U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 0-22464
KOALA CORPORATION
---------------------------
(Exact name of small business issuer
as specified in its charter)
Colorado 84-1238908
- ------------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11600 E. 53rd Avenue, Unit D, Denver, CO 80239
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(Address of principal executive offices)
(303) 574-1000
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(Issuer's telephone number)
------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __X__ No _____
The number of shares outstanding of the issuer's common stock, $.10 par value,
as of August 14, 2001 was 6,872,334 shares.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
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CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
------
Current Assets
Cash and cash equivalents $ 611,041 $ 200,786
Trade accounts receivable, net 9,417,096 13,636,044
Tax refund receivable and other receivables 4,038,180 2,221,741
Inventories 13,679,145 12,653,750
Prepaid expenses and other 2,559,619 1,421,280
------------ ------------
Total current assets 30,305,081 30,133,601
------------ ------------
Property and equipment, net 4,098,463 4,129,646
Identifiable intangible assets, net 27,214,750 27,762,155
Goodwill, net 28,858,906 29,403,998
------------ ------------
$ 90,477,200 $ 91,429,400
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable $ 4,172,570 $ 7,345,889
Acquisition liability, current portion 1,000,000 --
Accrued expenses and other 4,141,962 3,719,554
Credit facility, current portion 39,450,000 --
------------ ------------
Total current liabilities 48,764,532 11,065,443
------------ ------------
Long Term Liabilities:
Deferred income taxes and other 1,562,037 1,634,699
Acquisition liability, net of current portion -- 1,000,000
Credit facility, net of current portion -- 37,990,000
------------ ------------
Total long term liabilities 1,562,037 40,624,699
------------ ------------
Total liabilities 50,326,569 51,690,142
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Commitments and contingencies
Shareholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized;
issued and outstanding - none -- --
Common stock, $.10 par value, 10,000,000 shares authorized;
issued and outstanding 6,872,334 in 2001 and 2000 687,233 687,233
Note receivable from officer (696,646) (695,171)
Additional paid-in capital 20,256,774 20,256,774
Accumulated other comprehensive (loss) (51,852) (47,234)
Retained earnings 19,955,122 19,537,656
------------ ------------
Total shareholders' equity 40,150,631 39,739,258
------------ ------------
$ 90,477,200 $ 91,429,400
============ ============
See Notes to Condensed Consolidated Financial Statements
2
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 14,458,228 $ 17,162,269 $ 28,243,896 $ 28,641,976
Cost of sales 8,292,917 9,166,464 15,729,052 14,941,250
------------ ------------ ------------ ------------
Gross profit 6,165,311 7,995,805 12,514,844 13,700,726
Selling, general and administrative expenses 4,866,791 3,854,622 9,055,339 6,826,550
Amortization of intangibles 597,185 572,492 1,194,662 924,103
------------ ------------ ------------ ------------
Income from operations 701,335 3,568,691 2,264,843 5,950,073
Other (income) expense:
Interest expense 791,721 762,349 1,640,649 1,193,572
Other (income) and expense 1,554 (206,842) (43,752) (277,702)
------------ ------------ ------------ ------------
Income (loss) before income taxes (91,940) 3,013,184 667,946 5,034,203
Income tax provision (benefit) (34,478) 1,129,944 250,480 1,887,826
------------ ------------ ------------ ------------
Net income (loss) ($ 57,462) $ 1,883,240 $ 417,466 $ 3,146,377
============ ============ ============ ============
Net income (loss) per share - basic ($ 0.01) $ 0.28 $ 0.06 $ 0.47
============ ============ ============ ============
Net income (loss) per share - diluted ($ 0.01) $ 0.27 $ 0.06 $ 0.45
============ ============ ============ ============
Weighted average shares outstanding - basic 6,872,334 6,822,886 6,872,334 6,680,967
============ ============ ============ ============
Weighted average shares outstanding - diluted 6,872,334 7,099,309 6,884,752 6,936,796
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements
3
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
2001 2000
(unaudited) (unaudited)
------------ ------------
Cash flows from operating activities:
Net income $ 417,466 $ 3,146,377
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 415,521 431,910
Amortization 1,194,662 924,103
Changes in operating assets and liabilities:
Accounts receivable and other receivables 2,402,509 (410,967)
Inventories (1,025,395) (1,445,310)
Prepaid expenses and other (1,138,339) (1,603,688)
Accounts payable (3,173,319) 721,470
Accrued expenses and income taxes 349,746 (1,698,881)
