U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 0-22464
KOALA CORPORATION
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(Exact name of small business issuer as specified in its charter)
Colorado 84-1238908
- ------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7881 South Wheeling Court, Englewood, CO 80112
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(Address of principal executive offices)
(303) 539-8300
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(Issuer's telephone number)
--------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ...X... No......
The number of shares outstanding of the issuer's common stock, $.10 par value,
as of July 30, 2002 was 6,778,334 shares.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
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CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
------
Current Assets
Cash and cash equivalents $ -- $ --
Trade accounts receivable, net 7,285,006 7,372,667
Unbilled receivables 2,035,418 1,298,404
Tax refund receivable and other receivables 3,163,909 2,845,591
Inventories 10,026,941 10,983,825
Prepaid expenses and other 1,453,157 1,181,091
------------ ------------
Total current assets 23,964,431 23,681,578
------------ ------------
Property and equipment, net 3,985,711 4,184,436
Identifiable intangible assets, net 25,939,808 26,526,264
Goodwill, net 3,761,566 28,601,426
Other 135,209 51,096
------------ ------------
$ 57,786,725 $ 83,044,800
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable $ 4,577,712 $ 2,875,706
Accrued expenses and other 4,489,231 3,146,263
Acquisition liability 500,000 702,130
Current portion of credit facility 34,410,000 2,000,000
------------ ------------
Total current liabilities 43,976,943 8,724,099
------------ ------------
Long Term Liabilities:
Deferred income taxes and other 479,928 2,138,657
Credit facility -- 34,600,000
------------ ------------
Total long term liabilities 479,928 36,738,657
------------ ------------
Total liabilities 44,456,871 45,462,756
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized;
issued and outstanding - none -- --
Common stock, $.10 par value, 10,000,000 shares authorized;
issued and outstanding - 6,778,334 in 2002 and 6,872,334 in 2001 677,833 687,233
Note receivable from officer -- (715,195)
Additional paid-in capital 20,147,277 20,256,774
Accumulated other comprehensive loss (147,942) (194,351)
Retained earnings (deficit) (7,347,314) 17,547,583
------------ ------------
Total shareholders' equity 13,329,854 37,582,044
------------ ------------
$ 57,786,725 $ 83,044,800
============ ============
See Notes to Condensed Consolidated Financial Statements
2
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 12,153,179 $ 15,411,348 $ 24,413,002 $ 29,715,483
Cost of sales 8,461,725 9,246,037 15,325,582 17,200,639
------------ ------------ ------------ ------------
Gross profit 3,691,454 6,165,311 9,087,420 12,514,844
Selling, general and administrative expenses 5,304,001 4,866,791 9,671,470 9,055,339
Severance costs 872,565 -- 872,565 --
Amortization of intangibles 308,515 597,185 630,441 1,194,662
------------ ------------ ------------ ------------
Income (loss) from operations (2,793,627) 701,335 (2,087,056) 2,264,843
Other (income) expense:
Interest expense 705,434 791,721 1,427,467 1,640,649
Other (income) expense (27,266) 1,554 (53,183) (43,752)
------------ ------------ ------------ ------------
Income (loss) before income taxes and
cumulative effect of accounting change (3,471,795) (91,940) (3,461,340) 667,946
Income tax provision (benefit) (408,977) (34,478) (405,160) 250,480
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle (3,062,818) (57,462) (3,056,180) 417,466
Cumulative effect of change in accounting
principle, net of tax of $2,893,692 21,838,717 -- 21,838,717 --
------------ ------------ ------------ ------------
Net income (loss) $(24,901,535) $ (57,462) $(24,894,897) $ 417,466
============ ============ ============ ============
Net income (loss) per share - basic
Income (loss) before cumulative effect
of accounting change $ (0.45) $ (0.01) $ (0.45) $ 0.06
Cumulative effect of accounting change (3.19) -- (3.18) --
------------ ------------ ------------ ------------
Net income (loss) $ (3.64) $ (0.01) $ (3.63) $ 0.06
============ ============ ============ ============
Net income per share - diluted
Income (loss) before cumulative effect
of accounting change $ (0.45) $ (0.01) $ (0.45) $ 0.06
Cumulative effect of accounting change (3.19) -- (3.18) --
------------ ------------ ------------ ------------
Net income (loss) $ (3.64) $ (0.01) $ (3.63) $ 0.06
============ ============ ============ ============
Weighted average shares outstanding - basic 6,841,345 6,872,334 6,856,754 6,872,334
============ ============ ============ ============
Weighted average shares outstanding - diluted 6,841,345 6,872,334 6,856,754 6,884,752
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements
3
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
2002 2001
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $(24,894,897) $ 417,466
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 547,336 415,521
Amortization 630,441 1,194,662
Loan forgiveness included in severance costs 619,995 --
Cumulative effect of accounting change 24,732,409 --
Deferred income taxes (1,699,861) --
Other 17,300 --
Changes in operating assets and liabilities:
Trade accounts receivable and other receivables 363,723 1,156,732
