2000 compared to $1,056,276 for the first quarter of
1999. This increase was due primarily to the inclusion of SCS Interactive, Smart
Products, Superior Foam, and the higher level of sales achieved. General and
administrative expenses increased $559,030 to $1,324,590 for the first quarter
of 2000 compared to $765,560 for the first quarter of 1999. The increase in
general and administrative expense was primarily the result of the inclusion of
SCS Interactive, Smart Products, and Superior Foam.
Net income for the first quarter of 2000 was $1,263,137 (11% of sales) compared
with $948,677 (13% of sales) for the first quarter of 1999. This represents a
33% increase in net income. The historically lower margins from SCS Interactive,
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 first
quarter of 2000 increased 22% compared to the first quarter of 1999. 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 580,976 shares.
Liquidity and Capital Resources
The Company's free cash flow, defined as net income plus non-cash items,
increased by $512,483 to $1,807,906 for the three months ended March 31, 2000
from $1,295,423 for the three months ended March 31, 1999. The Company finances
its business activities primarily from cash provided by operating activities.
Cash provided by operating activities for the three months ended March 31, 2000
and 1999 was $209,598 and $1,755,664, respectively. The decrease in cash
provided by operating activities for the three months ended March 31, 2000
compared to the three months ended March 31, 1999 is due primarily to the
integration of SCS Interactive into Koala Corporation and a combination of an
increase in prepaids and inventory, and a decrease in accrued liabilities. The
Company continued its investment in inventory to support the sales growth, also
resulting in a corresponding increase in accounts payable. The Company
historically incurs significant expenditures for prepaid advertising in the
first quarter of the calendar year. These expenditures are for catalogs,
brochures, other print material, trade shows and media advertising that will be
utilized throughout the year.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (Continued)
Working capital as of March 31, 2000 and December 31, 1999 was $13,260,567 and
$12,629,482, respectively, and cash balances were $30,271 and $173,936 at the
same dates. The low cash balances are due to the Company's practice of applying
all excess cash against the line of credit to minimize interest expense payable
on line of credit balances.
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 $17,812,994 and $21,486,930 for the three months ended March 31,
2000 and 1999, respectively. During the first quarter of 2000, the Company
utilized all of its cash on hand and the credit facility to purchase the stock
of SCS Interactive. 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, the commercial foam product assets,
and the additional convenience 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 significant capital expenditures in the near future.
The Company increased its secured line of credit to $40.0 million from $15.0
million on March 1, 2000. 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 March 1,
2003. Interest payments are required at least every three months at a
fluctuating rate per annum equal to the applicable "Reserve Adjusted LIBOR Rate"
(8.47% at March 31, 2000). 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 $31,487,000 outstanding under the credit facility as of March 31,
2000.
11
PART II - OTHER INFORMATION
Item 1 - 5. None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27.1 March 31, 2000 Financial Data Schedule.
(b) Reports on Form 8-K
On March 15, 2000, the Company filed a Form 8-K under Item 2
and Item 7 for the acquisition of SCS Interactive, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
KOALA CORPORATION
May 15, 2000 /s/Mark A. Betker
- ------------ ---------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
May 15, 2000 /s/Jeffrey L. Vigil
- ------------ ----------------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
12