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, 2002
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.)
7881 South Wheeling Court
Englewood, Colorado 80112
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(Address of Principal Executive Offices)
(303) 539-8300
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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.
Indicate by checkmark whether the registrant is an accelerated filer:
___ Yes _X_ No
As of June 28, 2002, the aggregate market value of the voting and
non-voting common equity 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 Market was $5,878,489.
As of March 26, 2003, there were outstanding 6,778,334 shares of the
issuer's Common Stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2003 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report contains forward-looking statements that describe our business and
our expectations. All statements, other than statements of historical facts,
included in this report that address activities, events or developments that we
expect, believe, intend or anticipate will or may occur in the future, are
forward-looking statements. When used in this Form 10-K, the words "may,"
"will," "expect," "anticipate," "continue," "estimate," "project," "intend,"
"believe" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act") regarding events, conditions and financial trends that may
affect our future plan of operations, business strategy, operating results and
financial position. Forward-looking statements are inherently subject to risks
and uncertainties, many of which cannot be predicted with accuracy and some of
which might not even be anticipated. Future events and actual results, financial
and otherwise, could differ materially from those set forth in or contemplated
by the forward-looking statements herein. These risks and uncertainties include,
but are not limited to, those discussed in "Risk Factors" below.
BUSINESS
We are a leading designer, producer and worldwide marketer of innovative
commercial products, systems and custom solutions that create attractive
family-friendly environments for businesses and other public venues. We produce
family convenience products, such as baby changing stations and high chairs;
children's activity products, such as activity tables, carpets and foam play
products; and children's modular play equipment, including interactive water and
foam play systems. We intend to continue to capitalize on brand name recognition
established through our market-leading Koala Bear Kare(R) Baby Changing Station.
We market our products, systems and custom solutions to a wide range of
businesses and public facilities that serve customers and visitors who bring
children to their establishments. Our customers include Walt Disney World, The
Mayo Clinic, Target Stores, McDonalds, Pizza Hut, Burger King franchises and
many other customers in the retail, health care, supermarket, entertainment
venue and numerous other markets. We believe that the Koala Bear Kare brand is
widely recognized among family-friendly businesses and their customers.
We provide high-quality products with design features that cater to the
needs of our customers. We believe that competition in our various product
categories is fragmented and that we benefit from offering a broad selection of
branded products to our customers. We intend to continue providing
family-friendly products, systems and custom solutions through strategic
initiatives including: capitalizing on brand recognition; maximizing market
penetration; maintaining low cost, high quality production; developing new
solutions and enhanced products; and expanding our international marketing.
Our public filings are available at our web site at
http://www.koalabear.com and may also be obtained through the Securities and
Exchange Commission at its web site at http://www.sec.gov. No information or
documents at our web site are incorporated herein.
History
We were formed as a Colorado corporation in July 1993. Our predecessor was
formed in 1987 to produce and market a newly designed baby changing station.
This product established the foundation for our growth, and we believe that we
are the market leader in baby changing station products in terms of units sold.
During the 1990's, we developed from a single product company into a diversified
designer, producer and marketer of family convenience products, children's
activity products and children's modular play equipment. We introduced the Child
Protection Seat in 1991 and the Infant Seat Kradle in 1993. In 1994, we acquired
the rights to the Booster Buddy(R) booster seat. We began offering children's
activity systems in 1996, following the acquisition of a producer of activity
products. This acquisition initiated the development of the Koala Kare(TM)
System, which allows businesses to create custom activity systems to suit
individual space requirements and customer needs. We continued to expand our
product offerings in 1997 with new products such as the Koala(TM) Highchair, and
the acquisition of Delta Play, a custom manufacturer of creatively themed,
modular indoor children's play systems. With the acquisition of Park Structures
in 1998, we entered the outdoor children's modular play market. We completed
several acquisitions of complementary businesses and products in 1999 and 2000.
In 1999, we purchased the assets of Superior Foam & Polymers, Inc. and Smart
Products, Inc. Superior Foam manufactures and markets children's foam activity
products to amusement parks, water parks, shopping malls and retail stores.
Smart Products manufactures and distributes child safety and parental
convenience products to grocery stores, retailers and restaurants. In 2000, we
acquired SCS Interactive, Inc. and Fibar, Inc. SCS designs, manufactures and
markets children's interactive water play equipment for use in family
entertainment centers, water
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parks and amusement parks. Fibar markets and distributes playground surfacing
systems for use in outdoor playground and equestrian sites. As a result of our
product diversification efforts, the Baby Changing Station, while continuing to
be a growth opportunity for us, represented less than 20% of our sales in 2002.
In April 2002, our Chief Executive Officer resigned and we began a
comprehensive review of our operations and our strategic business plan. As a
result of this review, in January 2003, we implemented the reorganization of the
management of Delta Play Company, SCS Interactive and Superior Foam under the
name of KoalaPlay Group. This reorganization was designed to improve operations,
sales and marketing effectiveness.
In the fourth quarter of 2002, we formalized a plan to dispose of Park
Structures. We determined that the outdoor playground equipment product line no
longer fit into our strategic plan and that the promotional and capital
investment necessary to maximize the profitability of this product line was
greater than our available resources. In January 2003, we sold Park Structures
for approximately $4.3 million. Discussions and amounts herein for all years
presented relate to continuing operations only, unless otherwise noted. See Note
14 to the consolidated financial statements for further discussion on
discontinued operations. See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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 nearly 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 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.
Business Strategy
Our primary business objectives are to improve our financial condition and
to grow sales and earnings by continuing to be a leading provider of
family-friendly products, systems and solutions. Our key strategic initiatives
are summarized below.
Operational Restructuring and Consolidation. During the second half of
2001, we initiated an operational restructuring of the Company with the intent
of materially reducing operating costs and improving margins. The strategy
included a consolidation of manufacturing and administrative functions into our
Denver headquarters and manufacturing facility, implementation of a new Oracle
accounting system and personnel reductions. During 2002, we completed the
implementation of the Oracle accounting system, consolidated Fibar's
administrative functions and consolidated most of our treasury functions to
Denver. We also executed an aggressive cost reduction program in 2002 that
included the reduction of our workforce by an additional 80 employees, or 30%.
3
With the resignation of our Chief Executive Officer in April 2002, we
conducted a comprehensive review of the original operational restructuring plan.
As a result of this review, we concluded that the implementation of the
manufacturing consolidation to the Denver facility at this time would cause
severe disruptions to our operations and would require capital investment levels
that we did not believe were prudent. Accordingly, we did not consolidate the
manufacturing operations to the Denver facility. We will continue to evaluate
manufacturing consolidation options in 2003.
In the fourth quarter of 2002, we formalized a plan to dispose of Park
Structures. We determined that the outdoor playground equipment product line no
longer fit into our strategic plan and that the promotional and capital
investment necessary to maximize profitability of this product line was greater
than our available resources. In January 2003, we sold Park Structures for
approximately $4.3 million, and will focus our resources on development of our
remaining product lines and improving profitability in other operations.
We are pursuing several initiatives intended to increase our liquidity,
including accelerating the receipt of a $2.6 million tax refund generated from
the 2002 net operating loss carry-back, facility rent reductions, aggressive
cost cutting programs, aggressive inventory and accounts receivable management
and possible asset sales. We also have engaged in discussions with our lenders
and potential investors regarding a long-term restructuring of our credit
facility and recapitalization of our balance sheet. We have engaged an
investment banker to assist us in developing and executing a recapitalization
plan. For additional discussion of our restructuring and recapitalization plans,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
Capitalize on Brand Name Recognition. We believe that the Koala Bear Kare
brand name has achieved significant recognition with businesses and their
customers through the reputation of the Koala Bear Kare Baby Changing Station.
We intend to continue to leverage this brand recognition through the marketing
and licensing of our Koala Bear Kare brand and our other family convenience and
children's activity products and children's modular play systems. As noted
above, in 2003 we began marketing the product lines of Delta, SCS and Superior
Foam under the name of KoalaPlay Group to capitalize on this brand name
recognition.
In addition, we have begun to pursue licensing the Koala brand to related
products. As an example, in 2001 we entered into a product licensing agreement
with Associated Hygienic Products to market a disposable diaper changing pad to
be sold in the retail market. We continue to pursue and evaluate opportunities
to license the Koala brand.
Maximize Market Penetration. We intend to continue to increase market
penetration through an integrated marketing effort that includes manufacturer's
representative and dealer sales, direct sales, trade shows and trade magazine
advertising. We are continuing our direct telesales programs, which include
direct mail campaigns. We also intend to expand the cross selling of products to
new and existing customers and to expand the categories of facilities that
purchase our products. In 2003, we began marketing the product lines of Delta,
SCS and Superior Foam under the name of KoalaPlay Group to maximize the
synergies that these complementary product lines offer to our customers.
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, we currently outsource a substantial portion
of our manufacturing and assembly functions and handle certain design functions.
We believe that our new office and manufacturing facility provides us with
greater flexibility in vertically integrating operations by acquiring equipment
and reengineering our manufacturing processes. We have also reorganized the
management of the manufacturing operations of Delta, SCS and Superior Foam under
KoalaPlay Group and believe that this will improve their manufacturing
efficiency. As a result, our reliance on contract manufacturing may decrease and
we expect that this would result in meaningful savings and improve overall
quality.
Develop New Solutions. We seek to develop new solutions in order to meet
customer expectations and expand our business. For example, we designed the
Koala Highchair with unique features in response to restaurants' concerns about
the cleanliness and difficulties using their existing highchairs. We also
continually seek to improve and enhance our existing products and systems in
response to customer needs.
Expand International Marketing. We sell our products worldwide. Sales to
customers outside of North America have increased from approximately $1.1
million in 1996 to approximately $5.9 million in 2002. We have a sales
vice-president who is specifically focused on the international market. During
2002, we expanded international sales responsibilities to additional sales
executives. In addition, we plan to increase our international sales through
increased cross-selling of our products.
4
Products and Segments
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. Additional information
regarding the segments and their revenue is contained in Item 8.
Family Convenience and Children's Activity Products. Our family convenience
products include:
o the Koala Bear Kare Baby Changing Station
o the Koala Bear Kare Child Protection Seat
o the Koala Bear Kare Infant Seat Kradle
o the Booster Buddy Booster Seat, and
o the Koala Bear Kare Highchair.
We also market disposable sanitary paper liners to be used with our Baby
Changing Stations. All of these products, except for the Infant Seat Kradle and
the sanitary paper liners, are constructed out of durable polyethylene plastic
and are highly resistant to accidental damage or vandalism. With the acquisition
of Smart Products, we added complementary infant safety and customer service
products including shopping cart seats, highchairs, and SmartStrap child
protection straps.
Our children's activity products consist of the Koala Bear Kare Block and
Maze Activity Table, Koala Bear Kare Wonder Wall and Koala Bear Kare Activity
Center Carpet. These products, which include manipulative activities and
colorful blocks, letters, numbers and designs, are designed for use in
commercial waiting areas of businesses such as grocery stores, auto dealers,
retail stores, physicians and other professional services providers. These
products are solidly constructed to withstand heavy use and include hygienic
maintenance features. We market these products individually or under the name
Koala Kare Systems. The Koala Kare Systems allow businesses to create custom
activity systems to suit individual space requirements and customer needs. These
systems range from individual activity tables in doctors' offices to large
children's activity or play areas in supermarkets comprising several thousand
square feet where children are supervised in a controlled environment. Selected
activity products with interactive video machines and other interactive products
create a children's activity setting that allows parents to shop while their
children are entertained in a safe, clean and child-friendly environment. The
acquisition of Superior Foam added children's foam activity products to our
product offerings. The foam activity products are manufactured using a
proprietary process for applying specialized urethane coatings, which make the
products durable and resistant to extreme weather conditions. The products are
created in a variety of customized themes ranging from zoo animals to pirate
ships and are typically sold to water parks, shopping malls and retail stores.
For the years ended December 31, 2002, 2001 and 2000, our Family Convenience and
Children's Activity Products accounted for 40%, 34% and 38%, respectively, of
our consolidated revenues.
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 Fibar in 2000 expanded our product offerings into children's
outdoor playground surfacing. Fibar markets and distributes playground surfacing
systems consisting primarily of engineered wood fibers that provide a safe and
accessible playground surface at a lower relative cost. SCS manufactures
interactive water play equipment such as water cannons and other interactive
elements presented in attractive themes and combined with slides, fountains and
waterfalls used in water parks. SCS also created a dry variation of its
interactive designs marketed as the "foam factory" to family entertainment
centers. For the years ended December 31, 2002, 2001 and 2000, our Modular Play
Equipment accounted for 60%, 66% and 62%, respectively, of our consolidated
revenues.
Marketing and Sales
Family Convenience and Children's Activity Products. Our marketing strategy
for family convenience and children's activity products consists of extending
the Koala Bear Kare brand name, introducing new concepts and creating new groups
of customers for our products around our "family friendly" theme. We use a
combination of dealer sales and direct sales to market these products.
Since 1995, we have increased our sales and marketing costs in an effort to
increase sales to a wider market. Our distribution network consists of
manufacturer's sales representatives and dealers. The manufacturer's sales
representatives promote our products to the dealers, who purchase the products
from us and resell them to customers. The manufacturer's representatives receive
commissions from the sale of our products. Most dealers are not granted any
exclusive rights for products or territory.
5
Our direct sales program targets national accounts that 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 into business-to-business telesales. The
expansion included capital investment in telecommunications and data equipment
designed for managing our telesales and direct mail programs.
Dealer sales have accounted for a majority of our foreign sales. Factory
sales managers who are experienced in international sales currently serve
international dealers. We intend to continue to expand international marketing
activities by adding dealers and by locating Koala employees in selected markets
around the world to supervise international sales activity. In addition, we plan
to increase international sales of convenience and children's activity products
through increased cross selling of these products.
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. Delta sells indoor modular play equipment nationwide and
internationally through an in-house sales staff. Delta's marketing programs
include attendance at national and regional industry trade shows, a focused
media advertising campaign and publication of a product catalog. Fibar markets
playground surfacing products through a network of approximately 42 dealers,
most of whom also sell modular playground equipment. SCS's interactive play
equipment is marketed and sold through trade show attendance, trade journal
advertising and by direct sales staff and designers. In 2003, we consolidated
the sales management of Delta, SCS and Superior Foam under KoalaPlay Group. We
have hired a seasoned custom equipment sales executive to manage this new
division. We plan to increase our international sales through the marketing of
the modular play equipment of Delta 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.
As described above, we believe that our new office and manufacturing
facility provides us with opportunities to vertically integrate operations by
acquiring equipment and bringing the manufacturing in-house as we deem
appropriate.
