SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22464
KOALA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Colorado 84-1238908
-------- ----------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7881 South Wheeling Court
Englewood, Colorado 80112
(Address of Principal Executive Offices)
(303) 539-8300
--------------
(Registrant Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Act:
None
Securities Registered under Section 12(g) of the Act:
Common Stock, $.10 par value
----------------------------
(Title of Class)
Common Stock Purchase Rights
----------------------------
(Title of Class)
Indicate by checkmark whether the registrant: (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 issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. _X_ Yes ___ No
Indicate by checkmark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. _____
As of March 15, 2002, the aggregate market value of the voting stock held
by nonaffiliates of the registrant computed by reference to the last quoted
price at which such stock sold on such date as reported by the Nasdaq National
Market was $18,280,131.
As of March 15, 2002, there were outstanding 6,872,334 shares of the
issuer's Common Stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2002 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-K.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report contains forward-looking statements that describe our business and
our expectations. All statements, other than statements of historical facts,
included in this report that address activities, events or developments that we
expect, believe, intend or anticipate will or may occur in the future, are
forward-looking statements. When used in this Form 10-K, the words "may,"
"will," "expect," "anticipate," "continue," "estimate," "project," "intend,"
"believe" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act") regarding events, conditions and financial trends that may
affect our future plan of operations, business strategy, operating results and
financial position. 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, those discussed in "Risk Factors" below.
BUSINESS
We are a leading designer, producer and worldwide marketer of innovative
commercial products, systems and custom solutions that create attractive
family-friendly environments for businesses and other public venues. We produce
family convenience products, such as baby changing stations and high chairs;
children's activity products, such as activity tables, carpets and foam play
products; and children's modular play equipment, including interactive water and
foam play systems. We intend to continue to capitalize on brand name recognition
established through our market-leading Koala Bear Kare(R) Baby Changing Station.
We market our 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. Our customers include Walt Disney World, The
Mayo Clinic, Target Stores, McDonalds, Pizza Hut, Burger King franchises and
many other customers in the retail, health care, supermarket, entertainment
venue and numerous other markets. We believe that the Koala Bear Kare brand is
widely recognized among family-friendly businesses and their customers.
We provide high-quality products with design features that cater to the
needs of our customers. We believe that competition in our various product
categories is fragmented and that we benefit from offering a broad selection of
branded products to our customers. We intend to continue providing
family-friendly products, systems and custom solutions through strategic
initiatives including: capitalizing on brand recognition; maximizing market
penetration; acquiring complementary businesses and products; maintaining low
cost, high quality production; developing new solutions and enhanced products;
and expanding our international marketing.
History
We were formed as a Colorado corporation in July 1993. Our predecessor was
formed in 1987 to produce and market a newly designed baby changing station.
This product established the foundation for our growth, and we believe that we
are the market leader in baby changing station products in terms of units sold.
During the 1990's, we developed from a single product company into a diversified
designer, producer and marketer of family convenience products, children's
activity products and children's modular play equipment. We introduced the Child
Protection Seat in 1991 and the Infant Seat Kradle in 1993. In 1994, we acquired
the rights to the Booster Buddy(R) booster seat. We began offering children's
activity systems in 1996, following the acquisition of a producer of activity
products. This acquisition initiated the development of the Koala Kare(TM)
System, which allows businesses to create custom activity systems to suit
individual space requirements and customer needs. We continued to expand our
product offerings in 1997 with new products such as the Koala(TM) Highchair, and
the acquisition of Delta Play, a custom manufacturer of creatively themed,
modular indoor children's play systems. With the acquisition of Park Structures
in 1998, we entered the outdoor children's modular play market. We completed
several acquisitions of complementary businesses and products in 1999 and 2000.
In 1999, we purchased the assets of Superior Foam & Polymers, Inc. and Smart
Products, Inc. Superior Foam manufactures and markets children's foam activity
products to amusement parks, water parks, shopping malls and retail stores.
Smart Products manufactures and distributes child safety and parental
convenience products to grocery stores, retailers and restaurants. In 2000, we
completed a stock and asset purchase of SCS Interactive, Inc. and an asset
purchase of Fibar, Inc. SCS designs, manufactures and markets children's
interactive waterplay equipment for use in family entertainment centers, water
parks and amusement parks. Fibar markets and distributes playground surfacing
systems for use in outdoor playground and equestrian sites. As a result of our
product diversification efforts, the Baby Changing Station, while continuing to
be a growth opportunity for us, represented less than 15% of our sales in 2001.
2
Industry Overview
The Family Convenience and Children's Activity Market. We believe that
parents are traveling, shopping and dining out with their children more often
due to societal changes and demographic trends, including the strict time
constraints of two-income and single parent households. A March 1998 national
market research study conducted for us by the Howell Research Group reported
that seven out of ten parents (68%) interviewed shopped with their children
either all the time (27%) or most of the time (41%). According to the study, the
impact of child-friendly facilities is very positive. The majority of women and
a large number of the men interviewed said they shopped more frequently and
spent more time and money at child-friendly stores. We believe that businesses
increasingly need to create an accommodating and positive environment for
children in order to attract customers, increase sales and create customer
loyalty. We have developed and acquired family convenience and children's
activity products to help businesses meet these needs.
The United States Department of Justice estimates that there are over
5,000,000 public facilities in the United States that could use our bathroom
family convenience products, including restaurants, retail stores and shopping
centers. We estimate that the market for our children's activity products
includes approximately 1,500,000 facilities. We currently target over 160
categories of facilities to purchase our family convenience and children's
activity products, including quick service restaurants, airports, stadiums,
convention centers, supermarkets and other retail establishments.
The Children's Modular Play Market. The children's modular play market is
comprised of indoor and outdoor areas for child play. Customers for indoor
children's modular play equipment include many of the same businesses that
purchase family convenience and children's activity products. We believe that
many of the same demographic trends in the family convenience and children's
activity segments are driving demand for indoor children's modular play
products. In addition, we believe that customers increasingly are looking for
theming and custom-designed equipment in order to create a unique
family-friendly atmosphere for their businesses.
The children's outdoor modular play market for products produced by Park
Structures, Fibar and SCS includes municipalities and other governmental
agencies, public parks, public and private water parks, public and private
schools, day care centers, developers, apartment complexes, family entertainment
centers and amusement parks. We believe that this market has expanded for a
number of reasons. As cities across the United States have grown, the trend has
been to provide their constituents with better public services, including
playground equipment in public parks and recreation centers. Also, many existing
outdoor play structures are not accessible to people with disabilities or the
structures or their underlying surfaces do not comply with current safety codes.
In addition, wood structures, which were popular in the 1970s and 1980s, are not
as popular today because of safety and maintenance concerns, and because they
tend to deteriorate. Therefore, we believe that municipal risk managers and
others who make the buying decisions regarding outdoor play systems are
replacing or expanding their existing equipment.
Business Strategy
Our primary business objective is to grow sales and earnings by continuing
to be a leading provider of family-friendly products, systems and solutions. Our
key strategic initiatives are summarized below.
Operational Restructuring and Consolidation. During the second half of
2001, we initiated an operational restructuring of the Company with the intent
of materially reducing operating costs and improving margins. The strategy
includes a consolidation of manufacturing and administrative functions into our
new Denver headquarters and manufacturing facility, implementation of a new
Oracle accounting system, personnel reductions, elimination of certain low
margin service offerings and selected price increases. The restructuring is
currently being implemented and we expect to complete the process before the end
of 2002.
Capitalize on Brand Name Recognition. We believe that the Koala Bear Kare
brand name has achieved significant recognition with businesses and their
customers through the reputation of the Koala Bear Kare Baby Changing Station.
We intend to continue to leverage this brand recognition through the marketing
and licensing of our Koala Bear Kare brand and our other family convenience and
children's activity products and children's modular play systems.
In addition, we have begun to pursue licensing the Koala brand to related
products. As an example, we recently entered into a product licensing agreement
with Associated Hygenic Products to market a disposable diaper changing pad to
be sold in the retail market.
Maximize Market Penetration. We intend to continue to increase market
penetration through an integrated marketing effort that includes manufacturer's
representative and dealer sales, direct sales, trade shows and trade magazine
advertising. We are continuing our direct telesales programs, which include
direct mail campaigns. We also intend to expand the cross selling of products to
new and existing customers and to expand the categories of facilities that
purchase our products.
3
Acquire Complementary Businesses and Products. We have an established
acquisition program and regularly evaluate strategic acquisitions as a means of
adding complementary businesses and product lines. We have completed several
acquisitions and believe that there are opportunities to acquire other products
or business lines that would complement current operations, expand current
product offerings and provide additional opportunities to leverage our marketing
efforts. We intend to resume our acquisition program when our consolidation and
cost restructuring strategy has been fully implemented.
Maintain Low Production Costs and High Quality. We practice a "buy or
build" philosophy that seeks to maintain low production costs without
compromising quality. As a result, a substantial portion of our manufacturing
and assembly functions are currently outsourced, and certain design functions
are handled by us. We believe that our new office and manufacturing facility
provides us with opportunities to vertically integrate operations by acquiring
equipment and bringing the manufacturing process in-house. As a result, our
reliance on contract manufacturing may decrease and we expect that this would
result in meaningful savings and improve overall quality.
Develop New Solutions. We seek to develop new solutions in order to meet
customer expectations and expand our business. For example, we designed the
Koala Highchair with unique features in response to restaurants' concerns about
the cleanliness and difficulties using their existing highchairs. We also
continually seek to improve and enhance our existing products and systems in
response to customer needs.
Expand International Marketing. We sell our products worldwide. Sales to
customers outside of North America have increased from approximately $1.1
million in 1996 to approximately $3.7 million in 2001. We have hired a sales
vice-president who is specifically focused on the international market. In
addition, we plan to increase our international sales through increased
cross-selling of our products.
Products
We market our products in two product segments: family convenience and
children's activity products, and children's modular play equipment products.
These products are sold to businesses and other customers located in all 50
states and in approximately 50 foreign countries.
Family Convenience and Children's Activity Products. Our family
convenience products include:
o the Koala Bear Kare Baby Changing Station
o the Koala Bear Kare Child Protection Seat
o the Koala Bear Kare Infant Seat Kradle
o the Booster Buddy booster seat, and
o the Koala Bear Kare Highchair
We also market disposable sanitary paper liners to be used with our Baby
Changing Stations. All of these products, except for the Infant Seat Kradle and
the sanitary paper liners, are constructed out of durable polyethylene plastic
and are highly resistant to accidental damage or vandalism. With the acquisition
of Smart Products, we added complementary infant safety and customer service
products including shopping cart seats, highchairs, and SmartStrap child
protection straps.
Our children's activity products consist of the Koala Bear Kare Block and
Maze Activity Table, Koala Bear Kare Wonder Wall and Koala Bear Kare Activity
Center Carpet. These products, which include manipulative activities and
colorful blocks, letters, numbers and designs, are designed for use in
commercial waiting areas of businesses such as grocery stores, auto dealers,
retail stores, physicians and other professional services providers. These
products are solidly constructed to withstand heavy use and include hygienic
maintenance features. We market these products individually or under the name
Koala Kare Systems. The Koala Kare Systems allow businesses to create custom
activity systems to suit individual space requirements and customer needs. These
systems range from individual activity tables in doctors' offices to large
children's activity or play areas in supermarkets comprising several thousand
square feet where children are supervised in a controlled environment. Selected
activity products with interactive video machines and other interactive products
create a children's activity setting that allows parents to shop while their
children are entertained in a safe, clean and child-friendly environment. The
acquisition of Superior Foam added children's foam activity products to our
product offerings. The foam activity products are manufactured using a
proprietary process for applying specialized urethane coatings, which make the
products durable and resistant to extreme weather conditions. The products are
created in a variety of customized themes ranging from zoo animals to pirate
ships and are typically sold to water parks, shopping malls and retail stores.
4
Children's Modular Play Equipment. We currently market modular and custom
themed children's indoor play equipment. We work with each customer to create
custom designs that incorporate traditional modular components such as tunnels,
walkways, ladders and ball pits with creative theming, such as a pirate's ship
or jungle tree house. These products are designed for use in family
entertainment centers, quick-service restaurants and shopping malls. The
acquisition of Park Structures in 1998 and Fibar in 2000 expanded our product
offerings into children's outdoor modular play equipment and playground
surfacing. Park Structures designs, manufactures and markets modular and custom
outdoor play equipment for municipalities and other governmental agencies,
parks, public and private schools, day care centers, developers and apartment
complexes. Park Structures products consist of traditional modular outdoor
playground equipment such as decks, elevated climbing areas and slides. These
components are available in a wide variety of sizes, configurations and colors.
Fibar markets and distributes playground surfacing systems consisting primarily
of engineered wood fibers that provide a safe and accessible playground surface
at a lower relative cost. SCS manufactures interactive water play equipment such
as water cannons and other interactive elements presented in attractive themes
and combined with slides, fountains and waterfalls used in water parks. SCS also
created a dry variation of its interactive designs marketed as the "foam
factory" to family entertainment centers.
Marketing and Sales
Family Convenience and Children's Activity Products. Our marketing strategy
for family convenience and children's activity products consists of extending
the Koala Bear Kare brand name, introducing new concepts and creating new groups
of customers for our products around a theme For Happy Faces in Public Places(R)
to existing and new groups of customers. We use a combination of dealer sales
and direct sales to market these products.
Since 1995, we have increased our sales and marketing costs in an effort to
increase sales to a wider market. Our distribution network consists of
manufacturer's sales representatives and dealers. The manufacturer's sales
representatives promote our products to the dealers, who purchase the products
from us and resell them to customers. The manufacturer's representatives receive
commissions from the sale of our products. Most dealers are not granted any
exclusive rights for products or territory. We sell products of Smart Products
mostly through manufacturer's representatives and dealers. Dealer sales have
accounted for a minority of our domestic sales and a majority of our foreign
sales.
