<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 1998
REGISTRATION NO. 333-61551
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
KOALA CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
<TABLE>
<C> <S> <C>
COLORADO 3089 84-1238908
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
MARK A. BETKER
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
5031 SOUTH ULSTER STREET, SUITE 300 5031 SOUTH ULSTER STREET, SUITE 300
DENVER, COLORADO 80237 DENVER, COLORADO 80237
(303) 770-3500 (303) 770-3500
(ADDRESS AND TELEPHONE NUMBER (NAME, ADDRESS AND TELEPHONE
OF PRINCIPAL EXECUTIVE OFFICE) NUMBER OF AGENT FOR SERVICE)
COPIES TO:
DOUGLAS R. WRIGHT, ESQ. RICHARD M. RUSSO, ESQ.
JEFFREY A. SHERMAN, ESQ. GIBSON, DUNN & CRUTCHER LLP
OTTEN, JOHNSON, ROBINSON, NEFF & RAGONETTI, P.C. 1801 CALIFORNIA STREET, SUITE 4100
950 SEVENTEENTH STREET, SUITE 1600 DENVER, COLORADO 80202
DENVER, COLORADO 80202 (303) 298-5715
(303) 825-8400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH +
+STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 1, 1998
PRELIMINARY PROSPECTUS
1,200,000 SHARES
KOALA CORPORATION
COMMON STOCK
Of the 1,200,000 shares of Common Stock being offered hereby (the
"Offering"), 320,000 shares are being sold by Koala Corporation ("Koala" or the
"Company") and 880,000 shares are being sold by a shareholder of the Company
(the "Selling Shareholder"). The Company will not receive any of the proceeds
from the sale of shares of Common Stock by the Selling Shareholder. See
"Principal and Selling Shareholders." The Company's Common Stock is listed for
trading on the Nasdaq National Market under the symbol "KARE." On November 25,
1998, the last reported sale price of the Common Stock was $17.00 per share.
See "Price Range of Common Stock."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
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- --------------------------------------------------------------------------------
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
- --------------------------------------------------------------------------------
Total(3)......................... $ $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $300,000.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to an additional 180,000 shares of Common Stock solely to cover over-
allotments, if any, on the same terms and conditions as set forth above. If
the option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to certain
other conditions, including their right to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made on or
about , 1998.
CLEARY GULL REILAND & MCDEVITT INC.
TUCKER ANTHONY
INCORPORATED
CRAIG-HALLUM CAPITAL GROUP, INC. [/R]
The date of this Prospectus is , 1998
<PAGE>
[ARTWORK/PHOTOS]
KOALA BEAR KARE, KOALA KARE, BOOSTER BUDDY AND THE KOALA LOGO ARE REGISTERED
TRADEMARKS OF KOALA CORPORATION. THE COMPANY HAS APPLIED TO REGISTER THE
TRADEMARK HAPPY FACES IN PUBLIC PLACES. ALL OTHER COMPANY AND PRODUCT NAMES
REFERENCED HEREIN ARE REGISTERED TRADEMARKS OR TRADEMARKS OF THEIR RESPECTIVE
OWNERS.
2
<PAGE>
SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements and the
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option or outstanding options, warrants or
convertible securities. References to the Company include its wholly-owned
subsidiaries Delta Play Company, Delta Play (U.S.), Inc. and Koala Foreign
Sales Corporation. Pro forma information contained in this Prospectus includes
information of Park Structures, Inc. and Park Structures Sales, Inc.
(collectively, "Park Structures"), the assets of which will be acquired
simultaneously with the closing of the Offering. Certain information contained
herein is derived from industry sources. Although the Company believes that
this information is reliable, it has not independently verified this
information.
THE COMPANY
Koala Corporation ("Koala" or the "Company") is a leading designer, producer
and worldwide marketer of innovative commercial products, systems and custom
solutions that create attractive family-friendly environments for businesses
and other public venues. The Company produces family convenience products, such
as baby changing stations and high chairs; children's activity products, such
as activity tables and activity carpets; and children's modular play equipment.
The Company intends to capitalize on brand name recognition established through
its market-leading Koala Bear Kare Baby Changing Station, which has been
installed in approximately 300,000 public restrooms worldwide. The Company's
sales have grown from $3.8 million in 1993 to $13.6 million in 1997,
representing a compound annual growth rate of 37.2%. Sales for the nine months
ended September 30, 1998 were $13.5 million, representing a 44.5% increase from
the same period in 1997. Net income has grown from $1.0 million in 1993 to $2.4
million in 1997, representing a compound annual growth rate of 25.8%. Net
income for the nine months ended September 30, 1998 was $2.2 million,
representing a 21.7% increase from the same period in 1997.
The Company believes that parents increasingly travel, shop and dine out with
their children due to societal changes and demographic trends, including the
strict time constraints of two-income and single parent households. Koala also
believes that businesses increasingly need to create an accommodating and
positive environment for children in order to attract customers and to increase
sales and customer loyalty. The Company's 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. Management believes that the Koala Bear Kare
brand is widely recognized among family-friendly businesses and their
customers.
Koala has developed and acquired family convenience and children's activity
products to help businesses become family-friendly. The Company's family
convenience products include the Koala Bear Kare Baby Changing Station, the
Koala Infant Seat Kradle, the Koala Highchair and the Booster Buddy Booster
Seat. Koala's children's activity products are marketed under the name Koala
Kare Systems. 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 auto dealers, retail stores,
physicians and other professional services providers.
The children's modular play market is comprised of indoor and outdoor areas
for child play. The Company believes that many of the same demographic trends
in the family convenience and children's activity markets are driving demand
for children's modular play equipment. The children's indoor modular play
market includes quick service restaurants, shopping malls, day care centers and
family entertainment centers. The Company works with each individual customer
to create custom designs that utilize modular components such as tunnels,
walkways, ladders and ball pits either alone or in combination with a themed
environment such as a pirate's ship
3
<PAGE>
or jungle tree house. Simultaneously with the closing of this Offering, the
Company will enter the children's outdoor modular play market through the
acquisition of the assets of Park Structures, a producer of customized
children's outdoor modular play systems which had sales of $8.2 million and
$6.8 million for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. The children's outdoor modular play market
includes schools, parks, amusement parks, day care centers and apartment
complexes.
The Company's primary business objective is to grow its sales and earnings by
continuing to develop as a leading provider of family-friendly products,
systems and custom solutions. The Company's key strategic initiatives are
summarized below.
. Capitalize on Brand Name Recognition. The Company believes that the Koala
Bear Kare brand name has achieved significant recognition that can be
leveraged in marketing the Company's various product lines.
. Maximize Market Penetration. The Company intends to continue to increase
market penetration through integrated marketing, product cross-selling
and the development of new products and custom solutions.
. Acquire Complementary Businesses and Products. The Company intends to
continue to pursue acquisitions as a means to add complementary
businesses and expand its product offerings.
. Maintain Low Production Costs and High Quality. The Company seeks to
maintain low production costs either through outsourcing or using Company
personnel where it is more cost-effective. The Company believes that
outsourcing to qualified suppliers where appropriate enables it to focus
its resources on marketing and sales while maintaining quality
production.
. Expand International Marketing. The Company intends to continue to expand
its international marketing activities through the addition of
manufacturer's representatives and dealers and the placement of Koala
employees in key foreign locations to supervise international sales
activity.
The Company is a Colorado corporation formed in July 1993. The Company's
principal executive offices are located at 5031 South Ulster Street, Suite 300,
Denver, Colorado 80237, its telephone number is (303) 770-3500, and its web
site is http://koalabear.com.
RECENT DEVELOPMENTS
In August 1998, the Company entered into an agreement to purchase the assets
of Park Structures in consideration for up to $18.7 million. Park Structures
produces and markets children's outdoor modular play systems for
municipalities, parks, public and private schools, day care centers and private
developers. Closing of the Park Structures acquisition will occur
simultaneously with closing of the Offering. The Company will utilize existing
cash balances, the net proceeds of the Offering and approximately $8.5 million
of a new $15.0 million secured credit facility to finance the portion of the
purchase price due at the closing.
The Park Structures acquisition is the Company's third business acquisition
in three years and further broadens the Company's product lines. The
acquisition complements the Company's June 1997 acquisition of a line of
children's indoor modular play systems and also affords the Company an
opportunity to sell its family convenience and children's activity products
into new markets. At the closing, Park Structures will receive a note in the
principal amount of $13.2 million, payable on January 5, 1999. The note will be
secured by an irrevocable letter of credit. Because the note is due within 15
days of the closing of this Offering, the financial information contained in
this Prospectus has been prepared as if such note will not be issued. In
addition, if certain earnings targets are met, Park Structures will receive up
to an additional $5.5 million during 1999, of which up to $1.5 million will be
payable in Common Stock. The Company currently expects that all such additional
consideration, including the Common Stock, will become payable. Over the four
years ended December 31, 1997, Park Structures' sales have increased at a
compound annual growth rate of 33.3%. See "Park Structures Acquisition."
4
<PAGE>
THE OFFERING
Common Stock offered by:
<TABLE>
<C> <S>
The Company.................... 320,000 shares
The Selling Shareholder........ 880,000 shares
Total........................ 1,200,000 shares
Common Stock outstanding after
the Offering.................... 2,847,362 shares(1)
Use of proceeds.................. Acquisition of the assets of Park
Structures. See "Park Structures
Acquisition," "Use of Proceeds" and
"Business."
Nasdaq National Market symbol.... KARE
</TABLE>
- --------
(1) Excludes 403,000 shares of Common Stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $14.09 per
share, of which options to purchase 117,000 shares are currently
exercisable. See "Management."
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Common Stock, see "Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information set forth below is derived from the
consolidated financial statements of the Company, the financial statements of
Delta Play, Ltd., all of whose assets were acquired by the Company on June 1,
1997, and, as to the Pro Forma As Adjusted information, the financial
statements of Park Structures. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Koala" and the consolidated financial statements of the Company
and notes thereto that appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL KOALA PRO FORMA AS ADJUSTED(1)
---------------------------------------------------- --------------------------
NINE MONTHS
ENDED SEPTEMBER NINE MONTHS
YEAR ENDED DECEMBER 31, 30, YEAR ENDED ENDED
------------------------------------ --------------- DECEMBER 31, SEPTEMBER 30,
1993(2) 1994 1995 1996 1997 1997(3) 1998(3) 1997 1998
------- ------ ------ ------ ------- ------- ------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................... $3,842 $5,178 $6,537 $8,938 $13,621 $9,341 $13,493 $23,741 $20,340
Gross profit............ 2,406 3,346 3,986 5,697 8,093 5,725 7,515 11,629 10,279
Income from operations.. 1,465 1,918 2,357 2,699 3,661 2,733 3,425 4,872 4,820
Net income.............. 973 1,257 1,575 1,896 2,436 1,826 2,222 2,706 2,793
Net income per share:
--basic............... $ 0.40 $ 0.52 $ 0.66 $ 0.78 $ 0.97 $ 0.73 $ 0.88 $ 0.96 $ 0.98
--diluted............. $ 0.40 $ 0.52 $ 0.65 $ 0.75 $ 0.96 $ 0.72 $ 0.86 $ 0.94 $ 0.96
Weighted average common
shares outstanding:
--basic............... 2,405 2,402 2,399 2,431 2,504 2,496 2,527 2,824 2,847
--diluted............. 2,406 2,402 2,411 2,523 2,548 2,536 2,588 2,868 2,908
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 5,367 $ 7,747
Total assets............................................. 17,084 30,336
Total liabilities........................................ 2,115 10,581
Shareholders' equity..................................... 14,969 19,755
</TABLE>
- --------
(1) Information in these columns gives pro forma effect to the Park Structures
acquisition and the incurrence of the $8.5 million of indebtedness borrowed
to finance such acquisition as if incurred on January 1, 1997 and is
adjusted to reflect the sale of 320,000 shares of Common Stock offered by
the Company hereby at an assumed offering price of $17.00 per share less
underwriting discount and estimated offering expenses payable by the
Company and the anticipated application of the net proceeds therefrom. Does
not include up to $4.0 million in additional indebtedness that the Company
may incur to make future payments in connection with the Park Structures
acquisition. See "Use of Proceeds" and Unaudited Pro Forma Consolidated
Financial Statements and notes thereto.
(2) Results of operation for 1993 give pro forma effect to the Company's
initial public offering and merger with JBJ Industries, Inc.
(3) Results for the nine months ended September 30, 1997 include four months of
operations of Delta Play, Ltd., the assets of which were acquired effective
June 1, 1997. Results for the nine months ended September 30, 1998 reflect
a full period of operations of Delta Play, Ltd. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing shares of Common Stock offered
hereby. This Prospectus contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Prospectus, 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 the Company's future plan of
operations, business strategy, operating results and financial position.
Prospective investors are cautioned that any forward-looking statements are
not guarantees of future performance and are subject to risks and
uncertainties and that actual results could differ materially from the results
expressed in or implied by these forward-looking statements as a result of
various factors, many of which are beyond the Company's control. These factors
are described under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and in the risk
factors set forth below.
ABILITY TO INTEGRATE AND MANAGE PARK STRUCTURES
The Park Structures acquisition, which will expand the Company's modular
play equipment product line, is the Company's largest acquisition to date. The
Company's ability to realize any long-term advantages from the Park Structures
acquisition will depend in large part on the Company's successful integration
and management of the operations of Park Structures. Risks relating to such
integration include increased seasonality associated with products sold by
Park Structures and the risk of loss of services of management or other
employees of Park Structures or significant dealers who sell the Park
Structures products. There can be no assurance that the Company will be able
to successfully integrate Park Structures, the failure of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Park Structures Acquisition."
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth both internally and
as a result of acquisitions. A continuing period of significant growth could
place a strain on the Company's management, operations and other resources.
The Company's ability to manage its growth will require it to continue to
invest in its operational, financial and information systems and to attract,
retain, motivate and effectively manage its employees. The inability of the
Company's management to manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
A part of the Company's business strategy is to acquire other companies,
assets or product lines that complement or expand its existing business.
Acquisitions involve a number of risks that could materially affect the
Company, including the diversion of management's attention, the assimilation
of the operations and personnel of the acquired companies, the amortization of
acquired intangible assets and the potential loss of key personnel of the
acquired companies. Future acquisitions may entail the payment of
consideration in excess of book value, may result in the issuance of
additional shares of the Company's Common Stock or the incurrence of
additional indebtedness, all of which could have a dilutive effect on the
Company's net income per share. In addition, products offered by the Company
following a future acquisition may have lower gross profit margins than the
Company's current product lines. There can be no assurance that any
acquisition by the Company will not have a material adverse effect on the
Company's business, financial condition and results of operations. Other than
the Park Structures acquisition, the Company currently has no agreements or
understandings with respect to any potential acquisitions. See "Business--
Business Strategy."
7
<PAGE>
LIMITED DIVERSIFICATION; UNCERTAINTY OF ACCEPTANCE OF NEW PRODUCTS
A substantial amount of the Company's sales since inception have been
derived from marketing the Koala Bear Kare Baby Changing Station. Although the
Company has diversified through the addition of other family convenience
products, children's activity products and children's modular play equipment
and plans to introduce additional products, the Baby Changing Station will
continue to be an important component of the Company's sales. Until the
Company further diversifies its business and products, changes in competition
and other factors affecting the market for the Baby Changing Station could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the possibility exists that any new
products introduced by the Company in the future will not be accepted in the
marketplace. If this happens, the Company's reputation may suffer, and the
Company may incur substantial losses due to production, marketing and other
costs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Koala Overview" and "Business--History" and "--
Products."
PRODUCT LIABILITY RISKS
The Company's products are designed for use with infants and children. The
children's modular play equipment industry, which the Company has recently
entered, may be subject to greater number of claims than the convenience
products industry. The Company carries product liability insurance in an
amount that management deems adequate to cover risks associated with its
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 the Company, if successful, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Product Warranties and Insurance."
COMPETITION
The markets for the Company's products are highly competitive and include
numerous domestic and foreign competitors, including well-known manufacturers
of consumer and commercial child safety equipment, furniture and other
juvenile products that are substantially larger and have greater financial,
marketing and other resources than the Company. There can be no assurance
there will not be new entrants into the Company's markets or that the Company
will be able to compete successfully in the future. See "Business--
Competition."
DEPENDENCE UPON KEY PERSONNEL
The Company's future success will depend to a great extent upon the
continued service of certain senior management personnel and the Company's
continuing ability to attract, assimilate and retain highly qualified
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key personnel or that it can
attract, assimilate and retain such employees in the future. Although the
Company has non-disclosure and non-compete agreements with many of its
employees, including its executive officers, it does not have employment
agreements with any of its executive officers. The Company maintains a key-
person life insurance policy in the amount of $1 million on Mark A. Betker,
its Chairman, Chief Executive Officer and President. The loss of the services
of Mr. Betker or other key personnel or the inability to hire or retain
qualified personnel in the future could have a material adverse effect upon
the Company's business, financial condition and results of operations. See
"Management."
DEPENDENCE UPON OUTSIDE MANUFACTURERS
A large number of the components for the Company's products are manufactured
to the Company's specifications by outside suppliers. The Company's ability to
assemble and distribute its products depends upon its ability to obtain an
adequate uninterrupted supply of component parts. Although the Company owns
the significant tooling and molds used in the manufacture of the Company's
products, it does not have any long term agreements or contracts with its
suppliers, most of which are the single source of supply to the Company.
8
<PAGE>
While the Company believes that adequate alternative sources of supply of such
component parts could be located, there can be no assurance that any
interruption in the supply of such component parts to the Company because of
the failure of a supplier, a change to a new supplier or otherwise would not
have a material adverse effect on the Company's business, financial condition
or results of operations. Moreover, if the Company's tooling or molds are
damaged, the Company could suffer additional delays and costs until such
tooling or molds are repaired or replaced. Although the Company has business
interruption insurance to protect itself against such interruptions, such
insurance may not prevent such interruptions from having a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Business--Design and Manufacturing."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
As part of its growth strategy, the Company is seeking opportunities to
further expand its products and systems distribution into international
markets. Sales to customers outside of North America accounted for
approximately 18% and 19% of the Company's sales in 1997 and the nine months
ended September 30, 1998, respectively. In addition, the Company operates a
manufacturing and assembly facility in Vancouver, British Columbia, Canada.
The Company's international operations are subject to a wide range of general
business risks, including: fluctuations in currency exchange rates; unexpected
changes in legal and regulatory requirements; export restrictions, tariffs and
other trade barriers; political and economic instability; restrictions on
repatriation of funds or profits from foreign markets; longer payment cycles
and problems in collecting accounts receivable; difficulty in protecting the
Company's intellectual property; potentially adverse tax consequences,
including limitations on the Company's ability to claim a foreign tax credit
against its U.S. federal income taxes; and regulation by foreign regulatory
authorities. These and other factors associated with international operations
may have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is subject to the Foreign Corrupt Practices Act ("FCPA"), which
generally prohibits U.S. companies and their intermediaries from bribing
foreign officials for the purpose of obtaining or keeping business. The
Company may be exposed to liability under the FCPA as a result of past or
future actions taken without the Company's knowledge by dealers and other
intermediaries. Any liability the Company incurs under the FCPA could be
material.
GOVERNMENT REGULATIONS
Certain of the Company's products are subject to the provisions of the
Federal Consumer Product Safety Act and the Federal Hazardous Substances Act
(the "Acts") and the regulations promulgated thereunder. The Acts authorize
the Consumer Product Safety Commission (the "CPSC") to protect the public from
products that present a substantial risk of injury. The CPSC can require the
repurchase or recall by the manufacturer of articles which 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 the Company
markets its products. Any recall of its products could have a material adverse
effect on the Company. To date, the Company has not recalled any of its
products. See "Business--Regulation."
TRADEMARKS; LACK OF PATENT PROTECTION
The Company owns several trademarks, including the Koala Bear Kare logo set
forth on the cover of this Prospectus, to identify the Company and its
products and believes that such trademarks provide a significant competitive
advantage. Although the Company intends to vigorously defend its trademarks,
no assurance can be given either that such trademarks can be defended or that
such trademarks will not become commonly used. Further, although the Company
has design patents that cover the design and appearance of certain of its
existing products, such patents may not provide meaningful protection against
entry by competitors into the Company's markets. See "Business--Patents and
Trademarks."
9
<PAGE>
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's sales and earnings may fluctuate from quarter to quarter based
on several factors such as the number of new commercial construction starts,
production delays, public budget processes, supply costs and general economic
conditions. Demand for the Company's products can vary significantly from
quarter to quarter due to revisions in customer budgets or schedules and other
factors beyond the Company's control. Due to all of the foregoing factors, it
is possible that in some future period, the Company's results of operations
could fall below the expectations of securities analysts and investors. In
this event, the market price of the Common Stock could be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Data."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries to represent years. For example, the year "1998"
would be represented by "98." These systems and products will need to be able
to accept four digit entries to distinguish years beginning with 2000 from
prior years. As a result, systems and products that do not accept four digit
year entries will need to be upgraded or replaced to comply with such "Year
2000" requirements. The Company believes that its computer systems are Year
2000 compliant. There can be no assurance that the computer systems of
vendors, customers or other entities on which the Company relies will be Year
2000 compliant. There can be no assurance that unanticipated or undiscovered
Year 2000 compliance problems will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Koala--Year 2000" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Park Structures--Year 2000."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends and does not intend to pay any
cash dividends in the foreseeable future. The Company intends to retain all
earnings, if any, to invest in the Company's operations. The payment of future
dividends is within the discretion of the Board of Directors and will depend
upon the Company's future earnings, cash requirements, financial condition and
other factors that the Board of Directors may deem relevant. In addition, the
Company's credit agreement restricts the payment of cash dividends. See
"Dividend Policy."
VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock is subject to wide
fluctuations in response to factors such as actual or anticipated operating
results, announcements of new products developed by the Company, its
competitors or their customers, government regulatory action, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have often
been unrelated to the operating performance of particular companies. Many
factors that have influenced trading prices, such as actual or anticipated
operating results, growth rates, changes in estimates by analysts, market
conditions in the industry, announcements by competitors, regulatory actions,
the number of shares of Common Stock available for sale on the securities
markets and general economic conditions, will vary from period to period. Any
such event could result in a material adverse effect on the market price of
the Common Stock. See "Price Range of Common Stock."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
The Company's Articles of Incorporation authorizes the issuance of up to
1,000,000 shares of Preferred Stock. The Preferred Stock may be issued in
series with the material terms of any series determined solely by the Board of
Directors. Such terms would likely include dividend rights, conversion
features, voting rights, redemption rights and liquidation preferences. The
Company does not currently anticipate that it will issue any Preferred Stock.
However, if the Company does issue any series of Preferred Stock in the
future, it is likely that
10
<PAGE>
such shares will have dividend privileges and liquidation preferences superior
to those of the Common Stock. Further, the Preferred Stock may be issued with
voting, conversion or other terms determined by the Board of Directors
including, among others, dividend payment requirements, redemption provisions,
preferences as to dividends and distributions, and preferential voting rights.
The issuance of Preferred Stock may have the effect of delaying or preventing
a change in control, may decrease the amount of earnings and assets available
for distribution to the holders of the Common Stock and may adversely affect
the rights and powers, including voting rights, of the holders of the Common
Stock. See "Description of Securities."
LIMITATION ON DIRECTOR LIABILITY
The Company's articles of incorporation provide, as permitted by Colorado
law, that a director of the Company shall not be personally liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty
as a director, with certain exceptions. In addition, the Company's articles of
incorporation provide for indemnification of the directors and officers to the
fullest extent permitted by Colorado law. See "Management--Director Liability"
and "--Indemnification."
PARK STRUCTURES ACQUISITION
On August 14, 1998, the Company entered into an agreement to purchase the
assets of Park Structures in consideration for up to $18.7 million. Park
Structures, based in southern Florida, produces and markets children's outdoor
modular play systems for municipalities, parks, public and private schools,
day care centers and private developers. Closing of the Park Structures
acquisition will occur simultaneously with closing of the Offering. The Park
Structures acquisition is the Company's third business acquisition in three
years and further broadens the Company's product lines. The acquisition
complements the Company's June 1997 acquisition of a line of children's indoor
modular play systems and also affords the Company an opportunity to sell its
family convenience and children's activity products into new markets. Over the
four years ended December 31, 1997, Park Structures' sales have increased at a
compound annual growth rate of 33.3% from $2.6 million for the year ended
December 31, 1993 to $8.2 million for the year ended December 31, 1997. See
"Business--Park Structures" and "--Products."
At the closing, Park Structures will receive a note in the principal amount
of $13.2 million, payable on January 5, 1999. The note will be secured by an
irrevocable letter of credit. Because the note is due within 15 days of the
closing of this Offering, the financial information contained in this
Prospectus has been prepared as if such note will not be issued. In addition,
if certain earnings targets are met, Park Structures will receive up to an
additional $5.5 million during 1999, of which up to $1.5 million will be
payable in Common Stock. The Company currently expects that all of such
additional consideration, including the Common Stock, will become payable. The
number of shares of Common Stock payable will be based on the average daily
closing sale price of the Common Stock during December 1998. The purchase
price is subject to adjustment based on the amount of current assets and other
assets of Park Structures as of the closing and the amount of warranty
liability of Park Structures assumed by the Company as of the closing.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the 320,000
shares of Common Stock offered by the Company at an assumed price of $17.00
per share are approximately $4.8 million (approximately $7.6 million if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discount and other estimated offering expenses, all of which are
payable by the Company. See "Park Structures Acquisition."All of the net
proceeds will be used to fund a portion of the purchase price for the Park
Structures acquisition. The Company will not receive any of the proceeds from
the sale of 880,000 shares of Common Stock by the Selling Shareholder.
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the Nasdaq National Market under the symbol
"KARE." The table below sets forth for the quarters indicated the high and low
per share sale prices of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First quarter............................................. $ 6.750 $ 5.000
Second quarter............................................ 9.125 5.375
Third quarter............................................. 9.875 7.625
Fourth quarter............................................ 12.625 8.125
1996
First quarter............................................. $19.250 $10.625
Second quarter............................................ 19.125 16.375
Third quarter............................................. 21.000 13.750
Fourth quarter............................................ 17.000 12.250
1997
First quarter............................................. $14.375 $10.750
Second quarter............................................ 16.375 9.875
Third quarter............................................. 17.250 14.625
Fourth quarter............................................ 18.250 14.125
1998
First quarter............................................. $18.750 $14.000
Second quarter............................................ 20.125 15.750
Third quarter ............................................ 16.875 12.875
Fourth quarter (through November 25, 1998)................ 18.500 10.000
</TABLE>
The last reported sale price for the Common Stock on the Nasdaq National
Market on November 25, 1998 was $17.00. As of November 25, 1998, there were
approximately 101 holders of record of Common Stock. The Company believes that
as of such date there were approximately 2,200 beneficial holders of Common
Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends or distributions
on its Common Stock. The Company anticipates that for the foreseeable future
all earnings will be retained for use in the Company's operations and that no
cash dividends will be paid to shareholders. Any payment of cash dividends in
the future on the Common Stock will be dependent upon the Company's financial
condition, results of operations, current and anticipated cash requirements,
as well as other factors that the Board of Directors deems relevant. In
addition, the Company's current credit agreement restricts the payment of
dividends. The Company anticipates that similar restrictions on dividends will
be imposed by the Company's new credit facility.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 and pro forma as adjusted to reflect the issuance and sale
of 320,000 shares of Common Stock offered by the Company hereby at an assumed
price per share of $17.00 and the application of the net proceeds therefrom as
set forth under "Use of Proceeds." This table should be read in conjunction
with the consolidated financial statements of the Company and related notes
thereto and the Unaudited Consolidated Pro Forma Financial Statements and
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current maturities................. $ -- $ 8,466
Shareholders' equity:
Preferred Stock, 1,000,000 shares authorized; none out-
standing............................................... -- --
Common Stock, $0.10 par value, 10,000,000 shares
authorized; 2,527,362 shares issued and outstanding
(actual); and 2,847,362 shares (pro forma as
adjusted)(2).......................................... 253 285
Additional paid-in capital............................. 5,308 10,062
Other comprehensive income(3).......................... (128) (128)
Retained earnings...................................... 9,536 9,536
------- -------
Total shareholders' equity............................ 14,969 19,755
------- -------
Total capitalization................................ $14,969 $28,221
======= =======
</TABLE>
- --------
(1) Pro Forma As Adjusted also reflects the Park Structures acquisition and
the borrowing of $8.5 million under the Company's new revolving credit
facility. See Unaudited Consolidated Pro Forma Financial Statements and
notes thereto. Does not include up to $4.0 million in additional
indebtedness that the Company may incur to make future payments in
connection with the Park Structures acquisition.
(2) Does not include 403,000 shares of Common Stock issuable upon the exercise
of outstanding options at a weighted average exercise price of $14.09 per
share, of which options to purchase 117,000 shares are currently
exercisable. See "Management."
(3) Consists of translation of foreign currency.
13
<PAGE>
KOALA CONSOLIDATED SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of the Company as of and for each
of the last five fiscal years ended December 31, 1997 set forth below have
been derived from the Company's audited consolidated financial statements. The
selected consolidated financial data as of and for each of the nine-month
periods ended September 30, 1998 and September 30, 1997 have been derived from
the unaudited financial statements of the Company which, in the opinion of the
management of the Company, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The results of
operations for the nine-month period ended September 30, 1998 are not
necessarily indicative of results that may be expected for the full year. This
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Koala" and the
consolidated financial statements of the Company and notes thereto that appear
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ----------------
1993(1) 1994 1995 1996 1997 1997 1998(2)
------- ------ ------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................... $3,842 $5,178 $6,537 $ 8,938 $13,621 $ 9,341 $13,493
Cost of sales........... 1,436 1,832 2,551 3,241 5,528 3,616 5,977
------ ------ ------ ------- ------- ------- -------
Gross profit............ 2,406 3,346 3,986 5,697 8,093 5,725 7,515
Selling, general and ad-
ministrative
expenses............... 855 1,342 1,543 2,892 4,231 2,858 3,895
Amortization of intangi-
bles................... 86 86 86 106 201 134 196
------ ------ ------ ------- ------- ------- -------
Income from operations.. 1,465 1,918 2,357 2,699 3,661 2,733 3,425
Other (income) expense.. (6) (44) (109) 159 (115) (98) (20)
------ ------ ------ ------- ------- ------- -------
Income before income
taxes.................. 1,471 1,962 2,466 2,540 3,776 2,831 3,445
Provision for income
taxes.................. 498 705 891 644 1,340 1,005 1,223
------ ------ ------ ------- ------- ------- -------
Net income.............. $ 973 $1,257 $1,575 $ 1,896 $ 2,436 $ 1,826 $ 2,222
====== ====== ====== ======= ======= ======= =======
Net income per share:
--basic............... $ 0.40 $ 0.52 $ 0.66 $ 0.78 $ 0.97 $ 0.73 $ 0.88
--diluted............. $ 0.40 $ 0.52 $ 0.65 $ 0.75 $ 0.96 $ 0.72 $ 0.86
Weighted average common
shares
outstanding:
--basic............... 2,405 2,402 2,399 2,431 2,504 2,496 2,527
--diluted............. 2,406 2,402 2,411 2,523 2,548 2,536 2,588
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ----------------
1993(1) 1994 1995 1996 1997 1997 1998(2)
------- ------ ------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $1,532 $2,721 $4,417 $ 5,644 $ 3,945 $ 3,184 $ 5,367
Total assets............ 5,349 6,616 8,250 10,351 14,957 13,874 17,084
Total liabilities....... 302 328 388 573 2,107 1,639 2,115
Shareholders' equity.... 5,047 6,288 7,862 9,778 12,850 12,235 14,969
</TABLE>
- --------
(1) Results of operations for 1993 are pro forma, which give effect to the
Company's initial public offering and merger with JBJ Industries, Inc.
(2) Results for the nine months ended September 30, 1998 reflect a full period
of operations of the Company's children's indoor modular play division,
Delta Play Company, whose assets were acquired from Delta Play, Ltd.
effective June 1, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Koala."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF KOALA
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 the Company's sales,
projections concerning operations and available cash flow. The Company's
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 Prospectus.
KOALA OVERVIEW
Koala Corporation is a leading designer, producer and worldwide marketer of
innovative commercial products, systems and custom solutions that create
attractive family-friendly environments for businesses and other public
venues. The Company produces family convenience products, such as baby
changing stations and high chairs; children's activity products, such as
activity tables and activity carpets; and children's modular play equipment.
The Company intends to capitalize on brand name recognition established
through its market-leading Koala Bear Kare Baby Changing Station, which has
been installed in approximately 300,000 public restrooms worldwide. The
Company's sales have grown from $3.8 million in 1993 to $13.6 million in 1997,
representing a compound annual growth rate of 37.2%. Sales for the nine months
ended September 30, 1998 were $13.5 million, representing a 44.5% increase
from the same period in 1997. Net income has grown from $1.0 million in 1993
to $2.4 million in 1997, representing a compound annual growth rate of 25.8%.
Net income for the nine months ended September 30, 1998 was $2.2 million,
representing a 21.7% increase from the same period in 1997.
The Company markets its products, systems and custom solutions to a wide
range of businesses and public facilities that serve customers and visitors
who bring children to their establishments. Koala markets its products through
an integrated program of direct sales and distribution through a network of
independent manufacturer's sales representatives and dealers. Since 1995, the
Company has increased its sales and marketing efforts through the addition of
manufacturer's sales representatives, dealers and Company sales
representatives.
The Company's sales have been derived primarily from the sale of its 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 the Company's strategies has been
to reduce its dependence on Baby Changing Stations through the acquisition and
development of complementary products. In furtherance of this strategy, the
Company acquired certain assets of a manufacturer of commercial-use children's
activities products in March 1996 and the assets of Delta Play, Ltd., a
provider of custom children's indoor modular play equipment in June 1997. The
Company will further diversify its product offerings through the acquisition
of the assets of Park Structures, a producer of children's outdoor modular
play equipment. As a result of these acquisitions and introduction of new
products such as the Koala Highchair in 1997, sales of Baby Changing Stations
are expected to represent less than half of the Company's sales in 1998 and
thereafter.