Family Convenience and Children's Activity Products. We develop the
concepts for our family convenience and children's activity products in response
to the needs of our customers. We outsource the tooling design. In the
manufacturing process, components are molded to our specifications using various
plastic molding processes and delivered to us for assembly and shipment to
customers. We use a number of manufacturers for our products. We believe that
adequate alternative sources of raw materials and supplies are available for
these products if necessary.
Our foam products are manufactured using a proprietary manufacturing
process at our plant located near Austin, Texas. Unique designs are sculpted out
of foam and are coated with a proprietary coating and application technique
resulting in a highly customized and colorful product. The manufacturing process
requires minimum training of our personnel and utilizes readily obtainable
materials.
Children's Modular Play Equipment. Our engineers design children's indoor
modular play systems using computer design technologies applied to modular
components. We own all of the significant molds and tooling required for the
manufacture of specialized components used in the play equipment. Components for
these systems are manufactured to our specifications and purchased from outside
vendors. We fabricate certain metal and fiberglass components at our plant
located near Vancouver, British Columbia, Canada. These components are then
assembled by us at the plant and shipped to customers. We believe there are
adequate alternative sources of raw materials and supplies for the manufacture
of the indoor modular play equipment components.
6
SCS designs its modular water play products using computer design
technologies for the modular components. We subcontract the manufacture of
plastic molding and certain other raw material components with third parties. We
own all of the significant molds and tooling for these functions. We fabricate
the structural steel components for water park equipment at our facility located
near Portland, Oregon and we use a sub-contractor to manufacture the structural
steel components for non-water park equipment. We manufacture the interactive
equipment parts at our facility located in Denver, Colorado. We believe there
are adequate alternative sources of supply for the manufacture of the modular
water play equipment components.
As noted above, in January 2003 we reorganized the manufacturing operations
of Delta, SCS and Superior Foam under KoalaPlay Group. We have hired a seasoned
custom equipment manufacturing executive to manage this new division and
anticipate improved operational efficiencies as a result of this change.
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 components included in certain surfacing
systems. We control the quality of the product delivered to the customer by
obtaining samples of delivered product and testing compliance with rigid
specifications. We believe there are adequate alternative sources of supply for
the manufacture of the engineered wood fibers.
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 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 product that is as soft and durable.
Children's Modular Play Equipment. Our primary competitors in children's
indoor modular play equipment are Little Tikes Commercial Play Systems, Inc., a
unit of Newell, Inc., Miracle Recreation Equipment Company, Prime Play and
International Play 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 playground surfacing is from companies with higher priced
products, primarily rubber tiles and poured in place rubber surfaces.
Competition in interactive water park equipment is from White Water Industries,
NBGS International and from alternative entertainment offerings. SCS competes
primarily on the basis of quality and design. Fibar competes primarily on price.
Product Warranties and Insurance
For family convenience and children's activity products, we provide a
replacement guarantee for one year against damage of products from natural
disasters or vandalism, subject to a $100 service charge. We also provide a
five-year limited warranty on parts and labor covering any defects in
workmanship. For children's modular play equipment, we provide warranties
ranging from a one year limited warranty on parts and labor covering defects in
workmanship to a lifetime warranty on certain metallic parts. Historically, we
have experienced minimal returns and warranty claims. We carry product liability
insurance in an amount that we believe is adequate. Product liability claims
against us to date have been covered by insurance.
Patents and Trademarks
We own registrations and pending applications for many trademarks,
including the "Koala Bear Kare" mark and several variations of the Koala Bear
Kare logo that are featured on our products. We believe that the various Koala
Bear Kare trademarks are widely recognized and important to our continued
success. Each of our products marketed under this trademark prominently display
a blue and white sticker with one of our logos.
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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 a patent portfolio that
creates a barrier to duplicating the primary operating mechanisms of our water
play equipment.
Regulation
Some of our products are subject to the Federal Consumer Product Safety Act
and the Federal Hazardous Substances Act, among other laws, which empower the
Consumer Product Safety Commission (CPSC) to mandate the repair, replacement or
refund of the purchase price of products or, in extreme cases, even ban or force
a recall of a product that presents a substantial risk of injury to the public.
The CPSC may also issue civil and criminal penalties for knowing violations of
the Acts. Any such determination by the CPSC is subject to court review. Similar
laws exist in some states and cities in the United States and in many
jurisdictions throughout the world.
Our modular play equipment is designed and inspected to meet the safety
guidelines of the CPSC and the American Society for Testing and Materials (ASTM)
for commercial playground systems. We conduct in-house testing and inspection to
ensure compliance with the CPSC and ASTM guidelines.
Our operations in the United States and Canada involve light fabrication
activities utilizing paint, metal and fiberglass. We have the necessary permits
to conduct these activities, and we believe that we are in material compliance
with United States federal and state environmental laws and regulations and
Canadian environmental laws and regulations.
Many of our customers are required to comply with aspects of the Americans
With Disabilities Act (ADA). We provide various ADA compliant products to assist
our customers in meeting these requirements.
Employees
We had approximately 250 full-time employees as of December 31, 2002, with
approximately 204 in the United States and 46 in Canada. This compares to
approximately 271 full-time employees as of December 31, 2001. At March 15,
2003, we had approximately 178 employees. The reduction in employees compared to
December 31, 2002 primarily relates to Park Structures, which was sold in
January 2003. Our United States employees are not covered by any collective
bargaining agreements. The International Wood and Allied Workers of Canada
represents our Canadian employees. A collective bargaining agreement is
currently in place with the International Wood and Allied Workers and is
effective until 2004. We believe that relations with our employees are good.
Foreign Operations
We acquired the assets of Delta, a Canadian based provider of modular
play equipment, in June 1997. We created a foreign subsidiary to own and operate
this business. During 2002, Delta's sales, marketing, administrative,
manufacturing and distribution functions were decentralized, with the president
of Delta reporting to one of our executive officers. In January 2003, we
reorganized the management of Delta under KoalaPlay Group. Strategic planning,
market development and resource allocation are now the responsibility of the
president and general manager of KoalaPlay Group in conjunction with our
President and Chief Operating Officer. We believe that there is no greater risk
attendant to the business conducted by Delta than to that of our domestic
operations.
8
RISK FACTORS
In addition to the other information contained in this Form 10-K, the
following risk factors should be considered carefully in evaluating our
business.
Our accountants have expressed doubt about our ability to continue as a going
concern.
We received a report on our consolidated financial statements for the year
ended December 31, 2002 from our independent accountants that includes an
explanatory paragraph stating that there is substantial doubt about our ability
to continue as a going concern because we have suffered significant losses from
operations in 2002 and 2001, have a significant working capital deficit as of
December 31, 2002 and are not in compliance with certain debt covenants under
our credit facility at December 31, 2002. We can provide no assurance that the
actions we plan to take to address these conditions will be successful.
Recently enacted laws concerning public company reporting could affect our
operations.
Recently enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules proposed by the Securities and Exchange Commission could cause us to incur
increased costs as we evaluate the implications of new rules and respond to new
requirements. The new laws and regulations could make it more difficult for us
to obtain certain types of insurance, including directors and officers liability
insurance, and we may be forced to accept reduced policy limits and coverage or
incur substantially higher costs to obtain the same or similar coverage. The
impact of these events could also make it more difficult for us to attract and
retain qualified persons to serve on our board of directors, or as executive
officers. We are presently evaluating and monitoring developments with respect
to these new and proposed rules, and we cannot predict or estimate the amount of
the additional costs we may incur or the timing of such costs.
We may not return to profitability.
We have incurred significant and continuing losses in recent years. For the
year ended December 31, 2002 we incurred a loss of $33.5 million. For the year
ended December 31, 2001, we incurred a loss of $2.0 million. We may not be
successful in improving sales and gross margins, containing costs and
implementing our operational restructuring such that we return to profitable
operations.
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 incurred significant indebtedness. As of December 31, 2002, we
had approximately $33.3 million of indebtedness outstanding under our line of
credit and term loan. We are currently required to pay approximately $180,000 in
interest per month to service such indebtedness. Our debt service payment will
increase if the prime rate increases. In connection with the line of credit and
term loan, we granted to our lenders a security interest in substantially all of
our assets. In addition, to the extent that our assets continue to secure debt,
such assets will not be available to secure additional indebtedness.
We were in default of certain covenants under that indebtedness at December
31, 2002. On April 7, 2003, our lenders agreed to waive the non-compliance and
further amend the credit facility. The waiver and amendment provided for, among
other things, (i) deferral of all scheduled principal payments on the term loan
in 2003, (ii) term principal payments in 2004 of $500,000 on March 15, $1.0
million on March 31, $1.0 million on June 30 and the remaining balance of $23.0
million on September 26, 2004 when the term facility terminates, (iii) renewal
of the revolving line of credit to March 15, 2004, (iv) reduction of the total
line of credit commitment to $6.5 million to more accurately reflect our
expected level of borrowings after the sale of Park Structures, (v) waiver of a
requirement for the infusion of $10.0 million of additional capital, and (vi)
reset of the financial covenants based on our 2003 business plan.
We have engaged in discussions with our lenders and potential investors
regarding a long-term restructuring of our credit facility and recapitalization
of our balance sheet. These discussions have included the potential sale of
certain of our assets to repay our debt. We have engaged an investment banker to
assist us in developing and executing the recapitalization plan.
If we are unable to successfully restructure our loan agreement or
recapitalize the balance sheet, the lenders may take additional steps including
forcing us to sell assets, further limiting our borrowing capacity or declaring
us in default and foreclosing on the loan. If our lenders take such steps, it
could dramatically affect the carrying value of our assets, our ability to
maintain relationships with our vendors and customers, and our ability to obtain
new business or carry on our business.
9
Any new financing we obtain may significantly dilute our existing common
shareholders.
As discussed above, we are currently evaluating the feasibility of
obtaining new financing to reduce our term loan and recapitalize our balance
sheet. It is likely that any financing that we obtain will be senior in
liquidation preference to our common stock, will dilute the existing common
shareholders, and will have a significant impact on the earnings per share
available to our common shareholders. This could cause the price of our common
stock to fluctuate significantly.
Our recent losses and resulting reduced cash flows could impair our ability to
grow.
We incurred losses and reduced cash flows in 2002 and 2001 compared to our
historical operating results. This could impair our ability to obtain credit
from our suppliers, obtain additional credit from other outside sources and fund
our internal growth. This could also impact our ability to obtain orders and
deposits from our customers and could limit our ability to make the necessary
capital investment in our business to return our business to profitability.
If we do not successfully implement our restructuring, our operating results
could be impacted.
In late 2001 and during 2002, we implemented an operational restructuring
plan designed to reduce costs and improve our margins. We are continuing to
evaluate operating expenses in light of continuing weakness in our core markets,
and additional restructuring could be required as a result. If we are not
successful in implementing such a restructuring, our operating results could be
significantly impacted.
Our quarterly operating results have varied significantly.
Our sales and earnings have historically and may in the future fluctuate
from quarter to quarter based on several factors such as the number of new
commercial construction starts, production delays, cost overruns on large
projects, public budget processes, supply costs and general economic conditions.
Demand for our products can vary significantly from quarter to quarter due to
seasonality, revisions in customer budgets or schedules and other factors beyond
our control. Due to all of the foregoing factors, our results of operations have
and could in the future fall below our estimates and the expectations of
securities analysts and investors. In this event, the market price of the common
stock has, and could in the future be materially adversely affected.
If we fail to successfully expand our 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 implemented our new Oracle management
information system for the Koala, Fibar and corporate divisions in 2002. During
2003, we intend to expand the new integrated platform to Delta Play, SCS and
Superior Foam. If this expansion is not completed in a timely manner or is not
sufficient to sustain our operations at the divisions, our purchasing and sales
operations and our financial reporting could be disrupted, which could seriously
harm our operating results. In order to ensure the sufficiency of our system
expansion, we may need to invest in software enhancements and expanded
capabilities, as well as in additional computer hardware, which we may not be
able to undertake in our current financial condition.
We may become subject to product liability claims, which may impact our results.
Our products are designed for use with infants and children. The children's
modular play equipment industry may be subject to a greater number of claims
than the convenience products industry. We carry product liability insurance in
an amount that we believe is adequate to cover risks associated with our
products. There can be no assurance, however, that existing or future insurance
coverage will be sufficient to cover all product liability risks or that such
insurance will be available at favorable rates. Defending a product liability
claim could significantly divert management's attention. A partially or
completely uninsured claim against us, if successful, could have a material
adverse effect on our business, financial condition and results of operations.
See "Business--Product Warranties and Insurance."
We face intense competition.
The markets for our products are highly competitive and include numerous
domestic and foreign competitors, including well-known manufacturers of consumer
and commercial child play equipment, furniture and other juvenile products that
are substantially larger and have greater financial, marketing and other
resources than we have. There can be no assurance that there will not be new
entrants into our markets or that we will be able to compete successfully in the
future. See "Business--Competition."
10
If we lose our key personnel or cannot recruit additional personnel, our
business may suffer.
Our future success will depend to a great extent upon the continued service
of certain senior management personnel and our continuing ability to attract,
assimilate and retain highly qualified personnel. Competition for such personnel
is intense, and there can be no assurance that we can retain our key personnel
or that we can attract, assimilate and retain such employees in the future.
Although we have non-disclosure and non-compete agreements with many of our
employees, including our executive officers, we do not have employment
agreements with any of our executive officers. We do not maintain key-person
life insurance policies on any employees, including James A. Zazenski, our
President and Chief Operating Officer. The loss of the services of Mr. Zazenski
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 our products, we do not have any long-term agreements or contracts
with suppliers, most of which are the single source of supply. While we believe
that there are adequate alternative sources of such component parts, there can
be no assurance that any interruption in the supply of such component parts to
us or a change to a new supplier would not have a material adverse effect on our
business, financial condition or results of operations. Moreover, if our tooling
or molds are damaged, we could suffer additional delays and costs until such
tooling or molds are repaired or replaced. Although we have business
interruption insurance to protect us against such interruptions, such insurance
may not prevent such interruptions from having a material adverse effect upon
our business, financial condition and results of operations. See
"Business--Design and Manufacturing."
We face risks associated with international operations.
As part of our growth strategy, we are seeking opportunities to further
expand our products and systems distribution into international markets. Sales
to customers outside of North America accounted for approximately 20% of sales
in 2002. 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."
11
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. We are also
continuing to pursue additional patents and trademarks to protect our new
product developments, but cannot guarantee that these patents and trademarks
will be awarded or can be successfully defended. See "Business--Patents and
Trademarks."
Our stock price has been and is likely to 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 violations of our debt covenants;
o changes in operating and stock price performance of our competitors;
o additions or departures of key personnel; and
o future sales of equity or assets, including sales required by our
lenders.
Domestic and international stock markets often experience significant price
and volume fluctuations. These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock.
We are in non-compliance with the listing requirements of the Nasdaq SmallCap
Market.