International dealers are currently served by factory sales managers who
are experienced in international sales. We intend to continue to expand
international marketing activities by adding dealers and by locating Koala
employees in selected markets around the world to supervise international sales
activity. In addition, we plan to increase international sales of convenience
and children's activity products through increased cross-selling of these
products.
Our direct sales program targets national accounts who prefer to buy
directly from manufacturers and other end users that do not qualify as national
accounts or are not served by dealers. Superior Foam's unique product offerings
are sold by our direct sales staff. In 1999, we broadened our direct sales
capabilities with the expansion of our KoalaTel telesales division. The
expansion included capital investment in state-of-the-art telecommunications and
data equipment designed for managing our telesales and direct mail programs.
We support our marketing and sales activities through attendance at
national and international industry trade shows in various market segments, and
by advertising in trade magazines. Our advertising theme communicates that being
family-friendly may increase business through increased customer loyalty.
Our active public relations program is aimed at providing information
about the concept of being family-friendly and illustrating the benefits of our
family convenience and children's activity products. We assist industry
publications in creating editorial content or news stories about the emerging
trends around families' decisions about where to shop, eat or visit. In
addition, our sales managers host educational seminars for decision-makers at
key industry trade shows.
Children's Modular Play Equipment. We market and sell custom indoor modular
play equipment through trade show attendance, trade journal advertising and
regular contact by our salespeople with designers of projects in various
markets. Park Structures sells outdoor modular play equipment nationwide and
internationally through a network of approximately 40 independent dealers and
through an in-house sales staff that covers South Florida. Park Structures'
marketing programs include attendance at national industry and regional trade
shows, a focused media advertising campaign, incentive programs designed to
stimulate growth and the publication of a product catalog. Delta Play sells
indoor modular play equipment nationwide and internationally through an in-house
sales staff. Delta Play's marketing programs include attendance at national and
regional industry trade shows, a focused media advertising campaign and
publication of a product catalog. Fibar markets playground surfacing products
through a network of approximately 42 dealers, most of whom also sell modular
playground equipment. SCS's interactive play equipment is marketed and sold
through trade show attendance, trade journal advertising and by direct sales
staff and designers. We plan to increase our international sales through the
marketing of the modular play equipment of Park Structures and SCS.
5
Design and Manufacturing
We practice a "buy or build" philosophy in an effort to maintain low
production costs either through our personnel or outsourcing where it is more
cost-effective and does not compromise quality. As a result, a portion of
manufacturing and assembly functions currently are outsourced. We believe that
outsourcing to qualified suppliers, where appropriate, enables us to focus our
resources on marketing and sales while maintaining quality control through
frequent contacts with our suppliers. We actively monitor our supply
relationships and will consider shifting the manufacture of key components
in-house when strategic and economic factors warrant.
As described above, we believe that our new office and manufacturing
facility provides us with opportunities to vertically integrate operations by
acquiring equipment and bringing the manufacturing in-house.
Family Convenience and Children's Activity Products. We develop the
concepts for our family convenience and children's activity products in response
to the needs of our customers. We outsource the tooling design. In the
manufacturing process, components are molded to our specifications using various
plastic molding processes and delivered to us for assembly and shipment to
customers. We use a number of manufacturers for our products. We believe that
adequate alternative sources of supply are available for these products if
necessary.
Our foam products are manufactured using a proprietary manufacturing
process at our plant located near Austin, Texas. Unique designs are sculpted out
of foam and are coated with a proprietary coating and application technique
resulting in a highly customized and colorful product. The manufacturing process
requires minimum training of our personnel and utilizes readily obtainable
materials.
Children's Modular Play Equipment. Our engineers design children's indoor
modular play systems using computer design technologies applied to modular
components. We own all of the significant molds and tooling used in the
manufacture of specialized components used in the play equipment. Components for
these systems are manufactured to our specifications and purchased from outside
vendors. We fabricate certain metal and fiberglass components at our plant
located near Vancouver, British Columbia, Canada. These components are then
assembled by us at the plant and shipped to customers. We believe there are
adequate alternative sources of supply for the manufacture of the indoor modular
play equipment components.
We custom design children's outdoor play systems using the same technology.
We subcontract the plastic molding, fabrication and plastisol coating of deck
platforms and aluminum casting to third parties. We also own all of the
significant molds and tooling for these functions. We fabricate the majority of
the steel playground parts and assemble our modular play equipment at our plant
located in Coral Springs, Florida. We believe there are adequate alternative
sources of supply for the manufacture of the outdoor modular play equipment
components.
Fibar uses a nationwide network of suppliers that manufacture the
engineered wood fibers to our specifications and deliver the product directly to
the customer's site for installation. As a result, we maintain very low
inventory levels, primarily drainage materials included in certain surfacing
systems. We control the quality of the product delivered to the customer by
obtaining samples of delivered product and testing compliance with rigid
specifications. We believe there are adequate alternative sources of supply for
the manufacture of the engineered wood fibers.
SCS designs its products using computer design technologies for the modular
components. We subcontract the manufacture of plastic molding and certain other
raw material components with third parties. We own all of the significant molds
and tooling for these functions. We fabricate the structural steel components
for water park equipment at our facility located near Portland, Oregon and we
use a sub-contractor to manufacture the structural steel components for
non-water park equipment. We manufacture the interactive equipment parts at our
facility located in Denver, Colorado. We believe there are adequate alternative
sources of supply for the manufacture of the modular waterplay equipment
components.
Competition
Family Convenience and Children's Activity Products. We market our family
convenience products to businesses rather than to consumers. Presently, the
commercial products division of Newell, Inc. and a number of other companies
also sell family convenience products to the same commercial markets. We believe
that such competition has not had a material impact on us. We are not aware of
any companies marketing diaper changing stations intended for the commercial
market that have a greater market share than we do. We believe that there is an
under-served market for family convenience products. We believe that we are the
only company focused on marketing a wide variety of family convenience products
to the commercial market. We believe that our Koala Bear Kare products have
brand name recognition that provides us with a significant competitive
advantage. We compete principally on the basis of brand name recognition,
quality, customer service and price.
6
Competition in the children's activity product area is mainly from small
businesses that make similar products and from efforts by individual businesses
to create their own activity areas. We believe that our ability to offer custom
designed products under our Koala Kare Systems program and our product quality
and service give us a competitive advantage. We believe that our foam products
are unique and that no competitor offers a product that is as soft and durable.
Children's Modular Play Equipment. Our primary competitors in children's
indoor modular play equipment are Little Tikes Commercial Play Systems, Inc., a
unit of Newell, Inc., and Miracle Recreation Equipment Company. We compete in
the children's indoor modular play market on the basis of quality, safety,
service and our ability to provide a custom themed unit designed to meet the
unique needs of the customer. Competition in children's outdoor modular play
equipment is primarily from Game Time, Inc., a subsidiary of PlayCore, Inc.,
Miracle Recreation Equipment Company, Landscape Structures, Inc., Play World
Systems and Little Tikes. We believe that Park Structures competes on the basis
of design, quality and safety, price and customer service. Competition in
playground surfacing is from companies with higher priced products, primarily
rubber tiles and poured in place rubber surfaces. Competition in interactive
water park equipment is from White Water Industries and from alternative
entertainment offerings. SCS competes primarily on the basis of quality and
design. Fibar competes primarily on price.
Product Warranties and Insurance
For family convenience and children's activity products, we provide a
replacement guarantee for one year against damage of products from natural
disasters or vandalism, subject to a $100 service charge. We also provide a
five-year limited warranty on parts and labor covering any defects in
workmanship. For children's modular play equipment, we provide warranties
ranging from a one year limited warranty on parts and labor covering defects in
workmanship to a lifetime warranty on certain metallic parts. Historically, we
have experienced minimal returns and warranty claims. We carry product liability
insurance in an amount that we believe is adequate. Product liability claims
against us to date have been covered by insurance.
Patents and Trademarks
We own registrations and pending applications for many trademarks,
including the "Koala Bear Kare" mark and several variations of the Koala Bear
Kare logo that are featured on our products. We believe that the various Koala
Bear Kare trademarks are widely recognized and important to our continued
success. Each of our products marketed under this trademark prominently display
a blue and white sticker with one of our logos.
We own utility and design patents for many of our products. These patents
deter competitors from duplicating the design elements of our products but, with
the exception of SCS, we do not believe that such patents provide significant
barriers to entry. We believe that SCS has created an interlocking patent
portfolio that creates a barrier to duplicating the primary operating mechanisms
of our waterplay equipment.
Regulation
Some of our products are subject to the Federal Consumer Product Safety Act
and the Federal Hazardous Substances Act, among other laws, which empower the
Consumer Product Safety Commission (CPSC) to mandate the repair, replacement or
refund of the purchase price of products or, in extreme cases, even ban or force
a recall of a product that presents a substantial risk of injury to the public.
The CPSC may also issue civil and criminal penalties for knowing violations of
the Acts. Any such determination by the CPSC is subject to court review. Similar
laws exist in some states and cities in the United States and in many
jurisdictions throughout the world.
Our modular play equipment is designed and inspected to meet the safety
guidelines of the CPSC and the American Society for Testing and Materials (ASTM)
for commercial playground systems. We conduct in-house testing and inspection to
ensure compliance with the CPSC and ASTM guidelines. Park Structures is a member
of the International Play Equipment Manufacturers Association, a member-driven
international trade organization that represents and promotes an open market for
manufacturers of playground equipment. Park Structures also performs
manufacturing operations in conformance with the quality control standards
required by ISO 9001. Park Structures received ISO 9001 certification in
February 2000 and was recertified in December 2001.
Our operations in the United States and Canada involve light fabrication
activities utilizing paint, metal and fiberglass. We have the necessary permits
to conduct these activities, and we believe that we are in material compliance
with United States federal and state environmental laws and regulations and
Canadian environmental laws and regulations.
7
Many of our customers are required to comply with aspects of the Americans
With Disabilities Act (ADA). We provide various ADA compliant products to assist
our customers in meeting these requirements.
Employees
We had approximately 271 full-time employees as of December 31, 2001, with
approximately 225 in the United States and 46 in Canada. At March 15, 2002, we
had approximately 250 employees. Our United States employees are not covered by
any collective bargaining agreements. Our Canadian employees are represented by
the International Wood and Allied Workers of Canada. A collective bargaining
agreement is currently in place with the International Wood and Allied Workers
and is effective until 2004. We believe that relations with our employees are
good.
Foreign Operations
We acquired the assets of Delta Play, a Canadian based provider of
modular play equipment, in June 1997. We created a foreign subsidiary to own and
operate this business. Delta Play's sales, marketing, administrative,
manufacturing and distribution functions are decentralized. The president of
Delta Play reports to one of our executive officers. Strategic planning, market
development and resource allocation are the responsibility of the president in
conjunction with our Chief Executive Officer. We believe that there is no
greater risk attendant to the business conducted by Delta Play than to that of
our domestic operations.
8
RISK FACTORS
In addition to the other information contained in this Form 10-K, the
following risk factors should be considered carefully in evaluating our
business.
Our recent losses and resulting reduced cash flows could impair our ability to
grow at historical rates.
We incurred losses and reduced cash flows in 2001 compared to our
historical operating results. This could impair our ability to obtain credit
from our suppliers, obtain additional credit from other outside sources and fund
our internal growth. This could also impact our ability to obtain orders and
deposits from our customers.
Our growth has strained our resources, and if we are unable to manage our
growth, our operating results will be impaired.
We have experienced significant growth through acquisitions over the last
few years, which has strained our resources. A continuing period of significant
additional growth could place more strain on our management, operations and
other resources. Our ability to manage growth will require us to continue to
invest in operational, financial and information systems and to attract, retain,
motivate and effectively manage our employees. The inability of our management
to effectively manage growth could have a material adverse effect on our
business, financial condition and results of operations. See "Business."
We have significant outstanding indebtedness that requires large debt service
payments and limits our ability to receive additional financing.
In order to finance our acquisition strategy and working capital
requirements, we have incurred significant indebtedness. As of December 31,
2001, we had approximately $36.6 million of indebtedness outstanding under our
line of credit and term loan. We are currently required to pay approximately
$230,000 in interest per month to service such indebtedness and $500,000 per
quarter in principal in 2002. In addition, we may be required to make up to an
additional $2 million payment in April 2003 if we meet certain EBITDA goals
during 2002. Our debt service payment will increase if the prime rate increases.
In connection with the line of credit and term loan, we granted to our lenders a
security interest in all of our assets. In addition, to the extent that our
assets continue to secure debt, such assets will not be available to secure
additional indebtedness.
We were in default of certain covenants under that indebtedness at
September 30, 2001. We obtained a waiver of such non-compliance which is
contained in Amendment No. 1 to the new credit facility. The waiver required,
among other things, the infusion of $10 million of capital into the Company by
March 31, 2002, which would be used to reduce the balance outstanding under our
term loan. At December 31, 2002, we were again in default of certain covenants
under that indebtedness and anticipated, based on our expected results, that we
would be in default throughout 2002. On April 1, 2002, we obtained a waiver of
such non-compliance which is contained in Amendment No. 2 to the new credit
facility. Under the amendment, the due date of our line of credit has been
extended to April 15, 2003, the date to obtain the $10 million of additional
capital is changed to April 1, 2003, the quarterly payments for 2002 have been
reduced to $500,000 per quarter and the covenants have been reset. The amendment
also requires us to make up to $2 million in additional principal payments on
April 30, 2003 if we meet certain EBITDA targets for 2002. We have engaged an
investment banker to assist us with raising the additional financing. If we are
unable to obtain the additional financing, the bank could take additional steps
with regard to their loans to us, which could include declaring us in default,
forcing us to sell assets, limiting our borrowing capacity or foreclosure.
