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Filed pursuant to Rule 424B(4)
Registration No. 333-61551
PROSPECTUS
1,200,000 SHARES
KOALA CORPORATION
COMMON STOCK
Of the 1,200,000 shares of Common Stock being offered hereby (the
"Offering"), 320,000 shares are being sold by Koala Corporation ("Koala" or the
"Company") and 880,000 shares are being sold by a shareholder of the Company
(the "Selling Shareholder"). The Company will not receive any of the proceeds
from the sale of shares of Common Stock by the Selling Shareholder. See
"Principal and Selling Shareholders." The Company's Common Stock is listed for
trading on the Nasdaq National Market under the symbol "KARE." On December 16,
1998, the last reported sale price of the Common Stock was $16.50 per share.
See "Price Range of Common Stock."
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SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PROCEEDS PROCEEDS TO
PRICE TO UNDERWRITING TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDER
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Per Share...................... $16.25 $1.06 $15.19 $15.19
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Total(3)....................... $19,500,000 $1,272,000 $4,860,800 $13,367,200
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(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $300,000.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to an additional 180,000 shares of Common Stock solely to cover over-
allotments, if any, on the same terms and conditions as set forth above. If
the option is exercised in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Shareholder will be
$22,425,000, $1,462,800, $7,595,000 and $13,367,200, respectively. See
"Underwriting."
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The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to certain
other conditions, including their right to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made on or
about December 22, 1998.
CLEARY GULL REILAND & MCDEVITT INC.
TUCKER ANTHONY
INCORPORATED
CRAIG-HALLUM CAPITAL GROUP, INC.
The date of this Prospectus is December 16, 1998
[ARTWORK/PHOTOS]
KOALA BEAR KARE, KOALA KARE, BOOSTER BUDDY AND THE KOALA LOGO ARE REGISTERED
TRADEMARKS OF KOALA CORPORATION. THE COMPANY HAS APPLIED TO REGISTER THE
TRADEMARK HAPPY FACES IN PUBLIC PLACES. ALL OTHER COMPANY AND PRODUCT NAMES
REFERENCED HEREIN ARE REGISTERED TRADEMARKS OR TRADEMARKS OF THEIR RESPECTIVE
OWNERS.
2
SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements and the
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option or outstanding options, warrants or
convertible securities. References to the Company include its wholly-owned
subsidiaries Delta Play Company, Delta Play (U.S.), Inc., Koala Foreign Sales
Corporation and PS Florida, Inc. Pro forma information contained in this
Prospectus includes information of Park Structures, Inc. and Park Structures
Sales, Inc. (collectively, "Park Structures"), the assets of which will be
acquired simultaneously with the closing of the Offering and will be effective
as of the date of this Prospectus. Certain information contained herein is
derived from industry sources. Although the Company believes that this
information is reliable, it has not independently verified this information.
THE COMPANY
Koala Corporation ("Koala" or the "Company") is a leading designer, producer
and worldwide marketer of innovative commercial products, systems and custom
solutions that create attractive family-friendly environments for businesses
and other public venues. The Company produces family convenience products, such
as baby changing stations and high chairs; children's activity products, such
as activity tables and activity carpets; and children's modular play equipment.
The Company intends to capitalize on brand name recognition established through
its market-leading Koala Bear Kare Baby Changing Station, which management
estimates has been installed in approximately 300,000 public restrooms
worldwide. The Company's sales have grown from $3.8 million in 1993 to $13.6
million in 1997, representing a compound annual growth rate of 37.2%. Sales for
the nine months ended September 30, 1998 were $13.5 million, representing a
44.5% increase from the same period in 1997. Net income has grown from $1.0
million in 1993 to $2.4 million in 1997, representing a compound annual growth
rate of 25.8%. Net income for the nine months ended September 30, 1998 was $2.2
million, representing a 21.7% increase from the same period in 1997.
The Company believes that parents increasingly travel, shop and dine out with
their children due to societal changes and demographic trends, including the
strict time constraints of two-income and single parent households. Koala also
believes that businesses increasingly need to create an accommodating and
positive environment for children in order to attract customers and to increase
sales and customer loyalty. The Company's customers include Walt Disney World,
The Mayo Clinic, Target Stores, McDonalds, Pizza Hut, Burger King franchises
and many other customers in the retail, health care, supermarket, entertainment
venue and numerous other markets. Management believes that the Koala Bear Kare
brand is widely recognized among family-friendly businesses and their
customers.
Koala has developed and acquired family convenience and children's activity
products to help businesses become family-friendly. The Company's family
convenience products include the Koala Bear Kare Baby Changing Station, the
Koala Infant Seat Kradle, the Koala Highchair and the Booster Buddy Booster
Seat. Koala's children's activity products are marketed under the name Koala
Kare Systems. These products, which include manipulative activities and
colorful blocks, letters, numbers and designs, are designed for use in
commercial waiting areas of businesses such as auto dealers, retail stores,
physicians and other professional services providers.
The children's modular play market is comprised of indoor and outdoor areas
for child play. The Company believes that many of the same demographic trends
in the family convenience and children's activity markets are driving demand
for children's modular play equipment. The children's indoor modular play
market includes quick service restaurants, shopping malls, day care centers and
family entertainment centers. The Company works with each individual customer
to create custom designs that utilize modular components such as tunnels,
walkways, ladders and ball pits either alone or in combination with a themed
environment such as a pirate's ship
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or jungle tree house. Simultaneously with the closing of this Offering, the
Company will enter the children's outdoor modular play market through the
acquisition of the assets of Park Structures, a producer of customized
children's outdoor modular play systems which had sales of $8.2 million and
$6.8 million for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. The children's outdoor modular play market
includes schools, parks, amusement parks, day care centers and apartment
complexes.
The Company's primary business objective is to grow its sales and earnings by
continuing to develop as a leading provider of family-friendly products,
systems and custom solutions. The Company's key strategic initiatives are
summarized below.
. Capitalize on Brand Name Recognition. The Company believes that the Koala
Bear Kare brand name has achieved significant recognition that can be
leveraged in marketing the Company's various product lines.
. Maximize Market Penetration. The Company intends to continue to increase
market penetration through integrated marketing, product cross-selling
and the development of new products and custom solutions.
. Acquire Complementary Businesses and Products. The Company intends to
continue to pursue acquisitions as a means to add complementary
businesses and expand its product offerings.
. Maintain Low Production Costs and High Quality. The Company seeks to
maintain low production costs either through outsourcing or using Company
personnel where it is more cost-effective. The Company believes that
outsourcing to qualified suppliers where appropriate enables it to focus
its resources on marketing and sales while maintaining quality
production.
. Expand International Marketing. The Company intends to continue to expand
its international marketing activities through the addition of
manufacturer's representatives and dealers and the placement of Koala
employees in key foreign locations to supervise international sales
activity.
The Company is a Colorado corporation formed in July 1993. The Company's
principal executive offices are located at 5031 South Ulster Street, Suite 300,
Denver, Colorado 80237, its telephone number is (303) 770-3500, and its web
site is http://koalabear.com.
RECENT DEVELOPMENTS
In August 1998, the Company entered into an agreement to purchase the assets
of Park Structures in consideration for up to $18.7 million, subject to an
asset adjustment. Park Structures produces and markets children's outdoor
modular play systems for municipalities, parks, public and private schools, day
care centers and private developers. Closing of the Park Structures acquisition
will occur simultaneously with closing of the Offering. The Company will
utilize existing cash balances, the net proceeds of the Offering and
approximately $8.7 million of a new $15.0 million secured credit facility to
finance the portion of the purchase price due at the closing.
The Park Structures acquisition is the Company's third business acquisition
in three years and further broadens the Company's product lines. The
acquisition complements the Company's June 1997 acquisition of a line of
children's indoor modular play systems and also affords the Company an
opportunity to sell its family convenience and children's activity products
into new markets. At the closing, Park Structures will receive a note in the
principal amount of $13.5 million (which includes a preliminary asset
adjustment), payable on January 4, 1999. The note will be secured by an
irrevocable letter of credit. Because the note is due within 15 days of the
closing of this Offering, the financial information contained in this
Prospectus has been prepared as if such note will not be issued. In addition,
if certain earnings targets are met, Park Structures will receive up to an
additional $5.5 million during 1999, of which up to $1.5 million will be
payable in Common Stock. The Company currently expects that all such additional
consideration, including the Common Stock, will become payable. Over the four
years ended December 31, 1997, Park Structures' sales have increased at a
compound annual growth rate of 33.3%. See "Park Structures Acquisition."
4
THE OFFERING
Common Stock offered by:
The Company.................... 320,000 shares
The Selling Shareholder........ 880,000 shares
Total........................ 1,200,000 shares
Common Stock outstanding after
the Offering.................... 2,847,362 shares(1)
Use of proceeds.................. Acquisition of the assets of Park
Structures. See "Park Structures
Acquisition," "Use of Proceeds" and
"Business."
Nasdaq National Market symbol.... KARE
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(1) Excludes 403,000 shares of Common Stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $14.09 per
share, of which options to purchase 117,000 shares are currently
exercisable. See "Management."
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Common Stock, see "Risk Factors."
5
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information set forth below is derived from the
consolidated financial statements of the Company, the financial statements of
Delta Play, Ltd., all of whose assets were acquired by the Company on June 1,
1997, and, as to the Pro Forma As Adjusted information, the financial
statements of Park Structures. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Koala" and the consolidated financial statements of the Company
and notes thereto that appear elsewhere in this Prospectus.
HISTORICAL KOALA PRO FORMA AS ADJUSTED(1)
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NINE MONTHS
ENDED SEPTEMBER NINE MONTHS
YEAR ENDED DECEMBER 31, 30, YEAR ENDED ENDED
------------------------------------ --------------- DECEMBER 31, SEPTEMBER 30,
1993(2) 1994 1995 1996 1997 1997(3) 1998(3) 1997 1998
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(UNAUDITED) (UNAUDITED)
INCOME STATEMENT DATA:
Sales................... $3,842 $5,178 $6,537 $8,938 $13,621 $9,341 $13,493 $23,741 $20,340
Gross profit............ 2,406 3,346 3,986 5,697 8,093 5,725 7,515 11,629 10,279
Income from operations.. 1,465 1,918 2,357 2,699 3,661 2,733 3,425 4,872 4,820
Net income.............. 973 1,257 1,575 1,896 2,436 1,826 2,222 2,694 2,784
Net income per share:
--basic............... $ 0.40 $ 0.52 $ 0.66 $ 0.78 $ 0.97 $ 0.73 $ 0.88 $ 0.95 $ 0.98
--diluted............. $ 0.40 $ 0.52 $ 0.65 $ 0.75 $ 0.96 $ 0.72 $ 0.86 $ 0.94 $ 0.96
Weighted average common
shares outstanding:
--basic............... 2,405 2,402 2,399 2,431 2,504 2,496 2,527 2,824 2,847
--diluted............. 2,406 2,402 2,411 2,523 2,548 2,536 2,588 2,868 2,908
SEPTEMBER 30, 1998
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PRO FORMA
ACTUAL AS ADJUSTED(1)
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(UNAUDITED)
BALANCE SHEET DATA:
Working capital.......................................... $ 5,367 $ 7,747
Total assets............................................. 17,084 30,336
Total liabilities........................................ 2,115 10,807
Shareholders' equity..................................... 14,969 19,531
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(1) Information in these columns gives pro forma effect to the acquisition of
the assets of Delta Play, Ltd., the Park Structures acquisition and the
incurrence of the $8.7 million of indebtedness borrowed to finance such
acquisition as if incurred on January 1, 1997 and is adjusted to reflect
the sale of 320,000 shares of Common Stock offered by the Company hereby at
an offering price of $16.25 per share less underwriting discount and
estimated offering expenses payable by the Company and the anticipated
application of the net proceeds therefrom. Does not include up to $4.0
million in additional indebtedness that the Company may incur to make
future payments in connection with the Park Structures acquisition. See
"Use of Proceeds" and Unaudited Pro Forma Consolidated Financial Statements
and notes thereto.
(2) Results of operation for 1993 give pro forma effect to the Company's
initial public offering and merger with JBJ Industries, Inc.
(3) Results for the nine months ended September 30, 1997 include four months of
operations of Delta Play, Ltd., the assets of which were acquired effective
June 1, 1997. Results for the nine months ended September 30, 1998 reflect
a full period of operations of Delta Play, Ltd. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Koala."
6
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing shares of Common Stock offered
hereby. This Prospectus contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Prospectus, the
words "may," "will," "expect," "anticipate," "continue," "estimate,"
"project," "intend," "believe" and similar expressions are intended to
identify forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act") regarding events,
conditions and financial trends that may affect the Company's future plan of
operations, business strategy, operating results and financial position.
Prospective investors are cautioned that any forward-looking statements are
not guarantees of future performance and are subject to risks and
uncertainties and that actual results could differ materially from the results
expressed in or implied by these forward-looking statements as a result of
various factors, many of which are beyond the Company's control. These factors
are described under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and in the risk
factors set forth below.
ABILITY TO INTEGRATE AND MANAGE PARK STRUCTURES
The Park Structures acquisition, which will expand the Company's modular
play equipment product line, is the Company's largest acquisition to date. The
Company's ability to realize any long-term advantages from the Park Structures
acquisition will depend in large part on the Company's successful integration
and management of the operations of Park Structures. Risks relating to such
integration include increased seasonality associated with products sold by
Park Structures and the risk of loss of services of management or other
employees of Park Structures or significant dealers who sell the Park
Structures products. There can be no assurance that the Company will be able
to successfully integrate Park Structures, the failure of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Park Structures Acquisition."
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth both internally and
as a result of acquisitions. A continuing period of significant growth could
place a strain on the Company's management, operations and other resources.
The Company's ability to manage its growth will require it to continue to
invest in its operational, financial and information systems and to attract,
retain, motivate and effectively manage its employees. The inability of the
Company's management to manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
A part of the Company's business strategy is to acquire other companies,
assets or product lines that complement or expand its existing business.
Acquisitions involve a number of risks that could materially affect the
Company, including the diversion of management's attention, the assimilation
of the operations and personnel of the acquired companies, the amortization of
acquired intangible assets and the potential loss of key personnel of the
acquired companies. Future acquisitions may entail the payment of
consideration in excess of book value, may result in the issuance of
additional shares of the Company's Common Stock or the incurrence of
additional indebtedness, all of which could have a dilutive effect on the
Company's net income per share. In addition, products offered by the Company
following a future acquisition may have lower gross profit margins than the
Company's current product lines. There can be no assurance that any
acquisition by the Company will not have a material adverse effect on the
Company's business, financial condition and results of operations. Other than
the Park Structures acquisition, the Company currently has no agreements or
understandings with respect to any potential acquisitions. See "Business--
Business Strategy."
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LIMITED DIVERSIFICATION; UNCERTAINTY OF ACCEPTANCE OF NEW PRODUCTS
A substantial amount of the Company's sales since inception have been
derived from marketing the Koala Bear Kare Baby Changing Station. Although the
Company has diversified through the addition of other family convenience
products, children's activity products and children's modular play equipment
and plans to introduce additional products, the Baby Changing Station will
continue to be an important component of the Company's sales. Until the
Company further diversifies its business and products, changes in competition
and other factors affecting the market for the Baby Changing Station could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the possibility exists that any new
products introduced by the Company in the future will not be accepted in the
marketplace. If this happens, the Company's reputation may suffer, and the
Company may incur substantial losses due to production, marketing and other
costs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Koala" and "Business--History" and "--Products."
PRODUCT LIABILITY RISKS
The Company's products are designed for use with infants and children. The
children's modular play equipment industry, which the Company has recently
entered, may be subject to greater number of claims than the convenience
products industry. The Company carries product liability insurance in an
amount that management deems adequate to cover risks associated with its
products. There can be no assurance, however, that existing or future
insurance coverage will be sufficient to cover all product liability risks or
that such insurance will be available at favorable rates. Defending a product
liability claim could significantly divert management's attention. A partially
or completely uninsured claim against the Company, if successful, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Product Warranties and Insurance."
COMPETITION
The markets for the Company's products are highly competitive and include
numerous domestic and foreign competitors, including well-known manufacturers
of consumer and commercial child safety equipment, furniture and other
juvenile products that are substantially larger and have greater financial,
marketing and other resources than the Company. There can be no assurance
there will not be new entrants into the Company's markets or that the Company
will be able to compete successfully in the future. See "Business--
Competition."
DEPENDENCE UPON KEY PERSONNEL
The Company's future success will depend to a great extent upon the
continued service of certain senior management personnel and the Company's
continuing ability to attract, assimilate and retain highly qualified
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key personnel or that it can
attract, assimilate and retain such employees in the future. Although the
Company has non-disclosure and non-compete agreements with many of its
employees, including its executive officers, it does not have employment
agreements with any of its executive officers. The Company maintains a key-
person life insurance policy in the amount of $1 million on Mark A. Betker,
its Chairman, Chief Executive Officer and President. The loss of the services
of Mr. Betker or other key personnel or the inability to hire or retain
qualified personnel in the future could have a material adverse effect upon
the Company's business, financial condition and results of operations. See
"Management."
DEPENDENCE UPON OUTSIDE MANUFACTURERS
A large number of the components for the Company's products are manufactured
to the Company's specifications by outside suppliers. The Company's ability to
assemble and distribute its products depends upon its ability to obtain an
adequate uninterrupted supply of component parts. Although the Company owns
the significant tooling and molds used in the manufacture of the Company's
products, it does not have any long term agreements or contracts with its
suppliers, most of which are the single source of supply to the Company.
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While the Company believes that adequate alternative sources of supply of such
component parts could be located, there can be no assurance that any
interruption in the supply of such component parts to the Company because of
the failure of a supplier, a change to a new supplier or otherwise would not
have a material adverse effect on the Company's business, financial condition
or results of operations. Moreover, if the Company's tooling or molds are
damaged, the Company could suffer additional delays and costs until such
tooling or molds are repaired or replaced. Although the Company has business
interruption insurance to protect itself against such interruptions, such
insurance may not prevent such interruptions from having a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Business--Design and Manufacturing."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
As part of its growth strategy, the Company is seeking opportunities to
further expand its products and systems distribution into international
markets. Sales to customers outside of North America accounted for
approximately 18% and 19% of the Company's sales in 1997 and the nine months
ended September 30, 1998, respectively. In addition, the Company operates a
manufacturing and assembly facility in Vancouver, British Columbia, Canada.
The Company's international operations are subject to a wide range of general
business risks, including: fluctuations in currency exchange rates; unexpected
changes in legal and regulatory requirements; export restrictions, tariffs and
other trade barriers; political and economic instability; restrictions on
repatriation of funds or profits from foreign markets; longer payment cycles
and problems in collecting accounts receivable; difficulty in protecting the
Company's intellectual property; potentially adverse tax consequences,
including limitations on the Company's ability to claim a foreign tax credit
against its U.S. federal income taxes; and regulation by foreign regulatory
authorities. These and other factors associated with international operations
may have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is subject to the Foreign Corrupt Practices Act ("FCPA"), which
generally prohibits U.S. companies and their intermediaries from bribing
foreign officials for the purpose of obtaining or keeping business. The
Company may be exposed to liability under the FCPA as a result of past or
future actions taken without the Company's knowledge by dealers and other
intermediaries. Any liability the Company incurs under the FCPA could be
material.
GOVERNMENT REGULATIONS
Certain of the Company's products are subject to the provisions of the
Federal Consumer Product Safety Act and the Federal Hazardous Substances Act
(the "Acts") and the regulations promulgated thereunder. The Acts authorize
the Consumer Product Safety Commission (the "CPSC") to protect the public from
products that present a substantial risk of injury. The CPSC can require the
repurchase or recall by the manufacturer of articles which are found to be
defective and impose fines or penalties on the manufacturer. Similar laws
exist in some states and cities and in other countries in which the Company
markets its products. Any recall of its products could have a material adverse
effect on the Company. To date, the Company has not recalled any of its
products. See "Business--Regulation."
TRADEMARKS; LACK OF PATENT PROTECTION
The Company owns several trademarks, including the Koala Bear Kare logo set
forth on the cover of this Prospectus, to identify the Company and its
products and believes that such trademarks provide a significant competitive
advantage. Although the Company intends to vigorously defend its trademarks,
no assurance can be given either that such trademarks can be defended or that
such trademarks will not become commonly used. Further, although the Company
has design patents that cover the design and appearance of certain of its
existing products, such patents may not provide meaningful protection against
entry by competitors into the Company's markets. See "Business--Patents and
Trademarks."
9
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's sales and earnings may fluctuate from quarter to quarter based
on several factors such as the number of new commercial construction starts,
production delays, public budget processes, supply costs and general economic
conditions. Demand for the Company's products can vary significantly from
quarter to quarter due to revisions in customer budgets or schedules and other
factors beyond the Company's control. Due to all of the foregoing factors, it
is possible that in some future period, the Company's results of operations
could fall below the expectations of securities analysts and investors. In
this event, the market price of the Common Stock could be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Koala--Quarterly Data."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries to represent years. For example, the year "1998"
would be represented by "98." These systems and products will need to be able
to accept four digit entries to distinguish years beginning with 2000 from
prior years. As a result, systems and products that do not accept four digit
year entries will need to be upgraded or replaced to comply with such "Year
2000" requirements. The Company believes that its computer systems are Year
2000 compliant. There can be no assurance that the computer systems of
vendors, customers or other entities on which the Company relies will be Year
2000 compliant. There can be no assurance that unanticipated or undiscovered
Year 2000 compliance problems will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Koala--Year 2000" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Park Structures--Year 2000."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends and does not intend to pay any
cash dividends in the foreseeable future. The Company intends to retain all
earnings, if any, to invest in the Company's operations. The payment of future
dividends is within the discretion of the Board of Directors and will depend
upon the Company's future earnings, cash requirements, financial condition and
other factors that the Board of Directors may deem relevant. In addition, the
Company's credit agreement restricts the payment of cash dividends. See
"Dividend Policy."
VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock is subject to wide
fluctuations in response to factors such as actual or anticipated operating
results, announcements of new products developed by the Company, its
competitors or their customers, government regulatory action, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have often
been unrelated to the operating performance of particular companies. Many
factors that have influenced trading prices, such as actual or anticipated
operating results, growth rates, changes in estimates by analysts, market
conditions in the industry, announcements by competitors, regulatory actions,
the number of shares of Common Stock available for sale on the securities
markets and general economic conditions, will vary from period to period. Any
such event could result in a material adverse effect on the market price of
the Common Stock. See "Price Range of Common Stock."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
The Company's Articles of Incorporation authorizes the issuance of up to
1,000,000 shares of Preferred Stock. The Preferred Stock may be issued in
series with the material terms of any series determined solely by the Board of
Directors. Such terms would likely include dividend rights, conversion
features, voting rights, redemption rights and liquidation preferences. The
Company does not currently anticipate that it will issue any Preferred Stock.
However, if the Company does issue any series of Preferred Stock in the
future, it is likely that
10
such shares will have dividend privileges and liquidation preferences superior
to those of the Common Stock. Further, the Preferred Stock may be issued with
voting, conversion or other terms determined by the Board of Directors
including, among others, dividend payment requirements, redemption provisions,
preferences as to dividends and distributions, and preferential voting rights.
The issuance of Preferred Stock may have the effect of delaying or preventing
a change in control, may decrease the amount of earnings and assets available
for distribution to the holders of the Common Stock and may adversely affect
the rights and powers, including voting rights, of the holders of the Common
Stock. See "Description of Securities."
LIMITATION ON DIRECTOR LIABILITY
The Company's articles of incorporation provide, as permitted by Colorado
law, that a director of the Company shall not be personally liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty
as a director, with certain exceptions. In addition, the Company's articles of
incorporation provide for indemnification of the directors and officers to the
fullest extent permitted by Colorado law. See "Management--Director Liability"
and "--Indemnification."
