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 March 31, 1999
-----------------
[ ] 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)
11600 E. 53rd Avenue, Unit D, Denver, CO 80239
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(Address of principal executive offices)
(303) 574-1000
--------------
(Issuer's telephone number)
5031 So. Ulster Street, Suite 300, Denver, CO 80237
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(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 March 31, 1999 was 3,104,448 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
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 774,719 $ 6,493,570
Accounts receivable, trade ( less allowance for doubtful accounts
of $76,487 in 1999 and $111,444 in 1998) ..................... 5,723,341 5,781,256
Inventories ..................................................... 4,426,306 3,581,137
Prepaid expenses and other ...................................... 1,284,909 838,109
------------ ------------
Total current assets .............................................. 12,209,275 16,694,072
------------ ------------
Property and Equipment: ........................................... 3,521,481 2,991,182
Less accumulated depreciation .................................... 681,013 559,068
------------ ------------
2,840,468 2,432,114
------------ ------------
Other Assets:
Intangibles (net of accumulated amortization of $1,021,948
in 1999 and $793,821 in 1998) ................................. 28,134,457 22,479,014
------------ ------------
28,134,457 22,479,014
------------ ------------
$ 43,184,200 $ 41,605,200
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................ $ 2,610,324 $ 1,721,886
Accrued expenses and income taxes ............................... 965,427 375,219
Current portion of long-term debt ............................... -- 5,865,043
------------ ------------
Total current liabilities .................................... 3,575,751 7,962,148
------------ ------------
Long Term Liabilities:
Deferred income taxes ........................................... 645,000 645,000
Long-term debt, net of current portion .......................... 12,771,416 11,502,271
------------ ------------
Total long-term liabilities .................................. 13,416,416 12,147,271
------------ ------------
Total Liabilities ................................................. 16,992,167 20,109,419
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized;
issued and outstanding - none ................................ -- --
Common stock, $.10 par value, 10,000,000 shared authorized;
issued and outstanding - 3,104,448 in 1999 - 2,847,362 in 1998 310,448 284,736
Common stock to be issued, 47,900 in 1999 and 77,118 in 1998 .... 1,000,000 1,297,903
Additional paid in capital ...................................... 13,572,805 9,620,174
Other comprehensive loss ........................................ (54,025) (121,160)
Retained earnings ............................................... 11,362,805 10,414,128
------------ ------------
Total shareholders' equity ....................................... 26,192,033 21,495,781
------------ ------------
$ 43,184,200 $ 41,605,200
============ ============
See notes to consolidated financial statements
2
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1999 1998
----------- -----------
(unaudited) (unaudited)
Sales ........................................... $ 7,299,427 $ 4,013,994
Cost of sales ................................... 3,605,975 1,741,923
----------- -----------
Gross profit .................................... 3,693,452 2,272,071
Selling, general and administrative expenses .... 1,852,239 1,229,021
Amortization of intangibles ..................... 228,127 65,379
----------- -----------
Income from operations .......................... 1,613,086 977,671
----------- -----------
Other (income) expense:
Interest expense .............................. 108,559 --
Other (income) expense, net ................... 33,712 (6,807)
----------- -----------
Income before income taxes ...................... 1,470,815 984,478
Provision for income taxes ...................... 522,138 349,489
----------- -----------
Net income ...................................... $ 948,677 $ 634,989
=========== ===========
Net income per share - basic .................... $ 0.32 $ 0.25
=========== ===========
Weighted average shares outstanding - basic ..... 2,991,360 2,527,362
=========== ===========
Net income per share - diluted .................. $ 0.31 $ 0.25
=========== ===========
Weighted average shares outstanding - diluted ... 3,096,653 2,589,341
=========== ===========
See notes to consolidated financial statements
3
KOALA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1999 1998
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income ............................................... $ 948,677 $ 634,989
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ......................................... 118,619 67,465
Amortization ......................................... 228,127 65,379
(Increase) decrease in operating assets:
Accounts receivable, trade ........................ 529,446 107,550
Inventory ......................................... (725,169) (218,876)