Any new financing we obtain may significantly dilute our existing common
shareholders.
We are currently attempting to obtain new financing to reduce our term
loan. It is likely that any financing that we obtain will be senior in
liquidation preference to our common stock, will dilute the existing common
shareholders, and will have a significant impact on the earnings per share
available to our common shareholders. This could cause the price of our common
stock to fluctuate significantly.
Our quarterly operating results have varied significantly.
Our sales and earnings have historically and may in the future fluctuate
from quarter to quarter based on several factors such as the number of new
commercial construction starts, production delays, cost overruns on large
projects, public budget processes, supply costs and general economic conditions.
Demand for our products can vary significantly from quarter to quarter due to
seasonality, revisions in customer budgets or schedules and other factors beyond
our control. Due to all of the foregoing factors, our results of operations have
and could in the future fall below our estimates and the expectations of
securities analysts and investors. In this event, the market price of the common
stock has, and could in the future be materially adversely affected.
9
If we do not successfully implement our restructuring, our operating results
could be impacted.
In the second half of 2001, we began implementing an operational
restructuring plan designed to reduce costs and improve our margins. The
restructuring is expected to be completed in 2002. If we are not successful in
implementing the restrucuring as planned, our operating results could be
significantly impacted.
If we fail to successfully implement our new company-wide enterprise resource
planning software system our business may suffer.
Our success depends, in part, on the accuracy and proper utilization of
enterprise resource planning software. We currently rely on several different
management information systems to assist us in procurement, sales and other
decisions. We believe that our current software systems are no longer adequate
for our purposes. We are currently in the process of replacing our existing
software systems with a new integrated platform. If our new system is not
installed in a timely manner or is not sufficient to sustain our operations and
our anticipated or actual growth, our purchasing and sales operations and our
financial reporting could be disrupted, which could seriously harm our operating
results and cause the price of our common stock to decline. In order to ensure
the sufficiency of our system, we may need to invest in software enhancements
and expanded capabilities, as well as in additional computer hardware, which may
be expensive.
Our business could be hurt if we make acquisitions that are not successful.
An integral part of our business strategy has been to acquire other
companies, assets or product lines that complement or expand our existing
business. Acquisitions involve a number of risks that could materially affect
us, including the diversion of management's attention, the need to assimilate
the operations and personnel of the acquired companies, the impairment of
acquired intangible assets and the potential loss of key personnel of the
acquired companies. Future acquisitions may require the payment of consideration
in excess of book value and may result in the issuance of additional shares of
our common stock or the incurrence of additional indebtedness, all of which
could have a dilutive effect on our net income per share. In addition, products
offered following a future acquisition may have lower gross profit margins than
our current product lines. There can be no assurance that any acquisitions will
not have a material adverse effect on our business, financial condition and
results of operations. We currently do not have any agreements or understandings
regarding potential acquisitions. See "Business--Business Strategy."
We may become subject to product liability claims, which may impact our results.
Our products are designed for use with infants and children. The children's
modular play equipment industry may be subject to a greater number of claims
than the convenience products industry. We carry product liability insurance in
an amount that we believe is adequate to cover risks associated with our
products. There can be no assurance, however, that existing or future insurance
coverage will be sufficient to cover all product liability risks or that such
insurance will be available at favorable rates. Defending a product liability
claim could significantly divert management's attention. A partially or
completely uninsured claim against us, if successful, could have a material
adverse effect on our business, financial condition and results of operations.
See "Business--Product Warranties and Insurance."
We face intense competition.
The markets for our products are highly competitive and include numerous
domestic and foreign competitors, including well-known manufacturers of consumer
and commercial child play equipment, furniture and other juvenile products that
are substantially larger and have greater financial, marketing and other
resources than we have. There can be no assurance there will not be new entrants
into our markets or that we will be able to compete successfully in the future.
See "Business--Competition."
If we lose our key personnel or cannot recruit additional personnel, our
business may suffer.
Our future success will depend to a great extent upon the continued service
of certain senior management personnel and our continuing ability to attract,
assimilate and retain highly qualified personnel. Competition for such personnel
is intense, and there can be no assurance that we can retain our key personnel
or that we can attract, assimilate and retain such employees in the future.
Although we have non-disclosure and non-compete agreements with many of our
employees, including our executive officers, we do not have employment
agreements with any of our executive officers. We do not maintain key-person
life insurance policies on any employees, including Mark A. Betker, our
Chairman, Chief Executive Officer and President. The loss of the services of Mr.
Betker or other key personnel or the inability to hire or retain qualified
personnel in the future could have a material adverse effect upon our business,
financial condition and results of operations.
10
If our outside manufacturers fail to supply us in a timely and cost-effective
manner, our business may suffer.
A large number of the components for our products are manufactured to our
specifications by outside suppliers. Our ability to assemble and distribute our
products depends upon our ability to obtain an adequate uninterrupted supply of
component parts. Although we own the significant tooling and molds used in
manufacturing our products, we do not have any long term agreements or contracts
with suppliers, most of which are the single source of supply. While we believe
that there are adequate alternative sources of such component parts, there can
be no assurance that any interruption in the supply of such component parts to
us or a change to a new supplier would not have a material adverse effect on our
business, financial condition or results of operations. Moreover, if our tooling
or molds are damaged, we could suffer additional delays and costs until such
tooling or molds are repaired or replaced. Although we have business
interruption insurance to protect us against such interruptions, such insurance
may not prevent such interruptions from having a material adverse effect upon
our business, financial condition and results of operations. See
"Business--Design and Manufacturing."
We face risks associated with international operations.
As part of our growth strategy, we are seeking opportunities to further
expand our products and systems distribution into international markets. Sales
to customers outside of North America accounted for approximately 6% of sales in
2001. In addition, we operate a manufacturing and assembly facility in
Vancouver, British Columbia, Canada. Our international operations are subject to
a wide range of general business risks, including:
o fluctuations in currency exchange rates;
o unexpected changes in legal and regulatory requirements;
o export restrictions, tariffs and other trade barriers;
o political and economic instability;
o restrictions on repatriation of funds or profits from foreign markets;
o longer payment cycles and problems in collecting accounts receivable;
o difficulty in protecting our intellectual property;
o potentially adverse tax consequences, including limitations on our
ability to claim a foreign tax credit against our U.S. federal income
taxes; and
o regulation by foreign regulatory authorities.
These and other factors associated with international operations may have a
material adverse effect on our business, financial condition and results of
operations.
We are subject to the Foreign Corrupt Practices Act, which generally
prohibits U.S. companies and their intermediaries from bribing foreign officials
for the purpose of obtaining or keeping business. We may be exposed to liability
under the Foreign Corrupt Practices Act as a result of past or future actions
taken without our knowledge by dealers and other intermediaries. Any liability
that we incur under the Foreign Corrupt Practices Act could be material.
We are subject to burdensome government regulations that could impair our
operating results.
Some of our products are subject to the provisions of the Federal Consumer
Product Safety Act and the Federal Hazardous Substances Act and the regulations
promulgated thereunder. The acts authorize the Consumer Product Safety
Commission to protect the public from products that present a substantial risk
of injury. The Consumer Product Safety Commission can require the repurchase or
recall by the manufacturer of articles that are found to be defective and impose
fines or penalties on the manufacturer. Similar laws exist in some states and
cities and in other countries in which we market our products. Any recall of our
products could have a material adverse effect on our business, financial
condition and results of operations. To date, we have not recalled any of our
products. See "Business--Regulation."
We must continue to protect existing, and develop new, intellectual property to
remain competitive.
We own many trademarks, including the Koala Bear Kare logo, that identify
us and our products and believe that such trademarks provide a significant
competitive advantage. Although we intend to vigorously defend our trademarks,
there is no guarantee that such trademarks can be successfully defended against
infringement. Further, although we have design patents that cover the design and
appearance of certain of our existing products, such patents may not provide
meaningful protection against entry by competitors into our markets. See
"Business--Patents and Trademarks."
11
Our stock price has been and may continue to be volatile, which may result in
losses to our shareholders.
The trading price of our common stock has been and is likely to continue to
be volatile and could fluctuate widely in response to many of the following
factors, some of which are beyond our control:
|X| variations in our operating results;
|X| announcements of new product lines by us or our competitors;
|X| changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
|X| violations of our debt covenants;
|X| changes in operating and stock price performance of our competitors;
|X| additions or departures of key personnel; and |X| future sales of
equity, incuding sales required by our lenders.
Domestic and international stock markets often experience significant price
and volume fluctuations. These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock.
ITEM 2. DESCRIPTION OF PROPERTIES
In January 2002, we moved into a new 115,000 square foot office and
manufacturing facility in Denver, Colorado. This facility serves as the Company
headquarters as well as a manufacturing and assembly facility for interactive
play equipment and children's convenience and activity products. The lease on
this facility expires in 2012. We lease a 67,000 square foot plant near
Vancouver, British Columbia, where we manufacture and assemble indoor modular
play equipment. This lease expires in 2003. Our manufacturing and assembly
operations of our outdoor modular play equipment are conducted from a leased
90,000 square foot facility in Coral Springs, Florida. This lease expires in
2007, with one option to renew the lease for an additional five-year term. We
lease an approximately 11,000 square foot facility near Austin, Texas where we
manufacture foam activity products with a lease expiration date in 2002. Our
interactive water park equipment is manufactured at a leased 40,000 square foot
facility west of Portland, Oregon. This lease expires in 2010. Fibar's sales,
marketing and administrative operations are conducted at a leased 3,000 square
foot office facility located in Armonk, New York. This lease expires in 2003. We
believe that our facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
We have been a party to litigation in the ordinary course of our
businesses. We do not believe that any current litigation will have a material
adverse effect upon our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 2001.
12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq National Market under the symbol
KARE. The following table sets forth, for the periods indicated, the high and
low sales prices for our common stock for each quarter within the last two
fiscal years as reported by Nasdaq. These quotations reflect inter-dealer
prices, without retail markup, markdown or commissions and may not represent
actual transactions.
SALES PRICE
-----------
LOW HIGH
--- ----
YEAR ENDED DECEMBER 31, 2000
First quarter ............................................ $ 10.50 $ 17.50
Second quarter ........................................... $ 12.63 $ 15.50
Third quarter ............................................ $ 11.88 $ 16.38
Fourth quarter ........................................... $ 6.50 $ 16.31
YEAR ENDED DECEMBER 31, 2001
First quarter ............................................ $ 3.03 $ 12.00
Second quarter ........................................... $ 3.00 $ 4.25
Third quarter ............................................ $ 0.96 $ 5.40
Fourth quarter ........................................... $ 0.60 $ 1.36
As of March 15, 2002, there were approximately 125 shareholders of
record.
We have never paid cash dividends on our common stock. Our credit agreement
contains a restrictive covenant that prohibits the payment of dividends without
the lender's consent. We currently intend to retain any earnings for use in our
operations and do not anticipate paying cash dividends in the foreseeable
future.
13
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
(In thousands, except per share data)
INCOME STATEMENT DATA: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Sales $ 59,222 $ 61,589 $ 37,864 $ 19,645 $ 14,099
Cost of sales 37,137 34,702 18,822 9,172 6,006
-------- -------- -------- -------- --------
Gross profit 22,085 26,887 19,042 10,473 8,093
Selling, general and
administrative expense 19,204 15,955 9,467 5,485 4,231
Amortization of intangibles 2,395 2,085 959 298 201
-------- -------- -------- -------- --------
Income from operations 486 8,847 8,616 4,690 3,661
Interest expense 3,147 2,919 902 -- --
Other (income) expense 8 (363) (1) (79) (115)
-------- -------- -------- -------- --------
Income (loss) before income taxes (2,669) 6,291 7,715 4,769 3,776
Income tax (benefit) expense (679) 2,259 2,624 1,669 1,340
-------- -------- -------- -------- --------
Net income (loss) $ (1,990) $ 4,032 $ 5,091 $ 3,100 $ 2,436
======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.29) $ 0.60 $ 0.81 $ 0.61 $ 0.49
Diluted $ (0.29) $ 0.58 $ 0.78 $ 0.60 $ 0.48
Weighted average common
shares outstanding:
Basic 6,872 6,770 6,257 5,072 5,007
Diluted 6,872 7,001 6,516 5,198 5,096
BALANCE SHEET DATA:
Working capital $ 14,957 $ 19,068 $ 12,629 $ 8,732 $ 3,945
Total assets 83,045 91,429 48,558 41,605 14,957
Total liabilities 45,463 51,690 18,231 20,109 2,107
Shareholders' equity 37,582 39,739 30,327 21,496 12,850
Notes:
The Company has completed a number of acquisitions during the above periods as
described below. See MD&A for further discussion of the impact of these
acquisitions.
(A) SCS Interactive and Fibar were acquired during 2000.
(B) Superior Foam and Smart Products were acquired during 1999.
(C) Park Structures was acquired during 1998.
(D) Delta Play was acquired during 1997.
(E) Shipping and handling costs have been reclassified out of sales and into
cost of sales for all prior periods in order to be consistent with the 2001
presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
With the exception of historical matters, the matters discussed herein are
forward-looking statements that involve risks and uncertainties. Forward-looking
statements include, but are not limited to, statements concerning anticipated
trends in sales and net income, the mix of our sales, projections concerning
operations and available cash flow. Our actual results could differ materially
from the results discussed in such forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below, as
well as those discussed in "Risk Factors" and elsewhere in this Form 10-K.