Unbilled receivables (1,136,304) 1,245,777
Inventories 1,019,849 (1,025,395)
Prepaid expenses and other (359,423) (1,138,339)
Accounts payable 1,689,258 (3,173,319)
Acquisition liability (202,130) --
Accrued expenses and other 1,294,604 349,746
------------ ------------
Net cash provided by (used in) operating activities 2,622,300 (557,149)
------------ ------------
Cash flows from investing activities:
Capital expenditures (270,297) (379,668)
Patents and other (47,181) (171,499)
------------ ------------
Net cash used in investing activities (317,478) (551,167)
------------ ------------
Cash flows from financing activities:
Net proceeds (payments) on credit facility (2,190,000) 1,460,000
Payments on capital leases (33,667) --
Purchase of common stock (23,660) --
------------ ------------
Net cash ( used in) provided by financing activities (2,247,327) 1,460,000
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (57,495) 58,571
Net change in cash and cash equivalents -- 410,255
Cash and cash equivalents at beginning of period -- 200,786
------------ ------------
Cash and cash equivalents at end of period $ -- $ 611,041
============ ============
See Notes to Condensed Consolidated Financial Statements
4
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
1. Unaudited Information:
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the
disclosures normally required by accounting principles generally accepted
in the United States or those normally made in the Company's annual Form
10-K filing. Accordingly, the reader of this Form 10-Q should refer to the
Company's 10-K for the year ended December 31, 2001 for further
information.
The quarterly financial information has been prepared in accordance with
the Company's customary accounting practices and has not been audited. In
the opinion of management, the information presented reflects all
adjustments necessary for a fair statement of interim results. Except as
otherwise described in these notes, all such adjustments are of a normal
and recurring nature. The results of operations for the interim period
ended June 30, 2002 are not necessarily indicative of the results for a
full year.
2. Revenue Recognition
The Company recognizes revenue for the majority of its operations at either
the time its products are shipped, or when installation is complete in
cases where the Company performs the installation services. At SCS
Interactive (included in the Company's modular play equipment segment) the
percentage of completion method of accounting is utilized because the build
to install timeline of its jobs is of longer duration. The percentage of
completion is measured using actual costs compared to total estimated
costs. Revenues from shipping and handling are included in sales. Shipping
and handling costs are included in cost of sales.
3. Inventory:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory as of June 30, 2002 and December 31, 2001, consists of
the following:
June 30, 2002 December 31, 2001
------------- -----------------
Raw materials and component parts $ 3,497,947 $ 6,457,436
Work in process and finished goods 6,528,994 4,526,389
----------- ------------
$ 10,026,941 $ 10,983,825
4. Credit Facility:
The Company currently has a $12.5 million revolving credit facility and a
$27.0 million term loan. This facility is secured by substantially all of
the assets of the Company. The availability under the revolving credit
facility is determined by a formula based on inventory and accounts
receivable balances. At June 30, 2002, the Company had approximately $1.2
million available under the revolving line of credit facility. There are no
compensating balance requirements and the credit facility requires
compliance with financial loan covenants related to leverage, interest
coverage, fixed charges and capital expenditures. A commitment fee of .50%
per annum is payable quarterly in arrears based on the average daily unused
portion of the revolving line of credit.
5
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
4. Credit Facility (continued):
The term loan requires payments of $500,000 per quarter for 2002 (the
second quarter payment was made July 1, 2002), $1 million per quarter from
2003 to September 26, 2004 when the remaining balance is due, and requires
$2 million in additional principal payments on April 15, 2003 if the
Company meets certain EBITDA targets for 2002. The Company is also required
to obtain $10 million in additional capital, which is to be used to pay
down the balance of the term loan.
The interest rate on the revolving line of credit and the term loan is
variable based upon the bank's prime rate. At June 30, 2002 and December
31, 2001 the rate was 7.25%.
At June 30, 2002, the Company was in default of the covenants under the
loan agreement. The lenders waived the default, extended the due date of
the line of credit and the due date for the requirement to obtain the $10
million in additional capital to July 15, 2003 and reduced the amount
available under the line of credit to $12.5 million to more accurately
reflect the Company's expected level of borrowing. In addition, the lenders
removed the goodwill impairments from the covenant calculations. As a
result of the potential for non-compliance with the covenants in future
quarters, the Company has classified the entire balance of the credit
facility as a current liability in accordance with EITF 86-30. The Company
has initiated negotiations with the lenders to further restructure the loan
agreement.
