U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): March 1, 2000
Commission file number 0-22464
-------
KOALA CORPORATION
-----------------
(Exact name of issuer as
specified in its charter)
Colorado 84-1238908
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11600 E. 53rd Avenue, Unit D, Denver, CO 80239
----------------------------------------------
(Address of principal executive offices)
(303) 574-1000
--------------
(Issuer's telephone number)
Not Applicable
--------------
(Former name, former address, and former fiscal year,
if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OF ASSETS
On March 1, 2000, Koala Corporation (the "Company"), acquired all of
the outstanding capital stock of SCS Interactive, Inc., an Oregon corporation
("SCS") and certain intellectual property used in SCS's business for $20.2
million in cash plus $5.1 million in Koala Common Stock. The Company financed
the cash portion of the purchase price with the proceeds of a revolving credit
facility with U.S. Bank National Association. In addition, if certain earnings
targets are met, the former shareholders of SCS will receive additional cash
consideration in March 2002.
Based in Tillamook, Oregon, SCS produces and markets interactive
modular play equipment for use in water parks, indoor public facilities and
outdoor public facilities. The purchase price and terms were negotiated on an
arms length basis with the former shareholders of SCS and Rick Briggs. No
principal of SCS had a relationship with the Company prior to the transaction.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired.
The following financial statements of the business acquired are filed
herewith:
Financial Statements of SCS Interactive, Inc. as of September 30, 1999 and
1998 and for the years then ended (audited) and as of December 31, 1999 and
for the three months ended December 31, 1999 and 1998 (unaudited).
Independent Auditors Reports.
Balance Sheets as of September 30, 1999 and December 31, 1999
(audited).
Statements of Operations for the years ended September 30, 1999 and
1998 (audited) and for the three months ended December 31, 1999 and
1998 (unaudited).
Statements of Stockholder's Equity for the years ended September 30,
1999 and 1998 (audited).
Statements of Cash Flows for the years ended September 30, 1999 and
1998 (audited) and for the three months ended December 31, 1999 and
1998 (unaudited).
Notes to Financial Statements.
(b) Pro Forma Financial Information.
The following pro forma financial statements of the registrant are filed
herewith:
Unaudited Pro Forma Consolidated Financial Statements of Koala
Corporation for the Years Ended December 31, 1999 and December 31,
1998.
Unaudited Pro Forma Consolidated Financial Statements Introduction.
Unaudited Pro Forma Consolidated Balance Sheet as of December 31,
1999.
Unaudited Pro Forma Consolidated Statement of Income for the Year
ended December 31, 1999.
Unaudited Pro Forma Consolidated Statement of Income for the Year
ended December 31, 1998.
Notes to Unaudited Pro Forma Consolidated Financial Statements.
2
<PAGE>
(c) Exhibits.
10.1* Stock and Asset Purchase Agreement, dated March 1, 2000, among the
Company, the Shareholders of SCS Interactive, Inc. and Rick Briggs
10.2* First Amendment to Revolving Credit Agreement, dated March 1, 2000,
between the Company and U.S. Bank National Association
99.1* Press Release.
* Filed with the Form 8-K on March 15, 2000
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOALA CORPORATION
Date: May 12, 2000 By: /s/ Mark A. Betker
-------------------------------
Chairman and Chief Executive Officer
Executive Officer
3
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SEQUENTIAL
DESCRIPTION PAGE NO.
----------- --------
Audited Financial Statements of SCS Interactive, Inc. as of
September 30, 1999 and 1998 and for the Years then Ended........ F-2 to F-21
Unaudited Financial Statements of SCS Interactive, Inc. as
of December 31, 1999 and for theThree Months Ended December
31, 1999 and 1998 ............................................. F-22 to F-24
Unaudited Pro Forma Consolidated Financial Statements of
Koala Corporation as of December 31, 1999 and for the Year
Ended December 31,1999 ......................................... F-25 to F-29
F-1
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
SCS Interactive, Inc.:
We have audited the accompanying balance sheets of SCS Interactive, Inc. (an
Oregon corporation) as of September 30, 1999 and 1998 and the related statements
of income, shareholders' equity and cash flows for the year ended September 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements is 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 statement referred to above present fairly, in all
material respects, the financial position of SCS Interactive, Inc. as of
September 30, 1999 and 1998, and the results of its operations and cash flows
for the year ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/Arthur Andersen LLP
Portland, Oregon
November 10, 1999
F-2
<PAGE>
SCS INTERACTIVE, INC.
