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, 2000
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
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11600 East 53rd Avenue, Unit D
Denver, Colorado 80239
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(Address of Principal Executive Offices)
(303) 574-1000
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(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
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(Title of Class)
Common Stock Purchase Rights
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(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 February 28, 2001, 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 $33,477,802.
As of February 28, 2001, 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 2001 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. We intend to capitalize on
brand name recognition established through our market-leading Koala Bear Kare(R)
Baby Changing Station. Our sales have grown from $3.8 million in 1993 to $59.7
million in 2000. Net income has grown from $1.0 million in 1993 to $4.0 million
in 2000.
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.
We completed several acquisitions of complementary businesses and products
in 1999 and 2000. In 1999, we acquired two businesses. We purchased Superior
Foam & Polymers, Inc. on March 26, 1999, and Smart Products, Inc. on September
24, 1999. 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 two acquisitions. We completed the purchase of SCS Interactive, Inc.
on March 1, 2000 and we completed the purchase of Fibar, Inc. on August 23,
2000. 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.
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
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indoor children's play systems. With the acquisition of Park Structures in 1998,
we entered the outdoor children's modular play market. The acquisitions of
Superior Foam and Smart Products in 1999 added complementary products to our
convenience and activity product segments. During 2000, we added interactive
waterplay equipment and playground surfacing products to our modular play
equipment segment. 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 2000.
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.
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
of our other family convenience and children's activity products and children's
modular play systems under the Koala Bear Kare name.
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. In 2000, we continued our direct telesales programs. 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.
Acquire Complementary Businesses and Products. We have established a formal
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.
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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 outsourcing enables us to focus on marketing
and sales while maintaining quality control through frequent contacts with our
suppliers.
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. The
majority of international sales are convenience and activity products. Sales of
activity and convenience products to customers outside of North America have
increased from 12% of segment sales in 1996 to 19% of segment sales in 2000. We
intend to continue the expansion of our international marketing activities by
adding dealers and by locating our employees in selected markets around the
world to supervise international sales activity. In addition, we plan to
increase our international sales through increased cross-selling of our products
and the marketing of the modular play equipment of Park Structures and SCS.
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 are:
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 doctor's 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.
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 relatively lower 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.
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Marketing and Sales
Family Convenience and Children's Activity Products. Our marketing strategy
for family convenience and child 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 marketing budget in an effort to increase
sales to a wider market. In 1997, we expanded our distribution network, which
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 child 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 telesales programs. We continued our
telesales programs in 2000.
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 which 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 catalogue. 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.
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.
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, assembled and delivered to us for shipment to
customers. We use a number of manufacturers for our products. We believe that
alternative sources of supply are available for these products if necessary.
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Our foam products are manufactured using a proprietary manufacturing
process at our plants located in Denver, Colorado and 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 design 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
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 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 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 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 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.
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 soft, yet durable composition to the
product.
Children's Modular Play Equipment. Our primary competition in children's
indoor modular play equipment is Little Tikes Commercial Play Systems, Inc., a
unit of Newell, Inc., 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. and Little Tikes. We
believe that Park Structures competes on the basis of design, quality, 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 primarily
comes from alternative entertainment offerings as opposed to direct product
competition.
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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. 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
immaterial.
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 us. 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 to mandate the repair, replacement or refund
of the purchase price of products or, in extreme cases, even ban a product that
present 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 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 2000.
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 compliance with
United States federal and state environmental laws and regulations and Canadian
environmental laws and regulations.
Employees
We had approximately 400 full-time employees as of December 31, 2000, with
approximately 340 in the United States and 60 in Canada. 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 was signed in May 1999, effective
February 1999 for a two-year term. We are currently negotiating a new contract
with the International Wood and Allied Workers. We believe that an agreement
will be reached that will not significantly alter the economics of producing the
indoor modular play equipment at Delta Play. 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.
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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 growth has strained our resources, and if we are unable to manage our
growth, our operating results will be impaired.
We have recently experienced significant growth both internally and as a
result of acquisitions, 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."
Our business could be hurt if we make acquisitions that are not successful.
An integral part of our business strategy is 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 amortization 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."
Our quarterly operating results have historically 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
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 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.
We had a weakness in our internal accounting controls that led to adjustments in
the reporting of our year-end results.
After our initial release of our year-end results, we identified revenue
recognition errors in two of our divisions. We corrected these errors and
publicly reported the revised financial results immediately. Subsequent to
identifying this issue, we implemented additional policies and procedures for
both annual and quarterly reporting to assist in insuring that our financial
results are reported on an accurate and timely basis. There can be no assurance,
however, that these or other internal control weaknesses will not occur in the
future.
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,
2000, we had approximately $38 million of long term indebtedness under our line
of credit. We are currently required to pay approximately $276,000 in interest
per month to service such indebtedness. Our debt service payment will increase
if the prime rate and LIBOR rates increase or if the amount drawn under the line
increases. In connection with the line of credit, we granted to our lenders a
security interest in all of our assets. In the event of a default, the lenders
could declare our indebtedness immediately due and payable and could foreclose
on all of our assets. In addition, to the extent that our assets continue to
secure the line of credit, such assets will not be available to secure
additional indebtedness.