The Company's gross profit margins are affected by product mix, with the
Baby Changing Station and other family convenience products typically
providing higher gross profit margins than the children's activity products
and children's modular play equipment. These children's activity products and
children's modular play equipment, however, have higher average selling prices
and contribute to the Company's 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 the Company acquires additional companies or product lines, its
gross profit margins may be lower than those currently achieved from sales of
the Company's current product lines due to a number of factors that may
include products with higher average selling prices but lower gross margin
percentages. Although new product introductions or acquisitions may decrease
the overall gross profit margins, the Company believes that the addition of
new products will provide opportunities for revenue diversification and
increased profitability, while also reducing the Company's reliance on the
Baby Changing Station.
15
<PAGE>
COMPONENTS OF SALES AND EXPENSE
The Company recognizes sales at the time its products are shipped. Cost of
sales consists of components manufactured for the Company and direct labor and
manufacturing overhead incurred by the Company. All major components for the
family convenience products currently are manufactured and assembled by
outside vendors. Direct labor and manufacturing overhead relate to the
assembly of the products. Prior to September 1996, the Company performed the
assembly operations for the Baby Changing Stations, Child Protection Seats and
Infant Seat Kradles.
Selling, general and administrative expense consists primarily of
commissions paid to manufacturer's sales representatives and other
miscellaneous selling expenses, executive and office salaries, related payroll
taxes and advertising expenses.
The Company provides limited warranties for its products. The Company has
experienced minimal returns and warranty claims, and therefore no accrual has
been made for future claims.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data stated as a
percentage of sales:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 39.0 36.3 40.6 38.7 44.3
----- ----- ----- ----- -----
Gross profit.............................. 61.0 63.7 59.4 61.3 55.7
Selling, general and
administrative expenses.................. 23.6 32.3 31.0 30.6 28.9
Amortization of intangibles............... 1.3 1.2 1.5 1.4 1.4
----- ----- ----- ----- -----
Income from operations.................... 36.1 30.2 26.9 29.3 25.4
Other (income) expense.................... (1.6) 1.8 (0.8) (1.0) (0.1)
----- ----- ----- ----- -----
Income before income taxes................ 37.7 28.4 27.7 30.3 25.5
Provision for income taxes................ 13.6 7.2 9.8 10.8 9.0
----- ----- ----- ----- -----
Net income................................ 24.1% 21.2% 17.9% 19.5% 16.5%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997.
Sales increased 44.5%, or $4.2 million, to $13.5 million for the nine months
ended September 30, 1998 compared to $9.3 million for the nine months ended
September 30, 1997. A majority of the increase resulted from sales of
children's indoor modular play equipment, a product line acquired effective
June 1, 1997. The sales and marketing programs that the Company implemented
for the family convenience and children's activity product lines also
contributed to the increased sales.
Gross profit increased 31.3%, or $1.8 million, to $7.5 million for the nine
months ended September 30, 1998 compared to $5.7 million for the nine months
ended September 30, 1997. As a percentage of sales, gross profit decreased in
the 1998 period compared to the 1997 period primarily because of a change in
product mix that included sales of children's indoor modular play equipment
along with a higher proportion of sales of family convenience and children's
activity products through dealer channels, where lower gross profit margins
are realized.
Selling, general and administrative expense increased 36.3%, or $1.0 million
to $3.9 million for the nine months ended September 30, 1998 compared to $2.9
million for the nine months ended September 30, 1997. Sales and marketing
expense increased 33.0%, or $633,389 to $2.6 million for the nine months ended
September 30, 1998 compared to $1.9 million for the nine months ended
September 30, 1997. These cost increases were due to the inclusion of the
children's indoor modular play equipment line and higher expenses for various
marketing programs, commissions paid to manufacturer's sales representatives
and salaries of sales and
16
<PAGE>
marketing personnel added subsequent to the 1997 period, all of which were
associated with higher levels of sales. General and administrative expense
increased 43.1%, or $403,424, to $1.3 million for the nine months ended
September 30, 1998 compared to $935,845 for the nine months ended September
30, 1997. The increase was primarily the result of the inclusion of the
children's indoor modular play equipment line.
The Company's effective tax rate was 35.5% for both the nine months ended
September 30, 1998 and 1997. The Company's worldwide effective rate is
comprised of the federal statutory rate of 34.0%, and an effective state rate
of 2.0%, offset by the tax effect of a permanent difference in the book and
tax basis of goodwill, which is approximately a 0.5% reduction. The Company
pays Canadian taxes at an effective tax rate of 38.6%, however, the Company
receives a foreign tax credit for U.S. tax purposes.
Net income increased 21.7%, or $396,000, to $2.2 million for the nine months
ended September 30, 1998 compared to $1.8 million for the nine months ended
September 30, 1997. As a percentage of sales, net income declined during the
1998 period compared to the 1997 period primarily due to the inclusion of the
children's modular play equipment line in the product mix. Net income per
share (diluted) increased 19%, or $.14, to $.86 for the nine months ended
September 30, 1998 compared to $.72 for the nine months ended September 30,
1997. The percentage increase in net income per share (diluted) was lower than
the percentage increase in net income as a result of an increase of 52,248
shares in the weighted average number of shares outstanding.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales increased 52.4%, or $4.7 million, to $13.6 million in 1997 compared to
$8.9 million in 1996, primarily as a result of seven months of operations from
the children's indoor modular play equipment line and continued strong demand
for the Company's other products. The sales and marketing strategy implemented
by the Company for its other product lines contributed to the additional sales
revenue for 1997 and also provided diversification of the Company's product
line. The Company continued to increase sales and marketing efforts through
focused marketing programs and the addition of sales personnel during 1997.
Gross profit increased 42.1%, or $2.4 million, to $8.1 million in 1997
compared to $5.7 million for 1996. As a percentage of sales, gross profit
decreased in 1997 compared to 1996 primarily because of the change in product
mix with the addition of the children's indoor modular play equipment line
along with increased sales of products to dealers at lower margins. These
gross margin reductions were offset somewhat by lower costs of raw materials
and component parts and the change to subcontracted assembly in September
1996.
Selling, general and administrative expenses for 1997 increased 46.3%, or
$1.3 million, to $4.2 million in 1997 compared to $2.9 million for 1996. Sales
and marketing expense increased 76.4%, or $1.1 million, to $2.5 million in
1997 compared to $1.4 million in 1996. These increases were due to the
inclusion of the children's indoor modular play equipment line and the higher
level of sales achieved, and included costs for various marketing programs,
commissions paid to manufacturer's sales representatives and salaries of the
sales and marketing personnel added during 1997. General and administrative
expense increased 17.3%, or $254,000, to $1.7 million in 1997 compared to $1.5
million in 1996. The relatively small increase in general and administrative
expense compared to the sales increase was primarily the result of cost
reductions obtained by more efficient management of administrative functions.
These cost reductions offset the cost increases resulting from the inclusion
of general and administrative expense associated with the children's indoor
modular play equipment line for seven months of 1997. The Company also
incurred approximately $100,000 in non-recurring personnel recruiting and
employee relocation costs in 1996.
The Company's effective tax rates were 35.5% in 1997 compared to 25.4% in
1996. The Company realized a tax benefit in 1996 from the tax deduction
generated by the exercise of non-qualified stock options by a former officer
of the Company.
Net income increased 28.5%, or $540,000, to $2.4 million in 1997 compared to
$1.9 million in 1996. As a percentage of sales, net income decreased in 1997
compared to 1996 primarily due to the inclusion of children's indoor modular
play equipment in the product mix. Net income per share (diluted) for 1997
increased 28.0%, or $.21, to $.96 per share in 1997 compared to $.75 per share
in 1996. The percentage increase in net income per share was slightly lower
than the percentage increase in net income as a result of an increase of
24,883 shares in the weighted average number of shares outstanding.
17
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 30, 1995
Sales increased 36.7%, or $2.4 million, to $8.9 million in 1996, compared to
$6.5 million in 1995, as a result of continued growth in demand for the
Company's products. Sales of the Baby Changing Station accounted for the
majority of the growth in the Company's sales. Sales of the Booster Buddy,
Child Protection Seat and Infant Seat Kradle increased during the year, and
the addition of the children's activity product line beginning in April 1996
contributed to the increase in total sales.
Gross profit increased 42.9%, or $1.7 million, to $5.7 million in 1996
compared to $4.0 million in 1995. As a percentage of sales, gross profit
increased due to price reductions achieved in the cost of raw materials and
component parts and the change to subcontracted assembly in September 1996,
which reduced overhead costs.
Selling, general and administrative expenses increased 87.4%, or $1.4
million, to $2.9 million in 1996 compared to $1.5 million for 1995. As a
percentage of sales, selling, general and administrative expenses increased
only 8.7 percentage points because the Company increased sales without a
proportionate increase in general and administrative overhead. The increase in
selling, general and administrative expense was primarily due to increased
sales, marketing and administrative salaries, which includes the salary for
the chief financial officer added in 1996, as well as approximately $100,000
in non-recurring personnel recruiting and employee relocation costs. In
addition, the Company experienced increased advertising and other costs
associated with sales and marketing, including travel, telephone, consultants
and contract labor. The Company also increased its use of independent
manufacturer's representatives, which resulted in an increase in sales
commissions. The Company made the investment in these increased levels of
selling, general and administrative expenses in order to support the expanded
sales and marketing efforts begun in 1995.
The Company's effective income tax rates were 25.4% and 36.1% in 1996 and
1995, respectively. The Company realized a tax benefit in 1996 from the tax
deduction generated by the exercise of non-qualified stock options by a former
officer of the Company. The Company's effective tax rate also declined in 1996
due to the Company's move to Colorado, which has a lower statutory income tax
rate than Minnesota.
Net income for 1996 increased 20.4%, or $321,000, to $1.9 million in 1996
compared to $1.6 million in 1995. The additional expenses of the Company in
connection with expansion of sales and marketing, as well as the non-recurring
expenses incurred in 1996, contributed to a decline in net income as a
percentage of sales in 1996 compared to 1995. Net income per share (diluted)
increased 15.4%, or $.10 per share, to $.75 per share in 1996 compared to $.65
per share in 1995. The percentage increase in net income per share was lower
than the percentage increase in net income primarily as a result of an
increase of 112,000 shares in the weighted average number of shares
outstanding.
18
<PAGE>
QUARTERLY DATA
The following table sets forth certain unaudited quarterly historical
financial data for each of the Company's last eleven quarters ended September
30, 1998. This unaudited quarterly information has been prepared on the same
basis as the annual information presented elsewhere in this Prospectus and, in
the Company's opinion, includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the selected
quarterly information. This information should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Prospectus.
The operating results for any quarter shown are not necessarily indicative of
results for any future period.
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1996 1996 1996 1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.............. $1,871 $2,435 $2,433 $2,199 $2,251 $3,040 $4,049 $4,280 $4,014 $4,430 $5,049
Gross
profit............. 1,148 1,533 1,539 1,477 1,528 1,849 2,348 2,367 2,272 2,542 2,701
Income
from
operations......... 633 809 830 427 781 936 1,016 928 978 1,167 1,280
Net
income............. 428 530 557 381 530 628 668 610 635 774 813
Net income per
share (diluted).... $ 0.17 $ 0.21 $ 0.22 $ 0.15 $ 0.21 $ 0.25 $ 0.26 $ 0.24 $ 0.25 $ 0.30 $ 0.32
</TABLE>
Due to customer budgeting and ordering patterns, the Company's sales tend to
be stronger in the second and third quarters than in the first and fourth
quarters. In the fourth quarter of 1996, net income was adversely affected by
the cost of the Company's move from Minnesota to Colorado. Beginning with the
second quarter of 1997, the quarterly financial data includes the operations
of the assets acquired from Delta Play, Ltd.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its business activities primarily from
cash provided by operating activities. Cash provided by operating activities
for 1996 and 1997 was $1.3 million and $3.5 million, respectively, and cash
provided by operating activities for the nine months ended September 30, 1998
and 1997 was $564,000 and $2.2 million, respectively. The decrease in cash
provided by operating activities for the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997 is due primarily to a
combination of an increase in inventories of raw materials and finished goods
during the nine months ended September 30, 1998, a decrease in accounts
payable and increases in prepaid expenses during the 1998 period and the
receipt of a tax refund of $338,000 in March 1997.
Working capital as of September 30, 1998, December 31, 1997 and December 31,
1996 was 5.4 million, $3.9 million and $5.6 million, respectively, and cash
balances were $1.2 million, $1.8 million and $3.4 million, respectively, at
the same dates.
The Company has used its operating cash flow primarily to expand sales and
marketing activities, for acquisition and development of new products, for
capital expenditures and for working capital. Net cash used by investing
activities was $875,000 in 1996, $5.2 million in 1997, and $5.0 million and
$1.1 million for the nine months ended September 30, 1997 and 1998,
respectively. In 1996, the Company used $501,000 to purchase children's
activity assets, with substantially all of the balance devoted to capital
expenditures. In 1997, $4.6 million was used to purchase the assets of Delta
Play, Ltd., with the balance primarily devoted to capital expenditures. This
is the principal reason for the decrease in working capital and cash balances
at December 31, 1997. Net cash used in the nine months ended September 30,
1998 relate to capital expenditures for leasehold improvements related to a
new facility in British Columbia, tooling, computer hardware, computer
software, patents and intangibles. The Company also paid $610,160 of
additional consideration under the earn-out provisions of the Delta Play, Ltd.
purchase agreement in August 1998.
19
<PAGE>
The Company obtained a $2.0 million unsecured line of credit from a bank in
June 1997. The Company borrowed $500,000 on the line to fund operations after
the acquisition of the children's modular play equipment line in July 1997 and
repaid the loan from subsequent cash flow in the same month. Management
expects to use the credit facility periodically for short-term working capital
needs and for short-term financing of future acquisitions. The interest rate
on amounts borrowed under the line of credit ranges from LIBOR plus 2.25% to
LIBOR plus 2.75%. There were no amounts outstanding under the credit facility
as of September 30, 1998. This line of credit will be included as part of the
new $15.0 million secured credit facility that will be entered into in
connection with the Park Structures acquisition. This facility will also
include a $13.0 million secured revolving credit facility.
The Company intends to fund the initial $13.2 million cash portion of the
purchase price for the Park Structures acquisition through a combination of
the net proceeds from the Offering (approximately $4.8 million), existing cash
balances and a $13.0 million revolving credit facility from a bank. The
Company is in the process of negotiating and documenting the facility. The
Company anticipates that the credit facility will have a term of five years,
with required minimum annual reductions of $2.5 million in years two through
four. Loans under the facility will be secured by all of the assets of the
Company. The Company anticipates that the interest rate on amounts borrowed
under the line of credit will range from LIBOR plus 2.25% to LIBOR plus 2.75%.
Park Structures will also be entitled to receive up to an additional
$4.0 million in cash (and $1.5 million in Common Stock) if certain earnings
targets are met. See "Park Structures Acquisition." The Company currently
expects that all of such additional consideration will become payable. Any
such payments will be funded primarily from short-term borrowings under the
new credit facility. The Company believes that the working capital provided by
the Offering and cash flow from operations will be sufficient to fund its
operations for the foreseeable future.
YEAR 2000
Historically, certain computerized systems have used two digits rather than
four to identify the year. Computer equipment and software, as well as devices
with imbedded technology, that are depend on time or date information may
recognize a date using "00" as the year 1900 rather than the year 2000,
possibly resulting in range of problems, from simple miscalculations to total
system failures. This problem is generally referred to as the "Year 2000"
issue.
The Company has assessed its exposure to risks associated with the Year 2000
issue in terms of "internal" issues (systems and equipment which the Company
owns or controls), and "external" issues (systems and equipment of third
parties with whom the Company does business). For a discussion of the Year
2000 issues facing Park Structures, see "Management's Discussion & Analysis of
Results of Operations of Park Structures--Year 2000."
The Company has only limited information technology systems, consisting of
separate local area networks at its headquarters and Vancouver locations.
These networks run accounting software at both locations and design software
at the Vancouver location. The Company has completed assessment, remediation
through the installation of Year 2000 compliant software and independent
testing of all application software and the operating systems at both
locations, and believes that its information technology systems are Year 2000
compliant. The cost to the Company to achieve this compliance was
approximately $40,000, which was used to purchase software and hardware and to
pay independent consultants. The Company funded these costs from available
cash. The Company believes such remediation is complete, and expects that no
further costs of remeditation will be required. Should such remediation prove
inadequate, the most likely worst case scenario would be a failure of the
Company's computer systems, which would likely cause significant delays in
order taking, receiving, order fulfillment and other core functions which
would have a material adverse affect on the Company. However, because the
Company believes its remediation of its computer systems will allow the
Company to avoid the risks associated with the Year 2000 issues, it has not
developed a separate contingency plan for a scenario in which the Company's
remedial measures fail. The Company does not believe that it has any systems
or equipment other than its information technology systems that would have a
material adverse effect on the Company if such systems were not Year 2000
compliant.
20
<PAGE>
The Company is also evaluating whether there may be third parties that could
materially adversely affect the Company through non-compliance with the Year
2000 issue. The Company has identified Park Structures, suppliers, customers,
its bank and national delivery services as the parties most likely to
materially adversely affect the Company through such non-compliance. The risks
include the failure of suppliers to timely deliver materials and finished
products, the failure of customers to remit payments timely, the failure of
its bank to process its funds or loss of data relating to the Company's funds
and delays by national delivery services in shipments of the Company's
products. The most likely worst case scenario for the Company would be a
confluence of these events coupled with other adverse effects on the economy
generally that would impact sales of the Company's products. For a discussion
of Park Structures' Year 2000 readiness, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Park Structures--
Year 2000." The Company has contacted its ten largest suppliers and customers,
its bank and national delivery services to ascertain their Year 2000
readiness. To date, the Company has received responses from several of the
suppliers and customers, the bank and some of the national delivery services.
The respondents have indicated that they are at various stages of assessment,
remediation or testing of their systems relative to Year 2000 compliance.
Based on the responses, the Company does not foresee significant problems with
the Year 2000 issue and has not developed a contingency plan to deal with non-
compliance issues. Nevertheless, the Company will continue to monitor the
responses from third parties as well as the Year 2000 issue in general to
ascertain whether additional actions or contingency plans may be necessary. In
addition, despite its efforts to address Year 2000 issues, the Company could
potentially experience disruptions to its operations, including those related
to non-compliant systems used by third parties. Such disruptions could have a
material adverse effect on the Company.
NEW ACCOUNTING STANDARDS
SFAS No. 128, Earnings per Share, was issued in February 1997 and was
adopted by the Company effective for 1997. Earnings per share amounts for 1996
were restated in accordance with the provisions of SFAS No. 128. See Note 1 to
the Company's consolidated financial statements.
The FASB issued SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information, on June 30, 1997. This statement establishes additional
standards for segment reporting in the financial statements and is effective
for the Company's fiscal year ended December 31, 1998. Management intends to
comply with the disclosure requirements of this statement and does not
anticipate a material impact on the reported results of operations of each
segment.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1998. Management does not anticipate that the
adoption of this statement will have a significant effect on earnings or the
financial position of the Company.
21
<PAGE>
PARK STRUCTURES COMBINED SELECTED FINANCIAL DATA
(IN THOUSANDS)
The selected financial data of Park Structures as of and for each of the
last two fiscal years ended December 31, 1997 have been derived from the
audited combined financial statements of Park Structures. The selected
financial data of Park Structures as of and for the nine-month periods ended
September 30, 1997 and 1998 have been derived from the unaudited combined
financial statements of Park Structures which, in the opinion of the
management of Park Structures, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. The results
of operations for the nine-month period ended September 30, 1998 are not
necessarily indicative of results that may be expected for the full year. This
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Park Structures" and the
combined financial statements of Park Structures and notes thereto that appear
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- --------------
1996 1997 1997 1998
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.......................................... $7,145 $8,242 $5,717 $6,847
Cost of sales.................................. 4,910 5,560 3,857 4,084
------ ------ ------ ------
Gross profit................................... 2,235 2,682 1,860 2,763
Selling, general and administrative
expense....................................... 1,330 1,332 991 1,119
------ ------ ------ ------
Income from operations......................... 905 1,350 869 1,644
Other income (expense)......................... (622) (237) (193) 57
------ ------ ------ ------
Net income before taxes(1)..................... $ 283 $1,113 $ 676 $1,701
====== ====== ====== ======
- --------
(1) Park Structures has made an election under Subchapter S of the Internal
Revenue Code, and accordingly, no provision or liability for federal or
state income taxes is included.
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------- --------------
1996 1997 1997 1998
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:(1)
Total assets................................... $2,703 $3,275 $2,864 $5,165
Long term portion of capital lease
obligations................................... -- 19 -- 16
</TABLE>
- --------
(1)Excludes certain short-term liabilites of Park Structures that are not
being assumed by the Company.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF PARK STRUCTURES
PARK STRUCTURES OVERVIEW
Park Structures produces and markets children's outdoor modular play
equipment. Park Structures' customers include municipalities, parks, public
and private schools, day care centers and private developers. Sales are
primarily made through a network of approximately 40 national and
international dealers, except in the south Florida area, where direct sales
are made. Generally, Park Structures' sales cycle begins with the solicitation
of customers and responses to customers' bid specification proposals during
the period from November to March. Orders are received and the children's
modular play equipment is manufactured from April to October. As a result,
Park Structures typically carries a large backlog in the spring and early
summer months. Park Structures historically records a substantial majority of
its sales during the second six months of the year.
COMPONENTS OF REVENUE AND EXPENSES
Park Structures recognizes sales at the time its products are shipped. Cost
of sales consists of components manufactured for and by Park Structures and
direct labor and manufacturing overhead incurred by Park Structures. Certain
major components such as plastic molding and aluminum castings are
manufactured by outside vendors using Park Structures' proprietary molds and
tools.
Selling, general and administrative expenses consist primarily of executive
and office salaries, related payroll taxes, advertising expenses and other
miscellaneous selling expenses.
Other (income) expense consists primarily of interest income earned on cash
balances, interest expense on borrowed funds and fees paid to a related entity
for consulting services.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data stated as a
percentage of sales:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER SEPTEMBER
31, 30,
------------ ------------
1996 1997 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sales............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 68.7 67.5 67.5 59.6
----- ----- ----- -----
Gross profit..................................... 31.3 32.5 32.5 40.4
Selling, general and
administrative expenses......................... 18.6 16.1 17.3 16.3
----- ----- ----- -----
Income from operations........................... 12.7 16.4 15.2 24.1
Other (income) expense........................... 8.7 2.9 (3.4) .8
----- ----- ----- -----
Net income....................................... 4.0% 13.5% 11.8% 24.9%
===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Sales increased 19.8% or $1.1 million, to $6.8 million for the nine months
ended September 30, 1998 compared to $5.7 million for the nine months ended
September 30, 1997. The increase in sales occurred despite the relocation of
Park Structures' production facility in January 1998 and the relocation of the
powder coating operation to the new production facility in June 1998. The
implementation of new incentive programs for dealers and a more proactive
approach to managing the dealers led to the sales increases.
23
<PAGE>
Gross profit increased 48.5%, or $903,000, to $2.8 million for the nine
months ended September 30, 1998 compared to $1.9 million for the nine months
ended September 30, 1997 primarily due to significant decreases in costs of
certain component parts. These cost reductions were realized late in 1997 and
are primarily attributable to competitive bidding of vendors.
Selling, general and administrative expenses increased 12.9%, or $128,000,
to $1.1million for the nine months ended September 30, 1998 compared to
$991,000 for the nine months ended September 30, 1997. Sales and marketing
expense decreased $30,000, or 14.3%, to $180,000 for the nine months ended
September 30, 1998 from $210,000 for the nine months ended September 30, 1997.
This decrease was due to a decrease in catalogue distribution and advertising
in trade magazines. A significant increase is the $46,000 increase in rent
expense to $84,000 for the nine months ended September 30, 1998 from $38,000
for the nine months ended September 30, 1997. This was attributable to the
new, larger production facility.
Other (income) expenses consisted of a fee to a related entity which
decreased from $183,000 for the nine months ended September 30, 1997 to $0 for
the nine months ended September 30, 1998. This fee was paid pursuant to an
agreement with a shareholder. During the nine months ended September 30, 1998,
Park Structures recognized a $62,000 gain on the sale of assets related to the
disposition of the Park Structures' powder coating facility. This asset was
fully depreciated at the time of disposition and was replaced in June 1998
when Park Structures relocated its powder coating operations to the new
production facility.
Net income increased 151.6%, or $1.0 million, to $1.7 million for the nine
months ended September 30, 1998 from $676,000 for the nine months ended
September 30, 1997,as a result of the aforementioned factors.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales increased 15.3%, or $1.1 million, to $8.2 million in 1997 compared to
$7.1 million in 1996, primarily as a result of continued growth in demand for
Park Structures' products due to increased marketing efforts.
Gross profit increased 20.0%, or $446,000, to $2.7 million in 1997 compared
to $2.2 million in 1996. Inasmuch as gross profit margins remained fairly
constant, this increase directly relates to the increase in sales.
Selling, general and administrative expenses remained constant at $1.3
million in 1997 and 1996. Advertising expense increased by 54.1%, or $93,000,
to $265,000 in 1997 compared to $172,000 in 1996. This was attributable to an
increase in catalogue distribution and an increase in national advertising,
primarily in trade magazine publications. This increase was partially offset
by a decrease in bad debt expense. In 1996, $52,000 was written off because a
sales representative filed a petition for bankruptcy. There were no
significant amounts deemed uncollectible during 1997. The remaining increase
in advertising expense was offset by a decrease in salaries and benefits by
7.6%, or $65,000 to $784,000 in 1997 compared to $849,000 in 1996.
Other (income) expense consisted of a fee to a related entity, which
decreased $373,000, to $226,000 in 1997 from $599,000 in 1996. This fee was
paid pursuant to an agreement with an individual who subsequently became a
shareholder of Park Structures.
Net income increased $830,000 to $1.1 million in 1997 compared to $283,000
in 1996, as a result of the aforementioned reasons.
LIQUIDITY AND CAPITAL RESOURCES
Park Structures has financed its operations historically through proceeds
from a related party advance and internally generated cash. In May 1998, Park
Structures entered into an agreement with a bank for a $250,000 line of credit
which expires in June 1999. Advances of $178,900 were taken through September,
30 1998 under this line, which bears interest at the prime rate plus 0.50%.
Such advances were repaid as of November 30, 1998. This facility will not be
acquired by the Company.
24
<PAGE>
Park Structures' net increase (decrease) in cash and cash equivalents was
$293,000, ($204,000), ($254,001) and ($6,392) for the years ended 1996 and
1997 and the nine months ended September 30, 1997 and 1998, respectively.
The increase in cash for the year ended 1996 was due to a related party
advance of $508,000 which was partially utilized to fund the net cash used in
operations of $93,000 and to distribute $121,000 to the Company's shareholder.
The decrease in cash for 1997 was primarily due to net repayments to the
related party of $341,000 as well as $623,000 paid for leasehold improvements
on the new operating facility. These uses were offset by $761,000 of net cash
provided by operating activities primarily due to the $830,000 increase in net
income during 1997.
The decrease for the nine months ended September 30, 1997 is attributable to
a combination of $238,000 provided by operating activities offset by $175,000
used for the purchase of equipment and furniture for the new operating
facility and $317,000 related to the repayment of related party loans.
The decrease during the nine months ended September 30, 1998 was a
combination of $249,000 net cash provided by operating activities, primarily
attributable to the net income for the period, offset by net cash used in
investing activities of $197,000 for the purchase of equipment and furniture
for the new operating facility and the net cash used in financing activities
of $59,100 for shareholder distributions.
YEAR 2000
Because as the Park Structures acquisition has not been completed, the
Company has not completed its evaluation of Park Structures' Year 2000 issues.
Park Structures has informed the Company that it does not expects the cost to
modify its computer systems to address Year 2000 issues will be less than
$1,000 and that such remediation will be completed prior to the Year 2000.
Park Structures has informed the Company that it does not anticipate any
material disruption in its operations as a result of any Year 2000 issues.
Park Structures does not have any information concerning the potential impact
of Year 2000 issues on any of its suppliers or customers.
The Company plans to evaluate the potential impact of Year 2000 issues on
Park Structures' suppliers and customers. The Year 2000 issue could have a
material adverse effect on Park Structures' operations and on the Company.
25
<PAGE>
BUSINESS
Koala Corporation, a Colorado corporation, is a leading designer, producer
and worldwide marketer of innovative commercial products, systems and custom
solutions that create attractive family-friendly environments for businesses
and other public venues. The Company produces family convenience products,
such as baby changing stations and high chairs; children's activity products,
such as activity tables and activity carpets; and children's modular play
equipment. The Company intends to capitalize on brand name recognition
established through its market-leading Koala Bear Kare Baby's Changing
Station, which has been installed in approximately 300,000 public restrooms
worldwide. The Company's sales have grown from $3.8 million in 1993 to $13.6
million in 1997, representing a compound annual growth rate of 37.2%. Sales
for the nine months ended September 30, 1998 were $13.5 million. Net income
has grown from $1.0 million in 1993 to $2.4 million in 1997, representing a
compound annual growth rate of 25.8%, representing a 44.5% increase from the
same period in 1997. Net income for the nine months ended September 30, 1998
was $2.2 million, representing a 21.7% increase from the same period in 1997.
The Company markets its products, systems and custom solutions to a wide
range of businesses and public facilities that serve customers and visitors
who bring children to their establishments. The Company's 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. Management
believes that the Koala Bear Kare brand is widely recognized among family-
friendly businesses and their customers.
The Company provides high quality products with design features that cater
to the needs of its customers. The Company believes that competition in its
various product categories is fragmented and that Koala benefits from offering
a broad selection of products to its customers. The Company intends to
continue providing family-friendly products, systems and custom solutions
through strategic initiatives including: capitalizing on brand recognition;
maximizing market penetration; acquiring complementary businesses and
products; maintaining low cost, high quality production; developing new
solutions and enhanced products; and expanding its international marketing.
On August 14, 1998, the Company agreed to purchase the assets of Park
Structures, a manufacturer and marketer of outdoor children's modular play
equipment. Park Structures sells its products to municipalities, parks, public
and private schools, day care centers and private developers. Park Structures'
line of children's outdoor modular play equipment complements the Company's
existing line of children's indoor modular play equipment, and the acquisition
provides additional market opportunities for the Company.
HISTORY
The Company's predecessor was formed in 1987 to produce and market a newly-
designed baby changing station. This product has formed the foundation for the
Company's growth, and the Company believes that it is the market leader in
baby changing station products in terms of units sold. During the 1990's,
Koala has 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. The Company introduced the
Child Protection Seat in 1991 and the Infant Seat Kradle in 1993. In 1994, the
Company acquired the rights to the Booster Buddy booster seat. The Company
commenced its offering of children's activity systems in 1996, following the
acquisition of a producer of activity products. This acquisition initiated the
development of the Koala Kare System, which allows businesses to create custom
activity systems to suit individual space requirements and customer needs. The
Company continued to expand its product offerings in 1997 through new product
introductions, including the Koala 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, the Company will enter
the outdoor children's modular play market. As a result of the Company's
product diversification efforts, the Baby Changing Station, while continuing
to be a growth opportunity for the Company, is expected to represent less than
half of Koala's sales in 1998 and thereafter.
26
<PAGE>
INDUSTRY OVERVIEW
The Family Convenience and Children's Activity Market. The Company believes
that parents increasingly travel, shop and dine out with their children 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 the Company by the Howell Research Group reported
that seven out of ten parents (68%) interviewed shopped with their children
either all the time (27%) or most of the time (41%). According to the study,
the impact of child-friendly facilities is very positive. The majority of
women and a large number of the men interviewed, who shopped at child-friendly
stores, shopped more frequently and spent more time and money at these stores.
The Company believes that businesses increasingly need to create an
accommodating and positive environment for children in order to attract
customers, increase sales and create customer loyalty. The Company has
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 of the type targeted by the
Company, including restaurants, retail stores and shopping centers. The
Company estimates that the market for its children's activity products
includes approximately 1,500,000 facilities. The Company currently targets
over 60 categories of facilities to purchase its 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, such as quick
service restaurants, shopping malls, day care centers and family entertainment
centers. The Company believes 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, the Company believes
that customers increasingly are looking for theming and custom-designed
equipment in order to create a family-friendly atmosphere for their
businesses.
The children's outdoor modular play market for products produced by Park
Structures includes municipalities, schools, parks, amusement parks, day care
centers and apartment complexes. The Company believes that this market has
expanded for a number of reasons. Unlike the products of Park Structures, many
existing outdoor play structures are not accessible to people with
disabilities or the structures or their underlying surfaces do not comply with
current safety codes. In addition, wood structures, which were popular in the
1970s and 1980s, are not as popular today because of safety and maintenance
concerns and because they tend to deteriorate over time. Therefore, the
Company believes that municipal risk managers and others who control the
buying decisions regarding outdoor play systems, are seeking to replace or
expand their existing equipment.
BUSINESS STRATEGY
The Company's primary business objective is to grow its sales and earnings
by continuing to develop as a leading provider of family-friendly products,
systems and solutions. The Company's key strategic initiatives are summarized
below.
Capitalize on Brand Name Recognition. The Company believes that the Koala
Bear Kare brand name has achieved significant recognition with businesses and
their customers through the reputation of its Koala Bear Kare Baby Changing
Station. The Company intends to continue to leverage this brand recognition
through the marketing of its other family convenience and children's activity
products and children's modular play systems under the Koala Bear Kare name.
Maximize Market Penetration. The Company intends to continue to increase
market penetration through an integrated marketing effort that includes
manufacturer's representative and dealer sales, direct sales, trade shows and
trade magazine advertising. In 1997, the Company strengthened its existing
distribution network through the addition of more than 200 new manufacturer's
representatives and over 800 new dealers. The Company also intends to expand
cross-selling its products to new and existing customers and to expand the
categories of facilities that purchase its products.
27
<PAGE>
Acquire Complementary Businesses and Products. The Company has established a
formal acquisition program and regularly evaluates strategic acquisitions as a
means of adding complementary businesses and product lines. The Company has
completed several acquisitions and believes that there are opportunities to
acquire products or business lines that would complement current operations,
expand current product offerings and provide additional opportunities to
leverage the Company's marketing efforts.
Maintain Low Production Costs and High Quality. The Company has a "buy or
build" philosophy that seeks to maintain low production costs without
compromising quality. As a result, a substantial portion of its manufacturing
and assembly functions currently are outsourced, and certain design functions
are handled by the Company. The Company believes that outsourcing to qualified
suppliers where appropriate enables it to focus its resources on marketing and
sales while maintaining quality control through frequent contacts with its
suppliers.
