SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22464
KOALA CORPORATION
(Name of Small Business Issuer in Its Charter)
Colorado 84-1238908
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11600 East 53rd Avenue, Unit D
Denver, Colorado 80239
(Address of Principal Executive Offices)
(303) 574-1000
(Issuer's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, $.10 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
_X_ Yes ___ No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. _______
State the issuer's revenues for its most recent fiscal year: $37,134,712
As of February 11, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the issuer computed by reference to the last quoted price at
which such stock sold on such date as reported by the Nasdaq National Market was
approximately $71,253,000.
As of February 11, 2000, there were outstanding 6,397,128 shares of the issuer's
Common Stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report contains forward-looking statements that describe the Company's
business and the expectations of the Company and management. All statements,
other than statements of historical facts, included in this report that address
activities, events or developments that the Company expects, believes, intends
or anticipates will or may occur in the future, are forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not even
be anticipated. Future events and actual results, financial and otherwise, could
differ materially from those set forth in or contemplated by the forward-looking
statements herein. These risks and uncertainties include, but are not limited
to, those discussed in "Risk Factors" below.
BUSINESS
Koala Corporation ("Koala" or the "Company"), 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, carpets and foam play products; and
children's modular play equipment. The Company intends to capitalize on brand
name recognition established through its market-leading Koala Bear Kare(R)
Baby's Changing Station. The Company's sales have grown from $3.8 million in
1993 to $37.1 million in 1999. Net income has grown from $1.0 million in 1993 to
$5.1 million in 1999.
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 branded 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.
The Company has completed several acquisitions of complementary business
and products in 1998 and 1999. On December 16, 1998, the Company purchased 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(TM) 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. In 1999, the Company acquired
the assets of two businesses. Superior Foam & Polymers, Inc. ("Superior Foam")
was purchased on March 26, 1999 and Smart Products, Inc. ("Smart Products") was
purchased on September 24, 1999. Superior Foam manufactures and markets
children's foam activity products to amusement parks, water parks, shopping
malls and retail stores. Smart Products manufactures and distributes child
safety and parental convenience products to grocery stores, retailers and
restaurants.
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(TM) 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(TM) 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
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Play, a custom manufacturer of creatively themed, modular indoor children's play
systems. With the acquisition of Park Structures in 1998, the Company entered
the outdoor children's modular play market. The acquisitions of Superior Foam
and Smart Products in 1999 added complementary products to the Company's
convenience and activity product segments. As a result of the Company's product
diversification efforts, the Baby Changing Station, while continuing to be a
growth opportunity for the Company, represented less than one-quarter of Koala's
sales in 1999.
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 for its bathroom family convenience products. These facilities include
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 160 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 unique family-friendly atmosphere for their businesses.
The children's outdoor modular play market for products produced by Park
Structures includes municipalities and other governmental agencies, parks,
public and private schools, day care centers, developers and apartment
complexes. The Company believes that this market has expanded for a number of
reasons. In general, as cities across the United States have grown, the trend
has been to provide their constituents with better public services, including
playground equipment in public parks and recreation centers. Also, 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(R) 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 1999, the Company expanded its direct telesales
capabilities due to the success of a pilot program conducted in late 1998. The
Company also intends to expand the cross selling of its products to new and
existing customers and to expand the categories of facilities that purchase its
products.
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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 more 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 14% of sales in 1999. 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.
Products
The Company currently markets its products in two product segments: family
convenience and children's activity products, and children's modular play
equipment products. These products are sold to businesses and other customers
located in all 50 states and in approximately 50 foreign countries.
Family Convenience and Children's Activity Products. The Company currently
markets the following family convenience products: the Koala Bear Kare(R) Baby
Changing Station, the Koala Bear Kare Child Protection Seat, the Koala Bear Kare
Infant Seat Kradle, the Booster Buddy(TM) 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.
With the acquisition of Smart Products, the Company added complementary infant
safety and customer service products including shopping cart seats, highchairs,
and SmartStrapTM child protection straps.
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(TM) 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. The acquisition of Superior Foam added
complementary children's foam activity products to the Company's children's
activity segment.
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. The acquisition of Park
Structures in 1998 has expanded the Company's product offerings into children's
outdoor modular play equipment. The Park Structures division designs,
manufactures and markets modular and custom outdoor play equipment for
municipalities and other governmental agencies, parks, public and private
schools, day care centers, developers and apartment complexes. Park
Structures(TM) 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. The
Park Structures division custom designs its systems to meet customer
requirements.
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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(R) brand name, introducing new
concepts and creating new groups of customers for its products around a theme of
Happy Faces in Public PlacesTM. 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. 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. The products of Smart
Products are sold mostly through manufacturer's representatives and dealers as
well. Dealer sales have accounted for a minority of the Company's domestic sales
and a majority of the Company's foreign sales.
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's direct sales program targets national accounts who prefer to
buy directly from manufacturers and other end users that do not qualify as
national accounts or are not served by dealers. Superior Foam's unique product
offerings are sold by the Company's direct sales staff. In 1999, the Company
broadened its direct sales capabilities with the expansion of its KoalaTel
telesales division. The expansion included capital investment in
state-of-the-art telecommunications and data equipment designed for managing
telesales programs.
The Company supports its marketing and sales activities through attendance
at numerous national and international industry trade shows in various market
segments. 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.
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 portion
of its manufacturing and assembly functions currently are outsourced. 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.
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The Company's foam products are manufactured through the use of a
proprietary manufacturing process at its plant located near Austin, Texas.
Unique designs are sculpted through the use of foam and are coated with a
proprietary coating and application technique to create a highly customizable
and colorful product. The manufacturing process requires minimum training of
Company personnel and utilizes readily obtainable materials.
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.
The Company custom designs its children's outdoor play systems by applying
computer aided design technologies to modular components. The Company
subcontracts the plastic molding, fabrication and plastisol coating of deck
platforms and aluminum casting to outside subcontractors. The Company owns all
of the significant molds and tooling for these functions. The Company fabricates
the majority of the steel playground parts and assembles its modular play
equipment at its plant located in Coral Springs, Florida. The Company believes
there are alternative sources of supply for the manufacture of the modular play
equipment components.
Competition
Family Convenience and Children' Activity Products. The Company's family
convenience products are marketed to commercial customers and not to consumers.
Presently, the commercial products division of Newell, Inc. 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(R) 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.
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(TM) Systems program and on the basis of product quality and service. The
Company's foam products are unique and the Company believes that no other
competitor offers a soft, yet durable composition to the product.
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, to a lesser extent, 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. and Little Tikes. 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.
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Patents and Trademarks
The Company has registered various trademarks, including the "Koala Bear
Kare(R)" name and several variations of the Koala Bear Kare logo that are
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 display a blue
and white sticker with one of the Company's trademarks. The Company has also
registered the trademark "Booster Buddy(TM)" and the registration of the
trademarks "Delta Play(TM)" and "Happy Faces in Public Places(TM)" currently are
being sought. In addition to Park Structures registered trademark, the Company
also believes that it has proprietary rights to its play equipment designs.