---------------------
<TABLE>
<CAPTION>
BALANCE SHEETS
--------------
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,283,534 $ 235,861
Accounts receivable-
Trade 947,118 640,823
Related party -- 43,412
Other 27,878 61,903
Notes receivable - related party 103,287 107,176
Income taxes receivable -- 15,833
Inventories 1,705,849 1,110,772
Deferred income taxes 67,389 66,240
Other current assets 97,479 117,041
----------- -----------
Total current assets 5,232,534 2,399,061
----------- -----------
FURNITURE, FIXTURES AND EQUIPMENT:
Automobiles 52,850 50,255
Office furniture, fixtures and equipment 445,664 332,465
Machinery and equipment 404,237 287,732
Leasehold improvements 256,942 130,198
----------- -----------
1,159,693 800,650
Less- Accumulated depreciation and amortization (541,693) (418,979)
----------- -----------
Net furniture, fixtures and equipment 618,000 381,671
----------- -----------
INVESTMENT IN PARTNERSHIP 210,762 291,713
NOTE RECEIVABLE FROM PARTNERSHIP 92,925 92,925
OTHER ASSETS, net of accumulated amortization of $132,264
and $76,220 488,182 305,724
----------- -----------
$ 6,642,403 $ 3,471,094
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit $ -- $ 463,619
Accounts payable-
Trade 105,084 386,788
Related party -- 31,945
Accrued warranty expenses 186,025 170,181
Accrued compensation and related items 648,077 107,555
Income taxes payable 1,079,076 15,000
Other accrued liabilities 363,190 73,637
Deferred revenue 493,558 405,000
Current portion of capital lease obligations 29,791 29,129
Current portion of long-term debt 64,747 34,105
Current portion of notes payable to related party 96,763 230,722
----------- -----------
Total current liabilities 3,066,311 1,947,681
----------- -----------
CAPITAL LEASE OBLIGATIONS - LONG-TERM 48,881 70,835
LONG-TERM DEBT 88,599 25,535
NOTES PAYABLE TO RELATED PARTY - LONG-TERM -- 149,570
DEFERRED INCOME TAXES 60,814 71,746
SHAREHOLDERS' EQUITY:
Common stock, no par value, 6,000,000 shares authorized;
4,292,064 and 4,197,064 shares issued and outstanding at
September 30, 1999 and 1998, respectively 283,413 128,413
Retained earnings 3,094,385 1,077,314
----------- -----------
Total shareholders' equity 3,377,798 1,205,727
----------- -----------
$ 6,642,403 $ 3,471,094
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
SCS INTERACTIVE, INC.
---------------------
<TABLE>
<CAPTION>
STATEMENT OF INCOME
-------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------
<S> <C>
NET SALES $ 18,826,764
Cost of sales 11,297,624
------------
GROSS MARGIN 7,529,140
Selling, general and administrative expense 4,051,006
Bonuses 526,181
Royalties 266,862
------------
OPERATING INCOME 2,685,091
------------
OTHER INCOME (EXPENSE), net:
Interest income 70,460
Interest expense (20,328)
Other income, net 227,809
------------
Total other income, net 277,941
------------
INCOME BEFORE INCOME TAXES 2,963,032
PROVISION FOR INCOME TAXES 1,153,532
------------
NET INCOME $ 1,809,500
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
SCS INTERACTIVE, INC.
---------------------
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDERS' EQUITY
---------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------
Common Stock
-----------------------
Number of Retained
Shares Amount Earnings Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1998 4,197,064 $ 128,413 $1,077,314 $1,205,727
Issuances of common stock 95,000 155,000 -- 155,000
Cancellation of notes payable to
shareholders (Note 11) -- -- 207,571 207,571
Net income -- -- 1,809,500 1,809,500
---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1999 4,292,064 $ 283,413 $3,094,385 $3,377,798
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
SCS INTERACTIVE, INC.
---------------------
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,809,500
Adjustments to reconcile net income to net cash flows provided by
operating activities-
Depreciation and amortization 200,216
Gain on sale of assets (8,345)
Change in deferred income taxes (12,081)
Change in investment in partnership 80,951
Decrease (increase) in:
Accounts and other receivables (272,270)
Related party accounts and notes receivable 3,666
Inventories (595,077)
Other current assets 19,562
Other long-term assets (118,502)
Increase (decrease) in:
Accounts payable (281,704)
Related party accounts payable (31,945)
Accrued liabilities 828,466
Income taxes payable 1,079,909
Deferred revenue 88,558
-----------
Net cash flows provided by operating activities 2,790,904
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (314,284)
Proceeds from sale of assets 21,166
-----------
Net cash flows used in investing activities (293,118)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line of credit (463,619)
Net change in notes payable to related party (75,958)
Net borrowings from long-term debt 93,706
Proceeds from issuance of common stock 35,000
Net payments on capital leases (39,242)
-----------
Net cash flows used in financing activities (450,113)
-----------
Net increase in cash 2,047,673
CASH, beginning of year 235,861
-----------
CASH, end of year $ 2,283,534
===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 20,327
Cash paid for income taxes 85,043
NONCASH TRANSACTIONS:
Goodwill upon acquisition of business assets $ 120,000
Net assets acquired in exchange for receivable due to Company 43,635
Cancellation of notes payable to shareholders 207,571
Equipment acquired under capital lease 17,950
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
SCS INTERACTIVE, INC.
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1999
------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-----------------------------------------------------------
Description of Organization and Operations
- ------------------------------------------
On May 1, 1997, the Specialized Component Supply Company (SCS) and Interactive
Funplay Products (IFP) merged to form SCS Interactive, Inc. (the Company), an
Oregon corporation, in a corporate reorganization under IRC Section 368
(a)(1)(A). The merger was accounted for as a reorganization under common
control; therefore, there was no change in the underlying net assets of SCS or
IFP.
The Company designs, manufactures and distributes interactive waterplay and
dryplay structures for parks worldwide. Its customers primarily consist of
waterparks and family entertainment centers.
Revenue Recognition
- -------------------
Revenue from the sale of products is recognized using the percentage of
completion method of accounting.
Revenues from fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to total estimated contract costs for each contract. This method is used
because management considers cost to date to be the best available measure of
progress on these contracts.
Concentration of Credit Risk
- ----------------------------
For the year ended September 30, 1999, two customers represented approximately
25% and 13% of the Company's revenue, respectively.
Product Warranty
- ----------------
The Company provides their customers with a 12-month warranty from the date of
product purchase. Estimated warranty costs are accrued at the time of sale.