To be eligible for continued listing of our common stock on the Nasdaq
SmallCap Market, we must meet certain criteria, including (i) maintaining a
minimum bid price of $1.00 per share of common stock, (ii) maintaining a market
value of publicly held shares of at least $1.0 million, and (iii) maintaining a
market capitalization of $35 million, stockholder's equity of $2.5 million or
annual net income of $500,000.
The price of our common stock has been below $1.00 per share since
August 2002. If our price is not at or above $1.00 for ten (10) consecutive
business days by August 4, 2003, Nasdaq could initiate delisting procedures
based on our failure to meet the minimum bid price, even if we are in compliance
with the other listing requirements referred to above. We can offer no assurance
that the stock price will appreciate sufficiently, or will remain at an
appreciated level for a sufficient period of time, to avoid delisting as
described above.
Termination of our listing on the Nasdaq SmallCap Market may result in
trading in our stock being moved to the non-Nasdaq over-the-counter market in
what are commonly referred to as the OTC Bulletin Board or the "pink sheets." As
a result, investors may find it more difficult to dispose of our common stock or
to obtain accurate quotations as to the market value of our common stock, and
our ability to raise capital through the sale of equity securities could be
impaired.
We may seek to deregister our common stock from reporting under the Securities
Exchange Act of 1934.
For several reasons, including but not limited to the nature and
extent of the trading of our common stock and the significant management time
and costs, such as legal, accounting and insurance costs, associated with the
preparation and filing of our periodic reports with the Securities and Exchange
Commission, we may seek to deregister our common stock from reporting under the
Securities Exchange Act of 1934. If we take this action, our obligation to file
periodic reports, including quarterly and annual reports, will be suspended and
there would be no public information regarding the company after the
deregistration. In addition, our common stock will no longer be quoted on the
Nasdaq SmallCap Market or, if applicable, the OTC Bulletin Board. Our common
stock might be traded on the "pink sheets," but we can give no assurance that
this will occur. As a result, investors would likely find it more difficult to
dispose of or obtain accurate quotations for our common stock, and our ability
to sell equity securities and to raise capital, could be impaired.
12
Other risk factors.
There are numerous other factors, many of which are outside of our
control, which could adversely impact our results of operations and financial
condition. Such factors include: adverse weather conditions, natural disasters,
acts of international or domestic terrorism and international, political and
military developments which may, among other things, impair distribution of our
products and reduce customer spending on our products; labor disputes, which
could increase costs and disrupt production of our products; changing public and
consumer tastes, which could result in lower spending on our products; and legal
and regulatory developments that could impact how we operate with respect to
environmental activities, safety, protection of intellectual property, importing
or exporting of products and other areas.
ITEM 2. DESCRIPTION OF PROPERTIES
In January 2002, we moved into a new 115,000 square foot office and
manufacturing facility in Denver, Colorado. This facility serves as the Company
headquarters as well as a manufacturing and assembly facility for interactive
play equipment and children's convenience and activity products. In April 2002,
we renegotiated the lease to relinquish approximately 60,000 square feet of the
facility in order to reduce expenses and match capacity with our current needs.
The lease on this facility expires in 2012. We lease a 67,000 square foot plant
near Vancouver, British Columbia, where we manufacture and assemble indoor
modular play equipment. This lease expires in 2008. We lease an approximately
11,000 square foot facility near Austin, Texas where we manufacture foam
activity products on a month-to-month lease. Our interactive water park
equipment is manufactured at a leased 40,000 square foot facility west of
Portland, Oregon. This lease expires in 2010. Fibar's sales, marketing and
administrative operations are conducted at a leased 3,000 square foot office
facility located in Armonk, New York. This lease expires in 2004. The facility
for Park Structures is leased through 2007. As a part of the sale of Park
Structures, we subleased this property to the buyer. The sublease expires in
December 2005. 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 that were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 2002.
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq SmallCap Market under the symbol
KARE. The following table sets forth, for the periods indicated, the high and
low sales prices for our common stock for each quarter within the last two
fiscal years as reported by Nasdaq. These quotations reflect inter-dealer
prices, without retail markup, markdown or commissions and may not represent
actual transactions.
SALES PRICE
LOW HIGH
--- ----
YEAR ENDED DECEMBER 31, 2001
First quarter..........................................$3.03 $12.00
Second quarter......................................... $3.00 $4.25
Third quarter.......................................... $0.96 $5.40
Fourth quarter......................................... $0.60 $1.36
YEAR ENDED DECEMBER 31, 2002
First quarter.......................................... $0.92 $3.80
Second quarter......................................... $0.80 $2.90
Third quarter.......................................... $0.22 $0.95
Fourth quarter......................................... $0.17 $0.49
As of March 26, 2003, there were approximately 114 shareholders of
record.
We have never paid cash dividends on our common stock. Our credit agreement
contains a restrictive covenant that prohibits the payment of dividends without
the lenders' consent. We currently intend to retain any earnings for use in our
operations and do not anticipate paying cash dividends in the foreseeable
future.
Recent Issuances of Unregistered Shares
In 2000, we issued 425,761 shares of our common stock to the shareholders
of SCS as partial consideration for our purchase of all the shares of SCS. We
relied on Section 4(2) of the Securities Act of 1933 in issuing such shares. The
stock issued in this transaction was valued at approximately $5.1 million.
In 2000, we issued 49,445 shares of our common stock to the shareholders of
Fibar as partial consideration for our purchase of the assets of Fibar. We
relied on Section 4(2) of the Securities Act of 1933 in issuing such shares. The
stock issued in this transaction was valued at approximately $650,000.
14
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
(In thousands, except per share data)
INCOME STATEMENT DATA: 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Sales $ 36,454 $ 43,407 $ 46,567 $ 23,787 $ 18,950
Cost of sales 22,362 25,559 24,425 10,497 8,764
-------- -------- -------- -------- --------
Gross profit 14,092 17,848 22,142 13,290 10,186
Selling, general and administrative expense 16,993 16,024 12,944 7,056 5,436
Amortization of intangibles 1,054 1,881 1,570 466 284
-------- -------- -------- -------- --------
Income (loss) from operations (3,955) (57) 7,628 5,768 4,466
Interest expense 2,919 3,147 2,919 902 --
Other (income) expense (476) 7 (363) 12 (79)
-------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes and cumulative effect of change in accounting
principle (6,398) (3,211) 5,072 4,854 4,545
Income tax (benefit) expense (1,132) (817) 1,821 1,651 1,591
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (5,266) (2,394) 3,251 3,203 2,954
Income (loss) on discontinued operations, net of tax (6,444) 404 781 1,888 146
Cumulative effect of change in accounting principle, net
of tax (21,839) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ($33,549) ($ 1,990) $ 4,032 $ 5,091 $ 3,100
======== ======== ======== ======== ========
Net income (loss) per share - basic:
Income (loss) from continuing operations ($ 0.77) ($ 0.35) $ 0.48 $ 0.51 $ 0.58
Income (loss) from discontinued operations (0.95) 0.06 0.12 0.30 0.03
-------- -------- -------- -------- --------
(1.72) (0.29) 0.60 0.81 0.61
Cumulative effect of change in accounting principle,
net of tax (3.20) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ($ 4.92) ($ 0.29) $ 0.60 $ 0.81 $ 0.61
======== ======== ======== ======== ========
Net income (loss) per share - diluted:
Income (loss) from continuing operations ($ 0.77) $ (0.35) $ 0.47 $ 0.49 $ 0.57
Income (loss) from discontinued operations (0.95) 0.06 0.11 0.29 0.03
-------- -------- -------- -------- --------
(1.72) (0.29) 0.58 0.78 0.60
Cumulative effect of change in accounting principle,
net of tax (3.20) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ($ 4.92) ($ 0.29) $ 0.58 $ 0.78 $ 0.60
======== ======== ======== ======== ========
Weighted average common shares outstanding:
Basic 6,817 6,872 6,770 6,257 5,072
Diluted 6,817 6,872 7,001 6,516 5,198
BALANCE SHEET DATA:
Working capital (deficit) ($26,488) $ 9,413 $ 12,409 $ 7,935 $ 4,745
Total assets 47,076 83,045 91,429 48,558 41,605
Total liabilities 42,460 45,463 51,690 18,231 20,109
Shareholders' equity 4,616 37,582 39,739 30,327 21,496
Notes:
We have completed a number of acquisitions during the above periods as described
below. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for further discussion of the impact of these
acquisitions.
(A) SCS Interactive and Fibar were acquired during 2000.
(B) Superior Foam and Smart Products were acquired during 1999.
(C) Park Structures was acquired during 1998.
15
(D) Shipping and handling costs have been reclassified out of sales and
into cost of sales for all prior periods in order to be consistent
with the 2002 presentation.
(E) Park Structures was sold in January 2003. Therefore, all operating
results of Park Structures have been excluded from continuing
operations, and are presented as income (loss) from discontinued
operations.
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.
Overview
We are a leading designer, producer and worldwide marketer of innovative
commercial products, systems and custom solutions that create attractive
family-friendly environments for businesses and other public venues. Our sales
are derived from two business segments, family convenience and children's
activity products and children's modular play equipment. Our family convenience
and activity products include baby changing stations and high chairs, activity
tables, carpets and foam play products. Children's modular play equipment
includes indoor and outdoor playground equipment and interactive play equipment
used in water parks, family entertainment centers and amusement parks. We intend
to capitalize on brand name recognition established through our market-leading
Koala Bear Kare Baby Changing Station. Our sales have grown from $3.8 million in
1993 to $36.5 million in 2002, with sales growth generated by both the
acquisition of six businesses and the internal growth achieved by these
businesses during this period.
Prior to 1996, our sales were derived primarily from the sale of family
convenience products, which include Baby Changing Stations, disposable sanitary
liners for the Baby Changing Stations, Child Protection Seats, Infant Seat
Kradles and Booster Buddy Seats. One of our strategies has been to reduce our
dependence on Baby Changing Stations through the acquisition and development of
complementary products. In furtherance of this strategy, we acquired the
following businesses:
o Activities Unlimited, a manufacturer of commercial-use children's
activities products in March 1996;
o Delta Play, a provider of custom children's indoor modular play
equipment in June 1997;
o Park Structures, a producer of children's outdoor modular play
equipment in December 1998 (sold in 2003, see below);
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 Interactive, 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 20% of our sales in 2002.
In December 2002, we formalized a plan to dispose of Park Structures. We
determined that the outdoor playground equipment product line no longer fit into
our strategic plan and that the promotional and capital investment necessary to
maximize profitability of this product line was greater than our available
resources. In January 2003, we sold Park Structures for approximately $4.3
million, subject to adjustment based on the final closing balance sheet. For
financial reporting purposes, we have treated Park Structures as a discontinued
operation. Accordingly, the operating results of Park Structures have been
reported separately as discontinued operations in the consolidated statements of
operations and the assets and liabilities have been reclassified to other assets
and other liabilities in the consolidated balance sheets for all periods
presented in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." All discussions and amounts herein for all years
presented relate to continuing operations only unless otherwise noted. As such,
some discussions related to prior years have been modified to reflect
information on continuing operations only.
16
We market our products, systems and custom solutions to a wide range of
businesses and public facilities that serve customers and visitors who bring
children to their establishments. We market our products through an integrated
program of direct sales and distribution through a network of independent
manufacturer's sales representatives and dealers. Since 1995, we have increased
our sales and marketing efforts through the addition of manufacturer's sales
representatives, dealers and sales representatives.
Our gross profit margins are affected by product mix, with the Baby
Changing Station and other family convenience products and the children's
activity products typically providing higher gross profit margins than the
children's modular play equipment. The children's modular play equipment,
however, has higher average selling prices and contributes to our sales growth.
In addition, sales made through dealers provide lower gross profit margins than
direct sales due to the expense associated with the manufacturer's sales
representatives and dealers. To the extent we acquire additional companies or
product lines, our gross profit margins may be lower than those currently
achieved from sales of our current product lines due to a number of factors that
may include products with higher average selling prices but lower gross margin
percentages. Although our acquisitions have decreased the overall gross profit
margin percentages, we believe that the addition of new products and product
lines provides opportunities for revenue diversification and increased long-term
profitability, while also reducing our reliance on the Baby Changing Station.
Components of Sales and Expense
We recognize sales for the majority of our operations at either the time
our products are shipped, or when installation is complete in cases where we
perform the installation services. At SCS (included in the modular play
segment), we use the percentage of completion method of accounting because the
build-to-install timeline of their jobs is of longer duration. Revenues from
shipping and handling are included in sales. Cost of sales consists of
components manufactured for us and direct labor and overhead incurred by us.
With the exception of the foam activity products and baby changing stations, all
major components for the family convenience products and children's activity
products currently are manufactured and assembled by outside vendors. We
fabricate and assemble most of our modular play products. Cost of sales also
includes shipping and handling costs.
Selling, general and administrative expense consists primarily of
commissions paid to manufacturer's sales representatives and other selling
expenses, executive, sales, engineering and design, and office salaries, related
payroll taxes, advertising expenses and depreciation on office equipment and
computer hardware and software.
We provide limited warranties for our products. We have experienced minimal
returns and warranty claims, and therefore no accrual has been made for future
claims except for SCS, where a reserve of .75% of SCS's 2002 annual sales has
been recorded.
Critical Accounting Policies and Estimates
In preparing our financial statements, we are required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the balance
sheet and the reported amounts of revenues and expenses during the reporting
period. On an on-going basis, we evaluate our estimates and judgments, including
those related to revenue recognition, bad debts, inventories, intangible assets,
income taxes, warranty operations and contingencies and litigation. We base our
estimates and judgments on historical experience and other factors. Actual
results could differ from our estimates. Following is a discussion of some of
our more critical accounting policies and judgments.
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We make judgments
regarding these allowances based on our knowledge of the customer, historical
patterns and other factors.
We currently evaluate long-lived assets, including goodwill and other
intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. In
assessing the recoverability of long-lived assets, including goodwill and other
intangible assets, we must make assumptions regarding estimated future cash
flows and other factors, including the discount rate used, to calculate the fair
value of the respective assets. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges for these
assets.
Revenue at our SCS division is recognized on the percentage of completion
basis. Under this method, we make estimates with respect to the percentage of
completion of individual jobs and recognize revenue accordingly. Any losses
estimated on a contract would be recognized immediately.
We make judgments about the amount of warranty claims based on our
knowledge of historical warranty claims. We do not maintain a warranty reserve
at any of our divisions other than SCS.
We make judgments regarding the amount to record for future loss
contingencies related to legal actions and other disputes based on the available
information and consultation with our legal counsel.
17
The determination of our tax provision is complex and requires a number of
judgments about the recoverability of deferred tax assets, including our ability
to generate future taxable income.
New Accounting Standards
In December 2002, the Financial Accounting Standards Board ( "FASB ")
issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value-based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for our
year ended December 31, 2002 and for interim periods beginning January 1, 2003.