14
Koala Overview
We are a leading designer, producer and worldwide marketer of innovative
commercial products, systems and custom solutions that create attractive
family-friendly environments for businesses and other public venues. Our sales
are derived from two business segments, family convenience and children's
activity products and children's modular play equipment. Our family convenience
and activity products include baby changing stations and high chairs, activity
tables, carpets and foam play products. Children's modular play equipment
includes indoor and outdoor playground equipment and interactive play equipment
used in water parks, family entertainment centers and amusement parks. We intend
to capitalize on brand name recognition established through our market-leading
Koala Bear Kare Baby Changing Station. Our sales have grown from $3.8 million in
1993 to $59.2 million in 2001, with sales growth generated by both the
acquisition of seven businesses and the internal growth achieved by these
businesses during this period.
Prior to 1996, our sales were derived primarily from the sale of family
convenience products, which include Baby Changing Stations, disposable sanitary
liners for the Baby Changing Stations, Child Protection Seats, Infant Seat
Kradles and Booster Buddy Seats. One of our strategies has been to reduce our
dependence on Baby Changing Stations through the acquisition and development of
complementary products. In furtherance of this strategy, we acquired the
following businesses:
o Activities Unlimited, a manufacturer of commercial-use children's
activities products in March 1996;
o Delta Play, a provider of custom children's indoor modular play
equipment in June 1997;
o Park Structures, a producer of children's outdoor modular play
equipment in December 1998;
o Superior Foam, a manufacturer of children's foam activity
products in March 1999;
o Smart Products, a provider of children's safety and parental
convenience products in September 1999;
o SCS, a manufacturer of children's interactive water play
equipment in March 2000; and
o Fibar, a marketer and distributor of playground surfacing systems
in August 2000.
As a result of these acquisitions and introduction of new products, Baby
Changing Stations represented less than 15% of our sales in 2001.
We market our 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. We market our products through an integrated
program of direct sales and distribution through a network of independent
manufacturer's sales representatives and dealers. Since 1995, we have increased
our sales and marketing efforts through the addition of manufacturer's sales
representatives, dealers and sales representatives.
Our gross profit margins are affected by product mix, with the Baby
Changing Station and other family convenience products and the children's
activity products typically providing higher gross profit margins than the
children's modular play equipment. The children's modular play equipment,
however, has higher average selling prices and contributes to our sales growth.
In addition, sales made through dealers provide lower gross profit margins than
direct sales due to the expense associated with the manufacturer's sales
representatives and dealers. To the extent we acquire additional companies or
product lines, our gross profit margins may be lower than those currently
achieved from sales of our current product lines due to a number of factors that
may include products with higher average selling prices but lower gross margin
percentages. Although our acquisitions have decreased the overall gross profit
margin percentages, we believe that the addition of new products and products
lines provides opportunities for revenue diversification and increased long-term
profitability, while also reducing our reliance on the Baby Changing Station.
Components of Sales and Expense
We recognize sales for the majority of our operations at either the time
our products are shipped, or when installation is complete in cases where we
perform the installation services. At SCS Interactive (included in the modular
play segment), we use the percentage of completion method of accounting because
the build-to-install timeline of their jobs is of longer duration. Revenues from
shipping and handling are included in sales. Cost of sales consists of
components manufactured for us and direct labor and overhead incurred by us.
With the exception of the foam activity products and baby changing stations, all
major components for the family convenience products and children's activity
products currently are manufactured and assembled by outside vendors. We
fabricate and assemble most of our modular play products. Cost of sales also
includes shipping and handling costs.
Selling, general and administrative expense consists primarily of
commissions paid to manufacturer's sales representatives and other selling
expenses, executive, sales, engineering and design, and office salaries, related
payroll taxes, advertising expenses and depreciation on office equipment and
computer hardware and software.
We provide limited warranties for our products. We have experienced minimal
returns and warranty claims, and therefore no accrual has been made for future
claims except for SCS, where a reserve of .75% of SCS's 2001 annual sales has
been recorded.
15
Critical Accounting Policies and Estimates
In preparing our financial statements, we are required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the balance
sheet and the reported amounts of revenues and expenses during the reporting
period. On an on-going basis, we evaluate our estimates and judgments, including
those related to revenue recognition, bad debts, inventories, intangible assets,
income taxes, warranty operations and contingencies and litigation. We base our
estimates and judgments on historical experience and other factors. Actual
results could differ from our estimates. Following is a discussion of some of
our more critical accounting policies and judgments.
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We make judgments
regarding these allowances based on our knowledge of the customer, historical
patterns and other factors.
We have not established reserves for excess or obsolete inventories at any
of our locations because we believe that all of our existing inventory is
saleable for a price in excess of its carrying value. We specifically identify
inventory that we believe do not meet this criteria when we perform physical
inventories and assign a carrying value based on our best estimate of net
realizable value.
We exercise judgment in evaluating our intangible assets for impairment. We
have used estimates of future cash flows which take into account our anticipated
results of operations. Key assumptions that we have used to develop these cash
flows include estimates with respect to future sales volumes, margins and other
expenses. We believe our businesses will generate sufficient cash flow to
recover the goodwill under existing accounting rules and other intangible assets
we have recorded as a result of acquisitions.
In 2002, we will be required to adopt Statement of Financial Accounting
Standards (SFAS) 142, Goodwill and Other Intangible Assets (SFAS 142). See "New
Accounting Standards" below for further discussion of the impact of this
implementation.
Revenue at our SCS division is recognized on the percentage of completion
basis. Under this method, we make estimates with respect to the percentage of
completion of individual jobs and recognize revenue accordingly.
We do not maintain a warranty reserve at any of our divisions other than
SCS. We make judgements about the amount of warranty claims based on our
knowledge of historical warranty claims.
We make judgments regarding the amount to record for future loss
contingencies related to legal actions and other disputes based on the available
information and consultation with our legal counsel.
The determination of our tax provision is complex and requires a number of
judgments about the recoverability of deferred tax assets, including our ability
to generate future taxable income.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB)issued SFAS
141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets arising from business combinations completed after June 30,
2001. SFAS 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. SFAS 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives.
We will apply SFAS 142 beginning in the first quarter of 2002. Application
of the nonamortization provisions of SFAS 142 is expected to result in an
increase in net income of approximately $700,000 ($.10 per share) in 2002. We
will test goodwill for impairment using the two-step process prescribed in SFAS
142. The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. We expect to complete the first
step by June 30, 2002. Based on steps we have taken to prepare for the adoption
of SFAS 142, it is possible that a portion of the unamortized goodwill will be
impaired using the impairment measurement methodology required by SFAS 142. We
have not yet determined the amount of the potential impairment loss, if any. Any
impairment that is required to be recognized when adopting SFAS 142 will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. We will complete measurement of any impairment loss upon
the initial adoption of SFAS 142 by December 31, 2002.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which establishes one accounting model to be used
for long-lived assets to be disposed of by sale and broadens the presentation of
discontinued operations to include more disposal transactions. SFAS 144
supercedes SFAS 121, Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30,
16
Reporting the Results of Operations - Reporting the Effects Of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. We will adopt SFAS 144 as of January 1, 2002 and do not
anticipate any immediate impact from the adoption of this statement.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We will adopt SFAS 143 in 2003. We are
evaluating the impact of the adoption of SFAS 143 on our consolidated financial
statements.
Results of Operations
The following table sets forth certain income statement data stated as a
percentage of sales:
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Sales ...................................... 100.0% 100.0% 100.0%
Cost of sales .............................. 62.7 56.3 49.7
----- ----- -----
Gross profit ............................... 37.3 43.7 50.3
Selling, general and administrative expenses 32.5 25.9 25.0
Amortization of intangibles ................ 4.0 3.4 2.5
----- ----- -----
Income from operations ..................... 0.8 14.4 22.8
Interest expense ........................... 5.3 4.7 2.4
Other income ............................... 0 (0.5) 0
----- ----- -----
Income (loss) before income taxes .......... (4.5) 10.2 20.4
Income tax (benefit) expense ............... (1.1) 3.7 7.0
----- ----- -----
Net income (loss) .......................... (3.4)% 6.5% 13.4%
===== ===== =====
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Sales decreased 3.8%, or $2.4 million, to $59.2 million for the year ended
December 31, 2001 compared to $61.6 million for the year ended December 31,
2000. Sales for the fourth quarter of 2001 were $12.3 million as compared to
$15.4 million in 2000.
In the family convenience and children's activity segment, sales declined
from $17.7 million in 2000 to $14.9 million in 2001. Sales for the fourth
quarter of 2001 were $3.0 million compared to $4.3 million in 2000. We believe
the factors that contributed to this decline included a slowing economy and
tightened capital budgets for our customers, a cutback in purchases by our
customers as a result of the events of September 11 and a falloff in sales of
baby changing stations and other activity products that we believe is related to
reductions in our direct mail program in the fourth quarter of 2001 due to the
anthrax scare. We resumed direct mailings in January of 2002.
In the modular play equipment segment, sales increased from $43.9 million
in 2000 to $44.3 million in 2001. Sales for the fourth quarter of 2001 were $9.3
million compared to $11.1 million in 2000. The increase for the year is
primarily due to the inclusion of Fibar results for a full year in 2001 as
compared to four months in 2000, partially offset by a slowing economy, the
impacts of the September 11 events on the fourth quarter and a significant
reduction in the higher end themed sales in the water play division. We believe
results were negatively impacted due to poor weather and reduced attendance at
water parks in 2000, which caused this segment of the market to significantly
reduce their capital spending for 2001.
17
Gross profit decreased 17.9%, or $4.8 million, to $22.1 million for the
year ended December 31, 2001 compared to $26.9 million for the year ended
December 31, 2000. The decrease was due to the decrease in sales and a change in
the sales mix, with a higher proportion of the sales coming from the modular
play segment in 2001 as compared to 2000, which has lower margins than the
convenience segment. As a percentage of sales, gross profit decreased to 37.3%
of sales in 2001 compared to 43.7% of sales in 2000 primarily because of the
impact of the lower sales relative to our fixed production costs. Offsetting
this were the impacts of the personnel reductions from the operational
restructuring described below.
Selling, general and administrative expense increased 20.4%, or $3.2
million to $19.2 million for the year ended December 31, 2001 compared to $16.0
million for the year ended December 31, 2000. The majority of the increase was
due to the inclusion of SCS and Fibar for a full year in 2001 versus ten months
and four months, respectively, in 2000. Selling, general and administrative
expense as a percentage of sales increased to 32.5% of sales in 2001 compared to
25.9% in 2000 primarily due to the lower sales. Sales and marketing expense
increased 19%, or $1.4 million to $8.6 million for the year ended December 31,
2001 compared to $7.2 million for the year ended December 31, 2000. These cost
increases were primarily due to the inclusion of the sales and marketing costs
of the newly acquired businesses noted above. General and administrative expense
increased 20%, or $1.8 million, to $10.6 million for the year ended December 31,
2001 compared to $8.8 million for the year ended December 31, 2000. Once again,
the increase was primarily the result of the inclusion of a full year of the
newly acquired businesses in 2001.
Amortization expense from intangible assets increased from $2.1 million in
2000 to $2.4 million in 2001. This increase is primarily due to a full year of
amortization of goodwill and other identifiable intangible assets acquired in
the acquisitions of SCS and Fibar in 2000.
We used debt to finance the acquisitions of Park Structures in December
1998, Superior Foam and Smart Products in 1999, and SCS and Fibar in 2000. As a
result, we incurred interest expense of $3.1 million during the year ended
December 31, 2001 compared to $2.9 million during the year ended December 31,
2000. The increase in interest expense as a result of the increased borrowings
was partially offset by lower average interest rates during 2001.
Our effective tax rate was (25.4)% and 35.9% for the years ended December
31, 2001 and 2000, respectively. In 2001, we have a tax benefit due to our
operating losses. The decline in our effective tax rate for 2001 is due
primarily to the relationship of our non-deductible goodwill to our taxable
loss. Because the loss for 2001 is less than our pre-tax income in 2000, the
effect of the fixed amount of non-deductible goodwill is relatively larger on
the effective tax rate.
As a result of the factors discussed above, we incurred a net loss of $2.0
million for the year ended December 31, 2001 compared to net income of $4.0
million for the year ended December 31, 2000.
During the second half of 2001, we initiated an operational restructuring
with the intent of materially reducing operating costs and improving margins.
The strategy includes a consolidation of manufacturing and administrative
functions into our new Denver headquarters and manufacturing facility, personnel
reductions, elimination of certain low margin service offerings and selected
price increases. The restructuring is currently being implemented and we expect
to complete the process before the end of 2002. During 2001, we reduced our
workforce by approximately 124 employees, or 31%. We expect to make additional
reductions during 2002 as we consolidate additional functions into the Denver
facility. The costs associated with the reduction of our workforce in 2001 are
included in selling, general and administrative expenses and were not
significant. No costs have been accrued for the potential 2002 employee
reductions.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Sales increased 62.5%, or $23.7 million, to $61.6 million for the year
ended December 31, 2000 compared to $37.9 million for the year ended December
31, 1999. A majority of the increase resulted from sales of interactive water
play equipment, playground surfacing products and foam activity products
included in product lines acquired in 1999 and 2000. Sales in the modular play
segment accounted for $22.9 million of the $23.7 million increase. Sales in the
convenience and activity segment accounted for $.8 million of the increase. The
smaller contribution by the convenience and activity segment was due primarily
to the discontinuance of several children's activity products where gross
margins had fallen below the targeted threshold for this segment as well as the
effect of the general slowdown in orders during the fourth quarter of 2000 due
to a softening of the economy, offset by increases in revenues from acquired
product lines.
Gross profit increased 42%, or $7.9 million, to $26.9 million for the year
ended December 31, 2000 compared to $19.0 million for the year ended December
31, 1999. As noted above, the majority of the increase in gross profit resulted
from sales of products of the newly acquired businesses. As a percentage of
sales, gross profit decreased to 43.7% of sales in the 2000 period compared to
50.3% of sales in the 1999 period primarily because of a change in product mix
that included a higher proportion of sales of children's
18
modular play equipment. The gross profit percentage was also negatively impacted
by higher than expected costs incurred in the modular play equipment segment,
including cost overruns on several large jobs, and higher labor costs incurred
in the fourth quarter and the addition of quality assurance personnel for the
ISO 9001 program that was certified in early 2000.