Cash and Cash Equivalents
- -------------------------
The Company considers all financial instruments with an original maturity of
three months or less at purchase to be cash equivalents.
Accounts Receivable
- -------------------
Historically, the Company has not incurred significant losses related to its
trade accounts receivable. Accordingly, no allowance has been recorded in the
accompanying financial statements.
F-7
<PAGE>
Inventories
- -----------
Inventories are valued at the lower of cost or market, determined by using the
first-in, first-out (FIFO) method and include materials, labor and manufacturing
overhead. The components of inventory as of September 30, 1999 and 1998 are as
follows:
1999 1998
---------- ----------
Raw materials $1,122,772 $ 803,624
Work-in-process 583,077 307,148
---------- ----------
$1,705,849 $1,110,772
========== ==========
Furniture, Fixtures and Equipment
- ---------------------------------
Furniture, fixtures and equipment are stated at cost. Depreciation is computed
using accelerated depreciation methods based on the useful lives ranging from 5
to 7 years for automobiles, office furniture and fixtures, and machinery and
equipment. Leasehold improvements are amortized over the lease term or the
estimated useful life of the asset, whichever is shorter.
Long-Lived Assets
- -----------------
In accordance with SFAS 121, long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the asset.
Segment Reporting
- -----------------
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS 131)
for the year ended September 30, 1999. Based upon definitions contained within
SFAS 131, the Company has determined that it operates in one segment. In
addition, virtually all sales are domestic.
Other Assets
- ------------
Intangible assets are included in other assets at cost, net of accumulated
amortization of $132,264 as of September 30, 1999, which is provided using the
straight-line method over the periods estimated to be benefited. Intangible
assets consists of patent rights totaling $500,446 (accumulated amortization of
$126,264 at September 30, 1999), having an estimated useful life of ten years
and goodwill of $120,000 (accumulated amortization of $6,000 at September 30,
1999) associated with the purchase of certain net assets of a fountain design
partnership (Note 3), having an estimated useful life of 10 years. At each
balance sheet date, management assesses whether there has been an impairment in
the carrying value of cost in excess of net assets acquired, primarily by
comparing current and projected sales, operating income and annual cash flows,
on an undiscounted basis, with the related annual amortization expenses.
F-8
<PAGE>
Income Taxes
- ------------
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." SFAS 109 uses the liability
method so that deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities given the provisions of enacted tax laws and tax rates. Deferred
income tax expenses or benefits are based on the changes in the financial
statement basis versus the tax bases in the Company's assets or liabilities from
period to period.
Deferred Revenue
- ----------------
Deferred revenue consists of customer deposits received in advance on projects
in process at September 30, 1999 and 1998.
Research and Development Costs
- ------------------------------
Research and development costs are expensed when incurred. The Company's
research and development costs were not significant for the year ended September
30, 1999.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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 estimates using
the best information available at the time the estimates are made; however,
actual results could differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The carrying values of the Company's current assets and liabilities approximate
fair values primarily because of the short maturity of these instruments. The
fair values of the Company's long-term debt approximated its carrying values
based on borrowing rates currently available to the Company for loans with
similar terms. The fair value of preferred stock and receivables from an
affiliate is not practicable to estimate due to the related party nature of the
underlying transaction.
Recent Financial Accounting Standards Board Pronouncements
- ----------------------------------------------------------
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 137). SFAS 137 is an amendment to Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 137 establishes accounting and reporting standards
for all derivative instruments. SFAS 137 is effective for fiscal years beginning
after June 15, 2000. The Company does not have any derivative instruments and
accordingly, the adoption of SFAS 137 will have no impact on the Company's
financial position or results of operations.
2. EMPLOYEE BENEFIT PLANS:
-----------------------
The Company began a 401(k) profit sharing plan on January 1, 1996. Employees
become eligible to participate upon attaining age 21 and complete one year of
service. The Company will match up to 3% of participants' deferred compensation.
During the year ended September 30, 1999, the Company contributed $49,523 to the
401(k) profit sharing plan.
F-9
<PAGE>
3. ACQUISITION OF FOUNTAIN DESIGN PARTNERSHIP:
-------------------------------------------
During 1999, the Company acquired certain assets and assumed certain liabilities
of CMS Collaborative (CMS), a partnership whose partners are minority
shareholders of the Company. CMS is in the business of fountain design and has
been working with the Company for a number of years. As a result of the
purchase, the Company acquired all of CMS' equipment, tools, furniture and
fixtures and assumed the vacation liabilities for CMS employees that were hired
by the Company. The Company forgave the receivable due from CMS in exchange for
the net assets. In addition, the Company issued 60,000 shares of common stock,
valued at $120,000, to the partners of CMS for technical know-how and CMS' going
concern value. The parties agreed to the values in the purchase agreement. The
$120,000 has been recorded as goodwill and is included in other assets, and is
being amortized over 10 years.
4. OPERATING LEASES:
-----------------
The Company has noncancelable operating leases for land and buildings. The
following is a schedule of future minimum lease payments required under the
lease:
2000 $ 163,576
2001 164,976
2002 110,276
2003 108,876
2004 108,876
Thereafter 571,599
----------
$1,228,179
==========
5. CAPITAL LEASES:
---------------
The Company has capital leases for office furnitures and fixtures, and machinery
and equipment for terms ranging from seven to eight years.