8
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 planning to replace our current software
systems with a newer integrated platform. If our new system is not installed in
a timely manner or is not sufficient to sustain our present operations and our
anticipated growth for the foreseeable future, 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.
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 greater number of claims than
the convenience products industry. We carry product liability insurance in an
amount that we deem 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 safety 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 it 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.
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 of 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 because of the failure of a supplier, a change to a new supplier or
otherwise 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."
9
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. Our
international sales come primarily from the convenience and activity segment.
Sales to customers in this segment outside of North America accounted for
approximately 19% of this segment's sales in 2000. 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."
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:
o variations in our operating results;
o announcements of new product lines by us or our competitors;
o changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
o changes in operating and stock price performance of our competitors;
o additions or departures of key personnel; and
o future sales of our common stock.
10
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
We lease approximately 5,000 square feet for our direct sales operation and
15,000 square feet of office and warehouse space in Denver, Colorado for sales,
receiving, product assembly and shipping operations. These leases expire in
2001. 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 2002, with two options to renew
the lease for additional five-year terms. We lease an approximately 11,000
square foot facility near Austin, Texas where we manufacture foam activity
products and a 5,000 square foot facility in Denver, Colorado, both with lease
expiration dates in 2001. Our interactive water park equipment is manufactured
at a leased 40,000 square foot facility west of Portland, Oregon and a leased
10,000 square foot facility located in Denver, Colorado. These leases expire in
2010 and 2001, respectively. 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 2002. 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, 2000.
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, adjusted for the 2-for-1 stock split
effected as a 100% stock dividend on October 28, 1999. 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, 1999
First quarter .............................. $ 8 5/8 $12 1/8
Second quarter ............................. $ 9 5/8 $14 1/8
Third quarter .............................. $11 3/8 $15 3/8
Fourth quarter ............................. $12 1/4 $17 29/32
YEAR ENDED DECEMBER 31, 2000
First quarter .............................. $10 1/2 $17 1/2
Second quarter ............................. $12 5/8 $15 1/2
Third quarter .............................. $11 7/8 $16 3/8
Fourth quarter ............................. $ 6 1/2 $16 5/16
As of February 28, 2001, there were approximately 127 shareholders of
record.
11
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.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
(In thousands, except per share data)
INCOME STATEMENT DATA: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Sales $59,706 $37,135 $19,101 $13,621 $8,938
Cost of sales 32,819 18,093 8,628 5,528 3,241
------ ------ ----- ----- -----
Gross profit 26,887 19,042 10,473 8,093 5,697
Selling, general and
administrative expense 15,955 9,467 5,485 4,231 2,892
Amortization of intangibles 2,085 959 298 201 106
----- --- --- --- ---
Income from operations 8,847 8,616 4,690 3,661 2,699
Interest expense 2,919 902 - - -
Other (income) expense (363) (1) (79) (115) 159
----- --- ---- ----- ---
Income before income taxes 6,291 7,715 4,769 3,776 2,540
Provision for income taxes 2,259 2,624 1,669 1,340 644
----- ----- ----- ----- ---
Net income $4,032 $5,091 $3,100 $2,436 $1,896
====== ====== ====== ====== ======
Net income per share:
Basic $0.60 $0.81 $0.61 $0.49 $0.39
Diluted $0.58 $0.78 $0.60 $0.48 $0.38
Weighted average common shares
outstanding:
Basic 6,770 6,257 5,072 5,007 4,862
Diluted 7,001 6,516 5,198 5,096 5,047
BALANCE SHEET DATA:
Working capital $19,068 $12,629 $8,732 $3,945 $5,644
Total assets 91,429 48,558 41,605 14,957 10,351
Total liabilities 51,690 18,232 20,109 2,107 573
Shareholders' equity 39,739 30,327 21,496 12,850 9,779
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.
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 and 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 $59.7 million in 2000, with sales growth generated by
both the acquisition of seven businesses and the internal growth achieved by
these businesses during this period.
12
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 2000.
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
margins, we believe that the addition of new products and products lines will
provide 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 at the time our products are shipped, except for SCS,
where the percentage of completion method of accounting is used because the
build-to-install timeline of their jobs is of longer duration. Cost of sales
consists of components manufactured for us and direct labor and manufacturing
overhead incurred by us. With the exception of the foam activity products, all
major components for the family convenience products and children's activity
products currently are manufactured and assembled by outside vendors. Direct
labor and manufacturing overhead relate to the fabrication and assembly of the
modular play products and the manufacture of the foam activity products.
Selling, general and administrative expense consists primarily of
commissions paid to manufacturer's sales representatives and other selling
expenses, executive, sales 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 2000 annual sales has
been recorded.