5. Earnings per Share:
The following table provides a reconciliation of the numerator and
denominator for earnings per share:
Three Months ended Six Months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $(24,901,535) $ (57,462) $(24,894,897) $ 417,466
============ ============ ============ ============
Shares outstanding 6,841,345 6,872,334 6,856,754 6,872,334
Net effect of dilutive options -- -- -- 12,418
------------ ------------ ------------ ------------
Dilutive shares outstanding 6,841,345 6,872,334 6,856,754 6,884,752
============ ============ ============ ============
Options outstanding of 924,038 and 1,044,167 for the three months and
989,903 and 1,024,415 for the six months ended June 30, 2002 and 2001,
respectively, have been excluded from the above calculation because they
were not considered common share equivalents or because their effect would
have been anti-dilutive.
6. 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
6
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
6. Business Segments (continued):
reportable segments are strategic business units that offer different
products. They are managed separately based on the fundamental differences
in the operations.
The Company's convenience and activity products include the flagship
product, the baby changing station ("BCS") which is assembled at the
Company's facilities in Colorado. Other significant products in this
segment are the sanitary paper liners for the BCS, the child protection
seat, the infant seat kradle, the high chair, safety straps for shopping
carts and activity products which are manufactured for the Company
primarily in the United States. These products are sold directly and
through distribution channels, both in the United States and
internationally.
The Company's modular play equipment includes indoor/outdoor play
equipment, including water play equipment, and playground surfacing
materials. The indoor play equipment is custom designed for the customer. A
catalog is used to promote and advertise the outdoor play equipment.
However, custom modifications are often made to accommodate the customers'
needs and desires. These products are manufactured by the Company at its
facilities located in Colorado, British Columbia, Florida and Oregon. The
playground surfacing materials are manufactured by a national network of
sub-contractors. These products are sold directly and through
manufacturers' representatives/dealers both in the United States and
internationally.
The Company evaluates the performance of its segments based primarily on
operating profit before amortization and impairment of intangibles,
corporate expenses and interest income and expense. The Company allocates
corporate expenses to individual segments based on segment sales. Corporate
expenses consist primarily of labor costs of executive management, facility
costs, legal costs, systems costs and shareholder relations costs. The
following table presents sales and other financial information by business
segment (in thousands):
---------------------------------------------
Three Months Ended June 30, 2002
---------------------------------------------
Convenience Modular
and Activity Play
Products Equipment Total
------------ ----------- ---------
Sales $ 3,541 $ 8,612 $ 12,153
Operating income (loss) (480) (2,005) (2,485)
Capital expenditures 20 51 71
Total assets 19,793 37,994 57,787
7
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
6. Business Segments (continued):
---------------------------------------------
Three Months Ended June 30, 2001
---------------------------------------------
Convenience Modular
and Activity Play
Products Equipment Total
------------ ----------- ---------
Sales $ 3,658 $11,753 $15,411
Operating income 477 822 1,299
Capital expenditures 146 67 213
Total assets 20,503 69,974 90,477
---------------------------------------------
Six Months Ended June 30, 2002
---------------------------------------------
Convenience Modular
and Activity Play
Products Equipment Total
------------ ----------- ---------
Sales $ 7,333 $ 17,080 $ 24,413
Operating income (loss) 343 (1,800) (1,457)
Capital expenditures 190 80 270
Total assets 19,793 37,994 57,787
---------------------------------------------
Six Months Ended June 30, 2001
---------------------------------------------
Convenience Modular
and Activity Play
Products Equipment Total
------------ ----------- ---------
Sales $ 7,803 $21,912 $29,715
Operating income 1,612 1,848 3,460
Capital expenditures 220 160 380
Total assets 20,503 69,974 90,477
7. New Accounting Pronouncements:
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets"
and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived
Assets." In accordance with SFAS 142, the Company stopped amortizing
goodwill effective January 1, 2002. The Company has also identified certain
of its trademarks as indefinite lived assets and has ceased amortization
for those assets effective January 1, 2002.
In addition, SFAS 142 changes the way the Company evaluates goodwill for
impairment from a discounted cash flow approach to a fair value approach.
Under SFAS 142, the Company is required to split the two segments,
children's activity and convenience products and children's
8
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
7. New Accounting Pronouncements (continued):
modular play equipment, into reporting units. Goodwill impairment is
evaluated separately for each reporting unit by comparing the fair value of
the reporting unit with its underlying book value at January 1, 2002 in
order to determine any transitional impairment. For reporting units where
the fair value of the reporting unit was less than its book value, the
Company performed an additional test to determine the amount of the
impairment. This test consisted of determining the fair value of the assets
and liabilities in the reporting unit, adding the book value of the
goodwill, and then comparing that value to the overall fair value
determined above. The impairment amount for goodwill consists of the excess
of the detailed fair values plus goodwill over the fair value of the
reporting unit.
As a result of this test, the Company recorded a transitional impairment
charge of $21,838,717 (net of income taxes of $2,893,692) in the second
quarter of 2002, which is shown as the cumulative effect of an accounting
change in the accompanying consolidated statement of operations. The fair
value of the reporting units giving rise to the impairment charge was
estimated by an independent valuation firm using the expected present value
of future cash flows and other methodologies. The impairments were
primarily the result of decreases in operating revenues and cash flows as
compared to forecasts prepared at the dates the respective companies were
acquired.