Future minimum lease payments under capital leases as of September 30, 1999 are
as follows:
2000 $37,294
2001 27,280
2002 20,360
2003 10,246
2004 -
-------
Total minimum lease payments 95,180
Less- Amount representing interest and other
(interest rates ranging from 6.120% to 23.50%) 16,508
-------
Present value of minimum lease payments 78,672
Less- Current portion 29,791
-------
$48,881
=======
F-10
<PAGE>
6. INVESTMENT IN PARTNERSHIP:
--------------------------
In May 1996, IFP began the fabrication of a dryplay product called Atlanta Foam
Factory (the Factory). IFP incurred total costs of $1,092,925 to complete the
Factory. A third party, Stafford Family Park Partners I, L.P., (Stafford), an
unrelated party, contributed $500,000 in cash for the Factory, forming a limited
partnership (the Partnership) with IFP. IFP became the general partner of the
Factory holding a 50% interest in the joint venture and a $92,925 note
receivable from the Partnership. Stafford became the limited partner holding a
50% interest. Upon the merger of SCS and IFP, the Company succeeded IFP as the
general partner. The Factory was installed and has been managed by an amusement
park Silver Dollar City (Silver Dollar) in Marietta, Georgia. The investment is
recorded using the equity method. During the year ended September 30, 1999,
Stafford assigned its limited partner interest to JGA Corporation for
consideration of $500,000.
The Partnership receives revenue from Silver Dollar based on a proportionate
percentage of net revenue, above a set base revenue level. The Factory is
licensed to be managed at Silver Dollar through November 2006.
7. LINE OF CREDIT:
---------------
The Company had entered into two revolving lines of credit agreement with a
bank. One line of credit provided for total borrowings of up to $750,000 with
interest at 1.0% above the bank's prime rate and matured on November 30, 1998.
The other line of credit provided for total borrowing of up to $250,000 with
interest at 0.50% above the bank's prime rate and matured on March 1, 1999. Any
drawings against the second line of credit were secured by the Company's
receivables, inventory and equipment. The Company had drawn $463,619 against the
lines of credit as of September 30, 1998. The Company paid off the outstanding
line of credit in the current year as both lines of credit matured during the
current year.
The Company entered into a new revolving line of credit agreement with a bank.
The line of credit provides for total borrowings of up to $1,000,000 with
interest at 0.50% above the bank's prime rate (8.25% at September 30, 1999), and
the line of credit is due on May 1, 2000. The line of credit is secured by the
Company's receivables, inventory and equipment. No borrowings were outstanding
on this line of credit at September 30, 1999. The line of credit is guaranteed
by two of the Company's shareholders.
8. LONG-TERM DEBT:
---------------
Long-term debt consists of the following as of September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Notes payable, matured April 10, 1999, installment payment of
$404 each month with balance due at maturity, interest was
payable monthly at 2% above the bank's prime interest rate,
guaranteed by two shareholders $ -- $ 3,544
Note payable, matures August 20, 2000, installment payment of
$2,546 each month with the balance due at maturity, interest
is payable monthly at .5% above the bank's prime interest rate;
guaranteed by two shareholders 29,416 56,096
Note payable, matures November 10, 2002, installment payment of
$3,779 each month with the balance due at maturity, interest
is payable monthly at 1% above the bank's prime interest
rate; guaranteed by two shareholders 123,930 --
-------- --------
153,346 59,640
Less- Current portion 64,747 34,105
-------- --------
Long-term debt $ 88,599 $ 25,535
======== ========
</TABLE>
F-11
<PAGE>
Future payments under long-term debt arrangements, by year, are as follows:
Year Ending
September 30,
-------------
2000 $ 64,747
2001 38,771
2002 42,513
2003 7,315
--------
$153,346
========
9. INCOME TAXES:
-------------
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amount and
the tax bases of assets and liabilities.
The components of the provision (benefit) for income taxes for the year ended
September 30, 1999 consist of the following:
<TABLE>
<S> <C>
Current -
Federal $ 962,497
State 203,116
-----------
1,165,613
Deferred (12,081)
-----------
Total provision $ 1,153,532
===========
</TABLE>
The reconciliation between the effective tax rate and the statutory federal tax
rate as a percent of income is as follows:
<TABLE>
<S> <C>
Statutory federal income tax rate 34.0%
State taxes, net of federal income tax benefit 4.6
Other 0.7
----
39.3%
====
</TABLE>
The components of the net deferred tax assets and liabilities as of September
30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current deferred taxes-
Gross assets $ 97,796 $ 102,113
Gross liability (30,407) (35,873)
--------- ---------
Total current deferred taxes 67,389 66,240
--------- ---------
Noncurrent deferred taxes-
Gross assets -- --
Gross liability (60,814) (71,746)
--------- ---------
Total noncurrent deferred taxes (60,814) (71,746)
--------- ---------
Net deferred tax asset (liability) $ 6,575 $ (5,506)
========= =========
</TABLE>
F-12
<PAGE>
Deferred tax assets are primarily related to the differences in the financial
reporting and tax basis of accrued liabilities for warranty and vacation. The
deferred tax liability is related to the change in the Company tax filing
election from the cash method to the accrual method.
10. STOCK REDEMPTION AGREEMENT:
---------------------------
In July 1997, the Company entered into an agreement to purchase 538,742 shares
of common stock from three shareholders at $1 per share in exchange for notes
payable (Note 11). Principal payments to these shareholders totaled $75,958 and
$122,591 during 1999 and 1998, respectively.
11. RELATED PARTY TRANSACTIONS:
---------------------------
Notes Receivable
The Company has made various loans to one minority shareholder in the aggregate
amount of $103,287 and $107,176 as of September 30, 1999 and 1998, respectively.