We will continue to apply the disclosure only provision of SFAS No. 123, as
amended by SFAS No. 148.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others - an Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34."
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligation under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year end. However, the disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. We adopted the disclosure provisions of FIN 45 in fourth
quarter 2002. We will adopt the initial recognition and measurement provisions
of FIN 45 prospectively in first quarter 2003 and do not believe such provisions
will have a significant impact on our consolidated results of operations or
financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We do not expect the adoption of this
standard to have a material effect on our consolidated results of operations or
financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 61, Amendment of FASB No. 13, and Technical
Corrections." This statement clarifies guidance related to the reporting of
gains and losses from extinguishment of debt and resolves inconsistencies
related to the required accounting treatment of certain lease modifications. The
provisions of this statement relating to extinguishment of debt became effective
for the Company on January 1, 2003. The provisions of this statement related to
lease modifications are effective for transactions occurring after May 15, 2002.
We do not expect the adoption of this standard to have a material effect on our
consolidated results of operations or financial position.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes one accounting model to be
used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects Of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." We
adopted SFAS 144 as of January 1, 2002. See Note 14 to the consolidated
financial statements for a discussion of the impact of SFAS 144 in connection
with the sale of Park Structures.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. We will adopt SFAS 143 in 2003. We do not
believe the adoption of SFAS 143 will have a material impact on our consolidated
financial statements.
In June 2001, the FASB issued SFAS 141, Business Combinations. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 also includes guidance on
the initial recognition and measurement of goodwill and other intangible assets
arising from business combinations completed after June 30, 2001. The FASB also
adopted SFAS 142, Goodwill and Other Intangible Assets, as discussed in Note 1
to the consolidated financial statements.
18
Results of Operations
The following table sets forth certain income statement data stated as a
percentage of sales:
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Sales ...................................... 100.0% 100.0% 100.0%
Cost of sales .............................. 61.3 58.9 52.5
----- ----- -----
Gross profit ............................... 38.7 41.1 47.5
Selling, general and administrative expenses 46.6 36.9 27.8
Amortization of intangibles ................ 2.9 4.3 3.4
----- ----- -----
Income (loss) from operations .............. (10.8) (0.1) 16.3
Interest expense ........................... 8.0 7.3 6.3
Other (income) expense ..................... (1.3) 0.0 (0.8)
----- ----- -----
Income (loss) from continuing operations ... (17.5) (7.4) 10.8
Income tax (benefit) expense ............... (3.1) (1.9) 3.9
----- ----- -----
Net income (loss) from continuing operations (14.4)% (5.5)% 6.9%
===== ===== =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Sales decreased 16.1%, or $7.0 million, to $36.4 million for the year ended
December 31, 2002 compared to $43.4 million for the year ended December 31,
2001.
In the family convenience and children's activity segment, sales declined
from $14.9 million in 2001 to $14.6 million in 2002. We believe the factors that
contributed to this decline included a slowing economy and tightened capital
budgets for our customers and increased sales to distributors and national
accounts at lower prices.
In the modular play equipment segment, sales decreased from $28.5 million in
2001 to $21.8 million in 2002. The decrease was due to continued uncertainty
about the economy exhibited by many customers that has resulted in an
unwillingness to commit to major projects. In addition, a change in sales
representatives at certain of our modular play divisions has negatively impacted
our sales. Finally, growth in the outdoor playground market slowed as
municipalities directed funds to alternative recreational facilities, such as
skate parks, and directed more funds toward homeland security investments
following the events of September 11, 2001.
Gross profit decreased 21.2%, or $3.7 million, to $14.1 million (38.7% of sales)
for the year ended December 31, 2002 compared to $17.8 million (41.1% of sales)
for the year ended December 31, 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 and third quarters of 2002, we sold a significant
amount of product at very low margins as part of our more comprehensive
inventory management strategy. 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 and the
second and fourth quarters of 2002.
Selling, general and administrative expense increased 6.0%, or $1.0 million
to $17.0 million for the year ended December 31, 2002 compared to $16.0 million
for the year ended December 31, 2001. Selling, general and administrative
expense as a percentage of sales increased to 46.6% of sales in 2002 compared to
36.9% in 2001 primarily due to lower sales in 2002 as compared to 2001. Sales
and marketing expense decreased 37.5%, or $2.7 million to $4.5 million for the
year ended December 31, 2002 compared to $7.2 million for the year ended
December 31, 2001. This decrease was due primarily to the lower sales and
resulting lower sales commissions. General and administrative expense increased
42.0%, or $3.7 million, to $12.5 million for the year ended December 31,
19
2002 compared to $8.8 million for the year ended December 31, 2001. The increase
in general and administrative expenses was primarily the result of one-time
costs of approximately $650,000 as we aggressively worked to settle pending or
potential litigation, as well as higher auditing, consulting and FAS 142
implementation costs, costs associated with the implementation of our new Oracle
accounting system, severance costs for our former Chief Executive Officer as
discussed below and increased rent on our new facility, partially offset by the
employee reductions that we made in the fourth quarter of 2001 and the second
and fourth quarters of 2002.
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 $873,000 to recognize this transaction during the
second quarter of 2002, of which $620,000 represents a non-cash charge related
to the forgiveness of a promissory note from Mr. Betker.
Amortization expense from intangible assets decreased from $1.9 million in
2001 to $1.1 million in 2002. This decrease is primarily because we stopped
amortizing goodwill and trademarks effective January 1, 2002 with the adoption
of SFAS 142. See Note 1 to the consolidated financial statements for further
discussion.
We incurred interest expense of $2.9 million during the year ended December
31, 2002 compared to $3.1 million during the year ended December 31, 2001. The
decrease in interest expense is due to lower borrowings in 2002 compared to
2001.
Our effective tax rate related to continuing operations was (17.7)% and
(25.4)% for the years ended December 31, 2002 and 2001, respectively. In 2002,
the low effective tax rate benefit is due to the non-deductibility of a portion
of the goodwill impairment charge associated with SCS and the establishment of a
valuation allowance for deferred tax assets related to a portion of the
remaining goodwill impairment charge.
The loss from discontinued operations of $6.4 million in 2002 consists of a
loss before income taxes of $7.4 million net of $1.0 million of income tax
benefit. In December 2002, we formalized a plan to dispose of Park Structures.
As such, the operating results of the discontinued product line have been
reported separately as discontinued operations for all periods presented. The
loss before income taxes of $7.4 million in 2002 includes impairment losses of
$5.6 million and operating costs incurred prior to the decision to dispose of
Park Structures.
Income (loss) before the cumulative effect of an accounting change was a
loss of $11.7 million in 2002 compared to a loss of $2.0 million for 2001. The
decrease is due primarily to the Park Structures loss from discontinued
operations, 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 and
the second and fourth quarters of 2002.
As discussed in Note 1 to the consolidated financial statements, we
recorded a transitional impairment charge of $21.8 million (net of taxes of $2.9
million) 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.
As a result of the factors discussed above, we incurred a net loss of $33.5
million for the year ended December 31, 2002 compared to a net loss of $2.0
million for the year ended December 31, 2001.
During the second half of 2001, we initiated an operational restructuring
with the intent of materially reducing operating costs and improving margins.
The strategy included a consolidation of manufacturing and administrative
functions into our new Denver headquarters and manufacturing facility and
personnel reductions. During 2001, we reduced our workforce by approximately 124
employees, or 31%.
With the resignation of our Chief Executive Officer in April 2002, we began
a comprehensive review of the original operational restructuring plan and
manufacturing consolidation. As a result of this review, we concluded that the
implementation of this plan would cause severe disruptions to our operations and
would require capital investment levels that we did not believe were prudent.
Because of our concerns about the impact of these disruptions on our cash flow
and liquidity, we did not consolidate the manufacturing operations to the Denver
facility. However, we did implement an aggressive cost reduction program in 2002
that included the reduction of our workforce by an additional 21 employees, or
8%, in the second and fourth quarters of 2002. The costs associated with the
reduction of our workforce in 2002 are included in selling, general and
administrative expenses and were not significant.
20
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Sales decreased 6.9%, or $3.2 million, to $43.4 million for the year ended
December 31, 2001 compared to $46.6 million for the year ended December 31,
2000.
In the family convenience and children's activity segment, sales declined
from $17.7 million in 2000 to $14.9 million in 2001. We believe the factors that
contributed to this decline included a slowing economy and tightened capital
budgets for our customers, a cutback in purchases by our customers as a result
of the events of September 11, 2001 and a falloff in sales of baby changing
stations and other activity products that we believe is related to reductions in
our direct mail program in the fourth quarter of 2001 due to the anthrax scare.
We resumed direct mailings in January 2002.
In the modular play equipment segment, sales decreased from $28.9 million
in 2000 to $28.5 million in 2001. Sales for the fourth quarter of 2001 were $6.8
million compared to $7.6 million in 2000. The decrease for the year is primarily
due to a slowing economy, the impacts of the September 11, 2001 events on the
fourth quarter and a significant reduction in the higher end themed sales by
SCS, partially offset by the inclusion of Fibar results for a full year in 2001
as compared to only four months in 2000. We believe results were negatively
impacted due to poor weather and reduced attendance at water parks in 2000,
which caused this segment of the market to significantly reduce their capital
spending for 2001.
Gross profit decreased 19.4%, or $4.2 million, to $17.9 million for the
year ended December 31, 2001 compared to $22.1 million for the year ended
December 31, 2000. The decrease was due to the decrease in sales and a change in
the sales mix. In 2001 as compared to 2000, a higher proportion of the sales
came from the modular play segment, which has lower margins than the convenience
segment. As a percentage of sales, gross profit decreased to 41.1% of sales in
2001 compared to 47.5% of sales in 2000 primarily because of the impact of the
lower sales relative to our fixed production costs. Offsetting this were the
impacts of the personnel reductions from the operational restructuring described
below.
Selling, general and administrative expense increased 23.1%, or $3.0
million, to $16.0 million for the year ended December 31, 2001 compared to $13.0
million for the year ended December 31, 2000. The majority of the increase was
due to the inclusion of SCS and Fibar for a full year in 2001 versus ten months
and four months, respectively, in 2000. Selling, general and administrative
expense as a percentage of sales increased to 36.9% of sales in 2001 compared to
27.8% in 2000 primarily due to the lower sales. Sales and marketing expense
increased 26.3%, or $1.5 million to $7.2 million for the year ended December 31,
2001 compared to $5.7 million for the year ended December 31, 2000. These cost
increases were primarily due to the inclusion of a full year of the sales and
marketing costs of the newly acquired SCS and Fibar businesses noted above.
General and administrative expense increased 20.6%, or $1.5 million, to $8.8
million for the year ended December 31, 2001 compared to $7.3 million for the
year ended December 31, 2000. Once again, the increase was primarily the result
of the inclusion of a full year of the newly acquired businesses in 2001.
Amortization expense from intangible assets increased from $1.6 million in
2000 to $1.9 million in 2001. This increase is primarily due to a full year of
amortization of goodwill and other identifiable intangible assets acquired in
the acquisitions of SCS and Fibar in 2000.
We used debt to finance the acquisitions of Park Structures in December
1998, Superior Foam and Smart Products in 1999, and SCS and Fibar in 2000. As a
result, we incurred interest expense of $3.1 million during the year ended
December 31, 2001 compared to $2.9 million during the year ended December 31,
2000. The increase in interest expense as a result of the increased borrowings
was partially offset by lower average interest rates during 2001.
Our effective tax rate related to continuing operations was (25.4)% and
35.9% for the years ended December 31, 2001 and 2000, respectively. In 2001, we
had a tax benefit due to our operating losses. The decline in our effective tax
rate for 2001 is due primarily to the relationship of our non-deductible
goodwill to our taxable loss. Because the loss for 2001 is less than our pre-tax
income in 2000, the effect of the fixed amount of non-deductible goodwill is
relatively larger on the effective tax rate.
The income from discontinued operations of $404,600 in 2001 consists of
Park Structures income before income taxes of $542,600 net of $138,000 of income
tax expense. Income from discontinued operations of $781,700 in 2000 consists of
Park Structures income before income taxes of $1,219,500 net of $437,800 of
income tax expense.
As a result of the factors discussed above, we incurred a net loss of $2.0
million for the year ended December 31, 2001 compared to net income of $4.0
million for the year ended December 31, 2000.
21
During the second half of 2001, we initiated an operational restructuring
with the intent of materially reducing operating costs and improving margins.
The strategy included a consolidation of manufacturing and administrative
functions into our new Denver headquarters and manufacturing facility, personnel
reductions and elimination of certain low margin service offerings and selected
price increases. During 2001, we reduced our workforce by approximately 124
employees, or 31%. The costs associated with the reduction of our workforce in
2001 are included in selling, general and administrative expenses and were not
significant.
Seasonality and Quarterly Financial Information (unaudited):
Our business is seasonal due primarily to the slowdown of new construction
and inability to install outdoor modular play equipment and surfacing during the
winter months in many parts of the country and the general slowdown of
purchasing by retailers during their busy holiday season. As a result, we
typically have lower sales and gross profit in the fourth quarter.
The following table sets forth selected unaudited quarterly financial
information for the years ended December 31, 2002 and 2001. The information has
been derived from unaudited statements of operations data that we believe are
stated on a basis consistent with the audited financial statements and include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information in accordance with accounting principles
generally accepted in the United States. Our results of operations for any
quarter are not necessarily indicative of the results to be expected in any
future period.
Shipping and handling costs in the first three quarters of 2001 have been
reclassified from revenues to cost of sales to be consistent with the current
year-end presentation. These reclassifications had no impact on net income or
cash flows.
----------------------------------------------------
Quarter Ended
(unaudited and in thousands, except per share data)
----------------------------------------------------
2002 Mar. 31 June 30 Sept. 30 Dec. 31
---- ------- ------- -------- -------
Sales $9,629 $8,823 $9,570 $8,432
Gross profit 4,697 2,790 3,475 3,130
Loss from continuing operations (71) (3,214) (976) (1,005)
Income (loss) before change in accounting
principle 7 (3,063) (1,246) (7,408)
Net income (loss) 7 (24,902) (1,246) (7,408)
Basic and diluted earnings (loss) per share:
Loss from continuing operations (0.01) (0.47) (0.14) (0.15)
Loss before change in accounting principle 0.00 (0.45) (0.18) (1.09)
Net loss 0.00 (3.64) (0.18) (1.09)
----------------------------------------------------
Quarter Ended
(unaudited and in thousands, except per share data)
----------------------------------------------------
2001 Mar. 31 June 30 Sept. 30 Dec. 31
---- ------- ------- -------- -------
Sales $10,868 $10,261 $12,453 $9,825
Gross profit 5,053 4,092 5,331 3,372
Income (loss) from continuing operations 51 (844) 107 (1,708)
Net income (loss) 475 (57) 14 (2,422)
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations .01 (0.12) 0.02 (0.25)
Net income (loss) .07 (.01) .00 (.35)
22
Liquidity and Capital Resources
We have financed our operations primarily from cash provided by operating
activities and from cash advanced under our revolving bank line of credit. In
addition, we have financed various acquisitions using cash advanced under the
line of credit.