SFAS 144 requires that the Company evaluate its amortizable identified
intangible assets other than goodwill for impairment based upon
undiscounted future cash flow streams. If an impairment is identified, the
amount of the impairment is determined by comparing the carrying value to
its estimated fair market value. SFAS 142 requires that unamortized
intangible assets be evaluated for impairment by comparing the carrying
amount with its fair value. No impairment has been recognized for these
assets.
Identifiable intangible assets consist of the following:
June 30, 2002 December 31, 2001
------------- -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Patents $10,853,197 $ 1,668,211 $10,806,015 $ 1,309,509
Trade secrets 5,500,000 595,833 5,500,000 504,166
Product designs 10,044,409 1,385,304 10,044,409 1,217,897
Other 203,726 132,076 201,750 114,238
----------- ----------- ----------- -----------
Total $26,601,332 $ 3,781,424 $26,552,174 $ 3,145,810
=========== =========== =========== ===========
Unamortized intangible assets:
Trademarks $ 3,971,799 $ 851,899 $ 3,971,799 $ 851,899
=========== =========== =========== ===========
Amortization expense was $308,515 and $597,185 for the three months ended
June 30, 2002 and 2001, respectively, and $630,441 and $1,194,662 for the
six months ended June 30, 2002 and 2001, respectively.
9
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
7. New Accounting Pronouncements (continued):
Estimated amortization expense for each of the following years ending
December 31 is as follows:
2002 $1,266,000
2003 1,258,000
2004 1,241,000
2005 1,238,000
2006 1,238,000
The weighted average amortization period for each of the amortized
intangible assets at June 30, 2002 is as follows:
Patents 15.1 years
Trade secrets 25.1 years
Product designs 30.0 years
Other 8.6 years
Total 22.9 years
The changes in the carrying amounts of goodwill are as follows for the six
months ended June 30, 2002:
Convenience
and Activity Modular Play
Products Equipment Total
------------ ------------ ------------
Balance as of January 1, 2002 $ 1,001,566 $ 27,599,860 $ 28,601,426
Cumulative effect of accounting change -- (24,732,411) (24,732,411)
Other -- (107,449) (107,449)
------------ ------------ ------------
Balance as of June 30, 2002 $ 1,001,566 $ 2,760,000 $ 3,761,566
============ ============ ============
10
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
7. New Accounting Pronouncements (continued):
The following table shows the pro forma impact of not amortizing goodwill
and the trademarks in the prior year on income before cumulative effect of
change in accounting principle and earnings per share:
Three months ended Six months ended
June 30, June 30,
------------------------ -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Reported income (loss) before
cumulative effect of change in
accounting principle $(3,062,818) $(57,462) $(3,056,180) $ 417,466
Add back goodwill amortization -- 203,127 -- 406,254
Add back trademark amortization -- 17,643 -- 35,285
----------- -------- ----------- -----------
Adjusted income (loss) $(3,062,818) $163,308 $(3,056,180) $ 859,005
=========== ======== =========== ===========
Basic and Diluted earnings per share:
Reported income (loss) before
cumulative effect of change in
accounting principle $ (0.45) $ (0.01) $ (0.45) $ 0.06
Goodwill amortization -- 0.03 -- 0.06
Trademark amortization -- 0.00 -- 0.01
----------- -------- ----------- -----------
Adjusted income (loss) $ (0.45) $ 0.02 $ (0.45) $ 0.13
=========== ======== =========== ===========
8. Reclassifications:
Certain items have been reclassified in the prior year financial statements
to conform to the current year presentation. These consist primarily of a
reclassification of shipping and handling costs out of revenue and into
cost of sales. These reclassifications had no effect on net income or cash
flows.
11
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
9. Comprehensive Income:
SFAS 130, Reporting Comprehensive Income, requires the disclosure of
comprehensive income (loss), which includes, in addition to net income
(loss), other comprehensive income (loss) consisting of foreign currency
translation adjustments, which are not included in the traditional
statement of operations. A reconciliation of net income (loss) to
comprehensive income (loss) is as follows:
Three months ended Six months ended
------------------ ----------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $(24,901,535) $ (57,462) $(24,894,897) $ 417,466
Foreign currency
translation adjustment 118,482 17,495 46,409 (4,618)
------------ ------------ ------------ ------------
Total comprehensive income (loss) $(24,783,053) $ (39,967) $(24,848,488) $ 412,848
============ ============ ============ ============
10. CEO Resignation:
On April 30, 2002, Mark Betker, the Company's Chief Executive Officer,
resigned from the Company and entered into a Release Agreement that
contains the terms of Mr. Betker's discontinuation of service. The Release
Agreement replaces a Separation Agreement, executed on August 29, 2001,
between Mr. Betker and the Company. Some of the key terms of the Release
Agreement are as follows:
o The Company repurchased from Mr. Betker 14,000 shares of common stock for
$1.69 per share, the closing market price on April 29, 2002.