This loan is substantially secured by the note payable to this same shareholder
in the aggregate amount of $96,763 and $172,721 as of September 30, 1999 and
1998, respectively.
Notes Payable
The Company had three notes payable to three minority shareholders related to
the Stock Redemption Agreement (Note 10). These notes bear interest at 9% and
are due on April 30, 2000. Two of these minority shareholders decided to rescind
their Stock Redemption Agreement during 1999. This recission was recorded as an
increase to retained earnings as the original transaction was recorded to
retained earnings. As a result, notes payable of $207,571 were cancelled. Future
minimum principal payments on the remaining note payable at September 30, 1999
are as follows:
2000 $96,763
-------
$96,763
=======
The Company and two shareholders entered into royalty agreements in October 1995
which provides for royalty payments to be made on a portion of certain of the
Company's revenues. An amount of $20,000 was payable to one of the shareholders
under this agreement as of September 30, 1998.
12. SUBSEQUENT EVENTS:
------------------
Subsequent to year-end (October 1, 1999), the Company adopted the SCS
Interactive, Inc. Employees Stock Option Plan (the Plan) and the SCS
Interactive, Inc. Performance Bonus Stock Plan (the Bonus Plan). The number of
shares that may be issued pursuant to the Plan and the Bonus Plan are 300,000
shares and 200,000 shares, respectively. The Plan and the Bonus Plan are
intended for employee shareholders of the Company who own 100,000 shares or less
of the Company's common stock. Options under the Plan have a term of five years
and are fully vested upon the date of grant. The option price is dependent upon
the date of exercise.
In March 2000, all of the outstanding stock of the Company was sold to Koala
Corporation (Koala). Koala 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.
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
SCS Interactive, Inc.
Tillamook, Oregon
We have audited the statements of operations, shareholders' equity and cash
flows of SCS Interactive, Inc., an Oregon Corporation, for the year ended
September 30, 1998. 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 statements of operations, shareholders' equity and cash
flows referred to above present fairly, in all material respects, the results of
its operations and its cash flows for the year ended September 30, 1998 in
conformity with generally accepted accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
March 31, 2000
Denver, Colorado
F-14
<PAGE>
SCS INTERACTIVE, INC.
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended September 30, 1998
<S> <C>
Sales $ 12,242,754
Cost of sales 8,896,804
------------
Gross profit 3,345,950
Selling, general and administrative expenses 3,528,032
Royalties 300,842
------------
Operating loss (482,924)
------------
Other income (expense), net
Interest income 38,638
Interest expense (72,305)
Other income, net 302,709
------------
269,042
Loss before income taxes (213,882)
Income tax benefit 69,308
------------
Net loss $ (144,574)
============
</TABLE>
See notes to financial statements
F-15
<PAGE>
SCS INTERACTIVE, INC.
<TABLE>
<CAPTION>
Statement of Shareholders' Equity
For the Year Ended September 30, 1998
Common Stock
-------------------------
Number of Retained
Shares Amount Earnings Total
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 4,187,064 $ 118,413 $ 1,221,888 $ 1,340,301
Issuance of common stock for cash
10,000 10,000 -- 10,000
Net loss -- -- (144,574) (144,574)
----------- ----------- ----------- -----------
Balance at September 30, 1998 4,197,064 $ 128,413 $ 1,077,314 $ 1,205,727
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
F-16
<PAGE>
SCS INTERACTIVE, INC.
<TABLE>
<CAPTION>
Statement of Cash Flows
For the Year Ended September 30, 1998
<S> <C>
Cash flows from operating activities
Net loss $ (144,574)
Adjustments to reconcile net income to net cash provided by -----------
operating activities
Depreciation and amortization 161,578
Change in deferred taxes (69,308)
Decrease in equity of affiliate 141,414
Changes in assets and liabilities
Receivables (302,594)
Related party accounts and notes receivable 52,346
Inventories 1,237,086
Other current assets (85,161)
Accounts payable 303,189
Related party accounts payable 31,945
Income taxes payable (297,503)
Deferred revenue (904,137)
-----------
268,855
-----------
Net cash provided by operating activities 124,281
-----------
Cash flows from investing activities
Purchase of equipment (129,196)
Cost of patents (176,462)
-----------
Net cash used in investing activities (305,658)
-----------
Cash flows from financing activities
Net advances on line of credit 463,619
Net payments on notes payable to related party (108,450)
Net borrowings on long-term debt (27,855)
Proceeds from issuance of common stock 10,000
Net advances on capital leases (29,058)
-----------
Net cash provided by financing activities 308,256
-----------
Net increase in cash 126,879
Cash, beginning of year 108,982
-----------
Cash, end of year $ 235,861
===========
</TABLE>
Cash paid for interest and income taxes during the years ended September 30,
1998 was $72,305 and $120,000, respectively.
Supplemental disclosure of non-cash investing and financing activity:
Fixed assets acquired under capital lease during the fiscal year ended September
30, 1999 totaled $108,809.
See notes to financial statements
F-17
<PAGE>
SCS INTERACTIVE, INC.
Notes to financial statements
Note 1 - Organization and Summary of Significant Accounting Policies
- --------------------------------------------------------------------
Organization
- ------------
On May 1, 1997, the Specialized Component Supply Company (SCS) and Interactive
Funplay Products (IFP) merged to form SCS Interactive, Inc. (the Company), an
Oregon corporation, in a corporate reorganization under IRC Section 369 (a) (1)
(A). The merger was accounted for as a reorganization under common control;
therefore, there was no change in the underlying net assets of SCS or IFP.