Cash provided by (used in) operating activities for continuing operations
for 2002, 2001 and 2000 was $3.3 million, $1.3 million and $(1.3) million,
respectively. The increase in cash provided by operating activities for the year
ended December 31, 2002 compared to the year ended December 31, 2001 resulted
primarily from changes in working capital items as a result of our focus on
improving collections, reducing inventories and more closely managing vendor
relationships. The cash used in operating activities for the year ended December
31, 2000 resulted primarily from funding higher levels of receivables and
inventories required to support our growth and overpayment of estimated tax
installments.
Working capital as of December 31, 2002 and December 31, 2001 was ($26.5)
million and $9.4 million, respectively, and cash balances were $.3 million and
$0 for 2002 and 2001. The substantial decrease in working capital is due to the
reclassification of the credit facility as short-term as required by EITF 86-30,
which requires reclassification is required if the potential exists for
non-compliance in future quarters. The cash balances are low 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 borrowings under our line of
credit primarily for the expansion of sales and marketing activities, the
acquisition and development of new products and product lines, capital
expenditures and working capital. Net cash used in investing activities for
continuing operations was $.5 million for the year ended December 31, 2002, $1.5
million for the year ended December 31, 2001 and $23.4 million for the year
ended December 31, 2000. The decrease in cash used in investing activities was
primarily due to a heightened focus on reducing capital expenditures in 2002,
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. In 2001, we made payments of $.5 million
for holdbacks and earn-outs on prior acquisitions. In 2000, we used $22.3
million to purchase SCS and Fibar.
Net cash provided by (used in) financing activities for continuing
operations was ($3.4) million, ($1.4) million and $24.0 million for the years
ended December 31, 2002, 2001 and 2000, respectively. The use of funds in 2002
and 2001 primarily represents the net payments on our line of credit and term
loan. The source of funds in 2000 represents the purchase price in 2000 for SCS
and Fibar with the revolving credit facility from the bank.
We currently have a $6.5 million revolving credit facility and a $25.5
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 December 31, 2002, we
had approximately $.1 million available under the revolving line of credit
facility. On January 6, 2003 we received a $4.0 million cash payment for the
sale of Park Structures that was applied entirely to the revolving line of
credit. After that pay down and the recalculation of the borrowing base without
Park Structures' accounts receivable and inventory, we had approximately $1.1
million available under the revolving credit facility. There are no compensating
balance requirements and the credit facility requires compliance with financial
loan covenants related to minimum quarterly EBITDA, leverage, interest coverage
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 interest rate on the revolving line of credit and the term
loan is variable based upon the bank's prime rate. The rate was 7.0% and 7.5% at
December 31, 2002 and 2001, respectively.
We have been in non-compliance with certain covenants under our credit
facility at September 30, 2001, December 31, 2001, March 31, 2002, June 30, 2002
and September 30, 2002. We have obtained waivers of non-compliance subsequent to
each quarter end. These waivers through September 30, 2002 provided for, among
other things, (i) the infusion by July 15, 2003 of $10 million of capital into
the Company, which would be used to reduce the balance outstanding under our
term loan, (ii) extension of the due date of our line of credit to July 15,
2003, (iii) payment of up to $2 million in additional principal payments on
April 15, 2003 if we met certain EBITDA targets for 2002, and (iv) reduction of
the total line of credit commitment to $12.5 million to more accurately reflect
our expected level of borrowings. In addition, the lenders excluded any goodwill
impairments from the covenant calculations.
At December 31, 2002, we were again in non-compliance with our covenants.
On April 7, 2003, the banks agreed to waive the non-compliance and further amend
the credit facility. The waiver and amendment provided for, among other things,
(i) deferral of all scheduled principal payments on the term loan in 2003, (ii)
term loan principal payments in 2004 of $500,000 on March 15, $1 million on
March 31, $1 million on June 30 and the remaining balance of $23 million on
September 26, 2004 when the term facility terminates, (iii) renewal of the
revolving line of credit to March 15, 2004, (iv) reduction of the total line of
credit commitment to $6.5 million to more accurately reflect our expected level
of borrowings after the sale of Park Structures, (v) waiver of the requirement
for the infusion of $10 million of additional capital, and (vi) reset of the
financial covenants based on our 2003 business plan.
23
As noted above, our revolving line of credit and term loan will require
significant cash payments in the future. We have various other contractual
obligations, primarily lease agreements, that also require significant future
cash payments. The table below summarizes these future obligations.
Contractual
Obligations Total Less than 1 1-3 years 4-5 years After 5 years
----- ----------- --------- --------- -------------
year
----
Revolving line of credit $ 7,820,000 $ 0 $ 7,820,000 $ 0 $ 0
Term loan 25,500,000 0 25,500,000 0 0
Capital leases 277,226 135,643 121,978 19,605 0
Acquisition payments 269,792 269,792 0 0 0
Operating leases (1) 5,924,785 1,086,557 1,774,894 1,202,950 1,860,384
----------- ----------- ----------- ----------- -----------
Total $39,791,803 $ 1,491,992 $35,216,872 $ 1,222,555 $ 1,860,384
=========== =========== =========== =========== ===========
(1) Gives effect to lease amendment for our Denver headquarters facility
completed in April 2002, which reduces total lease obligations by $3.3 million.
We sold Park Structures in January 2003. We applied all of the $4 million
in proceeds to the repayment of bank debt. We are pursuing several initiatives
intended to increase our liquidity, including accelerating the receipt of a $2.6
million tax refund generated from the 2002 net operating loss carry-back,
facility rent reductions, aggressive cost cutting programs, aggressive inventory
and accounts receivable management and possible asset sales. For example, the
renegotiated lease for our Denver headquarters facility that we completed in
April 2003 will reduce our lease expenses by approximately $350,000 over the
next 12 months. We believe that the debt repayment deferral for 2003 and the
successful execution of our cost and liquidity initiatives will provide
sufficient cash flows to maintain our operations through at least December 31,
2003. If it appears that we will not meet our liquidity and financial covenant
targets, we will consider taking additional cost reduction steps, including
employee reductions and further spending cuts.
We have engaged in discussions with our lenders and potential investors
regarding a long-term restructuring of our credit facility and recapitalization
of our balance sheet. These discussions have included the potential sale of
certain assets of the Company to repay our debt. We also may issue equity or
debt securities in connection with a recapitalization. Any such transaction may
significantly dilute existing common shareholders. We have engaged an investment
banker to assist us in developing and executing the recapitalization plan. If we
are unable to successfully restructure our loan agreement or recapitalize the
balance sheet, the lenders may take additional steps including forcing us to
sell assets, further limiting our borrowing capacity or foreclosure.
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 $5.0 million at December 31, 2002 and
approximately $4.0 million at December 31, 2001.
We were not materially affected by changing raw materials prices in 2002
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, and steel prices, which increased materially due to the tariff
on foreign steel imports enacted in 2002.
On August 8, 2002, we were notified by Nasdaq that for the last 30
consecutive trading days, the price of the our common stock had closed below the
minimum $1.00 per share requirement for continued inclusion on The Nasdaq
National Market. We had 90 calendar days, or until November 6, 2002, to regain
compliance. On September 26, 2002, we received another notification that we did
not meet the Nasdaq minimum market value test. We applied to transfer to The
Nasdaq SmallCap Market and our application was approved. We were listed on the
SmallCap Market beginning on November 15, 2002. This gave us until February 4,
2003 to satisfy the continued inclusion requirements for the SmallCap Market. On
February 5, 2003, we were notified by Nasdaq that we were eligible to remain on
the Nasdaq SmallCap Market for an additional 180 calendar day grace period, or
until August 4, 2003, because we met the initial listing criteria for the
SmallCap Market. If our price is not at or above $1.00 for ten (10) consecutive
business days by August 4, 2003, Nasdaq could initiate delisting procedures
based on our failure to meet the minimum bid price. 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 common stock, and our
ability to raise capital through the sale of equity securities could be
impaired.
For several reasons, including but not limited to the nature and extent of
the trading of our common stock and the significant management time and costs,
such as legal, accounting and insurance costs, associated with the preparation
and filing of our periodic reports with the Securities and Exchange Commission,
we may seek to deregister our common stock from reporting under the Securities
Exchange Act of 1934. If we take this action, our obligation to file periodic
reports, including quarterly and annual reports, will be suspended and there
would be no public information regarding the company after the deregistration.
In addition, our common
24
stock will no longer be quoted on the Nasdaq SmallCap Market or, if applicable,
the OTC Bulletin Board. Our common stock might be traded on the "pink sheets,"
but we can give no assurance that this will occur. As a result, investors would
likely find it more difficult to dispose of or obtain accurate quotations for
our common stock, and our ability to sell equity securities and to raise
capital, could be impaired.
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 2002 and 2001 did not materially affect our
business during 2002 or 2001 and we do not believe, based on historical trends,
that future exchange rate fluctuations will have a material adverse impact on
our financial position, results of operations or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to our proxy statement for our 2003 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to our proxy statement for our 2003 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2002.
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 2003 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to our proxy statement for our 2003 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2002.
ITEM 14. CONTROLS AND PROCEDURES
Based upon an evaluation within 90 days prior to the filing of this report,
our President and Chief Operating Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures are effective and
sufficient to ensure that material information relating to the Company,
including our consolidated subsidiaries, is made known to them. There have been
no significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the date of this
evaluation.
25
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The Financial Statement Index is on Page F-1.
26
Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31,
Deducted from asset accounts: 2002 2001 2000
---- ---- ----
Allowance for doubtful accounts
Balance at beginning of period $ 228,923 $ 299,546 $ 131,030
Charged to expense 571,743 151,397 211,360
Forgiveness of loan from officer 652,837
Amount from acquisition -- -- 85,000
Deducted for loan from officer (652,837) -- --
Deducted (403,831) (222,020) (127,844)
--------- --------- ---------
Balance at end of period $ 396,835 $ 228,923 $ 299,546
========= ========= =========
Exhibits and Reports on Form 8-K
Exhibit
No. Description
--- -----------
3.1 Articles of Incorporation of Koala Corporation (3)
3.2 Bylaws of Koala Corporation (3)
4.1 Specimen Common Stock Certificate (1)
4.2 Rights Agreement dated November 7, 2000 by and between Koala
Corporation and Computershare Trust Company (7)
10.1 Incentive Stock Option Plan dated August 19, 1993 (1)+
10.2 Koala Corporation 1995 Stock Option Plan, as amended (3)+
10.3 Credit Agreement with U.S. Bank National Association (4)
10.4 Agreement for Sale and Purchase of Assets dated June 23, 1997 between
Delta Play, Ltd., et al and Koala Corporation (2)
10.5 Registration Rights Agreement dated June 23, 1997 between Delta Play,
Ltd., and Koala Corporation (2)
10.6 Indenture dated March 31, 1998 among Vanac Development Corp., Delta
Play Company and Koala Corporation
10.7 Stock and Asset Purchase Agreement dated March 1, 2000 by and among
Koala Coporation, the shareholders of SCS Interactive, Inc. and Rick
Briggs (6)
10.8 Form of Revolving Credit Agreement, dated November 17, 2000, between
Koala Corporation and U.S. Bank National Association (8)
10.9 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 (5)
10.10 Lease Agreement Dated March 16, 2000 between Dove Valley Business
Center, LLP and Koala Corporation (9)
10.11 Amended and Restated Revolving Credit Agreement among Koala
Corporation, U.S. Bank National Association, as agent for the lenders,
and Other Lenders Party Hereto, dated September 26, 2001. (10)
10.12 Amendment No. 1 to the Amended and Restated Revolving Credit, Term
Loan and Security Agreement (11)
10.13 Waiver and Amendment No. 2 to the Amended and Restated Revolving
Credit, Term Loan and Security Agreement (12)
10.14 Waiver and Amendment No. 3 to the Amended and Restated Revolving
Credit, Term Loan and Security Agreement (13)
10.15 Waiver and Amendment No. 4 to the Amended and Restated Revolving
Credit, Term Loan and Security Agreement (13)
10.16 Asset Purchase Agreement by and among PS Commercial Play LLC, Playcore
Wisconsin, PS Florida and Koala Corporation dated as of January 6,
2003 (14)
10.17 Amendment No. 5 to the Amended and Restated Revolving Credit, Term
Loan and Security Agreement*
10.18 Amendment No. 6 to the Amended and Restated Revolving Credit, Term
Loan and Security Agreement*
21.1 Subsidiaries*
23.1 Consent of Independent Auditors*
99.1 Certification of James A. Zazenski*
99.2 Certification of Jeffrey L. Vigil*
27
(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 exhibits included in the Company's Form
8-K filed on July 8, 1997.
(3) Incorporated by reference to the exhibits included in the Company's
Registration Statement on Form SB-2, Registration No. 333-61551.
(4) Incorporated by reference to the exhibits included in the Company's
Form 10-QSB for the quarter ended June 30, 1997
(5) Incorporated by reference to the exhibits included in the Company's
Form 8-K filed on April 2, 1999
(6) Incorporated by reference to the exhibits included in the Company's
Form 8-K filed on March 15, 2000
(7) Incorporated by reference to the exhibits included in the Company's
Form 8-A filed on November 8, 2000
(8) Incorporated by reference to the exhibits included in the Company's
Form 8-K filed on November 21, 2000
(9) Incorporated by reference to the exhibits included in the Company's
Form 10-K for the fiscal year ended December 31, 2000
(10) Incorporated by reference to the exhibits included in the Company's
Form 8-K filed on October 4, 2001
(11) Incorporated by reference to the exhibits included in the Company's
Form 10-Q for the quarter ended September 30, 2001
(12) Incorporated by reference to the exhibits included in the Company's
Form 10-K for the fiscal year ended December 31, 2001
(13) Incorporated by reference to the exhibits included in the Company's
Form 10-Q for the quarter ended June 30, 2002
(14) Incorporated by reference to the exhibits included in the Company's
Form 8-K filed on January 8, 2003
* Filed herewith.
+ Identifies Exhibit that consists of or includes a management contract or
compensatory plan or arrangement
a. Reports on Form 8-K
o On December 4, 2002, the Company filed a report on Form 8-K
regarding the resignation of Michael C. Franson as a director of
the Company.