PARK STRUCTURES ACQUISITION
On August 14, 1998, the Company entered into an agreement to purchase the
assets of Park Structures in consideration for up to $18.7 million, subject to
an asset adjustment. Park Structures, based in southern Florida, produces and
markets children's outdoor modular play systems for municipalities, parks,
public and private schools, day care centers and private developers. Closing
of the Park Structures acquisition will occur simultaneously with closing of
the Offering. The Park Structures acquisition is the Company's third business
acquisition in three years and further broadens the Company's product lines.
The acquisition complements the Company's June 1997 acquisition of a line of
children's indoor modular play systems and also affords the Company an
opportunity to sell its family convenience and children's activity products
into new markets. Over the four years ended December 31, 1997, Park
Structures' sales have increased at a compound annual growth rate of 33.3%
from $2.6 million for the year ended December 31, 1993 to $8.2 million for the
year ended December 31, 1997. See "Business--Park Structures" and "--
Products."
At the closing, Park Structures will receive a note in the principal amount
of $13.5 million (which includes a preliminary asset adjustment), payable on
January 4, 1999. The note will be secured by an irrevocable letter of credit.
Because the note is due within 15 days of the closing of this Offering, the
financial information contained in this Prospectus has been prepared as if
such note will not be issued. In addition, if certain earnings targets are
met, Park Structures will receive up to an additional $5.5 million during
1999, of which up to $1.5 million will be payable in Common Stock. The Company
currently expects that all of such additional consideration, including the
Common Stock, will become payable. The number of shares of Common Stock
payable will be based on the average daily closing sale price of the Common
Stock during December 1998. The purchase price is subject to adjustment based
on the amount of current assets and other assets of Park Structures as of the
closing and the amount of warranty liability of Park Structures assumed by the
Company as of the closing.
11
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the 320,000
shares of Common Stock offered by the Company at a price of $16.25 per share
are approximately $4.6 million (approximately $7.3 million if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discount and other estimated offering expenses, all of which are
payable by the Company. See "Park Structures Acquisition."All of the net
proceeds will be used to fund a portion of the purchase price for the Park
Structures acquisition. The Company will not receive any of the proceeds from
the sale of 880,000 shares of Common Stock by the Selling Shareholder.
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the Nasdaq National Market under the symbol
"KARE." The table below sets forth for the quarters indicated the high and low
per share sale prices of the Common Stock.
HIGH LOW
------- -------
1995
First quarter............................................. $ 6.750 $ 5.000
Second quarter............................................ 9.125 5.375
Third quarter............................................. 9.875 7.625
Fourth quarter............................................ 12.625 8.125
1996
First quarter............................................. $19.250 $10.625
Second quarter............................................ 19.125 16.375
Third quarter............................................. 21.000 13.750
Fourth quarter............................................ 17.000 12.250
1997
First quarter............................................. $14.375 $10.750
Second quarter............................................ 16.375 9.875
Third quarter............................................. 17.250 14.625
Fourth quarter............................................ 18.250 14.125
1998
First quarter............................................. $18.750 $14.000
Second quarter............................................ 20.125 15.750
Third quarter ............................................ 16.875 12.875
Fourth quarter (through December 16, 1998)................ 18.500 10.000
The last reported sale price for the Common Stock on the Nasdaq National
Market on December 16, 1998 was $16.50. As of November 25, 1998, there were
approximately 101 holders of record of Common Stock. The Company believes that
as of such date there were approximately 2,200 beneficial holders of Common
Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends or distributions
on its Common Stock. The Company anticipates that for the foreseeable future
all earnings will be retained for use in the Company's operations and that no
cash dividends will be paid to shareholders. Any payment of cash dividends in
the future on the Common Stock will be dependent upon the Company's financial
condition, results of operations, current and anticipated cash requirements,
as well as other factors that the Board of Directors deems relevant. In
addition, the Company's current credit agreement restricts the payment of
dividends. Similar restrictions on dividends will be imposed by the Company's
new credit facility.
12
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 and pro forma as adjusted to reflect the issuance and sale
of 320,000 shares of Common Stock offered by the Company hereby at a price per
share of $16.25 and the application of the net proceeds therefrom as set forth
under "Use of Proceeds." This table should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto and
the Unaudited Consolidated Pro Forma Financial Statements and notes thereto
included elsewhere in this Prospectus.
SEPTEMBER 30, 1998
----------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
------- --------------
(UNAUDITED)
(IN THOUSANDS)
Long-term debt, less current maturities................. $ -- $ 8,691
Shareholders' equity:
Preferred Stock, 1,000,000 shares authorized; none out-
standing............................................... -- --
Common Stock, $0.10 par value, 10,000,000 shares
authorized; 2,527,362 shares issued and outstanding
(actual); and 2,847,362 shares (pro forma as
adjusted)(2).......................................... 253 285
Additional paid-in capital............................. 5,308 9,837
Other comprehensive income(3).......................... (128) (128)
Retained earnings...................................... 9,536 9,536
------- -------
Total shareholders' equity............................ 14,969 19,530
------- -------
Total capitalization................................ $14,969 $28,221
======= =======
- --------
(1) Pro Forma As Adjusted also reflects the Park Structures acquisition and
the borrowing of $8.7 million under the Company's new revolving credit
facility. See Unaudited Consolidated Pro Forma Financial Statements and
notes thereto. Does not include up to $4.0 million in additional
indebtedness that the Company may incur to make future payments in
connection with the Park Structures acquisition.
(2) Does not include 403,000 shares of Common Stock issuable upon the exercise
of outstanding options at a weighted average exercise price of $14.09 per
share, of which options to purchase 117,000 shares are currently
exercisable. See "Management."
(3) Consists of translation of foreign currency.
13
KOALA CONSOLIDATED SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of the Company as of and for each
of the last five fiscal years ended December 31, 1997 set forth below have
been derived from the Company's audited consolidated financial statements. The
selected consolidated financial data as of and for each of the nine-month
periods ended September 30, 1998 and September 30, 1997 have been derived from
the unaudited financial statements of the Company which, in the opinion of the
management of the Company, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The results of
operations for the nine-month period ended September 30, 1998 are not
necessarily indicative of results that may be expected for the full year. This
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Koala" and the
consolidated financial statements of the Company and notes thereto that appear
elsewhere in this Prospectus.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ----------------
1993(1) 1994 1995 1996 1997 1997(2) 1998(2)
------- ------ ------ ------- ------- ------- -------
(UNAUDITED)
INCOME STATEMENT DATA:
Sales................... $3,842 $5,178 $6,537 $ 8,938 $13,621 $ 9,341 $13,493
Cost of sales........... 1,436 1,832 2,551 3,241 5,528 3,616 5,977
------ ------ ------ ------- ------- ------- -------
Gross profit............ 2,406 3,346 3,986 5,697 8,093 5,725 7,515
Selling, general and ad-
ministrative
expenses............... 855 1,342 1,543 2,892 4,231 2,858 3,895
Amortization of intangi-
bles................... 86 86 86 106 201 134 196
------ ------ ------ ------- ------- ------- -------
Income from operations.. 1,465 1,918 2,357 2,699 3,661 2,733 3,425
Other (income) expense.. (6) (44) (109) 159 (115) (98) (20)
------ ------ ------ ------- ------- ------- -------
Income before income
taxes.................. 1,471 1,962 2,466 2,540 3,776 2,831 3,445
Provision for income
taxes.................. 498 705 891 644 1,340 1,005 1,223
------ ------ ------ ------- ------- ------- -------
Net income.............. $ 973 $1,257 $1,575 $ 1,896 $ 2,436 $ 1,826 $ 2,222
====== ====== ====== ======= ======= ======= =======
Net income per share:
--basic............... $ 0.40 $ 0.52 $ 0.66 $ 0.78 $ 0.97 $ 0.73 $ 0.88
--diluted............. $ 0.40 $ 0.52 $ 0.65 $ 0.75 $ 0.96 $ 0.72 $ 0.86
Weighted average common
shares
outstanding:
--basic............... 2,405 2,402 2,399 2,431 2,504 2,496 2,527
--diluted............. 2,406 2,402 2,411 2,523 2,548 2,536 2,588
DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ----------------
1993(1) 1994 1995 1996 1997 1997 1998(2)
------- ------ ------ ------- ------- ------- -------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital......... $1,532 $2,721 $4,417 $ 5,644 $ 3,945 $ 3,184 $ 5,367
Total assets............ 5,349 6,616 8,250 10,351 14,957 13,874 17,084
Total liabilities....... 302 328 388 573 2,107 1,639 2,115
Shareholders' equity.... 5,047 6,288 7,862 9,778 12,850 12,235 14,969
- --------
(1) Results of operations for 1993 are pro forma, which give effect to the
Company's initial public offering and merger with JBJ Industries, Inc.
(2) Results for the nine months ended September 30, 1997 include four months
of operations of Delta Play, Ltd., the assets of which were acquired
effective June 1, 1997. Results for the nine months ended September 30,
1998 reflect a full period of operations of Delta Play, Ltd. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations of Koala."
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF KOALA
With the exception of historical matters, the matters discussed herein are
forward-looking statements that involve risks and uncertainties. Forward-
looking statements include, but are not limited to, statements concerning
anticipated trends in sales and net income, the mix of the Company's sales,
projections concerning operations and available cash flow. The Company's
actual results could differ materially from the results discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed in "Risk
Factors" and elsewhere in this Prospectus.
KOALA OVERVIEW
Koala Corporation is a leading designer, producer and worldwide marketer of
innovative commercial products, systems and custom solutions that create
attractive family-friendly environments for businesses and other public
venues. The Company produces family convenience products, such as baby
changing stations and high chairs; children's activity products, such as
activity tables and activity carpets; and children's modular play equipment.
The Company intends to capitalize on brand name recognition established
through its market-leading Koala Bear Kare Baby Changing Station, which has
been installed in approximately 300,000 public restrooms worldwide. The
Company's sales have grown from $3.8 million in 1993 to $13.6 million in 1997,
representing a compound annual growth rate of 37.2%. Sales for the nine months
ended September 30, 1998 were $13.5 million, representing a 44.5% increase
from the same period in 1997. Net income has grown from $1.0 million in 1993
to $2.4 million in 1997, representing a compound annual growth rate of 25.8%.
Net income for the nine months ended September 30, 1998 was $2.2 million,
representing a 21.7% increase from the same period in 1997.
The Company markets its products, systems and custom solutions to a wide
range of businesses and public facilities that serve customers and visitors
who bring children to their establishments. Koala markets its products through
an integrated program of direct sales and distribution through a network of
independent manufacturer's sales representatives and dealers. Since 1995, the
Company has increased its sales and marketing efforts through the addition of
manufacturer's sales representatives, dealers and Company sales
representatives.
The Company's sales have been derived primarily from the sale of its family
convenience products, which include Baby Changing Stations, disposable
sanitary liners for the Baby Changing Stations, Child Protection Seats, Infant
Seat Kradles and Booster Buddy seats. One of the Company's strategies has been
to reduce its dependence on Baby Changing Stations through the acquisition and
development of complementary products. In furtherance of this strategy, the
Company acquired certain assets of a manufacturer of commercial-use children's
activities products in March 1996 and the assets of Delta Play, Ltd., a
provider of custom children's indoor modular play equipment in June 1997. The
Company will further diversify its product offerings through the acquisition
of the assets of Park Structures, a producer of children's outdoor modular
play equipment. As a result of these acquisitions and introduction of new
products such as the Koala Highchair in 1997, sales of Baby Changing Stations
are expected to represent less than half of the Company's sales in 1998 and
thereafter.
The Company's gross profit margins are affected by product mix, with the
Baby Changing Station and other family convenience products typically
providing higher gross profit margins than the children's activity products
and children's modular play equipment. These children's activity products and
children's modular play equipment, however, have higher average selling prices
and contribute to the Company's sales growth. In addition, sales made through
dealers provide lower gross profit margins than direct sales due to the
expense associated with the manufacturer's sales representatives and dealers.
To the extent the Company acquires additional companies or product lines, its
gross profit margins may be lower than those currently achieved from sales of
the Company's current product lines due to a number of factors that may
include products with higher average selling prices but lower gross margin
percentages. Although new product introductions or acquisitions may decrease
the overall gross profit margins, the Company believes that the addition of
new products will provide opportunities for revenue diversification and
increased profitability, while also reducing the Company's reliance on the
Baby Changing Station.
15
COMPONENTS OF SALES AND EXPENSE
The Company recognizes sales at the time its products are shipped. Cost of
sales consists of components manufactured for the Company and direct labor and
manufacturing overhead incurred by the Company. All major components for the
family convenience products currently are manufactured and assembled by
outside vendors. Direct labor and manufacturing overhead relate to the
assembly of the products. Prior to September 1996, the Company performed the
assembly operations for the Baby Changing Stations, Child Protection Seats and
Infant Seat Kradles.
Selling, general and administrative expense consists primarily of
commissions paid to manufacturer's sales representatives and other
miscellaneous selling expenses, executive and office salaries, related payroll
taxes and advertising expenses.
The Company provides limited warranties for its products. The Company has
experienced minimal returns and warranty claims, and therefore no accrual has
been made for future claims.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data stated as a
percentage of sales:
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
Sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 39.0 36.3 40.6 38.7 44.3
----- ----- ----- ----- -----
Gross profit.............................. 61.0 63.7 59.4 61.3 55.7
Selling, general and
administrative expenses.................. 23.6 32.3 31.0 30.6 28.9
Amortization of intangibles............... 1.3 1.2 1.5 1.4 1.4
----- ----- ----- ----- -----
Income from operations.................... 36.1 30.2 26.9 29.3 25.4
Other (income) expense.................... (1.6) 1.8 (0.8) (1.0) (0.1)
----- ----- ----- ----- -----
Income before income taxes................ 37.7 28.4 27.7 30.3 25.5
Provision for income taxes................ 13.6 7.2 9.8 10.8 9.0
----- ----- ----- ----- -----
Net income................................ 24.1% 21.2% 17.9% 19.5% 16.5%
===== ===== ===== ===== =====
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997.
Sales increased 44.5%, or $4.2 million, to $13.5 million for the nine months
ended September 30, 1998 compared to $9.3 million for the nine months ended
September 30, 1997. A majority of the increase resulted from sales of
children's indoor modular play equipment, a product line acquired effective
June 1, 1997. The sales and marketing programs that the Company implemented
for the family convenience and children's activity product lines also
contributed to the increased sales.
Gross profit increased 31.3%, or $1.8 million, to $7.5 million for the nine
months ended September 30, 1998 compared to $5.7 million for the nine months
ended September 30, 1997. As a percentage of sales, gross profit decreased in
the 1998 period compared to the 1997 period primarily because of a change in
product mix that included sales of children's indoor modular play equipment
along with a higher proportion of sales of family convenience and children's
activity products through dealer channels, where lower gross profit margins
are realized.
Selling, general and administrative expense increased 36.3%, or $1.0 million
to $3.9 million for the nine months ended September 30, 1998 compared to $2.9
million for the nine months ended September 30, 1997. Sales and marketing
expense increased 33.0%, or $633,389 to $2.6 million for the nine months ended
September 30, 1998 compared to $1.9 million for the nine months ended
September 30, 1997. These cost increases were due to the inclusion of the
children's indoor modular play equipment line and higher expenses for various
marketing programs, commissions paid to manufacturer's sales representatives
and salaries of sales and
16
marketing personnel added subsequent to the 1997 period, all of which were
associated with higher levels of sales. General and administrative expense
increased 43.1%, or $403,424, to $1.3 million for the nine months ended
September 30, 1998 compared to $935,845 for the nine months ended September
30, 1997. The increase was primarily the result of the inclusion of the
children's indoor modular play equipment line.
The Company's effective tax rate was 35.5% for both the nine months ended
September 30, 1998 and 1997. The Company's worldwide effective rate is
comprised of the federal statutory rate of 34.0%, and an effective state rate
of 2.0%, offset by the tax effect of a permanent difference in the book and
tax basis of goodwill, which is approximately a 0.5% reduction. The Company
pays Canadian taxes at an effective tax rate of 38.6%, however, the Company
receives a foreign tax credit for U.S. tax purposes.
Net income increased 21.7%, or $396,000, to $2.2 million for the nine months
ended September 30, 1998 compared to $1.8 million for the nine months ended
September 30, 1997. As a percentage of sales, net income declined during the
1998 period compared to the 1997 period primarily due to the inclusion of the
children's modular play equipment line in the product mix. Net income per
share (diluted) increased 19%, or $.14, to $.86 for the nine months ended
September 30, 1998 compared to $.72 for the nine months ended September 30,
1997. The percentage increase in net income per share (diluted) was lower than
the percentage increase in net income as a result of an increase of 52,248
shares in the weighted average number of shares outstanding.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales increased 52.4%, or $4.7 million, to $13.6 million in 1997 compared to
$8.9 million in 1996, primarily as a result of seven months of operations from
the children's indoor modular play equipment line and continued strong demand
for the Company's other products. The sales and marketing strategy implemented
by the Company for its other product lines contributed to the additional sales
revenue for 1997 and also provided diversification of the Company's product
line. The Company continued to increase sales and marketing efforts through
focused marketing programs and the addition of sales personnel during 1997.
Gross profit increased 42.1%, or $2.4 million, to $8.1 million in 1997
compared to $5.7 million for 1996. As a percentage of sales, gross profit
decreased in 1997 compared to 1996 primarily because of the change in product
mix with the addition of the children's indoor modular play equipment line
along with increased sales of products to dealers at lower margins. These
gross margin reductions were offset somewhat by lower costs of raw materials
and component parts and the change to subcontracted assembly in September
1996.
Selling, general and administrative expenses for 1997 increased 46.3%, or
$1.3 million, to $4.2 million in 1997 compared to $2.9 million for 1996. Sales
and marketing expense increased 76.4%, or $1.1 million, to $2.5 million in
1997 compared to $1.4 million in 1996. These increases were due to the
inclusion of the children's indoor modular play equipment line and the higher
level of sales achieved, and included costs for various marketing programs,
commissions paid to manufacturer's sales representatives and salaries of the
sales and marketing personnel added during 1997. General and administrative
expense increased 17.3%, or $254,000, to $1.7 million in 1997 compared to $1.5
million in 1996. The relatively small increase in general and administrative
expense compared to the sales increase was primarily the result of cost
reductions obtained by more efficient management of administrative functions.
These cost reductions offset the cost increases resulting from the inclusion
of general and administrative expense associated with the children's indoor
modular play equipment line for seven months of 1997. The Company also
incurred approximately $100,000 in non-recurring personnel recruiting and
employee relocation costs in 1996.
The Company's effective tax rates were 35.5% in 1997 compared to 25.4% in
1996. The Company realized a tax benefit in 1996 from the tax deduction
generated by the exercise of non-qualified stock options by a former officer
of the Company.
Net income increased 28.5%, or $540,000, to $2.4 million in 1997 compared to
$1.9 million in 1996. As a percentage of sales, net income decreased in 1997
compared to 1996 primarily due to the inclusion of children's indoor modular
play equipment in the product mix. Net income per share (diluted) for 1997
increased 28.0%, or $.21, to $.96 per share in 1997 compared to $.75 per share
in 1996. The percentage increase in net income per share was slightly lower
than the percentage increase in net income as a result of an increase of
24,883 shares in the weighted average number of shares outstanding.
17
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales increased 36.7%, or $2.4 million, to $8.9 million in 1996, compared to
$6.5 million in 1995, as a result of continued growth in demand for the
Company's products. Sales of the Baby Changing Station accounted for the
majority of the growth in the Company's sales. Sales of the Booster Buddy,
Child Protection Seat and Infant Seat Kradle increased during the year, and
the addition of the children's activity product line beginning in April 1996
contributed to the increase in total sales.
Gross profit increased 42.9%, or $1.7 million, to $5.7 million in 1996
compared to $4.0 million in 1995. As a percentage of sales, gross profit
increased due to price reductions achieved in the cost of raw materials and
component parts and the change to subcontracted assembly in September 1996,
which reduced overhead costs.
Selling, general and administrative expenses increased 87.4%, or $1.4
million, to $2.9 million in 1996 compared to $1.5 million for 1995. As a
percentage of sales, selling, general and administrative expenses increased
only 8.7 percentage points because the Company increased sales without a
proportionate increase in general and administrative overhead. The increase in
selling, general and administrative expense was primarily due to increased
sales, marketing and administrative salaries, which includes the salary for
the chief financial officer added in 1996, as well as approximately $100,000
in non-recurring personnel recruiting and employee relocation costs. In
addition, the Company experienced increased advertising and other costs
associated with sales and marketing, including travel, telephone, consultants
and contract labor. The Company also increased its use of independent
manufacturer's representatives, which resulted in an increase in sales
commissions. The Company made the investment in these increased levels of
selling, general and administrative expenses in order to support the expanded
sales and marketing efforts begun in 1995.
The Company's effective income tax rates were 25.4% and 36.1% in 1996 and
1995, respectively. The Company realized a tax benefit in 1996 from the tax
deduction generated by the exercise of non-qualified stock options by a former
officer of the Company. The Company's effective tax rate also declined in 1996
due to the Company's move to Colorado, which has a lower statutory income tax
rate than Minnesota.
Net income for 1996 increased 20.4%, or $321,000, to $1.9 million in 1996
compared to $1.6 million in 1995. The additional expenses of the Company in
connection with expansion of sales and marketing, as well as the non-recurring
expenses incurred in 1996, contributed to a decline in net income as a
percentage of sales in 1996 compared to 1995. Net income per share (diluted)
increased 15.4%, or $.10 per share, to $.75 per share in 1996 compared to $.65
per share in 1995. The percentage increase in net income per share was lower
than the percentage increase in net income primarily as a result of an
increase of 112,000 shares in the weighted average number of shares
outstanding.
18
QUARTERLY DATA
The following table sets forth certain unaudited quarterly historical
financial data for each of the Company's last eleven quarters ended September
30, 1998. This unaudited quarterly information has been prepared on the same
basis as the annual information presented elsewhere in this Prospectus and, in
the Company's opinion, includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the selected
quarterly information. This information should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Prospectus.
The operating results for any quarter shown are not necessarily indicative of
results for any future period.
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1996 1996 1996 1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Sales.............. $1,871 $2,435 $2,433 $2,199 $2,251 $3,040 $4,049 $4,280 $4,014 $4,430 $5,049
Gross
profit............. 1,148 1,533 1,539 1,477 1,528 1,849 2,348 2,367 2,272 2,542 2,701
Income
from
operations......... 633 809 830 427 781 936 1,016 928 978 1,167 1,280
Net
income............. 428 530 557 381 530 628 668 610 635 774 813
Net income per
share (diluted).... $ 0.17 $ 0.21 $ 0.22 $ 0.15 $ 0.21 $ 0.25 $ 0.26 $ 0.24 $ 0.25 $ 0.30 $ 0.32
Due to customer budgeting and ordering patterns, the Company's sales tend to
be stronger in the second and third quarters than in the first and fourth
quarters. In the fourth quarter of 1996, net income was adversely affected by
the cost of the Company's move from Minnesota to Colorado. Beginning with the
second quarter of 1997, the quarterly financial data includes the operations
of the assets acquired from Delta Play, Ltd.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its business activities primarily from
cash provided by operating activities. Cash provided by operating activities
for 1996 and 1997 was $1.3 million and $3.5 million, respectively, and cash
provided by operating activities for the nine months ended September 30, 1998
and 1997 was $564,000 and $2.2 million, respectively. The decrease in cash
provided by operating activities for the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997 is due primarily to a
combination of an increase in inventories of raw materials and finished goods
during the nine months ended September 30, 1998, a decrease in accounts
payable and increases in prepaid expenses during the 1998 period and the
receipt of a tax refund of $338,000 in March 1997.
Working capital as of September 30, 1998, December 31, 1997 and December 31,
1996 was $5.4 million, $3.9 million and $5.6 million, respectively, and cash
balances were $1.2 million, $1.8 million and $3.4 million, respectively, at
the same dates.