The Company designs, manufactures and distributes interactive waterplay and
dryplay structures for parks worldwide. Its customers primarily consist of
waterparks and family entertainment centers.
Concentration of Credit Risk
- ----------------------------
September 30, 1998 two customers represented approximately 24% of the Company's
total revenue, respectively.
Cash and Cash Equivalents
- -------------------------
The Company considers all financial instruments with an original maturity of
three months or less at date of purchase to be cash equivalents.
Revenue Recognition
- -------------------
Revenue from the sale of products is recognized using the percentage of
completion method of accounting.
Revenues from fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to total estimated contract costs for each contract. This method is used
because management considers cost to date to be the best available measure of
progress on these contracts.
Product Warranty
- ----------------
The Company provided its customers with a 12-month warranty from the date of
product purchase. Estimated warranty costs are expensed at the time of sale.
Depreciation and Amortization
- -----------------------------
Depreciation on furniture, fixtures and equipment is computed using accelerated
depreciation methods based on useful lives ranging from 5 to 7 years. Leasehold
improvements are amortized over the lesser of the base term or the estimated
useful life of the asset.
The Company amortizes capitalized patent expenditures over the future period of
expected benefit of ten years.
F-18
<PAGE>
SCS INTERACTIVE, INC.
Notes to financial statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
Income Taxes
- ------------
The Company follows Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes". Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
carrying value. Deferred tax assets and liabilities are measured using enacted
tax rates expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment. A valuation allowance is established for any
deferred tax assets that are not expected to be realized.
Advertising
- -----------
Advertising costs are expensed as incurred and approximated $69,000 for fiscal
year ended September 30, 1998.
Use of 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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management believes that such estimates
have been based on reasonable assumptions and that such estimates are adequate,
however, actual results could differ from those estimates.
Note 2 - Commitments
- --------------------
Operating Leases
- ----------------
The Company leases land and buildings under operating leases with non-cancelable
lease terms expiring in 2010. Rent expense under operating leases was
approximately $109,000 for the year ended September 30, 1998.
F-19
<PAGE>
SCS INTERACTIVE, INC.
Notes to financial statements
Note 2 - Commitments (continued)
- --------------------------------
Future minimum rental commitments under non-cancelable leases are as follows:
Years Ended September 30,
-------------------------
1999 $ 141,826
2000 107,076
2001 107,076
2002 107,076
2003 107,076
Thereafter 749,531
--------------
$1,319,661
==============
401(k) Plan
- -----------
The Company has a 401(K) profit sharing plan for employees. All employees who
have attained age 21 and have completed 1 year of service are eligible to
participate. The plan provides for employer matching contributions up to 3% of
the participants' deferred compensation. The Company contributed approximately
$38,000 during 1998.
Note 3 - Income Taxes
- ---------------------
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amount and
the tax bases of assets and liabilities.
The components of the provision (benefit) for income taxes for the year ended
September 29, 1997 consist of the following:
Current
Federal $ -
State -
-------------
-
Deferred tax benefit (69,308)
--------------
Total provision (69,308)
==============
F-20
<PAGE>
SCS INTERACTIVE, INC.
Notes to financial statements
Note 4 - Investment in Partnership
- ----------------------------------
In May 1996, IFP began the fabrication of a dryplay product called Atlanta Foam
Factory (the Factory). IFP incurred total costs of $1,092,925 to complete the
Factory. A third party, Stafford Family Park Partners I, L.P., (Stafford), an
unrelated party, contributed $500,000 in cash for the Factory, forming a limited
partnership (the Partnership) with IFP. IFP became the general partner of the
Factory holding a 50% interest in the joint venture and a $92,925 note
receivable from the Partnership. Stafford became the limited partner holding a
50% interest. Upon the merger of SCS and IFP, the Company succeeded IFP as the
general partner. The Factory was installed and has been managed by an amusement
park Silver Dollar City (Silver Dollar) in Marietta, Georgia. The investment is
recorded using the equity method. During the year ended September 30, 1998, the
Company's share of the Partnership loss was approximately $141,000. During the
year ended September 30, 1999, Stafford assigned its limited partner interest to
JGA Corporation for consideration of $500,000.
The Partnership receives revenue from Silver Dollar based on a proportionate
percentage of net revenue, above a set base revenue level. The Factory is
licensed to be managed at Silver Dollar through November 2006
F-21
<PAGE>
SCS INTERACTIVE, INC.
---------------------
<TABLE>
<CAPTION>
BALANCE SHEET
-------------
As of December 31, 1999
-----------------------
(unaudited)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,957,986
Accounts receivable- 670,671
Inventories 1,846,569
Other current assets 122,330
----------
Total current assets 4,597,556
FURNITURE, FIXTURES AND EQUIPMENT, NET 802,890
INVESTMENT IN PARTNERSHIP 303,687
INTANGIBLE AND OTHER ASSETS, NET 511,582
----------
$6,215,715
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 252,876
Accrued liabilities and income taxes 2,900,439
----------
Total current liabilities 3,153,315
LONG-TERM DEBT 71,295
DEFERRED INCOME TAXES 60,814
----------
Total liabilities 3,285,424
----------
SHAREHOLDERS' EQUITY:
Common stock 283,413
Retained earnings 2,646,878
----------
Total shareholders' equity 2,930,291
----------
$6,215,715
==========
</TABLE>
F-22
<PAGE>
SCS INTERACTIVE, INC.