Prepaid expenses .................................. (510,001) (265,529)
Increase (decrease) in operating liabilities:
Accounts payable .................................. 625,964 (320,401)
Accrued expenses and income taxes ................. 540,001 (71,966)
------------ ------------
Net cash provided (used) by operations ..................... 1,755,664 (1,389)
------------ ------------
Cash flows from investing activities:
Payments for capital expenditures ........................ (447,045) (151,944)
Purchase of Superior Foam, net of cash acquired .......... (4,778,787) --
Purchase of Park Structures, net of cash acquired ........ (16,255,592) --
Payments for patents and intangibles ..................... (5,506) (2,956)
------------ ------------
Net cash used by investing activities ...................... (21,486,930) (154,900)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings ....................... 14,885,000 --
Payments on long-term borrowings ......................... (3,534,200) --
Sale of common stock, net of expenses .................... 2,680,450 --
------------ ------------
Net cash provided by financing activities .................. 14,031,250 --
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (18,835) 8,669
Net (decrease) in cash and cash equivalents ................ (5,718,851) (147,620)
Cash and cash equivalents at beginning of period ........... 6,493,570 1,832,677
------------ ------------
Cash and cash equivalents at end of period ................. $ 774,719 $ 1,685,057
============ ============
See notes to consolidated financial statements
4
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31, 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 March 31, 1999 and December 31, 1998, consists of
the following:
March 31, 1999 December 31, 1998
-------------- -----------------
Raw materials and component parts $3,658,492 $2,832,314
Finished goods 767,814 748,823
---------- ----------
$4,426,306 $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". 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 $11,350,800 as of March 31, 1999.
4. 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.
5
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
4. Earnings per share (continued):
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:
March 31,1999 March 31, 1998
------------- --------------
Weighted average shares
outstanding for basic EPS 2,991,360 2,527,362
Common stock equivalents for
unexercised stock options 105,293 61,979
---------- -----------
Weighted average shares
outstanding for diluted EPS 3,096,653 2,589,341
========== ===========
5. Acquisitions:
Acquisition of Superior Foam:
On March 26, 1999 the Company acquired substantially all the assets of
Superior Foam & Polymers, Inc., a provider of children's foam activities
products located near Austin, Texas. The acquisition was effective March 1,
1999 and was accounted for as a purchase. Results of operations of Superior
Foam were included in the Company's consolidated statements of income
beginning on the effective date.
As initial consideration, the Company paid $5.0 million cash, net of a
$200,000 holdback, and will issue 47,900 shares of Koala Corporation common
stock valued at $1.0 million. The Company paid the cash portion of the
purchase price with cash generated from both internal operations and an
advance on the Company's Line of Credit in the amount of $4.6 million. In
addition, estimated acquisition costs of $50,000 were paid or accrued at
March 31, 1999. The initial consideration and acquisition costs were
allocated to tangible assets based on relative fair value, with the
remaining balance allocated to proprietary trade secrets, trade names,
trade marks and goodwill and recorded as intangible assets. The acquisition
intangible costs will be amortized using the straight-line method using
estimated useful lives ranging from 5 to 30 years.
Acquisition of Park Structures:
On December 16, 1998, the Company acquired substantially all of the assets
of Park Structures, Inc., a provider of children's outdoor modular play
systems based in Coral Springs, Florida. The acquisition was effective
December 16, 1998 and was accounted for as a purchase. Results of
operations of Park Structures were included in the Company's consolidated
statements of income beginning on the effective date. The initial
consideration paid for Park Structures was $13,865,043, for which the
Company issued a promissory note, net of a $400,000 holdback, for
$13,465,043. Such promissory note was paid on January 4, 1999 using
proceeds of the secondary public offering and an advance of $7,600,000 on
the line of credit. In addition, preliminary acquisition costs of $131,479
were incurred and
6
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
4. Acquisitions (continued):
Acquisition of Park Structures (continued):
estimated asset adjustments of $1,001,798 were accrued. The financial
statements reflect a preliminary allocation of purchase price, to be
finalized upon evaluation of certain intangibles acquired. The initial
consideration, acquisition costs and asset adjustments were allocated to
tangible assets based on relative fair value, with the remaining balance
allocated to trade names, trade marks and goodwill and recorded as
intangible assets.