13
Results of Operations
The following table sets forth certain income statement data stated as a
percentage of sales:
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of sales 55.0 48.7 45.2
----- ----- -----
Gross profit 45.0 51.3 54.8
Selling, general and administrative expenses 26.7 25.5 28.7
Amortization of intangibles 3.5 2.6 1.6
----- ----- -----
Income from operations 14.8 23.2 24.5
Interest expense 4.9 2.4 0.0
Other income (0.6) (0) (0.4)
----- ----- -----
Income before income taxes 10.5 20.8 24.9
Provision for income taxes 3.8 7.1 8.7
----- ----- -----
Net income 6.7% 13.7% 16.2%
===== ===== =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Sales increased 61%, or $22.6 million, to $59.7 million for the year ended
December 31, 2000 compared to $37.1 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 $21.6 million of the $22.6 million increase. Sales in the
convenience and activity segment accounted for $1.0 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 45% of sales in the 2000 period compared to 51%
of sales in the 1999 period primarily because of a change in product mix that
included a higher proportion of sales of children's 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, 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 69%, 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 27% of sales in the 2000 period
compared to 26% 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%, 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 115%, 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.
14
Amortization expense from intangible assets increased from $1.0 million in
1999 to $2.1million 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 22%, 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 26%, 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.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales increased 94.4%, or $18.0 million, to $37.1 million for the year
ended December 31, 1999 compared to $19.1 million for the year ended December
31, 1998. A majority of the increase resulted from sales of outdoor modular play
equipment, foam activity products and safety and parental convenience products
included in product lines acquired in 1998 and 1999. The sales and marketing
programs that we implemented for the family convenience and children's activity
product lines also contributed to the increased sales.
Gross profit increased 81.8%, or $8.5 million, to $19.0 million for the
year ended December 31, 1999 compared to $10.5 million for the year ended
December 31, 1998. 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 in the 1999 period compared to the
1998 period primarily because of a change in product mix that included a higher
proportion of sales of children's modular play equipment.
Selling, general and administrative expense increased 72.6%, or $4.0
million to $9.5 million for the year ended December 31, 1999 compared to $5.5
million for the year ended December 31, 1998. Sales and marketing expense
increased 52.7%, or $1.8 million to $5.4 million for the year ended December 31,
1999 compared to $3.6 million for the year ended December 31, 1998. 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 1998 period also contributed to the increase. General and
administrative expense increased 109.2%, or $2.2 million, to $4.1 million for
the year ended December 31, 1999 compared to $1.9 million for the year ended
December 31, 1998. Once again, the increase was primarily the result of the
inclusion of the newly acquired businesses in late 1998 and 1999.
Amortization expense from intangible assets increased from $.3 million in
1998 to $1.0 million in 1999. This increase is primarily due to the amortization
of goodwill and other identifiable intangible assets acquired in the purchases
of Park Structures in late 1998, and Superior Foam and Smart Products in 1999.
We used debt to finance portions of the acquisitions of Park Structures,
Superior Foam and Smart Products. As a result, we incurred interest expense of
$.9 million in 1999. All of the debt financing activity for these acquisitions
occurred in 1999. We did not have any interest expense in 1998.
Our effective tax rate was 34.0% and 35.0% for the year ended December 31,
1999 and 1998, respectively. The decrease in our worldwide effective rate was
primarily due to an increase in export sales that qualify for the benefit
provided by the foreign sales corporation that we established in February 1998.
Net income increased 64.2%, or $2.0 million, to $5.1 million for the year
ended December 31, 1999 compared to $3.1 million for the year ended December 31,
1998. As a percentage of sales, net income declined during the 1999 period
compared to the 1998 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) increased 30.0%, or $.18, to $.78 for the year ended
December 31, 1999 compared to $.60 for the year ended December 31, 1998. The
percentage increase in net income per share (diluted) was lower than the
percentage increase in net income as a result of
15
an increase of 1.3 million shares in the weighted average number of shares
outstanding. All share quantities and per share amounts have been adjusted for
the effect of the 2-for-1 stock split that occurred on October 28, 1999.
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 during the winter months
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 years ended December 31, 2000 and 1999. 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.
During the quarter ended December 31, 2000, we incurred our first quarterly
net loss since becoming a public company in 1993. As noted in the discussion
above, for the year ended December 31, 2000 compared to the year ended December
31, 1999, this loss was primarily due to the lower level of sales experienced in
the fourth quarter combined with cost overruns on several large jobs and higher
labor costs incurred in the modular play equipment segment.
---------------------------------------------------------
Quarter Ended
(unaudited and in thousands, except per share data)
---------------------------------------------------------
2000 Mar. 31 June 30 Sept. 30 Dec. 31
---- ------- ------- -------- -------
Sales $11,480 $17,162 $16,399 $14,665
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)
---------------------------------------------------------
Quarter Ended
(unaudited and in thousands, except per share data)
---------------------------------------------------------
1999 Mar. 31 June 30 Sept. 30 Dec. 31
---- ------- ------- -------- -------
Sales $7,299 $9,151 $10,544 $10,141
Gross profit 3,693 4,753 5,301 5,295
Net income 949 1,266 1,477 1,399
Basic earnings per share .16 .20 .23 .22
Diluted earnings per share .15 .19 .22 .21
Liquidity and Capital Resources
We have financed our operations primarily from cash provided by operating
activities and our acquisitions from cash advanced under our revolving bank line
of credit. Cash provided by (used in) operating activities for 2000 and 1999 was
$(.4) million and $3.7 million, respectively. The decrease in cash provided by
(used in) operating activities for the year ended December 31, 2000 compared to
the year ended December 31, 1999 resulted primarily from funding higher levels
of working capital required to support our growth, primarily inventory and
overpayment of estimated tax installments during 2000.