---------------------
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
--------------------
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
-----------------------------------------------------
(unaudited)
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 2,724,173 $ 2,940,113
Cost of sales 1,888,607 1,956,173
----------- -----------
GROSS MARGIN 835,566 983,940
Selling, general and administrative expense 1,411,829 1,081,474
----------- -----------
OPERATING LOSS (576,263) (97,534)
OTHER INCOME (EXPENSE), net: 128,760 8,197
----------- -----------
LOSS BEFORE INCOME TAXES (447,503) (89,337)
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET LOSS $ (447,503) $ (89,337)
=========== ===========
</TABLE>
F-23
<PAGE>
SCS INTERACTIVE, INC.
---------------------
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
-----------------------
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
-----------------------------------------------------
(unaudited)
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (447,503) $ (89,337)
Adjustments to reconcile net income to net cash flows
provided by operating activities-
Depreciation and amortization ..................... 85,695 34,390
Decrease (increase) in:
Accounts receivables ............................ 407,612 (31,498)
Inventories ..................................... (140,720) (148,255)
Other current assets ............................ 42,538 117,473
Increase (decrease) in:
Accounts payable ................................ (45,810) (503,658)
Accrued liabilities ............................. 125,237 1,660,761
----------- -----------
Net cash flows provided by operating activities 27,049 1,039,876
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................. (263,012) (149,644)
Intangible assets ..................................... (23,400) 0
----------- -----------
Net cash flows used in investing activities ... (286,412) (149,644)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on long-term debt ........................ (17,304) (245,940)
Net payments on capital leases ........................ (48,881) 28,015
----------- -----------
Net cash flows used in financing activities ... (66,185) (217,925)
----------- -----------
Net (decrease) increase in cash ............... (325,548) 672,307
CASH, beginning of period ............................... 2,283,534 235,861
----------- -----------
CASH, end of period ..................................... $ 1,957,986 $ 908,168
=========== ===========
</TABLE>
F-24
<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, 1999 after giving pro forma effect to the purchase of SCS
Interactive, Inc. The unaudited pro forma consolidated financial statements
should be read in conjunction with the Company's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the respective
historical financial statements of the Company contained in the Company's Form
10-KSB for the year ended December 31, 1999. 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-25
<PAGE>
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET [all amounts in US Dollars]
as of December 31, 1999
SCS
KOALA INTERACTIVE PRO FORMA
CORPORATION INC. ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
(a) (b)
<S> <C> <C> <C> <C>
ASSETS
- ------------------------------------------------------
Current Assets
Cash and cash equivalents $173,936 $2,283,534 ($2,457,470) (e) $0
Accounts receivable, net of allowance
for doubtful accounts 9,234,685 1,078,283 0 10,312,968
Inventories 5,137,791 1,705,849 0 6,843,640
Prepaid expenses and other 1,249,384 164,868 0 1,414,252
----------- ---------- ----------- -----------
Total current assets 15,795,796 5,232,534 (2,457,470) 18,570,860
Property and equipment, net 3,213,980 618,000 0 3,831,980
Identifiable intangible assets, net 18,709,242 374,182 10,000,000 (d) 29,083,424
Goodwill, net 10,839,282 114,000 12,367,780 (d) 23,321,062
Investment in partnerships 0 303,687 (303,687) (f) 0
----------- ---------- ----------- -----------
$48,558,300 $6,642,403 $19,606,623 $74,807,326
=========== ========== =========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
- ------------------------------------------------------
Current Liabilities
Accounts payable $2,210,583 $105,084 $400,000 (c) $2,715,667
Accrued expenses and income taxes 955,731 2,799,717 2,181,097 (e) 5,936,545
Current portion of notes payable to related party 0 96,763 (96,763) (f) 0
Current portion of long-term debt 0 64,747 (64,747) (f) 0
----------- ---------- ----------- -----------
Total current liabilities 3,166,314 3,066,311 2,419,587 8,652,212
----------- ---------- ----------- -----------
Long Term Liabilities
Long term debt 13,979,000 88,599 15,506,834 (e) (f) 29,574,433
Deferred income taxes and other 1,086,270 109,695 0 1,195,965
----------- ---------- ----------- -----------
Total long term liabilities 15,065,270 198,294 15,506,834 30,770,398
----------- ---------- ----------- -----------
Total liabilities 18,231,584 3,264,605 17,926,421 39,422,610
----------- ---------- ----------- -----------
Shareholders' Equity
Preferred stock 0 0 0 0
Common stock 639,713 283,413 (240,837) (g) (h) 682,289
Note receivable from officer (383,505) 0 0 (383,505)
Additional paid-in capital 14,596,294 0 5,015,424 (g) 19,611,718
Accumulated other comprehensive loss (31,038) 0 0 (31,038)
Retained earnings 15,505,252 3,094,385 (3,094,385) (h) 15,505,252
----------- ---------- ----------- -----------
Total shareholders' equity 30,326,716 3,377,798 1,680,202 35,384,716
----------- ---------- ----------- -----------
$48,558,300 $6,642,403 $19,606,623 $74,807,326
=========== ========== =========== ===========
</TABLE>
See notes to unaudited pro forma consolidated financial statements
F-26
<PAGE>
KOALA CORPORATION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME [all amounts in US Dollars}
for the year ended December 31, 1999
SCS
KOALA INTERACTIVE PRO FORMA
CORPORATION INC. ADJUSTMENTS PRO FORMA
----------- ----------- ------------ ------------
(i) (j)
<S> <C> <C> <C> <C>
Net sales $37,134,712 $18,826,764 $0 $55,961,476
Cost of sales 18,092,588 11,297,624 0 29,390,212
----------- ----------- ----------- -----------