The Company holds both utility and 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 modular play equipment is designed and inspected to meet the
safety guidelines of the CPSC and the American Society for Testing and Materials
("ASTM") for commercial playground systems. 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. Park Structures also performs its manufacturing operations
in conformance with the quality control standards required by ISO 9001. Park
Structures received ISO 9001 certification in February 2000.
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 260 full-time employees at December 31, 1999,
with approximately 200 located in the United States and 60 located in Canada.
The Company's United States employees are not covered by any collective
bargaining agreements. The Company's Canadian employees are represented by the
International Wood and Allied Workers of Canada ("IWA"). A collective bargaining
agreement was signed in May 1999, effective February 1999 for a two-year term.
Management believes that relations with its employees are good.
Foreign Operations
The Company acquired the assets of Delta Play, a Canadian based
provider of modular play equipment, in June 1997. The Company created a foreign
subsidiary to own and operate this business. The subsidiary's sales, marketing,
administrative, manufacturing and distribution functions are decentralized. The
President of Delta Play reports to an executive officer of the Company.
Strategic planning, market development and resource allocation are the
responsibility of the President in conjunction with the Company's Chief
Executive Officer. The Company believes that there is no greater known
significant risk attendant to the business conducted by the foreign subsidiary
than to that of the Company's domestic operations.
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RISK FACTORS
In addition to the other information contained in this Form 10-KSB, the
following risk factors should be considered carefully in evaluating the Company
and its business. This Form 10-KSB contains certain forward-looking statements
that involve substantial risks and uncertainties. When used in this Form 10-KSB,
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.
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 effectively manage growth could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business."
Risks Associated with Acquisition Strategy
An integral 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. The Company currently has no agreements or understandings with
respect to any potential acquisitions. See "Business--Business Strategy."
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.
8
<PAGE>
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. 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 14% of
the Company's sales in 1999. 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(R) logo,
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."
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.
9
<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(R) 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 Operations" and
"Business--History" and "--Products."
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases approximately 5,000 square feet for its direct sales
operation and 15,000 square feet of office and warehouse space in Denver,
Colorado for sales, receiving and shipping operations. These leases expire in
2001. 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. The Company's manufacturing and
assembly operations of its outdoor modular play equipment are conducted from a
leased 90,000 square foot facility in Coral Springs, Florida. This lease expires
in 2002, with two options to renew the lease for additional five-year terms. The
Company's Smart Products division operates out of a leased 25,000 square foot
facility in Charlotte, North Carolina. This lease expires in 2001. The foam
activity products are manufactured at a leased 11,000 square foot facility
located near Austin, Texas, with a lease expiration date in 2001. The Company
believes that its facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company has been a party to litigation in the ordinary course of its
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 1999.
10
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company trades on the Nasdaq National Market under the
symbol KARE. The following table sets forth, for the periods indicated, the high
and low sales prices for the Company's Common Stock for each quarter within the
last two fiscal years as reported by Nasdaq, adjusted for the 2-for-1 stock
split effected as a 100% stock dividend on October 28, 1999. These quotations
reflect inter-dealer prices, without retail markup, markdown or commissions and
may not represent actual transactions.
SALES PRICE
-----------
LOW HIGH
--- ----
YEAR ENDED DECEMBER 31, 1998
First quarter .............................. $ 7 $ 9 3/8
Second quarter ............................. $ 7 7/8 $ 10 1/16
Third quarter .............................. $ 6 7/16 $ 8 7/16
Fourth quarter ............................. $ 5 $ 9 1/4
YEAR ENDED DECEMBER 31, 1999
First quarter .............................. $ 8 5/8 $ 12 1/8
Second quarter ............................. $ 9 5/8 $ 14 1/8
Third quarter .............................. $ 11 3/8 $ 15 3/8
Fourth quarter ............................. $ 12 1/4 $ 17 29/32
As of February 11, 2000, there were approximately 108 shareholders of
record.
The Company has never paid cash dividends on its Common Stock. The
Company's credit agreement contains a restrictive covenant that prohibits the
payment of dividends without the lender's consent. The Company currently intends
to retain any earnings for use in its operations and does not anticipate payment
of cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
With the exception of historical matters, the matters discussed herein are
forward-looking statements that involve risks and uncertainties. Forward-looking
statements include, but are not limited to, statements concerning anticipated
trends in sales and net income, the mix of 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 Form 10-KSB.
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 highchairs; children's activity products, such as activity tables, carpets
and foam play products, and children's modular play equipment. The Company
intends to capitalize on brand name recognition established through its
market-leading Koala Bear Kare(R) Baby Changing Station. The Company's sales
have grown from $3.8 million in 1993 to $37.1 million in 1999. Sales for the
year ended December 31, 1999 represented a 94% increase from the same period in
1998. Net income has grown from $1.0 million in 1993 to $5.1 million in 1999.
Net income for the year ended December 31, 1999 represented a 64% increase from
the same period in 1998.
11
<PAGE>
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.
In 1999, the Company broadened its direct sales capabilities with the expansion
of its KoalaTel telesales division. The expansion included capital investment in
state of the art telecommunications and data equipment designed for managing
telesales programs.
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(TM) 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 the assets of a manufacturer of commercial-use children's
activities products in March 1996, the assets of Delta Play, Ltd., a provider of
custom children's indoor modular play equipment in June 1997, the assets of Park
Structures, a producer of children's outdoor modular play equipment in December
1998, the assets of Superior Foam, a manufacturer of children's foam activity
products in March 1999 and Smart Products, a provider of children's safety and
parental convenience products in September 1999. As a result of these
acquisitions and introduction of new products, Baby Changing Stations
represented less than one-quarter of the Company's sales in 1999.
The Company's gross profit margins are affected by product mix, with the
Baby Changing Station and other family convenience products and the children's
activity products typically providing higher gross profit margins than the
children's modular play equipment. The children's modular play equipment,
however, has higher average selling prices and contributes to 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 that 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.
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. With the exception of the foam
activity products, all major components for the family convenience products and
children's activity products currently are manufactured and assembled by outside
vendors. Direct labor and manufacturing overhead relate to the assembly of the
modular play products and the manufacture of the foam activity products.
Selling, general and administrative expense consists primarily of
commissions paid to manufacturer's sales representatives and other selling
expenses, executive, sales and office salaries, related payroll taxes,
advertising expenses and depreciation on office equipment and computer hardware
and software.
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.