The Company has used its operating cash flow primarily to expand sales and
marketing activities, for acquisition and development of new products, for
capital expenditures and for working capital. Net cash used by investing
activities was $875,000 in 1996, $5.2 million in 1997, and $5.0 million and
$1.1 million for the nine months ended September 30, 1997 and 1998,
respectively. In 1996, the Company used $501,000 to purchase children's
activity assets, with substantially all of the balance devoted to capital
expenditures. In 1997, $4.6 million was used to purchase the assets of Delta
Play, Ltd., with the balance primarily devoted to capital expenditures. This
is the principal reason for the decrease in working capital and cash balances
at December 31, 1997. Net cash used in the nine months ended September 30,
1998 relate to capital expenditures for leasehold improvements related to a
new facility in British Columbia, tooling, computer hardware, computer
software, patents and intangibles. The Company also paid $610,160 of
additional consideration under the earn-out provisions of the Delta Play, Ltd.
purchase agreement in August 1998.
19
The Company obtained a $2.0 million unsecured line of credit from a bank in
June 1997. The Company borrowed $500,000 on the line to fund operations after
the acquisition of the children's modular play equipment line in July 1997 and
repaid the loan from subsequent cash flow in the same month. The interest rate
on amounts borrowed under the line of credit ranges from LIBOR plus 2.25% to
LIBOR plus 2.75%. There were no amounts outstanding under the credit facility
as of September 30, 1998. This line of credit will be replaced by the new
$15.0 million secured credit facility that will be entered into in connection
with the Park Structures acquisition. Management expects to use the credit
facility periodically for short-term working capital needs and for short-term
financing of future acquisitions.
The Company intends to fund 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 Offering (approximately $4.6 million), existing cash
balances and a portion of the $15.0 million revolving credit facility from a
bank. The credit facility will have a term of three years. Loans under the
facility will be secured by all of the assets of the Company. The Company
anticipates that the interest rate on amounts borrowed under the line of
credit will range from LIBOR plus 2.15% to LIBOR plus 2.60%. Park Structures
will also be entitled to receive up to an additional $4.0 million in cash (and
$1.5 million in Common Stock) if certain earnings targets are met. See "Park
Structures Acquisition." The Company currently expects that all of such
additional consideration will become payable. Any such payments will be funded
primarily from short-term borrowings under the new credit facility. The
Company believes that the working capital provided by the Offering and cash
flow from operations will be sufficient to fund its operations for the
foreseeable future.
YEAR 2000
Historically, certain computerized systems have used two digits rather than
four to identify the year. Computer equipment and software, as well as devices
with imbedded technology, that are depend on time or date information may
recognize a date using "00" as the year 1900 rather than the year 2000,
possibly resulting in range of problems, from simple miscalculations to total
system failures. This problem is generally referred to as the "Year 2000"
issue.
The Company has assessed its exposure to risks associated with the Year 2000
issue in terms of "internal" issues (systems and equipment which the Company
owns or controls), and "external" issues (systems and equipment of third
parties with whom the Company does business). For a discussion of the Year
2000 issues facing Park Structures, see "Management's Discussion & Analysis of
Results of Operations of Park Structures--Year 2000."
The Company has only limited information technology systems, consisting of
separate local area networks at its headquarters and Vancouver locations.
These networks run accounting software at both locations and design software
at the Vancouver location. The Company has completed assessment, remediation
through the installation of Year 2000 compliant software and independent
testing of all application software and the operating systems at both
locations, and believes that its information technology systems are Year 2000
compliant. The cost to the Company to achieve this compliance was
approximately $40,000, which was used to purchase software and hardware and to
pay independent consultants. The Company funded these costs from available
cash. The Company believes such remediation is complete, and expects that no
further costs of remeditation will be required. Should such remediation prove
inadequate, the most likely worst case scenario would be a failure of the
Company's computer systems, which would likely cause significant delays in
order taking, receiving, order fulfillment and other core functions which
would have a material adverse affect on the Company. However, because the
Company believes its remediation of its computer systems will allow the
Company to avoid the risks associated with the Year 2000 issues, it has not
developed a separate contingency plan for a scenario in which the Company's
remedial measures fail. The Company does not believe that it has any systems
or equipment other than its information technology systems that would have a
material adverse effect on the Company if such systems were not Year 2000
compliant.
20
The Company is also evaluating whether there may be third parties that could
materially adversely affect the Company through non-compliance with the Year
2000 issue. The Company has identified Park Structures, suppliers, customers,
its bank and national delivery services as the parties most likely to
materially adversely affect the Company through such non-compliance. The risks
include the failure of suppliers to timely deliver materials and finished
products, the failure of customers to remit payments timely, the failure of
its bank to process its funds or loss of data relating to the Company's funds
and delays by national delivery services in shipments of the Company's
products. The most likely worst case scenario for the Company would be a
confluence of these events coupled with other adverse effects on the economy
generally that would impact sales of the Company's products. For a discussion
of Park Structures' Year 2000 readiness, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Park Structures--
Year 2000." The Company has contacted its ten largest suppliers and customers,
its bank and national delivery services to ascertain their Year 2000
readiness. To date, the Company has received responses from several of the
suppliers and customers, the bank and some of the national delivery services.
The respondents have indicated that they are at various stages of assessment,
remediation or testing of their systems relative to Year 2000 compliance.
Based on the responses, the Company does not foresee significant problems with
the Year 2000 issue and has not developed a contingency plan to deal with non-
compliance issues. Nevertheless, the Company will continue to monitor the
responses from third parties as well as the Year 2000 issue in general to
ascertain whether additional actions or contingency plans may be necessary. In
addition, despite its efforts to address Year 2000 issues, the Company could
potentially experience disruptions to its operations, including those related
to non-compliant systems used by third parties. Such disruptions could have a
material adverse effect on the Company.
NEW ACCOUNTING STANDARDS
SFAS No. 128, Earnings per Share, was issued in February 1997 and was
adopted by the Company effective for 1997. Earnings per share amounts for 1996
were restated in accordance with the provisions of SFAS No. 128. See Note 1 to
the Company's consolidated financial statements.
The FASB issued SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information, on June 30, 1997. This statement establishes additional
standards for segment reporting in the financial statements and is effective
for the Company's fiscal year ended December 31, 1998. Management intends to
comply with the disclosure requirements of this statement and does not
anticipate a material impact on the reported results of operations of each
segment.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1998. Management does not anticipate that the
adoption of this statement will have a significant effect on earnings or the
financial position of the Company.
21
PARK STRUCTURES COMBINED SELECTED FINANCIAL DATA
(IN THOUSANDS)
The selected financial data of Park Structures as of and for each of the
last two fiscal years ended December 31, 1997 have been derived from the
audited combined financial statements of Park Structures. The selected
financial data of Park Structures as of and for the nine-month periods ended
September 30, 1997 and 1998 have been derived from the unaudited combined
financial statements of Park Structures which, in the opinion of the
management of Park Structures, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. The results
of operations for the nine-month period ended September 30, 1998 are not
necessarily indicative of results that may be expected for the full year. This
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Park Structures" and the
combined financial statements of Park Structures and notes thereto that appear
elsewhere in this Prospectus.
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- --------------
1996 1997 1997 1998
------ ------ ------ ------
(UNAUDITED)
INCOME STATEMENT DATA:
Sales.......................................... $7,145 $8,242 $5,717 $6,847
Cost of sales.................................. 4,910 5,560 3,857 4,084
------ ------ ------ ------
Gross profit................................... 2,235 2,682 1,860 2,763
Selling, general and administrative
expense....................................... 1,330 1,332 991 1,119
------ ------ ------ ------
Income from operations......................... 905 1,350 869 1,644
Other income (expense)......................... (622) (237) (193) 57
------ ------ ------ ------
Net income before taxes(1)..................... $ 283 $1,113 $ 676 $1,701
====== ====== ====== ======
- --------
(1) Park Structures has made an election under Subchapter S of the Internal
Revenue Code, and accordingly, no provision or liability for federal or
state income taxes is included.
DECEMBER 31, SEPTEMBER 30,
-------------- --------------
1996 1997 1997 1998
------ ------ ------ ------
(UNAUDITED)
BALANCE SHEET DATA:(1)
Total assets................................... $2,703 $3,275 $2,864 $5,165
Long term portion of capital lease
obligations................................... -- 19 -- 16
- --------
(1)Excludes certain short-term liabilites of Park Structures that are not
being assumed by the Company.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF PARK STRUCTURES
PARK STRUCTURES OVERVIEW
Park Structures produces and markets children's outdoor modular play
equipment. Park Structures' customers include municipalities, parks, public
and private schools, day care centers and private developers. Sales are
primarily made through a network of approximately 40 national and
international dealers, except in the south Florida area, where direct sales
are made. Generally, Park Structures' sales cycle begins with the solicitation
of customers and responses to customers' bid specification proposals during
the period from November to March. Orders are received and the children's
modular play equipment is manufactured from April to October. As a result,
Park Structures typically carries a large backlog in the spring and early
summer months. Park Structures historically records a substantial majority of
its sales during the second six months of the year.
COMPONENTS OF REVENUE AND EXPENSES
Park Structures recognizes sales at the time its products are shipped. Cost
of sales consists of components manufactured for and by Park Structures and
direct labor and manufacturing overhead incurred by Park Structures. Certain
major components such as plastic molding and aluminum castings are
manufactured by outside vendors using Park Structures' proprietary molds and
tools.
Selling, general and administrative expenses consist primarily of executive
and office salaries, related payroll taxes, advertising expenses and other
miscellaneous selling expenses.
Other (income) expense consists primarily of interest income earned on cash
balances, interest expense on borrowed funds and fees paid to a related entity
for consulting services.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data stated as a
percentage of sales:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER SEPTEMBER
31, 30,
------------ ------------
1996 1997 1997 1998
----- ----- ----- -----
Sales............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 68.7 67.5 67.5 59.6
----- ----- ----- -----
Gross profit..................................... 31.3 32.5 32.5 40.4
Selling, general and
administrative expenses......................... 18.6 16.1 17.3 16.3
----- ----- ----- -----
Income from operations........................... 12.7 16.4 15.2 24.1
Other income (expense)........................... (8.7) (2.9) (3.4) .8
----- ----- ----- -----
Net income....................................... 4.0% 13.5% 11.8% 24.9%
===== ===== ===== =====
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Sales increased 19.8% or $1.1 million, to $6.8 million for the nine months
ended September 30, 1998 compared to $5.7 million for the nine months ended
September 30, 1997. The increase in sales occurred despite the relocation of
Park Structures' production facility in January 1998 and the relocation of the
powder coating operation to the new production facility in June 1998. The
implementation of new incentive programs for dealers and a more proactive
approach to managing the dealers led to the sales increases.
23
Gross profit increased 48.5%, or $903,000, to $2.8 million for the nine
months ended September 30, 1998 compared to $1.9 million for the nine months
ended September 30, 1997 primarily due to significant decreases in costs of
certain component parts. These cost reductions were realized late in 1997 and
are primarily attributable to competitive bidding of vendors.
Selling, general and administrative expenses increased 12.9%, or $128,000,
to $1.1million for the nine months ended September 30, 1998 compared to
$991,000 for the nine months ended September 30, 1997. Sales and marketing
expense decreased $30,000, or 14.3%, to $180,000 for the nine months ended
September 30, 1998 from $210,000 for the nine months ended September 30, 1997.
This decrease was due to a decrease in catalogue distribution and advertising
in trade magazines. A significant increase is the $46,000 increase in rent
expense to $84,000 for the nine months ended September 30, 1998 from $38,000
for the nine months ended September 30, 1997. This was attributable to the
new, larger production facility.
Other (income) expenses consisted of a fee to a related entity which
decreased from $183,000 for the nine months ended September 30, 1997 to $0 for
the nine months ended September 30, 1998. This fee was paid pursuant to an
agreement with a shareholder. During the nine months ended September 30, 1998,
Park Structures recognized a $62,000 gain on the sale of assets related to the
disposition of the Park Structures' powder coating facility. This asset was
fully depreciated at the time of disposition and was replaced in June 1998
when Park Structures relocated its powder coating operations to the new
production facility.
Net income increased 151.6%, or $1.0 million, to $1.7 million for the nine
months ended September 30, 1998 from $676,000 for the nine months ended
September 30, 1997, as a result of the aforementioned factors.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales increased 15.3%, or $1.1 million, to $8.2 million in 1997 compared to
$7.1 million in 1996, primarily as a result of continued growth in demand for
Park Structures' products due to increased marketing efforts.
Gross profit increased 20.0%, or $446,000, to $2.7 million in 1997 compared
to $2.2 million in 1996. Inasmuch as gross profit margins remained fairly
constant, this increase directly relates to the increase in sales.
Selling, general and administrative expenses remained constant at $1.3
million in 1997 and 1996. Advertising expense increased by 54.1%, or $93,000,
to $265,000 in 1997 compared to $172,000 in 1996. This was attributable to an
increase in catalogue distribution and an increase in national advertising,
primarily in trade magazine publications. This increase was partially offset
by a decrease in bad debt expense. In 1996, $52,000 was written off because a
sales representative filed a petition for bankruptcy. There were no
significant amounts deemed uncollectible during 1997. The remaining increase
in advertising expense was offset by a decrease in salaries and benefits by
7.6%, or $65,000 to $784,000 in 1997 compared to $849,000 in 1996.
Other (income) expense consisted of a fee to a related entity, which
decreased $373,000, to $226,000 in 1997 from $599,000 in 1996. This fee was
paid pursuant to an agreement with an individual who subsequently became a
shareholder of Park Structures.
Net income increased $830,000 to $1.1 million in 1997 compared to $283,000
in 1996, as a result of the aforementioned reasons.
LIQUIDITY AND CAPITAL RESOURCES
Park Structures has financed its operations historically through proceeds
from a related party advance and internally generated cash. In May 1998, Park
Structures entered into an agreement with a bank for a $250,000 line of credit
which expires in June 1999. Advances of $178,900 were taken through September,
30 1998 under this line, which bears interest at the prime rate plus 0.50%.
Such advances were repaid as of November 30, 1998. This facility will not be
acquired by the Company.
24
Park Structures' net increase (decrease) in cash and cash equivalents was
$293,000, ($204,000), ($254,001) and ($6,392) for the years ended 1996 and
1997 and the nine months ended September 30, 1997 and 1998, respectively.
The increase in cash for the year ended 1996 was due to a related party
advance of $508,000 which was partially utilized to fund the net cash used in
operations of $93,000 and to distribute $121,000 to the Company's shareholder.
The decrease in cash for 1997 was primarily due to net repayments to the
related party of $341,000 as well as $623,000 paid for leasehold improvements
on the new operating facility, furniture and equipment. These uses were offset
by $761,000 of net cash provided by operating activities primarily due to the
$830,000 increase in net income during 1997.
The decrease for the nine months ended September 30, 1997 is attributable to
a combination of $238,000 provided by operating activities offset by $175,000
used for the purchase of leasehold improvements, equipment and furniture for
the new operating facility and $317,000 related to the repayment of related
party loans.
The decrease during the nine months ended September 30, 1998 was a
combination of $249,000 net cash provided by operating activities, primarily
attributable to the net income for the period, offset by net cash used in
investing activities of $197,000 for the purchase of equipment and furniture
for the new operating facility and the net cash used in financing activities
of $59,100 relating to the distribution to a stockholder of $204,000,
repayment of a related party loan of $36,000, offset by proceeds from the line
of credit of $179,000.
YEAR 2000
Because the Park Structures acquisition has not been completed, the Company
has not completed its evaluation of Park Structures' Year 2000 issues. Park
Structures has informed the Company that it does not expects the cost to
modify its computer systems to address Year 2000 issues will be less than
$1,000 and that such remediation will be completed prior to the Year 2000.
Park Structures has informed the Company that it does not anticipate any
material disruption in its operations as a result of any Year 2000 issues.
Park Structures does not have any information concerning the potential impact
of Year 2000 issues on any of its suppliers or customers.
The Company plans to evaluate the potential impact of Year 2000 issues on
Park Structures' suppliers and customers. The Year 2000 issue could have a
material adverse effect on Park Structures' operations and on the Company.
25
BUSINESS
Koala Corporation, a Colorado corporation, is a leading designer, producer
and worldwide marketer of innovative commercial products, systems and custom
solutions that create attractive family-friendly environments for businesses
and other public venues. The Company produces family convenience products,
such as baby changing stations and high chairs; children's activity products,
such as activity tables and activity carpets; and children's modular play
equipment. The Company intends to capitalize on brand name recognition
established through its market-leading Koala Bear Kare Baby's Changing
Station, which has been installed in approximately 300,000 public restrooms
worldwide. The Company's sales have grown from $3.8 million in 1993 to $13.6
million in 1997, representing a compound annual growth rate of 37.2%. Sales
for the nine months ended September 30, 1998 were $13.5 million, representing
a 44.5% increase from the same period in 1997. Net income has grown from $1.0
million in 1993 to $2.4 million in 1997, representing a compound annual growth
rate of 25.8%. Net income for the nine months ended September 30, 1998 was
$2.2 million, representing a 21.7% increase from the same period in 1997.
The Company markets its products, systems and custom solutions to a wide
range of businesses and public facilities that serve customers and visitors
who bring children to their establishments. The Company's customers include
Walt Disney World, The Mayo Clinic, Target Stores, McDonalds, Pizza Hut,
Burger King franchises and many other customers in the retail, health care,
supermarket, entertainment venue and numerous other markets. Management
believes that the Koala Bear Kare brand is widely recognized among family-
friendly businesses and their customers.
The Company provides high quality products with design features that cater
to the needs of its customers. The Company believes that competition in its
various product categories is fragmented and that Koala benefits from offering
a broad selection of products to its customers. The Company intends to
continue providing family-friendly products, systems and custom solutions
through strategic initiatives including: capitalizing on brand recognition;
maximizing market penetration; acquiring complementary businesses and
products; maintaining low cost, high quality production; developing new
solutions and enhanced products; and expanding its international marketing.
On August 14, 1998, the Company agreed to purchase the assets of Park
Structures, a manufacturer and marketer of outdoor children's modular play
equipment. Park Structures sells its products to municipalities, parks, public
and private schools, day care centers and private developers. Park Structures'
line of children's outdoor modular play equipment complements the Company's
existing line of children's indoor modular play equipment, and the acquisition
provides additional market opportunities for the Company.
HISTORY
The Company's predecessor was formed in 1987 to produce and market a newly-
designed baby changing station. This product has formed the foundation for the
Company's growth, and the Company believes that it is the market leader in
baby changing station products in terms of units sold. During the 1990's,
Koala has developed from a single product company into a diversified designer,
producer and marketer of family convenience products, children's activity
products and children's modular play equipment. The Company introduced the
Child Protection Seat in 1991 and the Infant Seat Kradle in 1993. In 1994, the
Company acquired the rights to the Booster Buddy booster seat. The Company
commenced its offering of children's activity systems in 1996, following the
acquisition of a producer of activity products. This acquisition initiated the
development of the Koala Kare System, which allows businesses to create custom
activity systems to suit individual space requirements and customer needs. The
Company continued to expand its product offerings in 1997 through new product
introductions, including the Koala Highchair, and the acquisition of Delta
Play, a custom manufacturer of creatively themed, modular indoor children's
play systems. With the acquisition of Park Structures, the Company will enter
the outdoor children's modular play market. As a result of the Company's
product diversification efforts, the Baby Changing Station, while continuing
to be a growth opportunity for the Company, is expected to represent less than
half of Koala's sales in 1998 and thereafter.
26
INDUSTRY OVERVIEW
The Family Convenience and Children's Activity Market. The Company believes
that parents increasingly travel, shop and dine out with their children due to
societal changes and demographic trends, including the strict time constraints
of two-income and single parent households. A March 1998 national market
research study conducted for the Company by the Howell Research Group reported
that seven out of ten parents (68%) interviewed shopped with their children
either all the time (27%) or most of the time (41%). According to the study,
the impact of child-friendly facilities is very positive. The majority of
women and a large number of the men interviewed, who shopped at child-friendly
stores, shopped more frequently and spent more time and money at these stores.
The Company believes that businesses increasingly need to create an
accommodating and positive environment for children in order to attract
customers, increase sales and create customer loyalty. The Company has
developed and acquired family convenience and children's activity products to
help businesses meet these needs.
The United States Department of Justice estimates that there are over
5,000,000 public facilities in the United States of the type targeted by the
Company, including restaurants, retail stores and shopping centers. The
Company estimates that the market for its children's activity products
includes approximately 1,500,000 facilities. The Company currently targets
over 60 categories of facilities to purchase its family convenience and
children's activity products, including quick service restaurants, airports,
stadiums, convention centers, supermarkets and other retail establishments.
The Children's Modular Play Market. The children's modular play market is
comprised of indoor and outdoor areas for child play. Customers for indoor
children's modular play equipment include many of the same businesses that
purchase family convenience and children's activity products, such as quick
service restaurants, shopping malls, day care centers and family entertainment
centers. The Company believes that many of the same demographic trends in the
family convenience and children's activity segments are driving demand for
indoor children's modular play products. In addition, the Company believes
that customers increasingly are looking for theming and custom-designed
equipment in order to create a family-friendly atmosphere for their
businesses.
The children's outdoor modular play market for products produced by Park
Structures includes municipalities, schools, parks, amusement parks, day care
centers and apartment complexes. The Company believes that this market has
expanded for a number of reasons. Unlike the products of Park Structures, many
existing outdoor play structures are not accessible to people with
disabilities or the structures or their underlying surfaces do not comply with
current safety codes. In addition, wood structures, which were popular in the
1970s and 1980s, are not as popular today because of safety and maintenance
concerns and because they tend to deteriorate over time. Therefore, the
Company believes that municipal risk managers and others who control the
buying decisions regarding outdoor play systems are seeking to replace or
expand their existing equipment.
BUSINESS STRATEGY
The Company's primary business objective is to grow its sales and earnings
by continuing to develop as a leading provider of family-friendly products,
systems and solutions. The Company's key strategic initiatives are summarized
below.
Capitalize on Brand Name Recognition. The Company believes that the Koala
Bear Kare brand name has achieved significant recognition with businesses and
their customers through the reputation of its Koala Bear Kare Baby Changing
Station. The Company intends to continue to leverage this brand recognition
through the marketing of its other family convenience and children's activity
products and children's modular play systems under the Koala Bear Kare name.
Maximize Market Penetration. The Company intends to continue to increase
market penetration through an integrated marketing effort that includes
manufacturer's representative and dealer sales, direct sales, trade shows and
trade magazine advertising. In 1997, the Company strengthened its existing
distribution network through the addition of approximately 200 new
manufacturer's representatives and over 800 new dealers. 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.
27
Acquire Complementary Businesses and Products. The Company has established a
formal acquisition program and regularly evaluates strategic acquisitions as a
means of adding complementary businesses and product lines. The Company has
completed several acquisitions and believes that there are opportunities to
acquire products or business lines that would complement current operations,
expand current product offerings and provide additional opportunities to
leverage the Company's marketing efforts.
Maintain Low Production Costs and High Quality. The Company has a "buy or
build" philosophy that seeks to maintain low production costs without
compromising quality. As a result, a substantial portion of its manufacturing
and assembly functions currently are outsourced, and certain design functions
are handled by the Company. The Company believes that outsourcing to qualified
suppliers where appropriate enables it to focus its resources on marketing and
sales while maintaining quality control through frequent contacts with its
suppliers.
Develop New Solutions. Koala seeks to develop new solutions in order to meet
customer expectations and expand its business. For example, the Koala
Highchair was designed and developed with unique features in response to
restaurants' concerns about the cleanliness and ease of use provided by their
existing highchairs. The Company also continually seeks to improve and enhance
its existing products and systems in response to customer needs.
Expand International Marketing. The Company sells its products worldwide.
Sales to customers outside of North America have increased from 12% of sales
in 1996 to 18% of sales in 1997. The Company intends to continue the expansion
of its international marketing activities by adding dealers and locating Koala
employees in selected markets around the world to supervise international
sales activity. In addition, the Company plans to increase its international
sales through increased cross-selling of its products and the marketing of the
outdoor modular play equipment of Park Structures.