28
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 15, 2003 By: /s/ James A. Zazenski
----------------------
James A. Zazenski, President and
Chief Operating Officer
Date: April 15, 2003 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/ John T. Pfannenstein Director and Chairman April 15, 2003
- --------------------------
John T. Pfannenstein
/s/ Nancy Pierce Director April 15, 2003
- --------------------------
Nancy Pierce
/s/ Randy Stein Director April 15, 2003
- --------------------------
Randy Stein
/s/ Richard Akright Director April 15, 2003
- --------------------------
Richard Akright
29
KOALA CORPORATION
CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, James A. Zazenski, certify that:
1. I have reviewed this annual report on Form 10-K of Koala Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 15, 2003
/s/ James A. Zazenski
--------------------------
James A. Zazenski
President and Chief
Operating Officer
(Principal Executive Officer)
30
KOALA CORPORATION
CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Jeffrey L. Vigil, certify that:
1. I have reviewed this annual report on Form 10-K of Koala Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
c) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Jeffrey L. Vigil
--------------------------
Jeffrey L. Vigil
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
31
KOALA CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2002 AND 2001 AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2002
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
SHAREHOLDERS AND
BOARD OF DIRECTORS
KOALA CORPORATION
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of KOALA
CORPORATION (a Colorado corporation) as of December 31, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002, 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.
The accompanying financial statements have been prepared assuming that KOALA
CORPORATION will continue as a going concern. As more fully described in Note 1,
the Company has incurred recurring operating losses and has a working capital
deficiency. In addition, the Company has not complied with certain covenants of
loan agreements with its banks. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
/s/ ERNST & YOUNG LLP
Denver, Colorado
April 7, 2003
F-2
KOALA CORPORATION
- ---------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
------------ ------------
ASSETS
------
Current Assets
Cash and cash equivalents $ 318,986 $ --
Accounts receivable, trade (less allowance for doubtful accounts
of $396,835 in 2002 and $228,923 in 2001) 3,713,722 5,421,970
Unbilled receivables 1,363,684 1,298,404
Tax refund and other receivables 3,344,346 2,831,491
Inventories 4,781,804 6,205,280
Prepaid expenses and other 746,350 1,088,460
------------ ------------
Total current assets 14,268,892 16,845,605
Property and equipment (net of accumulated depreciation
of $3,062,392 in 2002 and $2,261,767 in 2001) 2,956,907 3,175,489
Identifiable intangible assets (net of accumulated amortization
of $4,422,409 in 2002 and $3,365,357 in 2001) 20,137,158 21,108,616
Goodwill (net of accumulated amortization
of $335,580 in 2002 and $1,328,437 in 2001) 3,761,567 20,404,036
Other 103,097 29,396
Assets of discontinued operations 5,848,854 21,481,658
------------ ------------
$ 47,076,475 $ 83,044,800
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable $ 2,464,674 $ 2,219,515
Accrued expenses and other 4,702,450 2,511,537
Acquisition liability 269,792 702,130
Current portion of credit facility 33,320,000 2,000,000
------------ ------------
Total current liabilities 40,756,916 7,433,182
------------ ------------
Long Term Liabilities:
Deferred income taxes and other 141,544 2,130,086
Credit facility -- 34,600,000
------------ ------------
Total long term liabilities 141,544 36,730,086
------------ ------------
Liabilities of discontinued operations 1,561,968 1,299,488
------------ ------------
Total liabilities 42,460,428 45,462,756
------------ ------------
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 6,778,334 in 2002 and 6,872,334 in 2001 677,833 687,233
Notes receivable from officer -- (715,195)
Additional paid-in capital 20,147,314 20,256,774
Accumulated other comprehensive loss (207,913) (194,351)
Retained earnings (deficit) (16,001,187) 17,547,583
------------ ------------
Total shareholders' equity 4,616,047 37,582,044
------------ ------------
$ 47,076,475 $ 83,044,800
============ ============
See notes to consolidated financial statements
F-3
KOALA CORPORATION
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2002 2001 2000
------------ ------------ ------------
Sales $ 36,454,255 $ 43,406,770 $ 46,566,956
Cost of sales 22,362,406 25,558,573 24,425,272
------------ ------------ ------------
Gross profit 14,091,849 17,848,197 22,141,684
Selling, general and administrative expenses 16,993,338 16,024,347 12,943,959
Amortization of intangibles 1,053,641 1,880,885 1,570,297
------------ ------------ ------------
Income (loss) from operations (3,955,130) (57,035) 7,627,428
Other (income) expense:
Interest expense 2,919,226 3,147,327 2,919,465
Interest income (11,495) (18,808) (10,138)
Other (464,635) 25,906 (353,205)
------------ ------------ ------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle (6,398,226) (3,211,460) 5,071,306
Income tax (benefit) expense (1,131,902) (816,791) 1,820,598
------------ ------------ ------------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (5,266,324) (2,394,669) 3,250,708
Discontinued operations:
Income (loss) from operation of discontinued operations (7,400,629) 542,598 1,219,495
Income tax expense (benefit) (956,901) 138,002 437,799
------------ ------------ ------------
Income (loss) from discontinued operations (6,443,728) 404,596 781,696
------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle (11,710,052) (1,990,073) 4,032,404
Cumulative effect of change in accounting principle,
net of tax of $2,893,692 (21,838,718) -- --
------------ ------------ ------------
Net income (loss) $(33,548,770) $ (1,990,073) $ 4,032,404
============ ============ ============
Net income (loss) per share - basic:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (0.77) $ (0.35) $ 0.48
Income (loss) from discontinued operations (0.95) 0.06 0.12
------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle (1.72) (0.29) 0.60
Cumulative effect of change in accounting principle (3.20) -- --
------------ ------------ ------------
Net income (loss) $ (4.92) $ (0.29) $ 0.60
============ ============ ============
Net income (loss) per share - diluted:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (0.77) $ (0.35) $ 0.46
Income (loss) from discontinued operations (0.95) 0.06 0.11
------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle (1.72) (0.29) 0.58
Cumulative effect of change in accounting principle (3.20) -- --
------------ ------------ ------------
Net income (loss) $ (4.92) $ (0.29) $ 0.58
============ ============ ============
Weighted average shares outstanding - basic 6,817,222 6,872,334 6,769,508
============ ============ ============
Weighted average shares outstanding - diluted 6,817,222 6,872,334 7,000,986
============ ============ ============
See notes to consolidated financial statements
F-4
KOALA CORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Note Additional Other
Common Stock Receivable Paid-In Comprehensive Retained
Shares Amount Officer Capital Loss Earnings Total
----------------------------------------------------------------------------------------------------
Balance, December 31, 1999 6,397,128 $ 639,713 $(383,505) $14,596,294 $(31,038) $15,505,252 $30,326,716
Net income 4,032,404 4,032,404
Foreign currency translation
adjustment (16,196) (16,196)
-------------
Comprehensive income 4,016,208
Issuance of common stock for
acquisitions 475,206 47,520 5,660,480 5,708,000
Note receivable from officer,
including accrued interest (311,666) (311,666)
----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 6,872,334 687,233 (695,171) 20,256,774 (47,234) 19,537,656 39,739,258
Net loss (1,990,073) (1,990,073)
Foreign currency translation
adjustment (147,117) (147,117)
-------------
Comprehensive loss (2,137,190)
Note receivable from officer,
including accrued interest (20,024) (20,024)
----------------------------------------------------------------------------------------------------
Balance, December 31, 2001 6,872,334 687,233 (715,195) 20,256,774 (194,351) 17,547,583 37,582,044
Net loss (33,548,770) (33,548,770)
Foreign currency translation
adjustment (13,562) (13,562)
-------------
Comprehensive loss (33,562,332)
Forgiveness of note receivable
from officer 715,195 715,195
Return of common stock
from officer (80,000) (8,000) (87,200) (95,200)
Purchase of common stock (14,000) (1,400) (22,260) (23,660)
----------------------------------------------------------------------------------------------------
Balance, December 31, 2002 6,778,334 $ 677,833 $ -- $20,147,314 $(207,913) $(16,001,187) $4,616,047
====================================================================================================
See notes to consolidated financial statements
F-5
KOALA CORPORATION
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2002 2001 2000
------------- ------------ ------------
Cash flows from operating activities:
Net income (loss) ($33,548,770) ($ 1,990,073) $ 4,032,404
Loss (Income) from discontinued operations 6,443,728 (404,596) (781,696)
------------ ------------ ------------
($27,105,042) ($ 2,394,669) $ 3,250,708
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 779,209 722,783 626,079
Amortization 1,053,642 1,880,885 1,568,599
Forgiveness of note receivable from officer 619,995 -- --
Goodwill impairment 24,732,410 -- --
Deferred income tax expense (1,788,368) 348,834 345,028
Accrued interest on notes receivable from officer -- (20,024) (68,666)
Other 17,299 -- --
Changes in operating assets and liabilities:
Accounts receivable, trade 1,717,012 1,900,552 3,265,664
Unbilled receivables (65,280) 2,150,468 (3,448,872)
Tax refund receivable and other receivables 612,575 (1,352,058) (2,559,988)
Inventories 1,431,105 582,766 (2,704,316)
Prepaid expenses and other 47,856 206,627 35,465
Accounts payable 243,395 (2,562,444) 1,717,655
Acquisition liability (432,338) -- --
Accrued expenses, income taxes, and other 1,450,757 (156,768) (3,368,365)
------------ ------------ ------------
Net cash provided by (used in) continuing operations 3,314,227 1,306,952 (1,341,009)
Net cash provided by discontinued operations 1,095,136 1,357,531 959,173
------------ ------------ ------------
Net cash provided by (used in) operating activities 4,409,363 2,664,483 (381,836)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (421,350) (692,247) (586,442)
Acquisitions, net of cash acquired -- (470,580) (22,339,742)
Intangibles and other (85,381) (303,207) (205,012)
Advance to officer -- -- (243,000)
------------ ------------ ------------
Net cash used in continuing operations (506,731) (1,466,034) (23,374,196)
Net cash used in discontinued operations (134,148) (123,114) (211,922)
------------ ------------ ------------
Net cash used in investing activities (640,879) (1,589,148) (23,586,118)
------------ ------------ ------------
Cash flows from financing activities:
Purchase of common stock (23,660) -- --
Principal payments on capital leases (110,800) (40,392) --
Net proceeds from (repayments on) credit facility (3,280,000) (1,390,000) 24,011,000
------------ ------------ ------------
Net cash provided by (used in) continuing operations (3,414,460) (1,430,392) 24,011,000
Net cash used in discontinued operations -- (1,000) --
------------ ------------ ------------
Net cash provided by (used in) financing activities (3,414,460) (1,431,392) 24,011,000
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents (35,038) 155,271 (16,196)
Net increase (decrease) in cash and cash equivalents 318,986 (200,786) 26,850
Cash and cash equivalents, at beginning of period -- 200,786 173,936
------------ ------------ ------------
Cash and cash equivalents, at end of period $ 318,986 $ -- $ 200,786
============ ============ ============
See notes to consolidated financial statements
F-6
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies:
Nature of operations and business conditions:
Koala Corporation and its wholly owned subsidiaries (the "Company") is
a 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.
The Company has recorded recurring losses from continuing operations of
$2.4 million and $5.3 million during the years ended December 31, 2001
and 2002, respectively. These losses caused it to be in default on
certain of its debt covenants for the quarters ended June 30, September
30, and December 31 of 2001 and 2002. Based upon the Company's
historical operating performance, it is difficult to predict the
Company's ability to remain in compliance with its debt covenants again
during 2003. The uncertainty about the Company's ability to generate
adequate cash flow to service its debt and meet its debt covenants
raises doubt about the Company's ability to continue as a going
concern.
The Company is pursuing several initiatives intended to increase its
liquidity, including accelerating the receipt of a $2.6 million tax
refund generated from the 2002 net operating loss carry-back, building
lease rent reductions, aggressive cost cutting programs, aggressive
inventory management and possible asset sales. As discussed in Note 3,
the Company entered into an agreement with its lenders on April 7, 2003
which waives the existing violations of those covenants, modifies the
covenants and defers all scheduled 2003 term loan payments until March
2004.
The Company believes that the debt repayment deferral for 2003 and the
successful implementation of its cost and liquidity initiatives will
provide sufficient cash flows to maintain its operations through at
least December 31, 2003. If it appears that the Company will not meet
the covenant targets, it will consider taking additional cost reduction
steps, including employee reductions and further spending cuts.
As discussed in Note 14, the Company sold the assets of Park Structures
on January 6, 2003. The Company made the decision to dispose of Park
Structures during the fourth quarter of 2002. Accordingly, the
operating results of Park Structures have been reported separately as
discontinued operations in the consolidated statements of operations
and the assets and liabilities have been reclassified to other assets
and other liabilities in the consolidated balance sheets for all
periods presented. See Note 14 for further discussion on discontinued
operations.
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.
F-7
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
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, 2002 and
2001, 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, 2002, cash and cash
equivalents consisted solely of cash in the primary banking
institution. At December 31, 2001, cash overdrafts of $131,800 have
been recorded as a liability.
Inventories:
Inventories are stated at the lower of cost (including overhead) or
market (first-in, first-out). As of December 31, 2002 and 2001,
inventories consisted of the following:
2002 2001
---------- ----------
Raw materials $3,295,028 $3,827,463
Work-in-process and finished goods 1,486,776 2,377,817
---------- ----------
$4,781,804 $6,205,280
========== ==========
Property and equipment:
Property and equipment is stated at the lower of depreciated cost or
net realizable value. Depreciation and amortization is being provided
on the straight-line method over the estimated useful life of the
asset. The following is a schedule of estimated useful lives of
property and equipment:
Furniture and fixtures 7 years
Tooling and molds 6-10 years
Software 3-5 years
Shop and office equipment 3-10 years
Leasehold improvements 3-5 years
F-8
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
Property and equipment consist of the following at December 31:
2002 2001
---- ----
Tooling and molds $2,004,517 $1,952,926
Office equipment and software 2,427,059 2,699,741
Leasehold improvements 543,193 71,800
Furniture and fixtures 456,421 388,142
Shop equipment 588,109 324,647
---------- ----------
6,019,299 5,437,256
Less: accumulated depreciation 3,062,392 2,261,767
---------- ----------
$2,956,907 $3,175,489
========== ==========
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. 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 30 years.
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 of 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
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 $21,838,718 (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
F-9
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
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.
During the fourth quarter, the Company performed the required annual
review of the recoverability of goodwill for all of its reporting units
with goodwill balances as of September 30, 2002. No adjustment was
required under SFAS 142 based on the results of this review.