12
<PAGE>
Results of Operations
The following table sets forth certain income statement data stated as a
percentage of sales:
Years Ended December 31,
------------------------
1999 1998
---- ----
Sales ............................................. 100.0% 100.0%
Cost of sales ..................................... 48.7 45.2
----- -----
Gross profit ...................................... 51.3 54.8
Selling, general and administrative expenses ...... 25.5 28.7
Amortization of intangibles ....................... 2.6 1.6
----- -----
Operating income .................................. 23.2 24.5
Interest expense .................................. 2.4 0.0
Other (income) expense ............................ 0.0 (0.4)
----- -----
Income before provision for income taxes .......... 20.8 24.9
Provision for income taxes ........................ 7.1 8.7
----- -----
Net income ........................................ 13.7% 16.2%
===== =====
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales increased 94.4%, or $18.0 million, to $37.1 million for the year
ended December 31, 1999 compared to $19.1 million for the year ended December
31, 1998. A majority of the increase resulted from sales of outdoor modular play
equipment, foam activity products and safety and parental convenience products
included in product lines acquired in 1998 and 1999. The sales and marketing
programs that the Company implemented for the family convenience and children's
activity product lines also contributed to the increased sales.
Gross profit increased 81.8%, or $8.5 million, to $19.0 million for the
year ended December 31, 1999 compared to $10.5 million for the year ended
December 31, 1998. As noted above, the majority of the increase in gross profit
resulted from sales of products of the newly acquired businesses. As a
percentage of sales, gross profit decreased in the 1999 period compared to the
1998 period primarily because of a change in product mix that included a higher
proportion of sales of children's modular play equipment.
Selling, general and administrative expense increased 72.6%, or $4.0
million to $9.5 million for the year ended December 31, 1999 compared to $5.5
million for the year ended December 31, 1998. Sales and marketing expense
increased 52.7%, or $1.8 million to $5.4 million for the year ended December 31,
1999 compared to $3.6 million for the year ended December 31, 1998. These cost
increases were primarily due to the inclusion of the sales and marketing costs
of the newly acquired businesses noted above. Higher expenses for various
marketing programs and salaries of sales and marketing personnel added
subsequent to the 1998 period also contributed to the increase. General and
administrative expense increased 109.2%, or $2.1 million, to $4.1 million for
the year ended December 31, 1999 compared to $1.9 million for the year ended
December 31, 1998. Once again, the increase was primarily the result of the
inclusion of the newly acquired businesses in late 1998 and 1999.
Amortization expense from intangible assets increased from $297,600 in 1998
to $958,524 in 1999. This increase is primarily due to the amortization of
goodwill and other identifiable intangible assets acquired in the purchases of
Park Structures in late 1998, and Superior Foam and Smart Products in 1999.
13
<PAGE>
The Company utilized debt to finance portions of the acquisitions of Park
Structures, Superior Foam and Smart Products. As a result, the Company incurred
interest expense of $902,169 in 1999. All of the debt financing activity
occurred in 1999. The Company did not have any interest expense in 1998.
The Company's effective tax rate was 34.0% and 35.0% for the year ended
December 31, 1999 and 1998, respectively. The decrease in the Company's
worldwide effective rate was primarily due to an increase in export sales that
qualify for the benefit provided by the foreign sales corporation that the
Company established in February 1998.
Net income increased 64.2%, or $2.0 million, to $5.1 million for the year
ended December 31, 1999 compared to $3.1 million for the year ended December 31,
1998. As a percentage of sales, net income declined during the 1999 period
compared to the 1998 period primarily due to the inclusion of a larger
proportion of the children's modular play equipment line in the product mix. Net
income per share (diluted) increased 30.0%, or $.18, to $.78 for the year ended
December 31, 1999 compared to $.60 for the year ended December 31, 1998. The
percentage increase in net income per share (diluted) was lower than the
percentage increase in net income as a result of an increase of 1,318,065 shares
in the weighted average number of shares outstanding. All share quantities and
per share amounts have been adjusted for the effect of the 2-for-1 stock split
that occurred on October 28, 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales increased 40.2%, or $5.5 million, to $19.1 million for the year
ended December 31, 1998 compared to $13.6 million for the year ended December
31, 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 29.4%, or $2.4 million, to $10.5 million for the
year ended December 31, 1998 compared to $8.1 million for the year ended
December 31, 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 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 29.6%, or $1.3
million to $5.5 million for the year ended December 31, 1998 compared to $4.2
million for the year ended December 31, 1997. Sales and marketing expense
increased 42.1%, or $1.1 million to $3.6 million for the year ended December 31,
1998 compared to $2.5 million for the year ended December 31, 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 marketing
personnel added subsequent to the 1997 period, all of which were associated with
higher levels of sales. General and administrative expense increased 11.6%, or
$200,470, to $1.9 million for the year ended December 31, 1998 compared to $1.7
million for the year ended December 31, 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 35.0% and 35.5% for the year ended
December 31, 1998 and 1997, respectively. The decrease in the Company's
worldwide effective rate was primarily due to the benefit provided by the
foreign sales corporation that the Company established in February 1998.
Net income increased 27.2%, or $663,000, to $3.1 million for the year ended
December 31, 1998 compared to $2.4 million for the year ended December 31, 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
24.0%, or $.12, to $.60 for the year ended December 31, 1998 compared to $.48
for the year ended December 31, 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 101,714 shares in the weighted average number of shares
outstanding. All share quantities and per share amounts have been adjusted for
the effect of the 2-for-1 stock split that occurred on October 28, 1999.
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 1999 and 1998 was $3.7 million and $1.7 million, respectively.
The increase in cash provided by operating activities for the year ended
December 31, 1999 compared to the year ended December 31, 1998 resulted
primarily from a $2.0 million increase in net income year to year, offset by
funding the higher levels of working capital required to support the growth of
the current businesses and support the expansion of the newly acquired
businesses.
14
<PAGE>
Working capital as of December 31, 1999 and December 31, 1998 was $12.6
million and $8.7 million, respectively, and cash balances were $.2 million and
$6.5 million, respectively, at the same dates. The lower cash balance in 1999 is
the result of the Company's practice of applying all excess cash against the
line of credit to minimize interest expense payable on line of credit balances.
The 1998 ending cash balance was higher than normal because of the receipt of
the proceeds from the Company's secondary offering in late December 1998.
The Company has used its operating cash flow primarily to expand sales and
marketing activities, acquisition and development of new products, capital
expenditures and working capital. Net cash used by investing activities was
$26.6 million in 1999, and $1.4 million for the year ended December 31, 1998. In
1999, $25.4 million was used to purchase the assets of Park Structures, Superior
Foam and Smart Products. The balance was primarily devoted to capital
expenditures, including approximately $400,000 for the purchase of
telecommunications equipment for the expansion of the Company's KoalaTel
telesales division. This is the principal reason for the decrease in cash
balances at December 31, 1999.
The Company obtained a $15.0 million secured line of credit from a bank in
December 1998. The credit facility has a term of three years. Loans under the
facility are secured by all of the assets of the Company. The interest rate on
amounts borrowed under the line of credit is based on the applicable "Reserve
Adjusted LIBOR rate", which was 8.18% at December 31, 1999. There were no
amounts outstanding under the credit facility as of December 31, 1998, and
$13,979,000 outstanding as of December 31, 1999.