The purchase agreement also provides for additional consideration in the
form of cash and Company common stock if certain operating performance
criteria were met by Park Structures for the year ending December 31, 1998
and for the rolling twelve month period ending June 30, 1999. For the
December 31, 1998 earnout period, the additional consideration amounted to
77,118 shares of common stock valued at $1,297,903 and cash of $2,703,829.
For the June 30, 1999 earnout period, the maximum additional consideration
is $1.0 million cash. If minimum performance is not achieved, no additional
consideration will be payable. The additional consideration incurred for
the 1998 earnout has been treated as goodwill and recorded to intangibles
on the balance sheet. Any additional consideration paid for the 1999
earnout will be treated as goodwill and recorded to intangibles on the
balance sheet.
The pro forma unaudited results of operations of the Company for the three
months ended March 31, 1998 assuming consummation of the purchase of Park
Structures as of January 1, 1998 is as follows:
Three Months ended
March 31, 1998
--------------
Sales $ 5,240,983
Net income $ 701,160
Net income per share - diluted $ 0.23
5. 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. 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
7
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
5. Business Segments (continued):
Company at its facilities located in Delta, British Columbia and Coral
Springs, Florida. These products are sold direct and through manufacturers
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:
-------------------------------------------------------------------------------
March 31, 1999
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
March 31, 1998
-------------------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
---------------- ---------------- ----------------
Sales $ 2,452,551 $1,561,443 $ 4,013,994
Operating income 617,696 359,975 977,671
Capital expenditures 135,325 16,619 151,944
Total assets $ 8,937,583 $6,270,508 $15,208,091
6. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income, which was effective in 1998 for the
Company. The statement establishes new rules for the reporting and display
of comprehensive income. Comprehensive income is defined essentially as all
changes in shareholders' equity, exclusive of transactions with owners.
Comprehensive income was $67,135 and $8,669 for the three months ended
March 31, 1999 and 1998, respectively.
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 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 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 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.
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
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Components of Sales and Expenses (continued)
through manufacturers 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. 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, related payroll taxes, advertising expenses, commissions paid
to manufacturers's sales representatives and other miscellaneous selling
expenses.
The Company provides limited warranties for its products. The Company has
experienced minimal returns and warranty claims, and therefore no accrual has
been made for future claims.
The Company's quarterly revenues and net income are subject to fluctuation based
on customer order patterns and Company shipping activity. Because of these
fluctuations, comparisons of operating results from quarter to quarter for the
current year or for comparable quarters of the prior year may be difficult.
Except as set forth below, these fluctuations are not expected to be significant
when considered on an annual basis.
Recent Acquisitions
Acquisition of Park Structures:
In December 1998, the Company acquired substantially all of the assets of Park
Structures, Inc.("Park Structures"), a provider of children's outdoor modular
play systems based in Coral Springs, Florida for cash and stock consideration up
to $18.7 million and subject to an asset adjustment.
Park Structures products are marketed and sold to municipalities, parks, public
and private schools, day care centers and private developers. The Park
Structures acquisition further broadens the Company's product lines and
complements the Company's June 1997 acquisition of a line of children's indoor
modular play systems and also affords the Company an opportunity to sell its
family convenience and children's activity products into new markets. Park
Structures product line is included in the children's modular play equipment
business segment.
Acquisition of Superior Foam:
In March 1999, the Company acquired substantially all the assets of Superior
Foam & Polymers, Inc. ("Superior"), for cash and stock totaling $6.0 million.
Located near Austin, Texas, Superior is a manufacturer of commercial activity
products.