------------ ------------
Net cash provided by (used in) operating activities (557,149) 65,014
------------ ------------
Cash flows from investing activities:
Capital expenditures (379,668) (762,719)
Acquisitions, net of cash acquired -- (17,862,997)
Patents and other (171,499) (363,475)
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Net cash used in investing activities (551,167) (18,989,191)
------------ ------------
Cash flows from financing activities:
Net proceeds from credit facility 1,460,000 19,259,000
------------ ------------
Net cash provided by financing activities 1,460,000 19,259,000
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 58,571 (85,889)
Net increase in cash and cash equivalents 410,255 248,934
Cash and cash equivalents at beginning of period 200,786 173,936
------------ ------------
Cash and cash equivalents at end of period $ 611,041 $ 422,870
============ ============
See Notes to Condensed Consolidated Financial Statements
4
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
1. Unaudited information:
The accompanying financial statements are presented in accordance with
the requirements of Form 10-Q and consequently do not include all of
the disclosures normally required by accounting principles generally
accepted in the United States or those normally made in the Company's
annual Form 10-K filing. Accordingly, the reader of this Form 10-Q
should refer to the Company's 10-K for the year ended December 31,
2000 for further information.
The quarterly financial information has been prepared in accordance
with the Company's customary accounting practices and has not been
audited. In the opinion of management, the information presented
reflects all adjustments necessary for a fair statement of interim
results. All such adjustments are of a normal and recurring nature.
The results of operations for the interim period ended June 30, 2001
are not necessarily indicative of the results for a full year.
2. Revenue Recognition:
The Company recognizes revenue at the time its products are shipped or
installed, except for SCS, where the percentage of completion method
of accounting is used because the build-to-install timeline of its
jobs is of longer duration.
3. Inventory:
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventory as of June 30, 2001 and December 31,
2000, consists of the following:
June 30, 2001 December 31, 2000
------------- -----------------
Raw materials and component parts $ 6,311,419 $ 5,327,158
Work in progress 4,716,766 4,600,050
Finished goods 2,650,960 2,726,542
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$13,679,145 $12,653,750
=========== ===========
4. Credit Facility:
The Company has a $45.0 million line of credit that is secured by
substantially all of the assets of the Company. The line of credit may
be used for short-term working capital needs and future acquisitions.
There are no compensating balance requirements and the credit facility
requires compliance with financial loan covenants related to debt
levels compared to annualized cash flows from operations. The
aggregate outstanding balance under the credit facility may not exceed
3.5 times consolidated EBITDA (as defined in the loan agreement),
determined quarterly on a four quarter trailing basis. The credit
facility terminates and is payable in full on March 1, 2003. Interest
payments are required at least every three months at a fluctuating
rate per annum equal to the applicable "Reserve Adjusted LIBOR Rate"
or a commercial bank's prime rate (9.19% and 9.50% at December 31,
2000 and 9.00 % and 6.75% at June 30, 2001, respectively). A
commitment fee in the amount of .25% per annum is payable quarterly in
arrears based on the average daily unused portion of the line.
At June 30, 2001, the Company was not in compliance with the financial
covenants for maximum leverage ratio and minimum interest coverage
ratio. The Company obtained a waiver from its senior lenders for such
non-compliance. The waiver also amended the loan agreement to
establish $40.0 million as the maximum aggregate outstanding balance
available to the Company during the third quarter of 2001.
5
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
4. Credit Facility: (continued)
As a result of the non-compliance at June 30, 2001 and the potential
for non-compliance in future quarters, the entire balance of the
credit facility, totaling $39,450,000, has been re-classified as a
current liability. The Company has initiated negotiations with its
senior lenders to restructure the credit facility.
5. Business Segments:
The Company operates two business segments: (1) Family Convenience and
Children's Activity Products, and (2) Children's Modular Play
Equipment. The Company's reportable segments are strategic business
units that offer different products. They are managed separately based
on the fundamental differences in the operations.