Develop New Solutions. Koala seeks to develop new solutions in order to meet
customer expectations and expand its business. For example, the Koala
Highchair was designed and developed with unique features in response to
restaurants' concerns about the cleanliness and ease of use provided by their
existing highchairs. The Company also continually seeks to improve and enhance
its existing products and systems in response to customer needs.
Expand International Marketing. The Company sells its products worldwide.
Sales to customers outside of North America have increased from 12% of sales
in 1996 to 18% of sales in 1997. The Company intends to continue the expansion
of its international marketing activities by adding dealers and locating Koala
employees in selected markets around the world to supervise international
sales activity. In addition, the Company plans to increase its international
sales through increased cross-selling of its products and the marketing of the
outdoor modular play equipment of Park Structures.
PARK STRUCTURES
Park Structures, formed in 1986 and based in South Florida, is a leading
manufacturer and marketer of children's outdoor modular play equipment for
municipalities and other governmental agencies, parks, public and private
schools, day care centers and private developers. For the nine months ended
September 30, 1998, Park Structures had sales and operating income of $6.8
million and $1.6 million, respectively. Park Structures achieved compound
annual sales growth of 33.3% for the four years ended December 31, 1997. Park
Structures' products are sold on a national basis with a concentration of
sales in the southern United States. The Company believes there is an
opportunity to market its existing products through the Park Structures
distribution channels and to market its products as well as the Park
Structures products both to domestic customers and to customers in Europe and
Latin America. Park Structures' markets represent a new distribution
opportunity for the Company. The Company believes that it will be able to
increase the penetration of Park Structures' products to larger municipal
markets due to the Company's greater marketing and financial resources. Koala
intends to explore the opportunity to cross-sell its existing products into
the Park Structures markets and to introduce the Park Structures products to
its children's activity and indoor modular play customers.
PRODUCTS
The Company currently markets three groups of products: family convenience,
children's activity and children's modular play equipment products. These
products are sold to businesses and other customers located in all 50 states
and in approximately 50 foreign countries.
Family Convenience Products. The Company currently markets the following
family convenience products: the Koala Bear Kare Baby Changing Station, the
Koala Bear Kare Child Protection Seat, the Koala Bear Kare Infant Seat Kradle,
the Booster Buddy booster seat and the Koala Bear Kare Highchair. The Company
also markets disposable sanitary paper liners to be used with its 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. These
products are described below.
28
<PAGE>
Koala Bear Kare Baby Changing Station. Introduced in 1987, the Baby
Changing Station reinforced the need for publicly accessible baby changing
tables. The changing station provides customers with a safer and more
sanitary alternative to changing their children's diapers and encourages
customers to stay in a place of business instead of leaving to take care of
the baby. To date, there have been approximately 300,000 units installed
worldwide. The changing station fits in very small restrooms and is
available in a vertical, horizontal or counter-top design to accommodate a
variety of space requirements. A changing station unit is steel reinforced
to provide added safety and weight capacity. Each unit features child
protection straps with snap-lock fasteners that hold the child securely in
place. Stations are equipped with built-in sanitary liner dispensers.
Liners are biodegradable 3-ply paper and provide the same protection for an
infant that toilet seat covers provide adults. The paper liners are sold
separately to businesses with changing stations and provide the Company a
recurring revenue stream from its customers.
Koala Bear Kare Child Protection Seat. The Child Protection Seat is
designed for parents who need to use a restroom or dressing room in a
public place but are unable to fit their baby's stroller in the stall with
them. The protection seat mounts on the wall or door of a public restroom
stall or dressing room, offering customers a safer and more sanitary
alternative to leaving a child unattended or on the floor. The baby is kept
securely in place by child protection straps with snap-lock fasteners and a
uniquely designed tilt-back, polyethylene seat. The unit's compact folding
design fits easily in the smallest restrooms or dressing rooms and mounts
to a variety of surfaces.
Koala Bear Kare Infant Seat Kradle. The Infant Seat Kradle is effectively
a highchair for infants who are too small for high chairs. This product
permits parents in restaurants and other businesses to put their infant
carriers or car seats at table height. The Infant Seat Kradle consists of a
metal frame with a nylon mesh cradle and protection straps to hold the
infant carrier securely in place. The unit folds into a flat profile for
storage in tight spaces and, when open, takes up no more floor space than a
highchair.
Booster Buddy Booster Seat. The Booster Seat is designed to permit
children from the ages of 2 to 7 to enjoy movies, sports, theater and other
spectator events. The product reverses to provide two different height
levels for children and is equipped with a cup holder, a candy/popcorn
holder and built-in handle for easy carrying. The booster seat features an
easy-cleaning lightweight molded polyethylene design weighing only three
pounds. Seats stack together in an upright stand for easy storage and
accessibility to patrons.
Koala Bear Kare Highchair. The Highchair features a seamless molded
polyethylene construction that prohibits food and dirt from collecting in
hard-to-clean places, resulting in a more sanitary product. Its unique,
recessed two-wheel design allows for smooth movement and easy maneuvering,
yet eliminates accidental rolling. The polyethylene construction results in
a longer life and easier cleaning than wooden highchairs. The highchair is
stackable and easy to store.
Children's Activity Products. The Company's 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. The Company
markets these products individually or under the name Koala Kare Systems. The
Koala Kare Systems allow businesses to create custom activity systems to suit
individual space requirements and customer needs. These systems range from
individual activity tables in doctor's offices to large children's activity or
play areas in supermarkets comprising several thousand square feet where
children are supervised in a controlled environment. Selected activity
products with interactive video machines and other interactive products create
a children's activity setting that allows parents to shop while their children
are entertained and educated in a safe, clean and child-friendly environment.
Children's Modular Play Equipment. The Company currently markets modular and
custom themed children's indoor play equipment. The Company works with each
individual customer to create and produce custom designs that use traditional
modular components such as tunnels, walkways, ladders and ball pits either
alone or in combination to create a themed environment 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.
29
<PAGE>
The acquisition of Park Structures will expand the Company's product
offerings into children's outdoor modular play equipment. Park Structures
designs, manufactures and markets modular and custom outdoor play equipment
for municipalities and other governmental agencies, parks, public and private
schools, day care centers, developers and apartment complexes. The Park
Structures products consist of traditional modular outdoor playground
equipment such as decks, elevated climbing areas and slides. These components
are available in a wide variety of sizes, configurations and color options.
Park Structures custom designs its systems to meet customer requirements.
MARKETING AND SALES
Family Convenience and Children's Activity Products. The Company's marketing
strategy for its family convenience and child activity products consists of
extending the Koala Bear Kare brand name, introducing new concepts and
creating new groups of customers for its products around a theme of Happy
Faces in Public Places. The Company uses a combination of dealer sales and
direct sales to market these products.
Since 1995, the Company has increased its marketing budget in an effort to
increase sales of its products to a wider target market. In 1997, the Company
expanded its distribution network, which consists of manufacturer's sales
representatives and dealers, through the addition of more than 200 new
manufacturer's sales representatives and over 800 new dealers. The
manufacturer's sales representatives promote the Company's products to the
dealers, who purchase the products from the Company and resell them to
customers. The manufacturer's representatives receive commissions from the
sale of the Company's products. Most dealers are not granted any exclusive
rights for products or territory. Dealer sales have accounted for a minority
of the Company's domestic sales and a majority of the Company's foreign sales.
The Company's current distribution network consists of approximately 2,100
dealers served by over 300 manufacturer's sales representatives that serve
selected market segments. In addition, the Company markets directly to
national accounts who prefer to buy directly from manufacturers and other end
users that do not qualify as national accounts or are not served by dealers.
International dealers currently are served by factory sales managers who are
experienced in international sales. The Company intends to continue the
expansion of its international marketing activities by adding dealers and
locating Koala employees in selected markets around the world to supervise
international sales activity. In addition, the Company plans to increase its
international sales through increased cross-selling of its products and the
marketing of the outdoor modular play equipment of Park Structures.
The Company supports its marketing and sales activities through attendance
at numerous national and international industry trade shows in various market
segments and at local focused trade shows. The Company also invests in focused
advertising in trade magazines to promote its products to potential customers.
The theme of this advertising identifies the advantages to potential customers
in being family-friendly to promote increased business through increased
customer loyalty.
The Company conducts an active public relations program aimed at providing
information about the concept of being family-friendly and illustrating the
benefits of the Company's family convenience and children's activity products
for existing and prospective customers. The Company assists industry
publications in creating editorial content or news stories about the emerging
trends around families' decisions where to shop, eat or visit. In addition,
Company sales managers host educational seminars for decision makers at key
industry trade shows.
Children's Modular Play Equipment. The Company markets and sells its custom
indoor modular play equipment through trade show attendance, trade journal
advertising and regular contact by Company salespeople with designers of
projects in various markets. Park Structures sells nationwide and
internationally through a network of approximately 40 independent dealers and
through an in-house sales person who covers six counties in South Florida.
Park Structures' marketing programs include attendance at national industry
and regional trade shows, a focused media advertising campaign, incentive
programs designed to stimulate growth and the publication of a catalogue
depicting the products and capabilities of Park Structures.
30
<PAGE>
DESIGN AND MANUFACTURING
The Company has a "buy or build" philosophy that seeks to maintain low
production costs either through outsourcing or using Company personnel where
it is more cost-effective and does not compromise quality. As a result, a
substantial portion of its manufacturing and assembly functions currently are
outsourced, and certain design functions are handled by the Company. The
Company believes that outsourcing to qualified suppliers where appropriate
enables it to focus its resources on marketing and sales while maintaining
quality control through frequent contacts with its suppliers.
Family Convenience and Children's Activity Products. Koala develops the
concepts for its family convenience and children's activity products in
response to the needs of its customers. Following development of prototypes,
the Company outsources the design of the tooling for the production of these
products to independent designers. Product designs are incorporated into molds
and tooling owned by the Company. The Company provides these molds and tooling
to its suppliers in connection with the manufacture of the Company's products.
In the manufacturing process, components are molded to the Company's
specifications using various plastic molding processes, assembled and
delivered to the Company for shipment to customers. The Company uses a number
of manufacturers for its products. The Company believes that alternative
sources of supply are available for these products if necessary.
Children's Modular Play Equipment. The Company's design engineers custom
design its children's indoor modular play systems using computer aided design
technologies applied to modular components. The Company owns all of the
significant molds and tooling used in the manufacture of specialized
components used in the play equipment. Components for these systems are
manufactured to the Company's specifications and purchased from outside
vendors. The Company fabricates certain metal and fiberglass components at its
plant located near Vancouver, British Columbia, Canada. These components are
then assembled by the Company at the plant and shipped to customers.
Like the Company, Park Structures custom designs its children's outdoor play
systems by applying computer aided design technologies to modular components.
Park Structures subcontracts the plastic molding, fabrication and plastisol
coating of deck platforms and aluminum casting to outside subcontractors. Park
Structures owns all of the significant molds and tooling for these functions.
Park Structures fabricates the majority of the steel playground parts and
assembles its modular play equipment at its plant. The Company believes there
are alternative sources of supply for the manufacture of the modular play
equipment components.
COMPETITION
Family Convenience Products. The Company's family convenience products are
marketed to commercial customers and not to consumers. Presently, the
commercial products division of Rubbermaid Incorporated and a number of other
companies sell family convenience products to the commercial markets.
Management believes that such competition has not had a material impact on the
Company. The Company is not aware of any companies marketing diaper changing
stations intended for the commercial market that have a greater market share
than the Company. The Company believes that there is an under served market
for family convenience products. Koala believes that it is the only company
focused on marketing a wide variety of family convenience products to the
commercial market. The Company believes that its Koala Bear Kare products have
brand name recognition that provides the Company with a significant
competitive advantage. The Company competes principally on the basis of brand
name recognition, quality, customer service and price.
Children's Activity Products. 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. The
Company competes in this market through its ability to offer custom designed
products to its customers under its Koala Kare Systems program and on the
basis of product quality and service.
31
<PAGE>
Children's Modular Play Equipment. Competition in children's indoor modular
play equipment is primarily from Little Tikes Commercial Play Systems, Inc.
("Little Tikes"), a unit of Rubbermaid Incorporated, Miracle Recreation
Equipment Company and a number of other companies. The Company competes in the
children's indoor modular play market on the basis of quality, safety, service
and its ability to provide a custom themed unit designed to meet the unique
needs of the customer. Competition in children's outdoor modular play
equipment is primarily from Game Time, Inc., a subsidiary of PlayCore, Inc.,
Miracle Recreation Equipment Company, Landscape Structures, Inc., Little Tikes
and several companies with limited financial and operational resources. The
Company believes that Park Structures competes on the basis of design,
quality, safety, price and customer service.
PRODUCT WARRANTIES AND INSURANCE
For its 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 limited warranty on parts and labor covering
any defects in workmanship. For its children's 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
metallic parts. The Company has experienced minimal returns and warranty
claims. The Company carries product liability insurance in an amount that the
Company deems adequate. Product liability claims against the Company and Park
Structures to date have been immaterial. See "Risk Factors--Product Liability
Risks."
PATENTS AND TRADEMARKS
The Company has registered various trademarks, including the "Koala Bear
Kare" name and several variations of the Koala Bear Kare logo that is featured
on the Company's products. The Company believes that the various Koala Bear
Kare trademarks are widely recognized and important to the Company. Each of
the Company's products marketed under this trademark prominently displays a
blue and white sticker with one of the Company's trademarks. The Company has
also registered the trademark "Booster Buddy" and the registration of the
trademarks "Delta Play" and "Happy Faces in Public Places" currently are being
sought. Park Structures does not have registered trademarks but believes that
it has proprietary rights to its play equipment designs.
The Company holds design patents for certain of its products. These patents
prevent competitors from duplicating the design elements of the Company's
products, but the Company does not believe that such patents provide
significant barriers to entry.
REGULATION
Certain of the Company's products are subject to the provisions of, among
other laws, the Federal Consumer Product Safety Act and the Federal Hazardous
Substances Act (the "Acts"), which empower the Consumer Product Safety
Commission (the "CPSC") to require the repair, replacement or refund of the
purchase price of products that present a substantial risk of injury to the
public, and in the event the CPSC finds that no feasible consumer product
safety standard under the Acts would adequately protect the public, to order
such product banned. 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.
The Company's indoor modular play equipment and the outdoor modular play
equipment of Park Structures are designed and inspected to meet the safety
guidelines of the CPSC and the American Society for Testing and Materials
("ASTM") for commercial playground systems. The Company conducts in-house
testing and inspection to ensure that they comply with the CPSC and ASTM
guidelines. Park Structures is a member of the International Play Equipment
Manufacturers Association ("IPEMA"), a member driven international trade
organization that represents and promotes an open market for manufacturers of
playground equipment.
32
<PAGE>
The Company's operations in the United States do not involve manufacturing
or other activities that would subject it to laws and regulations concerning
environmental issues. The Company's assembly plant in Vancouver, British
Columbia performs light fabrication activities utilizing paint, metal and
fiberglass. The Company has obtained the necessary permits to conduct these
activities, and the Company believes that they have been conducted in
compliance with Canadian environmental laws and regulations. Park Structures
engages in manufacturing and assembly operations at its leased facility in
Florida. The Company believes that the Park Structures operations are
conducted in compliance with federal and state environmental laws and
regulations.
EMPLOYEES
The Company had approximately 90 full-time employees at September 30, 1998,
with 30 located in the United States and 60 located in Canada. The Company's
United States employees are not covered by any collective bargaining
agreements. In August 1998, the Company's Canadian employees held an election
regarding potential representation by the International Wood and Allied
Workers of Canada ("IWA"). The election resulted in a sufficient vote to
certify the union. The Company has begun the collective bargaining process
with the IWA. Management believes that relations with its employees are good.
Park Structures had 90 employees at September 30, 1998. The Park Structures
employees are not covered by any collective bargaining agreements.
PROPERTIES
The Company leases approximately 900 square feet of office space in Denver,
Colorado for its corporate office and 15,000 square feet of office and
warehouse space in Denver, Colorado for sales, receiving and shipping
operations. These leases expire in 2001. In addition, the Company leases a
67,000 square foot plant near Vancouver, British Columbia, where it conducts
its indoor modular play equipment manufacturing and assembly operations. This
lease expires in 2003. Park Structures leases a 90,000 square foot facility in
Coral Springs, Florida for its manufacturing and assembly operations. This
lease expires in 2002, with two options to renew the lease for additional five
year terms. The Company believes that its current facilities and those of Park
Structures are adequate for its existing needs.
LEGAL PROCEEDINGS
The Company and Park Structures are and have been a party to litigation in
the ordinary course of their businesses. The Company does not believe that any
current litigation will have a material adverse effect upon its business,
financial condition or results of operations.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the names, ages and positions of the directors and
executive officers of the Company as of September 30, 1998.
<TABLE>
<CAPTION>
DIRECTOR/OFFICER
NAME AGE COMPANY POSITION SINCE
---- --- ---------------- ----------------
<S> <C> <C> <C>
Mark A. Betker.......... 47 Chairman, President, Chief 1995
Executive Officer and Director
Jeffrey L. Vigil........ 45 Treasurer and Vice President of 1996
Finance and Administration
James A. Zazenski....... 33 Executive Vice President and 1997
General Manager
Michael C. Franson...... 43 Director 1994
Thomas W. Gamel......... 58 Director 1993
John T. Pfannenstein.... 41 Director 1993
Ellen S. Robinson....... 35 Director 1997
</TABLE>
Mark A. Betker has served as Chief Executive Officer, President and a
Director since joining the Company in November 1995, and as Chairman since
December 1996. From 1986 to 1995, Mr. Betker was executive vice president of
Windsor Industries Inc., a world-wide manufacturer of building maintenance
equipment. Mr. Betker received a M.B.A. degree from Regis University and a
B.A. degree from the University of Wisconsin.
Jeffrey L. Vigil has served as the Company's Treasurer and Vice President of
Finance and Administration since May 1996. From 1980 to 1989 and from 1993 to
1996, Mr. Vigil held various positions at Energy Fuels Corporation, a
privately owned Colorado natural resources company, including Accounting
Manager, Contract Administrator, Controller and Vice President of Finance.
From 1990 to 1993 Mr. Vigil was a self-employed financial consultant. From
1976 until 1979, Mr. Vigil served as an auditor with Arthur Anderson LLP. Mr.
Vigil is a certified public accountant and received a B.A. degree in
Accounting from the University of Wyoming.
James A. Zazenski has served as the Company's Executive Vice President and
General Manager since June 1997. From 1984 to 1997, Mr. Zazenski held various
positions at Windsor Industries, Inc., the last of which was Vice President of
Marketing. Mr. Zazenski received an M.B.A. degree and a B.A. degree from the
University of Colorado at Denver.
Michael C. Franson is a Director of the Company. He is currently an
Executive Vice President and principal of The Wallach Company, Inc., an
investment banking firm located in Denver, Colorado where he has worked since
1988. Mr. Franson received a M.B.A. degree from the Graduate School of
Business at the University of Oregon and an undergraduate degree from
California State University at Chico.
Thomas W. Gamel is a Director of the Company. Since 1992, Mr. Gamel has
served as Chairman of Rockmont Capital Partners, Ltd., formerly Rockmont Value
Investors, Ltd. ("Rockmont"), a privately-held investment company based in
Denver, Colorado. He has been an owner and director of Timpte Industries,
Inc., a diversified holding company since 1970, and is an owner and director
of several other private companies. Mr. Gamel received a B.A. degree from the
University of Notre Dame. Mr. Gamel has served as a director of United States
Exploration Inc., a publicly traded company, since 1997.
John T. Pfannenstein is a Director of the Company. From 1993 to 1995, he
served as the Company's Chairman of the Board, and from 1993 to May 1996 he
served as the Company's Treasurer. Mr. Pfannenstein co-founded Rockmont in
1992 and has served as its President since that time. Mr. Pfannenstein
received a B.A. degree from St. John's University (Minnesota).
34
<PAGE>
Ellen S. Robinson is a Director of the Company. Ms. Robinson served as
President of Ascent Sports, Inc. from June 1996 until July 1998, where she
oversaw the business operations of the Colorado Avalanche professional hockey
team and the Denver Nuggets professional basketball team. From 1988 to 1996,
Ms. Robinson was the vice president of customer development, general manager
and area marketing manager for the Pepsi Cola Bottling Company in Denver. Ms.
Robinson also serves as a director of a number of private non-profit
businesses. Ms. Robinson received a B.A. degree from the Wharton School of
Business at the University of Pennsylvania and a certificate in international
business from the University of Colorado.
Each director holds office until the next annual meeting of shareholders and
until his or her successor is duly elected and qualified. There are no family
relationships among directors or executive officers except that John T.
Pfannenstein and Jeffrey L. Vigil are brothers-in-law.
BOARD COMMITTEES
The Board of Directors has an Audit Committee, which consists of Mr.
Franson, Mr. Pfannenstein and Ms. Robinson. The purpose of the Audit Committee
is to recommend the appointment of the independent auditors for the Company,
review the scope of the audit, examine the auditors' reports, make appropriate
recommendations to the Board of Directors as a result of such review and
examination, and make inquiries into the effectiveness of the financial and
accounting functions and controls of the Company. The Audit Committee held two
meetings during 1997. The Company has no nominating or compensation
committees.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the years ended December
31, 1995, 1996 and 1997 for the Chief Executive Officer of the Company and the
other executive officer who received compensation of $100,000 or more during
the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ------------
NUMBER OF
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#)
- ----------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Mark A. Betker.......... 1997 159,230 27,659 -- --
Chief Executive Officer 1996 175,000 27,850 -- (2) --
1995 22,884(1) -- -- (2) 250,000
Jeffrey L. Vigil........ 1997 103,595 3,000 -- 10,000
Vice President 1996 53,846 -- -- --
Finance and
Administration 1995 -- -- -- --
</TABLE>
- --------
(1) Does not include consulting fees paid to Mr. Betker prior to his
employment by the Company in the amount of $18,000.
(2) Does not include an estimated aggregate total of $20,000 for the years
1995 and 1996 relating to housing costs, temporary living expenses, nor
certain out-of-pocket travel expenses incurred by Mr. Betker related to
travel to and relocation in Denver.
35
<PAGE>
OPTION GRANTS DURING 1997
<TABLE>
<CAPTION>
NUMBER OF % OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ---- ---------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Mark A. Betker..... -0- n/a n/a n/a
Jeffrey L. Vigil... 10,000(1) 32.2% $13.00 January 29, 2007
</TABLE>
- --------
(1) Options vest at a rate of 2,000 shares per year, on the anniversary date
of the grant, over the next five year period. The anniversary date of the
grant is January 29, 1997.
AGGREGATE OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
The following table summarizes the value of the unexercised options held by
the executive officers named in the summary compensation table as of December
31, 1997. There were no options exercised by any officers or directors of the
Company during 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING THE VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT "IN-THE-MONEY"
DECEMBER 31, 1997 OPTIONS AT DECEMBER 31, 1997(1)
------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
- ---- ----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Mark A. Betker..... 100,000 150,000 600,000 900,000
Jeffrey L. Vigil... -0- 10,000 -0- 42,500
</TABLE>
- --------
(1) "Value of Unexercised "In-the-Money' Options" is equal to the difference
between the closing bid price per share of the Company's Common Stock as
reported by Nasdaq on December 31, 1997, the last day of trading in 1997
($17.25 per share), and the option exercise price, multiplied by the
number of shares subject to such options.
COMPENSATION OF DIRECTORS
The Company does not pay employees or affiliates additional compensation for
services as a director. The Company pays each non-employee, unaffiliated
director an annual retainer of $5,000 and a fee of $1,000 per meeting
attended. The Board of Directors has also authorized payment of reasonable
travel and out-of-pocket expenses incurred by directors in attending board
meetings.
The Company's directors who are not employees of the Company are eligible to
be granted non-qualified stock options. The Company's directors who are also
employees of the Company are eligible to be granted incentive stock options.
During the year ended December 31, 1997, the Company granted 1,000 options to
Mr. Franson and 1,000 options to Ms. Robinson.
STOCK OPTION PLAN
The Company has approved the adoption of two stock option plans which allow
for the issuance of stock options to officers, employees and directors, and to
consultants who render bona fide services to the Company. In August 1993, the
Company adopted a Stock Option Plan (the "1993 Plan") which provides for the
issuance of options to purchase up to 100,000 shares of the Company's Common
Stock. In November 1995, the Company adopted another stock option plan. That
plan was amended and restated in May 1998 (the "Amended Plan"). The Amended
Plan provides for the issuance of options exercisable for up to 650,000 shares
of the Company's Common Stock. The purposes of both the 1993 Plan and the
Amended Plan are to advance the interest of the Company and its shareholders
by affording employees, directors and consultants ("Eligible Persons") upon
whose judgment, initiative and efforts the Company may rely for the successful
conduct of its business, an
36
<PAGE>
opportunity for investment in the Company and the incentive advantages
inherent in stock ownership in the Company. The 1993 Plan and the Amended Plan
(collectively, the "Plans") authorize the Board of Directors of the Company to
grant options to purchase shares of Common Stock to Eligible Persons selected
by the Board while considering criteria such as employment position or other
relationship with the company, duties and responsibilities, ability,
productivity, length of service or association, morale, interest in the
Company, recommendations by supervisors and other matters. There are currently
approximately 95 individuals who may be deemed Eligible Persons to receive
options under the Plans.
The Plans are administered by the Board, which selects the optionees and
determines: (i) the number of shares of Common Stock to be subject to each
option; (ii) the type of each option to be granted (non-qualified or incentive
stock option); (iii) the time at which each option is to be granted; (iv) the
purchase price for the option shares; (v) the option period; and (vi) the
period over which the option vests.
The Amended Plan permits the Board to designate certain options granted
under the Amended Plan as incentive stock options (an "Incentive Stock
Option"). An option designated by the Board as an Incentive Stock Option is
intended to qualify as an "incentive stock option" within the meaning of
Section 422 of the Internal Revenue Code. The purchase price of the Incentive
Stock Option may generally not be less than 100% of the fair market value of
the stock at the time the option is granted (110% if the optionee owns more
than 10% of the total voting shares of the Company). In addition, the
aggregate fair market value, determined at the time of grant, of the shares
under any Incentive Stock Option which are exercisable for the first time by
any one individual in any calendar year may not exceed $100,000. An Incentive
Stock Option may only be granted to an Eligible Person who is an employee of
the Company.
With respect to options that are not Incentive Stock Options ("Non-Qualified
Stock Options"), the exercise price may be less than the fair market value of
the applicable shares on the date of grant. The period within which any option
must be exercised may not be later than ten years from the date on which the
option was granted. An employee generally must exercise an option within three
months after the termination of his employment with the Company. At the time
of exercise the optionee must pay to the Company the full purchase price of
the shares in cash, shares of the Company's Common Stock having a fair market
value equal to the purchase price, or a combination of cash and shares.
DIRECTOR LIABILITY
The Company's articles of incorporation provide that a director shall not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its shareholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under the Colorado statutory
provision making directors personally liable for unlawful dividends, unlawful
stock repurchases or redemptions, and loans and guarantees of loans to
directors by the Company; or (iv) for any transaction for which the director
derived an improper personal benefit. This provision of the Company's articles
of incorporation does not affect the availability of equitable remedies such
as injunctive relief to prevent or remedy a director's breach of the duty of
care.
INDEMNIFICATION
Sections 7-109-102 and 7-109-107 of the Colorado Business Corporation Act
provide that a corporation may indemnify its current and former officers,
directors, employees and agents against reasonable expenses (including
attorneys' fees), judgments, penalties, fines and amounts paid in settlement
which, in each case, were incurred in connection with actions, suits, or
proceedings in which such persons are parties by reason of the fact that they
are or were an officer, director, employee or agent of the corporation, if:
(i) they acted in good faith; (ii) in the case of conduct in an official
capacity with the corporation; the conduct was in the corporation's best
interests; (iii) in all other cases, the conduct was at least not opposed to
the corporation's best interests; and (iv) in the case of a criminal
proceeding, they had no reasonable cause to believe the conduct was unlawful.
The
37
<PAGE>
corporation may not indemnify an officer, director, employee or agent of the
corporation: (i) in connection with a proceeding by the corporation or
enforcing rights of the corporation in which such person is adjudged liable to
the corporation or (ii) in connection with any proceeding charging improper
personal benefit, whether or not acting in an official capacity, in which such
person is adjudged liable on the basis that personal benefit was improperly
received. Unless limited by its articles of incorporation, a corporation shall
be required to indemnify an officer, director, employee, or agent who was
wholly successful in defense of a proceeding, against reasonable attorneys'
fees.
The articles of incorporation of the Company provide that the Company will
exercise, to the extent permitted by law, its power of indemnification, and
that the foregoing right of indemnification shall not be exclusive of other
rights to which a person shall be entitled as a matter of law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
38
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of October 31, 1998, the number of shares
of Common Stock beneficially owned by (i) each person known by the Company to
be the beneficial owner of more than 5% of the outstanding share of Common
Stock, (ii) each director of the Company, (iii) each executive officer, (iv)
all directors and executive officers of the Company as a group, and (v) the
Selling Shareholder.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) SHARES OFFERING(1)
----------------- BEING ---------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Rockmont Capital Limited
Liability Company(2)................ 1,073,000 42.5% 880,000 193,000 6.8%
700 Broadway, Suite 800
Denver, Colorado 80203
John T. Pfannenstein(2).............. 193,000 7.6 -- 193,000 6.8
700 Broadway, Suite 800
Denver, Colorado 80203
Thomas W. Gamel(2)................... 783,300 31.0 783,300 -0- *
700 Broadway, Suite 800
Denver, Colorado 80203
Mark A. Betker(3).................... 156,000 5.8 -- 156,000 5.2
5031 So. Ulster St., Suite 300
Denver, Colorado 80237
Jeffrey L. Vigil(4).................. 2,000 * -- 2,000 *
5031 So. Ulster St., Suite 300
Denver, Colorado 80237
Michael C. Franson(5)................ 2,400 * -- 2,400 *
1401 17th Street, Suite 750
Denver, Colorado 80202
Ellen S. Robinson(5)................. 2,000 * -- 2,000 *
1635 Clay Street
Denver, Colorado 80204
James A. Zazenski.................... -0- * -- -0- *
11600 E. 53rd Ave., Suite D
Denver, Colorado 80239
All directors and executive officers
as a group (7 persons)(6).......... 1,235,400 46.1 355,400 11.8
</TABLE>
- --------
* Less than one percent.
(1) Where the persons listed have the right to acquire additional shares of
Common Stock through the exercise of options or warrants within sixty days
of October 31, 1998, such additional shares are deemed to be outstanding
for the purpose of computing the percentage of outstanding shares owned by
such person, but are not deemed to be outstanding for the purpose of
computing the percentage ownership interest of any other person. Unless
otherwise indicated, each of the following persons has sole voting and
investment power with respect to the shares of Common Stock set forth
opposite their respective names.
39
<PAGE>
(2) Rockmont Capital Limited Liability Company ("Rockmont Capital") is the
owner of 1,073,000 shares of the Company's Common Stock. John T.
Pfannenstein, who is a Director of the Company, owns a 17.5 percent
membership interest in and is the Manager of Rockmont Capital. Each of the
following persons is an owner of a portion of the membership interests of
Rockmont Capital as indicated and is thereby deemed the beneficial owner
of a portion of the shares held by Rockmont Capital as follows:
<TABLE>
<CAPTION>
PERSON'S MEMBERSHIP NUMBER OF SHARES PERCENT OF
NAME INTEREST BENEFICIALLY OWNED OUTSTANDING SHARES
---- ------------------- ------------------ ------------------
<S> <C> <C> <C>
David B. Gamel.......... 20.9% 223,800 8.85%
Leslie D. Gamel......... 20.9% 223,800 8.85%
Lara M. Gamel........... 20.9% 223,800 8.85%
Lisa Gamel Scott........ 10.4% 111,900 4.42%
Robert D. Scott......... 9.4% 101,660 4.02%
</TABLE>
David, Leslie and Lara Gamel, and Lisa Gamel Scott (who is the wife of
Robert D. Scott), who are all brother and sisters, have agreed that their
father, Thomas W. Gamel, a Director of the Company, has the exclusive right
to vote their membership interests in Rockmont Capital until October 12,
1999, and each has agreed not to dispose of any membership interest in
Rockmont Capital without the consent of the Manager of Rockmont Capital,
currently John T. Pfannenstein, until October 12, 1999. Accordingly, Mr.
Gamel is deemed to be the beneficial owner of 783,300 shares of Common
Stock owned by Rockmont Capital.
Following the Offering, Rockmont will own a total of 193,000 shares of
Common Stock, of which Mr. Pfannenstein will own 188,040 shares and Mr.
Scott will own 4,960 shares.
(3) Includes options to acquire an aggregate of 150,000 shares of Common Stock
at exercise prices ranging from $9.25 to $13.25 per share.
(4) Consists of an option to acquire 2,000 shares of Common Stock at an
exercise price of $13.00 per share.
(5) Includes an option to acquire 2,000 shares of Common Stock at an exercise
price of $13.00 per share.
(6) Includes options to acquire 154,000 shares of Common Stock.
40
<PAGE>
DESCRIPTION OF SECURITIES
The articles of incorporation of the Company authorize the issuance of
10,000,000 shares of Common Stock, $.10 par value, and 1,000,000 shares of
Preferred Stock. The following description of the Company's Common Stock and
Preferred Stock is qualified in all respects by reference to the articles of
incorporation and bylaws of the Company, copies of which are exhibits to the
registration statement of which this Prospectus is a part. As of November 25,
1998, there were 2,527,362 shares of Common Stock outstanding, 101 holders of
record of Common Stock and approximately 2,200 beneficial holders of the
Common Stock.
COMMON STOCK
Holders of the Company's Common Stock are entitled to one vote for each
share held on each matter submitted to a vote of shareholders. Cumulative
voting for the election of directors is not permitted. Holders of Common Stock
have no preemptive rights. There are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock and such shares are
not subject to further calls or assessments by the Company. Holders of Common
Stock are entitled to participate pro rata in any dividends, if and when
declared, and in distributions upon any liquidation of the Company. The
Company does not intend to pay any cash dividends on its Common Stock in the
foreseeable future. See "Dividend Policy."