PARK STRUCTURES
Park Structures, formed in 1986 and based in South Florida, is a leading
manufacturer and marketer of children's outdoor modular play equipment for
municipalities and other governmental agencies, parks, public and private
schools, day care centers and private developers. For the nine months ended
September 30, 1998, Park Structures had sales and operating income of $6.8
million and $1.6 million, respectively. Park Structures achieved compound
annual sales growth of 33.3% for the four years ended December 31, 1997. Park
Structures' products are sold on a national basis with a concentration of
sales in the southern United States. The Company believes there is an
opportunity to market its existing products through the Park Structures
distribution channels and to market its products as well as the Park
Structures products both to domestic customers and to customers in Europe and
Latin America. Park Structures' markets represent a new distribution
opportunity for the Company. The Company believes that it will be able to
increase the penetration of Park Structures' products to larger municipal
markets due to the Company's greater marketing and financial resources. Koala
intends to explore the opportunity to cross-sell its existing products into
the Park Structures markets and to introduce the Park Structures products to
its children's activity and indoor modular play customers.
PRODUCTS
The Company currently markets three groups of products: family convenience,
children's activity and children's modular play equipment products. These
products are sold to businesses and other customers located in all 50 states
and in approximately 50 foreign countries.
Family Convenience Products. The Company currently markets the following
family convenience products: the Koala Bear Kare Baby Changing Station, the
Koala Bear Kare Child Protection Seat, the Koala Bear Kare Infant Seat Kradle,
the Booster Buddy booster seat and the Koala Bear Kare Highchair. The Company
also markets disposable sanitary paper liners to be used with its Baby
Changing Stations. All of these products, except for the Infant Seat Kradle
and the sanitary paper liners, are constructed out of durable polyethylene
plastic and are highly resistant to accidental damage or vandalism. These
products are described below.
28
Koala Bear Kare Baby Changing Station. Introduced in 1987, the Baby
Changing Station reinforced the need for publicly accessible baby changing
tables. The changing station provides customers with a safer and more
sanitary alternative to changing their children's diapers and encourages
customers to stay in a place of business instead of leaving to take care of
the baby. Management estimates that there have been approximately 300,000
units installed worldwide. The changing station fits in very small
restrooms and is available in a vertical, horizontal or counter-top design
to accommodate a variety of space requirements. A changing station unit is
steel reinforced to provide added safety and weight capacity. Each unit
features child protection straps with snap-lock fasteners that hold the
child securely in place. Stations are equipped with built-in sanitary liner
dispensers. Liners are biodegradable 3-ply paper and provide the same
protection for an infant that toilet seat covers provide adults. The paper
liners are sold separately to businesses with changing stations and provide
the Company a recurring revenue stream from its customers.
Koala Bear Kare Child Protection Seat. The Child Protection Seat is
designed for parents who need to use a restroom or dressing room in a
public place but are unable to fit their baby's stroller in the stall with
them. The protection seat mounts on the wall or door of a public restroom
stall or dressing room, offering customers a safer and more sanitary
alternative to leaving a child unattended or on the floor. The baby is kept
securely in place by child protection straps with snap-lock fasteners and a
uniquely designed tilt-back, polyethylene seat. The unit's compact folding
design fits easily in the smallest restrooms or dressing rooms and mounts
to a variety of surfaces.
Koala Bear Kare Infant Seat Kradle. The Infant Seat Kradle is effectively
a highchair for infants who are too small for high chairs. This product
permits parents in restaurants and other businesses to put their infant
carriers or car seats at table height. The Infant Seat Kradle consists of a
metal frame with a nylon mesh cradle and protection straps to hold the
infant carrier securely in place. The unit folds into a flat profile for
storage in tight spaces and, when open, takes up no more floor space than a
highchair.
Booster Buddy Booster Seat. The Booster Seat is designed to permit
children from the ages of 2 to 7 to enjoy movies, sports, theater and other
spectator events. The product reverses to provide two different height
levels for children and is equipped with a cup holder, a candy/popcorn
holder and built-in handle for easy carrying. The booster seat features an
easy-cleaning lightweight molded polyethylene design weighing only three
pounds. Seats stack together in an upright stand for easy storage and
accessibility to patrons.
Koala Bear Kare Highchair. The Highchair features a seamless molded
polyethylene construction that prohibits food and dirt from collecting in
hard-to-clean places, resulting in a more sanitary product. Its unique,
recessed two-wheel design allows for smooth movement and easy maneuvering,
yet eliminates accidental rolling. The polyethylene construction results in
a longer life and easier cleaning than wooden highchairs. The highchair is
stackable and easy to store.
Children's Activity Products. The Company's children's activity products
consist of the Koala Bear Kare Block and Maze Activity Table, Koala Bear Kare
Wonder Wall and Koala Bear Kare Activity Center Carpet. These products, which
include manipulative activities and colorful blocks, letters, numbers and
designs, are designed for use in commercial waiting areas of businesses such
as grocery stores, auto dealers, retail stores, physicians and other
professional services providers. These products are solidly constructed to
withstand heavy use and include hygienic maintenance features. The Company
markets these products individually or under the name Koala Kare Systems. The
Koala Kare Systems allow businesses to create custom activity systems to suit
individual space requirements and customer needs. These systems range from
individual activity tables in doctor's offices to large children's activity or
play areas in supermarkets comprising several thousand square feet where
children are supervised in a controlled environment. Selected activity
products with interactive video machines and other interactive products create
a children's activity setting that allows parents to shop while their children
are entertained and educated in a safe, clean and child-friendly environment.
Children's Modular Play Equipment. The Company currently markets modular and
custom themed children's indoor play equipment. The Company works with each
individual customer to create and produce custom designs that use traditional
modular components such as tunnels, walkways, ladders and ball pits either
alone or in combination to create a themed environment such as a pirate's ship
or jungle tree house. These products are designed for use in family
entertainment centers, quick-service restaurants and shopping malls.
29
The acquisition of Park Structures will expand the Company's product
offerings into children's outdoor modular play equipment. Park Structures
designs, manufactures and markets modular and custom outdoor play equipment
for municipalities and other governmental agencies, parks, public and private
schools, day care centers, developers and apartment complexes. The Park
Structures products consist of traditional modular outdoor playground
equipment such as decks, elevated climbing areas and slides. These components
are available in a wide variety of sizes, configurations and color options.
Park Structures custom designs its systems to meet customer requirements.
MARKETING AND SALES
Family Convenience and Children's Activity Products. The Company's marketing
strategy for its family convenience and child activity products consists of
extending the Koala Bear Kare brand name, introducing new concepts and
creating new groups of customers for its products around a theme of Happy
Faces in Public Places. The Company uses a combination of dealer sales and
direct sales to market these products.
Since 1995, the Company has increased its marketing budget in an effort to
increase sales of its products to a wider target market. In 1997, the Company
expanded its distribution network, which consists of manufacturer's sales
representatives and dealers, through the addition of approximately 200 new
manufacturer's sales representatives and over 800 new dealers. The
manufacturer's sales representatives promote the Company's products to the
dealers, who purchase the products from the Company and resell them to
customers. The manufacturer's representatives receive commissions from the
sale of the Company's products. Most dealers are not granted any exclusive
rights for products or territory. Dealer sales have accounted for a minority
of the Company's domestic sales and a majority of the Company's foreign sales.
The Company's current distribution network consists of approximately 2,100
dealers served by approximately 300 manufacturer's sales representatives that
serve selected market segments. In addition, the Company markets directly to
national accounts who prefer to buy directly from manufacturers and other end
users that do not qualify as national accounts or are not served by dealers.
International dealers currently are served by factory sales managers who are
experienced in international sales. The Company intends to continue the
expansion of its international marketing activities by adding dealers and
locating Koala employees in selected markets around the world to supervise
international sales activity. In addition, the Company plans to increase its
international sales through increased cross-selling of its products and the
marketing of the outdoor modular play equipment of Park Structures.
The Company supports its marketing and sales activities through attendance
at numerous national and international industry trade shows in various market
segments and at local focused trade shows. The Company also invests in focused
advertising in trade magazines to promote its products to potential customers.
The theme of this advertising identifies the advantages to potential customers
in being family-friendly to promote increased business through increased
customer loyalty.
The Company conducts an active public relations program aimed at providing
information about the concept of being family-friendly and illustrating the
benefits of the Company's family convenience and children's activity products
for existing and prospective customers. The Company assists industry
publications in creating editorial content or news stories about the emerging
trends around families' decisions where to shop, eat or visit. In addition,
Company sales managers host educational seminars for decision makers at key
industry trade shows.
Children's Modular Play Equipment. The Company markets and sells its custom
indoor modular play equipment through trade show attendance, trade journal
advertising and regular contact by Company salespeople with designers of
projects in various markets. Park Structures sells nationwide and
internationally through a network of approximately 40 independent dealers and
through an in-house sales person who covers six counties in South Florida.
Park Structures' marketing programs include attendance at national industry
and regional trade shows, a focused media advertising campaign, incentive
programs designed to stimulate growth and the publication of a catalogue
depicting the products and capabilities of Park Structures.
30
DESIGN AND MANUFACTURING
The Company has a "buy or build" philosophy that seeks to maintain low
production costs either through outsourcing or using Company personnel where
it is more cost-effective and does not compromise quality. As a result, a
substantial portion of its manufacturing and assembly functions currently are
outsourced, and certain design functions are handled by the Company. The
Company believes that outsourcing to qualified suppliers where appropriate
enables it to focus its resources on marketing and sales while maintaining
quality control through frequent contacts with its suppliers.
Family Convenience and Children's Activity Products. Koala develops the
concepts for its family convenience and children's activity products in
response to the needs of its customers. Following development of prototypes,
the Company outsources the design of the tooling for the production of these
products to independent designers. Product designs are incorporated into molds
and tooling owned by the Company. The Company provides these molds and tooling
to its suppliers in connection with the manufacture of the Company's products.
In the manufacturing process, components are molded to the Company's
specifications using various plastic molding processes, assembled and
delivered to the Company for shipment to customers. The Company uses a number
of manufacturers for its products. The Company believes that alternative
sources of supply are available for these products if necessary.
Children's Modular Play Equipment. The Company's design engineers custom
design its children's indoor modular play systems using computer aided design
technologies applied to modular components. The Company owns all of the
significant molds and tooling used in the manufacture of specialized
components used in the play equipment. Components for these systems are
manufactured to the Company's specifications and purchased from outside
vendors. The Company fabricates certain metal and fiberglass components at its
plant located near Vancouver, British Columbia, Canada. These components are
then assembled by the Company at the plant and shipped to customers.
Like the Company, Park Structures custom designs its children's outdoor play
systems by applying computer aided design technologies to modular components.
Park Structures subcontracts the plastic molding, fabrication and plastisol
coating of deck platforms and aluminum casting to outside subcontractors. Park
Structures owns all of the significant molds and tooling for these functions.
Park Structures fabricates the majority of the steel playground parts and
assembles its modular play equipment at its plant. The Company believes there
are alternative sources of supply for the manufacture of the modular play
equipment components.
COMPETITION
Family Convenience Products. The Company's family convenience products are
marketed to commercial customers and not to consumers. Presently, the
commercial products division of Rubbermaid Incorporated and a number of other
companies sell family convenience products to the commercial markets.
Management believes that such competition has not had a material impact on the
Company. The Company is not aware of any companies marketing diaper changing
stations intended for the commercial market that have a greater market share
than the Company. The Company believes that there is an under served market
for family convenience products. Koala believes that it is the only company
focused on marketing a wide variety of family convenience products to the
commercial market. The Company believes that its Koala Bear Kare products have
brand name recognition that provides the Company with a significant
competitive advantage. The Company competes principally on the basis of brand
name recognition, quality, customer service and price.
Children's Activity Products. Competition in the children's activity product
area is mainly from small businesses that make similar products and from
efforts by individual businesses to create their own activity areas. The
Company competes in this market through its ability to offer custom designed
products to its customers under its Koala Kare Systems program and on the
basis of product quality and service.
31
Children's Modular Play Equipment. Competition in children's indoor modular
play equipment is primarily from Little Tikes Commercial Play Systems, Inc.
("Little Tikes"), a unit of Rubbermaid Incorporated, Miracle Recreation
Equipment Company and a number of other companies. The Company competes in the
children's indoor modular play market on the basis of quality, safety, service
and its ability to provide a custom themed unit designed to meet the unique
needs of the customer. Competition in children's outdoor modular play
equipment is primarily from Game Time, Inc., a subsidiary of PlayCore, Inc.,
Miracle Recreation Equipment Company, Landscape Structures, Inc., Little Tikes
and several companies with limited financial and operational resources. The
Company believes that Park Structures competes on the basis of design,
quality, safety, price and customer service.
PRODUCT WARRANTIES AND INSURANCE
For its family convenience and children's activity products, the Company
provides a replacement guarantee for one year from purchase protecting against
damage from natural disasters or vandalism, subject to a $100 deductible. The
Company also provides a five year limited warranty on parts and labor covering
any defects in workmanship. For its children's modular play equipment, the
Company provides warranties ranging from a one year limited warranty on parts
and labor covering defects in workmanship to a lifetime warranty on certain
metallic parts. The Company has experienced minimal returns and warranty
claims. The Company carries product liability insurance in an amount that the
Company deems adequate. Product liability claims against the Company and Park
Structures to date have been immaterial. See "Risk Factors--Product Liability
Risks."
PATENTS AND TRADEMARKS
The Company has registered various trademarks, including the "Koala Bear
Kare" name and several variations of the Koala Bear Kare logo that is featured
on the Company's products. The Company believes that the various Koala Bear
Kare trademarks are widely recognized and important to the Company. Each of
the Company's products marketed under this trademark prominently displays a
blue and white sticker with one of the Company's trademarks. The Company has
also registered the trademark "Booster Buddy" and the registration of the
trademarks "Delta Play" and "Happy Faces in Public Places" currently are being
sought. Park Structures does not have registered trademarks but believes that
it has proprietary rights to its play equipment designs.
The Company holds design patents for certain of its products. These patents
prevent competitors from duplicating the design elements of the Company's
products, but the Company does not believe that such patents provide
significant barriers to entry.
REGULATION
Certain of the Company's products are subject to the provisions of, among
other laws, the Federal Consumer Product Safety Act and the Federal Hazardous
Substances Act (the "Acts"), which empower the Consumer Product Safety
Commission (the "CPSC") to require the repair, replacement or refund of the
purchase price of products that present a substantial risk of injury to the
public, and in the event the CPSC finds that no feasible consumer product
safety standard under the Acts would adequately protect the public, to order
such product banned. The CPSC may also issue civil and criminal penalties for
knowing violations of the Acts. Any such determination by the CPSC is subject
to court review. Similar laws exist in some states and cities in the United
States and in many jurisdictions throughout the world.
The Company's indoor modular play equipment and the outdoor modular play
equipment of Park Structures are designed and inspected to meet the safety
guidelines of the CPSC and the American Society for Testing and Materials
("ASTM") for commercial playground systems. The Company conducts in-house
testing and inspection to ensure that they comply with the CPSC and ASTM
guidelines. Park Structures is a member of the International Play Equipment
Manufacturers Association ("IPEMA"), a member driven international trade
organization that represents and promotes an open market for manufacturers of
playground equipment.
32
The Company's operations in the United States do not involve manufacturing
or other activities that would subject it to laws and regulations concerning
environmental issues. The Company's assembly plant in Vancouver, British
Columbia performs light fabrication activities utilizing paint, metal and
fiberglass. The Company has obtained the necessary permits to conduct these
activities, and the Company believes that they have been conducted in
compliance with Canadian environmental laws and regulations. Park Structures
engages in manufacturing and assembly operations at its leased facility in
Florida. The Company believes that the Park Structures operations are
conducted in compliance with federal and state environmental laws and
regulations.
EMPLOYEES
The Company had approximately 90 full-time employees at September 30, 1998,
with 30 located in the United States and 60 located in Canada. The Company's
United States employees are not covered by any collective bargaining
agreements. In August 1998, the Company's Canadian employees held an election
regarding potential representation by the International Wood and Allied
Workers of Canada ("IWA"). The election resulted in a sufficient vote to
certify the union. The Company has begun the collective bargaining process
with the IWA. Management believes that relations with its employees are good.
Park Structures had 90 employees at September 30, 1998. The Park Structures
employees are not covered by any collective bargaining agreements.
PROPERTIES
The Company leases approximately 900 square feet of office space in Denver,
Colorado for its corporate office and 15,000 square feet of office and
warehouse space in Denver, Colorado for sales, receiving and shipping
operations. These leases expire in 2001. In addition, the Company leases a
67,000 square foot plant near Vancouver, British Columbia, where it conducts
its indoor modular play equipment manufacturing and assembly operations. This
lease expires in 2003. Park Structures leases a 90,000 square foot facility in
Coral Springs, Florida for its manufacturing and assembly operations. This
lease expires in 2002, with two options to renew the lease for additional five
year terms. The Company believes that its current facilities and those of Park
Structures are adequate for its existing needs.
LEGAL PROCEEDINGS
The Company and Park Structures are and have been a party to litigation in
the ordinary course of their businesses. The Company does not believe that any
current litigation will have a material adverse effect upon its business,
financial condition or results of operations.
33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the names, ages and positions of the directors and
executive officers of the Company as of September 30, 1998.
DIRECTOR/OFFICER
NAME AGE COMPANY POSITION SINCE
---- --- ---------------- ----------------
Mark A. Betker.......... 47 Chairman, President, Chief 1995
Executive Officer and Director
Jeffrey L. Vigil........ 45 Treasurer and Vice President of 1996
Finance and Administration
James A. Zazenski....... 33 Executive Vice President and 1997
General Manager
Michael C. Franson...... 43 Director 1994
Thomas W. Gamel......... 58 Director 1993
John T. Pfannenstein.... 41 Director 1993
Ellen S. Robinson....... 35 Director 1997
Mark A. Betker has served as Chief Executive Officer, President and a
Director since joining the Company in November 1995, and as Chairman since
December 1996. From 1986 to 1995, Mr. Betker was executive vice president of
Windsor Industries Inc., a world-wide manufacturer of building maintenance
equipment. Mr. Betker received a M.B.A. degree from Regis University and a
B.A. degree from the University of Wisconsin.
Jeffrey L. Vigil has served as the Company's Treasurer and Vice President of
Finance and Administration since May 1996. From 1980 to 1989 and from 1993 to
1996, Mr. Vigil held various positions at Energy Fuels Corporation, a
privately owned Colorado natural resources company, including Accounting
Manager, Contract Administrator, Controller and Vice President of Finance.
From 1990 to 1993 Mr. Vigil was a self-employed financial consultant. From
1976 until 1979, Mr. Vigil served as an auditor with Arthur Anderson LLP. Mr.
Vigil is a certified public accountant and received a B.A. degree in
Accounting from the University of Wyoming.
James A. Zazenski has served as the Company's Executive Vice President and
General Manager since June 1997. From 1984 to 1997, Mr. Zazenski held various
positions at Windsor Industries, Inc., the last of which was Vice President of
Marketing. Mr. Zazenski received an M.B.A. degree and a B.A. degree from the
University of Colorado at Denver.
Michael C. Franson is a Director of the Company. He is currently an
Executive Vice President and principal of The Wallach Company, Inc., an
investment banking firm located in Denver, Colorado where he has worked since
1988. Mr. Franson received a M.B.A. degree from the Graduate School of
Business at the University of Oregon and an undergraduate degree from
California State University at Chico.
Thomas W. Gamel is a Director of the Company. Since 1992, Mr. Gamel has
served as Chairman of Rockmont Capital Partners, Ltd., formerly Rockmont Value
Investors, Ltd. ("Rockmont"), a privately-held investment company based in
Denver, Colorado. He has been an owner and director of Timpte Industries,
Inc., a diversified holding company since 1970, and is an owner and director
of several other private companies. Mr. Gamel received a B.A. degree from the
University of Notre Dame. Mr. Gamel has served as a director of United States
Exploration Inc., a publicly traded company, since 1997.
John T. Pfannenstein is a Director of the Company. From 1993 to 1995, he
served as the Company's Chairman of the Board, and from 1993 to May 1996 he
served as the Company's Treasurer. Mr. Pfannenstein co-founded Rockmont in
1992 and has served as its President since that time. Mr. Pfannenstein
received a B.A. degree from St. John's University (Minnesota).
34
Ellen S. Robinson is a Director of the Company. Ms. Robinson served as
President of Ascent Sports, Inc. from June 1996 until July 1998, where she
oversaw the business operations of the Colorado Avalanche professional hockey
team and the Denver Nuggets professional basketball team. From 1988 to 1996,
Ms. Robinson was the vice president of customer development, general manager
and area marketing manager for the Pepsi Cola Bottling Company in Denver. Ms.
Robinson also serves as a director of a number of private non-profit
businesses. Ms. Robinson received a B.A. degree from the Wharton School of
Business at the University of Pennsylvania and a certificate in international
business from the University of Colorado.
Each director holds office until the next annual meeting of shareholders and
until his or her successor is duly elected and qualified. There are no family
relationships among directors or executive officers except that John T.
Pfannenstein and Jeffrey L. Vigil are brothers-in-law.
BOARD COMMITTEES
The Board of Directors has an Audit Committee, which consists of Mr.
Franson, Mr. Pfannenstein and Ms. Robinson. The purpose of the Audit Committee
is to recommend the appointment of the independent auditors for the Company,
review the scope of the audit, examine the auditors' reports, make appropriate
recommendations to the Board of Directors as a result of such review and
examination, and make inquiries into the effectiveness of the financial and
accounting functions and controls of the Company. The Audit Committee held two
meetings during 1997. The Company has no nominating or compensation
committees.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the years ended December
31, 1995, 1996 and 1997 for the Chief Executive Officer of the Company and the
other executive officer who received compensation of $100,000 or more during
the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ------------
NUMBER OF
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#)
- ----------------- ---- ---------- --------- ------------ ------------
Mark A. Betker.......... 1997 159,230 27,659 -- --
Chief Executive Officer 1996 175,000 27,850 -- (2) --
1995 22,884(1) -- -- (2) 250,000
Jeffrey L. Vigil........ 1997 103,595 3,000 -- 10,000
Vice President 1996 53,846 -- -- --
Finance and
Administration 1995 -- -- -- --
- --------
(1) Does not include consulting fees paid to Mr. Betker prior to his
employment by the Company in the amount of $18,000.
(2) Does not include an estimated aggregate total of $20,000 for the years
1995 and 1996 relating to housing costs, temporary living expenses, nor
certain out-of-pocket travel expenses incurred by Mr. Betker related to
travel to and relocation in Denver.
35
OPTION GRANTS DURING 1997
NUMBER OF % OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ---- ---------- ------------- ---------------- ----------------
Mark A. Betker..... -0- n/a n/a n/a
Jeffrey L. Vigil... 10,000(1) 32.2% $13.00 January 29, 2007
- --------
(1) Options vest at a rate of 2,000 shares per year, on the anniversary date
of the grant, over the next five year period. The anniversary date of the
grant is January 29, 1997.
AGGREGATE OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
The following table summarizes the value of the unexercised options held by
the executive officers named in the summary compensation table as of December
31, 1997. There were no options exercised by any officers or directors of the
Company during 1997.
NUMBER OF SECURITIES
UNDERLYING THE VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT "IN-THE-MONEY"
DECEMBER 31, 1997 OPTIONS AT DECEMBER 31, 1997(1)
------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
- ---- ----------- ------------- --------------- -----------------
Mark A. Betker..... 100,000 150,000 600,000 900,000
Jeffrey L. Vigil... -0- 10,000 -0- 42,500
- --------
(1) "Value of Unexercised "In-the-Money' Options" is equal to the difference
between the closing bid price per share of the Company's Common Stock as
reported by Nasdaq on December 31, 1997, the last day of trading in 1997
($17.25 per share), and the option exercise price, multiplied by the
number of shares subject to such options.