The primary market for Superior's products are retail stores, shopping malls,
amusement parks and water parks. Superior's products come in a variety of
themes, shapes, colors and sizes. The products are suitable for both indoor and
outdoor use. Superior manufacturers 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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Sales increased 82% to $ 7,299,427 for the first quarter of 1999 compared to
$4,013,994 for the first quarter of 1998. Convenience and activity product
segment sales increased 30% to $3,178,432 for the three months ended March 31,
1999 compared to $2,452,551 for the three months ended March 31, 1998. Sales by
Superior Foam were included in this segment as of March 1, 1999, the effective
date of the purchase, however, the sales contribution was not material. Modular
play equipment segment sales increased 164% to $4,120,995 for the first quarter
of 1999 compared to $1,561,443 for the first quarter of 1998. The inclusion of
Park Structures for the entire first quarter of 1999 contributed significantly
to the increase.
Gross profit for the first quarter of 1999 was $3,693,452 (51% of sales)
compared with $2,272,071 (57% of sales) for the first quarter of 1998. The gross
profit percentage for the first quarter 1999 decreased from the gross profit
achieved for first 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 first quarter of
1999 to $1,821,836 (25% of sales) from $1,229,021 (31% of sales) for the same
period in 1998. Sales and marketing expenses increased $269,859 to $1,056,276
for the first quarter of 1999 compared to $786,417 for the first 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 $322,956 to $765,560 for the first quarter of 1999 compared
to $442,604 for the first quarter of 1998. The increase in general and
administrative expense was primarily the result of the inclusion of Park
Structures and Superior Foam and higher depreciation charges arising from the
addition of office equipment for the companies new tele-sales facility added in
January 1999.
Net income for the first quarter of 1999 was $948,677 (13% of sales) compared
with $634,989 (16% of sales) for the first quarter of 1998. This represents a
49% 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 first quarter of 1999
increased 25% compared to the first 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 507,312 shares.
Liquidity and Capital Resources
The Company's free cash flow, defined as net income plus non-cash items,
increased by $527,590 to $1,295,423 for the three months ended March 31, 1999
from $767,833 for the three months ended March 31, 1998. 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, 1999
and 1998 was $1,755,664 and ($1,389), respectively. The increase in cash
provided by operating activities for the three months ended March 31, 1999
compared to the three months ended March 31, 1998 is due primarily to a
combination of an increase in free cash flow as described above and a reduction
in accounts receivable. 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
Working capital as of March 31, 1999 and December 31, 1998 was $8,633,524 and
$8,731,924, respectively, and cash balances were $774,719 and $6,493,570 at the
same dates. The cash balance at December 31, 1998 included most of the proceeds
of the secondary public offering completed in December 1998. Cash balances
decreased in 1999 due to the use of internal cash balances for payment against
the note payable incurred in connection with the Park Structures acquisition.
The Company has used its operating cash flow primarily to expand sales and
marketing activities, for acquisition and development of new products, for
capital expenditures and for working capital. Net cash used by investing
activities was $21,558,136 and $154,900 for the three months ended March 31,
1999 and 1998, respectively. In 1999, the Company utilized all of its cash on
hand and the credit facility to pay the note payable related to the purchase of
the children's modular play equipment assets and the commercial foam product
assets. The Company also invested approximately $400,000 in the first quarter of
1999 for the data and telecommunications infrastructure utilized in the new
KoalaTel tele-sales facility. The Company does not anticipate any extraordinary
capital expenditures in the near future.
As discussed above, Park Structures is entitled to receive up to an additional
$1.0 million in cash in August 1999 if certain earnings targets are met for the
six months ended June 30, 1999. The Company anticipates that such payments would
be funded from existing cash balances, cash flow from operations and borrowings
under the line of credit. The Company believes that cash flow from operations
will be sufficient to fund its operations for the foreseeable future, and repay
the borrowings under the credit facility.