Working capital as of December 31, 2000 and December 31, 1999 was $19.1
million and $12.6 million, respectively, and cash balances were $.2 million for
both dates. 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 line of credit balances.
We have used our operating cash flow primarily to expand sales and
marketing activities, acquisition and development of new products, capital
expenditures and working capital. Net cash used in investing activities was
$23.6 million for the year ended December 31, 2000, and $26.6 million for the
year ended December 31, 1999. In 2000, $22.3 million was used to purchase SCS
16
and Fibar. The balance was primarily devoted to capital expenditures for fixed
assets, intellectual property and an advance to one of our officers related to
the exercise of stock options in 1999.
We increased our secured line of credit with a bank from $15.0 million at
December 1999 to $45.0 million on November 17, 2000. The credit facility matures
March 1, 2003. Loans under the facility are secured by all of our assets. The
interest rate on amounts borrowed under the line of credit is based on the
applicable "Reserve Adjusted LIBOR rate" or the commercial bank's prime rate. At
December 31, 2000 the 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. There was $38.0 million
outstanding under the credit facility as of December 31, 2000, and $14.0 million
outstanding as of December 31, 1999. Although we have used the credit facility
primarily for acquisitions, the credit facility is also available for working
capital purposes.
We funded the cash portion of the purchase price for both SCS and Fibar
with the revolving credit facility from the bank. These payments were funded
from short-term borrowings under the credit facility. We believe that working
capital provided by our cash flow from operations and our line of credit will be
sufficient to fund our operations for the foreseeable future.
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 $6.4 million at December 31, 2000 and
approximately $1.0 million at December 31, 1999.
During 2000, we were not materially affected by changing raw materials
prices except for polyethylene prices, which increased materially due to the
increase in costs for all petroleum based products experienced in the United
States during the year.
During 2001, we intend to take a number of steps to address and support our
growth. These steps include planning for and implementing a new information
system that will provide us with the ability to consolidate administrative
functions, hiring additional senior management and planning a move to a new
facility in 2002 that will consolidate manufacturing of some of our product
lines and allow us to vertically integrate certain components that are now being
manufactured by outside suppliers.
New Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued SAB
101, Revenue Recognition, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosure related to revenue recognition policies. We
believe our current revenue recognition policy is in compliance with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB 25
("FIN 44"). This interpretation clarifies (1) the definition of employee for
purposes of applying APB 25; (2) the criteria for determining whether a plan
qualifies as a noncompensatory plan; (3) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award; and (4)
the accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 did not impact our financial statements.
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.
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 2000 did not materially affect our business
during 2000 and we do not believe that future exchange rate fluctuations will
have a material adverse impact on our financial position, results of operations
or liquidity.
17
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 2001 Annual Meeting of Shareholders, which will
be filed with Securities and Exchange Commission within 120 days of our fiscal
year ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to our proxy statement for our 2001 Annual Meeting of Shareholders, which will
be filed with Securities and Exchange Commission within 120 days of our fiscal
year ended December 31, 2000.
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 2001 Annual Meeting of Shareholders, which will
be filed with Securities and Exchange Commission within 120 days of our fiscal
year ended December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to our proxy statement for our 2001 Annual Meeting of Shareholders, which will
be filed with Securities and Exchange Commission within 120 days of our fiscal
year ended December 31, 2000.
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
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31,
Deducted from asset accounts: 2000 1999 1998
--------- --------- ---------
Allowance for doubtful accounts
Balance at beginning of period $ 131,030 $ 111,144 $ 45,703
Charged to expense 285,460 155,395 86,560
Amount from acquisitions 85,000 - -
Deducted (114,034) (135,509) (21,119)
--------- --------- ---------
Balance at end of period $387, 456 $ 131,030 $ 111,144
========= ========= =========
18
Exhibits and Reports on Form 8-K
Exhibit Description
------- -----------
No.
---
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)
10.3 Industrial Lease dated August 1, 1996 between Buckhead Industrial
Properties, Inc. and Koala 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
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.
(b) Reports on Form 8-K
On November 13, 2000, the Company filed a Form 8-K reporting Item 5,
regarding the Rights Plan.
On November 21, 2000, the Company filed a Form 8-K reporting Item 5 and 7
regarding the credit agreement dated November 17, 2000 between Koala
Corporation and U.S. Bank National Association.