COMPENSATION OF DIRECTORS
The Company does not pay employees or affiliates additional compensation for
services as a director. The Company pays each non-employee, unaffiliated
director an annual retainer of $5,000 and a fee of $1,000 per meeting
attended. The Board of Directors has also authorized payment of reasonable
travel and out-of-pocket expenses incurred by directors in attending board
meetings.
The Company's directors who are not employees of the Company are eligible to
be granted non-qualified stock options. The Company's directors who are also
employees of the Company are eligible to be granted incentive stock options.
During the year ended December 31, 1997, the Company granted 1,000 options to
Mr. Franson and 1,000 options to Ms. Robinson.
STOCK OPTION PLAN
The Company has approved the adoption of two stock option plans which allow
for the issuance of stock options to officers, employees and directors, and to
consultants who render bona fide services to the Company. In August 1993, the
Company adopted a Stock Option Plan (the "1993 Plan") which provides for the
issuance of options to purchase up to 100,000 shares of the Company's Common
Stock. In November 1995, the Company adopted another stock option plan. That
plan was amended and restated in May 1998 (the "Amended Plan"). The Amended
Plan provides for the issuance of options exercisable for up to 650,000 shares
of the Company's Common Stock. The purposes of both the 1993 Plan and the
Amended Plan are to advance the interest of the Company and its shareholders
by affording employees, directors and consultants ("Eligible Persons") upon
whose judgment, initiative and efforts the Company may rely for the successful
conduct of its business, an
36
opportunity for investment in the Company and the incentive advantages
inherent in stock ownership in the Company. The 1993 Plan and the Amended Plan
(collectively, the "Plans") authorize the Board of Directors of the Company to
grant options to purchase shares of Common Stock to Eligible Persons selected
by the Board while considering criteria such as employment position or other
relationship with the company, duties and responsibilities, ability,
productivity, length of service or association, morale, interest in the
Company, recommendations by supervisors and other matters. There are currently
approximately 95 individuals who may be deemed Eligible Persons to receive
options under the Plans.
The Plans are administered by the Board, which selects the optionees and
determines: (i) the number of shares of Common Stock to be subject to each
option; (ii) the type of each option to be granted (non-qualified or incentive
stock option); (iii) the time at which each option is to be granted; (iv) the
purchase price for the option shares; (v) the option period; and (vi) the
period over which the option vests.
The Amended Plan permits the Board to designate certain options granted
under the Amended Plan as incentive stock options (an "Incentive Stock
Option"). An option designated by the Board as an Incentive Stock Option is
intended to qualify as an "incentive stock option" within the meaning of
Section 422 of the Internal Revenue Code. The purchase price of the Incentive
Stock Option may generally not be less than 100% of the fair market value of
the stock at the time the option is granted (110% if the optionee owns more
than 10% of the total voting shares of the Company). In addition, the
aggregate fair market value, determined at the time of grant, of the shares
under any Incentive Stock Option which are exercisable for the first time by
any one individual in any calendar year may not exceed $100,000. An Incentive
Stock Option may only be granted to an Eligible Person who is an employee of
the Company.
With respect to options that are not Incentive Stock Options ("Non-Qualified
Stock Options"), the exercise price may be less than the fair market value of
the applicable shares on the date of grant. The period within which any option
must be exercised may not be later than ten years from the date on which the
option was granted. An employee generally must exercise an option within three
months after the termination of his employment with the Company. At the time
of exercise the optionee must pay to the Company the full purchase price of
the shares in cash, shares of the Company's Common Stock having a fair market
value equal to the purchase price, or a combination of cash and shares.
DIRECTOR LIABILITY
The Company's articles of incorporation provide that a director shall not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its shareholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under the Colorado statutory
provision making directors personally liable for unlawful dividends, unlawful
stock repurchases or redemptions, and loans and guarantees of loans to
directors by the Company; or (iv) for any transaction for which the director
derived an improper personal benefit. This provision of the Company's articles
of incorporation does not affect the availability of equitable remedies such
as injunctive relief to prevent or remedy a director's breach of the duty of
care.
INDEMNIFICATION
Sections 7-109-102 and 7-109-107 of the Colorado Business Corporation Act
provide that a corporation may indemnify its current and former officers,
directors, employees and agents against reasonable expenses (including
attorneys' fees), judgments, penalties, fines and amounts paid in settlement
which, in each case, were incurred in connection with actions, suits, or
proceedings in which such persons are parties by reason of the fact that they
are or were an officer, director, employee or agent of the corporation, if:
(i) they acted in good faith; (ii) in the case of conduct in an official
capacity with the corporation; the conduct was in the corporation's best
interests; (iii) in all other cases, the conduct was at least not opposed to
the corporation's best interests; and (iv) in the case of a criminal
proceeding, they had no reasonable cause to believe the conduct was unlawful.
The
37
corporation may not indemnify an officer, director, employee or agent of the
corporation: (i) in connection with a proceeding by the corporation or
enforcing rights of the corporation in which such person is adjudged liable to
the corporation or (ii) in connection with any proceeding charging improper
personal benefit, whether or not acting in an official capacity, in which such
person is adjudged liable on the basis that personal benefit was improperly
received. Unless limited by its articles of incorporation, a corporation shall
be required to indemnify an officer, director, employee, or agent who was
wholly successful in defense of a proceeding, against reasonable attorneys'
fees.
The articles of incorporation of the Company provide that the Company will
exercise, to the extent permitted by law, its power of indemnification, and
that the foregoing right of indemnification shall not be exclusive of other
rights to which a person shall be entitled as a matter of law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
38
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of October 31, 1998, the number of shares
of Common Stock beneficially owned by (i) each person known by the Company to
be the beneficial owner of more than 5% of the outstanding share of Common
Stock, (ii) each director of the Company, (iii) each executive officer, (iv)
all directors and executive officers of the Company as a group, and (v) the
Selling Shareholder.
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) SHARES OFFERING(1)
----------------- BEING ---------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ --------- ------- ------- ------- -------
Rockmont Capital Limited
Liability Company(2)................ 1,073,000 42.6% 880,000 193,000 6.8%
700 Broadway, Suite 800
Denver, Colorado 80203
John T. Pfannenstein(2).............. 188,040 7.5 -- 188,040 6.6
700 Broadway, Suite 800
Denver, Colorado 80203
Thomas W. Gamel(2)................... 783,300 31.0 783,300 -0- *
700 Broadway, Suite 800
Denver, Colorado 80203
Mark A. Betker(3).................... 156,000 5.8 -- 156,000 5.2
5031 So. Ulster St., Suite 300
Denver, Colorado 80237
Jeffrey L. Vigil(4).................. 2,000 * -- 2,000 *
5031 So. Ulster St., Suite 300
Denver, Colorado 80237
Michael C. Franson(5)................ 2,400 * -- 2,400 *
1401 17th Street, Suite 750
Denver, Colorado 80202
Ellen S. Robinson(5)................. 2,000 * -- 2,000 *
1635 Clay Street
Denver, Colorado 80204
James A. Zazenski(6)................. 2,000 * -- 2,000 *
11600 E. 53rd Ave., Suite D
Denver, Colorado 80239
All directors and executive officers
as a group (7 persons)(7).......... 1,237,400 46.1 357,400 11.9
- --------
* Less than one percent.
(1) Where the persons listed have the right to acquire additional shares of
Common Stock through the exercise of options or warrants within sixty days
of October 31, 1998, such additional shares are deemed to be outstanding
for the purpose of computing the percentage of outstanding shares owned by
such person, but are not deemed to be outstanding for the purpose of
computing the percentage ownership interest of any other person. Unless
otherwise indicated, each of the following persons has sole voting and
investment power with respect to the shares of Common Stock set forth
opposite their respective names.
39
(2) Rockmont Capital Limited Liability Company ("Rockmont Capital") is the
owner of 1,073,000 shares of the Company's Common Stock. John T.
Pfannenstein, who is a Director of the Company, owns a 17.5 percent
membership interest in and is the Manager of Rockmont Capital. Each of the
following persons is an owner of a portion of the membership interests of
Rockmont Capital as indicated and is thereby deemed the beneficial owner
of a portion of the shares held by Rockmont Capital as follows:
PERSON'S MEMBERSHIP NUMBER OF SHARES PERCENT OF
NAME INTEREST BENEFICIALLY OWNED OUTSTANDING SHARES
---- ------------------- ------------------ ------------------
David B. Gamel.......... 20.9% 223,800 8.85%
Leslie D. Gamel......... 20.9% 223,800 8.85%
Lara M. Gamel........... 20.9% 223,800 8.85%
Lisa Gamel Scott........ 10.4% 111,900 4.42%
Robert D. Scott......... 9.4% 101,660 4.02%
David, Leslie and Lara Gamel, and Lisa Gamel Scott (who is the wife of
Robert D. Scott), who are all brother and sisters, have agreed that their
father, Thomas W. Gamel, a Director of the Company, has the exclusive right
to vote their membership interests in Rockmont Capital until October 12,
1999, and each has agreed not to dispose of any membership interest in
Rockmont Capital without the consent of the Manager of Rockmont Capital,
currently John T. Pfannenstein, until October 12, 1999. Accordingly, Mr.
Gamel is deemed to be the beneficial owner of 783,300 shares of Common
Stock owned by Rockmont Capital.
Following the Offering, Rockmont will own a total of 193,000 shares of
Common Stock, of which Mr. Pfannenstein will own 188,040 shares and Mr.
Scott will own 4,960 shares.
(3) Includes options to acquire an aggregate of 150,000 shares of Common Stock
at exercise prices ranging from $9.25 to $13.25 per share.
(4) Consists of an option to acquire 2,000 shares of Common Stock at an
exercise price of $13.00 per share.
(5) Includes options to acquire an aggregate of 2,000 shares of Common Stock
at exercise prices ranging from $13.00 to $16.00 per share.
(6) Consists of an option to acquire 2,000 shares of Common Stock at an
exercise price of $15.00 per share.
(7) Includes options to acquire 158,000 shares of Common Stock.
40
DESCRIPTION OF SECURITIES
The articles of incorporation of the Company authorize the issuance of
10,000,000 shares of Common Stock, $.10 par value, and 1,000,000 shares of
Preferred Stock. The following description of the Company's Common Stock and
Preferred Stock is qualified in all respects by reference to the articles of
incorporation and bylaws of the Company, copies of which are exhibits to the
registration statement of which this Prospectus is a part. As of November 25,
1998, there were 2,527,362 shares of Common Stock outstanding, 101 holders of
record of Common Stock and approximately 2,200 beneficial holders of the
Common Stock.
COMMON STOCK
Holders of the Company's Common Stock are entitled to one vote for each
share held on each matter submitted to a vote of shareholders. Cumulative
voting for the election of directors is not permitted. Holders of Common Stock
have no preemptive rights. There are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock and such shares are
not subject to further calls or assessments by the Company. Holders of Common
Stock are entitled to participate pro rata in any dividends, if and when
declared, and in distributions upon any liquidation of the Company. The
Company does not intend to pay any cash dividends on its Common Stock in the
foreseeable future. See "Dividend Policy."
All of the outstanding shares of Common Stock are duly and validly
authorized and issued, fully paid and nonassessable. The additional shares of
Common Stock to be issued in connection with the Offering will be, upon
issuance against full payment of the purchase price therefor, duly and validly
authorized and issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further shareholder
approval, to issue up to 1,000,000 shares of Preferred Stock from time to time
in one or more series, to establish the number of shares to be included in
each such series, and to fix the designation, powers, preferences and rights
of the shares of each such series and the qualifications, limitations or
restrictions thereof. The issuance of Preferred Stock may have the effect of
delaying or preventing a change in control of the Company. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of the Common
Stock. In certain circumstances, such issuances could have the effect of
decreasing the market price of the Common Stock. As of the closing of the
Offering, no shares of Preferred Stock will be outstanding and the Company
currently has no plans to issue any shares of Preferred Stock.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer & Trust, Inc., Denver, Colorado.
41
UNDERWRITING
The Underwriters named below, for which Cleary Gull Reiland & McDevitt Inc.,
Tucker Anthony Incorporated and Craig-Hallum Capital Group, Inc. are acting as
the representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company and the Selling Shareholder the number of shares of Common Stock set
forth opposite their respective names below.
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Cleary Gull Reiland & McDevitt Inc................................. 840,000
Tucker Anthony Incorporated........................................ 240,000
Craig-Hallum Capital Group, Inc.................................... 120,000
---------
Total............................................................ 1,200,000
=========
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby (other than those
shares covered by the over-allotment option described below), if any are
purchased.
The Company and the Selling Shareholder have been advised that the
Underwriters propose to offer the Common Stock to the public at the offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $.63 per share and that the
Underwriter and such dealers may reallow a discount of not in excess of $.10
per share to other dealers. The offering price and the concession and discount
to dealers may be changed by the Representatives after the Offering.
In the Underwriting Agreement, the Company has granted the Underwriters an
option, expiring at the close of business on the 45th day subsequent to the
date of this Prospectus, to purchase up to an aggregate of 180,000 additional
shares of Common Stock at the offering price, less the underwriting discount
set forth on the cover page of this Prospectus. The Underwriters may exercise
such option solely to cover over-allotments, if any, in the sale of the
shares. To the extent the Underwriters exercise such option, the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage of the option shares as the number of shares
to be purchased by it showing in the table above bears to 1,200,000, and the
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters, for which the Company will receive all of the proceeds.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments that the Underwriters may be
required to make with respect thereof. The liability of the Selling
Shareholder under this indemnity is limited to the amount of its proceeds.
The Company and certain shareholders, who collectively will beneficially own
approximately 357,000 shares of Common Stock immediately following the
Offering, have agreed that they will not, directly or indirectly, offer, sell
or otherwise dispose of any shares of Common Stock, other than the shares
offered pursuant to this Prospectus, for a period of 180 days from the date of
this Prospectus without the prior written consent of Cleary Gull Reiland &
McDevitt Inc.
In connection with the Offering, the Underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock. Such
transactions may include stabilization transactions effected in accordance
with Regulation M, pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriters
also may create a short position for the account of the Underwriters by
selling more Common Stock in connection with the Offering than it is committed
to purchase from the Company and the Selling Shareholder,
42
and in such case may purchase Common Stock in the open market following
completion of the Offering to cover all or a portion of such short position.
The Underwriters may also cover all or a portion of such short position, up to
180,000 shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. The Underwriters and selling group members may
engage in passive market making transactions in the Common Stock on the Nasdaq
Stock Market in accordance with Rule 103 of Regulation M. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if it is undertaken, it may be discontinued at any time.
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary
authority.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholder by Otten, Johnson, Robinson, Neff &
Ragonetti, P.C., Denver, Colorado. Certain legal matters will be passed upon
for the Underwriters by Gibson, Dunn & Crutcher LLP.
EXPERTS
The balance sheet of the Company as of December 31, 1996, and the statements
of income, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1996 included in this Prospectus and in
the Registration Statement, have been included herein in reliance on the
report of Blanski Peter Kronlage & Zoch, P.C., independent public accountants,
given on the authority of that firm as experts in auditing and accounting.
The consolidated financial statements of Koala Corporation as of December
31, 1997 and for the year then ended appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, to the extent indicated in their report thereon appearing elsewhere
herein and in the Registration Statement. Such consolidated financial
statements have been included herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The balance sheets of Delta Play Ltd. as of March 31, 1996 and 1997, and the
statements of income and retained earnings and statements of changes in
financial position for the years ended March 31, 1996 and 1997 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young,
chartered accountants, to the extent indicated in their report thereon
appearing elsewhere herein and in the Registration Statement. Such financial
statements have been included herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The balance sheets of Park Structures as of December 31, 1996 and 1997, and
the statements of income, changes in shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1997 included in this
Prospectus and in the Registration Statement, have been included herein in
reliance on the report of Goldstein Lewin & Co., independent public
accountants, given on the authority of that firm as experts in accounting and
auditing.
43
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information may be inspected and
copied at the public reference facilities of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices
located at: Seven World Trade Center, New York, New York 10048, and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained at prescribed rates from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Those materials may also be obtained from The Nasdaq Stock Market, 1735
K Street, NW, Washington, D.C. 20006, or may be obtained electronically on the
Commission's home page on the Internet at http://www.sec.gov.
This Prospectus constitutes part of a Registration Statement filed by the
Company with the Commission under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus omits certain of the information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement and related exhibits and schedules for further
information with respect to the Company and the Common Stock offered hereby.
Any statements contained elsewhere in this Prospectus concerning the
provisions of any documents are not necessarily complete, and in each instance
reference is made to the copy of the document filed as an exhibit to the
Registration Statement.
44
KOALA CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
KOALA CORPORATION
Independent Auditors' Reports............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September
30, 1998 (unaudited)..................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1995,
1996, and 1997
and the Nine Month Periods Ended September 30, 1997 and 1998 (unau-
dited)................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1995, 1996 and 1997 and the Nine Month Period Ended
September 30, 1998 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997
and the Nine Month Periods Ended September 30, 1997 and 1998 (unau-
dited)................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
PARK STRUCTURES, INC.
Independent Auditor's Report.............................................. F-16
Combined Balance Sheets as of December 31, 1996 and 1997 and September 30,
1998 (unaudited) ........................................................ F-17
Combined Income Statements for the Years Ended December 31, 1996 and 1997
and the Nine Month Periods Ended September 30, 1997 and 1998 (unaudited)
......................................................................... F-18
Combined Statement of Stockholder's Equity for the Years Ended December
31, 1996 and 1997
and the Nine Month Period Ended September 30, 1998 (unaudited) .......... F-19
Combined Statements of Cash Flows for the Years Ended December 31, 1996
and 1997
and the Nine Month Periods Ended September 30, 1997 and 1998 (unaudited)
......................................................................... F-20
Notes to Combined Financial Statements.................................... F-22
DELTA PLAY, LTD.
Auditor's Report.......................................................... F-27
Balance Sheets as of March 31, 1996 and 1997.............................. F-28
Statements of Income and Retained Earnings for the Years Ended March 31,
1996 and 1997............................................................ F-29
Statements of Changes in Financial Position for the Years Ended March 31,
1996 and 1997............................................................ F-30
Notes to Financial Statements............................................. F-31
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Financial Statements Introduction........ F-39
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1998... F-40
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1997........................................................ F-41
Unaudited Pro Forma Consolidated Statement of Income for the Nine Months
Ended September 30, 1998................................................. F-42
Notes to Unaudited Pro Forma Consolidated Financial Statements............ F-43
F-1
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheet of KOALA CORPORATION (a
Colorado corporation) as of December 31, 1996, and the related statements of
income, changes in shareholders' equity, and cash flows for the years ended
December 31, 1995 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KOALA CORPORATION as of
December 31, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1995 and 1996, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota Blanski Peter Kronlage & Zoch, P.C.
February 12, 1997
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of KOALA
CORPORATION (a Colorado corporation) as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of KOALA
CORPORATION at December 31, 1997, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Denver, Colorado Ernst & Young LLP
February 10, 1998
F-2
KOALA CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------- SEPTEMBER 30,
1996 1997 1998
----------- ----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............. $ 3,442,601 $ 1,832,677 $ 1,187,522
Accounts receivable, trade (less al-
lowance for doubtful accounts of
$30,000 in 1996, $45,703 in 1997 and
$45,054 (unaudited) in 1998)......... 1,656,515 2,212,802 3,229,418
Refundable income taxes............... 338,200 74,523 --
Inventories........................... 443,680 1,103,355 1,708,608
Prepaid expenses...................... 82,460 416,120 693,622
Deferred offering and acquisition
cost................................. 251,000
Deferred income taxes................. 10,900 14,314 14,314
----------- ----------- -----------
Total current assets.................... 5,974,356 5,653,791 7,084,484
----------- ----------- -----------
Property and equipment.................. 863,285 1,561,324 1,972,848
Less accumulated depreciation and amor-
tization............................... 165,496 322,616 508,082
----------- ----------- -----------
697,789 1,238,708 1,464,766
----------- ----------- -----------
Other assets:
Intangibles (net of accumulated amor-
tization of $295,360 in 1996,
$496,221 in 1997 and $699,466 (unau-
dited) in 1998)...................... 3,679,057 8,064,301 8,534,896
----------- ----------- -----------
$10,351,202 $14,956,800 $17,084,146
=========== =========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 273,511 $ 1,312,518 $ 1,328,002
Accrued expenses and income taxes..... 56,921 396,163 389,136
----------- ----------- -----------
Total current liabilities............... 330,432 1,708,681 1,717,138
----------- ----------- -----------
Deferred income taxes................... 242,200 398,047 398,047
----------- ----------- -----------
Commitments and contingencies (Notes 3
and 4)
Shareholders' equity:
Preferred stock, no par value;
1,000,000 shares authorized; issued
and outstanding 0 in 1996 and 1997,
and 0 (unaudited) in 1998........... -- -- --
Common stock, $.10 par value;
10,000,000 shares authorized; issued
and outstanding 2,481,260 in 1996,
2,527,362 in 1997 and 1998 (unau-
dited)............................... 248,126 252,736 252,736
Additional paid-in capital............ 4,651,884 5,307,988 5,307,988
Other comprehensive income............ -- (25,124) (127,971)
Retained earnings..................... 4,878,560 7,314,472 9,536,208
----------- ----------- -----------
Total shareholders' equity.............. 9,778,570 12,850,072 14,968,961
----------- ----------- -----------
$10,351,202 $14,956,800 $17,084,146
=========== =========== ===========
See notes to consolidated financial statements.
F-3
KOALA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
Sales................... $6,537,440 $8,938,282 $13,621,292 $9,340,926 $13,492,507
Cost of sales........... 2,551,676 3,241,328 5,528,542 3,615,529 5,977,138
---------- ---------- ----------- ---------- -----------
Gross profit............ 3,985,764 5,696,954 8,092,750 5,725,397 7,515,369
Selling, general and
administrative
expenses............... 1,543,495 2,892,095 4,230,988 2,857,808 3,894,621
Amortization of intangi-
bles................... 86,375 105,677 200,861 134,251 196,137
---------- ---------- ----------- ---------- -----------
Income from operations.. 2,355,894 2,699,182 3,660,901 2,733,338 3,424,611
---------- ---------- ----------- ---------- -----------
Other (income) expense:
Interest income........ (109,249) (129,463) (115,708) (97,541) (19,940)
Relocation expenses.... 0 288,923 0 0 0
---------- ---------- ----------- ---------- -----------
(109,249) 159,460 (115,708) (97,541) 19,940
---------- ---------- ----------- ---------- -----------
Income before income
taxes.................. 2,465,143 2,539,722 3,776,609 2,830,879 3,444,551
Provision for income
taxes.................. 890,447 644,182 1,340,697 1,004,962 1,222,815
---------- ---------- ----------- ---------- -----------
Net income.............. $1,574,696 $1,895,540 $ 2,435,912 $1,825,917 $ 2,221,736
========== ========== =========== ========== ===========
Net income per share.... $ 0.66 $ 0.78 $ 0.97 $ 0.73 $ 0.88
========== ========== =========== ========== ===========
Weighted average shares
outstanding............ 2,399,312 2,431,016 2,503,654 2,496,223 2,527,362
========== ========== =========== ========== ===========
Net income per share--
diluted................ $ 0.65 $ 0.75 $ 0.96 $ 0.72 $ 0.86
========== ========== =========== ========== ===========
Weighted average shares
outstanding--diluted... 2,411,416 2,523,265 2,548,148 2,535,770 2,588,018
========== ========== =========== ========== ===========
See notes to consolidated financial statements.