All of the outstanding shares of Common Stock are duly and validly
authorized and issued, fully paid and nonassessable. The additional shares of
Common Stock to be issued in connection with the Offering will be, upon
issuance against full payment of the purchase price therefor, duly and validly
authorized and issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further shareholder
approval, to issue up to 1,000,000 shares of Preferred Stock from time to time
in one or more series, to establish the number of shares to be included in
each such series, and to fix the designation, powers, preferences and rights
of the shares of each such series and the qualifications, limitations or
restrictions thereof. The issuance of Preferred Stock may have the effect of
delaying or preventing a change in control of the Company. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of the Common
Stock. In certain circumstances, such issuances could have the effect of
decreasing the market price of the Common Stock. As of the closing of the
Offering, no shares of Preferred Stock will be outstanding and the Company
currently has no plans to issue any shares of Preferred Stock.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer & Trust, Inc., Denver, Colorado.
41
<PAGE>
UNDERWRITING
The Underwriters named below, for which Cleary Gull Reiland & McDevitt Inc.,
Tucker Anthony Incorporated and Craig-Hallum Capital Group, Inc. are acting as
the representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company and the Selling Shareholder the number of shares of Common Stock set
forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Cleary Gull Reiland & McDevitt Inc.................................
Tucker Anthony Incorporated........................................
Craig-Hallum Capital Group, Inc....................................
---------
Total............................................................ 1,200,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby (other than those
shares covered by the over-allotment option described below), if any are
purchased.
The Company and the Selling Shareholder have been advised that the
Underwriters propose to offer the Common Stock to the public at the offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share and that the
Underwriter and such dealers may reallow a discount of not in excess of $
per share to other dealers. The offering price and the concession and discount
to dealers may be changed by the Representatives after the Offering.
In the Underwriting Agreement, the Company has granted the Underwriters an
option, expiring at the close of business on the 45th day subsequent to the
date of this Prospectus, to purchase up to an aggregate of 180,000 additional
shares of Common Stock at the offering price, less the underwriting discount
set forth on the cover page of this Prospectus. The Underwriters may exercise
such option solely to cover over-allotments, if any, in the sale of the
shares. To the extent the Underwriters exercise such option, the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage of the option shares as the number of shares
to be purchased by it showing in the table above bears to 1,200,000, and the
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters, for which the Company will receive all of the proceeds.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments that the Underwriters may be
required to make with respect thereof. The liability of the Selling
Shareholder under this indemnity is limited to the amount of its proceeds.
The Company and certain shareholders, who collectively will beneficially own
approximately 355,000 shares of Common Stock immediately following the
Offering, have agreed that they will not, directly or indirectly, offer, sell
or otherwise dispose of any shares of Common Stock, other than the shares
offered pursuant to this Prospectus, for a period of 180 days from the date of
this Prospectus without the prior written consent of Cleary Gull Reiland &
McDevitt Inc.
In connection with the Offering, the Underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock. Such
transactions may include stabilization transactions effected in accordance
with Regulation M, pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriters
also may create a short position for the account of the Underwriters by
selling more Common Stock in connection with the Offering than it is committed
to purchase from the Company and the Selling Shareholder,
42
<PAGE>
and in such case may purchase Common Stock in the open market following
completion of the Offering to cover all or a portion of such short position.
The Underwriters may also cover all or a portion of such short position, up to
180,000 shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. The Underwriters and selling group members may
engage in passive market making transactions in the Common Stock on the Nasdaq
Stock Market in accordance with Rule 103 of Regulation M. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if it is undertaken, it may be discontinued at any time.
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary
authority.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholder by Otten, Johnson, Robinson, Neff &
Ragonetti, P.C., Denver, Colorado. Certain legal matters will be passed upon
for the Underwriters by Gibson, Dunn & Crutcher LLP.
EXPERTS
The balance sheet of the Company as of December 31, 1996, and the statements
of income, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1996 included in this Prospectus and in
the Registration Statement, have been included herein in reliance on the
report of Blanski Peter Kronlage & Zoch, P.A., independent public accountants,
given on the authority of that firm as experts in auditing and accounting.
The consolidated financial statements of Koala Corporation as of December
31, 1997 and for the year then ended appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, to the extent indicated in their report thereon appearing elsewhere
herein and in the Registration Statement. Such consolidated financial
statements have been included herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The balance sheets of Delta Play Ltd. as of March 31, 1996 and 1997, and the
statements of income and retained earnings and statements of changes in
financial position for the years ended March 31, 1996 and 1997 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young,
chartered accountants, to the extent indicated in their report thereon
appearing elsewhere herein and in the Registration Statement. Such financial
statements have been included herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The balance sheets of Park Structures as of December 31, 1996 and 1997, and
the statements of income, changes in shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1997 included in this
Prospectus and in the Registration Statement, have been included herein in
reliance on the report of Goldstein Lewin & Co., independent public
accountants, given on the authority of that firm as experts in accounting and
auditing.
43
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information may be inspected and
copied at the public reference facilities of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices
located at: Seven World Trade Center, New York, New York 10048, and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained at prescribed rates from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Those materials may also be obtained from The Nasdaq Stock Market, 1735
K Street, NW, Washington, D.C. 20006, or may be obtained electronically on the
Commission's home page on the Internet at http://www.sec.gov.
This Prospectus constitutes part of a Registration Statement filed by the
Company with the Commission under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus omits certain of the information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement and related exhibits and schedules for further
information with respect to the Company and the Common Stock offered hereby.
Any statements contained elsewhere in this Prospectus concerning the
provisions of any documents are not necessarily complete, and in each instance
reference is made to the copy of the document filed as an exhibit to the
Registration Statement.
44
<PAGE>
KOALA CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KOALA CORPORATION
Independent Auditors' Reports............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September
30, 1998 (unaudited)..................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1995,
1996, and 1997
and the Nine Month Periods Ended September 30, 1997 and 1998 (unau-
dited)................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1995, 1996 and 1997 and the Nine Month Period Ended
September 30, 1998 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997
and the Nine Month Periods Ended September 30, 1997 and 1998 (unau-
dited)................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
PARK STRUCTURES, INC.
Independent Auditor's Report.............................................. F-16
Combined Balance Sheets as of December 31, 1996 and 1997 and September 30,
1998 (unaudited) ........................................................ F-17
Combined Income Statements for the Years Ended December 31, 1996 and 1997
and the Nine Month Periods Ended September 30, 1997 and 1998 (unaudited)
......................................................................... F-18
Combined Statement of Stockholder's Equity for the Years Ended December
31, 1996 and 1997
and the Nine Month Period Ended September 30, 1998 (unaudited) .......... F-19
Combined Statements of Cash Flows for the Years Ended December 31, 1996
and 1997
and the Nine Month Periods Ended September 30, 1997 and 1998 (unaudited)
......................................................................... F-20
Notes to Combined Financial Statements.................................... F-22
DELTA PLAY, LTD.
Auditor's Report.......................................................... F-27
Balance Sheets as of March 31, 1996 and 1997.............................. F-28
Statements of Income and Retained Earnings for the Years Ended March 31,
1996 and 1997............................................................ F-29
Statements of Changes in Financial Position for the Years Ended March 31,
1996 and 1997............................................................ F-30
Notes to Financial Statements............................................. F-31
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Financial Statements Introduction........ F-39
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1998... F-40
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1997........................................................ F-41
Unaudited Pro Forma Consolidated Statement of Income for the Nine Months
Ended September 30, 1998................................................. F-42
Notes to Unaudited Pro Forma Consolidated Financial Statements............ F-43
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheet of KOALA CORPORATION (a
Colorado corporation) as of December 31, 1996, and the related statements of
income, changes in shareholders' equity, and cash flows for the years ended
December 31, 1995 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 financial position of KOALA CORPORATION as of
December 31, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1995 and 1996, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota Blanski Peter Kronlage & Zoch, P.A.
February 12, 1997
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of KOALA
CORPORATION (a Colorado corporation) as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides 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, 1997, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Denver, Colorado Ernst & Young LLP
February 10, 1998
F-2
<PAGE>
KOALA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1996 1997 1998
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 3,442,601 $ 1,832,677 $ 1,187,522
Accounts receivable, trade (less al-
lowance for doubtful accounts of
$30,000 in 1996, $45,703 in 1997 and
$45,054 (unaudited) in 1998)......... 1,656,515 2,212,802 3,229,418
Refundable income taxes............... 338,200 74,523 --
Inventories........................... 443,680 1,103,355 1,708,608
Prepaid expenses...................... 82,460 416,120 693,622
Deferred offering and acquisition
cost................................. 251,000
Deferred income taxes................. 10,900 14,314 14,314
----------- ----------- -----------
Total current assets.................... 5,974,356 5,653,791 7,084,484
----------- ----------- -----------
Property and equipment.................. 863,285 1,561,324 1,972,848
Less accumulated depreciation and amor-
tization............................... 165,496 322,616 508,082
----------- ----------- -----------
697,789 1,238,708 1,464,766
----------- ----------- -----------
Other assets:
Intangibles (net of accumulated amor-
tization of $295,360 in 1996,
$496,221 in 1997 and $699,466 (unau-
dited) in 1998)...................... 3,679,057 8,064,301 8,534,896
----------- ----------- -----------
$10,351,202 $14,956,800 $17,084,146
=========== =========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 273,511 $ 1,312,518 $ 1,328,002
Accrued expenses and income taxes..... 56,921 396,163 389,136
----------- ----------- -----------
Total current liabilities............... 330,432 1,708,681 1,717,138
----------- ----------- -----------
Deferred income taxes................... 242,200 398,047 398,047
----------- ----------- -----------
Commitments and contingencies (Notes 3
and 4)
Shareholders' equity:
Preferred stock, no par value;
1,000,000 shares authorized; issued
and outstanding 0 in 1996 and 1997,
and 0 (unaudited) in 1998........... -- -- --
Common stock, $.10 par value;
10,000,000 shares authorized; issued
and outstanding 2,481,260 in 1996,
2,527,362 in 1997 and 1998 (unau-
dited)............................... 248,126 252,736 252,736
Additional paid-in capital............ 4,651,884 5,307,988 5,307,988
Other comprehensive income............ -- (25,124) (127,971)
Retained earnings..................... 4,878,560 7,314,472 9,536,208
----------- ----------- -----------
Total shareholders' equity.............. 9,778,570 12,850,072 14,968,961
----------- ----------- -----------
$10,351,202 $14,956,800 $17,084,146
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
KOALA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................... $6,537,440 $8,938,282 $13,621,292 $9,340,926 $13,492,507
Cost of sales........... 2,551,676 3,241,328 5,528,542 3,615,529 5,977,138
---------- ---------- ----------- ---------- -----------
Gross profit............ 3,985,764 5,696,954 8,092,750 5,725,397 7,515,369
Selling, general and
administrative
expenses............... 1,543,495 2,892,095 4,230,988 2,857,808 3,894,621
Amortization of intangi-
bles................... 86,375 105,677 200,861 134,251 196,137
---------- ---------- ----------- ---------- -----------
Income from operations.. 2,355,894 2,699,182 3,660,901 2,733,338 3,424,611
---------- ---------- ----------- ---------- -----------
Other (income) expense:
Interest income........ (109,249) (129,463) (115,708) (97,541) (19,940)
Relocation expenses.... 0 288,923 0 0 0
---------- ---------- ----------- ---------- -----------
(109,249) 159,460 (115,708) (97,541) 19,940
---------- ---------- ----------- ---------- -----------
Income before income
taxes.................. 2,465,143 2,539,722 3,776,609 2,830,879 3,444,551
Provision for income
taxes.................. 890,447 644,182 1,340,697 1,004,962 1,222,815
---------- ---------- ----------- ---------- -----------
Net income.............. $1,574,696 $1,895,540 $ 2,435,912 $1,825,917 $ 2,221,736
========== ========== =========== ========== ===========
Net income per share.... $ 0.66 $ 0.78 $ 0.97 $ 0.73 $ 0.88
========== ========== =========== ========== ===========
Weighted average shares
outstanding............ 2,399,312 2,431,016 2,503,654 2,496,223 2,527,362
========== ========== =========== ========== ===========
Net income per share--
diluted................ $ 0.65 $ 0.75 $ 0.96 $ 0.72 $ 0.86
========== ========== =========== ========== ===========
Weighted average shares
outstanding--diluted... 2,411,416 2,523,265 2,548,148 2,535,770 2,588,018
========== ========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
KOALA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
--------- -------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 2,399,312 $239,931 $4,639,179 $1,408,324 $ 0 $ 6,287,434
Net income.............. 1,574,696 1,574,696
Foreign currency trans-
lation adjustment...... 0 0
-----------
Comprehensive income.... 1,574,696
--------- -------- ---------- ---------- --------- -----------
Balance, December 31,
1995................... 2,399,312 239,931 4,639,179 2,983,020 0 7,862,130
Net income.............. 1,895,540 1,895,540
Foreign currency trans-
lation adjustment...... 0 0
-----------
Comprehensive income.... 1,895,540
Issuance of common
stock, exercise of op-
tions and warrants
(cashless)............. 81,948 8,195 (8,195) 0
Issuance of 2,200 war-
rants.................. 20,900 20,900
--------- -------- ---------- ---------- --------- -----------
Balance, December 31,
1996................... 2,481,260 248,126 4,651,884 4,878,560 0 9,778,570
Net income.............. 2,435,912 2,435,912
Foreign currency trans-
lation adjustment...... (25,124) (25,124)
-----------
Comprehensive income.... 2,410,788
Issuance of common stock
for acquisition of
Delta Play, Ltd........ 40,000 4,000 596,000 600,000
Issuance of common stock
for exercise of war-
rants.................. 6,102 610 60,104 60,714
--------- -------- ---------- ---------- --------- -----------
Balance, December 31,
1997................... 2,527,362 252,736 5,307,988 7,314,472 (25,124) 12,850,072
Net income (unaudited).. 2,221,736 2,221,736
Foreign currency trans-
lation adjustment (un-
audited)............... (102,847) (102,847)
-----------
Comprehensive income.... 2,118,889
--------- -------- ---------- ---------- --------- -----------
Balance, September 30,
1998 (unaudited)....... 2,527,362 $252,736 $5,307,988 $9,536,208 ($127,971) $14,968,961
========= ======== ========== ========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
KOALA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income.............. $1,574,696 $1,895,540 $2,435,912 $1,825,917 $2,221,736
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 55,162 83,148 163,133 92,287 186,926
Amortization........... 86,375 105,677 200,861 134,251 196,137
Loss on disposal of
property and equip-
ment.................. 332 31,796 0 0 0
Deferred income taxes.. 115,852 (18,852) 152,433 0 0
(Increase) decrease in
assets:
Accounts receivable,
trade................ 16,498 (683,191) (416,618) (604,481) (974,233)
Refundable income tax-
es................... (81,009) (172,815) 263,677 338,200 74,523
Inventories........... (168,641) (80,410) (106,791) 2,115 (643,853)
Prepaid expenses...... 25,528 (35,942) (313,293) (395,283) (292,528)
Deferred offering and
acquisition costs.... 0 (251,000)
Increase (decrease) in
liabilities:
Accounts payable...... (40,882) 177,492 818,509 706,829 58,524
Accrued expenses...... (8,207) 20,983 157,125 (102,742) 107,874
Accrued income taxes.. 0 0 180,764 213,937 (119,924)
---------- ---------- ---------- ---------- ----------
Net cash provided by op-
erating activities..... 1,575,704 1,323,426 3,535,712 2,211,030 564,182
---------- ---------- ---------- ---------- ----------
Cash flows from invest-
ing activities:
Payments for capital
expenditures.......... (126,183) (367,264) (520,321) (401,124) (430,479)
Purchase of Activities
Unlimited, LLC........ 0 (501,188) 0 0 0
Purchase of Delta Play,
Ltd., net of cash ac-
quired................ 0 0 (4,634,802) (4,594,455) (610,160)
Payments for patents
and intangibles....... (3,966) (6,503) (21,730) (20,461) (65,851)
---------- ---------- ---------- ---------- ----------
Net cash used by invest-
ing activities......... (130,149) (874,955) (5,176,853) (5,016,040) (1,106,490)
---------- ---------- ---------- ---------- ----------
Cash flows from financ-
ing activities:
Proceeds from exercise
of common stock war-
rants................. 0 0 39,633 0 0
---------- ---------- ---------- ---------- ----------
Net cash provided by fi-
nancing activities..... 0 0 39,633 0 0
---------- ---------- ---------- ---------- ----------
Effect of exchange rate
changes on cash........ 0 0 (8,416) 0 (102,847)
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash................ 1,445,555 448,471 (1,609,924) (2,805,010) (645,155)
Cash at beginning of pe-
riod................... 1,548,575 2,994,130 3,442,601 3,442,601 1,832,677
---------- ---------- ---------- ---------- ----------
Cash at end of period... $2,994,130 $3,442,601 $1,832,677 $ 637,591 $1,187,522
========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of operations:
Koala Corporation and its wholly owned subsidiaries (the "Company") is a
leading designer, producer and worldwide marketer of innovative commercial
products, systems and custom solutions that create attractive family-friendly
environments for businesses and other public venues. The Company produces
family convenience products, children's activity products and children's
indoor and outdoor modular play equipment.
Principles of consolidation:
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 operations of Delta
Play, Ltd. are included in the accompanying financial statements from June 1,
1997, the effective date of its acquisition. See note 10 below.
Relocation:
The Company completed the relocation of its executive offices from St. Paul,
Minnesota to Denver, Colorado during the third quarter of 1996. Total
relocation costs were approximately $289,000. The Company also established a
new manufacturing relationship with a Denver firm to manufacture and assemble
its products. Previously, the Company assembled its own products.
Use of estimates:
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. 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.
Unaudited information:
The accompanying consolidated balance sheets, consolidated statements of
income, consolidated statements of changes in shareholders' equity and
consolidated statements of cash flows as of and for the nine months ended
September 30, 1997 and 1998 are unaudited and have been prepared on the same
basis as the audited consolidated financial statements included herein. In the
opinion of management, such unaudited consolidated financial statements
include all adjustments necessary to present fairly the information set forth
therein, which consists solely of normal recurring adjustments. The results of
operations for the interim period presented are not necessarily indicative of
the results for a full year.
Reclassification:
Certain amounts in the financial statements for the years ended December 31,
1995 and 1996 have been reclassified to conform to the December 31, 1997
presentation.
Cash and cash equivalents:
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
F-7
<PAGE>
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, 1996 and 1997, cash and cash equivalents approximated
fair value and consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash in primary banking institution................... $ 459,364 $ 863,084
Cash in money market mutual funds..................... 2,983,237 969,593
---------- ----------
$3,442,601 $1,832,677
========== ==========
</TABLE>
Inventories:
Inventories are stated at the lower of first-in, first-out cost (including
manufacturing overhead applied to finished goods) or market. As of December
31, 1996, 1997 and September 30, 1998, inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................. $ 62,879 $ 605,066 $1,024,828
Finished goods............................. 380,801 498,289 683,780
-------- ---------- ----------
$443,680 $1,103,355 $1,708,608
======== ========== ==========
</TABLE>
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 lives of the assets. The
following is a schedule of estimated useful lives of property and equipment:
<TABLE>
<S> <C>
Furniture and fixtures............................................ 7 years
Tooling and molds................................................. 6-10 years
Shop and office equipment......................................... 3-10 years
</TABLE>
Intangibles:
Acquisition intangibles represent the excess of the cost of the companies
acquired over the fair value of their net assets at the date of acquisition.
Acquisition intangible costs are being amortized on the straight-line method
using an estimated useful life of up to 40 years.
Costs of obtaining patents and trademarks are capitalized and amortized on
the straight-line basis over 17 years for patents and 20 years for trademarks
once approval is granted. Costs are expensed if approval is denied.
Revenue recognition:
The Company recognizes revenues at the time its products are shipped.
Research and development costs:
Research and development costs are expensed when incurred. The Company's
research and development costs were not significant in 1995, 1996 or 1997.
F-8
<PAGE>
Advertising costs:
Advertising costs are expensed when incurred. Advertising expense for the
periods ended December 31, 1995, 1996, and 1997 was $492,871, $728,528, and
$405,178, respectively. Prepaid advertising costs at December 31, 1995, 1996,
and 1997 were $22,861, $29,508, and $35,724, respectively, and consist of
costs of advertising which have not taken place.
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 and the allowance for
uncollectible accounts.
The Company does not provide for U.S. income taxes on the unremitted
earnings of its foreign subsidiary ($290,337 at December 31, 1997) because the
Company intends to reinvest such unremitted earnings. Where it is contemplated
earnings may be remitted from the foreign subsidiary, the credit for foreign
taxes already paid generally offsets applicable federal income taxes.
Net income per share:
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods were
restated to conform to the Statement 128 requirements.
There is no difference between after-tax earnings for calculation of basic
earnings per share versus diluted earnings per share. The reconciliation of
the weighted average shares outstanding for purposes of calculating basic
earnings per share versus diluted earnings per share is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares out-
standing for basic earnings
per share.................. 2,399,312 2,431,016 2,503,654 2,496,223 2,527,362
Effect of dilutive securi-
ties:
Employee stock options.... 11,914 79,448 39,666 37,871 60,656
Warrants.................. 190 12,801 4,828 1,676 --
--------- --------- --------- --------- ---------
Dilutive potential common
shares..................... 12,104 92,249 44,494 39,547 60,656
--------- --------- --------- --------- ---------
Weighted average shares out-
standing for dilutive earn-
ings per share............. 2,411,416 2,523,265 2,548,148 2,535,770 2,588,018
========= ========= ========= ========= =========
</TABLE>
Foreign Currency Translation:
The financial statements of the Company's subsidiary located outside the
United States are measured using the local currency as the functional
currency. Assets and liabilities of this subsidiary are translated at the
rates of exchange at the balance sheet date. The resultant translation
adjustments are included in other comprehensive income, a separate component
of shareholders' equity. Income and expense items are translated at average
rates of exchange. Gains and losses on foreign currency transactions of these
subsidiaries are included in net earnings.
F-9
<PAGE>
Geographic Area Data:
The Company operates in one principal industry segment: the design,
manufacture and sale of children's protection and activity products. The
Company's products are sold primarily to commercial and governmental markets.
Geographically, sales, operating income and identifiable assets for non-
domestic entities for the year ended December 31, 1997 were $3,189,800,
$439,000 and $1,931,400, respectively. There were no material amounts of sales
or transfers among geographic areas during 1997.
2. CREDIT FACILITY:
The Company obtained a $2.0 million unsecured line of credit in June 1997.
The line of credit may be used for short-term working capital needs and future
acquisitions. There are no compensating balance requirements and the credit
facility requires compliance with financial loan covenants related to debt
levels compared to annualized cash flows from operations. The credit facility
terminates on June 24, 1999. There were no amounts outstanding under the
credit facility as of December 31, 1997.
3. COMMITMENTS AND CONTINGENCIES:
Operating lease:
The Company has entered into operating leases for facilities located in
Denver, Colorado, New Orleans, Louisiana and Delta, British Columbia, Canada.
The lease terms vary and run through July 31, 2001. All leases call for
monthly base rents, with the Company responsible for its share of common
building operating costs, payable on a monthly basis.
Facilities rent expense was $62,777, $85,146, and $187,719 for the years
ended December 31, 1995, 1996, and 1997, respectively. Total minimum operating
lease commitments for the years ending December 31 are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1998.......................................................... $122,841
1999.......................................................... 85,440
2000.......................................................... 85,440
2001.......................................................... 42,931
--------
$336,652
========
</TABLE>
Warranties:
For its 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 limited warranty on parts and labor covering
any defects in workmanship. For its children's modular play equipment, the
Company provides a one year limited warranty on parts and labor covering
defects in workmanship. The Company has experienced minimal returns and
warranty claims; therefore, as of December 31, 1995, 1996 and 1997, no accrual
has been made for future claims. The Company carries product liability
insurance in an amount that the Company deems adequate.
4. STOCK OPTIONS AND WARRANTS:
Options:
The Company adopted a Stock Option Plan (1993 Plan) in August 1993. The 1993
Plan provides that options to purchase up to 100,000 shares of common stock
may be granted. The Company adopted a second plan in November 1995 (1995 Plan)
which provides that additional options to purchase up to 400,000 shares of
common stock may be granted. The Company amended the 1995 Plan subsequent to
December 31, 1997. See footnote 12. 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.
F-10
<PAGE>
The Company applies APB Opinion 25 in accounting for its stock based
compensation plans. Accordingly, no compensation cost has been recognized for
the plan in 1995, 1996 and 1997. Had compensation cost been determined on the
basis of fair value pursuant to FASB Statement No. 123, net income and
earnings per share would have been presented as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported.................................. $1,574,696 $1,895,540 $2,435,912
========== ========== ==========
Pro forma (FASB 123)......................... $1,490,760 $1,713,373 $2,259,337
========== ========== ==========
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share:
As reported................................. $ 0.66 $ 0.78 $ 0.97
========== ========== ==========
Pro forma (FASB 123)........................ $ 0.62 $ 0.70 $ 0.90
========== ========== ==========
Diluted earnings per share:
As reported................................. $ 0.65 $ 0.75 $ 0.96
========== ========== ==========
Pro forma (FASB 123)........................ $ 0.62 $ 0.68 $ 0.89
========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
ASSUMPTION 1995 1996 1997
- ---------- ------------ ------------ -------
<S> <C> <C> <C>
Dividend yield................................ 0.00% 0.00% 0.00%
Risk-free interest rate:
5 year...................................... 5.38% 5.38% 5.71%
2 year...................................... 5.18% 5.18% --
Expected life................................. 2 to 5 years 2 to 5 years 5 years
Expected volatility........................... 30.47% 30.47% 38.70%
</TABLE>
F-11
<PAGE>
Following is a summary of the status of the plans:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding 12/31/94................................. 20,000 $ 5.50
Granted--1995...................................... 327,500 $10.46
-------
Outstanding 12/31/95................................. 347,500 $10.18
Surrendered--1996.................................. (46,783) $ 7.94
Exercised--1996.................................... (50,717) $ 7.93
-------
Outstanding 12/31/96................................. 250,000 $11.25
Granted--1997...................................... 33,000 $13.54
-------
Outstanding 12/31/97................................. 283,000 $11.52
Cancelled--1998 (unaudited)........................ (10,000)
Granted--1998 (unaudited).......................... 130,000 $18.62
-------
Outstanding 9/30/98 (unaudited)...................... 403,000 $14.09
-------
</TABLE>
In 1995, 1997 and 1998, no options were exercised. In 1996, 46,783 options
were exercised in a cashless exercise; 50,717 shares were issued.
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Options exercisable..................................... 97,500 50,000 103,000
====== ====== =======
Weighted average fair value of options granted during
the year............................................... $10.46 $ 0.00 $ 5.76
====== ====== =======
</TABLE>
A summary of the status of fixed options outstanding at December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
EXERCISABLE
OUTSTANDING OPTIONS OPTIONS
---------------------------- ---------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
PRICE NUMBER LIFE PRICE NUMBER PRICE
- ----- ------- ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$9.25 to $11.25.................... 151,000 8.0 years $ 9.92 61,000 $ 9.92
$13.00 to $15.00................... 132,000 8.5 years $13.34 52,000 $13.24
</TABLE>
The Company acquired Activities Unlimited LLC in March 1996. A portion of
the purchase price is in the form of options to purchase common stock of the
Company. Options were granted to the sellers of Activities Unlimited based on
operations during the first two years following the closing of the acquisition
(March 1997 and 1998). Options to purchase 1,000 shares will be granted for
each $25,000 of product line contribution, will be fully vested when granted
and will be exercisable at date of grant, expiring five years after date of
grant. The exercise price will be the fair market value of a share of stock on
the date of grant. As of December 31, 1997, 1,000 options had been granted
under this agreement.
Warrants:
The Company granted to the underwriter of its 1993 stock offering, for
nominal consideration, warrants to purchase up to 70,000 shares of its common
stock at $7.20 per share, beginning in October 1994 and expiring in October
1999. In January 1996, the underwriter exercised the warrants in a cashless
transaction, receiving 31,231 shares and surrendering 38,769 warrants.
F-12
<PAGE>
The Company acquired the assets of A & B Booster, Inc. in 1994. A portion of
the purchase price is in the form of warrants to purchase common stock at an
exercise price of $6.50 per share. Warrants were issuable to the sellers of A
& B Booster based on 100 shares of common stock of the Company for each whole
multiple of $10,000 of Booster Buddy sales in each of the three years
beginning August 1, 1994, 1995 and 1996. The warrants were exercisable at any
time prior to January 1, 1998. As of December 31, 1997, all warrants had been
surrendered and 6,102 shares of common stock had been issued. As of December
31, 1995 and 1996, there were 1,700 and 3,900 warrants outstanding,
respectively.
5.INCOME TAXES:
The components of the provision for income tax were:
<TABLE>
<CAPTION>
1995
----------------------------------------
FEDERAL FOREIGN STATE TOTAL
---------- -------- ------- ----------
<S> <C> <C> <C> <C>
Current tax expense................ $ 700,282 $ -- $74,313 $ 774,595
Deferred tax (benefit)............. 122,393 -- (6,541) 115,852
---------- -------- ------- ----------
Provision for income taxes......... $ 822,675 $ -- $67,772 $ 890,447
========== ======== ======= ==========
<CAPTION>
1996
----------------------------------------
FEDERAL FOREIGN STATE TOTAL
---------- -------- ------- ----------
<S> <C> <C> <C> <C>
Current tax expense................ $ 600,306 $ -- $62,728 $ 663,034
Deferred tax (benefit)............. (15,170) -- (3,682) (18,852)
---------- -------- ------- ----------
Provision for income taxes......... $ 585,136 $ -- $59,046 $ 644,182
========== ======== ======= ==========
<CAPTION>
1997
----------------------------------------
FEDERAL FOREIGN STATE TOTAL
---------- -------- ------- ----------
<S> <C> <C> <C> <C>
Current tax expense................ $ 963,764 $159,798 $64,702 $1,188,264
Deferred tax expense............... 152,406 -- 27 152,433
---------- -------- ------- ----------
Provision for income taxes......... $1,116,170 $159,798 $64,729 $1,340,697
========== ======== ======= ==========
</TABLE>
The Company's net deferred tax asset and liability consists of:
<TABLE>
<CAPTION>
1996
------------------------------
FEDERAL STATE TOTAL
--------- -------- ---------
<S> <C> <C> <C>
Deferred income tax asset (current)........ $ 9,850 $ 1,050 $ 10,900
Deferred income tax liability (non-
current).................................. (218,850) (23,350) (242,200)
--------- -------- ---------
$(209,000) $(22,300) $(231,300)
========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------
FEDERAL STATE TOTAL
--------- -------- ---------
<S> <C> <C> <C>
Deferred income tax asset (current)........ $ 13,538 $ 776 $ 14,314
Deferred income tax liability (non-
current).................................. (376,459) (21,588) (398,047)
--------- -------- ---------
$(362,921) $(20,812) $(383,733)
========= ======== =========
</TABLE>
F-13
<PAGE>
The effective tax rate differs from the statutory rate as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate................................... 34.0% 34.0% 34.0%
Foreign taxes in excess of federal statutory rate........ -- -- 4.6
Tax benefit of foreign tax credit........................ -- -- (4.4)
State income taxes net of federal effect................. 2.5 2.4 1.7
Effect of difference in tax basis of goodwill............ (1.5) (1.5) (1.1)
Cumulative effect of change in estimated effective state
income tax rate......................................... -- (3.3) --
Tax basis of non-qualified stock options exercised....... -- (5.6) --
Miscellaneous tax adjustments............................ 1.1 ( .6) .7
---- ---- ----
Effective tax rate....................................... 36.1% 25.4% 35.5%
==== ==== ====
</TABLE>
6. MAJOR SUPPLIERS:
For the periods ended December 31, 1995, 1996, and 1997, the Company
purchased a significant amount of component parts from three vendors which
accounted for approximately 64%, 69%, and 47% of the Company's total cost of
sales, respectively.
7. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Interest received................................. $109,249 $129,463 $104,839
======== ======== ========
Interest paid..................................... $ -- $ -- $ 989
======== ======== ========
Income taxes paid................................. $855,604 $835,849 $872,304
======== ======== ========
</TABLE>
8. 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 contributions to the Plan during 1997.
9. PREFERRED STOCK:
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, 1996 and December 31, 1997, none were outstanding. The Board
of Directors is granted authority to determine all rights with respect to the
preferred stock, including dividends.
10. ACQUISITIONS:
On June 23, 1997, the Company acquired substantially all of the assets of
Delta Play, Ltd. (Delta), a leading provider of custom children's indoor
modular play equipment based in Vancouver, British Columbia. The acquisition
was effective June 1, 1997 and was accounted for as a purchase. Results of
operations of Delta were included in the Company's consolidated statements of
income beginning on the effective date.
F-14
<PAGE>
As initial consideration, the Company paid $4,180,609 cash and issued 40,000
shares of the Company's common stock valued at $600,000. In addition, costs
related to the acquisition of approximately $456,000 were incurred and
capitalized as goodwill. The purchase agreement also provides for additional
consideration in the form of cash payments if certain operating performance
criteria are met by Delta over the twelve-month period from June 1, 1997 to
May 31, 1998. The range of additional consideration is C$900,000 (US$648,000)
to C$1,500,000 (US$1,080,000). If minimum performance is not achieved, no
additional consideration will be payable. Any subsequent payment will be
allocated to cost in excess of the fair value of assets acquired.
The pro forma unaudited results of operations for the twelve months ended
December 31, 1996 and 1997, assuming consummation of the purchase as of
January 1, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Sales.................................................. $13,526,902 $15,499,336
Net income............................................. $ 2,167,408 $ 2,513,770
Net income per share (diluted)......................... $ 0.85 $ 0.98
</TABLE>
In March 1996, the Company acquired all of the operating assets of
Activities Unlimited, LLC for $500,000 paid in cash. The Company markets
children's recreational and activity products, including commercial-use
children's play tables featuring interlocking construction blocks, games,
mazes, wall activities and other manipulative products. Due to immateriality,
its pro forma effects were not considered in the table above.
11. COMPREHENSIVE INCOME:
As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires foreign currency translation adjustments, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130.