o The Company agreed to pay Mr. Betker severance of $250,000 over the 12
month period ending April 30, 2003.
o The Company will forgive a promissory note from Mr. Betker for $715,195 on
the date it becomes due (April 29, 2003) provided that he remains in
material compliance with the terms of the agreement.
o Mr. Betker returned the 80,000 shares of common stock purchased with part
of the proceeds of the promissory note.
o For a period of two years, Mr. Betker agreed not to compete with the
Company or to solicit any employees of the Company.
o The parties entered into a consulting agreement whereby Mr. Betker will
provide consulting services at the request of the Board of Directors. To
date, no such services have been provided and no consulting fees have been
paid to Mr. Betker.
The Company recorded a pre-tax expense of $872,565 to recognize this transaction
during the second quarter of 2002, of which $619,995 represents a non-cash
charge related to the forgiveness of the note.
12
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that describe our business and
our expectations. All statements, other than statements of historical fact,
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 report, 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 and Section 21E
of the Securities Exchange Act of 1934 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, the risks
associated with the Company's significant outstanding indebtedness, including
the potential for additional defaults thereunder; the uncertainties associated
with sales fluctuations, customer order patterns and relationships with
manufacturer's sales representatives; continuing weakness in the economy; the
uncertainties associated with the introduction of new products; management of
growth, including the ability to attract and retain qualified employees; the
ability to integrate acquisitions made by the Company and the costs associated
with such acquisitions; dependence on James Zazenski, our chief operating
officer; substantial competition from larger companies with greater financial
and other resources than the Company; our dependence on suppliers for
manufacture of some of our products; currency fluctuations and other risks
associated with foreign sales and foreign operations; quarterly fluctuations in
revenues, income and overhead expense; government regulations including those
promulgated by the Consumer Product Safety Commission; and potential product
liability risk associated with our existing and future products. See "Risk
Factors" in the Company's Form 10-K for the year ended December 31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading designer, producer and worldwide marketer of innovative
commercial products, systems and solutions that create attractive
family-friendly environments for businesses and other public venues. 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, outdoor playground surfacing
and interactive play equipment used in water parks, family entertainment centers
and amusement parks. We intend to capitalize on the brand name recognition
established through our market-leading Koala Bear Kare Baby Changing Station.
We market and sell 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. We are continually working to
expand our sales and marketing efforts through the addition of manufacturer's
sales representatives, dealers and Company sales representatives.
We recognize revenue for the majority of our operations at either the time our
products are shipped, or when installation is complete in cases where we perform
the installation services. At SCS Interactive (included in our modular play
equipment segment) the percentage of completion method of accounting is utilized
because the build to install timeline of its jobs is of longer duration. The
percentage of completion is measured using actual costs compared to total
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
estimated costs. Revenues from shipping and handling are included in sales.
Shipping and handling costs are included in cost of sales.
For a discussion of other accounting policies that we believe are material to
our business see "Critical Accounting Policies and Estimates" in our Form 10-K
for the year ended December 31, 2001.
Our quarterly revenues and net income are subject to fluctuation based on
customer order patterns and our shipping activity. Because of these
fluctuations, comparisons of operating results from quarter to quarter for the
current year or for comparable quarters of the prior year may be difficult.
Except as set forth below, these fluctuations are not expected to be significant
when considered on an annual basis.
Results of Operations
Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001
(dollars in thousands).
Sales decreased 21.1% to $12,153 for the second quarter of 2002 compared to
$15,411 for the second quarter of 2001. Convenience and activity product segment
sales were comparable at $3,541 for the second quarter of 2002 compared to
$3,658 for the second quarter of 2001. Modular play equipment segment sales
decreased 26.7% to $8,612 for the second quarter of 2002 compared to $11,753 for
the second quarter of 2001. The decrease was due to continued weakness within
key target markets, timing delays in certain large orders and the effects of a
change in sales representatives at certain of our Modular play divisions.
Gross profit for the second quarter of 2002 was $3,691 (30.4% of sales) compared
with $6,165 (40.0% of sales) for the second quarter of 2001. The decrease in
gross profit as a percentage of sales was primarily because of the impact of the
lower sales relative to our fixed production costs and product mix in the
modular play segment. In the convenience and activities segment, as part of a
more comprehensive inventory management process, we sold approximately $400 of
slow moving inventory at very low margins. We anticipate that this could
continue in 2002 as we continue to work to reduce our inventory balances. This
decline in gross profit was partially offset by our overall lower level of costs
resulting from the operational restructuring and workforce reductions we
undertook in the fourth quarter of 2001.