Selling, general and administrative expense increased 68.5%, or $6.5
million to $16.0 million for the year ended December 31, 2000 compared to $9.5
million for the year ended December 31, 1999. Selling, general and
administrative expense as a percentage of sales increased to 25.9% of sales in
the 2000 period compared to 25.0% in the 1999 period primarily due to the
addition of sales, legal and engineering personnel and increased product
liability insurance premiums incurred as a result of higher levels of product
liability insurance coverage. Sales and marketing expense increased 33.3%, or
$1.8 million to $7.2 million for the year ended December 31, 2000 compared to
$5.4 million for the year ended December 31, 1999. These cost increases were
primarily due to the inclusion of the sales and marketing costs of the newly
acquired businesses noted above. Higher expenses for various marketing programs
and salaries of sales and marketing personnel added subsequent to the 1999
period also contributed to the increase. General and administrative expense
increased 114.6%, or $4.7 million, to $8.8 million for the year ended December
31, 2000 compared to $4.1 million for the year ended December 31, 1999. Once
again, the increase was primarily the result of the inclusion of the newly
acquired businesses in 1999 and 2000.
Amortization expense from intangible assets increased from $1.0 million in
1999 to $2.1 million in 2000. This increase is primarily due to the amortization
of goodwill and other identifiable intangible assets acquired in the
acquisitions of Superior Foam and Smart Products in 1999 and SCS and Fibar in
2000.
We used debt to finance the acquisitions of Park Structures in December
1998, Superior Foam and Smart Products in 1999, as well as the acquisitions of
SCS and Fibar in 2000. As a result, we incurred interest expense of $2.9 million
during the year ended December 31, 2000 compared to $.9 million during the year
ended December 31,1999.
Our effective tax rate was 35.9% and 34.0% for the years ended December 31,
2000 and 1999, respectively. The increase in our worldwide effective rate was
primarily due to the inclusion of a number of new state tax jurisdictions and
non-deductible goodwill as a result of the acquisition of SCS, offset by an
increase in export sales that qualify for the benefit provided by our foreign
sales corporation and a one-time net operating loss carryback at Delta Play.
Net income decreased 20.8%, or $1.1 million, to $4.0 million for the year
ended December 31, 2000 compared to $5.1 million for the year ended December 31,
1999. As a percentage of sales, net income declined during the 2000 period
compared to the 1999 period primarily due to the inclusion of a larger
proportion of the children's modular play equipment line in the product mix. Net
income per share (diluted) decreased 25.6%, or $.20, to $.58 for the year ended
December 31, 2000 compared to $.78 for the year ended December 31, 1999. The
percentage decrease in net income per share (diluted) was greater than the
percentage decrease in net income as a result of an increase of .5 million
shares in the weighted average number of shares outstanding.
Seasonality and Quarterly Financial Information (unaudited):
Our business is seasonal due primarily to the slowdown of new construction
and inability to install outdoor modular play equipment and surfacing during the
winter months in many parts of the country and the general slowdown of
purchasing by retailers during their busy holiday season. As a result, we
typically have lower sales and gross profit in the fourth and first calendar
quarters.
The following table sets forth selected unaudited quarterly financial
information for the years ended December 31, 2001 and 2000. The information has
been derived from unaudited statements of operations data that we believe are
stated on a basis consistent with the audited financial statements and include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information in accordance with accounting principles
generally accepted in the United States. Our results of operations for any
quarter are not necessarily indicative of the results to be expected in any
future period.
Shipping and handling costs in the first three quarters of 2001 and all
quarters in 2000 have been reclassified from revenues to cost of sales to be
consistent with the current year end presentation. These reclassifications had
no impact on net income or cash flows.
19
-----------------------------------------------------------
Quarter Ended
(unaudited and in thousands, except per share data)
-----------------------------------------------------------
2001 Mar. 31 June 30 Sept. 30 Dec. 31
---- ------- ------- -------- -------
Sales $14,304 $15,411 $17,169 $12,338
Gross profit 6,350 6,165 6,249 3,321
Net income (loss) 475 (57) 14 (2,422)
Basic earnings (loss) per share .07 (.01) .00 (.35)
Diluted earnings (loss) per share .07 (.01) .00 (.35)
-----------------------------------------------------------
Quarter Ended
(unaudited and in thousands, except per share data)
-----------------------------------------------------------
2000 Mar. 31 June 30 Sept. 30 Dec. 31
---- ------- ------- -------- -------
Sales $11,646 $17,352 $17,227 $15,364
Gross profit 5,705 7,996 8,122 5,064
Net income (loss) 1,263 1,883 1,567 (681)
Basic earnings (loss) per share .19 .28 .23 (.10)
Diluted earnings (loss) per share .19 .27 .22 (.10)
Liquidity and Capital Resources
We have financed our operations primarily from cash provided by operating
activities and from cash advanced under our revolving bank line of credit. In
addition, we have financed various acquisitions using cash advanced under the
line of credit.
We increased the maximum amount available under our secured line of credit
with U.S. Bank N.A., agent for various lenders, to $45.0 million on November 17,
2000. The interest rate on amounts borrowed under the line of credit was based
on the applicable Reserve Adjusted LIBOR rate or the bank's prime rate. At
December 31, 2000, the Reserve Adjusted LIBOR rate was 9.19% while the bank's
prime rate was 9.5%, compared to 8.18% and 8.5% at December 31, 1999,
respectively.
In the third quarter of 2001, we amended and restated our existing credit
facility and established a revolving credit facility in the amount of $14
million and a term loan in the amount of $28 million (the "New Credit
Facility"). This facility is secured by substantially all of our assets and
requires compliance with financial loan covenants related to leverage, interest
coverage, fixed charges and capital expenditures. Availability under the
revolving credit facility is determined by a formula based on inventory and
accounts receivable balances. A commitment fee of .50% per annum is payable
quarterly based on the average daily unused portion of the revolving line of
credit. The interest rate on this facility is the bank's prime rate plus 2.5%.
The bank's prime rate was 4.75% at December 31, 2001. The term loan is due
September 26, 2004. The revolving credit facility is due September 26, 2002.
There was $36.6 million outstanding under the credit facility as of December 31,
2001, and $38.0 million outstanding as of December 31, 2000.
At September 30, 2001, we were not in compliance with the financial
covenants for maximum leverage ratio and minimum interest coverage ratio. We
obtained a waiver of such non-compliance which is contained in Amendment No. 1
to the New Credit Facility. The waiver required, among other things, the
infusion of $10 million of capital into the Company by March 31, 2002, which
would be used to reduce the amounts outstanding under the term loan, and sets
new covenants.
At December 31, 2002, we were again in default of certain covenants under
that indebtedness and anticipated, based on our expected results, that we would
be in default throughout 2002. On April 1, 2002, we obtained a waiver of such
non-compliance which is contained in Amendment No. 2 to the New Credit Facility.
Under the amendment, the due date of our line of credit has been extended to
April 15, 2003, the date to obtain the $10 million of additional capital is
changed to April 1, 2003, the quarterly payments for 2002 have been reduced to
$500,000 per quarter and the covenants have been reset. The amendment also
requires us to make up to $2 million in additional principal payments on April
15, 2003 if we meet certain EBITDA targets during 2002. We have engaged an
investment banker to assist us with raising the additional financing.
Cash provided by (used in) operating activities for 2001, 2000 and 1999 was
$2.7 million, $(.4) million and $3.7 million, respectively. The increase in cash
provided by operating activities for the year ended December 31, 2001 compared
to the year ended December 31, 2000 resulted primarily from changes in working
capital items as a result of our focus on improving collections and reducing
inventories. The decrease for the year ended December 31, 2000 resulted
primarily from funding higher levels of working capital required to support our
growth, primarily inventory and overpayment of estimated tax installments in
2000.
20
Working capital as of December 31, 2001 and December 31, 2000 was $15.0
million and $19.1 million, respectively, and cash balances were $0 and $.2
million for 2001 and 2000. The relatively low cash balances are the result of
our practice of applying all excess cash against the line of credit to minimize
interest expense payable on the line of credit.
We have used our operating cash flow and borrowings under our line of
credit primarily for the expansion of sales and marketing activities, the
acquisition and development new products and product lines, capital expenditures
and working capital. Net cash used in investing activities was $1.6 million for
the year ended December 31, 2001, $23.6 million for the year ended December 31,
2000 and $26.6 million for the year ended December 31, 1999. In 2001, we made
payments of $.5 million for holdbacks and earnouts on prior acquisitions. In
2000, $22.3 million was used to purchase SCS and Fibar. In 1999, $25.4 million
was used to purchase the assets of Park Structures, Superior Foam and Smart
Products. The balance was primarily devoted to capital expenditures for fixed
assets, intellectual property and an advance in 2000 to one of our officers
related to the exercise of stock options in 1999.
Net cash provided by (used in) financing activities was $(1.4) million,
$24.0 million and $16.6 million for the years ended December 31, 2001, 2000 and
1999, respectively. The use of funds in 2001 primarily represents the net
payments on our line of credit and term loan. We funded the cash portion of the
purchase price in 2000 for SCS and Fibar with the revolving credit facility from
the bank. We funded the acquisition of Park Structures in 1999 through a
combination of existing cash balances and borrowings under the revolving credit
facility. In 1999, we received approximately $2.6 million in proceeds from the
exercise of the underwriter's over-allotment option on a secondary offering we
completed in 1998.
Our backlog of orders is comprised primarily of orders from our customers
in the modular play equipment segment. The amount of backlog at any given point
in time will vary due to customers' seasonal buying patterns and our production
capacity. The backlog of orders was $4.0 million at December 31, 2001 and
approximately $6.4 million at December 31, 2000.
We were not materially affected by changing raw materials prices except for
polyethylene prices in 2000, which increased materially due to the increase in
costs for all petroleum based products experienced in the United States during
the year.
Our revolving line of credit and term loan will require significant cash
payments in the future. We have various other contractual obligations, primarily
lease agreements, that also require significant future cash payments. The table
below summarizes these future obligations.
Contractual Obligations
Total Less than 1 1-3 years 4-5 years After 5 years
----- ------------ --------- --------- -------------
year
----
Revolving line of credit $ 9,600,000 $ 0 $ 9,600,000 $ 0 $ 0
Term loan 27,000,000 2,000,000 25,000,000 0 0
Capital leases 164,356 54,784 109,572 0 0
Acquisition payments 702,130 702,130 0 0 0
Operating leases 10,228,400 1,519,800 2,290,800 2,104,200 4,313,600
----------- ---------- ----------- ---------- ----------
Total $47,694,886 $4,276,714 $37,000,372 $2,104,200 $4,313,600
=========== ========== =========== ========== ==========
In addition to the above, our term loan requires additional payments of up
to $2 million by April 15, 2003 if we meet certain EBITDA targets for 2002 and
requires payments of up to 75% of our excess cash flow as defined.
We believe that our cash flow from operations and the unused capacity under
our revolving line of credit will be sufficient to fund our operations for the
next twelve months. We are required under our amended loan agreements to obtain
an additional $10 million of capital by April 1, 2003 to reduce amounts
currently outstanding under our term loan. If it appears that we will not meet
the covenant targets, we will consider taking additional cost reduction steps
which could include employee reductions and other spending cuts.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates is related
primarily to our line of credit, which accrues interest at an adjustable rate.
We do not believe that the future market risks will have material adverse impact
on our financial position, results of operations or liquidity. For purposes of
interest rate sensitivity, a variance in the interest rate of 1/4% will result
in a change in diluted earnings per share of approximately $0.01 per share.
21
Delta Play is located in Canada near Vancouver, British Columbia. Delta
Play's sales to customers outside Canada and a certain amount of our raw
material purchases are transacted in United States dollars. Sales to customers
within Canada, labor costs and certain raw material purchases are transacted in
Canadian dollars. The fluctuation in the exchange rate between United States
dollars and Canadian dollars during 2001 and 2000 did not materially affect our
business during 2001 or 2000 and we do not believe, based on historical trends,
that future exchange rate fluctuations will have a material adverse impact on
our financial position, results of operations or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to our proxy statement for our 2002 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to our proxy statement for our 2002 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to our proxy statement for our 2002 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to our proxy statement for our 2002 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2001.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The Financial Statement Index is on Page F-1.
Financial Statement Schedules
22
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31,
Deducted from asset accounts: 2001 2000 1999
---- ---- ----
Allowance for doubtful accounts
Balance at beginning of period $ 387,456 $ 131,030 $ 111,144
Charged to expense 357,322 285,460 155,395
Amount from acquisition -- 85,000 --
Deducted (298,977) (114,034) (135,509)
--------- --------- ---------
Balance at end of period $ 445,801 $ 387,456 $ 131,030
========= ========= =========
Exhibits and Reports on Form 8-K
Exhibit
No. Description
3.1 Articles of Incorporation of Koala Corporation (5) 3.2Bylaws of
Koala Corporation (5) 4.1Specimen Common Stock Certificate (1)
10.1 Incentive Stock Option Plan dated August 19, 1993 (1)
10.2 Koala Corporation 1995 Stock Option Plan, as amended (5)
Industrial Lease dated August 1, 1996 between Buckhead Industrial
Properties, Inc. and Koala
10.3 Corporation (2)
10.4 Credit Agreement with U.S. Bank National Association (4)
10.5 Agreement for Sale and Purchase of Assets dated June 23, 1997
between Delta Play, Ltd., et al and Koala Corporation (3)
10.6 Registration Rights Agreement dated June 23, 1997 between Delta
Play, Ltd., and Koala Corporation (4)
10.7 Agreement for Sale and Purchase of Assets dated August 14, 1998
between Park Structures, Inc. et al and Koala Corporation (5)
10.8 Indenture dated March 31, 1998 among Vanac Development Corp.,
Delta Play Company and Koala Corporation
10.9 Form of Revolving Credit Agreement, dated November 17, 2000,
between Koala Corporation and U.S. Bank National Association (5)
10.10 Agreement for Sale and Purchase of Assets dated March 26, 1999,
by and among Superior Foam & Polymers, Inc., James T. New, Jr.,
Kevin C. Brown and Koala Corporation (6)
10.11 Lease Agreement Dated March 16, 2000 between Dove Valley Business
Center, LLP and Koala Corporation
10.12 Amended and Restated Revolving Credit Agreement among Koala
Corporation, U.S. Bank National Association, as agent for the
lenders, and Other Lenders Party Hereto, dated September 26,
2001. (7)
10.13 Amendment No. 1 to the Amended and Restated Revolving Credit,
Term Loan and Security Agreement (8)
10.14 Waiver and Amendment No. 2 to the Amended and Restated Revolving
Credit, Term Loan and Security Agreement (9)
21.1 Subsidiaries
23.1 Consent of Independent Auditors
(1) Incorporated by reference to the exhibits included in the Company's
Registration Statement on Form SB-2, Registration No. 33-68482C.