The Company's convenience and activity products include the flagship
product, the baby changing station ("BCS"). Other significant products
in this segment are the sanitary paper liners for the BCS, the child
protection seat, the infant seat kradle, the high chair, safety straps
for shopping carts and activity products. Some of these products or
certain components of the products are manufactured by sub-contractors
and assembled by the Company in Colorado. The foam products are
manufactured by the Company in Texas. These products are sold direct
and through distribution.
The Company's modular play equipment includes both indoor and outdoor
equipment. The indoor play equipment is custom designed for the
customer. A catalog is used to promote and advertise the outdoor play
equipment, however, custom modifications are often made to accommodate
the customers' needs and desires. These products are manufactured by
the Company at its facilities located in British Columbia, Florida,
Oregon and New York. These products are sold direct and through
manufacturers' representatives/dealers.
The Company evaluates the performance of its segments based primarily
on operating profit before amortization, corporate expenses and
interest income and expense. The Company allocates corporate expenses
to individual segments based on segment sales. Corporate expenses are
primarily labor costs of executive management and shareholders'
relations costs. The following table presents sales and other
financial information by business segment:
6
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
5. Business Segments: (continued)
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Three Months Ended June 30, 2001
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Convenience Modular
and Activity Play Total
Products Equipment
---------- ---------- -----------
Sales $ 3,416,582 $11,041,646 $14,458,228
Operating income 387,215 314,120 701,335
Capital expenditures 145,621 66,913 212,534
Total assets 20,502,971 69,974,229 90,477,200
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Three Months Ended June 30, 2000
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Convenience Modular
and Activity Play Total
Products Equipment
---------- ---------- -----------
Sales $4,763,834 $12,398,435 $17,162,269
Operating income 1,454,202 2,114,489 3,568,691
Capital expenditures 72,883 581,119 654,002
Total assets 17,893,428 61,273,072 79,166,500
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Six Months Ended June 30, 2001
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Convenience Modular
and Activity Play Total
Products Equipment
---------- ---------- -----------
Sales $7,368,989 $20,874,907 $28,243,896
Operating income 1,431,555 833,288 2,264,843
Capital expenditures 220,224 159,444 379,668
Total assets 20,502,971 69,974,229 90,477,200
-------------------------------------------------------------------------------------
Six Months Ended June 30, 2000
-------------------------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
---------- ---------- -----------
Sales $9,015,687 $19,626,289 $28,641,976
Operating income 2,756,398 3,193,675 5,950,073
Capital expenditures 115,267 647,452 762,719
Total assets 17,893,428 61,273,072 79,166,500
7
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
6. New Accounting Standard:
In July 2001, the Financial Accounting Standards Board issued
Statement No. 141, Business Combinations ("SFAS 141") and Statement
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141
requires companies to reflect intangible assets apart from goodwill
and supercedes previous guidance related to business combinations.
SFAS 142 eliminates amortization of goodwill and amortization of
indefinite lived intangible assets. However, SFAS 142 also requires
the Company to perform impairment tests at least annually on all
goodwill and other intangible assets. These statements are required to
be adopted by the Company on January 1, 2002 and for any acquisitions
entered into after July 1, 2001. The Company is evaluating the impact
of the statements on its financial position, results of operations,
and cash flows.
8
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that describe the Company's
business and the expectations of the Company and management. All
statements, other than statements of historical facts, included in this
report that address activities, events or developments that the Company
expects, believes, intends or anticipates will or may occur in the future,
are forward-looking statements. Forward-looking statements are inherently
subject to risks and uncertainties, many of which cannot be predicted with
accuracy and some of which might not even be anticipated. Future events and
actual results, financial and otherwise, could differ materially from those
set forth in or contemplated by the forward-looking statements herein.
These risks and uncertainties include, but are not limited to, the
Company's reliance on the revenues from a major product, the Koala Bear
Kare(R) Baby Changing Station; the uncertainties associated with sales
fluctuations and customer order patterns; the uncertainties associated with
the introduction of new products; management of growth, including the
ability to attract and retain qualified employees; the ability to integrate
acquisitions made by the Company and the costs associated with such
acquisitions; dependence on Mark Betker, its chief executive officer;
substantial competition from larger companies with greater financial and
other resources than the Company; the risk associated with the significant
outstanding indebtedness incurred to finance the Company's acquisition
strategy; its dependence on suppliers for manufacture of some of its
products; currency fluctuations and other risks associated with foreign
sales and foreign operations; quarterly fluctuations in revenues, income
and overhead expense; government regulations including those promulgated by
the consumer products safety commission; and potential product liability
risk associated with its existing and future products. See "Risk Factors"
in Form 10-K for the year ended December 31, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Koala Corporation is a leading designer, producer and worldwide marketer of
innovative commercial products, systems and 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 modular play equipment. The Koala Bear
Kare Baby Changing Station, the Company's flagship product, has been
installed in thousands of public restrooms worldwide. The Baby Changing
Station has provided the foundation for the Company's growth and brand name
recognition.