19
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 2, 2001 By: /s/ Mark A. Betker
------------- --------------------------------------
Mark A. Betker, Chairman,
Chief Executive Officer and President
Date: April 2, 2001 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 2, 2001
-------------------------- and President (Principal Executive
Mark A. Betker Officer) and Director
/s/ Michael C. Franson Director April 2, 2001
--------------------------
Michael C. Franson
/s/ John T. Pfannenstein Director April 2, 2001
--------------------------
John T. Pfannenstein
/s/ Ellen Robinson
-------------------------- Director April 2, 2001
Ellen Robinson
20
KOALA CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2000 AND 1999 AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income 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, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, 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
March 13, 2001
F-2
KOALA CORPORATION
------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
2000 1999
---- ----
ASSETS
------
Current Assets
Cash and cash equivalents $ 200,786 $ 173,936
Accounts receivable, trade (less allowance for doubtful accounts
of $387,456 in 2000 and $131,030 in 1999) 13,636,044 9,234,685
Tax refund receivable and other receivables 2,221,741 -
Inventories 12,653,750 5,137,791
Prepaid expenses and other 1,421,280 1,249,384
----------- -----------
Total current assets 30,133,601 15,795,796
Property and equipment (net of accumulated depreciation
of $1,849,685 in 2000 and $1,060,038 in 1999) 4,129,646 3,213,980
Identifiable intangible assets (net of accumulated amortization
of $2,626,228 in 2000 and $1,371,326 in 1999) 27,762,155 18,709,242
Goodwill (net of accumulated amortization
of $1,212,083 in 2000 and $381,019 in 1999) 29,403,998 10,839,282
----------- -----------
$91,429,400 $48,558,300
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,345,889 $ 2,210,583
Accrued expenses and other 3,719,554 955,731
----------- -----------
Total current liabilities 11,065,443 3,166,314
----------- -----------
Long Term Liabilities:
Deferred income taxes and other 1,634,699 1,086,270
Acquisition liability 1,000,000 -
Credit facility 37,990,000 13,979,000
----------- -----------
Total long term liabilities 40,624,699 15,065,270
----------- -----------
Total liabilities 51,690,142 18,231,584
----------- -----------
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 2000 and 6,397,128 in 1999 687,233 639,713
Notes receivable from officer (695,171) (383,505)
Additional paid-in capital 20,256,774 14,596,294
Accumulated other comprehensive loss (47,234) (31,038)
Retained earnings 19,537,656 15,505,252
----------- -----------
Total shareholders' equity 39,739,258 30,326,716
----------- -----------
$91,429,400 $48,558,300
=========== ===========
See notes to consolidated financial statements
F-3
KOALA CORPORATION
--------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
2000 1999 1998
------------ ------------ ------------
Sales $ 59,706,017 $ 37,134,712 $ 19,100,765
Cost of sales 32,818,990 18,092,588 8,627,979
------------ ------------ ------------
Gross profit 26,887,027 19,042,124 10,472,786
Selling, general and administrative expenses 15,955,129 9,467,210 5,485,198
Amortization of intangibles 2,084,505 958,524 297,600
------------ ------------ ------------
Income from operations 8,847,393 8,616,390 4,689,988
Other (income) expense:
Interest expense 2,919,465 902,169 --
Interest income (10,138) (1,362) (78,712)
Other income (352,735) -- --
------------ ------------ ------------
Income before income taxes 6,290,801 7,715,583 4,768,700
Provision for income taxes 2,258,397 2,624,459 1,669,044
------------ ------------ ------------
Net income $ 4,032,404 $ 5,091,124 $ 3,099,656
============ ============ ============
Net income per share - basic $ 0.60 $ 0.81 $ 0.61
============ ============ ============
Net income per share - diluted $ 0.58 $ 0.78 $ 0.60
============ ============ ============
Weighted average shares outstanding - basic 6,769,508 6,256,729 5,072,116
============ ============ ============
Weighted average shares outstanding - diluted 7,000,986 6,516,075 5,198,010
============ ============ ============
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 Retained Comprehensive
Shares Amount be Issued Officer Capital Earnings Income (Loss) Total
--------- -------- ---------- --------- ---------- ---------- ------------- ----------
Balance, December 31, 1997 5,054,724 $505,472 $ - $ - $5,055,252 $7,314,472 ($25,124) $12,850,072
Net income 3,099,656 3,099,656
Foreign currency translation
adjustment (96,036) (96,036)
----------
Comprehensive income 3,003,620
Issuance of common stock for
secondary offering,
net of expense 640,000 64,000 4,280,186 4,344,186
Common stock to be issued for
acquisition of Park Structures 1,297,903 1,297,903
-------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,694,724 569,472 1,297,903 - 9,335,438 10,414,128 (121,160) 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 15,505,252 (31,038) 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 $19,537,656 ($47,234) $39,739,258
=================================================================================================
See notes to consolidated financial statements
F-5
KOALA CORPORATION
------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 4,032,404 $ 5,091,124 $ 3,099,656
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 789,647 500,970 238,269
Amortization 2,084,505 958,524 297,600
Deferred income taxes 424,580 410,613 222,267
Accrued interest on notes receivable from officer (68,666) (13,505) --
Changes in operating assets and liabilities:
Accounts receivable, trade (98,511) (2,786,346) (1,439,825)
Tax refund receivable and other receivables (2,221,741) (144,980) --
Inventories (6,134,713) (958,852) (910,071)
Prepaid expenses and other 114,698 (280,382) (250,959)
Accounts payable 3,780,931 425,737 342,466
Accrued expenses, income taxes, and unearned revenue (3,084,970) 514,701 86,217
------------ ------------ ------------
Net cash provided by (used in) operating activities (381,836) 3,717,604 1,685,620
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (798,364) (1,106,736) (519,918)
Acquisitions, net of cash acquired (22,339,742) (25,391,976) (741,627)
Intangibles and other (205,012) (130,169) (89,869)
Advance to officer (243,000) -- --
------------ ------------ ------------
Net cash used in investing activities (23,586,118) (26,628,881) (1,351,414)
------------ ------------ ------------
Cash flows from financing activities:
Sale of common stock, net of expenses -- 2,600,996 4,344,186
Net proceeds from credit facility 24,011,000 13,979,000 --
------------ ------------ ------------
Net cash provided by financing activities 24,011,000 16,579,996 4,344,186
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents (16,196) 11,647 (17,499)
Net increase (decrease) in cash and cash equivalents 26,850 (6,319,634) 4,660,893
Cash and cash equivalents at beginning of period 173,936 6,493,570 1,832,677
------------ ------------ ------------
Cash and cash equivalents at end of period $ 200,786 $ 173,936 $ 6,493,570
============ ============ ============
See notes to consolidated financial statements
F-6
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
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.