F-4
KOALA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
--------- -------- ---------- ---------- ------------- -----------
Balance, December 31,
1994................... 2,399,312 $239,931 $4,639,179 $1,408,324 $ 0 $ 6,287,434
Net income.............. 1,574,696 1,574,696
Foreign currency trans-
lation adjustment...... 0 0
-----------
Comprehensive income.... 1,574,696
--------- -------- ---------- ---------- --------- -----------
Balance, December 31,
1995................... 2,399,312 239,931 4,639,179 2,983,020 0 7,862,130
Net income.............. 1,895,540 1,895,540
Foreign currency trans-
lation adjustment...... 0 0
-----------
Comprehensive income.... 1,895,540
Issuance of common
stock, exercise of op-
tions and warrants
(cashless)............. 81,948 8,195 (8,195) 0
Issuance of 2,200 war-
rants.................. 20,900 20,900
--------- -------- ---------- ---------- --------- -----------
Balance, December 31,
1996................... 2,481,260 248,126 4,651,884 4,878,560 0 9,778,570
Net income.............. 2,435,912 2,435,912
Foreign currency trans-
lation adjustment...... (25,124) (25,124)
-----------
Comprehensive income.... 2,410,788
Issuance of common stock
for acquisition of
Delta Play, Ltd........ 40,000 4,000 596,000 600,000
Issuance of common stock
for exercise of war-
rants.................. 6,102 610 60,104 60,714
--------- -------- ---------- ---------- --------- -----------
Balance, December 31,
1997................... 2,527,362 252,736 5,307,988 7,314,472 (25,124) 12,850,072
Net income (unaudited).. 2,221,736 2,221,736
Foreign currency trans-
lation adjustment (un-
audited)............... (102,847) (102,847)
-----------
Comprehensive income.... 2,118,889
--------- -------- ---------- ---------- --------- -----------
Balance, September 30,
1998 (unaudited)....... 2,527,362 $252,736 $5,307,988 $9,536,208 ($127,971) $14,968,961
========= ======== ========== ========== ========= ===========
See notes to consolidated financial statements.
F-5
KOALA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Cash flows from operat-
ing activities:
Net income.............. $1,574,696 $1,895,540 $2,435,912 $1,825,917 $2,221,736
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 55,162 83,148 163,133 92,287 186,926
Amortization........... 86,375 105,677 200,861 134,251 196,137
Loss on disposal of
property and equip-
ment.................. 332 31,796 0 0 0
Deferred income taxes.. 115,852 (18,852) 152,433 0 0
(Increase) decrease in
assets:
Accounts receivable,
trade................ 16,498 (683,191) (416,618) (604,481) (974,233)
Refundable income tax-
es................... (81,009) (172,815) 263,677 338,200 74,523
Inventories........... (168,641) (80,410) (106,791) 2,115 (643,853)
Prepaid expenses...... 25,528 (35,942) (313,293) (395,283) (292,528)
Deferred offering and
acquisition costs.... 0 (251,000)
Increase (decrease) in
liabilities:
Accounts payable...... (40,882) 177,492 818,509 706,829 58,524
Accrued expenses...... (8,207) 20,983 157,125 (102,742) 107,874
Accrued income taxes.. 0 0 180,764 213,937 (119,924)
---------- ---------- ---------- ---------- ----------
Net cash provided by op-
erating activities..... 1,575,704 1,323,426 3,535,712 2,211,030 564,182
---------- ---------- ---------- ---------- ----------
Cash flows from invest-
ing activities:
Payments for capital
expenditures.......... (126,183) (367,264) (520,321) (401,124) (430,479)
Purchase of Activities
Unlimited, LLC........ 0 (501,188) 0 0 0
Purchase of Delta Play,
Ltd., net of cash ac-
quired................ 0 0 (4,634,802) (4,594,455) (610,160)
Payments for patents
and intangibles....... (3,966) (6,503) (21,730) (20,461) (65,851)
---------- ---------- ---------- ---------- ----------
Net cash used by invest-
ing activities......... (130,149) (874,955) (5,176,853) (5,016,040) (1,106,490)
---------- ---------- ---------- ---------- ----------
Cash flows from financ-
ing activities:
Proceeds from exercise
of common stock war-
rants................. 0 0 39,633 0 0
---------- ---------- ---------- ---------- ----------
Net cash provided by fi-
nancing activities..... 0 0 39,633 0 0
---------- ---------- ---------- ---------- ----------
Effect of exchange rate
changes on cash........ 0 0 (8,416) 0 (102,847)
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash................ 1,445,555 448,471 (1,609,924) (2,805,010) (645,155)
Cash at beginning of pe-
riod................... 1,548,575 2,994,130 3,442,601 3,442,601 1,832,677
---------- ---------- ---------- ---------- ----------
Cash at end of period... $2,994,130 $3,442,601 $1,832,677 $ 637,591 $1,187,522
========== ========== ========== ========== ==========
See notes to consolidated financial statements.
F-6
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of operations:
Koala Corporation and its wholly owned subsidiaries (the "Company") is a
leading designer, producer and worldwide marketer of innovative commercial
products, systems and custom solutions that create attractive family-friendly
environments for businesses and other public venues. The Company produces
family convenience products, children's activity products and children's
indoor and outdoor modular play equipment.
Principles of consolidation:
The consolidated financial statements include the accounts of Koala
Corporation and all subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation. The operations of Delta
Play, Ltd. are included in the accompanying financial statements from June 1,
1997, the effective date of its acquisition. See note 10 below.
Relocation:
The Company completed the relocation of its executive offices from St. Paul,
Minnesota to Denver, Colorado during the third quarter of 1996. Total
relocation costs were approximately $289,000. The Company also established a
new manufacturing relationship with a Denver firm to manufacture and assemble
its products. Previously, the Company assembled its own products.
Use of estimates:
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenue and
expenses. Actual results could vary from the estimates that were used.
Unaudited information:
The accompanying consolidated balance sheets, consolidated statements of
income, consolidated statements of changes in shareholders' equity and
consolidated statements of cash flows as of and for the nine months ended
September 30, 1997 and 1998 are unaudited and have been prepared on the same
basis as the audited consolidated financial statements included herein. In the
opinion of management, such unaudited consolidated financial statements
include all adjustments necessary to present fairly the information set forth
therein, which consists solely of normal recurring adjustments. The results of
operations for the interim period presented are not necessarily indicative of
the results for a full year.
Reclassification:
Certain amounts in the financial statements for the years ended December 31,
1995 and 1996 have been reclassified to conform to the December 31, 1997
presentation.
Cash and cash equivalents:
Cash and cash equivalents include cash on hand, demand deposits, savings
accounts, and short-term investments with original maturities of three months
or less. Cash and cash equivalents include financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
places its cash
F-7
and temporary cash investments with high credit quality institutions. At
times, cash held in the Company's primary bank may be in excess of the FDIC
insurance limit. Cash in money market mutual funds is not federally insured.
The Company performs periodic evaluations of the relative credit standing of
these financial institutions.
As of December 31, 1996 and 1997, cash and cash equivalents approximated
fair value and consisted of the following:
DECEMBER 31,
---------------------
1996 1997
---------- ----------
Cash in primary banking institution................... $ 459,364 $ 863,084
Cash in money market mutual funds..................... 2,983,237 969,593
---------- ----------
$3,442,601 $1,832,677
========== ==========
Inventories:
Inventories are stated at the lower of first-in, first-out cost (including
manufacturing overhead applied to finished goods) or market. As of December
31, 1996, 1997 and September 30, 1998, inventories consisted of the following:
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
-------- ---------- -------------
(UNAUDITED)
Raw materials.............................. $ 62,879 $ 605,066 $1,024,828
Finished goods............................. 380,801 498,289 683,780
-------- ---------- ----------
$443,680 $1,103,355 $1,708,608
======== ========== ==========
Property and equipment:
Property and equipment is stated at the lower of depreciated cost or net
realizable value. Depreciation and amortization is being provided on the
straight-line method over the estimated useful lives of the assets. The
following is a schedule of estimated useful lives of property and equipment:
Furniture and fixtures............................................ 7 years
Tooling and molds................................................. 6-10 years
Shop and office equipment......................................... 3-10 years
Intangibles:
Acquisition intangibles represent the excess of the cost of the companies
acquired over the fair value of their net assets at the date of acquisition.
Acquisition intangible costs are being amortized on the straight-line method
using an estimated useful life of up to 40 years.
Costs of obtaining patents and trademarks are capitalized and amortized on
the straight-line basis over 17 years for patents and 20 years for trademarks
once approval is granted. Costs are expensed if approval is denied.
Revenue recognition:
The Company recognizes revenues at the time its products are shipped.
Research and development costs:
Research and development costs are expensed when incurred. The Company's
research and development costs were not significant in 1995, 1996 or 1997.
F-8
Advertising costs:
Advertising costs are expensed when incurred. Advertising expense for the
periods ended December 31, 1995, 1996, and 1997 was $492,871, $728,528, and
$405,178, respectively. Prepaid advertising costs at December 31, 1995, 1996,
and 1997 were $22,861, $29,508, and $35,724, respectively, and consist of
costs of advertising which have not taken place.
Income taxes:
The Company provides for deferred taxes on temporary differences arising
from assets and liabilities whose bases are different for financial reporting
and state, federal and foreign income tax purposes. The differences relate
primarily to depreciable and amortizable assets and the allowance for
uncollectible accounts.
The Company does not provide for U.S. income taxes on the unremitted
earnings of its foreign subsidiary ($290,337 at December 31, 1997) because the
Company intends to reinvest such unremitted earnings. Where it is contemplated
earnings may be remitted from the foreign subsidiary, the credit for foreign
taxes already paid generally offsets applicable federal income taxes.
Net income per share:
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods were
restated to conform to the Statement 128 requirements.
There is no difference between after-tax earnings for calculation of basic
earnings per share versus diluted earnings per share. The reconciliation of
the weighted average shares outstanding for purposes of calculating basic
earnings per share versus diluted earnings per share is as follows:
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
Weighted average shares out-
standing for basic earnings
per share.................. 2,399,312 2,431,016 2,503,654 2,496,223 2,527,362
Effect of dilutive securi-
ties:
Employee stock options.... 11,914 79,448 39,666 37,871 60,656
Warrants.................. 190 12,801 4,828 1,676 --
--------- --------- --------- --------- ---------
Dilutive potential common
shares..................... 12,104 92,249 44,494 39,547 60,656
--------- --------- --------- --------- ---------
Weighted average shares out-
standing for dilutive earn-
ings per share............. 2,411,416 2,523,265 2,548,148 2,535,770 2,588,018
========= ========= ========= ========= =========
Foreign Currency Translation:
The financial statements of the Company's subsidiary located outside the
United States are measured using the local currency as the functional
currency. Assets and liabilities of this subsidiary are translated at the
rates of exchange at the balance sheet date. The resultant translation
adjustments are included in other comprehensive income, a separate component
of shareholders' equity. Income and expense items are translated at average
rates of exchange. Gains and losses on foreign currency transactions of these
subsidiaries are included in net earnings.
F-9
Geographic Area Data:
The Company operates in one principal industry segment: the design,
manufacture and sale of children's protection and activity products. The
Company's products are sold primarily to commercial and governmental markets.
Geographically, sales, operating income and identifiable assets for non-
domestic entities for the year ended December 31, 1997 were $3,189,800,
$439,000 and $1,931,400, respectively. There were no material amounts of sales
or transfers among geographic areas during 1997.
2. CREDIT FACILITY:
The Company obtained a $2.0 million unsecured line of credit in June 1997.
The line of credit may be used for short-term working capital needs and future
acquisitions. There are no compensating balance requirements and the credit
facility requires compliance with financial loan covenants related to debt
levels compared to annualized cash flows from operations. The credit facility
terminates on June 24, 1999. There were no amounts outstanding under the
credit facility as of December 31, 1997.
3. COMMITMENTS AND CONTINGENCIES:
Operating lease:
The Company has entered into operating leases for facilities located in
Denver, Colorado, New Orleans, Louisiana and Delta, British Columbia, Canada.
The lease terms vary and run through July 31, 2001. All leases call for
monthly base rents, with the Company responsible for its share of common
building operating costs, payable on a monthly basis.
Facilities rent expense was $62,777, $85,146, and $187,719 for the years
ended December 31, 1995, 1996, and 1997, respectively. Total minimum operating
lease commitments for the years ending December 31 are:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
1998.......................................................... $122,841
1999.......................................................... 85,440
2000.......................................................... 85,440
2001.......................................................... 42,931
--------
$336,652
========
Warranties:
For its family convenience and children's activity products, the Company
provides a replacement guarantee for one year from purchase protecting against
damage from natural disasters or vandalism, subject to a $100 deductible. The
Company also provides a five year limited warranty on parts and labor covering
any defects in workmanship. For its children's modular play equipment, the
Company provides a one year limited warranty on parts and labor covering
defects in workmanship. The Company has experienced minimal returns and
warranty claims; therefore, as of December 31, 1995, 1996 and 1997, no accrual
has been made for future claims. The Company carries product liability
insurance in an amount that the Company deems adequate.
4. STOCK OPTIONS AND WARRANTS:
Options:
The Company adopted a Stock Option Plan (1993 Plan) in August 1993. The 1993
Plan provides that options to purchase up to 100,000 shares of common stock
may be granted. The Company adopted a second plan in November 1995 (1995 Plan)
which provides that additional options to purchase up to 400,000 shares of
common stock may be granted. The Company amended the 1995 Plan subsequent to
December 31, 1997. See footnote 12. The exercise price of each option is equal
to the market price of the Company's stock on the date of grant. The option
term varies, as well as the vesting periods, at the discretion of the Board of
Directors.
F-10
The Company applies APB Opinion 25 in accounting for its stock based
compensation plans. Accordingly, no compensation cost has been recognized for
the plan in 1995, 1996 and 1997. Had compensation cost been determined on the
basis of fair value pursuant to FASB Statement No. 123, net income and
earnings per share would have been presented as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
Net income:
As reported.................................. $1,574,696 $1,895,540 $2,435,912
========== ========== ==========
Pro forma (FASB 123)......................... $1,490,760 $1,713,373 $2,259,337
========== ========== ==========
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
Basic earnings per share:
As reported................................. $ 0.66 $ 0.78 $ 0.97
========== ========== ==========
Pro forma (FASB 123)........................ $ 0.62 $ 0.70 $ 0.90
========== ========== ==========
Diluted earnings per share:
As reported................................. $ 0.65 $ 0.75 $ 0.96
========== ========== ==========
Pro forma (FASB 123)........................ $ 0.62 $ 0.68 $ 0.89
========== ========== ==========
The fair value of each option granted is estimated on the grant date using
the Black-Scholes Model. The following assumptions were made in estimating
fair value:
ASSUMPTION 1995 1996 1997
- ---------- ------------ ------------ -------
Dividend yield................................ 0.00% 0.00% 0.00%
Risk-free interest rate:
5 year...................................... 5.38% 5.38% 5.71%
2 year...................................... 5.18% 5.18% --
Expected life................................. 2 to 5 years 2 to 5 years 5 years
Expected volatility........................... 30.47% 30.47% 38.70%
F-11
Following is a summary of the status of the plans:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding 12/31/94................................. 20,000 $ 5.50
Granted--1995...................................... 327,500 $10.46
-------
Outstanding 12/31/95................................. 347,500 $10.18
Surrendered--1996.................................. (46,783) $ 7.94
Exercised--1996.................................... (50,717) $ 7.93
-------
Outstanding 12/31/96................................. 250,000 $11.25
Granted--1997...................................... 33,000 $13.54
-------
Outstanding 12/31/97................................. 283,000 $11.52
Cancelled--1998 (unaudited)........................ (10,000)
Granted--1998 (unaudited).......................... 130,000 $18.62
-------
Outstanding 9/30/98 (unaudited)...................... 403,000 $14.09
-------
In 1995, 1997 and 1998, no options were exercised. In 1996, 46,783 options
were exercised in a cashless exercise; 50,717 shares were issued.
1995 1996 1997
------ ------ -------
Options exercisable..................................... 97,500 50,000 103,000
====== ====== =======
Weighted average fair value of options granted during
the year............................................... $10.46 $ 0.00 $ 5.76
====== ====== =======
A summary of the status of fixed options outstanding at December 31, 1997 is
as follows:
EXERCISABLE
OUTSTANDING OPTIONS OPTIONS
---------------------------- ---------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
PRICE NUMBER LIFE PRICE NUMBER PRICE
- ----- ------- ----------- -------- ------ --------
$9.25 to $11.25.................... 151,000 8.0 years $ 9.92 61,000 $ 9.92
$13.00 to $15.00................... 132,000 8.5 years $13.34 52,000 $13.24
The Company acquired Activities Unlimited LLC in March 1996. A portion of
the purchase price is in the form of options to purchase common stock of the
Company. Options were granted to the sellers of Activities Unlimited based on
operations during the first two years following the closing of the acquisition
(March 1997 and 1998). Options to purchase 1,000 shares will be granted for
each $25,000 of product line contribution, will be fully vested when granted
and will be exercisable at date of grant, expiring five years after date of
grant. The exercise price will be the fair market value of a share of stock on
the date of grant. As of December 31, 1997, 1,000 options had been granted
under this agreement.
Warrants:
The Company granted to the underwriter of its 1993 stock offering, for
nominal consideration, warrants to purchase up to 70,000 shares of its common
stock at $7.20 per share, beginning in October 1994 and expiring in October
1999. In January 1996, the underwriter exercised the warrants in a cashless
transaction, receiving 31,231 shares and surrendering 38,769 warrants.
F-12
The Company acquired the assets of A & B Booster, Inc. in 1994. A portion of
the purchase price is in the form of warrants to purchase common stock at an
exercise price of $6.50 per share. Warrants were issuable to the sellers of A
& B Booster based on 100 shares of common stock of the Company for each whole
multiple of $10,000 of Booster Buddy sales in each of the three years
beginning August 1, 1994, 1995 and 1996. The warrants were exercisable at any
time prior to January 1, 1998. As of December 31, 1997, all warrants had been
surrendered and 6,102 shares of common stock had been issued. As of December
31, 1995 and 1996, there were 1,700 and 3,900 warrants outstanding,
respectively.
5.INCOME TAXES:
The components of the provision for income tax were:
1995
----------------------------------------
FEDERAL FOREIGN STATE TOTAL
---------- -------- ------- ----------
Current tax expense................ $ 700,282 $ -- $74,313 $ 774,595
Deferred tax (benefit)............. 122,393 -- (6,541) 115,852
---------- -------- ------- ----------
Provision for income taxes......... $ 822,675 $ -- $67,772 $ 890,447
========== ======== ======= ==========
1996
----------------------------------------
FEDERAL FOREIGN STATE TOTAL
---------- -------- ------- ----------
Current tax expense................ $ 600,306 $ -- $62,728 $ 663,034
Deferred tax (benefit)............. (15,170) -- (3,682) (18,852)
---------- -------- ------- ----------
Provision for income taxes......... $ 585,136 $ -- $59,046 $ 644,182
========== ======== ======= ==========
1997
----------------------------------------
FEDERAL FOREIGN STATE TOTAL
---------- -------- ------- ----------
Current tax expense................ $ 963,764 $159,798 $64,702 $1,188,264
Deferred tax expense............... 152,406 -- 27 152,433
---------- -------- ------- ----------
Provision for income taxes......... $1,116,170 $159,798 $64,729 $1,340,697
========== ======== ======= ==========
The Company's net deferred tax asset and liability consists of:
1996
------------------------------
FEDERAL STATE TOTAL
--------- -------- ---------
Deferred income tax asset (current)........ $ 9,850 $ 1,050 $ 10,900
Deferred income tax liability (non-
current).................................. (218,850) (23,350) (242,200)
--------- -------- ---------
$(209,000) $(22,300) $(231,300)
========= ======== =========
1997
------------------------------
FEDERAL STATE TOTAL
--------- -------- ---------
Deferred income tax asset (current)........ $ 13,538 $ 776 $ 14,314
Deferred income tax liability (non-
current).................................. (376,459) (21,588) (398,047)
--------- -------- ---------
$(362,921) $(20,812) $(383,733)
========= ======== =========
F-13
The effective tax rate differs from the statutory rate as follows:
1995 1996 1997
---- ---- ----
Federal statutory rate................................... 34.0% 34.0% 34.0%
Foreign taxes in excess of federal statutory rate........ -- -- 4.6
Tax benefit of foreign tax credit........................ -- -- (4.4)
State income taxes net of federal effect................. 2.5 2.4 1.7
Effect of difference in tax basis of goodwill............ (1.5) (1.5) (1.1)
Cumulative effect of change in estimated effective state
income tax rate......................................... -- (3.3) --
Tax basis of non-qualified stock options exercised....... -- (5.6) --
Miscellaneous tax adjustments............................ 1.1 ( .6) .7
---- ---- ----
Effective tax rate....................................... 36.1% 25.4% 35.5%
==== ==== ====
6. MAJOR SUPPLIERS:
For the periods ended December 31, 1995, 1996, and 1997, the Company
purchased a significant amount of component parts from three vendors which
accounted for approximately 64%, 69%, and 47% of the Company's total cost of
sales, respectively.
7. SUPPLEMENTAL CASH FLOW INFORMATION:
1995 1996 1997
-------- -------- --------
Interest received................................. $109,249 $129,463 $104,839
======== ======== ========
Interest paid..................................... $ -- $ -- $ 989
======== ======== ========
Income taxes paid................................. $855,604 $835,849 $872,304
======== ======== ========
8. 401(K) PLAN:
Effective January 1997, the Company adopted a 401(k) Plan for the benefit of
substantially all of its U.S. employees meeting specified eligibility
requirements. The Plan permits contributions by the Company but does not
require them. The Company made no contributions to the Plan during 1997.
9. PREFERRED STOCK:
During 1996 the shareholders voted to amend the Articles of Incorporation to
provide for the issuance of 1,000,000 shares of no par value preferred stock.
At December 31, 1996 and December 31, 1997, none were outstanding. The Board
of Directors is granted authority to determine all rights with respect to the
preferred stock, including dividends.
10. ACQUISITIONS:
On June 23, 1997, the Company acquired substantially all of the assets of
Delta Play, Ltd. (Delta), a leading provider of custom children's indoor
modular play equipment based in Vancouver, British Columbia. The acquisition
was effective June 1, 1997 and was accounted for as a purchase. Results of
operations of Delta were included in the Company's consolidated statements of
income beginning on the effective date.
F-14
As initial consideration, the Company paid $4,180,609 cash and issued 40,000
shares of the Company's common stock valued at $600,000. In addition, costs
related to the acquisition of approximately $456,000 were incurred and
capitalized as goodwill. The purchase agreement also provides for additional
consideration in the form of cash payments if certain operating performance
criteria are met by Delta over the twelve-month period from June 1, 1997 to
May 31, 1998. The range of additional consideration is C$900,000 (US$648,000)
to C$1,500,000 (US$1,080,000). If minimum performance is not achieved, no
additional consideration will be payable. Any subsequent payment will be
allocated to cost in excess of the fair value of assets acquired.
The pro forma unaudited results of operations for the twelve months ended
December 31, 1996 and 1997, assuming consummation of the purchase as of
January 1, 1996 and 1997, are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
----------- -----------
Sales.................................................. $13,526,902 $15,499,336
Net income............................................. $ 2,167,408 $ 2,513,770
Net income per share (diluted)......................... $ 0.85 $ 0.98
In March 1996, the Company acquired all of the operating assets of
Activities Unlimited, LLC for $500,000 paid in cash. The Company markets
children's recreational and activity products, including commercial-use
children's play tables featuring interlocking construction blocks, games,
mazes, wall activities and other manipulative products. Due to immateriality,
its pro forma effects were not considered in the table above.
11. COMPREHENSIVE INCOME:
As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires foreign currency translation adjustments, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130.
12. SUBSEQUENT EVENTS (UNAUDITED):
On August 14, 1998, the Company signed an agreement to purchase the combined
assets of Park Structures, Inc. and Park Structures Sales, Inc. ("Park
Structures") in exchange for consideration of up to $18.7 million in cash and
common stock of Koala Corporation. Park Structures produces and markets
children's outdoor modular play systems for municipalities, parks, public and
private schools, day care centers and private developers. Closing of the Park
Structures acquisition will occur simultaneously with closing of a secondary
public offering of the Company's common stock. The Company plans to issue
approximately 320,000 shares of common stock pursuant to such offering, and
will utilize available cash and a revolving line of credit from a bank to
complete the financing of the purchase.