Selling, general and administrative expenses increased for the second quarter of
2002 to $5,304 (43.6% of sales) from $4,867 (31.6% of sales) for the same period
in 2001. Sales and marketing expenses decreased $373 to $1,493 for the second
quarter of 2002 compared to $1,866 for the second quarter of 2001. This decrease
was due to the lower sales and resulting lower sales commissions and a focus on
cost containment, including selected employee reductions. General and
administrative expenses increased $810 to $3,811 for the second quarter of 2002
compared to $3,001 for the second quarter of 2001. The increase in general and
administrative expenses was primarily the result of one-time costs of
approximately $400 as we aggressively worked to settle various disputes, as well
as higher auditing costs, costs associated with the implementation of our new
Oracle accounting system, and increased rent on our new facility, partially
offset by the employee reductions that we made in the fourth quarter of 2001.
As discussed in Note 10 to the condensed consolidated financial statements, on
April 30, 2002, Mark Betker, our Chief Executive Officer, resigned from the
Company and entered into a Release Agreement that contains the terms of Mr.
Betker's discontinuation of service. The Release Agreement replaced a Separation
Agreement, executed on August 29, 2001, between Mr. Betker and the Company. We
recorded a pre-tax expense of $873 to recognize this transaction during the
second quarter of 2002, of which $620 represents a non-cash charge related to
the forgiveness of the note.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Amortization expense from intangible assets decreased for the second quarter of
2002 to $309 from $597 for the same period of 2001, primarily because we stopped
amortizing goodwill and certain of our trademarks effective January 1, 2002 with
the adoption of SFAS 142. See Note 7 to the condensed consolidated financial
statements for further discussion.
We incurred interest expense of $705 during the quarter ended June 30, 2002
compared to $792 during the quarter ended June 30, 2001. The decrease in
interest expense is due to lower borrowings in the second quarter of 2002
compared to 2001.
Our effective tax rate is a benefit of approximately 11.8% for the quarter ended
June 30, 2002. The lower effective tax rate is due to the non-deductibility of a
portion of the goodwill impairment charge associated with SCS Interactive and
the establishment of a valuation allowance for deferred tax assets related to a
portion of the remaining goodwill impairment charge. We do not believe that it
meets the "more likely than not" criteria set forth in SFAS 109.
Loss before cumulative effect of accounting change increased in the second
quarter of 2002 to a loss of $3,063 from a loss of $57 for the second quarter of
2001. The increased loss is due primarily to the lower level of sales compared
to 2001, severance costs and the higher level of selling, general and
administrative expenses discussed above, partially offset by the employee
reductions that we made in the fourth quarter of 2001.
As discussed in Note 7 to the condensed consolidated financial statements, we
recorded a transitional impairment charge of $21,839 (net of taxes of $2,894)
during the second quarter of 2002 to reflect the implementation of SFAS 142. The
impact of this charge is shown as the cumulative effect of an accounting change
in the consolidated statement of operations.
Net loss per share (assuming dilution) for the second quarter of 2002 increased
to $(3.64) per share (assuming dilution) compared to $(0.01) per share (assuming
dilution) for the second quarter of 2001.
Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001
(dollars in thousands).
Sales decreased 17.8% to $24,413 for the six months ended June 30, 2002 compared
to $29,715 for the six months ended June 30, 2001. Convenience and activity
product segment sales decreased 6.0% to $7,333 for the six months ended June 30,
2002 compared to $7,803 for the six months ended June 30, 2001. The decrease was
due primarily to soft economic conditions in the first quarter of 2002. Modular
play equipment segment sales decreased 22.1% to $17,080 for the first six months
of 2002 compared to $21,912 for the first six months of 2001. The decrease was
due to continued weakness within key target markets, timing delays in certain
large orders and the effects of a change in sales representatives at certain
modular play divisions.
Gross profit for the first six months of 2002 was $9,087 (37.2% of sales)
compared with $12,515 (42.1% of sales) for the first six months of 2001. The
decrease in gross profit as a percentage of sales was primarily because of the
impact of the lower sales relative to our fixed production costs and product mix
in the modular play segment. During the second quarter of 2002, we sold
approximately $400 worth of product at very low margins as part of our more
comprehensive inventory management strategy. We anticipate that these type of
sales could continue in 2002 as we work to reduce our inventory balances. This
decline in gross profit was partially offset by our overall lower level of costs
resulting from the operational restructuring and workforce reductions we
undertook in the fourth quarter of 2001.
Selling, general and administrative expenses increased for the first six months
of 2002 to $9,671 (39.6% of sales) from $9,055 (30.5% of sales) for the same
period in 2001. Sales and marketing expenses decreased $849 to $2,819 for the
first six months of 2002 compared to $3,668 for the first six months of 2001.
This decrease was due primarily to the lower sales and resulting lower
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
sales commissions. General and administrative expenses increased $1,465 to
$6,852 for the six months ended June 30, 2002 compared to $5,387 for the six
months ended June 30, 2001. The increase in general and administrative expenses
was primarily the result of one-time costs of $520 as we aggressively worked to
settle disputes, as well as higher auditing costs, costs associated with the
implementation of our new Oracle accounting system, and increased rent on our
new facility, partially offset by the employee reductions that we made in the
fourth quarter of 2001.