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 at December 31:
2002 2001
------------------------ --------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized Intangible Assets:
Patents $10,891,396 $ 2,030,135 $10,806,015 $ 1,309,509
Trade secrets 5,500,000 687,499 5,500,000 504,166
Product designs 4,044,409 752,711 4,044,409 617,897
Other 151,963 100,165 151,750 81,886
----------- ----------- ----------- -----------
Total $20,587,768 $ 3,570,510 $20,502,174 $ 2,513,458
=========== =========== =========== ===========
Unamortized Intangible Assets:
Trademarks $ 3,971,799 $ 851,899 $ 3,971,799 $ 851,899
=========== =========== =========== ===========
Estimated amortization expense for each of the following years ending
December 31 is as follows:
2003 $1,053,000
2004 1,044,000
2005 1,041,000
2006 1,041,000
2007 1,041,000
The weighted average amortization period for each of the amortized
intangible assets at December 31, 2002 is as follows:
Patents 15.2 years
Trade secrets 30.0 years
Product designs 30.0 years
Other 8.6 years
Total 23.8 years
F-10
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
The changes in the carrying amounts of goodwill are as follows for the
year ended December 31, 2002:
Convenience
and Activity Modular Play
Products Equipment Total
-------- --------- -----
Balance as of January 1, 2002 $ 1,001,566 $ 19,402,470 $ 20,404,036
Cumulative effect of accounting change -- (16,535,020) (16,535,020)
Other -- (107,449) (107,449)
------------ ------------ ------------
Balance as of December 31, 2002 $ 1,001,566 $ 2,760,001 $ 3,761,567
============ ============ ============
The following table shows the pro forma impact of not amortizing
goodwill and the trademarks in the prior year on income (loss) before
cumulative effect of change in accounting principle and earnings per
share:
For the year ended December 31, 2002 2001 2000
---- ---- ----
Reported income (loss) before cumulative
effect of change in accounting principle
$ (11,710,052) $ (1,990,073) $ 4,032,404
Add back goodwill amortization -- 812,506 664,389
Add back trademark amortization -- 70,569 70,569
-------------- ------------- -------------
Adjusted income (loss) $ (11,710,052) $ (1,106,998) $ 4,767,362
============== ============= =============
Basic earnings per share:
Reported income (loss) before cumulative
effect of change in accounting principle
$ (1.72) $ (0.29) $ 0.60
Goodwill amortization -- 0.12 0.09
Trademark amortization -- 0.01 0.01
-------------- ------------- -------------
Adjusted income (loss) $ (1.72) $ (0.16) $ 0.70
============== ============= =============
Diluted earnings per share:
Reported income (loss) before cumulative
effect of change in accounting principle
$ (1.72) $ (0.29) $ 0.58
Goodwill amortization -- 0.12 0.09
Trademark amortization -- 0.01 0.01
-------------- ------------- -------------
Adjusted income (loss) $ (1.72) $ (0.16) $ 0.68
============== ============= =============
Revenue recognition:
The Company recognizes revenues for the majority of its operations at
either the time its products are shipped, or when installation is
complete in cases where the Company performs the installation services.
At SCS Interactive (included in the Company's modular play equipment
segment), the percentage of completion method of accounting is utilized
because the build to install timeline of its jobs is of longer
duration. The percentage of completion is measured using actual costs
compared to total estimated
F-11
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
costs. Revenues from shipping and handling are included in sales.
Shipping and handling costs are included in cost of sales.
Advertising costs:
Advertising costs, except for the preparation of catalog materials, are
expensed when incurred. Costs of preparing catalog materials are
deferred and amortized over the life of the catalog, typically one
year. Advertising expenses for the periods ended December 31, 2002,
2001 and 2000 were $801,825, $1,684,525 and $1,810,500, respectively.
Income taxes:
The Company provides for deferred taxes on temporary differences
arising from assets and liabilities whose bases are different for
financial reporting and state, federal and foreign income tax purposes.
The differences relate primarily to depreciable and amortizable assets,
certain accrued expenses and the allowance for uncollectible accounts.
For foreign corporate income taxes paid, the Company will utilize a
foreign tax credit against the federal corporate income tax liability.
Foreign currency translation:
The financial statements of the Company's subsidiaries located outside
the United States are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date. Income
and expense items are translated at average rates of exchange. The
resultant translation adjustments are included in equity adjustment
from translation, a separate component of shareholders' equity. Gains
and losses on foreign currency transactions are included in operations.
The net foreign exchange losses for the year ended December 31, 2002
and 2001 were $18,305 and $195,234, respectively. The amount in 2000
was not significant.
Earnings per share
The following table provides a reconciliation of the numerator and
denominator for earnings (loss) per share:
December 31,
------------
2002 2001 2000
---- ---- ----
Net income (loss) $(33,548,770) $ (1,990,073) $ 4,032,404
============ ============ ============
Shares outstanding 6,817,222 6,872,334 6,769,508
Net effect of dilutive options -- -- 231,478
------------ ------------ ------------
Dilutive shares outstanding 6,817,222 6,872,334 7,000,986
============ ============ ============
F-12
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
Options outstanding of 517,500, 1,044,500 and 43,750 at December 31,
2002, 2001 and 2000, respectively, have been excluded from the above
calculation because they were not considered common share equivalents
or because their effect would be anti-dilutive.
Stock Option Compensation
As more fully described in Note 6, the Company operates a stock option
plan. The Company has elected to account for stock-based compensation
arrangements using the intrinsic value method under the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees". Under this method, stock compensation is
recognized to the extent that the exercise price is less than the
market price for the underlying stock on the date of grant.
Accordingly, no compensation cost has been recognized for the plans in
2002, 2001 or 2000. FASB Statement No. 123, "Accounting for Stock
Compensation", and FASB Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123.", require certain disclosures as if stock
compensation had been determined using fair value methodologies. Had
compensation cost been determined on the basis of fair value pursuant
to FASB Statement No. 123, net income (loss) and earnings (loss) per
share would have been presented as follows:
Net income (loss) 2002 2001 2000
------------------- ---- ---- ----
As reported $(33,548,770) $(1,990,073) $ 4,032,404
============ =========== =============
Pro forma (FASB 123) $(33,644,770) $(2,432,156) $ 3,471,723
============ =========== =============
Basic earnings (loss) per share
As reported $ (4.92) $ (.29) $ .60
============ =========== =============
Pro forma (FASB 123) $ (4.94) $ (.35) $ .51
============ =========== =============
Diluted earnings (loss) per share
As reported $ (4.92) $ (.29) $ .58
============ =========== =============
Pro forma (FASB 123) $ (4.94) $ (.35) $ .50
============ =========== =============
New Accounting Pronouncements:
In December 2002, the Financial Accounting Standards Board ( "FASB ")
issued SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No. 123."
SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent
F-13
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
disclosures in both annual and interim financial statements about the
method of accounting for stock based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is
effective for the Company's year ended December 31, 2002 and for its
interim periods beginning January 1, 2003. The Company will continue to
apply the disclosure only provision of SFAS No. 123 and SFAS No. 148,
as presented above.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others -
an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission
of FASB Interpretation No. 34." FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements
about its obligation under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantor's fiscal year end. However, the
disclosure requirements in FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002.
The Company adopted the disclosure provisions of FIN 45 in fourth
quarter 2002. The Company will adopt the initial recognition and
measurement provisions of FIN 45 prospectively in first quarter 2003
and does not believe such provisions will have a significant impact on
the Company's consolidated results of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December
31, 2002. Management does not expect that adoption of this standard
will have a material effect on the Company's consolidated results of
operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 61, Amendment of FASB No. 13, and Technical
Corrections." This statement clarifies guidance related to the
reporting of gains and losses from extinguishment of debt and resolves
inconsistencies related to the required accounting treatment of certain
lease modifications. The provisions of this statement relating to
extinguishment of debt become effective for the Company on January 1,
2003. The provisions of this statement related to lease modifications
are effective for transactions occurring after May 15, 2002. Management
does not expect that adoption of this standard will have a material
effect on the Company's consolidated results of operations or financial
position.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes one accounting
model to be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more
disposal transactions. SFAS 144 supercedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of and the
accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects Of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The
Company adopted SFAS 144 as of January 1, 2002.
F-14
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
In June 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The
Company will adopt SFAS 143 in 2003. The Company does not believe the
adoption of SFAS 143 will have a material impact on the consolidated
financial statements.
In June 2001, the FASB issued SFAS 141, Business Combinations. SFAS 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also
includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. The FASB also issued SFAS 142, Goodwill
and Other Intangible Assets, as previously discussed.
Reclassifications:
Certain items have been reclassified in the prior year financial
statements to conform to the current year presentation. These consist
primarily of a reclassification of shipping and handling costs out of
revenue and into cost of sales. These reclassifications had no effect
on net income or cash flows.
2. Debt:
The following is a summary of the Company's debt as of December 31,:
2002 2001
---- ----
$12.5 million revolving credit facility (reduced to $6.5
million after December 31, 2002), maturing March 15, 2004,
interest payable monthly at bank's prime rate plus a
variable margin, effective rate at December 31, 2002 and
2001 was 7.0% and 7.25%, respectively $7,820,000 $9,600,000
Term loan, maturing on September 26, 2004, principal
payments of $500,000 at March 15, 2004, $1,000,000 at March
31, 2004, and $1,000,000 at June 30, 2004, interest payable
monthly at bank's prime rate plus a variable margin,
effective rate at December 31, 2002 was 7.0%. 25,500,000 27,000,000
---------- ----------
$33,320,000 $36,600,000
=========== ===========
In the third quarter of 2001, the Company amended and restated its
existing $45 million revolving credit facility and established a
revolving credit facility in the amount of $14 million and a term loan
in the amount of $28 million (the "New Credit Facility"). This facility
is secured by substantially all of the assets of the Company and
requires compliance with financial loan covenants related to leverage,
interest coverage, fixed charges and capital expenditures. Availability
under the revolving credit facility is determined by a formula based on
inventory and accounts receivable balances.
F-15
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
2. Debt (continued):
A commitment fee of .50% per annum is payable quarterly based on the
average daily unused portion of the revolving line of credit.
At September 30, 2001, the Company was not in compliance with the
financial covenants for maximum leverage ratio and minimum interest
coverage ratio. The Company obtained a waiver of such non-compliance
which is contained in Amendment No. 1 to the New Credit Facility. The
waiver required, among other things, the infusion of $10 million of
capital into the Company by March 31, 2002, which would be used to
reduce the amounts outstanding under the term loan, and set new
covenants.
At December 31, 2001, the Company was again in default of certain
covenants under that indebtedness. On April 1, 2002, the Company
obtained a waiver of such non-compliance, which is contained in
Amendment No. 2 to the New Credit Facility. Under the amendment, the
due date of the line of credit 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 and the covenants were reset. The amendment also required the
Company to make up to $2 million in additional principal payments on
April 15, 2003 if certain EBITDA targets were met for 2002.
At December 31, 2002, the Company was again in default of the covenants
under that indebtedness. On April 7, 2003, the Company obtained a
waiver of such non-compliance, which is contained in Amendment No. 6 to
the New Credit Facility. Under the amendment, all principal payments on
the term loan were deferred until 2004. A $500,000 principal payment
will be due on March 15, 2004, followed by $1 million quarterly
installments on March 31 and June 30, 2004. The above requirement for
the infusion of $10 million of additional capital was also waived, and
the covenants reset. 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 following is a summary of the debt maturities as of December 31,
2002:
2003 $ 0
2004 33,320,000
----------
Total $ 33,320,000
============
3. Supplemental financial information:
2002 2001 2000
---- ---- ----
Interest received $ 11,495 $ 16,248 $ 21,044
=========== =========== ===========
Interest paid $ 2,939,563 $ 3,236,001 $ 2,932,413
=========== =========== ===========
Income taxes paid $ 22,686 $ 149,508 $ 3,272,029
=========== =========== ===========
F-16
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
4. Capital lease:
The Company entered into capital leases for certain equipment and
software in 2002 and 2001. The amounts are included in equipment and
accumulated depreciation as follows:
December 31,
2002 2001
---- ----
Equipment $ 449,915 $ 183,996
Accumulated depreciation 138,811 19,582
Amortization expense for these leases for the years ended December 31,
2002 and 2001 was $99,043 and $19,582 respectively. Future payments due
under these leases at December 31, 2002 are as follows:
2003 $ 157,663
2004 107,028
2005 21,984
2006 18,420
Thereafter 3,070
-------
Total 308,165
Less amounts
representing interest 30,939
--------
Total $ 277,226
=========
Current portion $ 135,682
=========
Non-current portion $ 141,544
=========
5. Commitments and contingencies:
Operating leases:
The Company has entered into operating leases for facilities located in
Denver, Colorado, Coral Springs, Florida, Tillamook, Oregon, Armonk,
New York, Wimberley, Texas, and Delta, British Columbia, Canada. As
more fully described in Note 14, the facility in Coral Springs, Florida
has been subleased to a third party. The Company has other operating
leases for equipment and furniture and fixtures.
The lease terms vary and run through December 31, 2012. One of the
leases contains a five year renewal option. All of the building leases
call for monthly base rents, with the Company responsible for its share
of common building operating costs, payable on a monthly basis.
F-17
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
5. Commitments and contingencies (continued):
Rent expense was $1,356,340, $1,132,800 and $968,200 for the years
ended December 31, 2002, 2001 and 2000, respectively. Total minimum
operating lease commitments are as follows:
Year Ending December 31, Amount
------------------------ ------
2003 $ 1,086,557
2004 1,012,128
2005 762,766
2006 686,380
2007 516,570
Thereafter 1,860,384
-----------
5,924,785
Less: sublease income 432,000
-----------
$ 5,492,785
Warranties:
For family convenience and children's activity products, the Company
provides a replacement guarantee for one year from purchase protecting
against damage from natural disasters or vandalism subject to a $100
deductible. The Company also provides a five-year warranty on parts and
labor covering any defects in workmanship. For modular play equipment,
the Company provides warranties ranging from a one-year limited
warranty on parts and labor covering defects in workmanship to a
lifetime warranty on certain metal parts. The Company has experienced
minimal returns and warranty claims, except for SCS Interactive where a
warranty accrual of .75% of 2002 and 2001 sales has been recorded.
6. Stock options:
The Company adopted a stock option plan in August 1993 (the 1993 Plan).
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 (the 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.