In August 1998, the Company paid $610,160 in additional consideration
pursuant to the earnout provisions of the Delta purchase agreement. The
additional consideration paid was treated as goodwill and recorded to
intangibles on the balance sheet.
In January 1998, the Company authorized the amendment and restatement of the
1995 Koala Corporation Stock Option Plan to grant an additional 250,000 shares
and allow the transfer of non-qualified stock options to family members
without Board of Directors approval or to non-employees with Board of
Directors approval. The amendment and restatement was approved by the
Company's shareholders' at its annual shareholders' meeting in May 1998.
F-15
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Park Structures, Inc. and Affiliate
Coral Springs, Florida
We have audited the accompanying combined balance sheets of Park Structures,
Inc. and Affiliate as of December 31, 1997 and 1996, and the related combined
statements of income, retained earnings and stockholder's equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Park Structures,
Inc. and Affiliate at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Boca Raton, Florida
July 28, 1998 Goldstein Lewin & Co.
F-16
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............ $ 537,609 $ 333,521 $ 327,129
Accounts receivable.................. 1,183,401 1,099,070 2,129,993
Other receivables.................... -- -- 14,942
Inventories.......................... 939,850 1,073,006 1,582,798
Prepaid expenses..................... -- 21,797 105,597
Current portion of note receivable... -- -- 15,000
Current portion of deferred rent
expense............................. -- 13,307 13,307
---------- ---------- ----------
Total current assets.................. 2,660,860 2,540,701 4,188,766
---------- ---------- ----------
Property and equipment, net........... 38,173 666,385 816,244
---------- ---------- ----------
Other assets:
Note receivable, net of current
portion............................. -- -- 30,000
Deferred rent expense, net of current
portion............................. -- 42,138 32,158
Deposits............................. 3,663 25,350 98,164
---------- ---------- ----------
3,663 67,488 160,322
---------- ---------- ----------
$2,702,696 $3,274,574 $5,165,332
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of capital lease
obligations......................... $ -- $ 4,091 $ 4,360
Accounts payable and accrued
expenses............................ 601,242 338,233 513,150
Customers' deposits.................. -- 39,428 118,401
Line of Credit....................... -- -- 178,900
Loan from related party.............. 807,603 466,956 430,956
---------- ---------- ----------
Total current liabilities............. 1,408,845 848,708 1,245,767
---------- ---------- ----------
Capital lease obligations, net of
current portion...................... -- 18,818 15,513
---------- ---------- ----------
Commitments and contingencies
Stockholder's equity:
Common stock......................... 1,000 1,000 1,000
Retained earnings.................... 1,292,851 2,406,048 3,903,052
---------- ---------- ----------
1,293,851 2,407,048 3,904,052
---------- ---------- ----------
$2,702,696 $3,274,574 $5,165,332
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-17
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED INCOME STATEMENTS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
Sales, net................ $7,145,279 $8,241,758 $5,717,299 $6,847,436
Cost of goods sold........ 4,909,576 5,559,611 3,856,888 4,083,517
---------- ---------- ---------- ----------
Gross profit.............. 2,235,703 2,682,147 1,860,411 2,763,919
Selling, general and
administrative expenses.. 1,330,301 1,332,366 991,422 1,119,499
---------- ---------- ---------- ----------
Income from operations.... 905,402 1,349,781 868,989 1,644,420
---------- ---------- ---------- ----------
Other income and
(expenses):
Interest income.......... 9,224 31,640 25,729 8,129
Interest expense......... (31,978) (41,763) (35,766) (13,508)
Fee to related entity.... (599,219) (226,461) (182,604) --
Gain on sale of assets... -- -- -- 62,000
---------- ---------- ---------- ----------
Total other income and
(expenses)............... (621,973) (236,584) (192,641) 56,621
---------- ---------- ---------- ----------
Net income................ $ 283,429 $1,113,197 $ 676,348 $1,701,041
========== ========== ========== ==========
Pro forma net income data
(unaudited):
Net income, as reported.. $ 283,429 $1,113,197 $ 676,348 $1,701,041
Pro forma tax provision
(Note 1)................. 103,000 419,000 254,000 640,000
---------- ---------- ---------- ----------
Pro forma net income...... $ 180,429 $ 694,197 $ 422,348 $1,061,041
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-18
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
COMMON STOCK (NOTE 8)
----------------------------
SHARES
---------------------
PARK
PARK STRUCTURES
STRUCTURES SALES, RETAINED
INC. INC. AMOUNT EARNINGS
---------- ---------- ------ ----------
Balance, January 1, 1996............. 500 500 $1,000 $1,130,850
Distributions........................ (121,428)
Net income........................... 283,429
--- --- ------ ----------
Balance, December 31, 1996........... 500 500 1,000 1,292,851
Net income........................... 1,113,197
--- --- ------ ----------
Balance, December 31, 1997........... 500 500 1,000 2,406,048
Distributions (unaudited)............ (204,037)
Net income (unaudited)............... 1,701,041
--- --- ------ ----------
Balance, September 30, 1998
(unaudited)......................... 500 500 $1,000 $3,903,052
=== === ====== ==========
The accompanying notes are an integral part of these financial statements.
F-19
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1997 1998
-------- ---------- -------- ----------
(UNAUDITED)
Cash flows from operating
activities:
Net income........................ $283,429 $1,113,197 $676,348 $1,701,041
Adjustments to reconcile net in-
come to net cash provided by
(used in) operating activities:
(Gain) on sale of assets........ (62,000)
Depreciation.................... 25,236 19,075 15,442 58,712
Changes in assets and
liabilities:
(Increase) decrease in:
Accounts receivable............ (664,153) 84,331 (93,115) (1,030,923)
Other receivables.............. (14,942)
Inventories.................... (179,876) (133,156) (90,124) (509,792)
Prepaid expenses............... (21,797) (26,518) (83,800)
Deferred rent expense.......... (55,445) 9,980
Deposits....................... (21,687) (21,687) (72,814)
Increase (decrease) in:
Accounts payable and accrued
liabilities.................. 467,996 (263,009) (311,496) 174,917
Customer deposits............. (25,619) 39,428 88,911 78,973
-------- ---------- -------- ----------
Net cash provided by (used in) op-
erating activities................ (92,987) 760,937 237,761 249,352
-------- ---------- -------- ----------
Cash flows from investing
activities:
Proceeds from sale of assets...... 12,000
Purchase of equipment and
furniture........................ (623,089) (174,796) (208,571)
-------- ---------- -------- ----------
Net cash used in investing activi-
ties.............................. (623,089) (174,796) (196,571)
-------- ---------- -------- ----------
The accompanying notes are an integral part of these financial statements.
F-20
PARK STRUCTURES, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1996 1997 1997 1998
------------ ----------- -------- --------
(UNAUDITED)
Cash flows provided by
financing activities:
Proceeds from line of credit.. $ $ 70,000 $ 70,000 $178,900
Payments on line of credit.... (70,000) (70,000)
Payments on capital lease
obligations.................. (1,289) (319) (3,036)
Payments received on note
receivable................... 5,000
Proceeds from related party
loans........................ 507,603 157,431
Repayment of related party
loans........................ (498,078) (316,647) (36,000)
Distributions to stockholder.. (121,428) (204,037)
------------ ----------- -------- --------
Net cash provided by (used in)
financing activities.......... 386,175 (341,936) (316,966) (59,173)
------------ ----------- -------- --------
Increase (decrease) in cash.... 293,188 (204,088) (254,001) (6,392)
Cash:
Beginning..................... 244,421 537,609 537,609 333,521
------------ ----------- -------- --------
Ending........................ $ 537,609 $ 333,521 $283,608 $327,129
============ =========== ======== ========
Supplementary disclosures:
Interest paid................. $ 31,978 $ 41,763 $ 35,766 $ 13,508
============ =========== ======== ========
Supplementary schedule of
noncash investing and financ-
ing activities:
Note received as payment for
sale of assets............... $ -- $ -- $ -- $ 50,000
============ =========== ======== ========
Capital lease obligations in-
curred for acquisition of
equipment..................... $ -- $ 24,198 $ 24,198 $ --
============ =========== ======== ========
The accompanying notes are an integral part of these financial statements.
F-21
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Park Structures, Inc. and its affiliate, Park Structures Sales, Inc.,
collectively known as the "Company", were incorporated in the State of Florida
on January 8, 1986 and February 2, 1995, respectively, to engage in the
manufacturing and sale of playground and park equipment, primarily in the
continental United States.
A summary of the Company's significant accounting policies follows:
Principles of Combination
The combined financial statement includes the accounts of the Company and
its affiliate. All significant intercompany transactions have been eliminated
in the combined financial statements. The companies have been combined because
of their common ownership.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories of finished goods and work in process are stated at the lower of
standard cost (which approximates average cost) or market. Raw material
inventories are stated at the lower of average cost or market.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over the assets' estimated useful lives. Amortization of capital leases
is included in depreciation expense.
Income Taxes
The Company, with the consent of its shareholder, has elected under the
Internal Revenue Code to be treated as an S corporation. In lieu of corporate
income taxes, the stockholder of an S corporation is taxed on his
proportionate share of the Company's taxable income. Therefore, no provision
or liability for Federal or State income taxes has been included in the
financial statement. Had such taxes been payable by the combined corporations,
a tax provision of approximately $103,000 and $419,000 for the years ended
December 31, 1996 and 1997, respectively, and $254,000 and $640,000 for the
nine months ended September 30, 1997 and 1998, respectively, would have
resulted on a combined corporation basis. The provision has been calculated
for Federal and State purposes utilizing a blended rate of 36.3% for December
31, 1996 and 37.6% for December 31, 1997 and September 30, 1997 and 1998.
F-22
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
Revenue Recognition:
The Company recognizes revenue upon shipment of the unit.
Advertising Costs:
Advertising costs are generally charged to operations in the year incurred
and amounted to $172,422 and $265,401 during 1996 and 1997, respectively, and
$210,336 and $179,965 during the nine months ended September 30, 1997 and
1998, respectively.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement. Actual results could differ from those estimates.
NOTE 2: INVENTORIES:
Inventories consists of the following:
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
Raw materials........................ $743,598 $ 848,949 $1,252,290
Work in process...................... 175,856 200,771 296,159
Finished goods....................... 20,396 23,286 34,349
-------- ---------- ----------
$939,850 $1,073,006 $1,582,798
======== ========== ==========
NOTE 3: PROPERTY AND EQUIPMENT:
Property and equipment consists of:
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, (LIFE IN
1996 1997 1998 YEARS)
------------ ------------ ------------- --------
Machinery & equipment..... $64,166 $104,674 $200,393 5
Vehicles.................. 69,372 69,372 69,372 5
Furniture & fixtures...... -- 2,655 29,194 7
Leasehold improvements.... -- -- 690,438 14
------- -------- --------
133,538 176,701 989,397
Less: accumulated
depreciation............. 95,365 114,440 173,153
------- -------- -------- ---
38,173 62,261 816,244
Construction in progress.. -- 604,124 --
------- -------- --------
$38,173 $666,385 $816,244
======= ======== ========
F-23
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
NOTE 4: LINE OF CREDIT:
In May, 1998, the Company entered into a $250,000 line of credit with a bank
which expires June 5, 1999. The line provides for interest, payable monthly,
at 9% through May, 1998 then interest is to be at prime plus .5%. The line is
guaranteed by the Company's president and collateralized by all the assets of
the Company.
NOTE 5: TRANSACTIONS WITH RELATED PARTIES:
Loans from a related party amounted to $807,603 at December 31, 1996 and
$466,956 at December 31, 1997. Of these amounts $300,000 was interest bearing,
at 10% per annum, through December 31, 1997. The balance of the loans are non-
interest bearing and payable on demand.
The Company paid $18,000 for rent expense and $30,000 for interest to a
related entity during each of the years ended December 31, 1997 and 1996.
Fees, based upon sales and income, to a related entity amounted to $226,461
and $599,219 for the years ended December 31, 1997 and 1996, respectively and
$182,604 and $-0- for the nine months ended September 30, 1997 and 1998,
respectively. The fee arrangement was terminated January 1, 1998.
NOTE 6: CAPITAL LEASE OBLIGATIONS:
The Company is the lessee of equipment under capital leases expiring in
various years through 2002. The assets and liabilities under capital leases
were recorded at the lower of the present value of the minimum lease payments
or the fair value of the asset.
Capital lease obligations at December 31, 1997 consist of:
Obligation under capital lease, $322 due monthly through August,
2002, with a bargain purchase option exercisable at that date for
$101............................................................. $14,949
Obligation under capital lease, $168 due monthly through August,
2002, with a bargain purchase option exercisable at that date for
$101............................................................. 7,960
-------
22,909
Less: Current portion............................................. (4,091)
-------
$18,818
=======
The future minimum lease payments under capital leases together with the
present value of net minimum lease payments are due as follows:
YEAR ENDING DECEMBER 31,
------------------------
1998................................................................ $ 5,880
1999................................................................ 5,880
2000................................................................ 5,880
2001................................................................ 5,880
2002................................................................ 3,920
-------
Total minimum lease payments........................................ 27,440
Less: amount representing interest.................................. (4,531)
-------
Present value of net minimum lease payments......................... $22,909
=======
F-24
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
NOTE 7: OPERATING LEASES:
The Company has entered into non-cancelable operating leases for building
and equipment.
The following is a schedule by year of future minimum lease payments under
the non-cancelable operating leases which have initial or remaining lease
terms in excess of one year at December 31, 1997.
YEAR ENDING DECEMBER 31,
------------------------
1998.............................................................. $227,375
1999.............................................................. 209,007
2000.............................................................. 206,289
2001.............................................................. 198,000
2002.............................................................. 33,000
--------
$873,671
========
As part of the lease agreement certain rental amounts were abated for the
first five month period of the lease. In addition, the Company did not take
control of the premises until mid-December, 1997. Consequently, $56,000 has
been capitalized as net deferred rent and is being amortized over the
remaining life of the lease (50.5 months).
NOTE 8: CAPITAL STRUCTURE:
At December 31, 1997 common stock consisted of 500 authorized, issued and
outstanding shares, $1.00 par value, for each of Park Structures, Inc. and its
affiliate.
NOTE 9: CONTINGENCIES:
Warranties:
The Company provides warranties ranging from one year on certain parts of
the structures to a lifetime warranty on certain metallic parts. The Company
has experienced minimal warranty claims which have not been passed on to the
original supplier of the materials or parts; therefore, as of December 31,
1997 and September 30, 1998, no accrual has been made for future claims.
NOTE 10: CONCENTRATION OF CREDIT RISK:
The Company places its excess cash investments in a financial institution in
amounts that at times exceeds the Federal insured limits.
The Company's credit sales are made to customers in the ordinary course of
business. The Company performs on going credit evaluations of its customers
and generally requires no collateral.
NOTE 11: INTERIM FINANCIAL INFORMATION:
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial position of the Company
and the results of its operations and cash flows for the nine months ended
September 30, 1997 and 1998 and changes in stockholders equity for the nine
months ended September 30, 1998. The results of operations and cash flows for
the nine months ended September 30, 1997 and 1998 are not necessarily
indicative of the results of operations and cash flows for the full year.
F-25
PARK STRUCTURES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENT
(Information with respect to the nine months ended September 30, 1997 and 1998
is unaudited)
NOTE 12: EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT:
In August 1998, the Company signed an agreement to sell the combined assets
of the Company in consideration for up to $18.7 million in cash and common
stock of Koala Corporation (Koala). Closing of the sale is planned to occur
simultaneously with the closing of a secondary public offering of Koala's
common stock.
F-26
AUDITOR'S REPORT
To the Shareholders of
Delta Play Ltd.
We have audited the balance sheets of Delta Play Ltd. as at March 31, 1997
and 1996 and the statements of income and retained earnings and changes in
financial position for the years then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at March 31, 1997 and 1996
and the results of its operations and the changes in its financial position
for each of the years in the two year period ended March 31, 1997 in
accordance with accounting principles generally accepted in Canada. As
required by the British Columbia Company Act, we report that, in our opinion,
these principles have been applied on a consistent basis.
Vancouver, Canada, / s / Ernst & Young
June 11, 1997 Chartered Accountants
(except as to note 9 which is
as of June 23, 1997).
F-27
DELTA PLAY LTD.
INCORPORATED UNDER THE LAWS OF BRITISH COLUMBIA
BALANCE SHEETS
AS AT MARCH 31,
---------------------
1997 1996
---------- ----------
(IN CANADIAN DOLLARS)
ASSETS
Current:
Cash..................................................... $ -- $ 403,379
Accounts receivable (notes 3 and 6)...................... 344,604 317,947
Prepaid expenses and deposits............................ 35,143 30,122
Inventory (note 4)....................................... 823,613 616,091
---------- ----------
Total current assets...................................... 1,203,360 1,367,539
---------- ----------
Fixed assets (note 5)..................................... 115,097 105,931
Due from related parties (note 6)......................... 462,129 83,666
---------- ----------
1,780,586 1,557,136
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Bank overdraft........................................... 8,266 --
Accounts payable and accrued liabilities (note 6)........ 450,314 138,330
Customer deposits........................................ 140,749 274,864
Bonuses payable (note 6)................................. 550,000 345,000
Income taxes payable..................................... 99,119 74,000
---------- ----------
Total current liabilities................................. 1,248,448 832,194
---------- ----------
Deferred income taxes..................................... 62,000 62,000
Due to related parties (note 6)........................... 188,703 306,237
---------- ----------
Total liabilities......................................... 1,499,151 1,200,431
---------- ----------
Contingencies (note 8)....................................
Shareholders' equity
Share capital (note 7).................................... 102 101
Retained earnings......................................... 281,333 356,604
---------- ----------
Total shareholders' equity................................ 281,435 356,705
---------- ----------
$1,780,586 $1,557,136
========== ==========
On behalf of the Board:
/s/ /s/
Director Director
See accompanying notes.
F-28
DELTA PLAY LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEAR ENDED MARCH 31,
----------------------
1997 1996
---------- ----------
(IN CANADIAN DOLLARS)
Sales.................................................. $6,257,104 $3,662,645
Cost of goods sold (schedule 1) (note 6)............... 3,828,135 2,260,355
---------- ----------
Gross profit........................................... 2,428,969 1,402,290
---------- ----------
Expenses:
Sales expenses (schedule 2) (note 6)................... 538,305 446,233
Administrative expenses (schedule 3) (note 6).......... 696,415 559,228
Management, employee bonuses and other fees (note 6)... 730,000 420,000
---------- ----------
1,964,720 1,425,461
---------- ----------
Income (loss) before income taxes...................... 464,249 (23,171)
---------- ----------
Income tax provision:
--current............................................. 138,019 74,000
--deferred............................................ -- (75,000)
---------- ----------
138,019 (1,000)
---------- ----------
Net income (loss) for the year......................... 326,230 (22,171)
Retained earnings, beginning of year................... 356,604 614,040
Dividends (note 7)..................................... (401,501) (95,292)
Redemption of shares (note 7).......................... -- (139,973)
---------- ----------
Retained earnings, end of year......................... $ 281,333 $ 356,604
========== ==========
See accompanying notes.
F-29
DELTA PLAY LTD.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
YEAR ENDED MARCH
31,
--------------------
1997 1996
--------- ---------
(IN CANADIAN
DOLLARS)
Operating activities:
Net income (loss) for the year.......................... $ 326,230 $ (22,171)
Add charges not requiring a current cash payment:
Depreciation and amortization.......................... 27,158 30,827
Deferred income taxes.................................. -- (75,000)
Net change in non-cash working capital balances related
to operations.......................................... 168,488 83,327
--------- ---------
Cash provided by operating activities................... 521,876 16,983
--------- ---------
Investing activities:
Purchase of fixed assets................................ (38,499) --
Proceeds from sale of assets (note 6)................... 2,475 --
--------- ---------
Cash used in investing activities....................... (36,024) --
--------- ---------
Financing activities:
Dividends............................................... (401,501) (95,292)
Redemption of shares (note 7)........................... -- (140,000)
Due from (to) related parties........................... (495,996) 43,800
--------- ---------
Cash used in financing activities....................... (897,497) (191,492)
--------- ---------
Decrease in cash during year............................ (411,645) (174,509)
Cash (bank overdraft), beginning of year................ 403,379 577,888
--------- ---------
Cash (bank overdraft), end of year...................... $ (8,266) $ 403,379
========= =========
See accompanying notes.
F-30
DELTA PLAY LTD.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
IN CANADIAN DOLLARS
1. BUSINESS OPERATIONS:
The Company is incorporated under the laws of the province of British
Columbia. The Company designs and manufactures modular soft playgrounds and
accessories.
2. ACCOUNTING POLICIES:
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada which conform in all material respects
to United States accounting principles as required by the United States
Securities and Exchange Commission. These financial statements have been
prepared in Canadian dollars unless otherwise stated.
The following is a summary of the significant accounting policies used in
the preparation of these financial statements.
Inventory:
Inventory is valued at the lower of cost, determined on a first in first out
basis, and net realizable value for work in progress and replacement cost for
materials.
Depreciation and amortization:
Fixed assets are recorded at cost and are depreciated over their estimated
useful lives on a declining balance basis at the following annual rates:
Automotive equipment..................................................... 30%
Computer equipment....................................................... 30%
Office furniture......................................................... 20%
Tools.................................................................... 20%
Plant equipment.......................................................... 20%
Management's estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management believes that the estimates utilized in
preparing its financial statements are reasonable and prudent. Actual results
could differ from those estimates.
Fair values of financial instruments:
The fair values of financial instruments approximate carrying values unless
otherwise indicated.
Foreign exchange:
The Company follows the temporal method of accounting for the translation of
foreign currency amounts into Canadian dollars. Under this method, all
monetary assets and liabilities expressed in foreign currencies are translated
at rates of exchange in effect at the year end, and non-monetary assets and
liabilities are translated at historical rates of exchange. Revenue and
expense items expressed in foreign currencies are translated at the rate of
exchange prevailing on the date of the transaction.
Gains and losses arising on foreign currency translation are included in
income.
F-31
Revenue recognition:
Revenues from product sales are recorded upon shipment.
3. ACCOUNTS RECEIVABLE:
1997 1996
-------- --------
Trade......................................................... $288,804 $276,448
Other......................................................... 55,800 41,499
-------- --------
$344,604 $317,947
======== ========
While the Company sells its products to many customers, four customers
[1996--three customers] represent approximately 71% [1996--52%] of the year
end balance of trade accounts receivable.
4. INVENTORY:
1997 1996
-------- --------
Materials.................................................. $628,812 $578,091
Work in progress........................................... 194,801 38,000
-------- --------
$823,613 $616,091
======== ========
5. FIXED ASSETS:
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
1997
Automotive equipment.......................... $ 41,097 $ 30,570 $ 10,527
Computer equipment............................ 13,607 8,246 5,361
Office furniture.............................. 23,549 11,994 11,555
Tools......................................... 4,867 4,346 521
Plant equipment............................... 153,815 66,682 87,133
-------- -------- --------
$236,935 $121,838 $115,097
======== ======== ========
1996
Automotive equipment.......................... $ 41,097 $ 26,058 $ 15,039
Computer equipment............................ 15,207 5,606 9,601
Office furniture.............................. 24,124 9,033 15,091
Tools......................................... 4,867 4,215 652
Plant equipment............................... 115,316 49,768 65,548
-------- -------- --------
$200,611 $ 94,680 $105,931
======== ======== ========
F-32
6.RELATED PARTY TRANSACTIONS:
[a] Amounts due from related parties and due to related parties are without
interest or stated terms of repayment and comprise the following:
1997 1996
-------- --------
Due from related parties:
401566 B.C. Ltd.--controlling shareholder................ $462,129 $ --
Wash-a-Ball Solutions.................................... -- 83,666
-------- --------
$462,129 $ 83,666
======== ========
Due to related parties:
Safeplay Designs Inc..................................... $188,488 $255,163
Director................................................. 215 51,074
-------- --------
$188,703 $306,237
======== ========
The amounts due from 401566 B.C. Ltd. include an amount of U.S. $317,195.