The Company funded the initial $13.5 million cash portion of the purchase
price for the Park Structures acquisition through a combination of the net
proceeds from the secondary public offering in December 1998 (approximately $4.8
million after deducting underwriting fees), existing cash balances and a portion
of the $15.0 million revolving credit facility from a bank. The seller of Park
Structures also received an additional $4.0 million in cash (and $1.5 million in
Common Stock) due to certain earn-out targets that were achieved during 1998 and
1999. These payments were funded primarily from short-term borrowings under the
new credit facility. The Company believes that the working capital provided by
its line of credit 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 dependent on time or date information may
recognize a date using "00" as the year 1900 rather than the year 2000, possibly
resulting in a 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).
As of February 16, 2000, there were no material Year 2000 issues noted with
any of the Company's computer systems, or to the Company's knowledge, to any
third party that the Company does business with. No costs were expected or
accrued in prior financial statements, and no additional material costs are
expected to be incurred or accrued relating to the "Year 2000" issue.
New Accounting Standards
None
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 is incorporated herein by reference to
the Company's proxy statement for its 2000 Annual Meeting of Shareholders, which
will be filed with Securities and Exchange Commission within 120 days of the
Company's fiscal year ended December 31, 1999.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference
to the Company's proxy statement for its 2000 Annual Meeting of Shareholders,
which will be filed with Securities and Exchange Commission within 120 days of
the Company's fiscal year ended December 31, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by reference
to the Company's proxy statement for its 2000 Annual Meeting of Shareholders,
which will be filed with Securities and Exchange Commission within 120 days of
the Company's fiscal year ended December 31, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference
to the Company's proxy statement for its 2000 Annual Meeting of Shareholders,
which will be filed with Securities and Exchange Commission within 120 days of
the Company's fiscal year ended December 31, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Description
No.
3.1 Articles of Incorporation of Koala Corporation (5) 3.2Bylaws of
Koala Corporation (5) 4.1Specimen Common Stock Certificate (1)
10.1 Incentive Stock Option Plan dated August 19, 1993 (1)
10.2 Koala Corporation 1995 Stock Option Plan, as amended (5)
Industrial Lease dated August 1, 1996 between Buckhead Industrial
Properties, Inc. and Koala
10.3 Corporation (2)
10.4 Credit Agreement with U.S. Bank National Association (4)
10.5 Agreement for Sale and Purchase of Assets dated June 23, 1997
between Delta Play, Ltd., et al and Koala Corporation (3)
10.6 Registration Rights Agreement dated June 23, 1997 between Delta
Play, Ltd., and Koala Corporation (4)
10.7 Agreement for Sale and Purchase of Assets dated August 14, 1998
between Park Structures, Inc. et al and Koala Corporation (5)
10.8 Indenture dated March 31, 1998 among Vanac Development Corp.,
Delta Play Company and Koala Corporation
10.9 Form of Revolving Credit Agreement, dated December 16, 1998,
between Koala Corporation and U.S. Bank National Association (5)
10.10 Agreement for Sale and Purchase of Assets dated March 26, 1999,
by and among Superior Foam & Polymers, Inc James T. New, Jr.,
Kevin C. Brown and Koala Corporation (6)
21.1 Subsidiaries
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
- ----------
16
<PAGE>
(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.
(5) Incorporated by reference to the exhibits included in the Company's
Registration Statement on Form SB-2, Registration No. 333-61551.
(6) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on
April 2, 1999.
(b) Reports on Form 8-K
On October 8, 1999, the Company filed a Form 8-K reporting Items 2 and 7.
Pro forma financial statements were not required.
17
<PAGE>
SIGNATURES
In accordance with Section 13 of the Securities and Exchange Act of 1934, the
registrant caused this report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
KOALA CORPORATION
Date: February 17, 2000 By: /s/ Mark A. Betker
----------------- -------------------
Mark A. Betker, Chairman,
Chief Executive Officer and President
Date: February 17, 2000 By: /s/ Jeffrey L. Vigil
----------------- ---------------------
Jeffrey L. Vigil
Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report on Form 10-KSB has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Mark A. Betker Chairman, Chief Executive Officer February 17, 2000
- ------------------------ and President (Principal Executive
Mark A. Betker Officer)and Director
/s/ Michael C. Franson Director February 17, 2000
- ------------------------
Michael C. Franson
/s/ John T. Pfannenstein Director February 17, 2000
- ------------------------
John T. Pfannenstein
/s/ Ellen Robinson Director February 17, 2000
- ------------------------
Ellen Robinson
18
<PAGE>
KOALA CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
SHAREHOLDERS AND
BOARD OF DIRECTORS
KOALA CORPORATION
DENVER, COLORADO
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of KOALA
CORPORATION (a Colorado corporation) as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KOALA CORPORATION
at December 31, 1999 and 1998, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Denver, Colorado
February 1, 2000
F-2
<PAGE>
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets
Cash and cash equivalents .......................................... $ 173,936 $ 6,493,570
Accounts receivable, trade (less allowance for doubtful accounts
of $131,030 in 1999 and $111,144 in 1998) ....................... 9,234,685 5,781,256
Inventories ........................................................ 5,137,791 3,581,137
Prepaid expenses and other ......................................... 1,249,384 838,109
------------ ------------
Total current assets ............................................ 15,795,796 16,694,072
------------ ------------
Property and equipment, net .......................................... 3,213,980 2,432,114
Identifiable intangible assets (net of accumulated amortization
of $1,371,326 in 1999 and $754,882 in 1998) ........................ 18,709,242 13,464,224
Goodwill (net of accumulated amortization
of $381,019 in 1999 and $38,939 in 1998) ........................... 10,839,282 9,014,790
------------ ------------
$ 48,558,300 $ 41,605,200
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable ................................................... $ 2,210,583 $ 1,721,886
Accrued expenses ................................................... 955,731 375,219
Current portion of long term debt .................................. -- 5,865,043
------------ ------------
Total current liabilities ....................................... 3,166,314 7,962,148
------------ ------------
Long Term Liabilities:
Deferred income taxes and other .................................... 1,086,270 645,000
Credit facility (note 3) ........................................... 13,979,000 --
Long term debt, net of current portion (note 4) .................... -- 11,502,271
------------ ------------
Total long term liabilities ..................................... 15,065,270 12,147,271
------------ ------------
Total liabilities .................................................... 18,231,584 20,109,419
------------ ------------
Commitments and contingencies (note 7)
Shareholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized;
no shares issued and outstanding ................................ -- --