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.
Business Segments
The Company's sales are derived from two business segments: (1) Family
Convenience and Children's Activity Products, and (2) Children's Modular
Play Equipment.
The Company's convenience and activity products include the flagship
product, the Baby Changing Station. Other significant products in this
segment are the sanitary paper liners for the Baby Changing Station, the
child protection seat, the infant seat kradle, the high chair, safety
straps for shopping carts and activity products. These products are sold
direct and through distribution. The Company recognizes sales of products
from this business segment at the time the products are shipped.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Segments (continued)
The Company's modular play equipment includes indoor/outdoor play equipment
and playground surfacing materials. The indoor play equipment is custom
designed for the customer. A catalog is used to promote and advertise the
outdoor play equipment, however, custom modifications are often made to
accommodate the customers needs and desires. These products are
manufactured by the Company at its facilities located in British Columbia,
Florida and Oregon. The playground surfacing materials are manufactured by
a national network of sub-contractors. These products are sold direct and
through manufacturers' representatives and dealers. The Company recognizes
revenue at the time its products are shipped or installed, except for
products sold by SCS Interactive, where the percentage of completion method
of accounting is used because the build-to-install timeline of its jobs is
of longer duration.
The Company's quarterly revenues and net income are subject to fluctuation
based on customer order patterns and Company shipping activity. Because of
these fluctuations, comparisons of operating results from quarter to
quarter for the current year or for comparable quarters of the prior year
may be difficult. Except as set forth below, these fluctuations are not
expected to be significant when considered on an annual basis.
Results of Operations
Three Months Ended June 30, 2001 compared to Three Months Ended June 30,
2000
Sales decreased 16% to $14,458,228 for the three months ended June 30, 2001
compared to $17,162,269 for the three months ended June 30, 2000.
Convenience and activity product segment sales decreased 28% to $3,416,582
for the three months ended June 30, 2001 compared to $4,763,834 for the
three months ended June 30, 2000. The Company attributes the decrease to
the softening economy and tightened capital spending budgets. Modular play
equipment segment sales decreased 11% to $11,041,646 for the second quarter
of 2001 compared to $12,398,435 for the second quarter of 2000. Again, the
Company attributes the decrease to the softening economy and the resultant
tightened capital spending budgets and the inability to finalize the
installation by June 30, 2001 of several large orders that shipped during
the quarter.
Gross profit for the second quarter of 2001 was $6,165,311 (43% of sales)
compared with $7,995,805 (47% of sales) for the second quarter of 2000. The
decrease in gross profit as a percentage of sales was primarily due to the
larger proportion of modular play segment sales to total sales, due to the
inclusion of SCS and Fibar in the second quarter of 2001. The modular play
segment has lower margins than the convenience and activity segment.
Selling, general and administrative expenses increased for the second
quarter of 2001 to $4,866,791 (34% of sales) from $3,854,622 (22% of sales)
for the same period in 2000. Sales and marketing expenses increased
$100,236 to $1,866,170 for the second quarter of 2001 compared to
$1,765,934 for the second quarter of 2000. This increase was due primarily
to the inclusion of Fibar. General and administrative expenses increased
$911,933 to $3,000,621 for the second quarter of 2001 compared to
$2,088,688 for the second quarter of 2000. The increase in general and
administrative expense was primarily the result of the inclusion of Fibar.
Amortization expense from intangible assets increased for the second
quarter of 2001 to $597,185 from $572,492 for the same period of 2000. This
increase is primarily due to the amortization of goodwill and other
identifiable intangible assets acquired in the acquisitions of SCS
Interactive and Fibar Systems in March 2000 and September 2000,
respectively.