The Company obtained a $15.0 million secured line of credit on December 16,
1998. The line of credit is secured by substantially all of the assets of the
Company. The line of credit may be used for short-term working capital needs and
future acquisitions. There are no compensating balance requirements and the
credit facility requires compliance with financial loan covenants related to
debt levels compared to annualized cash flows from operations. The credit
facility terminates and is payable in full on December 16, 2001. Interest
payments are required at least every three months at a fluctuating rate per
annum equal to the applicable "Reserve Adjusted LIBOR Rate". A commitment fee in
the amount of .25% is payable quarterly in arrears based on the average daily
unused portion of the line. There was $11,350,800 outstanding under the credit
facility as of March 31, 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 depended 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).
Because the acquisitions of Park Structures and Superior Foam (collectively "the
New Divisions") were only recently completed on 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.
The New Divisions have informed the Company that they do not anticipate any
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Year 2000 (continued)
material disruption in their operations as a result of any Year 2000 issues. The
New Divisions do not have any information concerning the potential impact of
Year 2000 issues on any of its suppliers or customers. The Company plans to
further evaluate the potential impact of Year 2000 issues on the New Divisions'
suppliers and customers. The Year 2000 issue could have a material adverse
effect on New Divisions' operations and on the Company.
The Company's other operations have only limited information technology systems,
consisting of separate local area networks at its headquarters and Vancouver
locations. These networks run accounting software at both locations and design
software at the Vancouver location. The Company has completed assessment,
remediation through the installation of Year 2000 compliant software and
independent testing of all application software and the operating systems at
both locations, and believes that its information technology systems are Year
2000 compliant. The cost to the Company to achieve this compliance was
approximately $40,000, which was used to purchase software and hardware and to
pay independent consultants. The Company funded these costs from available cash.
The Company believes such remediation is complete, and expects that no further
costs of remediation will be required. Should such remediation prove inadequate,
the most likely worst case scenario would be a failure of the Company's computer
systems, which would likely cause significant delays in order taking, receiving,
order fulfillment and other core functions which would have a material adverse
affect on the Company. However, because the Company believes its remediation of
its computer systems will allow the Company to avoid the risks associated with
the Year 2000 issues, it has not developed a separate contingency plan for a
scenario in which the Company's remedial measures fail. The Company does not
believe that it has any systems or equipment other than its information
technology systems that would have a material adverse effect on the Company if
such systems were not Year 2000 compliant.
The Company is also evaluating whether there may be third parties that could
materially adversely affect the Company through non-compliance. The Company has
identified the New Divisions, suppliers, customers, its bank and national
delivery services as the parties most likely to materially adversely affect the
Company through such non-compliance. The risks include the failure of suppliers
to timely deliver materials and finished products, the failure of customers to
remit payments timely, the failure of its bank to process its funds or loss of
data relating to the Company's funds and delays by national delivery services in
shipments of the Company's products. The most likely worst case scenario for the
Company would be a confluence of these events coupled with other adverse effects
on the economy generally that would impact sales of the Company's products. The
Company has contacted its ten largest suppliers and customers, its bank and
national delivery services to ascertain their Year 2000 readiness. To date, the
Company has received responses from all of the suppliers and customers, the bank
and some of the national delivery services. The respondents have indicated that
they are at various stages of assessment, remediation or testing of their
systems relative to Year 2000 compliance. Based on the responses, the Company
does not foresee significant problems with the Year 2000 issue and has not
developed a contingency plan to deal with non-compliance issues. Nevertheless,
the Company will continue to monitor the responses from third parties as well as
the Year 2000 issue in general to ascertain whether additional actions or
contingency plans may be necessary. In addition, despite its efforts to address
Year 2000 issues, the Company could potentially experience disruptions to its
operations, including those related to non-compliant systems used by third
parties. Such disruptions could have a material adverse effect on the Company.
13
PART II - OTHER INFORMATION
Item 1 - 5. None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27.1 March 31, 1999 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 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
May 17, 1999 /s/Mark A. Betker
- ------------ -------------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
May 17, 1999 /s/Jeffrey L. Vigil
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Vice President Finance and Administration
(Principal Financial and Accounting Officer)