Safeplay Designs Inc. is a company whose shareholder is related to a
director of the Company.
As the amounts are not expected to be repaid within the next twelve months,
they have been classified as non-current assets and liabilities, respectively.
As collateral for any amounts borrowed from 401566 B.C. Ltd. in the future,
the Company has provided a Security Agreement providing a charge against all
assets of the Company.
[b] On May 1, 1996, the Company sold its design business and certain fixed
assets to Safeplay Designs Inc. for $2,476, using the provisions of Section 85
of the Income Tax Act (Canada). As consideration, the Company received a non-
interest bearing demand promissory note in the amount of $2,475 and one Class
E, non-voting preferred share of Safeplay Designs Inc. No gain or loss
resulted on the sale transaction.
During the year, the Company was charged $528,215 [1996--$60,000] by
Safeplay Designs Inc. for design services rendered and is included in cost of
goods sold--labour. At March 31, 1997, $140,400 remains outstanding and is
included in accounts payable and accrued liabilities. In addition, the Company
was charged $23,750 [1996--$Nil] by Safeplay Designs Inc. for accounting
services. The Company charged Safeplay Designs Inc. $23,837 [1996--$Nil] for
various administrative services and $13,750 [1996--$Nil] for rental of office
space, of which $19,713 remains outstanding and is included in accounts
receivable.
[c] Included in accounts payable and accrued liabilities at March 31, 1997
is an amount of $13,008 [March 31, 1996--$11,303] due to a director for
reimbursement of various costs.
[d] During the year the Company provided bonuses aggregating $730,000
[1996--$420,000] to officers and employees of which $550,000 [1996--
$345,000] remains outstanding as at March 31, 1997.
F-33
7. SHARE CAPITAL:
1997 1996
---- ----
Authorized:
100,000 Class A, voting non-participating common shares without par
value.............................................................. $ $
90,000 Class B, non-voting participating common shares without par
value..............................................................
90,000 Class C, non-voting participating common shares without par
value..............................................................
90,000 Class D, non-voting participating common shares without par
value..............................................................
90,000 Class E, non-voting participating common shares without par
value..............................................................
90,000 Class F, non-voting participating common shares without par
value..............................................................
90,000 Class G, non-voting participating common shares without par
value..............................................................
90,000 Class H, non-voting participating common shares without par
value..............................................................
90,000 Class I, non-voting participating common shares without par
value..............................................................
90,000 Class J, non-voting participating common shares without par
value..............................................................
90,000 Class K, non-voting participating common shares without par
value..............................................................
100,000 Class L, non-voting participating common shares with a par
value of $0.01 each................................................
Issued and outstanding:
55 [1996--55] Class A shares........................................ 55 55
16 [1996--16] Class B shares........................................ 16 16
24 [1996--24] Class D shares........................................ 24 24
3 [1996--3] Class F shares......................................... 3 3
3 [1996--3] Class G shares......................................... 3 3
16 [1996--Nil] Class L shares....................................... 1 --
--- ---
102 101
=== ===
During the year ended March 31, 1996, the Company redeemed 11 Class A common
shares and 16 Class E common shares for $140,000. The excess of the redemption
amount over the par value of the shares, aggregating $139,973, was charged to
retained earnings.
On November 22, 1996, the Company amended its authorized share capital to
include 100,000 Class L, non-voting participating common shares with a par
value of $0.01 each.
On November 28, 1996, the Company declared and paid a stock dividend on the
Class D, non-voting participating common shares in the amount of $0.01 per
share. The stock dividend was paid by allotting and issuing as fully paid, 16
Class L, non-voting participating common shares with a par value of $0.01
each.
The Class A common shares are not entitled to dividends. Dividends may be
paid on a class of participating shares to the exclusion of any or all of the
other participating shares. In the event of liquidation, dissolution or
winding up of the Company, the distribution of assets will be made first to
the holders of the Class A shares to the extent of their paid-in amount,
secondly to holders of the Class D common shares, thirdly to the holders of
the Class L common shares and thereafter, pari passu to the holders of the
remaining classes of participating shares. The amounts to be paid will include
any declared but unpaid dividends.
8. CONTINGENCIES:
The Company is involved in a legal action against a third party for
collection of an account receivable arising in the normal course of business.
The third party has initiated a counter claim for an unspecified amount
alleging misrepresentation with respect to the contract price.
F-34
The Company has commenced foreclosure proceedings against a third party for
collection of an accounts receivable arising in the normal course of business.
The third party has commenced a legal action against the Company for
approximately $140,000 alleging misrepresentation with respect to the contract
price.
The outcome of these claims is not determinable at this time and the amount
of liability, if any, cannot be reasonably estimated. Accordingly, no
provision has been recorded in these financial statements.
9.SUBSEQUENT EVENTS:
On June 23, 1997, the Company sold its assets and business undertakings to
Koala Corporation, a publicly traded company based in Denver, Colorado. The
purchase price was approximately cash of U.S. $4.1 million and shares of Koala
Corporation with a value of approximately U.S. $0.6 million.
F-35
SCHEDULE 1
DELTA PLAY LTD.
SCHEDULE OF COST OF GOODS SOLD
YEAR ENDED MARCH 31,
---------------------
1997 1996
---------- ----------
(IN CANADIAN DOLLARS)
Freight and duty......................................... $ 209,805 $ 91,747
Labour (Note 6).......................................... 1,524,870 834,976
Materials................................................ 1,659,988 988,502
Overhead (Note 6)........................................ 433,472 345,130
---------- ----------
Total cost of goods sold................................. $3,828,135 $2,260,355
========== ==========
See accompanying notes.
F-36
SCHEDULE 2
DELTA PLAY LTD.
SCHEDULE OF SALES EXPENSES
YEAR ENDED MARCH
31,
-----------------
1997 1996
-------- --------
(IN CANADIAN
DOLLARS)
Advertising................................................... $117,949 $100,513
Bad debt expense.............................................. 30,332 109,819
Commission.................................................... 84,194 10,900
Promotion..................................................... 42,113 77,581
Salaries...................................................... 94,448 98,208
Telephone..................................................... 35,754 23,838
Travel........................................................ 133,515 25,374
-------- --------
Total sales expenses.......................................... $538,305 $446,233
======== ========
See accompanying notes.
F-37
SCHEDULE 3
DELTA PLAY LTD.
SCHEDULE OF ADMINISTRATIVE EXPENSES
YEAR ENDED MARCH 31,
----------------------
1997 1996
---------- ----------
(IN CANADIAN DOLLARS)
Bank charges............................................ $ 2,964 $ 1,507
Cost recovery (Note 6).................................. (23,837) --
Courier................................................. 24,245 7,738
Depreciation and amortization........................... 27,158 30,827
Insurance............................................... 106,725 66,278
Interest income......................................... (17,885) (36,731)
Management salaries..................................... -- 64,988
Miscellaneous........................................... 1,270 2,617
Office.................................................. 90,221 65,636
Postage................................................. 5,906 4,249
Professional fees (Note 6).............................. 56,311 48,518
Travel.................................................. 52,005 14,844
Wages and benefits...................................... 313,398 255,278
Workers' compensation................................... 57,934 33,479
---------- ----------
Total administrative expenses........................... $ 696,415 $ 559,228
========== ==========
See accompanying notes.
F-38
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--INTRODUCTION
The accompanying unaudited pro forma consolidated financial statements
reflect the consolidated results of operations of Koala Corporation for the
year ended December 31, 1997, and the nine months ended September 30, 1998
after giving pro forma effect to the purchase of Park Structures and Delta
Play, Ltd. ("Delta Play"). The unaudited pro forma consolidated financial
statements should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Company and
Park Structures and the respective historical financial statements of the
Company (F-2), Park Structures (F-16) and Delta Play, Ltd. (F-27). The
unaudited pro forma information does not purport to be indicative of actual
results that would have been achieved had the acquisitions actually been
completed as of the dates indicated on the following pages nor which may be
achieved in the future.
F-39
KOALA CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(ALL AMOUNTS IN US DOLLARS)
SEPTEMBER 30, 1998
---------------------------------------------------------
KOALA PARK PRO FORMA
CORPORATION STRUCTURES ADJUSTMENTS PRO FORMA
------------ ----------- ------------ -----------
(A) (B)
ASSETS
Current assets:
Cash................... $ 1,187,522 $ 327,129 $(1,514,651)(c) $ 0
Accounts receivable,
net of allowance for
doubtful accounts..... 3,229,418 2,144,935 (14,942)(d) 5,359,411
Inventory.............. 1,708,608 1,582,798 0 3,291,406
Prepaid expenses....... 693,622 133,904 (28,307)(d) 799,219
Deferred offering and
acquisition costs..... 251,000 0 (251,000)(c) 0
Deferred income taxes.. 14,314 0 0 14,314
----------- ---------- ----------- -----------
Total current assets.... 7,084,484 4,188,766 (1,808,900) 9,464,350
----------- ---------- ----------- -----------
Property and equipment,
net of accumulated
depreciation........... 1,464,766 816,244 0 2,281,010
----------- ---------- ----------- -----------
Other assets:
Other assets
intangibles and
patents, net of
accumulated
amortization.......... 8,534,896 0 9,957,975 (e) 18,492,871
Deposits and other..... 0 160,322 (62,158)(d) 98,164
----------- ---------- ----------- -----------
Total other assets...... 8,534,896 160,322 9,895,817 18,591,035
----------- ---------- ----------- -----------
$17,084,146 $5,165,332 $ 8,086,917 $30,336,395
=========== ========== =========== ===========
LIABILITIES & SHAREHOLD-
ERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses...... $ 1,328,002 $1,066,867 $(1,066,867)(d) $ 1,328,002
Line of credit......... -- 178,900 (178,900) --
Accrued income taxes... 389,136 0 0 (d) 389,136
----------- ---------- ----------- -----------
Total current liabili-
ties................... 1,717,138 1,245,767 (1,245,767) 1,717,138
----------- ---------- ----------- -----------
Long-term liabilities:
Notes payable.......... 8,691,449 (s) 8,691,449
Other.................. 15,513 (15,513)(d) 0
----------- ---------- ----------- -----------
Total long-term liabili-
ties................... 0 15,513 8,675,936 8,691,449
----------- ---------- ----------- -----------
Deferred income taxes... 398,047 0 0 398,047
----------- ---------- ----------- -----------
Total liabilities....... 2,115,185 1,261,280 7,430,169 10,806,634
----------- ---------- ----------- -----------
Shareholders' equity:
Preferred stock........ 0 0 0 0
Common stock........... 252,736 1,000 31,000 (c)(f) 284,736
Additional paid in cap-
ital.................. 5,307,988 0 4,528,800 (c) 9,836,788
Translation of foreign
currency.............. (127,971) 0 0 (127,971)
Retained earnings...... 9,536,208 3,903,052 (3,903,052)(f) 9,536,208
----------- ---------- ----------- -----------
Total shareholders' eq-
uity................... 14,968,961 3,904,052 656,748 19,529,761
----------- ---------- ----------- -----------
$17,084,146 $5,165,332 $ 8,086,917 $30,336,395
=========== ========== =========== ===========
See notes to unaudited pro forma consolidated financial statements
F-40
KOALA CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(ALL AMOUNTS IN US DOLLARS)
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
KOALA DELTA PLAY, PARK PRO FORMA
CORPORATION LTD. STRUCTURES ADJUSTMENTS PRO FORMA
----------- ----------- ---------- ----------- -----------
(g) (h) (i)
Net sales............... $13,621,292 $1,878,044 $8,241,758 $ 0 $23,741,094
Cost of sales........... 5,528,542 1,148,999 5,559,611 (125,000)(j) 12,112,152
----------- ---------- ---------- --------- -----------
Gross profit............ 8,092,750 729,045 2,682,147 125,000 11,628,942
----------- ---------- ---------- --------- -----------
Selling, general and
administrative
expenses............... 4,230,988 370,596 1,332,366 0 5,933,950
Management, employee bo-
nuses and other fees... 0 219,106 0 0 (r) 219,106
Amortization of
intangibles and
patents............... 200,861 0 0 402,912 (k) 603,773
----------- ---------- ---------- --------- -----------
Income from operations.. 3,660,901 139,343 1,349,781 (277,912) 4,872,113
----------- ---------- ---------- --------- -----------
Other (income)
expenses............... (115,708) 0 10,123 (41,763)(l) (147,348)
Interest expense on
acquisition debt....... 0 0 0 615,705 (t) 615,705
Fees paid to related
entities............... 0 0 226,461 0 (r) 226,461
----------- ---------- ---------- --------- -----------
Income before provision
for income taxes....... 3,776,609 139,343 1,113,197 (851,854) 4,177,295
Provision for income
taxes.................. 1,340,697 49,467 419,000 (326,223)(m) 1,482,941
----------- ---------- ---------- --------- -----------
Net income.............. $ 2,435,912 $ 89,876 $ 694,197 $(525,631)(r) $ 2,694,354
=========== ========== ========== ========= ===========
Net income per share.... $ 0.97 (r) $ 0.95
=========== ===========
Weighted average shares
outstanding............ 2,503,654 (n) 2,823,654
=========== ===========
Net income per share--
diluted................ $ 0.96 (r) $ 0.94
=========== ===========
Weighted average shares
outstanding--diluted... 2,548,148 (n) 2,868,148
=========== ===========
See notes to unaudited pro forma consolidated financial statements
F-41
KOALA CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(ALL AMOUNTS IN US DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------
KOALA PARK PRO FORMA
CORPORATION STRUCTURES ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
(o) (p)
Net sales................ $13,492,507 $6,847,436 $ 0 $20,339,943
Cost of sales............ 5,977,138 4,083,517 0 10,060,655
----------- ---------- --------- -----------
Gross profit............. 7,515,369 2,763,919 0 10,279,288
----------- ---------- --------- -----------
Selling, general and
administrative
expenses................ 3,894,621 1,119,499 0 5,014,120
Amortization of
intangibles and
patents................. 196,137 0 248,949 (k) 445,086
----------- ---------- --------- -----------
Income from operations... 3,424,611 1,644,420 (248,949) 4,820,082
Interest expense on
acquisition debt........ 0 0 531,265 (u) 531,265
Other (income) expenses.. (19,940) (56,621) 48,492 (q) (28,069)
----------- ---------- --------- -----------
Income before provision
for income taxes........ 3,444,551 1,701,041 (828,706) 4,316,886
Provision for income
taxes................... 1,222,815 640,000 (330,321)(m) 1,532,494
----------- ---------- --------- -----------
Net income............... $ 2,221,736 $1,061,041 $(498,385) $ 2,784,392
=========== ========== ========= ===========
Net income per share..... $ 0.88 $ 0.98
=========== ===========
Weighted average shares
outstanding............. 2,527,362 (n) 2,847,362
=========== ===========
Net income per share--
diluted................. $ 0.86 $ 0.96
=========== ===========
Weighted average shares
outstanding--diluted.... 2,588,018 (n) 2,908,018
=========== ===========
See notes to unaudited pro forma consolidated financial statements
F-42
KOALA CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated balance sheet reflects the financial
position of Koala Corporation as of September 30, 1998, as if the acquisition
of Park Structures occurred on that date. The unaudited pro forma consolidated
statement of income for the year ended December 31, 1997 gives effect to the
consolidated results of operations for the year ended December 31, 1997, as if
the acquisitions of Park Structures and Delta Play occurred on January 1,
1997. The unaudited pro forma consolidated statement of income for the nine
months ended September 30, 1998 gives effect to the consolidated results of
operations for the nine months ended September 30, 1998, as if the acquisition
of Park Structures occurred on January 1, 1998. These results are not
necessarily indicative of the consolidated results of operations of the
Company as they may be in the future, or as they might have been had these
events been effective at January 1, 1997 and 1998, respectively. The unaudited
pro forma consolidated financial statements should be read in conjunction with
the historical financial statements of the Company and Park Structures and the
related notes thereto.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
ARE AS FOLLOWS:
(a) Represents the unaudited consolidated balance sheet of Koala Corporation
as of September 30, 1998.
(b) Represents the unaudited combined balance sheet of Park Structures as of
September 30, 1998.
(c) The Company will finance the acquisition of Park Structures through a
combination of borrowings of bank debt and the proceeds from the issuance
and sale of 320,000 shares of Koala Corporation common stock at an assumed
market value of $16.25 per share pursuant to this Offering. Gross proceeds
of $5,200,000 million plus bank loan proceeds of $8,691,449 million plus
$1,514,651 million of available cash are used to pay acquisition costs of
$15,017,900 (see below) and stock offering costs of $639,200 (of which
approximately $151,000 has been paid through September 30, 1998). The
issuance of stock is reflected by increasing common stock by $32,000 and
additional paid in capital by $4,528,800 ($5,200,000, less $32,000
allocated to common stock, less $639,200 offering costs).
Park Structures preliminary acquisition cost at closing, based on
contractual consideration pursuant to the purchase agreement and estimated
direct costs incurred to consummate the transaction is as follows:
Purchase price-cash portion................................. $12,500,000
Payment for leasehold improvements.......................... 732,000
Additional amounts paid for current assets
and other assets, in excess of minimum..................... 1,635,900
Estimated direct costs of acquisition (approximately
$100,000 paid through September 30, 1998).................. 150,000
-----------
Total acquisition costs (preliminary)....................... $15,017,900
===========
Park Structures is entitled to receive up to an additional $5.5 million,
of which $4.0 million is payable in cash and $1.5 million is payable in
the Company's common stock, if certain earnings targets are met. Assuming
the additional consideration is paid, total acquisition cost increases to
$20,517,900. Income from operations for the twelve months ended June 30,
1999 from Park Structures must be greater than $3,150,000 for the maximum
consideration to be paid. The additional consideration, if incurred, will
be allocated to goodwill and amortized to expense over 30 years. For the
year ended December 31, 1997, the impact on pro forma net income after
taxes of the additional consideration would be $122,550 per year, or $.04
per diluted share, for additional amortization expense, net of income
taxes. For the nine months ended September 30, 1998, the impact on pro
forma net income after taxes of the additional consideration would be
$91,900, or $.03 per diluted share, for additional amortization expense,
net of income taxes.
F-43
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED):
Should the Company utilize debt to finance the $4.0 million cash portion
of the additional consideration, the impact on December 31, 1998 pro forma
net income after taxes of the interest expense would be $210,270 for the
future months and $0.07 per diluted share. For the nine months ended
September 30, 1998, the impact on pro forma net income after taxes of the
interest expense would be $157,700 and $0.05 per diluted share
(d) Represents elimination of assets excluded and liabilities not assumed
pursuant to the terms of the Park Structures asset purchase agreement.
(e) Represents the allocation to intangible assets of the cost over fair value
of net assets acquired as a result of the preliminary purchase price
allocation for Park Structures.
(f) Elimination of common stock and retained earnings of Park Structures for
proper reflection of pro forma retained earnings as if the purchase
occurred on September 30, 1998.
(g) Represents the consolidated results of operations of Koala Corporation for
the year ended December 31, 1997, which includes the results of operations
of Delta Play Company for the seven months subsequent to its effective
acquisition date of June 1, 1997.
(h) Represents the unaudited results of operations of Delta Play, Ltd. for the
five months ended May 31, 1997, with all amounts translated to U.S.
currency at a rate of .72035, which is the average exchange rate for the
five month period.
(i) Represents the combined results of operations of Park Structures for the
year ended December 31, 1997.
(j) Represents the adjustment to remove the profit component of related party
charges from Safeplay Designs, Inc., an affiliate of Delta Play, Ltd. A
separate statement of income for Safeplay is not included in the
accompanying unaudited pro forma consolidated statement of income since
Delta Play, Ltd. was Safeplay's sole customer and the majority of payments
to Safeplay for design costs are recorded in cost of sales.
(k) Represents the increase to amortization expense for the amortization of
cost over fair value of net assets acquired over 30 years as a result of
the preliminary purchase price allocation for both Delta Play, Ltd. and
Park Structures. On the December 31, 1997 pro forma income statement, the
amount of the adjustment for Delta Play, Ltd. is $70,980 for the five
month period ended May 31, 1997, and the adjustment for Park Structures is
$331,732 for the twelve month period ended December 31, 1997. On the
September 30, 1998 pro forma income statement, the entire amount of the
adjustment equaling $248,949 relates to Park Structures.
(l) Represents interest expense incurred by Park Structures on liabilities not
assumed by Koala.
(m) Reflects applicable income tax effects of adjustments at an effective tax
rate of 35.5%.
(n) Reflects the increase to common stock equivalents for 320,000 shares
issued in connection with this offering
(o) Represents the unaudited consolidated results of operations of Koala
Corporation for the nine months ended September 30, 1998.
(p) Represents the combined results of operations of Park Structures for the
nine months ended September 30, 1998.
F-44
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED):
(q) Represents the elimination of $62,000 for gain on Park Structures sale of
an asset that was not acquired by Koala and elimination of Park Structures
interest expense of $13,508 on liabilities not assumed by Koala.
(r) Represents Delta Play, Ltd. management bonuses utilized for tax planning
purposes that will no longer be paid pursuant to the terms of the
employment agreement executed at the closing of the Delta purchase and
fees paid to related entities by Park Structures that will no longer be
paid after the closing of the Park Structures purchase.
These items were not given effect to as pro forma adjustments, but had
they been, pro forma net income and net income per share--diluted would be
as follows:
Pro forma net income before taxes................................ $4,177,295
Management bonuses............................................... 219,106
Fees to related entities......................................... 226,461
----------
Adjusted pro forma net income before taxes....................... 4,622,862
Provision for income taxes at 35.5%.............................. 1,641,116
----------
Adjusted net income.............................................. $2,981,746
Adjusted net income per share.................................... $ 1.06
Adjusted net income per share--diluted........................... $ 1.04
(s) Represents the bank loan financing required to complete the purchase of
Park Structures along with utilization of the net proceeds of the
Offering. The credit facility provides for a moritorium on principal
repayments in year one.
(t) Represents interest expense, committment fees and amortization of
origination fees on the bank loan financing as if the loan was extended on
January 1, 1997. The average interest rate utilized is 7.99% which is the
average LIBOR rate plus 2.35% for the twelve month period ended December
31, 1997. For purposes of interest rate sensitivity, a variance in the
interest rate of up to 1/4% would have an immaterial effect on pro forma
income.
(u) Represents interest expense, committment fees and amortization of
origination fees on the bank loan financing as if the loan was extended on
January 1, 1998. The average interest rate utilized is 8.00% which is the
average LIBOR rate plus 2.35% for the nine month period ended September
30, 1998. For purposes of interest rate sensitivity, a variance in the
interest rate of up to 1/4% would have an immaterial effect on pro forma
income.
F-45
[ARTWORK/PHOTOS]
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No dealer, salesperson or any other person has been authorized to give any
information or to make any representation in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company, the Selling Shareholder, or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any security other than the shares of Common Stock offered by this
Prospectus, nor does it constitute an offer to sell or a solicitation of any
offer to buy the shares of Common Stock by anyone in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or soliciation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained here in is correct as
of any time subsequent to the date hereof.
---------------
TABLE OF CONTENTS
PAGE
----
Summary.................................................................. 3
Risk Factors............................................................. 7
Park Structures Acquisition.............................................. 11
Use of Proceeds.......................................................... 12
Price Range of Common Stock.............................................. 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Koala Consolidated Selected Financial Data............................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Koala.................................................. 15
Park Structures Combined Selected Financial Data......................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Park Structures........................................ 23
Business................................................................. 26
Management............................................................... 34
Principal and Selling Shareholders....................................... 39
Description of Securities................................................ 41
Underwriting............................................................. 42
Legal Matters............................................................ 43
Experts.................................................................. 43
Additional Information................................................... 44
Index to Financial Statements............................................ F-1
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1,200,000 SHARES
KOALA CORPORATION
COMMON STOCK
---------------
PROSPECTUS
---------------
CLEARY GULL REILAND & MCDEVITT INC.
TUCKER ANTHONY
INCORPORATED
CRAIG-HALLUM CAPITAL GROUP, INC.
DECEMBER 16, 1998
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