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 September 30, 2001
------------------
[ ] 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)
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(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 November 14, 2001 was 6,872,334 shares.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
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CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
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(unaudited)
ASSETS
------
Current Assets
Cash and cash equivalents $ 215,267 $ 200,786
Trade accounts receivable, net 10,571,930 10,187,172
Unbilled receivables 3,725,716 3,448,872
Tax refund receivable and other receivables 1,790,961 2,221,741
Inventories 12,541,100 12,653,750
Prepaid expenses and other 2,264,691 1,421,280
---------- ----------
Total current assets 31,109,665 30,133,601
---------- ----------
Property and equipment, net 4,128,188 4,129,646
Identifiable intangible assets, net 26,907,178 27,762,155
Goodwill, net 28,589,669 29,403,998
---------- ----------
$ 90,734,700 $ 91,429,400
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable $ 4,100,036 $ 7,345,889
Acquisition liability, current portion 1,000,000 --
Accrued expenses and other 5,181,133 3,719,554
Credit facility, current portion 38,760,000 --
---------- ----------
Total current liabilities 49,041,169 11,065,443
---------- ----------
Long Term Liabilities:
Deferred income taxes and other 1,558,401 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 1,558,401 40,624,699
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Total liabilities 50,599,570 51,690,142
---------- ----------
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 (708,373) (695,171)
Additional paid-in capital 20,256,774 20,256,774
Accumulated other comprehensive (loss) (69,364) (47,234)
---------- ----------
Retained earnings 19,968,860 19,537,656
---------- ----------
Total shareholders' equity 40,135,130 39,739,258
---------- ----------
$ 90,734,700 $ 91,429,400
============ ============
2
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 16,174,934 $ 16,399,356 $ 44,418,830 $ 45,041,332
Cost of sales 9,925,522 8,277,459 25,654,574 23,218,709
------------ ------------ ------------ ------------
Gross profit 6,249,412 8,121,897 18,764,256 21,822,623
Selling, general and administrative expenses 4,858,185 4,223,872 13,913,524 11,050,422
Amortization of intangibles 603,344 605,925 1,798,006 1,530,028
------------ ------------ ------------ ------------
Income from operations 787,883 3,292,100 3,052,726 9,242,173
Other (income) expense:
Interest expense 763,439 841,814 2,404,088 2,035,386
Other (income) and expense 2,464 (57,545) (41,288) (335,247)
------------ ------------ ------------ ------------
Income before income taxes 21,980 2,507,831 689,926 7,542,034
Income tax provision 8,242 940,437 258,722 2,828,263
------------ ------------ ------------ ------------
Net income $ 13,738 $ 1,567,394 $ 431,204 $ 4,713,771
============ ============ ============ ============
Net income per share - basic $ 0.00 $ 0.23 $ 0.06 $ 0.70
============ ============ ============ ============
Net income per share - diluted $ 0.00 $ 0.22 $ 0.06 $ 0.67
============ ============ ============ ============
Weighted average shares outstanding - basic 6,872,334 6,843,763 6,872,334 6,735,232
============ ============ ============ ============
Weighted average shares outstanding - diluted 6,872,334 7,107,288 6,880,612 6,988,949
============ ============ ============ ============
3
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
2001 2000
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(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 431,204 $ 4,713,771
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 636,419 621,673
Amortization 1,798,006 1,530,028
Changes in operating assets and liabilities:
Accounts receivable and other receivables (230,822) (2,496,439)
Inventories 112,650 (2,920,506)
Prepaid expenses and other (843,411) (656,405)
Accounts payable (3,245,853) 190,937
Accrued expenses and income taxes 1,385,281 571,890
------------ ------------
Net cash provided by operating activities 43,474 1,554,949
------------ ------------
Cash flows from investing activities:
Capital expenditures (630,293) (905,896)
Acquisitions, net of cash acquired -- (23,539,481)
Patents and other (195,289) (335,124)
------------ ------------
Net cash used in investing activities (825,582) (24,780,501)
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Cash flows from financing activities:
Net proceeds from credit facility 770,000 23,546,000
------------ ------------
Net cash provided by financing activities 770,000 23,546,000
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Effect of exchange rate changes on cash and cash equivalents 26,589 (98,432)
Net increase in cash and cash equivalents 14,481 222,016
Cash and cash equivalents at beginning of period 200,786 173,936
------------ ------------
Cash and cash equivalents at end of period $ 215,267 $ 395,952
============ ============
4