F-18
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
6. Stock options (continued):
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 2002 2001 2000
---------- ---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate -
5 year 4.33 % 4.51 % 5.00%
Expected life 5 years 5 years 5 years
Expected volatility 148.0% 89.80% 47.20%
Following is a summary of the status of the plans during 2002, 2001 and
2000:
2002 2001 1999
---- ---- ----
Options exercisable 346,600 707,700 614,800
======= ======= =======
Weighted average fair value of
options granted during the year $1.60 $1.50 $6.84
===== ===== =====
F-19
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
6. Stock options (continued):
Following is a summary of the status of the plans for the years ended
December 31, 2002, 2001 and 2000:
Number of Weighted Average
Shares Exercise Price Price
------ -------------- -----
Outstanding, December 31, 1999 965,000 $ 8.47 $ 4.63 to $16.38
Granted 128,500 $12.99 $10.00 to $15.00
Forfeited (39,000) $10.51 $ 7.25 to $16.00
--------
Outstanding, December 31, 2000 1,054,500 $ 8.95 $ 4.63 to $16.38
Granted 36,000 $ 1.97 $ 1.06 to $ 3.25
Forfeited (46,000) $12.54 $ 6.50 to $13.88
--------
Outstanding, December 31, 2001 1,044,500 $ 8.56 $ 1.06 to $16.38
=========
Granted 92,000 $ 1.18 $ 1.06 to $ 1.75
Forfeited (619,000) $ 7.37 $ 1.75 to $14.00
---------
Outstanding, December 31, 2002 517,500 $ 9.45 $ 1.06 to $16.38
=======
A summary of the status of fixed options outstanding at December 31,
2002 is as follows:
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Price Number Life Price Number Price
----- ------ ---- ----- ------ -----
$1.06 to $4.63 78,000 8.82 years $1.85 24,000 $1.33
$5.63 to $7.50 42,000 4.26 years $6.98 42,000 $6.98
$8.00 to $11.50 227,500 5.27 years $9.85 174,600 $9.81
$12.25 to $16.38 170,000 6.63 years $13.01 106,000 $12.92
F-20
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
7. Income taxes:
The components of the provision for income tax from continuing
operations were:
-------------------------------------------------------
2002
-------------------------------------------------------
Federal Foreign State Total
Current tax benefit $(1,131,902) $ -- $ -- $(1,131,902)
Deferred tax benefit -- -- -- --
----------- ------------ ----------- -----------
Income tax benefit $(1,131,902) $ -- $ -- $(1,131,902)
=========== ============ =========== ===========
-------------------------------------------------------
2001
-------------------------------------------------------
Current tax benefit $(1,165,625) $ -- $ -- $(1,165,625)
Deferred tax expense
(benefit) 399,430 -- (50,596) 348,834
----------- ---------- ----------- -----------
Income tax benefit $ (766,195) $ -- $ (50,596) $ (816,791)
=========== ========== =========== ===========
-------------------------------------------------------
2000
-------------------------------------------------------
Current tax expense $1,336,021 $ -- $ 139,549 $1,475,570
Deferred tax expense 334,005 -- 11,023 345,028
---------- ------------ ---------- ----------
Income tax expense $1,670,026 $ -- $ 150,572 $1,820,598
========== ============ ========== ==========
The tax effects of temporary differences that give rise to a
significant portion of the deferred tax assets and liabilities at
December 31, 2002 and 2001 are as follows:
2002 2001
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 160,932 $ 161,538
Impairment of goodwill 3,883,899 --
Loss on sale of discontinued operation 2,341,726 --
State operating loss carryforwards 714,474 50,596
Other 162,701 2,541
----------- -----------
7,263,732 214,675
----------- -----------
Deferred tax liabilities:
Depreciation 364,978 281,134
Amortization 2,066,449 1,721,911
----------- -----------
2,431,427 2,003,045
----------- -----------
Valuation allowance (4,832,306) --
----------- -----------
Net deferred tax liability $ -- $ 1,788,370
=========== ===========
F-21
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
7. Income taxes (continued):
The components of income (loss) before income taxes from continuing
operations for the years ended December 31 are as follows:
2002 2001 2000
---- ---- ----
Foreign $ (574,000) $ (746,000) $ (595,000)
US (5,824,000) (2,465,000) 5,666,000
----------- ----------- -----------
Total $(6,398,000) $(3,211,000) $ 5,071,000
=========== =========== ===========
The effective tax rate differs from the statutory rate as follows:
2002 2001 2000
---- ---- ----
Federal statutory rate (34.0)% (34.0)% 34.0%
Foreign taxes in excess of federal statutory rate - 3.7 -
State income taxes - net of federal effect (1.5) (1.9) 2.5
Effect of difference in tax basis of goodwill 11.6 5.1 1.5
Foreign sales corporation - 1.4 (1.8)
Valuation allowance 11.5 - -
Goodwill impairment rate differential (4.8) - -
Miscellaneous tax adjustments (.5) .3 (.3)
------ ------ ----
Effective tax rate (17.7)% (25.4)% 35.9%
====== ====== ====
8. Major suppliers:
For the years ended December 31, 2002, 2001, and 2000 the Company
purchased a significant amount of component parts from four, three and
three vendors, which accounted for approximately 11%, 9% and 14% of the
Company's total cost of sales, respectively.
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 2002, 2001 or 2000. The Company also maintained a
second plan in 2001 and 2000 that related to the purchase of SCS
Interactive on March 1, 2000. Contributions to this plan were matched
up to 3% of the participants' deferred compensation. This plan was
merged into the Koala plan effective March 1, 2001. During the years
ended December 31, 2001 and 2000, the Company contributed $18,827 and
$67,783, respectively, to this 401(k) profit sharing plan.
10. Preferred stock and shareholder rights plan:
During 1996, the shareholders voted to amend the Articles of
Incorporation to provide for the issuance of 1,000,000 shares of no par
value preferred stock. At December 31, 2002
F-22
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
10. Preferred stock and shareholder rights plan (continued):
and 2001, 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 a dividend of one
right to purchase preferred stock (a "Right") for each outstanding
share of common stock of the Company. Each share of subsequently issued
common stock also incorporates one Right. 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 will expire on November 7, 2010, unless the Rights are earlier
redeemed by the Company.
The Rights are not currently exercisable, and would become 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 (an "Acquiring
Person.").
The Company is generally entitled to redeem the Rights at $.001 per
Right at any time until a person or group has become an Acquiring
Person. Under the Rights "flip-in" feature, if any such person or group
becomes an Acquiring Person, then each Right not owned by such
Acquiring Person will entitle its holder to purchase, at the Right's
then current purchase price, shares of common stock having a market
value of two times the purchase price of the Right.
Under the Rights "flip-over" provision, if, after any person or group
becomes an Acquiring Person, 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 Shares have substantial dividend and voting rights
relative to the common stock and substantial preferential rights to the
common stock on liquidation of the Company. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Company's Board of Directors. The
Company does not expect the Rights to interfere with any merger or
other business combination approved by the Board of Directors, as the
Rights may be amended to permit such acquisition or redeemed by the
Company at $.001 per Right prior to the earlier of (i) the time that a
person or group has acquired beneficial ownership of 15% or more of the
common stock; or (ii) the expiration date of the Rights.
Until the Rights become exercisable, the Rights will have no dilutive
impact on the Company's earnings per share data. The Rights are
protected by customary anti-dilution provisions.
F-23
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
11. Geographic and business segments:
The Company's sales are derived from two business segments: (1) Family
Convenience and Children's Activity Products, and (2) Children's
Modular Play Equipment. The Company's reportable segments are strategic
business units that offer different products. They are managed
separately based on the fundamental differences in the operations.
The Company's convenience and activity products include the flagship
product, the baby changing station ("BCS") which is assembled at the
Company's facilities in Colorado. Other significant products in this
segment are the sanitary paper liners for the BCS, the child protection
seat, the infant seat kradle, the high chair, safety straps for
shopping carts and activity products. These products are sold direct
and through distribution channels, both in the United States and
internationally. The Company recognizes sales of products from this
business segment at the time the products are shipped.
The Company's modular play equipment includes indoor/outdoor play
equipment and playground surfacing materials. The indoor play equipment
is custom designed for the customer. A catalog is used to promote and
advertise the outdoor play equipment, however, custom modifications are
often made to accommodate the customers' needs and desires. These
products are manufactured by the Company at its facilities located in
Colorado, British Columbia, Florida, and Oregon. The playground
surfacing materials are manufactured by a national network of
sub-contractors. These products are sold direct and through
manufacturers' representatives/dealers both in the United States and
internationally. The Company recognizes revenue at the time its
products are shipped or, in cases where the Company performs the
installation, when installation is complete, at the majority of its
operations. At the Company's SCS Interactive division, the percentage
of completion method of accounting is used for those projects where the
build to install timeline is of longer duration.
F-24
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
11. Geographic and business segments (continued):
The Company evaluates the performance of its segments based primarily
on operating profit before acquisition intangible amortization, and
interest income and expense. The Company allocates corporate expenses
to individual segments based on segment sales. Corporate expenses are
primarily labor costs of executive management and shareholder relation
costs. The following table presents sales and other financial
information by business segment (in thousands):
------------------------------------------------------------------------------------
2002
------------------------------------------------------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
---------------- ---------------- -------------
Sales $14,619 $21,835 $36,454
Operating income (loss) 625 (3,526) (2,901)
Depreciation and amortization 687 1,146 1,833
Capital expenditures 341 80 421
Total assets 17,562 29,514 47,076
------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
---------------- ---------------- -------------
Sales $14,911 $28,496 $43,407
Operating income (loss) 2,121 (297) 1,824
Depreciation and amortization 764 1,840 2,604
Capital expenditures 290 402 692
Total assets 18,333 64,712 83,045
------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------
Convenience
and Activity Modular Play
Products Equipment Total
---------------- ---------------- -------------
Sales $17,681 $28,886 $46,567
Operating income 4,839 4,359 9,198
Depreciation and amortization 730 1,465 2,195
Capital expenditures 289 297 586
Total assets 21,037 70,392 91,429
F-25
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
11. Geographic and business segments (continued):
Geographic area data:
Geographically, sales, operating income and identifiable assets for
non-domestic entities for the years ended December 31, 2002, 2001 and
2000 were as follows (in thousands):
2002 2001 2000
---- ---- ----
Sales $5,262 $6,569 $4,270
Operating income (loss) (1,202) 218 (350)
Identifiable assets 2,254 3,064 3,582
There were no material amounts of sales or transfers among geographic
areas during 2002, 2001 or 2000.
Revenues from sales to customers outside the United States were: $7.3
million, $4.7 million, and $4.9 million, for the years ended December
31, 2002, 2001 and 2000, respectively.
12. Quarterly financial data - unaudited (in thousands, except per
share data):
------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------
2002 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Sales $ 9,629 $ 8,823 $ 9,570 $8,432
Gross profit 4,697 2,790 3,475 3,130
Loss from continuing operations before
cumulative effect of change in
accounting principle (71) (3,214) (976) (1,005)
Income (loss) before cumulative effect
of change in accounting principle 7 (3,063) (1,246) (7,408)
Net income (loss) 7 (24,902) (1,246) (7,408)
Basic and diluted loss per share:
Loss from continuing operations
before cumulative effect of
change in accounting principle (.01) (.47) (.14) (.15)
Loss before cumulative effect of
change in accounting principle .00 (.45) (.18) (1.09)
Net loss .00 (3.64) (.18) (1.09)
F-26
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
12. Quarterly financial data - unaudited (in thousands, except per
share data) (continued):
------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------
2001 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Sales $ 10,868 $ 10,261 $ 12,453 $ 9,824
Gross profit 5,053 4,092 5,331 3,372
Income (loss) from continuing
operations 51 (844) 107 (1,709)
Net income (loss) 475 (57) 14 (2,422)
Basic and diluted income (loss) per
share:
Income (loss) from continuing
operations .01 (.12) .02 (.25)
Net income (loss) .07 (.01) .00 (.35)
Shipping and handling costs in the first three quarters of 2001 have
been reclassified from revenues to cost of sales to be consistent with
the current year presentation. These reclassifications had no impact on
net income or cash flows.
13. 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 replaced a Separation Agreement, executed on August
29, 2001, between Mr. Betker and the Company. 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.
F-27
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
14. Discontinued Operations and Subsequent Event:
Effective January 6, 2003, the Company sold substantially all of the
assets of its wholly owned subsidiary PS Florida, Inc. dba Park
Structures (part of the Company's Modular Play Equipment segment) to PS
Commercial Play, LLC (an unrelated entity whose sole member is PlayCore
Wisconsin, Inc.) for approximately $4.3 million plus the assumption of
certain liabilities. The assets sold include equipment, accounts
receivable, personal property, intellectual property and inventory. The
purchase price was negotiated between the parties based on the June 30,
2002 balance sheet of PS Florida, Inc., and is subject to adjustment
based on the final closing balance sheet and resolution of certain
estimated items. In connection with the sale, the Company recorded an
impairment loss on the assets of the discontinued operation of
$5,628,045, net of tax benefit of $835,772. The revenue of the Park
Structures included in "Income (loss) from discontinued operations" on
the statement of operations for the years ended December 31, 2002, 2001
and 2000 were $11,351,508, $15,814,935 and $15,021,758, respectively.
The major classes of assets and liabilities that have been included at
fair value in the "Assets of Discontinued Operations" and "Liabilities
of Discontinued Operations" captions on the balance sheet are as
follows:
2002 2001
---- ----
Accounts receivable, net $1,699,034 $1,950,697
Inventory 3,101,427 4,778,545
Property & equipment, net 942,489 1,008,947
Identifiable intangible assets, net - 5,417,648
Goodwill, net - 8,197,390
Other 105,904 128,431
---------- -----------
Total assets of discontinued operations $5,848,854 $21,481,658
========== ===========
Accounts payable $1,039,468 $ 656,191
Accrued liabilities & other 522,500 643,297
---------- ----------
Total liabilities of discontinued operations $1,561,968 $1,299,488
========== ==========
F-28
EXHIBIT 21.1
Subsidiaries of the Company
Percentage
Name of Subsidiary Jurisdiction of Incorporation Ownership
------------------ ----------------------------- ---------
Delta Play (US), Inc. State of Colorado 100%
Delta Play Company Province of Nova Scotia, Canada 100%
Sample Road Real Estate
Holdings, Inc. f/k/a
PS Florida, Inc. State of Colorado 100%
SCS Interactive, Inc. State of Oregon 100%
Koala Surfaces, Inc. State of Colorado 100%
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement on Form S-8 pertaining to the 1995 Stock Option Plan of Koala
Corporation of our Report dated April 7, 2003, with respect to the
consolidated financial statements and schedule of Koala Corporation
included in the Annual Report on Form 10-K for the year ended December
31, 2002.
/s/ Ernst & Young LLP
Denver, Colorado
April 7, 2003
EXHIBIT 99
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. Zazenski, President and Chief Operating Officer (Principal
Executive Officer) of Koala Corporation (the "Company"), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the period ended December
31, 2002 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Dated: April 15, 2003
/s/ James A. Zazenski
--------------------------
James A. Zazenski
President and Chief
Operating Officer
(Principal Executive Officer)
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey L. Vigil, Vice President Finance and Administration
(Principal Financial and Accounting Officer) of Koala Corporation (the
"Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the period ended December
31, 2002 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Dated: April 15, 2003
/s/ Jeffrey L. Vigil
--------------------------
Jeffrey L. Vigil
Vice President Finance and Administration
(Principal Financial and Accounting Officer)