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, 2000 and
1999, 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 and 1999, cash and cash
equivalents consisted solely of cash in the primary banking
institution.
F-7
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
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, 2000 and 1999,
inventories consisted of the following:
2000 1999
---- ----
Raw materials $ 5,327,158 $ 2,116,864
Work-in-process and finished goods 7,326,592 3,020,927
----------- -----------
$12,653,750 $ 5,137,791
=========== ===========
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
Shop and office equipment 3 - 10 years
Leasehold improvements 3 - 5 years
Property and equipment consist of the following at December 31:
2000 1999
---- ----
Tooling and molds $1,978,584 $1,670,917
Office equipment 1,554,257 1,044,143
Leasehold improvements 1,072,648 739,981
Furniture and fixtures 651,752 423,204
Shop equipment 722,090 395,773
---------- ----------
5,979,331 4,274,018
Less: accumulated depreciation 1,849,685 1,060,038
---------- ----------
$4,129,646 $3,213,980
========== ==========
F-8
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
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.
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 the intangibles will not be recoverable, as determined
by a discounted 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 event has been
identified that would indicate an impairment of the value of material
intangible assets recorded in the accompanying consolidated financial
statements.
Revenue recognition:
The Company recognizes revenues at the time its products are shipped,
except for SCS Interactive where the percentage of completion method of
accounting is utilized because the build to install timeline of its
jobs are of longer duration.
Research and development costs:
Research and development costs are expensed when incurred. The
Company's research and development costs were not significant in 2000,
1999 or 1998.
Advertising costs:
Advertising costs are expensed when incurred. Advertising expense for
the periods ended December 31, 2000, 1999 and 1998 were $1,810,500,
$1,301,422 and $443,309 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.
F-9
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
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. The
resultant translation adjustments are included in equity adjustment
from translation, a separate component of shareholders' equity. Income
and expense items are translated at average rates of exchange. Gains
and losses on foreign currency transactions of these subsidiaries are
included in net earnings.
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.
2. Acquisitions:
Acquisition of Fibar Systems:
Effective August 23, 2000, the Company purchased substantially all of
the assets of Fibar, Inc. ("Fibar"), a provider of playground surfacing
solutions located in Armonk, New York. Results of operations of Fibar
have been included in the Company's consolidated statement of income
since the effective date of the transaction.
The purchase price consisted of cash and Koala Corporation common
stock. A cash payment of $5,350,000 was made at closing, which was
based on the cash component of the purchase price less holdbacks equal
to $500,000. The cash component was financed primarily from an advance
on the Company's line of credit. The stock component resulted in the
issuance of 49,445 shares of Koala common stock valued at $650,000. In
addition, costs of $400,039 were incurred in connection with this
acquisition. Initial consideration and acquisition costs were allocated
to tangible assets based on relative fair value, with the remaining
balance allocated to goodwill.
Acquisition of SCS Interactive:
Effective March 1, 2000, the Company purchased all of the outstanding
common stock of SCS Interactive, Inc. ("SCS"), a provider of
interactive water play products located in Tillamook, Oregon. Results
of operations of SCS have been included in the Company's consolidated
statement of income since the effective date of the transaction.
F-10
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
2. Acquisitions (continued):
Acquisition of SCS Interactive (continued):
The purchase price consisted of cash and Koala Corporation common
stock. A cash payment of $18,052,903 was made at closing, which was
based on the cash component of the purchase price less holdbacks equal
to $2,181,097. The cash component was financed primarily from an
advance on the Company's line of credit. The stock component resulted
in the issuance of 425,761 shares of Koala common stock valued at
$5,058,000. In addition, costs of approximately $400,000 were incurred
in connection with this acquisition. Initial consideration and
acquisition costs were allocated to tangible assets based on relative
fair value, with the remaining balance allocated to patents, other
intellectual property and goodwill.
The pro forma unaudited results of operations of the Company for the
twelve months ended December 31, 2000 and 1999 assuming consummation of
the purchase of SCS as of January 1, are as follows:
2000 1999
---- ----
Sales $ 63,370,417 $ 55,961,476
Net income $ 4,064,394 $ 5,247,809
Net income per share - diluted $ 0.57 $ 0.76
The above pro forma information does not include the pro forma results
of Fibar, as such amounts are immaterial.