12. SUBSEQUENT EVENTS (UNAUDITED):
On August 14, 1998, the Company signed an agreement to purchase the combined
assets of Park Structures, Inc. and Park Structures Sales, Inc. ("Park
Structures") in exchange for consideration of up to $18.7 million in cash and
common stock of Koala Corporation. Park Structures produces and markets
children's outdoor modular play systems for municipalities, parks, public and
private schools, day care centers and private developers. Closing of the Park
Structures acquisition will occur simultaneously with closing of a secondary
public offering of the Company's common stock. The Company plans to issue
approximately 320,000 shares of common stock pursuant to such offering, and
will utilize available cash and a revolving line of credit from a bank to
complete the financing of the purchase.
In August 1998, the Company paid $610,160 in additional consideration
pursuant to the earnout provisions of the Delta purchase agreement. The
additional consideration paid was treated as goodwill and recorded to
intangibles on the balance sheet.
In January 1998, the Company authorized the amendment and restatement of the
1995 Koala Corporation Stock Option Plan to grant an additional 250,000 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-15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Park Structures, Inc. and Affiliate
Coral Springs, Florida
We have audited the accompanying combined balance sheets of Park Structures,
Inc. and Affiliate as of December 31, 1997 and 1996, and the related combined
statements of income, retained earnings and stockholder's equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Park Structures,
Inc. and Affiliate at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Boca Raton, Florida
July 28, 1998 Goldstein Lewin & Co.
F-16
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 537,609 $ 333,521 $ 327,129
Accounts receivable.................. 1,183,401 1,099,070 2,129,993
Other receivables.................... -- -- 14,942
Inventories.......................... 939,850 1,073,006 1,582,798
Prepaid expenses..................... -- 21,797 105,597
Current portion of note receivable... -- -- 15,000
Current portion of deferred rent
expense............................. -- 13,307 13,307
---------- ---------- ----------
Total current assets.................. 2,660,860 2,540,701 4,188,766
---------- ---------- ----------
Property and equipment, net........... 38,173 666,385 816,244
---------- ---------- ----------
Other assets:
Note receivable, net of current
portion............................. -- -- 30,000
Deferred rent expense, net of current
portion............................. -- 42,138 32,158
Deposits............................. 3,663 25,350 98,164
---------- ---------- ----------
3,663 67,488 160,322
---------- ---------- ----------
$2,702,696 $3,274,574 $5,165,332
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of capital lease
obligations......................... $ -- $ 4,091 $ 4,360
Accounts payable and accrued
expenses............................ 601,242 338,233 513,150
Customers' deposits.................. -- 39,428 118,401
Line of Credit....................... -- -- 178,900
Loan from related party.............. 807,603 466,956 430,956
---------- ---------- ----------
Total current liabilities............. 1,408,845 848,708 1,245,767
---------- ---------- ----------
Capital lease obligations, net of
current portion...................... -- 18,818 15,513
---------- ---------- ----------
Commitments and contingencies
Stockholder's equity:
Common stock......................... 1,000 1,000 1,000
Retained earnings.................... 1,292,851 2,406,048 3,903,052
---------- ---------- ----------
1,293,851 2,407,048 3,904,052
---------- ---------- ----------
$2,702,696 $3,274,574 $5,165,332
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales, net................ $7,145,279 $8,241,758 $5,717,299 $6,847,436
Cost of goods sold........ 4,909,576 5,559,611 3,856,888 4,083,517
---------- ---------- ---------- ----------
Gross profit.............. 2,235,703 2,682,147 1,860,411 2,763,919
Selling, general and
administrative expenses.. 1,330,301 1,332,366 991,422 1,119,499
---------- ---------- ---------- ----------
Income from operations.... 905,402 1,349,781 868,989 1,644,420
---------- ---------- ---------- ----------
Other income and
(expenses):
Interest income.......... 9,224 31,640 25,729 8,129
Interest expense......... (31,978) (41,763) (35,766) (13,508)
Fee to related entity.... (599,219) (226,461) (182,604) --
Gain on sale of assets... -- -- -- 62,000
---------- ---------- ---------- ----------
Total other income and
(expenses)............... (621,973) (236,584) (192,641) 56,621
---------- ---------- ---------- ----------
Net income................ $ 283,429 $1,113,197 $ 676,348 $1,701,041
========== ========== ========== ==========
Pro forma net income data
(unaudited):
Net income, as reported.. $ 283,429 $1,113,197 $ 676,348 $1,701,041
Pro forma tax provision
(Note 1)................. 103,000 419,000 254,000 640,000
---------- ---------- ---------- ----------
Pro forma net income...... $ 180,429 $ 694,197 $ 422,348 $1,061,041
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK (NOTE 8)
----------------------------
SHARES
---------------------
PARK
PARK STRUCTURES
STRUCTURES SALES, RETAINED
INC. INC. AMOUNT EARNINGS
---------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1996............. 500 500 $1,000 $1,130,850
Distributions........................ (121,428)
Net income........................... 283,429
--- --- ------ ----------
Balance, December 31, 1996........... 500 500 1,000 1,292,851
Net income........................... 1,113,197
--- --- ------ ----------
Balance, December 31, 1997........... 500 500 1,000 2,406,048
Distributions (unaudited)............ (204,037)
Net income (unaudited)............... 1,701,041
--- --- ------ ----------
Balance, September 30, 1998
(unaudited)......................... 500 500 $1,000 $3,903,052
=== === ====== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1997 1998
-------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $283,429 $1,113,197 $676,348 $1,701,041
Adjustments to reconcile net in-
come to net cash provided by
(used in) operating activities:
(Gain) on sale of assets........ (62,000)
Depreciation.................... 25,236 19,075 15,442 58,712
Changes in assets and
liabilities:
(Increase) decrease in:
Accounts receivable............ (664,153) 84,331 (93,115) (1,030,923)
Other receivables.............. (14,942)
Inventories.................... (179,876) (133,156) (90,124) (509,792)
Prepaid expenses............... (21,797) (26,518) (83,800)
Deferred rent expense.......... (55,445) 9,980
Deposits....................... (21,687) (21,687) (72,814)
Increase (decrease) in:
Accounts payable and accrued
liabilities.................. 467,996 (263,009) (311,496) 174,917
Customer deposits............. (25,619) 39,428 88,911 78,973
-------- ---------- -------- ----------
Net cash provided by (used in) op-
erating activities................ (92,987) 760,937 237,761 249,352
-------- ---------- -------- ----------
Cash flows from investing
activities:
Proceeds from sale of assets...... 12,000
Purchase of equipment and
furniture........................ (623,089) (174,796) (208,571)
-------- ---------- -------- ----------
Net cash used in investing activi-
ties.............................. (623,089) (174,796) (196,571)
-------- ---------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1996 1997 1997 1998
------------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows provided by
financing activities:
Proceeds from line of credit.. $ $ 70,000 $ 70,000 $
Payments on line of credit.... (70,000) (70,000) 178,900
Payments on capital lease
obligations.................. (1,289) (319) (3,036)
Payments received on note
receivable................... 5,000
Proceeds from related party
loans........................ 507,603 157,431
Repayment of related party
loans........................ (498,078) (316,647) (36,000)
Distributions to stockholder.. (121,428) (204,037)
------------ ----------- -------- --------
Net cash provided by (used in)
financing activities.......... 386,175 (341,936) (316,966) (59,173)
------------ ----------- -------- --------
Increase (decrease) in cash.... 293,188 (204,088) (254,001) (6,392)
Cash:
Beginning..................... 244,421 537,609 537,609 333,521
------------ ----------- -------- --------
Ending........................ $ 537,609 $ 333,521 $283,608 $327,129
============ =========== ======== ========
Supplementary disclosures:
Interest paid................. $ 31,978 $ 41,763 $ 35,766 $ 13,508
============ =========== ======== ========
Supplementary schedule of
noncash investing and financ-
ing activities:
Note received as payment for
sale of assets............... $ -- $ -- $ -- $ 50,000
============ =========== ======== ========
Capital lease obligations in-
curred for acquisition of
equipment..................... $ -- $ 24,198 $ 24,198 $ --
============ =========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Park Structures, Inc. and its affiliate, Park Structures Sales, Inc.,
collectively known as the "Company", were incorporated in the State of Florida
on January 8, 1986 and February 2, 1995, respectively, to engage in the
manufacturing and sale of playground and park equipment, primarily in the
continental United States.
A summary of the Company's significant accounting policies follows:
Principles of Combination
The combined financial statement includes the accounts of the Company and
its affiliate. All significant intercompany transactions have been eliminated
in the combined financial statements. The companies have been combined because
of their common ownership.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories of finished goods and work in process are stated at the lower of
standard cost (which approximates average cost) or market. Raw material
inventories are stated at the lower of average cost or market.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over the assets' estimated useful lives. Amortization of capital leases
is included in depreciation expense.
Income Taxes
The Company, with the consent of its shareholder, has elected under the
Internal Revenue Code to be treated as an S corporation. In lieu of corporate
income taxes, the stockholder of an S corporation is taxed on his
proportionate share of the Company's taxable income. Therefore, no provision
or liability for Federal or State income taxes has been included in the
financial statement. Had such taxes been payable by the combined corporations,
a tax provision of approximately $103,000 and $419,000 for the years ended
December 31, 1996 and 1997, respectively, and $254,000 and $640,000 for the
nine months ended September 30, 1997 and 1998, respectively, would have
resulted on a combined corporation basis. The provision has been calculated
for Federal and State purposes utilizing a blended rate of 36.3% for December
31, 1996 and 37.6% for December 31, 1997 and September 30, 1997 and 1998.
F-22
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
Revenue Recognition:
The Company recognizes revenue upon shipment of the unit.
Advertising Costs:
Advertising costs are generally charged to operations in the year incurred
and amounted to $172,422 and $265,401 during 1996 and 1997, respectively, and
$210,336 and $179,965 during the nine months ended September 30, 1997 and
1998, respectively.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement. Actual results could differ from those estimates.
NOTE 2: INVENTORIES:
Inventories consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Raw materials........................ $743,598 $ 848,949 $1,252,290
Work in process...................... 175,856 200,771 296,159
Finished goods....................... 20,396 23,286 34,349
-------- ---------- ----------
$939,850 $1,073,006 $1,582,798
======== ========== ==========
</TABLE>
NOTE 3: PROPERTY AND EQUIPMENT:
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, (LIFE IN
1996 1997 1998 YEARS)
------------ ------------ ------------- --------
<S> <C> <C> <C> <C>
Machinery & equipment..... $64,166 $104,674 $200,393 5
Vehicles.................. 69,372 69,372 69,372 5
Furniture & fixtures...... -- 2,655 29,194 7
Leasehold improvements.... -- -- 690,438 14
------- -------- --------
133,538 176,701 989,397
Less: accumulated
depreciation............. 95,365 114,440 173,153
------- -------- -------- ---
38,173 62,261 816,244
Construction in progress.. -- 604,124 --
------- -------- --------
$38,173 $666,385 $816,244
======= ======== ========
</TABLE>
F-23
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
NOTE 4: LINE OF CREDIT:
In May, 1998, the Company entered into a $250,000 line of credit with a bank
which expires June 5, 1999. The line provides for interest, payable monthly,
at 9% through May, 1998 then interest is to be at prime plus .5%. The line is
guaranteed by the Company's president and collateralized by all the assets of
the Company.
NOTE 5: TRANSACTIONS WITH RELATED PARTIES:
Loans from a related party amounted to $807,603 at December 31, 1996 and
$466,956 at December 31, 1997. Of these amounts $300,000 was interest bearing,
at 10% per annum, through December 31, 1997. The balance of the loans are non-
interest bearing and payable on demand.
The Company paid $18,000 for rent expense and $30,000 for interest to a
related entity during each of the years ended December 31, 1997 and 1996.
Fees, based upon sales and income, to a related entity amounted to $226,461
and $599,219 for the years ended December 31, 1997 and 1996, respectively and
$182,604 and $-0- for the nine months ended September 30, 1997 and 1998,
respectively. The fee arrangement was terminated January 1, 1998.
NOTE 6: CAPITAL LEASE OBLIGATIONS:
The Company is the lessee of equipment under capital leases expiring in
various years through 2002. The assets and liabilities under capital leases
were recorded at the lower of the present value of the minimum lease payments
or the fair value of the asset.
Capital lease obligations at December 31, 1997 consist of:
<TABLE>
<S> <C>
Obligation under capital lease, $322 due monthly through August,
2002, with a bargain purchase option exercisable at that date for
$101............................................................. $14,949
Obligation under capital lease, $168 due monthly through August,
2002, with a bargain purchase option exercisable at that date for
$101............................................................. 7,960
-------
22,909
Less: Current portion............................................. (4,091)
-------
$18,818
=======
</TABLE>
The future minimum lease payments under capital leases together with the
present value of net minimum lease payments are due as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998................................................................ $ 5,880
1999................................................................ 5,880
2000................................................................ 5,880
2001................................................................ 5,880
2002................................................................ 3,920
-------
Total minimum lease payments........................................ 27,440
Less: amount representing interest.................................. (4,531)
-------
Present value of net minimum lease payments......................... $22,909
=======
</TABLE>
F-24
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
NOTE 7: OPERATING LEASES:
The Company has entered into non-cancelable operating leases for building
and equipment.
The following is a schedule by year of future minimum lease payments under
the non-cancelable operating leases which have initial or remaining lease
terms in excess of one year at December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.............................................................. $227,375
1999.............................................................. 209,007
2000.............................................................. 206,289
2001.............................................................. 198,000
2002.............................................................. 33,000
--------
$873,671
========
</TABLE>
As part of the lease agreement certain rental amounts were abated for the
first five month period of the lease. In addition, the Company did not take
control of the premises until mid-December, 1997. Consequently, $56,000 has
been capitalized as net deferred rent and is being amortized over the
remaining life of the lease (50.5 months).
NOTE 8: CAPITAL STRUCTURE:
At December 31, 1997 common stock consisted of 500 authorized, issued and
outstanding shares, $1.00 par value, for each of Park Structures, Inc. and its
affiliate.
NOTE 9: CONTINGENCIES:
Warranties:
The Company provides warranties ranging from one year on certain parts of
the structures to a lifetime warranty on certain metallic parts. The Company
has experienced minimal warranty claims which have not been passed on to the
original supplier of the materials or parts; therefore, as of December 31,
1997 and September 30, 1998, no accrual has been made for future claims.
NOTE 10: CONCENTRATION OF CREDIT RISK:
The Company places its excess cash investments in a financial institution in
amounts that at times exceeds the Federal insured limits.
The Company's credit sales are made to customers in the ordinary course of
business. The Company performs on going credit evaluations of its customers
and generally requires no collateral.
NOTE 11: INTERIM FINANCIAL INFORMATION:
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial position of the Company
and the results of its operations and cash flows for the nine months ended
September 30, 1997 and 1998 and changes in stockholders equity for the nine
months ended September 30, 1998. The results of operations and cash flows for
the nine months ended September 30, 1997 and 1998 are not necessarily
indicative of the results of operations and cash flows for the full year.
F-25
<PAGE>
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
NOTE 12: EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT:
In August 1998, the Company signed an agreement to sell the combined assets
of the Company in consideration for up to $18.7 million in cash and common
stock of Koala Corporation (Koala). Closing of the sale is planned to occur
simultaneously with the closing of a secondary public offering of Koala's
common stock.
F-26
<PAGE>
AUDITOR'S REPORT
To the Shareholders of
Delta Play Ltd.
We have audited the balance sheets of Delta Play Ltd. as at March 31, 1997
and 1996 and the statements of income and retained earnings and changes in
financial position for the years then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at March 31, 1997 and 1996
and the results of its operations and the changes in its financial position
for each of the years in the two year period ended March 31, 1997 in
accordance with accounting principles generally accepted in Canada. As
required by the British Columbia Company Act, we report that, in our opinion,
these principles have been applied on a consistent basis.
Vancouver, Canada, /s/ Ernst & Young
June 11, 1997 Chartered Accountants
(except as to note 9 which is
as of June 23, 1997).
F-27
<PAGE>
DELTA PLAY LTD.
INCORPORATED UNDER THE LAWS OF BRITISH COLUMBIA
BALANCE SHEETS
<TABLE>
<CAPTION>
AS AT MARCH 31,
---------------------
1997 1996
---------- ----------
(IN CANADIAN DOLLARS)
<S> <C> <C>
ASSETS
Current:
Cash..................................................... $ -- $ 403,379
Accounts receivable (notes 3 and 6)...................... 344,604 317,947
Prepaid expenses and deposits............................ 35,143 30,122
Inventory (note 4)....................................... 823,613 616,091
---------- ----------
Total current assets...................................... 1,203,360 1,367,539
---------- ----------
Fixed assets (note 5)..................................... 115,097 105,931
Due from related parties (note 6)......................... 462,129 83,666
---------- ----------
1,780,586 1,557,136
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Bank overdraft........................................... 8,266 --
Accounts payable and accrued liabilities (note 6)........ 450,314 138,330
Customer deposits........................................ 140,749 274,864
Bonuses payable (note 6)................................. 550,000 345,000
Income taxes payable..................................... 99,119 74,000
---------- ----------
Total current liabilities................................. 1,248,448 832,194
---------- ----------
Deferred income taxes..................................... 62,000 62,000
Due to related parties (note 6)........................... 188,703 306,237
---------- ----------
Total liabilities......................................... 1,499,151 1,200,431
---------- ----------
Contingencies (note 8)....................................
Shareholders' equity
Share capital (note 7).................................... 102 101
Retained earnings......................................... 281,333 356,604
---------- ----------
Total shareholders' equity................................ 281,435 356,705
---------- ----------
$1,780,586 $1,557,136
========== ==========
</TABLE>
On behalf of the Board:
/s/ /s/ [/R]
Director Director
See accompanying notes.
F-28
<PAGE>
DELTA PLAY LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1997 1996
---------- ----------
(IN CANADIAN DOLLARS)
<S> <C> <C>
Sales.................................................. $6,257,104 $3,662,645
Cost of goods sold (schedule 1) (note 6)............... 3,828,135 2,260,355
---------- ----------
Gross profit........................................... 2,428,969 1,402,290
---------- ----------
Expenses:
Sales expenses (schedule 2) (note 6)................... 538,305 446,233
Administrative expenses (schedule 3) (note 6).......... 696,415 559,228
Management, employee bonuses and other fees (note 6)... 730,000 420,000
---------- ----------
1,964,720 1,425,461
---------- ----------
Income (loss) before income taxes...................... 464,249 (23,171)
---------- ----------
Income tax provision:
--current............................................. 138,019 74,000
--deferred............................................ -- (75,000)
---------- ----------
138,019 (1,000)
---------- ----------
Net income (loss) for the year......................... 326,230 (22,171)
Retained earnings, beginning of year................... 356,604 614,040
Dividends (note 7)..................................... (401,501) (95,292)
Redemption of shares (note 7).......................... -- (139,973)
---------- ----------
Retained earnings, end of year......................... $ 281,333 $ 356,604
========== ==========
</TABLE>
See accompanying notes.
F-29
<PAGE>
DELTA PLAY LTD.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
(IN CANADIAN
DOLLARS)
<S> <C> <C>
Operating activities:
Net income (loss) for the year.......................... $ 326,230 $ (22,171)
Add charges not requiring a current cash payment:
Depreciation and amortization.......................... 27,158 30,827
Deferred income taxes.................................. -- (75,000)
Net change in non-cash working capital balances related
to operations.......................................... 168,488 83,327
--------- ---------
Cash provided by operating activities................... 521,876 16,983
--------- ---------
Investing activities:
Purchase of fixed assets................................ (38,499) --
Proceeds from sale of assets (note 6)................... 2,475 --
--------- ---------
Cash used in investing activities....................... (36,024) --
--------- ---------
Financing activities:
Dividends............................................... (401,501) (95,292)
Redemption of shares (note 7)........................... -- (140,000)
Due from (to) related parties........................... (495,996) 43,800
--------- ---------
Cash used in financing activities....................... (897,497) (191,492)
--------- ---------
Decrease in cash during year............................ (411,645) (174,509)
Cash (bank overdraft), beginning of year................ 403,379 577,888
--------- ---------
Cash (bank overdraft), end of year...................... $ (8,266) $ 403,379
========= =========
</TABLE>
See accompanying notes.
F-30
<PAGE>
DELTA PLAY LTD.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
IN CANADIAN DOLLARS
1. BUSINESS OPERATIONS:
The Company is incorporated under the laws of the province of British
Columbia. The Company designs and manufactures modular soft playgrounds and
accessories.
2. ACCOUNTING POLICIES:
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada which conform in all material respects
to United States accounting principles as required by the United States
Securities and Exchange Commission. These financial statements have been
prepared in Canadian dollars unless otherwise stated.
The following is a summary of the significant accounting policies used in
the preparation of these financial statements.
Inventory:
Inventory is valued at the lower of cost, determined on a first in first out
basis, and net realizable value for work in progress and replacement cost for
materials.
Depreciation and amortization:
Fixed assets are recorded at cost and are depreciated over their estimated
useful lives on a declining balance basis at the following annual rates:
<TABLE>
<S> <C>
Automotive equipment..................................................... 30%
Computer equipment....................................................... 30%
Office furniture......................................................... 20%
Tools.................................................................... 20%
Plant equipment.......................................................... 20%
</TABLE>
Management's estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management believes that the estimates utilized in
preparing its financial statements are reasonable and prudent. Actual results
could differ from those estimates.
Fair values of financial instruments:
The fair values of financial instruments approximate carrying values unless
otherwise indicated.
Foreign exchange:
The Company follows the temporal method of accounting for the translation of
foreign currency amounts into Canadian dollars. Under this method, all
monetary assets and liabilities expressed in foreign currencies are translated
at rates of exchange in effect at the year end, and non-monetary assets and
liabilities are translated at historical rates of exchange. Revenue and
expense items expressed in foreign currencies are translated at the rate of
exchange prevailing on the date of the transaction.
Gains and losses arising on foreign currency translation are included in
income.
F-31
<PAGE>
Revenue recognition:
Revenues from product sales are recorded upon shipment.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Trade......................................................... $288,804 $276,448
Other......................................................... 55,800 41,499
-------- --------
$344,604 $317,947
======== ========
</TABLE>
While the Company sells its products to many customers, four customers
[1996--three customers] represent approximately 71% [1996--52%] of the year
end balance of trade accounts receivable.
4. INVENTORY:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Materials.................................................. $628,812 $578,091
Work in progress........................................... 194,801 38,000
-------- --------
$823,613 $616,091
======== ========
</TABLE>
5. FIXED ASSETS:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
<S> <C> <C> <C>
1997
Automotive equipment.......................... $ 41,097 $ 30,570 $ 10,527
Computer equipment............................ 13,607 8,246 5,361
Office furniture.............................. 23,549 11,994 11,555
Tools......................................... 4,867 4,346 521
Plant equipment............................... 153,815 66,682 87,133
-------- -------- --------
$236,935 $121,838 $115,097
======== ======== ========
1996
Automotive equipment.......................... $ 41,097 $ 26,058 $ 15,039
Computer equipment............................ 15,207 5,606 9,601
Office furniture.............................. 24,124 9,033 15,091
Tools......................................... 4,867 4,215 652
Plant equipment............................... 115,316 49,768 65,548
-------- -------- --------
$200,611 $ 94,680 $105,931
======== ======== ========
</TABLE>
F-32
<PAGE>
6.RELATED PARTY TRANSACTIONS:
[a] Amounts due from related parties and due to related parties are without
interest or stated terms of repayment and comprise the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Due from related parties:
401566 B.C. Ltd.--controlling shareholder................ $462,129 $ --
Wash-a-Ball Solutions.................................... -- 83,666
-------- --------
$462,129 $ 83,666
======== ========
Due to related parties:
Safeplay Designs Inc..................................... $188,488 $255,163
Director................................................. 215 51,074
-------- --------
$188,703 $306,237
======== ========
</TABLE>
The amounts due from 401566 B.C. Ltd. include an amount of U.S. $317,195.
Safeplay Designs Inc. is a company whose shareholder is related to a
director of the Company.
As the amounts are not expected to be repaid within the next twelve months,
they have been classified as non-current assets and liabilities, respectively.
As collateral for any amounts borrowed from 401566 B.C. Ltd. in the future,
the Company has provided a Security Agreement providing a charge against all
assets of the Company.
[b] On May 1, 1996, the Company sold its design business and certain fixed
assets to Safeplay Designs Inc. for $2,476, using the provisions of Section 85
of the Income Tax Act (Canada). As consideration, the Company received a non-
interest bearing demand promissory note in the amount of $2,475 and one Class
E, non-voting preferred share of Safeplay Designs Inc. No gain or loss
resulted on the sale transaction.
During the year, the Company was charged $528,215 [1996--$60,000] by
Safeplay Designs Inc. for design services rendered and is included in cost of
goods sold--labour. At March 31, 1997, $140,400 remains outstanding and is
included in accounts payable and accrued liabilities. In addition, the Company
was charged $23,750 [1996--$Nil] by Safeplay Designs Inc. for accounting
services. The Company charged Safeplay Designs Inc. $23,837 [1996--$Nil] for
various administrative services and $13,750 [1996--$Nil] for rental of office
space, of which $19,713 remains outstanding and is included in accounts
receivable.
[c] Included in accounts payable and accrued liabilities at March 31, 1997
is an amount of $13,008 [March 31, 1996--$11,303] due to a director for
reimbursement of various costs.
[d] During the year the Company provided bonuses aggregating $730,000
[1996--$420,000] to officers and employees of which $550,000 [1996--
$345,000] remains outstanding as at March 31, 1997.
F-33
<PAGE>
7. SHARE CAPITAL:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Authorized:
100,000 Class A, voting non-participating common shares without par
value.............................................................. $ $
90,000 Class B, non-voting participating common shares without par
value..............................................................
90,000 Class C, non-voting participating common shares without par
value..............................................................
90,000 Class D, non-voting participating common shares without par
value..............................................................
90,000 Class E, non-voting participating common shares without par
value..............................................................
90,000 Class F, non-voting participating common shares without par
value..............................................................
90,000 Class G, non-voting participating common shares without par
value..............................................................
90,000 Class H, non-voting participating common shares without par
value..............................................................
90,000 Class I, non-voting participating common shares without par
value..............................................................
90,000 Class J, non-voting participating common shares without par
value..............................................................
90,000 Class K, non-voting participating common shares without par
value..............................................................
100,000 Class L, non-voting participating common shares with a par
value of $0.01 each................................................
Issued and outstanding:
55 [1996--55] Class A shares........................................ 55 55
16 [1996--16] Class B shares........................................ 16 16
24 [1996--24] Class D shares........................................ 24 24
3 [1996--3] Class F shares......................................... 3 3
3 [1996--3] Class G shares......................................... 3 3
16 [1996--Nil] Class L shares....................................... 1 --
--- ---
102 101
=== ===
</TABLE>
During the year ended March 31, 1996, the Company redeemed 11 Class A common
shares and 16 Class E common shares for $140,000. The excess of the redemption
amount over the par value of the shares, aggregating $139,973, was charged to
retained earnings.
On November 22, 1996, the Company amended its authorized share capital to
include 100,000 Class L, non-voting participating common shares with a par
value of $0.01 each.
On November 28, 1996, the Company declared and paid a stock dividend on the
Class D, non-voting participating common shares in the amount of $0.01 per
share. The stock dividend was paid by allotting and issuing as fully paid, 16
Class L, non-voting participating common shares with a par value of $0.01
each.
The Class A common shares are not entitled to dividends. Dividends may be
paid on a class of participating shares to the exclusion of any or all of the
other participating shares. In the event of liquidation, dissolution or
winding up of the Company, the distribution of assets will be made first to
the holders of the Class A shares to the extent of their paid-in amount,
secondly to holders of the Class D common shares, thirdly to the holders of
the Class L common shares and thereafter, pari passu to the holders of the
remaining classes of participating shares. The amounts to be paid will include
any declared but unpaid dividends.
8. CONTINGENCIES:
The Company is involved in a legal action against a third party for
collection of an account receivable arising in the normal course of business.
The third party has initiated a counter claim for an unspecified amount
alleging misrepresentation with respect to the contract price.
F-34
<PAGE>
The Company has commenced foreclosure proceedings against a third party for
collection of an accounts receivable arising in the normal course of business.
The third party has commenced a legal action against the Company for
approximately $140,000 alleging misrepresentation with respect to the contract
price.
The outcome of these claims is not determinable at this time and the amount
of liability, if any, cannot be reasonably estimated. Accordingly, no
provision has been recorded in these financial statements.
9. SUBSEQUENT EVENTS:
On June 23, 1997, the Company sold its assets and business undertakings to
Koala Corporation, a publicly traded company based in Denver, Colorado. The
purchase price was approximately cash of U.S. $4.1 million and shares of Koala
Corporation with a value of approximately U.S. $0.6 million.
F-35
<PAGE>
SCHEDULE 1
DELTA PLAY LTD.
SCHEDULE OF COST OF GOODS SOLD
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1997 1996
---------- ----------
(IN CANADIAN DOLLARS)
<S> <C> <C>
Freight and duty......................................... $ 209,805 $ 91,747
Labour (Note 6).......................................... 1,524,870 834,976
Materials................................................ 1,659,988 988,502
Overhead (Note 6)........................................ 433,472 345,130
---------- ----------
Total cost of goods sold................................. $3,828,135 $2,260,355
========== ==========
</TABLE>
See accompanying notes.
F-36
<PAGE>
SCHEDULE 2
DELTA PLAY LTD.
SCHEDULE OF SALES EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1997 1996
-------- --------
(IN CANADIAN
DOLLARS)
<S> <C> <C>
Advertising................................................... $117,949 $100,513
Bad debt expense.............................................. 30,332 109,819
Commission.................................................... 84,194 10,900
Promotion..................................................... 42,113 77,581
Salaries...................................................... 94,448 98,208
Telephone..................................................... 35,754 23,838
Travel........................................................ 133,515 25,374
-------- --------
Total sales expenses.......................................... $538,305 $446,233
======== ========
</TABLE>
See accompanying notes.
F-37
<PAGE>
SCHEDULE 3
DELTA PLAY LTD.
SCHEDULE OF ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1997 1996
---------- ----------
(IN CANADIAN DOLLARS)
<S> <C> <C>
Bank charges............................................ $ 2,964 $ 1,507
Cost recovery (Note 6).................................. (23,837) --
Courier................................................. 24,245 7,738
Depreciation and amortization........................... 27,158 30,827
Insurance............................................... 106,725 66,278
Interest income......................................... (17,885) (36,731)
Management salaries..................................... -- 64,988
Miscellaneous........................................... 1,270 2,617
Office.................................................. 90,221 65,636
Postage................................................. 5,906 4,249
Professional fees (Note 6).............................. 56,311 48,518
Travel.................................................. 52,005 14,844
Wages and benefits...................................... 313,398 255,278
Workers' compensation................................... 57,934 33,479
---------- ----------
Total administrative expenses........................... $ 696,415 $ 559,228
========== ==========
</TABLE>
See accompanying notes.
F-38
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--INTRODUCTION
The accompanying unaudited pro forma consolidated financial statements
reflect the consolidated results of operations of Koala Corporation for the
year ended December 31, 1997, and the nine months ended September 30, 1998
after giving pro forma effect to the purchase of Park Structures and Delta
Play, Ltd. ("Delta Play"). The unaudited pro forma consolidated financial
statements should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Company and
Park Structures and the respective historical financial statements of the
Company (F-2), Park Structures (F-16) and Delta Play, Ltd. (F-27). The
unaudited pro forma information does not purport to be indicative of actual
results that would have been achieved had the acquisitions actually been
completed as of the dates indicated on the following pages nor which may be
achieved in the future.