(2) Incorporated by reference to Exhibit 10.11 of the Company's Form 10-K
for the year ended December 31, 1996.
(3) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K/A
filed on September 8, 1997.
(4) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K/A
filed on September 8, 1997.
(5) Incorporated by reference to the exhibits included in the Company's
Registration Statement on Form SB-2, Registration No. 333-61551.
(6) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K
filed on April 2, 1999.
(7) Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K
filed on October 4, 2001
(8) Incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q
for the quarter ended September 30, 2001.
(9) Filed herewith.
(b) Reports on Form 8-K
|X| October 4, 2001
|X| October 26, 2001
23
SIGNATURES
In accordance with Section 13 of the Securities and Exchange Act of 1934, the
registrant caused this report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
KOALA CORPORATION
Date: April 1, 2002 By: /s/ Mark A. Betker
------------- -------------------
Mark A. Betker, Chairman,
Chief Executive Officer and President
Date: April 1, 2002 By: /s/ Jeffrey L. Vigil
------------- ---------------------
Jeffrey L. Vigil
Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report on Form 10-K has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Mark A. Betker Chairman, Chief Executive Officer April 1, 2002
- -------------------------- and President (Principal Executive
Mark A. Betker Officer) and Director
/s/ Michael C. Franson Director April 1, 2002
- --------------------------
Michael C. Franson
/s/ John T. Pfannenstein Director April 1, 2002
- --------------------------
John T. Pfannenstein
/s/ Nancy Pierce
- -------------------------- Director April 1, 2002
Nancy Pierce
/s/ Randy Stein Director April 1, 2002
- --------------------------
Randy Stein
24
KOALA CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2001 AND 2000 AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2001
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
SHAREHOLDERS AND
BOARD OF DIRECTORS
KOALA CORPORATION
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of KOALA
CORPORATION (a Colorado corporation) as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included financial statement schedule II. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KOALA CORPORATION
at December 31, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Denver, Colorado
April 1, 2002
F-2
KOALA CORPORATION
- --------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
2001 2000
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 0 $ 200,786
Accounts receivable, trade (less allowance for doubtful accounts
of $445,801 in 2001 and $387,456 in 2000) 7,372,667 10,187,172
Unbilled receivables 1,298,404 3,448,872
Tax refund and other receivables 2,845,591 2,221,741
Inventories 10,983,825 12,653,750
Prepaid expenses and other 1,181,091 1,421,280
------------ ------------
Total current assets 23,681,578 30,133,601
Property and equipment (net of accumulated depreciation
of $2,753,808 in 2001 and $1,849,685 in 2000) 4,184,436 4,129,646
Identifiable intangible assets (net of accumulated amortization
of $3,997,709 in 2001 and $2,626,228 in 2000) 26,526,264 27,762,155
Goodwill (net of accumulated amortization
of $2,232,669 in 2001 and $1,212,083 in 2000) 28,601,426 29,285,910
Other 51,096 118,088
------------ ------------
$ 83,044,800 $ 91,429,400
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,875,706 $ 7,345,889
Accrued expenses and other 3,146,263 3,219,554
Acquisition liability 702,130 500,000
Current portion of credit facility 2,000,000 --
------------ ------------
Total current liabilities 8,724,099 11,065,443
------------ ------------
Long Term Liabilities:
Deferred income taxes and other 2,138,657 1,634,699
Acquisition liability, less current portion -- 1,000,000
Credit facility 34,600,000 37,990,000
------------ ------------
Total long term liabilities 36,738,657 40,624,699
------------ ------------
Total liabilities 45,462,756 51,690,142
------------ ------------
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 6,872,334 in 2001 and 2000 687,233 687,233
Notes receivable from officer (715,195) (695,171)
Additional paid-in capital 20,256,774 20,256,774
Accumulated other comprehensive loss (194,351) (47,234)
Retained earnings 17,547,583 19,537,656
------------ ------------
Total shareholders' equity 37,582,044 39,739,258
------------ ------------
$ 83,044,800 $ 91,429,400
============ ============
See notes to consolidated financial statements
F-3
KOALA CORPORATION
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2001 2000 1999
------------------ ----------------- -----------------
Sales $59,221,705 $61,588,714 $37,863,770
Cost of sales 37,137,044 34,701,687 18,821,646
------------------ ----------------- -----------------
Gross profit 22,084,661 26,887,027 19,042,124
Selling, general and administrative expenses 19,204,007 15,955,129 9,467,210
Amortization of intangibles 2,395,091 2,084,505 958,524
------------------ ----------------- -----------------
Income from operations 485,563 8,847,393 8,616,390
Other (income) expense:
Interest expense 3,147,327 2,919,465 902,169
Interest income (18,808) (10,138) (1,362)
Other 25,906 (352,735) -
------------------ ----------------- -----------------
Income (loss) before income taxes (2,668,862) 6,290,801 7,715,583
Income tax (benefit) expense (678,789) 2,258,397 2,624,459
------------------ ----------------- -----------------
Net income (loss) ($1,990,073) $4,032,404 $5,091,124
================== ================= =================
Net income (loss) per share - basic ($0.29) $0.60 $0.81
================== ================= =================
Net income (loss) per share - diluted ($0.29) $0.58 $0.78
================== ================= =================
Weighted average shares outstanding - basic 6,872,334 6,769,508 6,256,729
================== ================= =================
Weighted average shares outstanding - diluted 6,872,334 7,000,986 6,516,075
================== ================= =================
See notes to consolidated financial statements
F-4
KOALA CORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Note Additional Other
Common Stock Stock to Receivable Paid-In Comprehensive Retained
Shares Amount be Issued Officer Capital Loss Earnings Total
----------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,694,724 $ 569,472 $ 1,297,903 $ - $ 9,335,438 ($121,160) $10,414,128 $ 21,495,781
Net income 5,091,124 5,091,124
Foreign currency translation
adjustment 90,122 90,122
------------
Comprehensive income 5,181,246
Issuance of common stock for
cash, net of expenses 360,000 36,000 2,564,996 2,600,996
Issuance of common stock for
acquisitions 257,754 25,776 (1,297,903) 2,332,829 1,060,702
Issuance of common stock for
stock options 84,650 8,465 363,031 371,496
Note receivable from officer,
including accrued interest (383,505) (383,505)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 1999 6,397,128 639,713 - (383,505) 14,596,294 (31,038) 15,505,252 30,326,716
Net income 4,032,404 4,032,404
Foreign currency translation
adjustment (16,196) (16,196)
------------
Comprehensive income 4,016,208
Issuance of common stock for
acquisitions 475,206 47,520 5,660,480 5,708,000
Note receivable from officer,
including accrued interest (311,666) (311,666)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 6,872,334 687,233 - (695,171) 20,256,774 (47,234) 19,537,656 39,739,258
Net loss (1,990,073) (1,990,073)
Foreign currency translation
adjustment (147,117) (147,117)
------------
Comprehensive loss (2,137,190)
Note receivable from officer,
including accrued interest (20,024) (20,024)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2001 6,872,334 $687,233 $ - ($715,195) $20,256,774 ($194,351) $17,547,583 $ 37,582,044
====================================================================================================
See notes to consolidated financial statements
F-5
KOALA CORPORATION
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2001 2000 1999
------------------ ------------------ -----------------
Cash flows from operating activities:
Net income (loss) ($1,990,073) $4,032,404 $5,091,124
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 920,379 789,647 500,970
Amortization 2,395,091 2,084,505 958,524
Deferred income tax expense 348,834 424,580 410,613
Accrued interest on notes receivable from officer (20,024) (68,666) (13,505)
Changes in operating assets and liabilities:
Accounts receivable, trade 2,707,590 3,350,161 (2,786,346)
Unbilled receivables 2,150,468 (3,448,872) -
Tax refund receivable and other receivables (1,208,156) (2,221,741) (144,980)
Inventories 1,526,783 (6,134,713) (958,852)
Prepaid expenses and other 301,992 114,698 (280,382)
Accounts payable (4,433,996) 3,780,931 425,737
Accrued expenses, income taxes, and other (34,405) (3,084,970) 514,701
------------------ ------------------ -----------------
Net cash provided by (used in) operating activities 2,664,483 (381,836) 3,717,604
------------------ ------------------ -----------------
Cash flows from investing activities:
Capital expenditures (815,361) (798,364) (1,106,736)
Acquisitions, net of cash acquired (470,580) (22,339,742) (25,391,976)
Intangibles and other (303,207) (205,012) (130,169)
Advance to officer - (243,000) -
------------------ ------------------ -----------------
Net cash used in investing activities (1,589,148) (23,586,118) (26,628,881)
------------------ ------------------ -----------------
Cash flows from financing activities:
Sale of common stock, net of expenses - - 2,600,996
Principal payments on capital leases (41,392) - -
Net proceeds from (repayments on) credit facility (1,390,000) 24,011,000 13,979,000
------------------ ------------------ -----------------
Net cash provided by (used in) financing activities (1,431,392) 24,011,000 16,579,996
------------------ ------------------ -----------------
Effect of exchange rate changes on cash and cash equivalents 155,271 (16,196) 11,647
Net increase (decrease) in cash and cash equivalents (200,786) 26,850 (6,319,634)
Cash and cash equivalents, at beginning of period 200,786 173,936 6,493,570
------------------ ------------------ -----------------
Cash and cash equivalents, at end of period $0 $200,786 $173,936
================== ================== =================
See notes to consolidated financial statements
F-6
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies:
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 custom solutions that create
attractive family-friendly environments for businesses and other public
venues. The Company produces family convenience and activity products,
children's indoor and outdoor modular play equipment and playground
surfacing systems. 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.
During 2001, the Company recorded a loss which caused it to be in
default on certain of its debt covenants for the quarters ended June
30, September 30, and December 31, 2001. Based upon its estimated
results for 2002, the Company anticipated that it would be in
violation of the covenants again during 2002. As a result, as
discussed in Note 3, the Company entered into an agreement with its
lenders on April 1, 2002 which waives the existing violations of those
covenants and modifies the covenants and payment terms for 2002. The
Company believes that the debt modifications will allow it to be in
compliance with the covenants during 2002 and that it will have
sufficient cash flows to maintain its operations through at least
December 31, 2002. If it appears that the Company will not meet the
covenant targets, it will consider taking additional cost reduction
steps which could include employee reductions and other spending cuts.
Use of estimates:
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles
in the United States. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenue and
expenses. Actual results could vary from the estimates that were used.
Financial instruments:
The fair value of financial instruments, consisting of investments in
cash, cash equivalents, receivables, obligations under accounts
payable, and debt instruments, is based on interest rates available to
the Company and comparisons to quoted prices. At December 31, 2001 and
2000, the fair value of these financial instruments approximates
carrying value.
Cash and cash equivalents include cash on hand, demand deposits,
savings accounts, and short-term investments with original maturities
of three months or less. Cash and cash equivalents include financial
instruments that potentially subject the Company to a concentration of
credit risk. The Company places its cash and temporary cash investments
with high credit quality institutions. At times, cash held in the
Company's primary bank may be in excess of the FDIC insurance limit.
Cash in money market mutual funds is not federally insured. The Company
performs periodic evaluations of the relative credit standing of these
financial institutions. As of December 31, 2000, cash and cash
equivalents consisted solely of cash in the primary banking
institution. At December 31, 2001, cash overdrafts of $ 131,800 have
been recorded as a liability.
F-7
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
Inventories:
Inventories are stated at the lower of cost (including overhead) or
market (first-in, first-out). As of December 31, 2001 and 2000,
inventories consisted of the following:
2001 2000
---- ----
Raw materials $ 6,457,436 $ 5,327,158
Work-in-process and finished goods 4,526,389 7,326,592
------------ ------------
$ 10,983,825 $ 12,653,750
Property and equipment:
Property and equipment is stated at the lower of depreciated cost or
net realizable value. Depreciation and amortization is being provided
on the straight-line method over the estimated useful life of the
asset. The following is a schedule of estimated useful lives of
property and equipment:
Furniture and fixtures 7 years
Tooling and molds 6-10 years
Software 3-5 years
Shop and office equipment 3-10 years
Leasehold improvements 3-5 years
Property and equipment consist of the following at December 31:
2001 2000
---- ----
Tooling and molds $2,165,085 $1,978,584
Office equipment and software 2,830,922 1,554,257
Leasehold improvements 771,186 1,072,648
Furniture and fixtures 624,459 651,752
Shop equipment 546,592 722,090
---------- ----------
6,938,244 5,979,331
Less: accumulated depreciation 2,753,808 1,849,685
---------- ----------
$4,184,436 $4,129,646
Goodwill and identifiable intangible assets:
The excess of acquisition cost over fair value of net tangible and
identifiable intangible assets of businesses acquired in purchase
transactions, has been included in goodwill and is being amortized on a
straight-line basis over 30 years. Identifiable intangible assets
include patents, trademarks, trade names, proprietary trade secrets,
proprietary product designs, customer lists and non-compete agreements
and are being amortized over the lesser of the assets' legal life (if
applicable) or their estimated economic lives, ranging from 5 to 40
years.