3. Credit facility:
The Company increased its secured line of credit to $45.0 million on
November 17, 2000. The line of credit is secured by substantially all
of the assets of the Company. The line of credit may be used for
short-term working capital needs and future acquisitions. There are no
compensating balance requirements and the credit facility requires
compliance with financial loan covenants related to debt levels
compared to annualized cash flows from operations. The credit facility
terminates and is payable in full on March 1, 2003. Interest payments
are required at least every three months at a fluctuating rate per
annum equal to the applicable "Reserve Adjusted LIBOR Rate" or a
commercial bank's prime rate (9.19% and 9.50% at December 31, 2000 and
8.18% and 8.50% at December 31, 1999, respectively). A commitment fee
in the amount of .25% is payable quarterly in arrears based on the
average daily unused portion of the line.
F-11
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
4. Supplemental financial information:
2000 1999 1998
---- ---- ----
Interest received $ 21,044 $ 8,586 $ 83,043
========== ========== ==========
Interest paid $2,932,413 $ 772,074 --
========== ========== ==========
Income taxes paid $3,272,029 $2,370,282 $1,420,483
========== ========== ==========
5. Commitments and contingencies:
Operating lease:
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 lease terms vary and run through December 31, 2010. All leases call
for monthly base rents, with the Company responsible for its share of
common building operating costs, payable on a monthly basis.
Facilities rent expense was $968,200, $695,885 and $338,277 for years
ending December 31, 2000, 1999 and 1998 respectively. Total minimum
operating lease commitments are as follows:
Year Ending December 31, Amount
------------------------ ------
2001 $ 924,979
2002 1,140,678
2003 844,493
2004 716,688
2005 730,968
thereafter 4,411,596
-----------
$ 8,769,402
===========
F-12
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
5. Commitments and contingencies (continued):
Warranties:
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. The Company has
experienced minimal returns and warranty claims, except for SCS where a
warranty accrual of .75% of 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 2000 1999 1998
---------- ---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate
5 year 5.00% 6.25% 6.25%
Expected life 5 years 5 years 5 years
Expected volatility 47.20% 42.50% 43.00%
F-13
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
6. Stock options (continued):
The Company applies APB Opinion 25 in accounting for its stock based
compensation plans. Accordingly, no compensation cost has been
recognized for the plans in 2000, 1999 or 1998. Had compensation cost
been determined on the basis of fair value pursuant to FASB Statement
No. 123, net income and earnings per share would have been presented as
follows:
Net income 2000 1999 1998
---------- ---- ---- ----
As reported $4,032,404 $5,091,124 $ 3,099,656
========== ========== =============
Pro forma (FASB 123) $3,471,723 $4,721,877 $ 2,742,162
========== ========== =============
Basic earnings per share
------------------------
As reported $ .60 $ .81 $ .61
====== ====== =======
Pro forma (FASB 123) $ .51 $ .75 $ .54
====== ====== =======
Diluted earnings per share
--------------------------
As reported $ .58 $ .78 $ .60
====== ====== =======
Pro forma (FASB 123) $ .50 $ .72 $ .53
====== ====== =======
Following is a summary of the status of the plans during 2000,1999 and 1998:
2000 1999 1998
---- ---- ----
Options exercisable 614,800 422,000 344,000
======== ======== ========
Weighted average fair value of
options granted during the year $ 6.84 $ 5.65 $ 4.37
====== ====== ======
F-14
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
6. Stock options (continued):
Following is a summary of the status of the plans during 2000,1999 and 1998:
Number of Weighted Average
Shares Exercise Price Price
------ -------------- -----
Outstanding, December 31, 1997 566,000 $ 5.76 $4.63 to $7.50
Granted 260,000 $ 9.31 $7.25 to $11.50
Forfeited (20,000) $ 6.50 $ 6.50
--------
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
=========
F-15
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
6. Stock options (continued):
A summary of the status of fixed options outstanding at December 31,
2000 is as follows:
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Price Number Life Price Number Price
----- ------ ---- ----- ------ -----
$4.63 to $7.50 484,000 5.2 years $ 5.98 456,000 $ 5.91
$8.00 to $11.50 272,500 7.6 years $ 9.91 90,800 $ 9.71
$12.50 to $16.38 298,000 8.8 years $ 12.91 68,000 $ 12.51
7. Income taxes:
The components of the provision for income tax were:
-------------------------------------------------
2000
-------------------------------------------------
Federal Foreign State Total
Current tax expense $1,694,268 $ 0 $ 139,549 $1,833,817
Deferred tax expense 413,557 0 11,023 424,580
---------- ---------- ---------- ----------
Provision for income taxes $2,107,825 $ 0 $ 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
---------- ---------- ---------- ----------
Provision for income taxes $2,270,508 $ 155,129 $ 198,822 $2,624,459
========== ========== ========== ==========
-------------------------------------------------
1998
-------------------------------------------------
Federal Foreign State Total
Current tax expense $1,153,496 $ 234,048 $ 59,233 $1,446,777
Deferred tax expense 216,860 -- 5,407 222,267
---------- ---------- ---------- ----------
Provision for income taxes $1,370,356 $ 234,048 $ 64,640 $1,669,044
========== ========== ========== ==========
F-16
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
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, 2000 and 1999 are as follows:
2000 1999
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 140,634 $ 46,387
---------- ----------
Deferred tax liabilities:
Depreciation 340,000 259,000
Amortization 1,242,000 804,000
---------- ----------
1,582,000 1,063,000
---------- ----------
Net deferred tax liability $1,441,336 $1,016,613
========== ==========
The effective tax rate differs from the statutory rate as follows:
2000 1999 1998
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
Foreign taxes in excess of federal statutory rate 0.0 2.0 4.9
Tax benefit of foreign tax credit (0.0) (2.0) (4.9)
State income taxes - net of federal effect 2.5 1.3 .8
Effect of difference in tax basis of goodwill 1.5 (0.5) (0.8)
Foreign sales corporation benefit (1.8) (1.3) (1.1)
Miscellaneous tax adjustments (.3) .5 2.1
---- ---- ----
Effective tax rate 35.9% 34.0% 35.0%
==== ==== ====
8. Major suppliers:
For the periods ended December 31, 2000, 1999, and 1998 the Company
purchased a significant amount of component parts from three and four
vendors, which accounted for approximately 15%, 18% and 38% of the
Company's total cost of sales, respectively.