Common stock, $.10 par value, 10,000,000 shares authorized;
issued and outstanding (6,397,128 in 1999 and 5,694,724 in 1998) 639,713 569,472
Common stock to be issued (154,236 shares in 1998) ................. -- 1,297,903
Note receivable from officer ....................................... (383,505) --
Additional paid-in capital ......................................... 14,596,294 9,335,438
Accumulated other comprehensive income (loss) ...................... (31,038) (121,160)
Retained earnings .................................................. 15,505,252 10,414,128
------------ ------------
Total shareholders' equity .......................................... 30,326,716 21,495,781
------------ ------------
$ 48,558,300 $ 41,605,200
============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
KOALA CORPORATION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
Sales .......................................... $ 37,134,712 $ 19,100,765
Cost of sales .................................. 18,092,588 8,627,979
------------ ------------
Gross profit ................................... 19,042,124 10,472,786
------------ ------------
Selling, general and administrative expenses ... 9,467,210 5,485,198
Amortization of intangibles .................... 958,524 297,600
------------ ------------
Income from operations ......................... 8,616,390 4,689,988
------------ ------------
Other (income) expense:
Interest expense ............................. 902,169 --
Interest income .............................. (1,362) (78,712)
------------ ------------
Income before income taxes ..................... 7,715,583 4,768,700
Provision for income taxes ..................... 2,624,459 1,669,044
------------ ------------
Net income ..................................... $ 5,091,124 $ 3,099,656
============ ============
Net income per share - basic ................... $ 0.81 $ 0.61
============ ============
Net income per share - diluted ................. $ 0.78 $ 0.60
============ ============
Weighted average shares outstanding - basic .... 6,256,729 5,072,116
============ ============
Weighted average shares outstanding - diluted .. 6,516,075 5,198,010
============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Common stock Common Note Additional Other
--------------------- Stock to Receivable Paid-In Retained Comprehensive
Shares Amount be Issued Officer Capital Earnings Income (Loss) Total
---------- --------- ----------- ---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 ....... 5,054,724 $ 505,472 $ -- $ -- $ 5,055,252 $ 7,314,472 ($ 25,124)$ 12,850,072
Net income ....................... -- -- -- -- -- 3,099,656 -- 3,099,656
Foreign currency translation
adjustment ................... -- -- -- -- -- -- (96,036) (96,036)
------------
Comprehensive income ............. -- -- -- -- -- -- -- 3,003,620
Issuance of common stock for cash,
net of expenses .............. 640,000 64,000 -- -- 4,280,186 -- -- 4,344,186
Common stock to be issued for
acquisition of Park Structures -- -- 1,297,903 -- -- -- -- 1,297,903
---------- --------- ----------- ---------- ------------ ------------ ------------ ------------
Balance, December 31, 1998 ....... 5,694,724 569,472 1,297,903 -- 9,335,438 10,414,128 (121,160) 21,495,781
---------- --------- ----------- ---------- ------------ ------------ ------------ ------------
Net income ....................... -- -- -- -- -- 5,091,124 -- 5,091,124
Foreign currency translation
adjustment ................... -- -- -- -- -- -- 90,122 90,122
------------
Comprehensive income ............. -- -- -- -- -- -- -- 5,181,246
Issuance of common stock for cash,
net of expenses .............. 360,000 36,000 -- -- 2,564,996 -- -- 2,600,996
Issuance of common stock for
acquisitions ................. 257,754 25,776 (1,297,903) -- 2,332,829 -- -- 1,060,702
Issuance of common stock for
stock options ................ 84,650 8,465 -- -- 363,031 -- -- 371,496
Note receivable from officer ..... -- -- -- (383,505) -- -- -- (383,505)
---------- --------- ----------- ---------- ------------ ------------ ------------ ------------
Balance, December 31, 1999 ....... 6,397,128 $ 639,713 $ -- ($ 383,505) $ 14,596,294 $ 15,505,252 ($ 31,038)$ 30,326,716
========== ========= =========== ========== ============ ============ ============ ============
</TABLE>
F-5
<PAGE>
KOALA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 5,091,124 $ 3,099,656
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ......................................... 500,970 238,269
Amortization ......................................... 958,524 297,600
Deferred income taxes ................................ 410,613 222,267
Increase in operating assets:
Accounts receivable, trade ........................ (2,786,346) (1,439,825)
Inventories ....................................... (958,852) (910,071)
Prepaid expenses and other ........................ (438,867) (250,959)
Increase in operating liabilities:
Accounts payable .................................. 425,737 342,466
Accrued expenses and income taxes ................. 514,701 86,217
------------ ------------
Net cash provided by operations ............................ 3,717,604 1,685,620
------------ ------------
Cash flows from investing activities:
Capital expenditures ................................. (1,106,736) (519,918)
Acquisitions, net of cash acquired ................... (25,391,976) (741,627)
Patents and intangibles .............................. (130,169) (89,869)
------------ ------------
Net cash used by investing activities ...................... (26,628,881) (1,351,414)
------------ ------------
Cash flows from financing activities:
Sale of common stock, net of expenses ................ 2,600,996 4,344,186
Net proceeds from (payments on) credit facility ...... 13,979,000 --
------------ ------------
Net cash provided by financing activities .................. 16,579,996 4,344,186
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 11,647 (17,499)
Net increase (decrease) in cash and cash equivalents ....... (6,319,634) 4,660,893
Cash and cash equivalents at beginning of period ........... 6,493,570 1,832,677
------------ ------------
Cash and cash equivalents at end of period ................. $ 173,936 $ 6,493,570
============ ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies:
Nature of operations:
Koala Corporation and its wholly owned subsidiaries (the "Company") is
a leading designer, producer and worldwide marketer of innovative
commercial products, systems and custom solutions that create
attractive family-friendly environments for businesses and other public
venues. The Company produces family convenience and activity products
and children's indoor and outdoor modular play equipment. The
consolidated financial statements include the accounts of Koala
Corporation and all subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Use of estimates:
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenue and expenses. Actual results could vary from
the estimates that were used.
Financial instruments:
The fair value of financial instruments, consisting of investments in
cash, cash equivalents, receivables, obligations under accounts
payable, and debt instruments, is based on interest rates available to
the Company and comparisons to quoted prices. At December 31, 1999 and
1998, the fair value of these financial instruments approximates
carrying value.
Cash and cash equivalents include cash on hand, demand deposits,
savings accounts, and short-term investments with original maturities
of three months or less. Cash and cash equivalents include financial
instruments that potentially subject the Company to a concentration of
credit risk. The Company places its cash and temporary cash investments
with high credit quality institutions. At times, cash held in the
Company's primary bank may be in excess of the FDIC insurance limit.