F-39
<PAGE>
KOALA CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(ALL AMOUNTS IN US DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------------------
KOALA PARK PRO FORMA
CORPORATION STRUCTURES ADJUSTMENTS PRO FORMA
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
(A) (B)
ASSETS
Current assets:
Cash................... $ 1,187,522 $ 327,129 $(1,514,651)(c) $ 0
Accounts receivable,
net of allowance for
doubtful accounts..... 3,229,418 2,144,935 (14,942)(d) 5,359,411
Inventory.............. 1,708,608 1,582,798 0 3,291,406
Prepaid expenses....... 693,622 133,904 (28,307)(d) 799,219
Deferred offering and
acquisition costs..... 251,000 0 (251,000)(c) 0
Deferred income taxes.. 14,314 0 0 14,314
----------- ---------- ----------- -----------
Total current assets.... 7,084,484 4,188,766 (1,808,900) 9,464,350
----------- ---------- ----------- -----------
Property and equipment,
net of accumulated
depreciation........... 1,464,766 816,244 0 2,281,010
----------- ---------- ----------- -----------
Other assets:
Other assets
intangibles and
patents, net of
accumulated
amortization.......... 8,534,896 0 9,957,975 (e) 18,492,871
Deposits and other..... 0 160,322 (62,158)(d) 98,164
----------- ---------- ----------- -----------
Total other assets...... 8,534,896 160,322 9,895,817 18,591,035
----------- ---------- ----------- -----------
$17,084,146 $5,165,332 $ 8,086,917 $30,336,395
=========== ========== =========== ===========
LIABILITIES & SHAREHOLD-
ERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses...... $ 1,328,002 $1,066,867 $(1,066,867)(d) $ 1,328,002
Line of credit -- 178,900 (178,900) --
Accrued income taxes... 389,136 0 0 389,136
----------- ---------- ----------- -----------
Total current liabili-
ties................... 1,717,138 1,245,767 (1,245,767) 1,717,138
----------- ---------- ----------- -----------
Long-term liabilities:
Notes payable.......... 8,465,849 (s) 8,465,849
Other.................. 15,513 (15,513)(d) 0
----------- ---------- ----------- -----------
Total long-term liabili-
ties................... 0 15,513 8,450,336 8,465,849
----------- ---------- ----------- -----------
Deferred income taxes... 398,047 0 0 398,047
----------- ---------- ----------- -----------
Total liabilities....... 2,115,185 1,261,280 7,204,569 10,581,034
----------- ---------- ----------- -----------
Shareholders' equity:
Preferred stock........ 0 0 0 0
Common stock........... 252,736 1,000 31,000 (c)(f) 284,736
Additional paid in cap-
ital.................. 5,307,988 0 4,754,400 (c) 10,062,388
Translation of foreign
currency.............. (127,971) 0 0 (127,971)
Retained earnings...... 9,536,208 3,903,052 (3,903,052)(f) 9,536,208
----------- ---------- ----------- -----------
Total shareholders' eq-
uity................... 14,968,961 3,904,052 882,348 19,755,361
----------- ---------- ----------- -----------
$17,084,146 $5,165,332 $ 8,086,917 $30,336,395
=========== ========== =========== ===========
</TABLE>
See notes to unaudited pro forma consolidated financial statements
F-40
<PAGE>
KOALA CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(ALL AMOUNTS IN US DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
KOALA DELTA PLAY, PARK PRO FORMA
CORPORATION LTD. STRUCTURES ADJUSTMENTS PRO FORMA
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(g) (h) (i)
Net sales............... $13,621,292 $1,878,044 $8,241,758 $ 0 $23,741,094
Cost of sales........... 5,528,542 1,148,999 5,559,611 (125,000)(j) 12,112,152
----------- ---------- ---------- --------- -----------
Gross profit............ 8,092,750 729,045 2,682,147 125,000 11,628,942
----------- ---------- ---------- --------- -----------
Selling, general and
administrative
expenses............... 4,230,988 370,596 1,332,366 0 5,933,950
Management, employee bo-
nuses and other fees... 0 219,106 0 0 (r) 219,106
Amortization of
intangibles and
patents............... 200,861 0 0 402,912 (k) 603,773
----------- ---------- ---------- --------- -----------
Income from operations.. 3,660,901 139,343 1,349,781 (277,912) 4,872,113
----------- ---------- ---------- --------- -----------
Other (income)
expenses............... (115,708) 0 10,123 (41,763)(l) (147,348)
Interest expense on
acquisition debt....... 0 0 0 597,341 (t) 597,341
Fees paid to related
entities............... 0 0 226,461 0 (r) 226,461
----------- ---------- ---------- --------- -----------
Income before provision
for income taxes....... 3,776,609 139,343 1,113,197 (833,490) 4,195,659
Provision for income
taxes.................. 1,340,697 49,467 419,704 (319,704)(m) 1,489,460
----------- ---------- ---------- --------- -----------
Net income.............. $ 2,435,912 $ 89,876 $ 694,197 $(513,786)(r) $ 2,706,199
=========== ========== ========== ========= ===========
Net income per share.... $ 0.97 (r) $ 0.96
=========== ===========
Weighted average shares
outstanding............ 2,503,654 (n) 2,823,654
=========== ===========
Net income per share--
diluted................ $ 0.96 (r) $ 0.94
=========== ===========
Weighted average shares
outstanding--diluted... 2,548,148 (n) 2,868,148
=========== ===========
</TABLE>
See notes to unaudited pro forma consolidated financial statements
F-41
<PAGE>
KOALA CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(ALL AMOUNTS IN US DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------
KOALA PARK PRO FORMA
CORPORATION STRUCTURES ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(o) (p)
Net sales................ $13,492,507 $6,847,436 $ 0 $20,339,943
Cost of sales............ 5,977,138 4,083,517 0 10,060,655
----------- ---------- --------- -----------
Gross profit............. 7,515,369 2,763,919 0 10,279,288
----------- ---------- --------- -----------
Selling, general and
administrative
expenses................ 3,894,621 1,119,499 0 5,014,120
Amortization of
intangibles and
patents................. 196,137 0 248,949 (k) 445,086
----------- ---------- --------- -----------
Income from operations... 3,424,611 1,644,420 (248,949) 4,820,082
Interest expense on
acquisition debt........ 0 0 517,475 (u) 517,475
Other (income) expenses.. (19,940) (56,621) 48,492 (q) (28,069)
----------- ---------- --------- -----------
Income before provision
for income taxes........ 3,444,551 1,701,041 (814,916) 4,330,676
Provision for income
taxes................... 1,222,815 640,000 (325,426)(m) 1,537,389
----------- ---------- --------- -----------
Net income............... $ 2,221,736 $1,061,041 $(489,490) $ 2,793,287
=========== ========== ========= ===========
Net income per share..... $ 0.88 $ 0.98
=========== ===========
Weighted average shares
outstanding............. 2,527,362 (n) 2,847,362
=========== ===========
Net income per share--
diluted................. $ 0.86 $ 0.96
=========== ===========
Weighted average shares
outstanding--diluted.... 2,588,018 (n) 2,908,018
=========== ===========
</TABLE>
See notes to unaudited pro forma consolidated financial statements
F-42
<PAGE>
KOALA CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated balance sheet reflects the financial
position of Koala Corporation as of September 30, 1998, as if the acquisition
of Park Structures occurred on that date. The unaudited pro forma consolidated
statement of income for the year ended December 31, 1997 gives effect to the
consolidated results of operations for the year ended December 31, 1997, as if
the acquisitions of Park Structures and Delta Play occurred on January 1,
1997. The unaudited pro forma consolidated statement of income for the nine
months ended September 30, 1998 gives effect to the consolidated results of
operations for the nine months ended September 30, 1998, as if the acquisition
of Park Structures occurred on January 1, 1998. These results are not
necessarily indicative of the consolidated results of operations of the
Company as they may be in the future, or as they might have been had these
events been effective at January 1, 1997 and 1998, respectively. The unaudited
pro forma consolidated financial statements should be read in conjunction with
the historical financial statements of the Company and Park Structures and the
related notes thereto.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
ARE AS FOLLOWS:
(a) Represents the unaudited consolidated balance sheet of Koala Corporation
as of September 30, 1998.
(b) Represents the unaudited combined balance sheet of Park Structures as of
September 30, 1998.
(c) The Company will finance the acquisition of Park Structures through a
combination of borrowings of bank debt and the proceeds from the issuance
and sale of 320,000 shares of Koala Corporation common stock at an assumed
market value of $17.00 per share pursuant to this Offering. Gross proceeds
of $5,440,000 million plus bank loan proceeds of $8,465,849 million plus
$1,514,651 million of available cash are used to pay acquisition costs of
$15,017,900 (see below) and stock offering costs of $653,600 (of which
approximately $151,000 has been paid through September 30, 1998). The
issuance of stock is reflected by increasing common stock by $32,000 and
additional paid in capital by $4,754,400 ($5,440,000, less $32,000
allocated to common stock, less $653,600 offering costs).
Park Structures preliminary acquisition cost at closing, based on
contractual consideration pursuant to the purchase agreement and estimated
direct costs incurred to consummate the transaction is as follows:
<TABLE>
<S> <C>
Purchase price-cash portion................................. $12,500,000
Payment for leasehold improvements.......................... 732,000
Additional amounts paid for current assets
and other assets, in excess of minimum..................... 1,635,900
Estimated direct costs of acquisition (approximately
$100,000 paid through September 30, 1998).................. 150,000
-----------
Total acquisition costs (preliminary)....................... $15,017,900
===========
</TABLE>
Park Structures is entitled to receive up to an additional $5.5 million,
of which $4.0 million is payable in cash and $1.5 million is payable in
the Company's common stock, if certain earnings targets are met. Assuming
the additional consideration is paid, total acquisition cost increases to
$20,517,900. Income from operations for the twelve months ended June 30,
1999 from Park Structures must be greater than $3,150,000 for the maximum
consideration to be paid. The additional consideration, if incurred, will
be allocated to goodwill and amortized to expense over 30 years. For the
year ended December 31, 1997, the impact on pro forma net income after
taxes of the additional consideration would be $122,550 per year, or $0.04
per diluted share, for additional amortization expense, net of income
taxes. For the nine months ended September 30, 1998, the impact on pro
forma net income after taxes of the additional consideration would be
$91,900, or $0.03 per diluted share, for additional amortization expense,
net of income taxes.
F-43
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED):
Should the Company utilize debt to finance the $4.0 million cash portion
of the additional consideration, the impact on December 31, 1998 pro forma
net income after taxes of the interest expense would be $210,270 for the
future months and $0.07 per diluted share. For the nine months ended
September 30, 1998, the impact on pro forma net income after taxes of the
interest expense would be $157,700 and $0.05 per diluted share
(d) Represents elimination of assets excluded and liabilities not assumed
pursuant to the terms of the Park Structures asset purchase agreement.
(e) Represents the allocation to intangible assets of the cost over fair value
of net assets acquired as a result of the preliminary purchase price
allocation for Park Structures.
(f) Elimination of common stock and retained earnings of Park Structures for
proper reflection of pro forma retained earnings as if the purchase
occurred on September 30, 1998.
(g) Represents the consolidated results of operations of Koala Corporation for
the year ended December 31, 1997, which includes the results of operations
of Delta Play Company for the seven months subsequent to its effective
acquisition date of June 1, 1997.
(h) Represents the unaudited results of operations of Delta Play, Ltd. for the
five months ended May 31, 1997, with all amounts translated to U.S.
currency at a rate of .72035, which is the average exchange rate for the
five month period.
(i) Represents the combined results of operations of Park Structures for the
year ended December 31, 1997.
(j) Represents the adjustment to remove the profit component of related party
charges from Safeplay Designs, Inc., an affiliate of Delta Play, Ltd. A
separate statement of income for Safeplay is not included in the
accompanying unaudited pro forma consolidated statement of income since
Delta Play, Ltd. was Safeplay's sole customer and the majority of payments
to Safeplay for design costs are recorded in cost of sales.
(k) Represents the increase to amortization expense for the amortization of
cost over fair value of net assets acquired over 30 years as a result of
the preliminary purchase price allocation for both Delta Play, Ltd. and
Park Structures. On the December 31, 1997 pro forma income statement, the
amount of the adjustment for Delta Play, Ltd. is $70,980 for the five
month period ended May 31, 1997, and the adjustment for Park Structures is
$331,732 for the twelve month period ended December 31, 1997. On the
September 30, 1998 pro forma income statement, the entire amount of the
adjustment equaling $248,949 relates to Park Structures.
(l) Represents interest expense incurred by Park Structures on liabilities not
assumed by Koala.
(m) Reflects applicable income tax effects of adjustments at an effective tax
rate of 35.5%.
(n) Reflects the increase to common stock equivalents for 320,000 shares
issued in connection with this offering
(o) Represents the unaudited consolidated results of operations of Koala
Corporation for the nine months ended September 30, 1998.
(p) Represents the combined results of operations of Park Structures for the
nine months ended September 30, 1998.
F-44
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED):
(q) Represents the elimination of $62,000 for gain on Park Structures sale of
an asset that was not acquired by Koala and elimination of Park Structures
interest expense of $13,508 on liabilities not assumed by Koala.
(r) Represents Delta Play, Ltd. management bonuses utilized for tax planning
purposes that will no longer be paid pursuant to the terms of the
employment agreement executed at the closing of the Delta purchase and
fees paid to related entities by Park Structures that will no longer be
paid after the closing of the Park Structures purchase.
These items were not given effect to as pro forma adjustments, but had
they been, pro forma net income and net income per share--diluted would be
as follows:
<TABLE>
<S> <C>
Pro forma net income before taxes................................ $4,195,659
Management bonuses............................................... 219,106
Fees to related entities......................................... 226,461
----------
Adjusted pro forma net income before taxes....................... 4,641,226
Provision for income taxes at 35.5%.............................. 1,647,635
----------
Adjusted net income.............................................. $2,993,591
Adjusted net income per share.................................... $ 1.06
Adjusted net income per share--diluted........................... $ 1.04
</TABLE>
(s) Represents the bank loan financing required to complete the purchase of
Park Structures along with utilization of the net proceeds of the
Offering. The credit facility provides for a moritorium on principal
repayments in year one.
(t) Represents interest expense on the bank loan financing as if the loan was
extended on January 1, 1997. The average interest rate utilized is 8.14%
which is the average LIBOR rate plus 2.5% for the twelve month period
ended December 31, 1997. For purposes of interest rate sensitivity, a
variance in the interest rate of up to 1/4% would have an immaterial
effect on pro forma income.
(u) Represents interest expense on the bank loan financing as if the loan was
extended on January 1, 1998. The average interest rate utilized is 8.15%
which is the average LIBOR rate plus 2.5% for the nine month period ended
September 30, 1998. For purposes of interest rate sensitivity, a variance
in the interest rate of up to 1/4% would have an immaterial effect on pro
forma income.
F-45
<PAGE>
[ARTWORK/PHOTOS]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company, the Selling Shareholder, or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any security other than the shares of Common Stock offered by this
Prospectus, nor does it constitute an offer to sell or a solicitation of any
offer to buy the shares of Common Stock by anyone in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or soliciation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained here in is correct as
of any time subsequent to the date hereof.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Park Structures Acquisition.............................................. 11
Use of Proceeds.......................................................... 12
Price Range of Common Stock.............................................. 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Koala Consolidated Selected Financial Data............................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Koala.................................................. 15
Park Structures Combined Selected Financial Data......................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Park Structures........................................ 23
Business................................................................. 26
Management............................................................... 34
Principal and Selling Shareholders....................................... 39
Description of Securities................................................ 41
Underwriting............................................................. 42
Legal Matters............................................................ 43
Experts.................................................................. 43
Additional Information................................................... 44
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,200,000 SHARES
[LOGO OF KOALA CORPORATION]
COMMON STOCK
---------------
PROSPECTUS
---------------
CLEARY GULL REILAND & MCDEVITT INC.
TUCKER ANTHONY
INCORPORATED
CRAIG-HALLUM CAPITAL GROUP, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
* * *
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* Underwriting Agreement
3.1 Articles of Incorporation of Koala Corporation
3.2 Bylaws of Koala Corporation
4.1 Specimen Common Stock Certificate(1)
5.1* Opinion of Otten, Johnson, Robinson, Neff & Ragonetti, P.C.
10.1 Incentive Stock Option Plan dated August 19, 1993(1)
10.2 Koala Corporation 1995 Stock Option Plan, as amended
10.3 Industrial Lease dated August 1, 1996 between Buckhead Industrial
Properties, Inc. and Koala Corporation(2)
10.4 Credit Agreement with U.S. Bank National Association(4)
10.5 Agreement for Sale and Purchase of Assets dated June 23, 1997
between Delta Play, Ltd., et al. and Koala Corporation(3)
10.6 Registration Rights Agreement dated June 23, 1997 between Delta
Play, Ltd., and Koala Corporation(4)
10.7 Agreement for Sale and Purchase of Assets dated August 14, 1998
between Park Structures, Inc. et al and Koala Corporation
10.8 Indenture dated March 31, 1998 among Vanal Development Corp., Delta
Play Company and Koala Corporation
21.1 Subsidiaries
23.1* Consent of Ernst & Young LLP
23.2* Consent of Blanski Peter Kronlage & Zoch, P.A.
23.3* Consent of Goldstein Lewin & Co.
23.4* Consent of Ernst & Young Chartered Accountants
23.5* Consent of Otten, Johnson, Robinson, Neff & Ragonetti, P.C.
(contained in Exhibit 5.1)
24.1 Power of Attorney (on page II-4)
27.1* Financial Data Schedule
</TABLE>
- --------
* Filed herewith.
(1) Incorporated by reference to the exhibits included in the Company's
Registration Statement on Form SB-2, Registration No. 33-68482C.
(2) Incorporated by reference to Exhibit 10.11 of the Company's Form 10-KSB
for the year ended December 31, 1996.
(3) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K/A filed
on September 8, 1997.
(4) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K/A filed
on September 8, 1997.
* * *
II-1
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has authorized this amendment to the registration
statement to be signed on its behalf by the undersigned in Denver, Colorado,
on November 30, 1998.
KOALA CORPORATION
/s/ Mark A. Betker
By: _________________________________
Name: Mark A. Betker
Title: Chairman of the Board,
President and Chief
Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Mark A. Betker Chairman of the Board, November 30, 1998
____________________________________ President and Chief
Mark A. Betker Executive Officer
/s/ Jeffrey L. Vigil Vice President of November 30, 1998
____________________________________ Finance and
Jeffrey L. Vigil Administration
(Principal Financial
and Accounting
Officer)
/s/ Michael C. Franson Director November 30, 1998
____________________________________
Michael C. Franson
/s/ Thomas W. Gamel* Director November 30, 1998
____________________________________
Thomas W. Gamel
/s/ John T. Pfannenstein* Director November 30, 1998
____________________________________
John T. Pfannenstein
/s/ Ellen S. Robinson* Director November 30, 1998
____________________________________
Ellen S. Robinson
*By: /s/ Jeffrey L. Vigil
-----------------------------------
Jeffrey L. Vigil, Attorney-in-Fact
</TABLE>
II-2
<PAGE>
KOALA CORPORATION
1,200,000 SHARES OF COMMON STOCK/*/
UNDERWRITING AGREEMENT
----------------------
DECEMBER ____, 1998
CLEARY GULL REILAND & McDEVITT INC.
TUCKER ANTHONY INCORPORATED
CRAIG-HALLUM CAPITAL GROUP, INC.
As Representatives of the Several Underwriters
Identified in Schedule II Annexed Hereto
c/o Cleary Gull Reiland & McDevitt Inc.
100 East Milwaukee Avenue
Milwaukee, WI 53202
Ladies and Gentlemen:
SECTION 1. INTRODUCTORY. Koala Corporation, a Colorado corporation (the
------------
"Company"), and Rockmont Capital Limited (the "Selling Stockholder") propose to
sell a total of 1,200,000 shares (the "Firm Shares") of common stock, $.10 par
value per share (the "Common Stock"), to the several underwriters identified in
Schedule II annexed hereto (the "Underwriters"), who are acting severally and
not jointly. In addition, the Company has agreed to grant to the Underwriters
an option to purchase up to 180,000 additional shares of Common Stock (the
"Optional Shares") as provided in section 6 hereof. The Firm Shares and, to the
extent such option is exercised, the Optional Shares are hereinafter
collectively referred to as the "Shares."
You, as representatives of the Underwriters (the "Representatives"), have
advised the Company and the Selling Stockholder that the Underwriters propose to
make a public offering of their respective portions of the Shares as soon
hereafter as in your judgment is advisable and that the public offering price of
the Shares initially will be $____ per share.
The Company and the Selling Stockholder hereby confirm their respective
agreements with the Underwriters and each other as follows:
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
---------------------------------------------
represents and warrants to, and agrees with, the several Underwriters, and shall
be deemed to
_________________________
/*/ Plus an option to acquire up to 180,000 additional shares of Common Stock
from the Company to cover over-allotments.
<PAGE>
represent and warrant to the several Underwriters on each Closing Date (as
hereinafter defined), that:
(a) Each of the Company and the subsidiaries of the Company, all of
which are listed on Exhibit 21 of the Company's most recent Annual Report
on Form 10-KSB (individually, a "Subsidiary" and collectively, the
"Subsidiaries"), has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as presently conducted
and described in the Prospectus (as hereinafter defined) and the
Registration Statement (as hereinafter defined); each of the Company and
the Subsidiaries is duly registered and qualified to do business as a
foreign corporation under the laws of, and is in good standing as such in,
each jurisdiction in which such registration or qualification is required,
except where the failure to so register or qualify would not have a
material adverse effect on the condition (financial or other), business,
property, net worth, results of operations or prospects of the Company and
the Subsidiaries, taken as a whole ("Material Adverse Effect"); and no
proceeding has been instituted in any such jurisdiction revoking, limiting
or curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification. Complete and correct copies of the certificate
of incorporation, articles of incorporation, or other organizational
documents, as amended or restated (the "Articles of Incorporation") and by-
laws, as amended or restated ("By-laws"), of the Company and each of the
Subsidiaries or the equivalent documents to the Articles of Incorporation
and By-laws for those Subsidiaries which have been formed in jurisdictions
in which Articles of Incorporation and By-laws are not applicable, as in
effect on the date hereof have been delivered to the Representatives, and
no changes thereto will be made on or subsequent to the date hereof and
prior to each Closing Date.
(b) The shares of Common Stock issued and outstanding immediately
prior to the issuance and sale of the Shares hereunder as set forth in the
Prospectus have been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus and the Registration Statement. There are no preemptive,
preferential or, except as described in the Prospectus, other rights to
subscribe for or purchase any shares of Common Stock (including the
Shares), and no shares of Common Stock have been issued in violation of
such rights. The Shares to be issued and sold to the Underwriters have
been duly authorized and, when issued, delivered and paid for pursuant to
this Agreement, will be validly issued, fully paid and nonassessable and
will conform to the description thereof contained in the Prospectus and the
Registration Statement. The delivery of certificates for the Shares to be
issued and sold hereunder and payment therefor pursuant to the terms of
this Agreement will pass valid title to such Shares to the Underwriters,
free and clear of any lien, claim, encumbrance or defect in title. Except
as described in the Prospectus, there are no outstanding options, warrants
or other rights of any description, contractual or otherwise, entitling any
person to be issued any class of security by the Company or any Subsidiary,
and there are no holders of Common Stock or
2
<PAGE>
other securities of the Company or any Subsidiary, or of securities that
are convertible or exchangeable into Common Stock or other securities of
the Company or any Subsidiary, that have rights to the registration of
such Common Stock or securities under the Securities Act of 1933, as
amended, and the regulations thereunder (together, the "Act") or the
securities laws or regulations of any of the states (the "Blue Sky Laws").
(c) Except for the Subsidiaries, the Company has no subsidiaries and
does not own any equity interest in or control, directly or indirectly, any
other corporation, limited liability company, partnership, joint venture,
association, trust or other business organization. The Company owns
directly or indirectly all of the issued and outstanding capital stock of
each Subsidiary, free and clear of any and all liens, claims, encumbrances
or security interests, and all such capital stock has been duly authorized
and validly issued and is fully paid and nonassessable and was issued free
and clear of preemptive or similar rights. There are no outstanding
options, warrants or other rights of any description, contractual or
otherwise, entitling any person to subscribe for or purchase any shares of
capital stock of any Subsidiary.
(d) The Company has full corporate power and authority to enter into
and perform this Agreement, and the execution and delivery by the Company
of this Agreement and the performance by the Company of its obligations
hereunder and the consummation of the transactions described herein, have
been duly authorized with respect to the Company by all necessary corporate
action and will not: (i) violate any provisions of the Articles of
Incorporation or By-laws of the Company or any Subsidiary; (ii) violate any
provisions of, or result in the breach, modification or termination of, or
constitute a default under, any provision of any agreement, lease,
franchise, license, indenture, permit, mortgage, deed of trust, evidence of
indebtedness or other instrument to which the Company or any Subsidiary is
a party or by which the Company or any Subsidiary, or any property owned or
leased by the Company or any Subsidiary, may be bound or affected; (iii)
violate any statute, ordinance, rule or regulation applicable to the
Company or any Subsidiary, or order or decree of any court, regulatory or
governmental body, arbitrator, administrative agency or instrumentality of
the United States or other country or jurisdiction having jurisdiction over
the Company or any Subsidiary; or (iv) result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any Subsidiary. No consent, approval, authorization or other
order of any court, regulatory or governmental body, arbitrator,
administrative agency or instrumentality of the United States or other
country or jurisdiction is required for the execution and delivery of this
Agreement by the Company, the performance of its obligations hereunder or
the consummation of the transactions contemplated hereby, except for
compliance with the Act, the Securities Exchange Act of 1934, as amended,
and the regulations thereunder (together, the "Exchange Act"), the Blue Sky
Laws applicable to the public offering of the Shares by the several
Underwriters and the clearance of such offering and the underwriting
arrangements evidenced hereby with the National Association of Securities
Dealers, Inc. (the "NASD"). This Agreement has been duly authorized,
executed and delivered by and on behalf of the Company and is a valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms.
3
<PAGE>
(e) A registration statement on Form SB-2 (Reg. No. 333-61551) with
respect to the Shares, including a preliminary form of prospectus, has been
carefully prepared by the Company in conformity with the requirements of
the Act and has been filed with the Securities and Exchange Commission (the
"Commission"). The conditions for use of Form SB-2, set forth in the
General Instructions thereto, have been satisfied. Such registration
statement, as finally amended and revised at the time such registration
statement was or is declared effective by the Commission (including the
information contained in the form of final prospectus, if any, filed with
the Commission pursuant to Rule 424(b) and Rule 430A under the Act and
deemed to be part of the registration statement if the registration
statement has been declared effective pursuant to Rule 430A(b)) and as
thereafter amended by post-effective amendment, if any, is herein referred
to as the "Registration Statement." The related final prospectus in the
form first filed with the Commission pursuant to Rule 424(b) or, if no such
filing is required, as included in the Registration Statement, or any
supplement thereto, is herein referred to as the "Prospectus." The
prospectus subject to completion in the form included in the Registration
Statement at the time of the initial filing of the Registration Statement
with the Commission, and each such prospectus as amended from time to time
until the date of the Prospectus, is referred to herein as the "Preliminary
Prospectus." Reference made herein to each Preliminary Prospectus or the
Prospectus, as amended or supplemented, shall include all documents and
information incorporated by reference therein under the Exchange Act. Each
Preliminary Prospectus filed as part of the Registration Statement as
originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Act, complied when so filed in all material repsects
with the Act. The Company has prepared and filed such amendments to the
Registration Statement since its initial filing with the Commission, if
any, as may have been required to the date hereof, and will file such
additional amendments thereto as may hereafter be required. There have
been delivered to the Representatives two signed copies of the Registration
Statement and each amendment thereto, if any, including one copy of any
document filed under the Exchange Act and deemed to be incorporated by
reference into the Registration Statement, together with one copy of each
exhibit filed therewith or incorporated by reference therein, and such
number of conformed copies for each of the Underwriters of the Registration
Statement and each amendment thereto, if any (but without exhibits), and of
each Preliminary Prospectus and of the Prospectus as the Representatives
have requested.
(f) Neither the Commission nor any state securities commission has
issued any order preventing or suspending the use of any Preliminary
Prospectus, nor have any proceedings for that purpose been initiated or
threatened, and each Preliminary Prospectus filed with the Commission as
part of the Registration Statement as originally filed or as part of any
amendment or supplement thereto complied when so filed with the
requirements of the Act and, as of its date, did not include any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading. As of the effective date of the Registration Statement, and at
all times subsequent thereto up to each Closing Date, the Registration
Statement and the Prospectus contained or will contain all statements that
are required to be stated therein in accordance with the Act and conformed
or will conform in all respects
4
<PAGE>
to the requirements of the Act, and neither the Registration Statement nor
the Prospectus included or will include any untrue statement of a material
fact or omitted or will omit to state a material fact required to be stated
therein or necessary to make the statements, therein not misleading.
Neither the Company, nor to the Company's knowledge, any person that
controls, is controlled by (including the Subsidiaries) or is under common
control with the Company, has distributed or will distribute prior to each
Closing Date any offering material in connection with the offering and sale
of the Shares other than a Preliminary Prospectus, the Prospectus, the
Registration Statement or other materials permitted by the Act and provided
to the Representatives. There has not occurred any material adverse
change, or any development involving a prospective material adverse cahnge,
in the condition, financial or otherwise, or in the earnings, business,
prospects or operations of the Company, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent
to the date of this Agreement).
(g) The documents that are incorporated by reference in each
Preliminary Prospectus, the Prospectus or the Registration Statement or
from which information is so incorporated by reference, when they became
effective or were filed with the Commission, as the case may be, compiled
with the requirements of the Act or the Exchange Act, as applicable, and
when read together with the other information included in such Preliminary
Prospectus, the Prospectus or the Registration Statement, as the case may
be, do not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(h) Each of Ernst & Young LLP, Blanski Peter Kronlage & Zoch, P.A.,
and Goldstein Lewin & Co., which have expressed their opinions with respect
to the audited consolidated financial statements filed with the Commission
or incorporated by reference and included as a part of each Preliminary
Prospectus, the Prospectus or the Registration Statement are independent
accountants as required by the Act.
(i) The consolidated financial statements and the related notes
thereto included or incorporated by reference in each Preliminary
Prospectus, the Prospectus and the Registration Statement present fairly
the financial position, results of operations and cash flows of the Company
as of their respective dates or for the respective periods covered thereby,
all in conformity with generally accepted accounting principles
consistently applied throughout the periods involved. The financial
statement schedules, if any, included in the Registration Statement present
fairly the information required to be stated therein on a basis consistent
with the consolidated financial statements of the Company contained
therein. The Company had an outstanding capitalization as set forth in the
Registration Statement and under "Capitalization" in the Prospectus as of
the date indicated therein, and there has been no material change thereto
since such date except as disclosed in the Prospectus. The financial and
statistical information and data relating to the Company in each
Preliminary Prospectus, the Prospectus and the Registration Statement are
accurately presented and prepared on a basis consistent with the audited
consolidated financial statements and books and records of the Company. The
5
<PAGE>
consolidated financial statements and schedules and the related notes
thereto included or incorporated by reference in each Preliminary
Prospectus, the Prospectus or the Registration Statement are the only such
financial statements and schedules required under the Act to be set forth
therein.
(j) Neither the Company nor any Subsidiary is, nor with the giving of
notice or passage of time or both, would be, in violation or in breach of:
(i) its respective Articles of Incorporation, or By-laws; (ii) any statute,
ordinance, order, rule or regulation applicable to the Company or such
Subsidiary; (iii) any order or decree of any court, regulatory body,
arbitrator, administrative agency or other instrumentality of the United
States or other country or jurisdiction having jurisdiction over the
Company or such Subsidiary; or (iv) any provision of any agreement, lease,
franchise, license, indenture, permit, mortgage, deed of trust, evidence of
indebtedness or other instrument to which the Company or such Subsidiary is
a party or by which any property owned or leased by the Company or such
Subsidiary is bound or affected, except, in the cases of clauses (ii), and
(iv) above, for such violations or breaches that would not have a Material
Adverse Effect. Neither the Company nor any Subsidiary has received notice
of any violation of any applicable statute, ordinance, order, rule or
regulation applicable to the Company or any Subsidiary. The Company and
each Subsidiary have obtained and hold, and are in compliance with, all
permits, certificates, licenses, approvals, registrations, franchises,
consents and authorizations of governmental or regulatory authorities
required under all laws, rules and regulations in connection with their
businesses (hereinafter "permit" or "permits") except where such failure
would not have a Material Adverse Effect, and all of such permits are in
full force and effect; and the Company and each Subsidiary have fulfilled
and performed all of their respective obligations with respect to each such
permit and no event has occurred which would result in, or after notice or
lapse of time would result in, revocation or termination of any such permit
or result in any other impairment of the rights of the holder of such
permit. Neither the Company nor any Subsidiary is or has been (by virtue
of any action, omission to act, contract to which it is a party or other
occurrence) in violation of any applicable foreign, federal, state,
municipal or local statutes, laws, ordinances, rules, regulations or orders
(including those relating to environmental protection, occupational safety
and health and equal employment practices) heretofore or currently in
effect, the violation of which could have a Material Adverse Effect.
(k) There are no legal or governmental proceedings or investigations
pending or threatened to which the Company or any Subsidiary is or may be a
party or to which any property owned or leased by the Company or any
Subsidiary is or may be subject, including, without limitation, any such
proceedings that are related to environmental or employment discrimination
matters, which are required to be described in the Registration Statement
or the Prospectus which are not so described, or which question the
validity of this Agreement or any action taken or to be taken pursuant
hereto. Except as described in the Registration Statement or the
Prospectus, neither the Company nor any Subsidiary: (i) is in violation of
any statute, ordinance, rule or regulation, or any decision, order or
decree of any court, regulatory body, arbitrator, administrative agency
6
<PAGE>
or other instrumentality of the United States or other country or
jurisdiction having jurisdiction over the Company or such Subsidiary
relating to the use, disposal or release of hazardous or toxic substances
or relating to the protection or restoration of the environmental or human
exposure to hazardous or toxic substances (collectively, "environmental
laws"); (ii) owns or operates any real property contaminated with any
substance that is subject to any environmental laws; (iii) is liable for
any off-site disposal or contamination pursuant to any environmental laws;
or (iv) is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim identified in (i) through (iv)
above could have a Material Adverse Effect.
(1) There is no transaction, relationship, obligation, agreement or
other document required to be described in the Registration Statement or
the Prospectus or to be filed or deemed to be filed as an exhibit to the
Registration Statement by the Act, which has not been described or filed as
required. All such contracts or agreements to which the Company or any
Subsidiary is a party have been duly authorized, executed and delivered by
the Company or such Subsidiary, constitute valid and binding agreements of
the Company or such Subsidiary, and are enforceable by and against the
Company or such Subsidiary, in accordance with the respective terms
thereof, subject to bankruptcy, insolvency, and moratorium laws and other
principles of equity.
(m) The Company or a Subsidiary has good and valid title to all
property and assets reflected as owned by the Company or such Subsidiary in
the Company's consolidated financial statements included or incorporated by
reference in the Registration Statement (or the Prospectus), free and clear
of all liens, claims, mortgages, security interests or other encumbrance of
any kind or nature whatsoever except those, if any, reflected in such
financial statements (or elsewhere in the Registration Statement or the
Prospectus). All property (real and personal) held or used by the Company
or a Subsidiary under leases, licenses, franchises or other agreements is
held by the Company or such Subsidiary under valid, subsisting, binding and
enforceable leases, franchises, licenses or other agreements.
(n) Neither the Company nor, to the Company's knowledge, any person
that controls, is controlled by (including the Subsidiaries) or is under
common control with the Company has taken or will take, directly or
indirectly, any action designed to cause or result in, or which
constituted, or which could cause or result in, stabilization or
manipulation, under the Exchange Act or otherwise, of the price of any
security of the Company to facilitate the sale or resale of the Common
Stock.
(o) Except as described in the Registration Statement or the
Prospectus, since the respective dates as of which information is given in
the Registration Statement or the Prospectus and prior to each Closing
Date: (i) neither the Company nor any Subsidiary has or will have incurred
any liability or obligation, direct or contingent, or entered into any
transaction, that is material to the Company, except in the ordinary course
of business; (ii) except for regular quarterly dividends paid in the
ordinary course of business, if any, the Company has not and will not have
paid or declared any dividend or
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other distribution with respect to its capital stock and neither the
Company nor any Subsidiary is or will be delinquent in the payment of
principal or interest on any outstanding debt obligation; and (iii) there
has not been and will not have been any change in the capital stock, any
material change in the indebtedness of the Company or any Subsidiary, or
any change or development involving or which could be expected to involve,
a Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business.