Amortization expense from intangible assets decreased for the first six months
of 2002 to $630 from $1,195 for the same period of 2001, primarily because we
stopped amortizing goodwill and trademarks effective January 1, 2002 with the
adoption of SFAS 142. See Note 7 to the condensed consolidated financial
statements for further discussion.
We incurred interest expense of $1,427 during the six months ended June 30, 2002
compared to $1,641 during the six months ended June 30, 2001. The decrease in
interest expense is due to lower borrowings in the first six months of 2002
compared to 2001.
Our effective tax rate is a benefit of approximately 11.7% for the six months
ended June 30, 2002. The lower effective tax rate is due to the
non-deductibility of a portion of the goodwill impairment charge associated with
SCS Interactive and the establishment of a valuation allowance for deferred tax
assets related to a portion of the remaining goodwill impairment charge. We do
not believe that it meets the "more likely than not" criteria set forth in SFAS
109.
Loss before cumulative effect of accounting change was $3,056 for the six months
ended June 30, 2002 compared to income of $417 for the six months ended June 30,
2001. The decrease is due primarily to the lower level of sales compared to
2001, severance and the higher level of selling, general and administrative
expenses discussed above, partially offset by the employee reductions that we
made in the fourth quarter of 2001.
Net income (loss) per share (assuming dilution) for the six months ended June
30, 2002 was $(3.63) per share (assuming dilution) compared to $0.06 per share
(assuming dilution) for the six months ended June 30, 2001.
Liquidity and Capital Resources (dollars in thousands)
We finance our business activities primarily from cash provided by operating
activities and from borrowings on our credit facility. Cash provided by (used
in) operating activities for the six months ended June 30, 2002 and 2001 was
$2,622 and $(557), respectively. The increase in cash provided by operating
activities for the six months ended June 30, 2002 compared to the six months
ended June 30, 2001 is due primarily to changes in working capital items. Lower
inventory balances resulted in additional cash from operations in 2002 as we
continued to focus on reducing inventories. In addition, our accounts payable
and accrued liability balances increased in 2002 as we more closely managed our
vendor relationships.
At June 30, 2002 and December 31, 2001, working capital was $(20,013) and
$14,957, and cash balances were $0 and $0, respectively. The decrease in working
capital is due to the reclassification of the credit facility as short-term as
required by EITF 86-30, under which reclassification is required if the
potential exists for non-compliance in future quarters. The zero cash balances
are due to 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 and our credit facility primarily for
capital expenditures and working capital. Net cash used in investing activities
was $317 and $551 for the six months ended June 30, 2002 and 2001, respectively.
The decrease in cash used in investing activities was
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
primarily due to larger expenditures made on intellectual property in 2001
offset by capital expenditures associated with the move into our new
headquarters and manufacturing facility in January 2002 and the implementation
of our new Oracle accounting system.
Net cash used in financing activities was $2,247 in 2002 compared to net cash
provided by financing activities of $1,460 in 2001. The use of cash in 2002 is
primarily due to payments on our revolving credit facility and term loan. We
currently have a $12.5 million revolving credit facility and a $27.0 million
term loan. This facility is secured by substantially all of our assets. The
availability under the revolving credit facility is determined by a formula
based on inventory and accounts receivable balances. At June 30, 2002, we had
approximately $1.2 million available under the revolving line of credit
facility. There are no compensating balance requirements and the credit facility
requires compliance with financial loan covenants related to leverage, interest
coverage, fixed charges and capital expenditures. A commitment fee of .50% per
annum is payable quarterly in arrears based on the average daily unused portion
of the revolving line of credit.
The term loan requires payments of $500 per quarter for 2002 (the second quarter
payment was made on July 1, 2002), $1 million per quarter from 2003 to September
26, 2004 when the remaining balance is due, and requires $2 million in
additional principal payments on April 15, 2003 if we meet certain EBITDA
targets for 2002. The interest rate on the revolving line of credit and the term
loan is variable based upon the bank's prime rate. At June 30, 2002 and December
31, 2001, the rate was 7.25%.
We were in default of certain covenants under our credit facility at September
30, 2001. We obtained a waiver of such non-compliance which is contained in
Amendment No. 1 to the new credit facility. The waiver required, among other
things, the infusion of $10 million of capital into the Company by March 31,
2002, which would be used to reduce the balance outstanding under our term loan.
At December 31, 2001 and March 31, 2002, we were again in default of certain
covenants under that indebtedness. On April 1, 2002, we obtained a waiver of
such non-compliance which is contained in Amendment No. 2 to the new credit
facility. Under the amendment, the due date of our line of credit was extended
to April 15, 2003, the date to obtain the $10 million of additional capital was
changed to April 1, 2003, the quarterly payments for 2002 were reduced to
$500,000 per quarter for 2002, and the covenants were reset. The amendment also
required us to make up to $2 million in additional principal payments on April
15, 2003 if we meet certain EBITDA targets for 2002.