Cash in money market mutual funds is not federally insured. The Company
performs periodic evaluations of the relative credit standing of these
financial institutions. As of December 31, 1999 and 1998, cash and cash
equivalents consisted of the following:
1999 1998
----- ----
Cash in primary banking institution $ 173,936 $1,623,570
Cash in mutual funds and agencies -- 4,870,000
---------- ----------
$ 173,936 $6,493,570
========== ==========
F-7
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
Inventories:
Inventories are stated at the lower of cost (including manufacturing
overhead applied to work-in-process and finished goods) or market
(first-in, first-out). As of December 31, 1999 and 1998, inventories
consisted of the following:
1999 1998
---- ----
Raw materials $2,116,864 $2,832,314
Work-in-process and finished goods 3,020,927 748,823
---------- ----------
$5,137,791 $3,581,137
========== ==========
Property and equipment:
Property and equipment is stated at the lower of depreciated cost or
net realizable value. Depreciation and amortization is being provided
on the straight-line method over the estimated useful life of the
asset. The following is a schedule of estimated useful lives of
property and equipment:
Furniture and fixtures 7 years
Tooling and molds 6 - 10 years
Shop and office equipment 3 - 10 years
Leasehold improvements 3 - 5 years
Property, plant and equipment consist of the following at December 31,
1999 and 1998:
1999 1998
---- ----
Tooling and molds $1,670,917 $1,338,035
Office equipment 1,044,143 490,766
Leasehold improvements 739,981 700,013
Furniture and fixtures 423,204 184,288
Shop equipment 395,773 278,080
----------- -----------
4,274,018 2,991,182
Less: accumulated depreciation 1,060,038 559,068
---------- ----------
$3,213,980 $2,432,114
========== ==========
F-8
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
Goodwill and identifiable intangible assets:
The excess of acquisition cost over fair value of net tangible and
identifiable intangible assets of businesses acquired in purchase
transactions, has been included in goodwill and is being amortized on a
straight-line basis over 30 years. Identifiable intangible assets
include patents, trademarks, trade names, proprietary trade secrets,
proprietary product designs, customer lists and non-compete agreements
and are being amortized over the lesser of the assets' legal life (if
applicable) or their estimated economic lives, ranging from 5 to 40
years.
The Company's policy is to account for goodwill and identifiable
intangible assets at the lower of amortized cost or net realizable
value. As part of an ongoing review of the valuation and amortization
of intangible assets, management assesses the carrying value of the
Company's intangible assets to determine if changes in facts and
circumstances suggest that they may be impaired. If this review
indicates that the intangibles will not be recoverable, as determined
by a discounted cash flow analysis over the remaining amortization
period, the carrying value of the Company's intangibles would be
reduced to its estimated fair market value. No event has been
identified that would indicate an impairment of the value of material
intangible assets recorded in the accompanying consolidated financial
statements.
Revenue recognition:
The Company recognizes revenues at the time its products are shipped.
Research and development costs:
Research and development costs are expensed when incurred. The
Company's research and development costs were not significant in 1999
or 1998.
Advertising costs:
Advertising costs are expensed when incurred. Advertising expense for
the periods ended December 31, 1999 and 1998 was $1,301,422 and
$443,309, respectively.
Income taxes:
The Company provides for deferred taxes on temporary differences
arising from assets and liabilities whose bases are different for
financial reporting and state, federal and foreign income tax purposes.
The differences relate primarily to depreciable and amortizable assets,
certain accrued expenses and the allowance for uncollectible accounts.
For foreign corporate income taxes paid, the Company will utilize a
foreign tax credit against the federal corporate income tax liability.
F-9
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued):
Foreign currency translation:
The financial statements of the Company's subsidiaries located outside
the United States are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date. The
resultant translation adjustments are included in equity adjustment
from translation, a separate component of shareholders' equity. Income
and expense items are translated at average rates of exchange. Gains
and losses on foreign currency transactions of these subsidiaries are
included in net earnings.
Reclassifications:
Certain amounts in the 1998 financial statements have been reclassified
to conform to the 1999 presentation.
Stock Split:
On October 8, 1999, the Company's Board of Directors approved a
two-for-one stock split effected as a stock dividend. All amounts in
the accompanying financial statements and related footnotes have been
restated to reflect this stock split.
2. Acquisitions:
Acquisition of Smart Products:
Effective September 1, 1999, the Company purchased substantially all of
the assets of Smart Products, Inc., a provider of child safety and
parental convenience products located in Charlotte, North Carolina.
Results of operations of Smart Products were included in the Company's
consolidated statement of income beginning on the effective date of the
transaction.
The purchase price consisted of a cash payment of $1,273,000, which was
financed from both internal operations and an advance on the Company's
line of credit in the amount of approximately $800,000. In addition,
costs of $117,000 were incurred in connection with this acquisition.
Initial consideration and acquisition costs were allocated to tangible
assets based on relative fair value, with the remaining balance
allocated to goodwill.
Acquisition of Superior Foam:
Effective March 1, 1999, the Company purchased substantially all of the
assets of Superior Foam & Polymers, Inc., a provider of children's foam
activities products located near Austin, Texas. Results of operations
of Superior Foam were included in the Company's consolidated statement
of income beginning on the effective date of the transaction.
F-10
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
2. Acquisitions: (continued)
Acquisition of Superior Foam:
As consideration, the Company paid $5.0 million cash, and issued 95,800
shares of Koala Corporation common stock valued at approximately $1.0
million on the effective date. The Company paid the cash portion of the
purchase price with cash generated from both internal operations and an
advance on the Company's line of credit in the amount $4.6 million. In
addition, costs of $204,223 were incurred in connection with this
acquisition. The consideration and acquisition costs were allocated to
tangible assets based on relative fair value, with the remaining
balance allocated to proprietary trade secrets, non-compete agreements
and goodwill and have been recorded as intangible assets in the
accompanying consolidated balance sheet.
Acquisition of Park Structures:
Effective December 16, 1998, the Company purchased substantially all of
the assets of Park Structures, Inc., a provider of children's outdoor
modular play systems based in Coral Springs, Florida. Results of
operations of Park Structures were included in the Company's
consolidated statement of income beginning on the effective date of the
transaction. The initial consideration paid for Park Structures was
$13,865,043, for which the Company issued a promissory note, net of a
$400,000 holdback, for $13,465,043. Such promissory note was paid on
January 4, 1999 using proceeds of the secondary public offering and an
advance of $7,600,000 on the Company's line of credit. In addition,
acquisition costs of $131,479 and asset adjustments of $1,001,798 were
incurred and paid with cash from operations and an advance on the
Company's line of credit in the amount of approximately $1,000,000. The
December 31, 1999 financial statements reflect the final allocation of
the purchase price. The consideration, acquisition costs and asset
adjustments were allocated to tangible assets based on relative fair
value, with the remaining balance allocated to proprietary product
designs, non-compete agreements and goodwill and have been recorded as
intangible assets in the accompanying consolidated balance sheet.
The purchase agreement also provided for additional consideration in
the form of cash and Company common stock if certain operating
performance criteria were met by Park Structures for the year ending
December 31, 1998 and for the rolling twelve-month period ending June
30, 1999. For the December 31, 1998 earnout period, the additional
consideration amounted to 161,954 shares of common stock valued at
$1,362,842 and cash of $2,789,925. For the June 30, 1999 earnout
period, the additional consideration amounted to $1.0 million, which
was paid in cash during 1999. The earnouts have been allocated to
goodwill.