(p) Neither the Company nor any person that controls, is controlled by
(including the Subsidiaries) or is under common control with the Company
has, directly or indirectly: (i) made any unlawful contribution to any
candidate for political office, or failed to disclose fully any
contribution in violation of law; or (ii) made any payment to any federal,
state or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof or
applicable foreign jurisdictions.
(q) The Company or a Subsidiary owns or possesses adequate rights to
use all patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights and
licenses presently used in or necessary for the conduct of its business or
ownership of its properties, and neither the Company nor any Subsidiary has
violated or infringed upon the rights of others, or received any notice of
conflict with the asserted rights of others, in respect thereof.
(r) The Company and each Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any Subsidiary has been refused any
insurance coverage sought or applied for; and except as described in the
Prospectus neither the Company nor any Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not have a material adverse effect on the Company.
(s) No labor dispute with the employees of the Company or any
Subsidiary, which dispute could reasonably be expected to result in a
Material Adverse Effect, exists or, to the knowledge of the Company, is
imminent, and neither the Company nor any Subsidiary, except as disclosed
in the Registration Statement, is a party to any collective bargaining
agreement and, to the knowledge of the Company, no union organizational
attempts are pending. There has been no change in the relationship of the
Company or any Subsidiary with any of its principal suppliers,
manufacturers, contractors or customers resulting in or that could result
in a Material Adverse Effect.
(t) Neither the Company nor any Subsidiary is an "investment company",
an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment
8
<PAGE>
company", as such terms are defined in the Investment Company Act of 1940,
as amended.
(u) All federal, state and local tax returns required to be filed by
or on behalf of the Company or any Subsidiary have been filed (or are the
subject of valid extension) with the appropriate federal, state and local
authorities, and all such tax returns, as filed, are accurate in all
material respects; all federal, state and local taxes (including estimated
tax payments) required to be shown on all such tax returns or claimed to be
due from or with respect to the business of the Company or such Subsidiary
have been paid or reflected as a liability on the financial statements of
the Company or such Subsidiary for appropriate periods; all deficiencies
asserted as a result of any federal, state or local tax audits have been
paid or finally settled, and no issue has been raised in any such audit
which, by application of the same or similar principles, reasonably could
be expected to result in a proposed deficiency for any other period not so
audited; no state of facts exist or has existed which would constitute
grounds for the assessment of any tax liability with respect to the periods
which have not been audited by appropriate federal, state or local
authorities; there are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any federal, state or local
tax return of any period; and neither the Company nor any Subsidiary has
ever been a member of an affiliated group of corporations filing
consolidated federal income tax returns, other than a group of which the
Company is and has been the common parent.
(v) Except plans listed as Exhibits to the Company's most recent
Annual Report on Form 10-KSB (collectively, the "Plans"), neither the
Company nor any Subsidiary is a participating employer or plan sponsor with
respect to any employee pension benefit plan as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
or any employee welfare benefit plan as defined in Section 3(1) of ERISA,
including, without limitation, any multiemployer welfare or pension plan.
With respect to the Plans, the Company is in substantial compliance with
all applicable regulations, including ERISA and the Code. With respect to
each defined benefit retirement plan, such plan does not have benefit
liabilities (as defined in Section 400 l(a)(16) of ERISA) exceeding the
assets of the plan. The Company or the administrator of each of the Plans,
as the case may be, has timely filed the reports required to be filed by
ERISA and the Code in connection with the maintenance of the Plans, and no
facts, including, without limitation, any "reportable event" as defined by
ERISA and the regulations thereunder, exist in connection with the Plans
which, under applicable law, would constitute grounds for the termination
of any of the Plans by the Pension Benefit Guaranty Corporation or for the
appointment by the appropriate United States District Court of a trustee to
administer any of the Plans.
(w) The Company and each Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurances that: (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of consolidated financial statements in conformity with
generally accepted accounting principles and to maintain
9
<PAGE>
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(x) None of the Company, any Subsidiary, any officer or director of
the Company or any Subsidiary, or, to the Company's knowledge, any person
who owns, of record or beneficially, any class of securities issued by the
Company is: (i) an officer, director or partner of any brokerage firm,
broker or dealer that is a member of the NASD ("NASD Member"); or (ii)
directly or indirectly, a "person associated with" an NASD member or an
"affiliate", of an NASD member, as such terms are used in the NASD Rules of
the Association.
(y) The Common Stock has been registered pursuant to Section 12(g) of
the Exchange Act. The Company has prepared and filed with the Commission a
registration statement for the Common Stock pursuant to Section 12(g) of
the Exchange Act. Such registration statement either has been declared
effective by the Commission under the Exchange Act or will be declared
effective by the Commission prior to or concurrently with the commencement
of the public offering of the Shares. The Common Stock (including the
Shares) has been approved for designation upon notice of issuance as a
Nasdaq National Market security on The Nasdaq Stock Market ("Nasdaq")
concurrently with the effectiveness of the Registration Statement.
(z) All offers and sales of the securities of the Company and each
Subsidiary prior to the date hereof were made in compliance with the Act
and all other applicable state and federal laws or regulations.
(aa) Except with respect to Shares of Common Stock sold to the Company
in connection with a "cashless exercise" relating to any of the Company's
stock option plans, the Company has obtained for the benefit of the
Underwriters the agreement, enforceable by Cleary Gull Reiland & McDevitt
Inc. ("Cleary Gull"), of each of the officers and directors of the Company
listed in the Prospectus, and each of the stockholders of the Company who
are listed on Schedule III hereof, who owns of record the number of shares
of Common Stock set forth on Schedule III opposite such stockholder's name,
that for a period of 180 days after the date of the Prospectus, such
persons will not, without the prior written consent of Cleary Gull,
directly or indirectly, offer, sell, transfer, or pledge, contract to sell,
transfer or pledge, or cause or in any way permit to be sold, transferred,
pledged, or otherwise disposed of, any: (i) shares of Common Stock; (ii)
rights to purchase shares of Common Stock (including, without limitation,
shares of Common Stock that may be deemed to be beneficially owned by any
such stockholder in accordance with the applicable regulations of the
Commission and shares of Common Stock that may be issued upon the exercise
of a stock option, warrant or other convertible security); or (iii)
securities that are convertible or exchangeable into shares of Common
Stock.
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(bb) A copy of the Custody Agreement executed by the Selling
Stockholder and a copy of the Selling Stockholder's Selling Stockholder's
Questionnaire have been furnished to counsel for the Underwriters prior to
the date hereof, along with such other information as such counsel may
reasonably request in connection with their review thereof.
(cc) The Company has complied with all provisions of Section 517.075
of the Florida Statutes, relating to doing business with the government of
Cuba or with any person or affiliate located in Cuba.
A certificate signed by any officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby. A certificate delivered by the Company to its counsel for
purposes of enabling such counsel to render the opinion referred to in section
10(d) will also be furnished to the Representatives and counsel for the
Underwriters and shall be deemed to be additional representations and warranties
to the Underwriters by the Company as to the matters covered thereby.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER. The
---------------------------------------------------------
Selling Stockholder represents and warrants to and agrees with the several
Underwriters and the Company, and shall be deemed to represent and warrant to
the several Underwriters and the Company on each Closing Date, that:
(a) The Selling Stockholder has duly executed a custody agreement
("Custody Agreement") naming _________________ as custodian ("Custodian")
of the Shares of the Selling Stockholder for the purpose of selling such
Shares to the Underwriters on each Closing Date and receiving payment
therefor. This Agreement and the Custody Agreement have been duly
authorized, executed and delivered by the Selling Stockholder.
(b) All consents, approvals, authorizations and orders necessary
for the execution and delivery by the Selling Stockholder of this Agreement
and the Custody Agreement and for the sale and delivery of the Shares to be
sold by the Selling Stockholder hereunder, as set forth on Schedule I
annexed hereto, have been obtained. The Selling Stockholder has, and at the
time of delivery thereof hereunder the Selling Stockholder will have, good
and valid title to the Shares proposed to be sold by the Selling
Stockholder hereunder, free and clear of all voting trust arrangements,
liens, encumbrances, security interests, equities, and claims, other than
any created by the Custody Agreement or this Agreement for the benefit of
the Underwriters. The Selling Stockholder has full right, power and
authority to enter into this Agreement and the Custody Agreement and to
sell, assign, transfer and deliver such Shares hereunder, free and clear of
all voting trust arrangements, liens, encumbrances, security interests,
equities, claims and community or marital property rights, other than any
created by the Custody Agreement or this Agreement for the benefit of the
Underwriters. The Shares to
11
<PAGE>
be sold by the Selling Stockholder have been duly authorized and are
validly issued, fully paid and non-assessable and were not issued in
violation of pre-emptive or other similar rights. Upon delivery of and
payment for such Shares hereunder, the Underwriters will acquire good and
valid title thereto, free and clear of all voting trust arrangements,
liens, encumbrances, security interests, equities, claims and community or
marital property rights.
(c) The Selling Stockholder has not distributed and will not
distribute any Preliminary Prospectus, the Prospectus or any other material
in connection with the offering and sale of the Shares. The Selling
Stockholder has not taken and will not take, directly or indirectly, any
action designed to or which could cause or result in, under the Exchange
Act or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Common
Stock.
(d) The execution, delivery and performance by the Selling Stockholder
of this Agreement and the Custody Agreement will not, if applicable, result
in the violation of any provisions of the Articles of Incorporation, By-
laws or other governing documents of the Selling Stockholder, or constitute
a breach, or be in contravention, of any provision of any agreement,
franchise, license, indenture, mortgage, deed of trust or other instrument
to which the Selling Stockholder is a party or by which the Selling
Stockholder or the Selling Stockholder's property may be bound or affected,
or any statute, rule or regulation applicable to the Selling Stockholder,
or violate any order or decree of any court, regulatory body,
administrative agency or other governmental body having jurisdiction over
the Selling Stockholder or any of the Selling Stockholder's property. No
consent, approval, authorization or other order of any court, regulatory
body, administrative agency or other governmental body is required for the
execution and delivery of, and performance under, this Agreement by the
Selling Stockholder or the consummation by the Selling Stockholder of the
transactions contemplated by this Agreement, except for compliance with the
Act, the Exchange Act, the Blue Sky Laws applicable to the public offering
of the Shares by the Underwriters and the clearance of such offering with
the NASD. The Selling Stockholder hereby represents and warrants that the
Custody Agreement has been duly executed and delivered by or on behalf of
the Selling Stockholder to the Representatives.
(e) This Agreement and the Custody Agreement are each valid and
binding agreements of the Selling Stockholder enforceable in accordance
with their respective terms, subject to bankruptcy, insolvency, and
moratorium laws and other principles of equity.
(f) The Selling Stockholder has deposited in custody, under the
Custody Agreement, certificates in negotiable form for the Shares to be
sold hereunder by the Selling Stockholder as set forth opposite the Selling
Stockholder's name on Schedule I annexed hereto (including the maximum
number of Optional Shares set forth on Schedule 1) for the purpose of
further delivery pursuant to this Agreement. The Selling Stockholder
agrees that the Shares of the Selling Stockholder on deposit with the
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<PAGE>
Custodian are subject to the interests of the Company and the Underwriters,
that the arrangements made for such custody, pursuant to the Custody
Agreement, are to that extent irrevocable, and that the obligations of the
Selling Stockholder hereunder and under the Custody Agreement shall not be
terminated, except as provided in this Agreement and the Custody Agreement,
by any act of the Selling Stockholder, by operation of law, by the death or
incapacity of the Selling Stockholder or, by the occurrence of any other
event. If any Selling Stockholder should die or become incapacitated, or
if any other event should occur before the delivery of the Shares
hereunder, the certificates for Shares then on deposit with the Custodian
shall, to the extent such Shares are purchased by the Underwriters, be
delivered by the Custodian in accordance with the terms and conditions of
this Agreement and the Custody Agreement as if such death, incapacity, or
other event had not occurred, regardless of whether or not the Custodian
shall have received notice thereof. The Selling Stockholder represents that
the Custodian has been authorized to receive and acknowledge receipt of the
proceeds of sale of the Shares sold by the Selling Stockholder against
delivery thereof and otherwise to act on behalf of the Selling Stockholder.
(g) Insofar as it relates to the Selling Stockholder, each Preliminary
Prospectus, as of its date, has conformed in all material respects with the
requirements of the Act and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to, make the statements therein not misleading; and on the effective date
of the Registration Statement and at all times subsequent thereto up to
each Closing Date, (i) the Registration Statement and the Prospectus, as
they relate to the Selling Stockholder, did or will conform to the
requirements of the Act, and (ii) neither the Registration Statement nor
the Prospectus as it relates to the Selling Stockholder did or will include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading.
(h) To the knowledge of the Selling Stockholder, the representations
and warranties of the Company set forth in section 2 hereof are true and
correct.
(i) The information contained in the Selling Stockholder's Selling
Stockholders' Questionnaire completed in connection with the Company's
public offering and delivered to the Representatives was, as of the date of
such questionnaire, and is, as of the date of this Agreement, true and
correct.
A certificate signed by or on behalf of the Selling Stockholder as such and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed a representation and warranty by the Selling Stockholder to the
Underwriters as to the matters covered thereby. A certificate delivered by or
on behalf of the Selling Stockholder to counsel for the Selling Stockholder for
purposes of enabling such counsel to render the opinion referred in Section
10(e) will also be furnished to the Representatives and counsel for the
Underwriters and shall be deemed to be additional representations and warranties
to the Underwriters by the Selling Stockholder as to the matters covered
thereby.
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<PAGE>
SECTION 4. REPRESENTATION OF UNDERWRITERS. The Representatives will act
------------------------------
as the representatives for the several Underwriters in connection with the
public offering of the Shares, and any action under or in respect of this
Agreement taken by the Representatives will be binding upon all of the
Underwriters.
SECTION 5. INFORMATION FURNISHED BY THE UNDERWRITERS. The information set
-----------------------------------------
forth in the last paragraph on the outside front cover page of the Prospectus
concerning the terms of the offering by the Underwriters, and the concession and
reallowance amounts appearing under the caption "Underwriting" in the Prospectus
constitute all of the information furnished to the Company by and on behalf of
the Underwriters for use in connection with the preparation of the Registration
Statement and the Prospectus, as such information is referred to in this
Agreement.
SECTION 6. PURCHASE, SALE AND DELIVERY OF SHARES.
-------------------------------------
(a) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set forth,
the Company agrees to sell to the Underwriters identified in Schedule II
annexed hereto 320,000 Firm Shares, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company the number of Firm
Shares as hereinafter set forth at the price per share of $_____. The
obligation of each Underwriter to the Company shall be to purchase from the
Company that number of full Firm Shares which (as nearly as practicable in
full shares as determined by the Representatives) bears the same proportion
to the number of Firm Shares to be sold by the Company as the number of
shares set forth opposite the name of such Underwriter in Schedule II
annexed hereto bears to the total number of Firm Shares to be purchased by
all of the Underwriters under this Agreement.
(b) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set forth,
the Selling Stockholder agrees, to sell to the Underwriters that number of
full Firm Shares set forth opposite the name of the Selling Stockholder in
Schedule I annexed hereto (a total of 880,000 shares), and each of the
Underwriters agrees, severally and not jointly, to purchase from the
Selling Stockholder the number of Firm Shares as hereinafter set forth at
the same purchase price per share as stated in the preceding paragraph.
The obligation of each Underwriter to the Selling Stockholder shall be to
purchase from the Selling Stockholder that number of full Firm Shares which
(as nearly as practicable in full shares as determined by the
Representatives) bears the same proportion to the number of Firm Shares to
be sold by the Selling Stockholder as the number of shares set forth
opposite the name of such Underwriter in Schedule II annexed hereto bears
to the total number of Firm Shares to be purchased by all of the
Underwriters under this Agreement.
(c) On the First Closing Date (as hereinafter defined), the Company
and the Custodian on behalf of the Selling Stockholder will deliver to the
Representatives, at the offices of Cleary Gull Reiland & McDevitt Inc., 100
East Milwaukee Avenue, Milwaukee, WI 53202, or through the facilities of
The Depository Trust Company, for the accounts of the several Underwriters,
certificates representing the Firm Shares to be
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<PAGE>
sold by them against payment of the purchase price therefor by wire
transfer of immediately available funds to the accounts specified by the
Company and the Selling Stockholder. As referred to in this Agreement, the
"First Closing Date" shall be on the third full business day after the date
of the Prospectus, at 9:00 a.m., Milwaukee, Wisconsin time, or at such
other date or time not later than ten full business days after the date of
the Prospectus as the Representatives, the Company and the Selling
Stockholder may agree. The certificates for the Firm Shares to be so
delivered will be in denominations and registered in such names as the
Representatives request by notice to the Company and the Selling
Stockholder, or either of them, prior to the First Closing Date, and such
certificates will be made available for checking and packaging at 9:00
a.m., Milwaukee, Wisconsin time on the first full business day preceding
the First Closing Date at a location to be designated by the
Representatives.
(d) In addition, on the basis of the representations, warranties and
agreements herein contained, and subject to the terms and conditions herein
set forth, the Company hereby agrees to sell to the Underwriters, and the
Underwriters, severally and not jointly, shall have the right at any time
within forty-five days after the date of the Prospectus to purchase up to
180,000 Optional Shares from the Company at the same purchase price per
share to be paid for the Firm Shares, for use solely in covering any over-
allotments made by the Underwriters in the sale and distribution of the
Firm Shares. The option granted hereunder may be exercised in full or in
part upon notice by the Representatives to the Company and the Selling
Stockholder, or either of them, within forty-five days after the date of
the Prospectus setting forth the aggregate number of Optional Shares to be
purchased by the Underwriters and sold by the Company, the names and
denominations in which the certificates for such shares are to be
registered and the date and place at which such certificates will be
delivered. Such date of delivery (the "Second Closing Date") shall be
determined by the Representatives, provided that the Second Closing Date,
which may be the same as the First Closing Date, shall not be earlier than
the First Closing Date and, if after the First Closing Date, shall not be
earlier than three nor later than ten full business days after delivery of
such notice to exercise. Certificates for the Optional Shares will be made
available for checking and packaging at 9:00 a.m., Milwaukee, Wisconsin
time, on the first full business day preceding the Second Closing Date at a
location to be designated by the Representatives. The manner of payment
for and delivery of (including the denominations of and the names in which
certificates are to be registered) the Optional Shares shall be the same as
for the Firm Shares.
(e) The Representatives have advised the Company and the Selling
Stockholder that each Underwriter has authorized the Representatives to
accept delivery of the Shares and to make payment therefor. It is
understood that the Representatives, individually and not as
representatives of the Underwriters, may (but shall not be obligated to)
make payment for any Shares to be purchased by any Underwriter whose funds
shall not have been received by the Representatives by the First Closing
Date or the Second Closing Date, as the case may be, for the account of
such Underwriter, but any such payment shall not relieve such Underwriter
from any obligation under this
15
<PAGE>
Agreement. As referred to in this Agreement, "Closing Date" shall mean
either the First Closing Date or the Second Closing Date.
SECTION 7. COVENANTS OF THE COMPANY. The Company covenants and agrees
------------------------
with the several Underwriters that:
(a) If the effective time of the Registration Statement is not
prior to the execution and delivery of this Agreement, the Company will use
its best efforts to cause the Registration Statement to become effective at
the earliest possible time and, upon notification from the Commission that
the Registration Statement has become effective, will so advise the
Representatives and counsel to the Underwriters promptly. If the effective
time of the Registration Statement is prior to the execution and delivery
of this Agreement and any information shall have been omitted therefrom in
reliance upon Rule 430A, the Company, at the earliest possible time, will
furnish the Representatives with a copy of the Prospectus to be filed by
the Company with the Commission to comply with Rule 424(b) and Rule 430A
under the Act and, if the Representatives do not object to the contents
thereof, will comply with such Rules. Upon compliance with such Rules, the
Company will so advise the Representatives promptly. The Company will
advise the Representatives and counsel to the Underwriters and the Selling
Stockholder promptly of the issuance by the Commission or any state
securities commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose, or of any notification of the suspension of qualification of the
Shares for sale in any jurisdiction or the initiation or threatening of any
proceedings for that purpose, and will also advise the Representatives and
counsel to the Underwriters and the Selling Stockholder promptly of any
request of the Commission for amendment or supplement of the Registration
Statement, of any Preliminary Prospectus or of the Prospectus, or for
additional information, and the Company will not file any amendment or
supplement to the Registration Statement (either before or after it becomes
effective), to any Preliminary Prospectus or to the Prospectus (including a
prospectus filed pursuant to Rule 424(b)), or file any document under the
Exchange Act in the time period from the execution of this Agreement
through the First Closing Date with respect to the Firm Shares, or from the
time of notice by the Representatives exercising the option to purchase the
Optional Shares through the Second Closing Date with respect to the
Optional Shares, without first providing the Underwriters with a copy prior
to such filing (with a reasonable opportunity to review such amendment or
supplement) or if the Representatives object to such filing.
(b) If, at any time when a prospectus relating to the Shares is
required by law to be delivered in connection with sales by an Underwriter
or dealer, any event occurs as a result of which the Prospectus would
include an untrue statement of a material fact, or would omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to supplement the
Prospectus to comply with the Act, the Company promptly will advise the
Representatives and counsel to the Underwriters and the Selling Stockholder
thereof and will promptly prepare and file with
16
<PAGE>
the Commission, at its expense, an amendment to the Registration Statement
which will correct such statement or omission or an amendment which will
effect such compliance; and, if any Underwriter is required to deliver a
prospectus after the effective date of the Registration Statement, the
Company, upon request of the Representatives, will prepare promptly such
prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act. The Company consents to
the use, in accordance with the provisions of the Act and with the Blue Sky
Laws of the jurisdictions in which the Shares are offered by the several
Underwriters and by dealers, of each Preliminary Prospectus.
(c) Neither the Company nor any Subsidiary will, prior to the Second
Closing Date, if any, incur any liability or obligation, direct or
contingent, or enter into any material transaction, other than in the
ordinary course of business, or enter into any transaction with an
"affiliate," as defined in Rule 405 under the Act, which is required to be
described in the Prospectus pursuant to Item 404 of Regulation S-K under
the Act, except as described in the Prospectus.
(d) Except with respect to Shares of Common Stock acquired in
connection with a "cashless exercise" relating to any of the Company's
stock option plans, neither the Company nor any Subsidiary will, prior to
the Second Closing Date, if any, acquire any of the Common Stock nor,
except for the Company's regular quarterly dividend paid in the ordinary
course of business, if any, will the Company declare or pay any dividend or
make any other distribution upon its Common Stock payable to stockholders
of record on a date prior to such earlier date, except as described in the
Prospectus.
(e) The Company will make generally available to its security holders
and the Representatives an earnings statement as soon as practicable, but
in no event later than sixty days after the end of its fiscal quarter in
which the first anniversary of the effective date of the Registration
Statement occurs, covering a period of twelve consecutive calendar months
beginning after the effective date of the Registration Statement, which
will satisfy the provisions of the last paragraph of Section 11(a) of the
Act and Rule 158 promulgated thereunder.
(f) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company
will furnish to the Representatives, at the expense of the Company, copies
of the Registration Statement, the Prospectus, any Preliminary Prospectus
and all amendments and supplements to any such documents, including any
document filed under the Exchange Act and deemed to be incorporated by
reference in the Registration Statement, in each case as soon as available
and in such quantities as the Representatives may reasonably request.
(g) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder for the purposes set forth in the
Prospectus.
(h) The Company will cooperate with the Representatives and counsel to
the Underwriters in qualifying or registering the Shares for sale under the
Blue Sky Laws of
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such jurisdictions as the Representatives designates, and will continue
such qualifications or registrations in effect so long as reasonably
requested by the Representatives to effect the distribution of the Shares.
The Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any such jurisdiction where
it is not presently qualified. In each jurisdiction where any of the Shares
shall have been qualified as provided above, the Company will file such
reports and statements as may be required to continue such qualification
for a period of not less than one year from the date of the Prospectus. The
Company shall promptly prepare and file with the Commission, from time to
time, such reports as may be required to be filed by the Act and the
Exchange Act, and the Company shall comply in all respects with the
undertakings given by the Company in connection with the qualification or
registration of the Shares for offering and sale under the Blue Sky Laws.
(i) During the period of three years from the date of the Prospectus,
the Company will furnish to each of the Representatives and to each of the
other Underwriters who may so request, as soon as available, each report,
statement or other document of the Company or its Board of Directors mailed
to its stockholders or filed with the Commission, and such other
information concerning the Company as the Representatives may reasonably
request.
(j) The Company shall deliver the requisite notice of issuance to
Nasdaq and shall take all necessary or appropriate action within its power
to maintain the authorization for trading of the Common Stock as a Nasdaq
National Market security, or take such action to authorize the Common Stock
for listing on the New York Stock Exchange or the American Stock Exchange,
for a period of at least thirty-six months after the date of the
Prospectus.
(k) Except for (i) the issuance and sale by the Company of Common
Stock upon exercise of presently existing outstanding stock options, and
(ii) the sale of the Shares to be sold by the Company pursuant to this
Agreement, the Company shall not, for a period of 180 days after the date
of the Prospectus, without the prior written consent of Cleary Gull,
directly or indirectly, offer, sell or otherwise dispose of, contract to
sell or otherwise dispose of, or cause or in any way permit to be sold or
otherwise disposed of, any: (i) shares of Common Stock; (ii) rights to
purchase shares of Common Stock; or (iii) securities that are convertible
or exchangeable into shares of Common Stock.
(l) The Company will maintain a transfer agent and, if required by law
or the rules of The Nasdaq Stock Market or any national securities exchange
on which the Common Stock is listed, a registrar (which, if permitted by
applicable laws and rules, may be the same entity as the transfer agent)
for its Common Stock. The Company shall, as soon as practicable after the
date hereof, use its best efforts to obtain listing in Standard and Poor's
Stock Guide, or such other recognized securities manuals for which it may
qualify for listing, and the Company shall use its best efforts to maintain
such listings for at least five years after the First Closing Date.
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(m) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any rumor, publication or event
relating to of affecting the Company shall occur as a result of which, in
the opinion of Cleary Gull, the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to the Prospectus), the
Company will, after written notice from Cleary Gull advising the Company of
any of the matters set forth above, promptly consult with Cleary Gull
concerning the advisability and substance of, and, if the Company and
Cleary Gull jointly determine that it is appropriate, disseminate, a press
release or other public statement responding to or commenting on, such
rumor, publication or event.
(n) The Company will comply or cause to be complied with the
conditions to the obligations of the Underwriters in section 10 hereof.
SECTION 8. COVENANTS OF THE SELLING STOCKHOLDER. The Selling Stockholder
------------------------------------
covenants and agrees with the several Underwriters and the Company as follows:
(a) If the effective time of the Registration Statement is not
prior to the execution and delivery of this Agreement, the Selling
Stockholder will cooperate to the extent necessary to cause the
Registration Statement to become effective at the earliest possible time;
and the Selling Stockholder will do and perform all things to be done and
performed by the Selling Stockholder prior to each Closing Date, pursuant
to this Agreement or the Custody Agreement.
(b) The Selling Stockholder agrees to deliver to the Custodian on
or prior to the First Closing Date a properly completed and executed United
States Treasury Department Form W-9 (or other applicable substitute form or
statement specified by Treasury Department regulations in lieu thereof).
(c) The Selling Stockholder will pay all federal and other taxes,
if any, on the transfer or sale of the Shares being sold by the Selling
Stockholder to the Underwriters.
(d) For a period of 180 days after the date of the Prospectus, the
Selling Stockholder will not, without the prior written consent of Cleary
Gull, directly or indirectly, offer, sell, transfer, or pledge, contract to
sell, transfer or pledge or cause or in any way permit to be sold,
transferred, pledged or otherwise disposed of any: (i) shares of Common
Stock; (ii) rights to purchase shares of Common Stock (including, without
limitation, shares of Common Stock that may be deemed to be beneficially
owned by the Selling Stockholder in accordance with the rules and
regulations of the Commission and shares of Common Stock that may be issued
upon exercise of a stock option, warrant or other convertible security); or
(iii) securities that are convertible or exchangeable into shares of Common
Stock.
(e) The Selling Stockholder will furnish any documents, instruments
or other information which the Representatives may reasonably request in
connection with the sale and transfer of the Shares to the Underwriters.
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SECTION 9. PAYMENT OF EXPENSES. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective, or
if this Agreement is terminated for any reason, the Company will pay the costs,
fees and expenses incurred in connection with the public offering of the Shares.
Such costs, fees and expenses to be paid by the Company will include, without
limitation:
(a) All costs, fees and expenses (excluding the expenses incurred
by the Underwriters and the legal fees and disbursements of counsel for the
Underwriters, but including such fees and disbursements described in
subsection (b) of this section 9) incurred in connection with the
performance of the Company's obligations hereunder, including without
limiting the generality of the foregoing: the registration fees related to
the filing of the Registration Statement with the Commission; the fees and
expenses related to the quotation of the Shares on Nasdaq or other national
securities exchange; the fees and expenses of the Company's counsel,
accountants, transfer agent and registrar; the costs and expenses incurred
in connection with the preparation, printing, shipping, and delivery of the
Registration Statement, each Preliminary Prospectus and the Prospectus
(including all exhibits and financial statements) and all agreements and
supplements provided for herein, this Agreement and the Custody Agreement,
including, without limitation, shipping expenses via overnight delivery
and/or courier service to comply with applicable prospectus delivery
requirements; and the costs and expenses associated with the production of
materials related to, and travel expenses incurred by the management of the
Company in connection with, the various meetings to be held between the
Company's management and prospective investors.
(b) All registration fees and expenses, including legal fees and
disbursements of counsel for the Underwriters incurred in connection with
qualifying or registering all or any part of the Shares for offer and sale
under the Blue Sky Laws and the clearing of the public offering and the
underwriting arrangements evidenced hereby with the NASD.
(c) All fees and expenses related to printing of the certificates
for the Shares, and all transfer taxes, if any, with respect to the sale
and delivery of the Shares to the Underwriters. Notwithstanding the
foregoing, the Selling Stockholder shall be solely responsible for any
transfer or sales tax imposed upon the transfer and sale of the Selling
Stockholder's Shares to the Underwriters and for the Selling Stockholder's
respective pro rata share of all fees and expenses of the Custodian. All
costs and expenses incident to the performance of the Selling Stockholder's
obligations hereunder which are not otherwise specifically provided for in
this section will be borne and paid solely by the Selling Stockholder. In
the event the Selling Stockholder shall fail to pay the Selling
Stockholder's pro rata share of the costs, fees and expenses described in
this section within five days after demand by the Representatives therefor,
the Company shall be obligated to pay such costs, fees and expenses on
demand.
SECTION 10. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
-------------------------------------------------
obligations of the several Underwriters under this Agreement shall be subject to
the accuracy of the representations and warranties on the part of the Company
and the Selling Stockholder herein set
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forth as of the date hereof and as of each Closing Date, to the accuracy of the
statements of the Company's officers and the Selling Stockholder made pursuant
to the provisions hereof, to the performance by the Company and the Selling
Stockholder of their respective obligations hereunder, and to the following
additional conditions, unless waived in writing by the Representatives:
(a) The Registration Statement shall have been declared effective by
the Commission not later than 5:30 p.m., Washington, D.C. time, prior to
the date on the date of this Agreement, or such later time as shall have
been consented to by the Representatives, which consent shall be deemed to
have been given if the Registration Statement shall have been declared
effective on or before the date and time requested in the acceleration
request submitted on behalf of the Representatives pursuant to Rule 461
under the Act; all filings required by Rules 424(b) and 430A under the Act
shall have been timely made; no stop order suspending the effectiveness of
the Registration Statement shall have been issued by the Commission or any
state securities commission nor, to the knowledge of the Company, shall any
proceedings for that purpose have been initiated or threatened; and any
request of the Commission or any state securities commission for inclusion
of additional information in the Registration Statement, or otherwise,
shall have been complied with to the satisfaction of the Representatives.
(b) Since the dates as of which information is given in the
Registration Statement:
(i) there shall not have occurred any change or development
involving, or which could be expected to involve, a Material Adverse
Effect, whether or not arising from transactions in the ordinary
course of business; and
(ii) the Company shall not have sustained any loss or
interference from any labor dispute, strike, fire, flood, windstorm,
accident or other calamity (whether or not insured) or from any court
or governmental action, order or decree,
the effect of which on the Company, in any such case described in clause
(i) or (ii) above, is in the opinion of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares on the terms and in the
manner contemplated in the Registration Statement and the Prospectus.
(c) The Representatives shall not have advised the Company that the
Registration Statement or the Prospectus contains an untrue statement of
fact that, in the opinion of the Representatives or counsel for the
Underwriters, is material, or omits to state a fact that, in the opinion of
the Representatives or such counsel, is material and is required to be
stated therein or necessary to make the statements therein not misleading.