The Company used debt to finance the acquisitions of SCS Interactive and
Fibar Systems. As a result, the Company incurred interest expense of
$791,721 during the quarter ended June 30, 2001 compared to $762,349 during
the quarter ended June 30, 2000.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Three Months Ended June 30, 2001 compared to Three Months Ended June 30,
2000)
Net income (loss) for the second quarter of 2001 was ($57,462) (.4% of
sales) compared with $1,883,240 (11% of sales) for the second quarter of
2000. This represents a 103% decrease in net income. The decrease in total
sales combined with the historically lower operating margins on sales from
the modular play segment contributed to the decrease in net income as a
percentage of sales, as well as the higher level of selling, general and
administrative expenses discussed above. Net income (loss) per share
(assuming dilution) for the second quarter of 2001 decreased 104% to
($0.01) per share (assuming dilution) compared to $0.27 per share (assuming
dilution) for the second quarter of 2000.
Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
Sales decreased 1% to $28,243,896 for the six months ended June 30, 2001
compared to $28,641,976 for the six months ended June 30, 2000. Convenience
and activity product segment sales decreased 18% to $7,368,989 for the six
months ended June 30, 2001 compared to $9,015,687 for the six months ended
June 30, 2000. The Company attributes the decrease to the softening economy
and tightened capital spending budgets. Modular play equipment segment
sales increased 6% to $20,874,907 for the six months ended June 30, 2001
compared to $19,626,289 for the six months ended June 30, 2000. The
inclusion of Fibar and SCS Interactive in this segment in 2001 is the
primary reason for the increase.
Gross profit for the six months ended June 30, 2000 was $12,514,844 (44% of
sales) compared with $13,700,726 (48% of sales) for the six months ended
June 30, 2000. The gross profit percentage for the six months ended June
30, 2001 decreased from the gross profit percentage achieved for the six
months ended June 30, 2000 primarily because of the increase in the
proportional mix of modular play equipment sales, which have lower margins
than the convenience and activity products.
Selling, general and administrative expenses increased for the six months
ended June 30, 2001 to $9,055,339 (32% of sales) from $6,826,550 (24% of
sales) for the same period in 2000. Sales and marketing expenses increased
$254,639 to $3,667,911 for the six months ended June 30, 2001 compared to
$3,413,272 for the same period in 2000. This increase was due primarily to
the inclusion of Fibar and SCS Interactive. General and administrative
expenses increased $1,974,150 to $5,387,428 for the six months ended June
30, 2001 compared to $3,413,278 for the same period in 2000. The increase
in general and administrative expense was primarily the result of the
inclusion of Fibar and SCS Interactive and the additions of corporate legal
and engineering personnel.
Amortization expense from intangible assets increased for the six months
ended June 30, 2001 to $1,194,662 from $924,103 for the same period of
2000. This increase is primarily due to the amortization of goodwill and
other identifiable intangible assets acquired in the acquisitions of SCS
Interactive and Fibar Systems in March 2000 and September 2000,
respectively.
The Company used debt to finance the acquisitions of SCS Interactive and
Fibar Systems. As a result, the Company incurred interest expense of
$1,640,649 during the six months ended June 30, 2001 compared to $1,193,572
during the six months ended June 30, 2000.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
Net income for the six months ended June 30, 2001 was $417,466 (1% of
sales) compared with $3,146,377 (11% of sales) for the six months ended
June 30, 2000. This represents an 87% decrease in net income. The lower
margins from the modular play segment and the lower level of sales achieved
in the convenience and activity segment contributed to the decrease in net
income as a percentage of sales. Net income per share (assuming dilution)
for the six months ended June 30, 2001 decreased 87% to $0.06 per share
(assuming dilution) compared to $0.45 per share (assuming dilution) for the
six months ended June 30, 2000.
Liquidity and Capital Resources
The Company's free cash flow before capital expenditures, defined as net
income plus non-cash items, decreased by $2,474,741 to $2,027,649 for the
six months ended June 30, 2001 from $4,502,390 for the six months ended
June 30, 2000. The Company's free cash flow declined primarily because of
the decrease in net income between the periods. The Company finances its
business activities primarily from cash provided by operating activities
and from borrowings on its credit facility. Cash provided by (used in)
operating activities for the six months ended June 30, 2001 and 2000 was
($498,963) and $65,014, respectively. The decrease in cash provided by
operating activities for the six months ended June 30, 2001 compared to the
six months ended June 30, 2000 is due primarily to (1) the decrease in net
income, (2) the working capital associated with the integration of Fibar
and SCS into the Company, (3) an increase in prepaid assets, and (4) a
decrease in accounts payable due to the payment of inventory purchases that
were received but not paid at December 31, 2000.