F-11
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
3. Credit facility:
The Company obtained a $15.0 million secured line of credit on December
16, 1998. The line of credit is secured by substantially all of the
assets of the Company. The line of credit may be used for short-term
working capital needs and future acquisitions. There are no
compensating balance requirements and the credit facility requires
compliance with financial loan covenants related to debt levels
compared to annualized cash flows from operations. The credit facility
terminates and is payable in full on December 16, 2001. Interest
payments are required at least every three months at a fluctuating rate
per annum equal to the applicable "Reserve Adjusted LIBOR Rate" (8.18%
at December 31, 1999). A commitment fee in the amount of .25% is
payable quarterly in arrears based on the average daily unused portion
of the line.
4. Debt:
On December 16, 1998, the Company issued a non-interest-bearing
promissory note in the amount of $13,465,043 for the purchase of the
assets of Park Structures. The promissory note was secured by an
irrevocable letter of credit from a financial institution. The
promissory note was paid in full on January 4, 1999.
5. Common stock:
On December 16, 1998, the Company completed a secondary public offering
of 2,400,000 shares of Koala Corporation common stock. The Company sold
640,000 shares of common stock, and a selling shareholder sold the
remaining 1,760,000 shares. The Company received proceeds, net of
offering expenses, of $4,344,186 for the 640,000 shares of Company
stock sold. On January 22, 1999, the Company's underwriters exercised
their over-allotment option to purchase an additional 360,000 shares of
the Company's common stock pursuant to the 1998 common stock offering.
The issuance of the shares resulted in net proceeds after offering
expenses of $2,600,996. The proceeds were used to reduce long-term debt
that was incurred under the credit facility to purchase the assets of
Park Structures.
6. Supplemental financial information:
Supplemental cash flow information:
1999 1998
---- ----
Interest received $ 8,586 $ 83,043
========== ==========
Interest paid $ 772,074 --
========== ==========
Income taxes paid $2,370,282 $1,420,483
========== ==========
F-12
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
6. Supplemental financial information: (continued)
<TABLE>
<CAPTION>
Supplemental non-cash information:
1999 1998
---- ----
<S> <C> <C>
Net assets acquired from Smart
Products $1,390,000 --
========== ==========
Net assets acquired from
Superior Foam $6,204,223 --
========== ==========
Net assets acquired from Park Structures -- $19,086,772
========== ===========
Note payable and other amounts payable
to Seller of Park Structures -- $17,367,314
========== ===========
Common stock issued to the Seller of
Park Structures $64,939 $ 1,297,903
========== ===========
Common stock issued to the Sellers of
Superior Foam $1,000,000 --
========== ===========
</TABLE>
7. Commitments and contingencies:
Operating lease:
The Company has entered into operating leases for facilities located in
Denver, Colorado, Coral Springs, Florida, Charlotte, North Carolina,
Wimberley, Texas, and Delta, British Columbia, Canada.
The lease terms vary and run through May 31, 2003. All leases call for
monthly base rents, with the Company responsible for its share of
common building operating costs, payable on a monthly basis.
F-13
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
7. Commitments and contingencies: (continued)
Facilities rent expense was $695,885 and $338,277 for years ending
December 31, 1999 and 1998, respectively. Total minimum operating lease
commitments are as follows:
Year Ending December 31, Amount
------------------------ ------
2000 $ 789,107
2001 703,966
2002 379,864
2003 141,585
-------
$2,014,522
==========
Warranties:
The Company provides a replacement guarantee for one year from purchase
protecting against damage from natural disasters or vandalism subject
to a $100 deductible. The Company also provides a five-year warranty on
parts and labor covering any defects in workmanship. The Company has
experienced minimal returns and warranty claims; therefore, as of
December 31, 1999 and 1998, no accrual has been made for future claims.
8. Stock 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
exercise price of each option is equal to the market price of the
Company's stock on the date of grant. The option term varies, as well
as the vesting periods, at the discretion of the Board of Directors.
In January 1998, the Company authorized the amendment and restatement
of the 1995 Plan to grant an additional 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-14
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
8. Stock options: (continued)
The fair value of each option granted is estimated on the grant date
using the Black-Scholes Model. The following assumptions were made in
estimating fair value:
1999 1998
---- ----
Assumption
----------
Dividend yield 0.0% 0.0%
Risk-free interest rate
5 year 6.25% 6.25%
Expected life 5 years 5 years
Expected volatility 42.50% 43.00%
The Company applies APB Opinion 25 in accounting for its stock based
compensation plans. Accordingly, no compensation cost has been
recognized for the plans in 1999 and 1998. Had compensation cost been
determined on the basis of fair value pursuant to FASB Statement No.
123, net income and earnings per share would have been presented as
follows:
Net income 1999 1998
---------- ---- ----
As reported $5,091,124 $3,099,656
========== ==========
Pro forma (FASB 123) $4,721,877 $2,742,162
========== ==========
Basic earnings per share
------------------------
As reported $.81 $.61
==== ====
Pro forma (FASB 123) $.75 $.54
===== ====
Diluted earnings per share
--------------------------
As reported $.78 $.60
==== ====
Pro forma (FASB 123) $.72 $.53
===== ====
F-15
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
8. Stock options: (continued)
Following is a summary of the status of the plans during 1999 and 1998:
Weighted
Number of Average
Shares Exercise Price Price
------ -------------- -----
Outstanding December 31, 1997 ......... 566,000 $5.76 $4.63
to $7.50
Granted - 1998 .................... 260,000 $9.31 $7.25
to $11.50
Forfeited - 1998 .................. (20,000) $6.50 $6.50
------
Outstanding December 31, 1998 ......... 806,000 $6.89 $4.63
to $11.50
Granted - 1999 .................... 261,000 $12.20 $9.69
to $16.38
Exercised - 1999 .................. (102,000) $5.43 $4.63
-------- to $9.00
Outstanding December 31, 1999 ......... 965,000 $8.47 $4.63
======== to $16.38
1999 1998
---- ----
Options exercisable 422,000 334,000
======= =======
Weighted average fair value of
options granted during the year $5.65 $4.37
======= =======
F-16
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
8. Stock options: (continued)
A summary of the status of fixed options outstanding at December 31,
1999 is as follows:
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Price Number Life Price Number Price
----- ------ ---- ----- ------ -----
$4.63 to 500,000 6.2 years $6.02 344,000 $5.95
$7.50
$8.00 to 158,000 8.3 years $8.89 28,000 $8.64
$10.38
$11.50 to 300,000 9.1 years $12.21 50,000 $12.18
$13.00
$13.50 to 7,000 9.8 years $14.82 -- --
$16.38
9. Income taxes:
The components of the provision for income tax were:
--------------------------------------------------
1999
-------------------------------------------------
Federal Foreign State Total
------- ------- ----- -----
Current tax expense ...... $1,903,943 $ 155,129 $ 154,774 $2,213,846
Deferred tax expense ..... 366,565 -- 44,048 410,613
---------- ---------- ---------- ----------
Provision for income taxes $2,270,508 $ 155,129 $ 198,822 $2,624,459
========== ========== ========== ==========
--------------------------------------------------
1998
-------------------------------------------------
Federal Foreign State Total
------- ------- ----- -----
Current tax expense ...... $1,153,496 $ 234,048 $ 59,233 $1,446,777
Deferred tax expense ..... 216,860 -- 5,407 222,267
---------- ---------- ---------- ----------
Provision for income taxes $1,370,356 $ 234,048 $ 64,640 $1,669,044
========== ========== ========== ==========
F-17
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
9. Income taxes: (continued)
The tax effects of temporary differences that give rise to a
significant portion of the deferred tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Allowance for doubtful accounts ............ $ 46,387 $ 39,000
---------- ----------
Deferred tax liabilities:
Depreciation ............................... 259,000 214,000
Amortization ............................... 804,000 403,000
Other ...................................... -- 28,000
---------- ----------
1,063,000 645,000
---------- ----------
Net deferred tax liability ................... $1,016,613 $ 606,000
========== ==========
The effective tax rate differs from the statutory rate as follows:
1999 1998
---- ----
Federal statutory rate ................................... 34.0% 34.0%
Foreign taxes in excess of federal statutory rate ........ 2.0 4.9
Tax benefit of foreign tax credit ........................ (2.0) (4.9)
State income taxes - net of federal effect ............... 1.3 0.8
Effect of difference in tax basis of goodwill ............ (0.5) (0.8)
Foreign sales corporation benefit ........................ (1.3) (1.1)
Miscellaneous tax adjustments ............................ .5 2.1
---- ----
Effective tax rate ....................................... 34.0% 35.0%
==== ====
10. Major suppliers:
For the periods ended December 31, 1999 and 1998, the Company purchased
a significant amount of component parts from three vendors which
accounted for approximately 18% and 38% of the Company's total cost of
sales, respectively.