F-17
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
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 2000, 1999 or 1998. The Company also maintained a
second plan in 2000 that related to the purchase of SCS Interactive on
March 1, 2000. Contributions to this plan are matched up to 3% of the
participants' deferred compensation. During the year ended December 31,
2000, the Company contributed $67,783 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, 2000 and December 31, 1999, 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.
F-18
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
10. Preferred stock and shareholder rights plan (continued):
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.
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"). 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. The Company recognizes sales of
products from this business segment at the time the products are
shipped.
F-19
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
11. Geographic and business segments (continued):
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
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. The Company recognizes revenue at the time its
products are shipped, or by the percentage of completion method of
accounting for those projects where the build to install timeline is of
longer duration.
The Company evaluates the performance of its segments based primarily
on operating profit before acquisition intangible amortization,
corporate expenses and interest income and expense. The Company
allocates corporate expenses to individual segments based on segment
sales. Corporate expenses are primarily labor costs of executive
management and shareholders' relations costs. The following table
presents sales and other financial information by business segment (in
thousands):
---------------------------------------
2000
---------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
----------------------------------------
Sales $17,033 $42,673 $59,706
Operating income 4,482 4,365 8,847
Capital expenditures 289 509 798
Total assets 19,588 71,383 90,971
---------------------------------------
1999
---------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
----------------------------------------
Sales $16,109 $21,026 $37,135
Operating income 5,076 3,540 8,616
Capital expenditures 779 328 1,107
Total assets 18,865 29,693 48,558
F-20
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
11. Geographic and business segments (continued):
---------------------------------------
1998
---------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
---------------------------------------
Sales $11,946 $ 7,155 $19,101
Operating income 3,661 1,029 4,690
Capital expenditures 294 225 519
Total assets 15,209 26,396 41,605
Geographic area data:
Geographically, sales, operating income and identifiable assets for
non-domestic entities for the years ended December 31, 2000, 1999 and
1998 were $4,270,016,$7,205,284, and $6,690,230, $(349,606), $924,369
and $1,133,917, and $3,582,352, $3,700,731 and $2,737,443 respectively.
There were no material amounts of sales or transfers among geographic
areas during 2000, 1999 or 1998.
12. Quarterly Financial Data-Unaudited
(in thousands, except per share data):
-------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------
2000 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Sales $11,480 $17,162 $16,399 $14,665
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)
-------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------
1999 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Sales $7,299 $9,151 $10,544 $10,141
Gross profit 3,693 4,753 5,301 5,295
Net income 949 1,266 1,477 1,399
Basic earnings per share .16 .20 .23 .22
Diluted earnings per share .15 .19 .22 .21
F-21
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
--------------------------------------------------------------------------------
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. At
December 31, 2000, the Company had a receivable of $695,171 from this
officer, including accrued interest for the purpose of the officer's
exercise of vested stock options. The notes are full recourse, secured
by marketable securities of the officer and interest bearing at an
adjustable rate equal to a commercial bank's prime rate. The note that
was originally due February 12, 2001 was extended until February 12,
2002. As a result, these notes are due on May 3, 2001 and February 12,
2002. The notes have been recorded as a reduction of shareholders'
equity in the Company's balance sheet at December 31, 2000 and 1999.
F-22
EXHIBIT 21.1
Subsidiaries of the Company
Name of Subsidiary Jurisdiction of Incorporation Percentage 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%
Koala Foreign Sales Corporation Barbados 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 March 13, 2001, with respect to the consolidated financial
statements of Koala Corporation included in the Annual Report on Form 10-K for
the year ended December 31, 2000.
/s/ERNST & YOUNG LLP
Denver, Colorado
April 2, 2001