At June 30, 2001 and December 31, 2000, working capital was ($18,459,451)
and $19,068,158, and cash balances were $611,041 and $200,786,
respectively. The negative working capital at June 30, 2001 is the result
of reclassifying the credit facility to current liabilities as the result
of the Company's non-compliance with certain financial covenants of the
credit facility as of that date. The low cash balances are due to the
Company's practice of applying all excess cash against the line of credit
to minimize interest expense payable on line of credit balances.
The Company has used its operating cash flow and its credit facility
primarily to expand sales and marketing activities, for acquisition and
development of new products, for capital expenditures and for working
capital. Net cash used in investing activities was $551,167 and $18,989,191
for the six months ended June 30, 2001 and 2000, respectively. The
substantial decrease in cash used in investing activities was primarily due
to the acquisition of SCS Interactive in March 2000, compared to no
acquisition activity in the first quarter of 2001. Capital expenditures
were $379,668 for the six months ended June 30, 2001 compared to $762,719
of the same period of 2000. The decrease was due primarily to molds and
tools purchased in 2000.
The Company has a $45.0 million line of credit that is secured by
substantially all of the assets of the Company. The line of credit may be
used for short-term working capital needs and future acquisitions. There
are no compensating balance requirements and the credit facility requires
compliance with financial loan covenants related to debt levels compared to
annualized cash flows from operations. The aggregate outstanding balance
under the credit facility may not exceed 3.5 times consolidated EBITDA (as
defined in the loan agreement), determined quarterly on a four quarter
trailing basis. Interest payments are required at least every three months
at a fluctuating rate per annum equal to the applicable "Reserve Adjusted
LIBOR Rate" or a commercial bank's prime rate (9.19% and 9.50% at December
31, 2001 and 9.00% and 6.75% at June 30, 2001, respectively). A commitment
fee in the amount of .25% is payable quarterly in arrears based on the
average daily unused portion of the line. There was $39,450,000 outstanding
under the credit facility as of June 30, 2001.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Liquidity and Capital Resources (continued)
The Company was not in compliance with the financial covenants for maximum
levarage ratio and minimum interest coverage based on the June 30, 2001
financial statements. The Company obtained a waiver and has initiated
negotiations with its senior lenders to restructure the current credit
facility. The Company believes that the restructuring will be completed
before the end of the third quarter. The waiver and amendment obtained from
the senior lenders also established $40.0 million as the maximum aggregate
outstanding balance that may be utilized by the Company during the third
quarter. The Company believes that cashflow from operations and the unused
capacity available under the credit facility will be adequate to finance
future business activities.
PART II - OTHER INFORMATION
Item 1 - 3. None
Item 4.
Submission of Matters to a Vote of Security Holders
On May 17, 2001, the Company held its Annual Meeting of Shareholders.
At such meeting, the Company's shareholders (i) elected four directors
to serve until the Company's next annual meeting; (ii) approved the
appointment of Ernst & Young LLP to serve as the Company's independent
auditors for the year ended December 31, 2001. The number of votes
cast in matters is set forth below:
1. Election of Directors
VOTES AGAINST BROKER
NAME VOTES FOR OR WITHHELD ABSTENTIONS NON-VOTES
----------------------------------------------------------------------
Mark Betker 4,935,076 190,094 0 0
Michael C
Franson 5,059,875 65,295 0 0
John T
Pfannenstein 5,063,316 61,854 0 0
Ellen S
Robinson 5,059,231 65,939 0 0
2. Approval of Appointment of Ernst & Young LLP
Votes For Votes Against or Withheld Abstentions Broker Non-Votes
--------- ------------------------- ----------- ----------------
4,825,631 27,340 272,199 0
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Waiver and Amendment to Revolving Credit and
Security Agreement
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
KOALA CORPORATION
August 14, 2001 /s/Mark A. Betker
- --------------------------- --------------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
August 14, 2001 /s/Jeffrey L. Vigil
- --------------------------- --------------------------------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
14