(d) The Representatives shall have received an opinion of Otten,
Johnson, Robinson, Neff & Ragonetti, P.C., counsel for the Company,
addressed to the
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Representatives, as the representatives of the Underwriters, and dated the
First Closing Date or the Second Closing Date, as the case may be, to the
effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and authority
to own, lease and operate its properties and conduct its business as
presently conducted and as described in the Prospectus and the
Registration Statement; the Company is duly registered and qualified
to do business as a foreign corporation under the laws of, and is in
good standing as such in, each jurisdiction in which such registration
or qualification is required, except where the failure to so register
or qualify would not have a Material Adverse Effect;
(ii) The authorized capital stock of the Company consists of
10,000,000 shares of Common Stock, par value $0.10 per share, and
1,000,000 shares of Preferred Stock, and all such stock conforms as to
legal matters to the descriptions thereof in the Prospectus and the
Registration Statement;
(iii) The issued and outstanding shares of capital stock of the
Company immediately prior to the issuance and sale of the Shares to be
sold by the Company hereunder have been duly authorized and validly
issued, are fully paid and nonassessable, and there are no preemptive,
preferential or other rights to subscribe for or purchase any shares
of capital stock of the Company, and no shares of capital stock of the
Company have been issued in violation of such rights;
(iv) To such counsel's knowledge, except for the Subsidiaries,
the Company has no subsidiaries, and the Company does not own any
equity interest in or control, directly or indirectly, any other
corporation, limited liability company, partnership, joint venture,
association, trust or other business organization except as described
in the Prospectus, the Registration Statement and Schedule 2(c)
hereto; each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and authority
to own, lease and operate its properties and to conduct its business
as presently conducted and as described in the Prospectus and the
Registration Statement; each Subsidiary is duly registered or
qualified to do business as a foreign corporation under the laws of,
and is in good standing as such in, each jurisdiction in which such
registration or qualification is required, except where the failure to
so register or qualify would not have a Material Adverse Effect; the
issued and outstanding shares of the capital stock of each Subsidiary
have been duly authorized and validly issued, are fully paid and
nonassessable and there are no preemptive, preferential or other
rights to subscribe for or purchase any shares of capital stock of any
Subsidiary, and no shares of capital stock of any Subsidiary have been
issued in violation of such rights; the Company owns directly and
beneficially all of the issued and
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<PAGE>
outstanding capital stock of each Subsidiary, free and clear of any
and all liens, claims, encumbrances and security interests;
(v) The certificates for the Shares to be delivered hereunder
are in due and proper form and conform to the requirements of
applicable law; and when duly countersigned by the Company's transfer
agent, and delivered to the Representatives or upon the order of the
Representatives against payment of the agreed consideration therefor
in accordance with the provisions of this Agreement, the Shares to be
sold by the Company represented thereby will be duly authorized and
validly issued, fully paid and nonassessable, and free of any
preemptive, preferential or other rights to subscribe for or purchase
shares of Common Stock;
(vi) The Registration Statement has become effective under the
Act, and to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or are threatened
under the Act or any Blue Sky Laws; the Registration Statement and the
Prospectus and any amendment or supplement thereto, including any
document incorporated by reference in the Registration Statement,
(except for the financial statements and other statistical or
financial data included therein as to which such counsel need express
no opinion) comply as to form in all material respects with the
requirements of the Act; the conditions for use of Form SB-2, set
forth in the General Instructions thereto, have been satisfied; no
facts have come to the attention of such counsel which lead it to
believe that either the Registration Statement or the Prospectus or
any amendment or supplement thereto, including any document
incorporated by reference in the Registration Statement, contains any
untrue statement of a material fact or omitted or will omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of the
First Closing Date or the Second Closing Date, as the case may be,
contained any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of
the circumstances under which they were made (except for the financial
statements and other financial data included therein as to which such
counsel need express no opinion); to such counsel's knowledge, there
are no legal or governmental proceedings pending or threatened,
including, without limitation, any such proceedings that are related
to environmental or employment discrimination matters, required to be
described in the Registration Statement or the Prospectus which are
not so described or which question the validity of this Agreement or
any action taken or to be taken pursuant thereto, nor is there any
transaction, relationship, agreement, contract or other document of a
character required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to or incorporated by
reference in the Registration Statement by the Act, which is not
described, filed or incorporated by reference as required;
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(vii) The Company has full corporate power and authority to
enter into and perform this Agreement; the performance of the
Company's obligations hereunder and the consummation of the
transactions described herein have been duly authorized by the Company
by all necessary corporate action and this Agreement has been duly
executed and delivered by and on behalf of the Company, and is a
legal, valid and binding agreement of the Company enforceable against
the Company in accordance with its terms, except that rights to
indemnity or contribution may be limited by applicable law and except
as enforceability of this Agreement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, and by equitable principles limiting the
right to specific performance or other equitable relief; no consent,
approval, authorization or other order or decree of any court,
regulatory or governmental body, arbitrator, administrative agency or
other instrumentality of the United States or other country or
jurisdiction having jurisdiction over the Company is required for the
execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement (except for compliance
with the Act, the Exchange Act, applicable Blue Sky Laws and the
clearance of the underwriting arrangements by the NASD);
(viii) The execution, delivery and performance of this Agreement
by the Company will not: (A) violate any provisions of the Articles of
Incorporation or By-laws of the Company or any Subsidiary; (B) or
result in the breach, modification or termination of, or constitute a
default under, any agreement, lease, franchise, license, indenture,
permit, mortgage, deed of trust, other evidence of indebtedness or
other instrument to which the Company or any Subsidiary is a party or
by which the Company or such Subsidiary, or any of their respective
owned or leased property is bound, and which is filed or incorporated
by reference as an exhibit to the Registration Statement; or (C)
violate any statute, ordinance, rule, or regulation of any regulatory
or governmental body, or to such counsel's knowledge, any order or
decree of any court, arbitrator, administrative agency or other
instrumentality of the United States or other country or jurisdiction
having jurisdiction over the Company or any Subsidiary (assuming
compliance with all applicable federal and state securities laws);
(ix) To such counsel's knowledge, except as described in the
Prospectus, there are no holders of Common Stock or other securities
of the Company, or securities that are convertible or exchangeable
into Common Stock or other securities of the Company, that have rights
to the registration of such securities
(x) The Common Stock (including the Shares) has been
designated for inclusion as a National Market security on The Nasdaq
Stock Market and is registered under the Exchange Act;
24
<PAGE>
(xi) Neither the Company nor any Subsidiary is, nor with the
giving of notice or passage of time or both would be, in violation of
its respective Articles of Incorporation or By-laws or, to such
counsel's knowledge, in default in any material respect in the
performance of any agreement, lease, franchise, license, permit,
mortgage, deed of trust, evidence of indebtedness or other instrument,
or any other document that is filed as an exhibit to or incorporated
by reference in the Registration Statement, to which the Company or
any Subsidiary is subject or bound;
(xii) Neither the Company nor any Subsidiary is an "investment
company", an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company", as such terms are defined
in the Investment Company Act of 1940, as amended, and, upon its
receipt of any proceeds from the sale of the Shares, the Company will
not become or be deemed to be an "investment company" thereunder;
(xiii) The description or incorporation by reference in the
Registration Statement and the Prospectus of legal matters, statutes,
documents, regulations, legal and governmental proceedings, and
contracts and other legal documents described or incorporated by
reference therein fairly and correctly present, in all material
respects, the information required to be included therein by the Act
and fairly summarize the matters referred to therein; and
(xiv) All offers and sales by the Company of its capital stock
before the date hereof were at all relevant times duly registered
under or exempt from the registration requirements of the Act, and
were duly registered under or the subject of an available exemption
from the registration requirements of any applicable Blue Sky Laws.
In rendering such opinion, counsel for the Company may rely, to the extent
counsel deems such reliance proper, as to matters of fact upon certificates of
officers of the Company and of governmental officials, and copies of all such
certificates shall be furnished to the Representatives and for the Underwriters
on or before each Closing Date. Such opinion may incorporate reasonable
exclusions and qualifications.
(e) The Representatives shall have received an opinion from of Otten,
Johnson, Robinson, Neff & Ragonetti, P.C., counsel for the Selling
Stockholder, dated the First Closing Date or the Second Closing
(i) Each of this Agreement and the Custody Agreement has been
duly authorized, executed and delivered by or on behalf of the Selling
Stockholder and such agreement constitutes the valid and binding
agreement of the Selling Stockholder, enforceable in accordance with
its respective terms, except that rights to indemnity or contribution
thereunder may be limited by applicable law and except as
enforceability of such agreement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws generally
affecting the
25
<PAGE>
rights of creditors and by equitable principles limiting the right to
specific performance or other equitable relief;
(ii) The execution and delivery of this Agreement and the
Custody Agreement and the consummation of the transactions herein and
therein contemplated will not, if applicable, result in the violation
of any provisions of the Articles of Incorporation, By-laws or other
governing documents of the Selling Stockholder, or constitute a
breach, or to such counsel's knowledge, be in contravention, of any
provision of any agreement, franchise, license, indenture, mortgage,
deed of trust or other instrument to which the Selling Stockholder is
a party or by which the Selling Stockholder or the Selling
Stockholder's property may be bound or affected, or any statute, rule
or regulation applicable to the Selling Stockholder, or to such
counsel's knowledge, violate any order or decree of any court,
regulatory or governmental body, administrative body or
instrumentality of the United States or other jurisdiction having
jurisdiction over the Selling Stockholder or any of the Selling
Stockholder's property;
(iii) The Selling Stockholder has full legal right, power and
authority, and has secured any consent, approval, authorization and
order required to enter into and perform this Agreement and the
Custody Agreement and to sell, assign, transfer and deliver title to
the Shares to be sold by the Selling Stockholder as provided herein;
and upon delivery to the Underwriters or upon the order of the
Representatives against payment of the agreed consideration therefor
in accordance with the provisions of this Agreement, the Underwriters
will acquire good and marketable title to the Shares to be sold
hereunder by the Selling Stockholder, free and clear of all voting
trust arrangements, liens, encumbrances, security interests, equities,
claims and community or marital property rights; and
(iv) To such counsel's knowledge, the information concerning
the Selling Stockholders contained in the Prospectus under the caption
"Principal and Selling Stockholders" complies in all material respects
with the Act.
In rendering such opinion, counsel for the Selling Stockholder may rely, to
the extent counsel deems such reliance proper, as to matters of fact upon
certificates of the Selling Stockholder, and copies of all such certificates
shall be furnished to the Representatives and counsel for the Underwriters on or
before each Closing Date. Such opinion may incorporate reasonable exclusions
and qualifications.
(f) The Representatives shall have received an opinion of Gibson,
Dunn & Crutcher LLP, counsel for the Underwriters, dated the First Closing
Date or the Second Closing Date, as the case may be, with respect to the
issuance and sale of the Shares by the Company, the Registration Statement
and other related matters as the Representatives may require, and the
Company shall have furnished to such counsel such documents and shall have
exhibited to them such papers and records as they request for the purpose
of enabling them to pass upon such matters.
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(g) The Representatives shall have received on each Closing Date, a
certificate of Mark A. Betker, Chief Executive Officer, and Jeffrey L.
Vigil, Vice President, Finance and Administration, of the Company, to the
effect that:
(i) The representations and warranties of the Company set
forth in section 2 hereof are true and correct as of the date of this
Agreement and as of the date of such certificate, and the Company has
complied with all the agreements and satisfied all the conditions to
be performed or satisfied by it at or prior to the date of such
certificate;
(ii) The Commission has not issued an order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus or
any amendment or supplement thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued; and to
the knowledge of the respective signatories, no proceedings for that
purpose have been initiated or are pending or contemplated under the
Act or under the Blue Sky Laws of any jurisdiction;
(iii) Each of the respective signatories has carefully examined
the Registration Statement and the Prospectus, and any amendment or
supplement thereto, including any documents filed under the Exchange
Act and deemed to be incorporated by reference in the Registration
Statement, and such documents contain all statements required to be
stated therein, and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and since
the date on which the Registration Statement was initially filed, no
event has occurred that was required to be set forth in an amended or
supplemented prospectus or in an amendment to the Registration
Statement that has not been so set forth; and
(iv) Since the date on which the Registration Statement was
initially filed with the Commission, there shall not have occurred any
change or development involving, or which could be expected to
involve, a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as disclosed
in the Prospectus and the Registration Statement as heretofore amended
or (but only if the Representatives expressly consent thereto in
writing) as disclosed in an amendment or supplement thereto filed with
the Commission and delivered to the Representatives after the
execution of this Agreement; since such date and except as so
disclosed or in the ordinary course of business, the Company has not
incurred any liability or obligation, direct or indirect, or entered
into any transaction which is material to the Company; since such date
and except as so disclosed, there has not been any change in the
outstanding capital stock of the Company, or any change that is
material to the Company in the short-term debt or long-term debt of
the Company; since such date and except as so disclosed or as
contemplated in this Agreement, the Company has not acquired any of
the Common Stock or other capital stock of the Company nor has the
Company declared or paid any dividend, or made any other
27
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distribution, upon its outstanding Common Stock payable to
stockholders of record on a date prior to such Closing Date; since
such date and except as so disclosed, the Company has not incurred any
material contingent obligations, and no material litigation is pending
or threatened against the Company; and, since such date and except as
so disclosed, the Company has not sustained any material loss or
interference from any strike, fire, flood, windstorm, accident or
other calamity (whether or not insured) or from any court or
governmental action, order or decree.
The delivery of the certificate provided for in this subsection (g) shall
be and constitute a representation and warranty of the Company as to the facts
required in the immediately foregoing clauses (i), (ii), (iii) and (iv) to be
set forth in said certificate.
(h) The Representatives shall have received a certificate from the
Selling Stockholder, dated the First Closing Date or the Second Closing
Date, as the case may be, to the effect that: (i) the representations and
warranties of the Selling Stockholder in Section 3 of this Agreement are
true and correct as of the date of this Agreement and as of the date of
such certificate, as if again made on and as of such Closing Date, and the
Selling Stockholder has complied with all of the agreements and satisfied
all of the conditions to be performed or satisfied by the Selling
Stockholder at or prior to such Closing Date; and (ii) the Selling
Stockholder has no reason to believe that the Registration Statement or any
amendment thereto, including any documents filed under the Exchange Act and
deemed to be incorporated by reference in the Registration Statement, at
the time it was declared effective by the Commission contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus, as amended or supplemented, including
any documents filed under the Exchange Act and deemed to be incorporated by
reference in the Registration Statement, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(i) At the time this Agreement is executed and also on each Closing
Date, there shall be delivered to the Representatives a letter addressed to
the Representatives, as the representatives of the Underwriters, from each
of Ernst & Young LLP, Blanski Peter Kronlage & Zoch, P.A., and Goldstein
Lewin & Co., the Company's independent accountants, the first letters to be
dated the date of this Agreement, the second letters to be dated the First
Closing Date and the third letters (if applicable) to be dated the Second
Closing Date, which shall be in form and substance satisfactory to the
Representatives and shall contain information as of a date within five days
of the date of such letter. There shall not have been any change or
decrease set forth in any of the letters referred to in this subsection (i)
which makes it impracticable or inadvisable in the judgment of the
Representatives to proceed with the public offering or purchase of the
Shares as contemplated hereby.
28
<PAGE>
(j) The Shares shall have been qualified or registered for sale under
the Blue Sky Laws of such jurisdictions as shall have been specified by the
Representatives, the underwriting terms and arrangements for the offering
shall have been cleared by the NASD, and the Common Stock (including the
Shares) shall have been designated for inclusion as a Nasdaq National
Market security on the Nasdaq Stock Market and shall have been registered
under the Exchange Act.
(k) Such further certificates and documents as the Representatives
may reasonably request (including certificates of officers of the Company).
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to the
Representatives and to Gibson, Dunn & Crutcher LLP, counsel for the
Underwriters. The Company and the Selling Stockholder shall furnish the
Representatives with such manually signed or conformed copies of such opinions,
certificates, letters and documents as the Representatives may reasonably
request.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at either Closing Date is not so satisfied, this Agreement at the
election of the Representatives will terminate upon notification to the Company
and the Selling Stockholder, or any one of them, without liability on the part
of any Underwriter, including the Representatives, the Company or the Selling
Stockholder except for the provisions of section 7(n) hereof, the expenses to be
paid by the Company and the Selling Stockholder pursuant to section 9 hereof and
except to the extent provided in section 12 hereof.
SECTION 11. MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENT. The Company
------------------------- ----------------------
will use its best efforts and the Selling Stockholder will use his best efforts
to prevent the issuance of any stop order suspending the effectiveness of the
Registration Statement, and, if such stop order is issued, to obtain as soon as
possible the lifting thereof.
SECTION 12. INDEMNIFICATION.
---------------
(a) The Company and the Selling Stockholder, jointly and severally,
subject to the last paragraph of this Section 12, agree to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act or the Exchange Act, from and
against any losses, claims, damages, expenses, liabilities or actions in
respect thereof ("Claims"), joint or several, to which such Underwriter or
each such controlling person may become subject under the Act, the Exchange
Act, Blue Sky Laws or other federal or state statutory laws or regulations,
at common law or otherwise (including payments made in settlement of any
litigation), insofar as such Claims arise out of or are based upon any
breach of any representation, warranty or covenant made by the Company in
this Agreement, or any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or in
any application filed under any Blue Sky Law or other document executed by
the Company for that purpose or based upon written information furnished by
the Company and filed in any state or other jurisdiction to qualify any or
all of the Shares under the
29
<PAGE>
securities laws thereof (any such document, application or information
being hereinafter called a "Blue Sky Application") or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading. The Company and the Selling Stockholder, jointly
and severally, subject to the last paragraph of this Section 12, agree to
reimburse each Underwriter and each such controlling person for any legal
fees or other expenses incurred by such Underwriter or any such controlling
person in connection with investigating or defending any such Claim;
provided, however, that the Company and the Selling Stockholder will not be
liable in any such case to the extent that: (i) any such Claim arises out
of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or supplement thereto or in any Blue
Sky Application in reliance upon and in conformity with the written
information furnished to the Company pursuant to section 5 of this
Agreement or (ii) such statement or omission was contained or made in any
Preliminary Prospectus and corrected in the Prospectus and (1) any such
Claim suffered or incurred by any Underwriter (or any person who controls
any Underwriter) resulted from an action, claim or suit by any person who
purchased Shares which are the subject thereof from such Underwriter in the
offering, and (2) such Underwriter failed to deliver or provide a copy of
the Prospectus to such person at or prior to the confirmation of the sale
of such Shares, unless such failure was due to failure by the Company to
provide copies of the Prospectus to the Underwriters as required by this
Agreement. The indemnification obligations of the Company and the Selling
Stockholder as provided above are in addition to and in no way limit any
liabilities the Company and the Selling Stockholder may otherwise have.
(b) The Selling Stockholder, agrees to indemnify and hold harmless
each Underwriter and each controlling person from and against any Claims to
which such Underwriter or each such controlling person may become subject
under the Act, the Exchange Act, Blue Sky laws or other federal or state
statutory laws or regulations, at common law or otherwise (including
payments made in settlement of any litigation), insofar as such Claims
arise out of or are based upon any breach of any representations, warranty
or covenant made by the Selling Stockholder in this Agreement.
(c) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors and each of its officers
who signs the Registration Statement, and each person, if any, who controls
the Company within the meaning of the Act or the Exchange Act and the
Selling Stockholder against any Claim to which the Company, or any such
director, officer, controlling person or Selling Stockholder may become
subject under the Act, the Exchange Act, Blue Sky Laws or other federal or
state statutory laws or regulations, at common law or otherwise (including
payments made in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter and Cleary Gull),
insofar as such Claim arises out of or is based upon any untrue or alleged
untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or in any Blue Sky Application, or arises out of or
30
<PAGE>
is based upon any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or in any Blue Sky
Application, or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or in any Blue Sky Application, in
reliance solely upon and in conformity with the written information
furnished by the Representatives to the Company pursuant to section 5 of
this Agreement. Each Underwriter will severally reimburse any legal fees or
other expenses incurred by the Company, or any such director, officer,
controlling person or Selling Stockholder in connection with investigating
or defending any such Claim, and from any and all Claims solely resulting
from failure of an Underwriter to deliver a Prospectus, if the person
asserting such Claim purchased Shares from such Underwriter and a copy of
the Prospectus (as then amended if the Company shall have furnished any
amendments thereto) was not sent or given by or on behalf of such
Underwriter to such person, at or prior to the written confirmation of the
sale of the Shares to such person, and if the Prospectus (as so amended)
would have cured the defect giving rise to such Claim. The indemnification
obligations of each Underwriter as provided above are in addition to any
liabilities any such Underwriter may otherwise have. Notwithstanding the
provisions of this section, no Underwriter shall be required to indemnify
or reimburse the Company, or any officer, director, controlling person or
the Selling Stockholder in an aggregate amount in excess of the total price
at which the Shares purchased by any such Underwriter hereunder were
offered to the public, less the amount of any damages such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.
(d) The Selling Stockholder agrees to indemnify and hold harmless the
Company, each of its directors and each of its officers who signs the
Registration Statement, and each person, if any, controlling the Company
within the meaning of the Act or the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Underwriter set forth in
subsection (a) of this section. In case any Claim shall be brought or
asserted against the Company, its directors, such officers or any such
controlling person, in respect of which indemnity may be sought against the
Selling Stockholder, the Selling Stockholder shall have the rights and
duties given to the Company, and the Company, such directors or officers
and any such controlling person shall have the rights and duties given to
the Underwriters by subsection (a) of this section.
(e) Promptly after receipt by an indemnified party under this section
of notice of the commencement of any action in respect of a Claim, such
indemnified party will, if a Claim in respect thereof is to be made against
an indemnifying party under this section, notify the indemnifying party in
writing of the commencement thereof, but the omission so to notify the
indemnifying party will not relieve an indemnifying party from any
liability it may have to any indemnified party under this section or
otherwise, except to the extent that the failure to so notify the
indemnifying party causes such party prejudice. In case any such action is
brought against any indemnified party, and such indemnified
31
<PAGE>
party notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in and, to the extent
that he, she or it may wish, jointly with all other indemnifying parties,
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and any
indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to the indemnified
party and/or other indemnified parties which are different from or
additional to those available to any indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume
such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties.
(f) Upon receipt of notice from the indemnifying party to such
indemnified party of the indemnifying party's election to assume the
defense of such action and upon approval by the indemnified party of
counsel selected by the indemnifying party, the indemnifying party will not
be liable to such indemnified party under this section for any legal fees
or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof, unless:
(i) the indemnified party shall have employed separate counsel
in connection with the assumption of legal defenses in accordance with
the proviso to the last sentence of subsection (e) of this section (it
being understood, however, that the indemnifying party shall not be
liable for the legal fees and expenses of more than one separate
counsel, approved by Cleary Gull, if one or more of the Underwriters
or their controlling persons are the indemnified parties);
(ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after the indemnified
party's notice to the indemnifying party of commencement of the
action; or
(iii) the indemnifying party has authorized the employment of
counsel at the expense of the indemnifying party.
(g) If the indemnification provided for in this section is unavailable
to an indemnified party under subsection (a), (b), (c) or (d) hereof in
respect of any Claim referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall, subject to the
limitations hereinafter set forth, contribute to the amount paid or payable
by such indemnified party as a result of such Claim:
(i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, the Selling Stockholder and
the Underwriters from the offering of the Shares; or
(ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative
32
<PAGE>
benefits referred to in clause (i) above, but also the relative fault
of the Company, the Selling Stockholder and the Underwriters in
connection with the statements or omissions which resulted in such
Claim, as well as any other relevant equitable considerations.
The relative benefits received by each of the Company, the Selling
Stockholder and the Underwriters shall be deemed to be in such proportion so
that the Underwriters are responsible for that portion represented by the
percentage that the amount of the underwriting discounts and commissions per
share appearing on the cover page of the Prospectus bears to the public offering
price per share appearing thereon, and the Company, and the Selling Stockholder,
are responsible for the remaining portion. The relative fault of the Company,
the Selling Stockholder and the Underwriters shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Stockholder, or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the Claims referred to above shall be
deemed to include, subject to the limitations set forth in subsections (e) and
(f) of this section, any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any action or claim.
(h) The Company, the Selling Stockholder and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
section were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method or allocation which does not take into account the equitable
considerations referred to in subsection (f) of this section.
Notwithstanding the other provisions of this section, no Underwriter shall
be required to contribute any amount that is greater than the amount by
which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this section are
several in proportion to their respective underwriting commitments and not
joint.
(i) Notwithstanding any provision of this section 12 to the contrary,
the liability of the Selling Stockholder arising under this section 12
shall not exceed the purchase price received by the Selling Stockholder
from the Underwriters for the Shares sold by the Selling Stockholder.
SECTION 13. DEFAULT OF UNDERWRITERS. It shall be a condition to the
-----------------------
obligations of each Underwriter to purchase the Shares in the manner as
described herein, that, except as hereinafter provided in this section, each of
the Underwriters shall purchase and pay for all the Shares agreed to be
purchased by such Underwriter hereunder upon tender to the Representatives
33
<PAGE>
of all such Shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Shares hereunder on either
the First Closing Date or the Second Closing Date and the aggregate number of
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed ten percent (10%) of the total number of Shares which
the Underwriters are obligated to purchase on such Closing Date, the
Representatives may make arrangements for the purchase of such Shares by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date the nondefaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Shares which such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of Shares with respect to which such default or defaults occur
is greater than ten percent (10%) of the total number of Shares which the
Underwriters are obligated to purchase on such Closing Date, and arrangements
satisfactory to the Representatives for the purchase of such Shares by other
persons are not made within thirty-six hours after such default, this Agreement
will terminate without liability on the part of any nondefaulting Underwriter,
the Company, and the Selling Stockholder except to the extent provided in
section 12 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives shall have the right to postpone the First Closing Date or the
Second Closing Date, as the case may be, for not more than seven business days
in order that the necessary changes in the Registration Statement, Prospectus
and any other documents, as well as any other arrangements, may be effected. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 14. EFFECTIVE DATE. This Agreement shall become effective upon
--------------
the execution and delivery of this Agreement by the parties hereto. Such
execution and delivery shall include an executed copy of this Agreement sent by
telecopier, facsimile transmission or other means of transmitting written
documents.
SECTION 15. TERMINATION. Without limiting the right to terminate this
-----------
Agreement pursuant to any other provision hereof, this Agreement may be
terminated by the Representatives prior to or on the First Closing Date and the
over-allotment option from the Company referred to in section 6 hereof, if
exercised, may be cancelled by the Representatives at any time prior to or on
the Second Closing Date, if in the judgment of the Representatives, payment for
and delivery of the Shares is rendered impracticable or inadvisable because:
(a) additional governmental restrictions, not in force and effect on
the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or the American Stock Exchange,
or trading in securities generally shall have been suspended or materially
limited on either such exchange or on The Nasdaq Stock Market or a general
banking moratorium shall have been established by either federal or state
authorities in New York, Colorado, Florida or Wisconsin;
34
<PAGE>
(b) any event shall have occurred or shall exist which makes untrue or
incorrect in any material respect any statement or information contained in
the Registration Statement or which is not reflected in the Registration
Statement but should be reflected therein to make the statements or
information contained therein not misleading in any material respect; or
(c) an outbreak or escalation of hostilities or other national or
international calamity or any substantial change in political, financial or
economic conditions shall have occurred or shall have accelerated to such
extent, in the judgment of the Representatives, as to have a material
adverse effect on the financial markets of the United States, or to make it
impracticable or inadvisable to proceed with completion of the sale of and
payment for the Shares as provided in this Agreement.
Any termination pursuant to this Section shall be without liability on the
part of any Underwriter to the Company or the Selling Stockholder, or on the
part of the Company or the Selling Stockholder to any Underwriter, except for
expenses to be paid by the Company and the Selling Stockholder pursuant to
section 9 hereof or reimbursed by the Company pursuant to section 7(n) hereof
and except as to indemnification to the extent provided in section 12 hereof.
SECTION 16. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties, covenants and
other statements of the Company, of its officers or directors, of the Selling
Stockholder, and of the several Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, Selling Stockholder or
the Company or any of its or their partners, officers, directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder.
SECTION 17. NOTICES. All communications hereunder will be in writing and,
-------
if sent to the Representatives, will be mailed, delivered, telecopied (with
receipt confirmed) or telegraphed and confirmed to Cleary Gull Reiland &
McDevitt Inc. at 100 East Milwaukee Avenue, Milwaukee, WI 53202, Attention:
David Prokupek, Chief Executive Officer, with a copy to Gibson, Dunn & Crutcher,
LLP, 1801 California St., Suite 4100, Denver, CO 80202, Attention: Richard M.
Russo, Esq. and if sent to the Company, will be mailed, delivered, telecopied
(with receipt confirmed) or telegraphed and confirmed to the Company at 5031
South Ulster Street, Suite 300, Denver, CO 80237, Attention: Mark A. Betker,
Chairman, President and CEO, with a copy to Otten, Johnson, Robinson, Neff &
Ragonetti, P.C., Attention: Douglas R. Wright, Esq. and, if sent to the Selling
Stockholder, will be mailed, delivered, telecopied (with receipt confirmed) or
telegraphed and confirmed, to Rockmont Capital Limited, 700 Broadway, Suite 800,
Denver, CO 80203, with copies to Otten, Johnson, Robinson, Neff & Ragonetti,
P.C., Attention: Douglas R. Wright, Esq.
SECTION 18. SUCCESSORS. This Agreement will inure to the benefit of and
----------
be binding upon the parties hereto and their respective successors, personal
representatives and assigns, and to the benefit of the officers and directors
and controlling persons referred to in section 12 hereof and no other person
will have any right or obligation hereunder. The term "successors" shall not
35
<PAGE>
include any purchaser of the Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 19. PARTIAL UNENFORCEABILITY. If any section, paragraph, clause
------------------------
or provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph clause or provision hereof.
SECTION 20. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
----------------------------
governed by and construed in accordance with the internal laws of the State of
New York without reference to conflict of law principles thereunder. This
Agreement may be signed in various counterparts which together shall constitute
one and the same instrument, and shall be effective when at least one
counterpart hereof shall have been executed by or on behalf of each party
hereto.
36
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company, the Selling Stockholder and the
several Underwriters, including the Representatives, all in accordance with its
terms.
Very truly yours,
KOALA CORPORATION
By: ________________________________
Its: _______________________________
THE SELLING STOCKHOLDER:
ROCKMONT CAPITAL LIMITED
By:_______________________________
Name:__________________
Title:_________________
37
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed
and accepted as of the date
first above written.
CLEARY GULL REILAND & McDEVITT INC.
TUCKER ANTHONY INCORPORATED
CRAIG-HALLUM CAPITAL GROUP, INC.
By: Cleary Gull Reiland & McDevitt Inc.
Acting as Representatives of the several
Underwriters (including themselves) identified
in Schedule II annexed hereto.
By:________________________________
Authorized Representative
38
<PAGE>
KOALA CORPORATION
Schedule I
----------
<TABLE>
<CAPTION>
Number of Number of
Firm Shares Optional Shares
---------------------- -------------------------
<S> <C> <C>
The Company 320,000 180,000
Rockmont Capital Limited 880,000 0
--------- -------
Total 1,200,000 180,000
</TABLE>
39
<PAGE>
KOALA CORPORATION
Schedule II
-----------
<TABLE>
<CAPTION>
Number of Firm Shares
Name of Underwriter
- ------------------- to be Purchased
------------------------------------
<S> <C>
Cleary Gull Reiland & McDevitt Inc.
Tucker Anthony Incorporated
Craig-Hallum Capital Group, Inc. ____________
Total 1,200,000
</TABLE>
40
<PAGE>
EXHIBIT 5.1
[Letterhead of Otten, Johnson, Robinson, Neff & Ragonetti, P.C.]
November 30, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Koala Corporation
Form SB-2 Registration Statement
File No. 333-61551
------------------
Ladies and Gentlemen:
We have acted as counsel for Koala Corporation, a Colorado corporation (the
"Company"). In such capacity, we have examined the above-referenced
Registration Statement on Form SB-2 under the Securities Act of 1933, as amended
(the "Registration Statement"), which the Company has filed covering the sale of
1,380,000 shares of the Company's common stock (the "Shares"). Capitalized
terms used and not defined herein shall have the meanings given to them in the
Registration Statement.
In addition to the Registration Statement, we have examined the Company's
articles of incorporation and by-laws and the record of its corporate
proceedings and have made such other investigation and reviewed such other
documents as we have deemed necessary in order to express the opinions set forth
below.
Based upon the foregoing and upon such further examinations as we have
deemed relevant and necessary, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing under
the laws of the State of Colorado.
2. The Shares have been duly and validly authorized and upon payment
therefor in accordance with the Underwriting Agreement will constitute duly and
validly issued and outstanding and fully paid and non-assessable shares of the
Company.
We render the foregoing opinions as members of the Bar of the State of
Colorado and express no opinion as to laws other than the laws of the State of
Colorado and the federal laws of the United States of America.
<PAGE>
We hereby consent to the use of our name beneath the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement and to
the filing of a copy of this opinion as Exhibit 5.1 thereto.
/s/ OTTEN, JOHNSON, ROBINSON, NEFF & RAGONETTI, P.C.
2
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 10, 1998, in the Registration Statement (Form
SB-2) and related Prospectus of Koala Corporation for the registration of
1,200,000 shares of its common stock.
/s/Ernst & Young LLP
Denver, Colorado
November 25, 1998
<PAGE>
Exhibit 23.2
Independent Auditor's Consent
We consent to the use in the Registration Statements and Prospectus on Form SB-2
dated November 25, 1998, of Koala Corporation of our report dated February 12,
1997, on the financial statements of Koala Corporation for the years ended
December 31, 1996 and 1995, incorporated by reference in the Registration
Statement, and to the use of our name and the statements with respect to us
under the heading "Experts" in such Prospectus.
/s/BLANSKI PETER KRONLAGE & ZACH, P.C.
Minneapolis, Minnesota
November 30, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated July 28, 1998, relating to the combined financial statements of
Park Structures, Inc. and Affiliate and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/GOLDSTEIN LEWIN & CO.
Boca Raton, Florida
November 30, 1998
<PAGE>
Exhibit 23.4
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 11, 1997 (except as to note 9 which is as of June
23, 1997) in the Registration Statement (Form SB-2) and related Prospectus of
Koala Corporation for the registration of 1,200,000 shares of its common stock.
/s/Ernst & Young
Chartered Accountants
Vancouver, Canada
November 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JUL-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 1,832,677 1,187,522
<SECURITIES> 0 0
<RECEIVABLES> 2,333,028 3,274,472
<ALLOWANCES> 45,703 45,054
<INVENTORY> 1,103,355 1,708,608
<CURRENT-ASSETS> 5,653,791 7,084,484
<PP&E> 1,561,324 1,972,848
<DEPRECIATION> 322,616 508,082
<TOTAL-ASSETS> 14,956,800 17,084,146
<CURRENT-LIABILITIES> 1,708,681 1,717,138
<BONDS> 0 0
0 0
0 0
<COMMON> 252,736 252,736
<OTHER-SE> 12,597,336 14,716,225
<TOTAL-LIABILITY-AND-EQUITY> 14,956,800 17,084,146
<SALES> 13,621,292 13,492,507
<TOTAL-REVENUES> 13,621,292 13,492,507
<CGS> 5,528,542 5,977,138
<TOTAL-COSTS> 5,528,542 5,977,138
<OTHER-EXPENSES> 4,431,849 4,070,818
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,776,609 3,444,551
<INCOME-TAX> 1,340,697 1,222,815
<INCOME-CONTINUING> 2,435,912 2,221,736
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,435,912 2,221,736
<EPS-PRIMARY> 0.97 0.88
<EPS-DILUTED> 0.96 0.86
</TABLE>