Gross profit 19,042,124 7,529,140 0 26,571,264
Selling, general and administrative expenses 9,467,210 4,051,006 0 13,518,216
Management and employee bonuses 0 526,181 0 (k) 526,181
Royalties 0 266,862 (266,862) (l) 0
Amortization of intangibles and patents 958,524 0 1,181,496 (m) 2,140,020
----------- ----------- ----------- -----------
Operating income 8,616,390 2,685,091 (914,634) 10,386,847
----------- ----------- ----------- -----------
Other (income) expenses (1,362) (298,269) (10,491) (n) (310,122)
Interest expense 902,169 20,328 1,377,978 (o) (p) 2,300,475
----------- ----------- ----------- -----------
Income before provision
for income taxes 7,715,583 2,963,032 (2,282,121) 8,396,494
Provision for income taxes 2,624,459 1,153,532 (629,306) (q) 3,148,685
---------- ----------- ----------- -----------
Net income $5,091,124 $ 1,809,500 ($1,652,815) (k) $ 5,247,809
========== =========== =========== ===========
Net income per share $0.81 (k) $0.79
========== ===========
Weighted average shares outstanding 6,256,729 425,758 (r) 6,682,487
=========== =========== ===========
Net income per share - diluted $0.78 (k) $0.76
=========== ===========
Weighted average shares outstanding - diluted 6,516,075 425,758 (r) 6,941,833
=========== =========== ===========
</TABLE>
See notes to unaudited pro forma consolidated financial statements
F-27
<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 December 31, 1999, as if the acquisition of
SCS Interactive, Inc. ("SCS") occurred on that date. The unaudited pro forma
consolidated statement of income for the year ended December 31, 1999 gives
effect to the consolidated results of operations for the year ended December 31,
1999, as if the acquisition of SCS occurred on January 1, 1999. 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, 1999. The unaudited pro forma consolidated
financial statements should be read in conjunction with the historical financial
statements of the Company and SCS and the related notes thereto.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ARE AS
FOLLOWS:
(a) Represents the balance sheet of Koala Corporation as of December 31, 1999.
(b) Represents the balance sheet of SCS as of September 30, 1999.
(c) The preliminary acquisition cost based on contractual consideration
pursuant to the purchase agreement and direct costs incurred to
consummate the transaction is summarized as follows:
Purchase price-cash portion $20,234,000
Purchase price-stock portion 5,058,000
Direct costs of acquisition (accounts payable) 400,000
-----------
Total acquisition costs (preliminary) $25,692,000
===========
(d) Represents the allocation to intangible assets of the cost
($25,692,000) over fair value of net assets acquired ($3,324,220) as a
result of the preliminary purchase price allocation. $10.0 million was
allocated to identifiable intangible assets based on the negotiated
value of patents per the Purchase Agreement.
(e) Represents the bank loan financing required to complete the purchase of
SCS. Amount is based on the cash portion of the purchase price of
$20,234,000, less holdbacks totaling $2,181,097, less the cash on hand
at December 31, 1999 totaling $2,457,470.
(f) Represents elimination of SCS's investment in partnerships, notes
payable to related party and current and long term debt which were not
purchased or assumed pursuant to the terms of the Purchase Agreement.
(g) Represents issuance of 425,758 shares of Koala Corporation common stock
for payment of the stock portion of the purchase price.
(h) Elimination of common stock and retained earnings of SCS for proper
reflection of pro forma retained earnings as if the purchase occurred
on December 31, 1999.
(i) Represents the results of operations of Koala Corporation for the year
ended December 31, 1999.
(j) Represents the results of operations of SCS Interactive, Inc. for the
year ended September 30, 1999
(k) Represents discretionary management bonuses that will no longer be paid
pursuant to the terms of employment agreements in place at the closing
of the purchase. Pro forma adjustments were not made for the management
bonuses. Had they been treated as pro forma adjustments in the 1999
Unaudited Pro Forma Consolidated Statement of Income, pro forma net
income and net income per share - diluted would be as follows:
F-28
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (con't):
(k) Management bonuses (con't)
Pro forma net income before taxes................. $8,396,494
Management bonuses................................ 526,181
----------
Adjusted pro forma net income before taxes........ 8,922,675
Provision for income taxes at 37.5%............... 3,346,003
----------
Adjusted net income............................... $5,576,672
==========
Adjusted net income per share..................... $0.83
=====
Adjusted net income per share--diluted............. $0.80
=====
(l) Represents royalties paid for license costs for patents held by prior
owners that were purchased by Koala pursuant to the Purchase Agreement
and will no longer be paid.
(m) Represents the increase to amortization expense for the amortization of
cost over fair value of net assets acquired over 13 years for patents
and 30 years for goodwill as a result of the preliminary purchase price
allocation.
(n) Represents the elimination of SCS's interest income earned on cash
balances that were applied against long-term debt ($70,460) and the
elimination of loss on partnership investment ($80,951).
(o) Represents interest expense, commitment fees and amortization of
origination fees on the bank loan financing as if the loan was extended
on January 1, 1999 ($1,398,306). The average interest rate utilized is
7.62% which is the average LIBOR rate plus 2.5% for the twelve month
period ended December 31, 1999. 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.
(p) Represents the elimination of interest expense on current and
long-term debt ($20,328).
(q) Reflects applicable income tax effects of adjustments to reflect a pro
forma effective tax rate of 37.5%.
(r) Reflects the increase to common stock equivalents for 425,758 shares
issued in connection with the acquisition.
F-29