At June 30, 2002, we were again in default of certain covenants. On August 13,
2002, the lenders waived the default, extended the due date of the line of
credit and the due date for the requirement to obtain the additional $10 million
in capital to July 15, 2003 and reduced the total line of credit commitment to
$12.5 million to more accurately reflect our expected level of borrowings. These
changes are contained in Amendment No. 4 to the credit facility. In addition,
the lenders excluded any goodwill impairments from the covenant calculations. We
are currently in discussions with the lenders to further restructure the credit
agreement. If we are unable to successfully restructure our credit agreement, we
expect to be in default for the remainder of 2002.
Our revolving line of credit and term loan will require significant cash
payments in the future. We have various other contractual obligations, primarily
lease agreements, that also require significant future cash payments. These
obligations have not materially changed from those disclosed in our report on
Form 10-K for the year ended December 31, 2001.
If we are able to successfully restructure our credit agreement, we believe that
our cash flow from operations and the availability under our revolving line of
credit will be sufficient to fund our operations through June 30, 2003. We may
also consider selling certain assets to reduce the outstanding balance of the
loans.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are required under our amended credit agreement to obtain an additional $10
million of capital by July 15, 2003 to reduce amounts currently outstanding
under our term loan. We have engaged an investment banker to assist us with
raising the additional financing, but do not believe it is feasible at the
current time to complete such a transaction. If we are unable to successfully
restructure our loan agreement, the lenders may take additional steps including
forcing us to sell assets, limiting our borrowing capacity or foreclosure.
On August 8, 2002, the we were notified by Nasdaq that for the last 30
consecutive trading days, the price of the our common stock has closed below the
minimum $1.00 per share requirement for continued inclusion on the National
Market. We have 90 calendar days, or until November 6, 2002, to regain
compliance. Compliance during this 90 day period can be demonstrated if the bid
price of our common stock closes at $1.00 per share or more for a minimum of 10
consecutive trading days. If compliance cannot be demonstrated by November 6,
2002, our shares will be delisted.
We are currently considering alternatives, including applying to transfer to The
Nasdaq SmallCap Market. If we submit the application by November 6, 2002, and
the application is approved, we will be afforded the 180 calendar day SmallCap
Market grace period. This would allow us until February 4, 2003 to satisfy the
continued inclusion requirements for the SmallCap Market. We may also be
eligible for an additional 180 calendar day grace period, or until August 4,
2003, provided that we meet the initial listing criteria for the SmallCap
Market. Furthermore, we may be eligible to transfer back to The Nasdaq National
Market if, by August 4, 2003, our bid price maintains the $1.00 per share
requirement for 30 consecutive trading days and we have maintained compliance
with all other continued listing requirements for the National Market.
If we are unable to maintain a Nasdaq listing, investors may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of our stock.
18
PART II - OTHER
INFORMATION
Item 1-3 None
Item 4. Submission of Matters to a Vote of Security Holders
On May 16, 2002, the Company held its Annual Meeting of Shareholders.
At such meeting, the Company's shareholders (i) elected four directors
to serve until the Company's next annual meeting; (ii) ratified the
selection of Ernst & Young LLP to serve as the Company's independent
auditors for the year ending December 31, 2002. The number of votes
cast in these matters is set forth below:
1. Election of Directors
Votes Against or Broker
Name Votes For Withheld Abstentions Non-Votes
---- --------- -------- ----------- ---------
Michael C. Franson 5,926,422 85,341 0 0
John T. Pfannenstein 5,895,674 116,089 0 0
Nancy Pierce 5,917,432 94,331 0 0
Randy Stein 5,916,228 95,535 0 0
2. Ratification of Selection of Ernst & Young LLP
Votes Against or Broker
Votes For Withheld Abstentions Non-Votes
--------- ---------------- ----------- ---------
5,724,868 272,336 14,559 0
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.15 Amendment No. 3 to the Amended and Restated
Revolving Credit, Term Loan and Security Agreement
Exhibit 10.16 Amendment No. 4 to the Amended and Restated
Revolving Credit, Term Loan and Security Agreement
Exhibit 99.1 Certification of James A. Zazenski
Exhibit 99.2 Certification of Jeffrey L. Vigil
(b) Reports on Form 8-K
On April 30, 2002 a report was filed reporting items 5 and 7 of
the 8-K rules.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
KOALA CORPORATION
August 14, 2002 /s/James A. Zazenski
- ---------------------- -----------------------------------------
President and Chief Operating Officer
(Principal Executive Officer)
August 14, 2002 /s/Jeffrey L. Vigil
- ---------------------- -----------------------------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
20