11. 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 1998 and two contributions during 1999 that were not
material.
F-18
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
12. 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, 1999 and December 31, 1998, none
were outstanding. The Board of Directors is granted authority to
determine dividends and other rights and preferences for the preferred
stock.
13. Geographic and business segments:
Business segments:
The Company operates two business segments: (1) Family Convenience and
Children's Activity Products, and (2) Children's Modular Play
Equipment. The Company's reportable segments are strategic business
units that offer different products. They are managed separately based
on the fundamental differences in the operations.
The Company's convenience and activity products include the flagship
product, the Baby Changing Station ("BCS"). Other significant products
in this segment are the sanitary paper liners for the BCS, the Child
Protection Seat, the Infant Seat Kradle, the highchair, block and bead
tables and the wonder wall. All of these products are manufactured by
sub-contractors or purchased from third parties. These products are
sold direct and through distribution.
The Company's modular play equipment includes both indoor and outdoor
equipment. The indoor play equipment is custom designed for the
customer. A catalog is used to promote and advertise the outdoor play
equipment, however, custom modifications are often made to accommodate
the customers needs and desires. The products are manufactured by the
Company at its facilities located in Delta, British Columbia, and Coral
Springs, Florida. These products are sold direct and through
manufacturer's representatives/dealers.
The Company evaluates the performance of its segments based primarily
on operating profit before acquisition intangible amortization,
corporate expenses and interest income and expense. The Company
allocates corporate expenses to individual segments based on segment
sales. Corporate expenses are primarily labor costs of executive
management and shareholders' relations costs. The following table
presents sales and other financial information by business segment:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------
Convenience and Modular Play
Activity Products Equipment Total
----------- ---------- -----------
<S> <C> <C> <C>
Sales ....................... $16,108,368 $21,026,344 $37,134,712
Operating income ............ 5,076,201 3,540,189 8,616,390
Capital expenditures ........ 778,700 328,036 1,106,736
Total assets ................ 18,865,034 29,693,266 48,558,300
</TABLE>
F-19
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
13. Geographic and business segments: (continued)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------
Convenience and Modular Play
Activity Products Equipment Total
----------- ---------- -----------
<S> <C> <C> <C>
Sales ....................... $11,946,053 $ 7,154,712 $19,100,765
Operating income ............ 3,661,275 1,028,713 4,689,988
Capital expenditures ........ 294,036 225,882 519,918
Total assets ................ 15,209,446 26,395,754 41,605,200
</TABLE>
Geographic area data:
Geographically, sales, operating income and identifiable assets for
non-domestic entities for the years ended December 31, 1999 and 1998
were $7,205,284 and $6,690,230, $924,369 and $1,133,917 and $3,700,731
and $2,737,443, respectively. There were no material amounts of sales
or transfers among geographic areas during 1999 or 1998.
14. Note receivable from officer:
During the third and fourth quarters of 1999, the Company made secured
loans to an officer of the Company in the amount of $370,000, for the
purpose of the officer's exercise of vested stock options. The notes
are full recourse, secured by marketable securities of the officer and
interest bearing at an adjustable rate equal to a commercial bank's
prime rate. The notes are due on February 12, and May 3, 2001. The
notes have been recorded as a reduction of shareholders' equity in the
Company's balance sheet at December 31, 1999. At December 31, 1999,
$13,505 of interest had been accrued on the note.
F-20
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
Name of Subsidiary Jurisdiction of Incorporation Percentage Ownership
------------------ ----------------------------- --------------------
Delta Play (US), Inc. State of Colorado 100%
Delta Play Company Province of Nova Scotia, Canada 100%
PS Florida, Inc. State of Colorado 100%
Koala Foreign Sales Barbados 100%
Corporation
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 pertaining to the 1995 Stock Option Plan of Koala Corporation of our
report dated February 1, 2000, with respect to the consolidated financial
statements of Koala Corporation included in the Annual Report on Form 10-KSB for
the year ended December 31, 1999.
/s/ERNST & YOUNG LLP
Denver, Colorado
February 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 173,936
<SECURITIES> 0
<RECEIVABLES> 9,365,715
<ALLOWANCES> (131,030)
<INVENTORY> 5,137,791
<CURRENT-ASSETS> 15,795,796
<PP&E> 4,274,018
<DEPRECIATION> (1,060,038)
<TOTAL-ASSETS> 48,558,300
<CURRENT-LIABILITIES> 3,166,314
<BONDS> 0
0
0
<COMMON> 639,713
<OTHER-SE> 29,687,003
<TOTAL-LIABILITY-AND-EQUITY> 48,558,300
<SALES> 37,134,712
<TOTAL-REVENUES> 37,134,712
<CGS> 18,092,588
<TOTAL-COSTS> 18,092,588
<OTHER-EXPENSES> 10,424,372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 902,169
<INCOME-PRETAX> 7,715,583
<INCOME-TAX> 2,624,459
<INCOME-CONTINUING> 5,091,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,091,124
<EPS-BASIC> .81
<EPS-DILUTED> .78
</TABLE>