F-8
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
The Company's policy is to account for goodwill and identifiable
intangible assets at the lower of amortized cost or net realizable
value. As part of an ongoing review of the valuation and amortization
of intangible assets, management assesses the carrying value of the
Company's intangible assets to determine if changes in facts and
circumstances suggest that they may be impaired. If this review
indicates that there may be an impairment, as determined by an
undiscounted cash flow analysis over the remaining amortization period,
the carrying value of the Company's intangibles would be reduced to its
estimated fair market value. No impairment of the value of the
intangible assets was recorded in the accompanying consolidated
financial statements during the years ended December 31, 2001, 2000 or
1999.
In June of 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) 142 "Goodwill and
Other Intangible Assets" (SFAS 142). This statement will change the way
the Company accounts for goodwill and other intangible assets beginning
in 2002. Under SFAS 142, the Company will stop amortizing goodwill
beginning January 1, 2002. This is expected to result in a reduction in
amortization of approximately $1 million per year.
In addition, the implementation of SFAS 142 will change the way the
Company evaluates goodwill for impairment. Under SFAS 142, the Company
will be required to split the two segments; children's activity and
convenience products and children's modular play equipment, into
reporting units. Goodwill impairment will be evaluated separately for
each reporting unit by comparing the fair value of the reporting unit
with its underlying book value. If the fair value of the reporting unit
is less than its book value, the Company will be required to perform an
additional test to determine the amount of the impairment. This test
will consist of determining the fair value of all of the assets and
liabilities in the reporting unit, adding the book value of goodwill,
and then comparing that value to the overall fair value determined
above. The impairment amount for goodwill will consist of any excess of
the detailed fair values plus goodwill over the fair value of the
reporting unit.
Identifiable intangible assets consist of the following at December 31:
2001 2000
---- ----
Trademarks $ 3,971,799 $ 3,971,799
Patents 10,806,015 10,666,259
Trade secrets 5,500,000 5,500,000
Product designs 10,044,409 10,044,409
Other 201,750 205,916
----------- -----------
Total 30,523,973 30,388,383
Less accumulated amortization 3,997,709 2,626,228
----------- -----------
$26,526,264 $27,762,155
SFAS 142 is required to be implemented as of January 1, 2002. However,
the Company will have until June 30, 2002 to determine if there is an
impairment of goodwill and until December 31, 2002 to determine the
amount of the impairment. Previously filed 2002 quarterly information
will be required to be restated for any impairments subsequently
recognized.
F-9
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
Revenue recognition:
The Company recognizes revenues for the majority of its operations at
either the time its products are shipped, or when installation is
complete in cases where the Company performs the installation services.
At SCS Interactive (included in the Company's modular play equipment
segment), the percentage of completion method of accounting is utilized
because the build to install timeline of its jobs is of longer
duration. The percentage of completion is measured using actual costs
compared to total estimated costs. Revenues from shipping and handling
are included in sales. Shipping and handling costs are included in cost
of sales.
Advertising costs:
Advertising costs, except for the preparation of catalog materials, are
expensed when incurred. Costs of preparing catalog materials are
deferred and amortized over the life of the catalog, typically one
year. Advertising expenses for the periods ended December 31, 2001,
2000 and 1999 were $1,684,525, $1,810,500 and $1,301,422, respectively.
Income taxes:
The Company provides for deferred taxes on temporary differences
arising from assets and liabilities whose bases are different for
financial reporting and state, federal and foreign income tax purposes.
The differences relate primarily to depreciable and amortizable assets,
certain accrued expenses and the allowance for uncollectible accounts.
For foreign corporate income taxes paid, the Company will utilize a
foreign tax credit against the federal corporate income tax liability.
Foreign currency translation:
The financial statements of the Company's subsidiaries located outside
the United States are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date. Income
and expense items are translated at average rates of exchange. The
resultant translation adjustments are included in equity adjustment
from translation, a separate component of shareholders' equity. Gains
and losses on foreign currency transactions are included in operations.
The net foreign exchange loss for the year ended December 31, 2001 was
$195,234. Amounts in prior years were not significant.
F-10
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
Earnings per share
The following table provides a reconciliation of the numerator and
denominator for earnings per share:
December 31
-----------
2001 2000 1999
---- ---- ----
Net income (loss) $(1,990,073) $ 4,032,404 $ 5,091,124
=========== =========== ===========
Shares outstanding 6,872,334 6,769,508 6,256,729
Net effect of dilutive options -- 231,478 259,346
----------- ----------- -----------
Dilutive shares outstanding 6,872,334 7,000,986 6,516,075
=========== =========== ===========
Options outstanding of 1,044,500, 43,750, and 127,125 at December 31,
2001, 2000 and 1999, respectively, have been excluded from the above
calculation because they were not considered common share equivalents
or because their effect would be anti-dilutive.
Stock Split:
On October 8, 1999, the Company's Board of Directors approved a
two-for-one stock split effected as a stock dividend. All amounts in
the accompanying financial statements and related footnotes have been
restated to reflect this stock split.
New Accounting Pronouncements:
In June 2001, the FASB issued SFAS 141, Business Combinations. SFAS 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also
includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. The FASB also adopted SFAS 142, Goodwill
and Other Intangible Assets, as previously discussed.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes one accounting
model to be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more
disposal transactions. SFAS 144 supercedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of and the
accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects Of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. The Company
will adopt SFAS 144 as of January 1, 2002 and does not anticipate any
immediate impact from the adoption of this statement.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs.
F-11
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
The Company will adopt SFAS 143 in 2003. The Company does not believe
the adoption of SFAS 143 will have a material impact on the
consolidated financial statements.
Reclassifications:
Certain items have been reclassified in the prior year financial
statements to conform to the current year presentation. These consist
primarily of a reclassification of shipping and handling costs out of
revenue and into cost of sales. These reclassifications had no effect
on net income or cash flows.
2. Debt:
The following is a summary of the Company's debt as of December 31:
2001 2000
---- ----
$14.0 million revolving credit facility,
maturing April 15, 2003, interest payable
monthly at bank's prime rate plus a variable
margin, effective rate at December 31, 2001
and 2000 was 7.25% and 9.5%, respectively $9,600,000 $37,990,000
Term loan, maturing on September 26, 2004,
quarterly principal payments of $500,000
through December 31, 2002, interest payable
monthly at bank's prime rate plus a variable
margin, effective rate at December 31, 2001
was 7.25% 27,000,000 -
---------- -----------
$36,600,000 $37,990,000
=========== ===========
The Company increased its secured line of credit with a bank from
$15.0 million at December 1999 to $45.0 million on November 17, 2000.
The interest rate on amounts borrowed under the line of credit was
based on the applicable Reserve Adjusted LIBOR rate, or the commercial
bank's prime rate.
In the third quarter of 2001, the Company amended and restated its
existing $45 million revolving credit facility and established a
revolving credit facility in the amount of $14 million and a term loan
in the amount of $28 million (the "New Credit Facility"). This
facility is secured by substantially all of the assets of the Company
and requires compliance with financial loan covenants related to
leverage, interest coverage, fixed charges and capital expenditures.
Availability under the revolving credit facility is determined by a
formula based on inventory and accounts receivable balances. A
commitment fee of .50% per annum is payable quarterly based on the
average daily unused portion of the revolving line of credit.
At September 30, 2001, the Company was not in compliance with the
financial covenants for maximum leverage ratio and minimum interest
coverage ratio. The Company
F-12
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
2. Debt (continued):
obtained a waiver of such non-compliance which is contained in
Amendment No. 1 to the New Credit Facility. The waiver required, among
other things, the infusion of $10 million of capital into the Company
by March 31, 2002, which would be used to reduce the amounts
outstanding under the term loan, and sets new covenants.
At December 31, 2001, the Company was again in default of certain
covenants under that indebtedness and anticipated, based on expected
results, that it would be in default throughout 2002. On April 1, 2002,
the Company obtained a waiver of such non-compliance which is contained
in Amendment No. 2 to the New Credit Facility. Under the amendment, the
due date of the line of credit has been extended to April 15, 2003, the
date to obtain the $10 million of additional capital is changed to
April 1, 2003, the quarterly payments for 2002 have been reduced to
$500,000 per quarter and the covenants have been reset. The amendment
also requires the Company to make up to $2 million in additional
principal payments on April 15, 2003 if certain EBITDA targets are met
for 2002. The Company has engaged an investment banker to assist with
raising the additional financing.
The following is a summary of the debt maturities as of December 31,
2001
2002 $2,000,000
2003 13,600,000
2004 21,000,000
----------
Total $36,600,000
===========
3. Supplemental financial information:
2001 2000 1999
---- ---- ----
Interest received $ 16,248 $ 21,044 $ 8,586
========== ========== ==========
Interest paid $3,236,001 $2,932,413 $ 772,074
========== ========== ==========
Income taxes paid $ 149,508 $3,272,029 $2,370,282
========== ========== ==========
4. Capital lease:
The Company entered into a capital lease for certain equipment and
software in 2001. The amounts are included in equipment and accumulated
depreciation as follows:
December 31,
------------
2001
----
Equipment $183,996
Accumulated depreciation 19,582
F-13
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
4. Capital lease (continued):
Amortization expense for this lease for the year ended December 31,
2001 was $19,582. Future payments due under this lease at December 31,
2001 are as follows:
2002 $ 72,318
2003 72,318
2004 72,318
---------
Total 216,954
Less amounts representing
interest 52,598
---------
Total $ 164,356
=========
Current portion $ 54,784
=========
Non-current portion $ 109,572
=========
5. Commitments and contingencies:
Operating leases:
The Company has entered into operating leases for facilities located in
Denver, Colorado, Coral Springs, Florida, Tillamook, Oregon, Armonk,
New York, Wimberley, Texas, and Delta, British Columbia, Canada. The
Company has other operating leases for equipment and furniture and
fixtures.
The lease terms vary and run through December 31, 2012. One of the
leases contains a five year renewal option. All of the building leases
call for monthly base rents, with the Company responsible for its share
of common building operating costs, payable on a monthly basis.
Rent expense was $1,132,800, $968,200 and $695,900 for the years ended
December 31, 2001, 2000 and 1999, respectively. Total minimum operating
lease commitments are as follows:
Year Ending December 31, Amount
------------------------ ------------
2002 $ 1,519,800
2003 1,211,000
2004 1,079,800
2005 1,053,300
2006 1,050,900
Thereafter 4,313,600
------------
$ 10,228,400
============
Warranties:
For family convenience and children's activity products, the Company
provides a replacement guarantee for one year from purchase protecting
against damage from natural disasters or vandalism subject to a $100
deductible. The Company also provides a five-year warranty on parts
and labor covering any defects in workmanship. For
F-14
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
5. Commitments and contingencies (continued):
modular play equipment, the Company provides warranties ranging from a
one year limited warranty on parts and labor covering defects in
workmanship to a lifetime warranty on certain metal parts. The Company
has experienced minimal returns and warranty claims, except for SCS
Interactive where a warranty accrual of .75% of 2001 and 2000 sales has
been recorded.
6. Stock options:
The Company adopted a Stock Option Plan (1993 Plan) in August 1993. The
1993 Plan provides that options to purchase up to 200,000 shares of
common stock may be granted. The Company adopted a second plan in
November 1995 (1995 Plan) which provides that additional options to
purchase up to 800,000 shares of common stock may be granted. The
exercise price of each option is equal to the market price of the
Company's stock on the date of grant. The option term varies, as well
as the vesting periods, at the discretion of the Board of Directors.
In January 1998, the Company authorized the amendment and restatement
of the 1995 Plan to grant an additional 500,000 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.
The fair value of each option granted is estimated on the grant date
using the Black-Scholes Model. The following assumptions were made in
estimating fair value:
Assumption 2001 2000 1999
---------- ---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate -
5 year 4.51% 5.00% 6.25%
Expected life 5 years 5 years 5 years
Expected volatility 89.80% 47.20% 42.50%
F-15
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
5. Stock options (continued):
The Company applies the intrinsic value method as defined by APB
Opinion 25 and its interpretations in accounting for its stock based
compensation plans. Accordingly, no compensation cost has been
recognized for the plans in 2001, 2000 or 1999. FASB Statement No. 123,
Accounting for Stock Compensation, requires certain disclosures as if
stock compensation had been determined using fair value methodologies.
Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net income (loss) and earnings
(loss) per share would have been presented as follows:
Net income (loss) 2001 2000 1999
------------------- ---- ---- ----
As reported $(1,990,073) $4,032,404 $5,091,124
=========== ========== ==========
Pro forma (FASB 123) $(2,432,156) $3,471,723 $4,721,877
============ ========== ==========
Basic earnings (loss) per share
As reported $(.29) $.60 $.81
===== ==== ====
Pro forma (FASB 123) $(.35) $.51 $.75
===== ==== ====
Diluted earnings (loss) per share
As reported $(.29) $.58 $.78
===== ==== ====
Pro forma (FASB 123) $(.35) $.50 $.72
===== ==== ====
Following is a summary of the status of the plans during 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Options exercisable 707,700 614,800 422,000
======= ======= =======
Weighted average fair value of
options granted during the year $1.50 $6.84 $5.65
===== ===== =====
F-16
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
6. Stock options (continued):
Following is a summary of the status of the plans for the years ended
December 31, 2001, 2000 and 1999:
Number of Weighted Average
Shares Exercise Price Price
----------- ---------------- ----------------
Outstanding, December 31, 1998 806,000 $6.89 $4.63 to $11.50
Granted 261,000 $12.20 $9.69 to $16.38
Exercised (102,000) $5.43 $4.63 to $9.00
---------
Outstanding, December 31, 1999 965,000 $8.47 $4.63 to $16.38
Granted 128,500 $12.99 10.00 to $15.00
Forfeited (39,000) $10.51 $7.25 to $16.00
--------
Outstanding, December 31, 2000 1,054,500 $8.95 $4.63 to $16.38
Granted 36,000 $1.97 $1.06 to $3.25
Forfeited (46,000) $12.54 $6.50 to $13.88
--------
Outstanding, December 31, 2001 1,044,500 $8.56 $1.06 to $16.38
=========
F-17
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
6. Stock options (continued):
A summary of the status of fixed options outstanding at December 31,
2001 is as follows:
Outstanding Options Exercisable Options
-------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Price Number Life Price Number Price
----- ------ ---- ----- ------ -----
$1.06 to $4.63 156,000 3.45 years $4.01 120,000 $4.63
$5.63 to $7.50 362,000 4.22 years $6.42 346,000 $6.39
$8.00 to $11.50 270,500 6.59 years $9.92 142,500 $9.82
$12.50 to $16.38 256,000 7.78 years $12.90 99,200 $12.71
7. Income taxes:
The components of the provision for income tax were:
--------------------------------------------------------
2001
-------------------------------------------------------
Federal Foreign State Total
Current tax expense (benefit) $(1,027,623) $ - $ - $(1,027,623)
Deferred tax expense (benefit) 399,430 - (50,596) 348,834
----------- ----------- ----------- -----------
Income tax benefit $ (628,193) $ - $ (50,596) $ (678,789)
=========== =========== =========== ===========
--------------------------------------------------------
2000
-------------------------------------------------------
Federal Foreign State Total
Current tax expense $ 1,694,268 $ - $ 139,549 $ 1,833,817
Deferred tax expense 413,557 - 11,023 424,580
----------- ----------- ----------- -----------
Income tax expense $ 2,107,825 $ - $ 150,572 $ 2,258,397
=========== =========== =========== ===========
--------------------------------------------------------
1999
-------------------------------------------------------
Federal Foreign State Total
Current tax expense $ 1,903,943 $ 155,129 $ 154,774 $ 2,213,846
Deferred tax expense 366,565 - 44,048 410,613
----------- ----------- ----------- -----------
Income tax expense $ 2,270,508 $ 155,129 $ 198,822 $ 2,624,459
=========== =========== =========== ===========
F-18
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
7. Income taxes (continued):
The tax effects of temporary differences that give rise to a
significant portion of the deferred tax assets and liabilities at
December 31, 2001 and 2000 are as follows:
2001 2000
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 161,538 $ 140,634
State operating loss carryforwards 50,596 --
Other 2,541 --
---------- ----------
214,675 140,634
---------- ----------
Deferred tax liabilities:
Depreciation 281,134 340,000
Amortization 1,721,911 1,242,000
---------- ----------
2,003,045 1,582,000
---------- ----------
Net deferred tax liability $1,788,370 $1,441,366
========== ==========
The components of income (loss) before income taxes for the years ended
December 31 are as follows:
2001 2000 1999
---- ---- ----
Foreign $ (746,000) $ (595,000) $ 503,000
US (1,923,000) 6,886,000 7,213,000
----------- ----------- -----------
Total $(2,669,000) $ 6,291,000 $ 7,716,000
=========== =========== ===========
The effective tax rate differs from the statutory rate as follows:
2001 2000 1999
---- ---- ----
Federal statutory rate (34.0)% 34.0% 34.0%
Foreign taxes in excess of federal statutory rate 3.7 0.0 2.0
Tax benefit of foreign tax credit 0.0 0.0 (2.0)
State income taxes - net of federal effect (1.9) 2.5 1.3
Effect of difference in tax basis of goodwill 5.1 1.5 (0.5)
Foreign sales corporation 1.4 (1.8) (1.3)
Miscellaneous tax adjustments .3 (.3) .5
------ ------ ------
Effective tax rate (25.4)% 35.9% 34.0%
====== ====== ======
8. Major suppliers:
For the years ended December 31, 2001, 2000, and 1999 the Company
purchased a significant amount of component parts from three, three and
four vendors, which accounted for approximately 9%, 14% and 17% of the
Company's total cost of sales, respectively.
F-19
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
9. 401(k) Plan:
Effective January 1997, the Company adopted a 401(k) Plan for the
benefit of substantially all of its U.S. employees meeting specified
eligibility requirements. The Plan permits contributions by the Company
but does not require them. The Company made no material contributions
to the Plan during 2001, 2000 or 1999. The Company also maintained a
second plan in 2000 and 2001 that related to the purchase of SCS
Interactive on March 1, 2000. Contributions to this plan were matched
up to 3% of the participants' deferred compensation. This plan was
merged into the Koala plan effective March 1, 2001. During the years
ended December 31, 2001 and 2000, the Company contributed $18,827 and
$67,783, respectively, to this 401(k) profit sharing plan.
10. Preferred stock and shareholder rights plan:
During 1996, the shareholders voted to amend the Articles of
Incorporation to provide for the issuance of 1,000,000 shares of no par
value preferred stock. At December 31, 2001 and 2000, none were
outstanding. The Board of Directors is granted authority to determine
dividends and other rights and preferences for the preferred stock.
On October 31, 2000, the Board of Directors declared, to shareholders
of record at the close of business on November 13, 2000, a dividend of
one right to purchase preferred stock (a "Right") for each outstanding
share of common stock, par value $.10 per share, of the Company. As a
result, there are 35,000 shares of preferred stock reserved for
issuance relating to such rights. Each share of subsequently issued
common stock also incorporates one Right. The Rights will expire on
November 7, 2010. Each Right entitles shareholders, in certain
circumstances, to buy one one-thousandth of a newly issued share of
Series A Junior Participating Preferred Stock (the"Junior Preferred
Shares") of the Company at the initial purchase price of $50.00 per one
one-thousandth of a Junior Preferred Share.
The Rights are exercisable and transferable apart from the common stock
only if a person or group (other than certain exempt persons) acquires
beneficial ownership of 20% or more of the common stock, or commences a
tender or exchange offer upon consummation of which such person or
group would beneficially own 20% or more of the common stock.
The Company is generally entitled to redeem the Rights at $.001 per
Right at any time until a person or group has become the beneficial
owner of 20% or more of the common stock. Under the Rights "flip-in"
feature, if any such person or group becomes the beneficial owner of
20% or more of the common stock, then each Right not owned by such
person or group will entitle its holder to purchase, at the Right's
then current purchase price, shares of common stock having a market
value of two times the purchase price of the Right.
Under the Rights "flip-over" provision, if, after any person or group
(other than certain exempt persons) becomes the beneficial owner of 20%
or more of the common stock, the Company is involved in a merger or
other business combination transaction with another person, or sells
50% or more of its assets or earning power in one or more transactions,
each Right will entitle its holder to purchase, at the Right's then
current purchase price, shares of common stock of such other person
having a market value of twice the Right's purchase price.
F-20
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
10. Preferred stock and shareholder rights plan (continued):
The Junior Preferred Stock will not be redeemable and, unless otherwise
provided in connection with the creation of a subsequent series of
preferred stock, will be subordinate to all other series of the
Company's preferred stock. Each share of Junior Preferred Stock will
represent the right to receive, when and if declared, a quarterly
dividend at an annual rate equal to the greater of $0.01 per share or
1,000 times the quarterly per share cash dividends declared on the
common stock during the immediately preceding fiscal year. In addition,
each share of Junior Preferred Stock will represent the right to
receive 1,000 times any non-cash dividends (other than dividends
payable in common stock) declared on the common stock, in like kind.
In the event of the liquidation, dissolution, or winding up of the
Company, each share of Junior Preferred Stock will represent the right
to receive a liquidation payment in an amount equal to the greater of
$1.00 per share or 1,000 times the liquidation payment made per share
of common stock. Each share of Junior Preferred Stock will have 1,000
votes, voting together with the common stock. In the event of any
merger, consolidation, or other transaction in which common shares are
exchanged, each share of Junior Preferred Stock will represent the
right to receive 1,000 times the amount received per share of common
stock. The rights of the Junior Preferred Stock as to dividends,
liquidation, voting rights and merger participation are protected by
anti-dilution provisions.
11. Geographic and 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 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") which is assembled at the
Company's facilities in Colorado. 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, safety straps for
shopping carts and activity products. These products are sold direct
and through distribution channels, both in the United States and
internationally. The Company recognizes sales of products from this
business segment at the time the products are shipped.
The Company's modular play equipment includes indoor/outdoor play
equipment and playground surfacing materials. 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
Colorado, British Columbia, Florida, and Oregon. The playground
surfacing materials are manufactured by a national network of
sub-contractors. These products are sold direct and through
manufacturers' representatives/dealers both in the United States and
internationally. The Company recognizes revenue at the time its
products are shipped or, in cases where the Company performs the
installation, when installation is complete, at the majority of its
operations. At the Company's SCS Interactive division, the percentage
of completion method of accounting is used for those projects where the
build to install timeline is of longer duration.
F-21
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
11. Geographic and business segments (continued):
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 shareholder relation costs. The following table presents
sales and other financial information by business segment (in
thousands):
- -------------------------------------------------------------------------------
2001
- -------------------------------------------------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
-------- ------------ ---------
Sales $ 14,911 $ 44,311 $ 59,222
Operating income 1,762 (1,276) 486
Depreciation and amortization
764 2,551 3,315
Capital expenditures 290 525 815
Total assets 18,333 64,712 83,045
- -------------------------------------------------------------------------------
2000
- -------------------------------------------------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
-------- ------------ ---------
Sales $ 17,681 $ 43,908 $ 61,589
Operating income 4,482 4,365 8,847
Depreciation and amortization
730 2,144 2,874
Capital expenditures 289 509 798
Total assets 21,037 70,392 91,429
F-22
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
11. Geographic and business segments (continued):
- -------------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
-------- ------------ ---------
Sales $ 16,838 $ 21,026 $ 37,864
Operating income 5,076 3,540 8,616
Depreciation and amortization
592 868 1,460
Capital expenditures 779 328 1,107
Total assets 18,865 29,693 48,558
Geographic area data:
Geographically, sales, operating income and identifiable assets for
non-domestic entities for the years ended December 31, 2001, 2000 and
1999 were as follows (in thousands):
2001 2000 1999
---- ---- ----
Sales $6,569 $4,270 $7,205
Operating income (loss) 218 (350) 924
Identifiable assets 3,064 3,582 3,701
There were no material amounts of sales or transfers among geographic
areas during 2001, 2000 or 1999.
Revenues from sales to customers outside the United States were (in
thousands): $4,726, $4,888 and $4,927, for the years ended December 31,
2001, 2000 and 1999, respectively.
12. Quarterly financial data - unaudited (in thousands, except per share
data):
---------------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------
2001 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Sales $14,304 $15,411 $17,169 $12,338
Gross profit 6,350 6,165 6,249 3,321
Net income (loss) 475 (57) 14 (2,422)
Basic earnings (loss) per share .07 (.01) .00 (.35)
Diluted earnings (loss) per share .07 (.01) .00 (.35)
F-23
================================================================================
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
12. Quarterly financial data - unaudited (in thousands, except per share
data) (continued):
---------------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------
2000 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Sales $11,646 $17,352 $17,227 $15,364
Gross profit 5,705 7,996 8,122 5,064
Net income (loss) 1,263 1,883 1,567 (681)
Basic earnings (loss) per share .19 .28 .23 (.10)
Diluted earnings (loss) per share .19 .27 .22 (.10)
Shipping and handling costs in the first three quarters of 2001 and all
quarters in 2000 have been reclassified from revenues to cost of sales
to be consistent with the current year end presentation. These
reclassifications had no impact on net income or cash flows.
13. Notes receivable from officer:
During the third and fourth quarters of 1999 and the second quarter of
2000, the Company made secured loans to an officer of the Company for
the purpose of the officer's exercise of vested stock options. In
August 2001, the Company and the officer executed a new note. The note
bears interest at 3.78%, is due at the earlier of August 30, 2004 or
one year from the date the officer's employment with the Company is
terminated and is secured by all of the shares of common stock
beneficially owned by the officer. At December 31, 2001 and 2000, the
Company had a receivable of $715,195 and $695,171 from this officer,
including accrued interest. The notes have been recorded as a reduction
of shareholders' equity in the Company's balance sheet at December 31,
2001 and 2000. As a result of the issuance of the new note, the Company
will account for the option using variable accounting. Under variable
accounting, the Company will recognize an expense to the extent the
share price of the Company's common stock exceeds $2.20 at the end of
any quarterly period until the note is paid.
F-24
================================================================================
EXHIBIT 21.1
Subsidiaries of the Company
Percentage
Name of Subsidiary Jurisdiction of Incorporation Ownership
------------------ ----------------------------- ----------
Delta Play (US), Inc. State of Colorado 100%
Delta Play Company Province of Nova Scotia, Canada 100%
PS Florida, Inc. State of Colorado 100%
SCS Interactive, Inc. State of Oregon 100%
Koala Surfaces, Inc. State of Colorado 100%
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement on Form S-8 pertaining to the 1995 Stock Option Plan of Koala
Corporation of our Report dated April 1, 2002, with respect to the
consolidated financial statements and schedule of Koala Corporation
included in the Annual Report on Form 10-K for the year ended December
31, 2001.
/s/ Ernst & Young LLP
Denver, Colorado
April 1, 2002