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 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 products sold by its SCS Interactive division, 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 September 30, 2001 and December 31, 2000, consists
of the following:
September 30, 2001 December 31, 2000
Raw materials $ 5,948,895 $ 5,327,158
Work in progress 3,737,629 4,600,050
Finished goods 2,854,576 2,726,542
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$12,541,100 $ 12,653,750
4. Debt:
The following is a summary of the Company's debt as of September 30, 2001
and December 31, 2000:
Sept. 30, 2001 Dec. 31, 2000
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$14.0 million revolving credit facility, maturing September
26, 2002, interest payable monthly at bank's prime rate plus
a variable margin, effective rate at September 30, 2001 and
December 31, 2000 was 8.5% and 9.5%, respectively ............... $10,760,000 $37,990,000
Term loan, maturing on September 26, 2004, quarterly
principal payments of $1.0 million, interest payable monthly
at bank's prime rate plus a variable margin, effective rate
at September 30, 2001 was 8.5% .................................. 28,000,000 0
----------- -----------
$38,760,000 $37,990,000
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5
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
4. Debt (continued):
On September 26, 2001, the Company and its senior lenders amended and
restated its existing $45.0 million revolving credit facility and
established a revolving credit facility ("Revolving Credit") in the amount
of $14.0 million and a term loan ("Term Credit") in the amount of $28.0
million (together, the "New Credit Facility"). The New Credit Facility is
secured by substantially all of the assets of the Company. There are no
compensating balance requirements and the New Credit Facility requires
compliance with financial loan covenants related to leverage, interest
coverage, fixed charges and capital expenditures. The Revolving Credit may
be used for short-term working capital needs. Availability under the
Revolving Credit is governed by a monthly borrowing base formula based on
levels of inventory and accounts receivable. A commitment fee in the amount
of .50% per annum is payable quarterly in arrears based on the average
daily unused portion of the Revolving Credit.
The following is a summary of the debt maturities as of September 30, 2001:
2001 $ 1,000,000
2002 14,760,000
2003 4,000,000
2004 19,000,000
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Total $38,760,000
===========
At September 30, 2001, the Company was not in compliance with the financial
covenants for maximum leverage ratio and minimum interest coverage ratio.
The Company has received a waiver of such non-compliance from its senior
lenders. The waiver requires, among other things, the infusion of $10.0
million of capital into the Company by March 31, 2002 to be used for senior
debt reduction and resets the financial covenants. As a result of the
non-compliance at September 30, 2001 and the potential for non-compliance
in future quarters, the entire balance of the Revolving Credit and Term
Credit, totaling $38,760,000, has been re-classified as a current
liability.
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.
6
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
5. Business Segments (continued):
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 shareholder relations costs. The
following table presents sales and other financial information by business
segment:
--------------------------------------------------------------------------------
Three Months Ended September 30, 2001
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Convenience Modular
and Activity Play Total
Products Equipment
---------- ---------- -----------
Sales $3,873,860 $12,301,074 $16,174,934
Operating income 621,570 166,313 787,883
Capital expenditures 68,349 182,276 250,625
Total assets 18,879,586 71,855,114 90,734,700
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Three Months Ended September 30, 2000
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Convenience Modular
and Activity Play Total
Products Equipment
---------- ---------- -----------
Sales $3,830,188 $12,569,168 $16,399,356
Operating income 1,030,845 2,261,255 3,292,100
Capital expenditures 44,449 98,728 143,177
Total assets 18,815,756 70,207,244 89,023,000
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Nine Months Ended September 30, 2001
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Convenience Modular
and Activity Play Total
Products Equipment
---------- ---------- -----------
Sales $11,242,849 $33,175,981 $44,418,830
Operating income 2,053,125 999,601 3,052,726
Capital expenditures 288,573 341,720 630,293
Total assets 18,879,586 71,855,114 90,734,700
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Nine Months Ended September 30, 2000
-------------------------------------------------------------------------------------
Convenience Modular
and Activity Play Total
Products Equipment
---------- ---------- -----------
Sales $12,845,875 $32,195,457 $45,041,332
Operating income 3,787,244 5,454,929 9,242,173
Capital expenditures 159,716 746,180 905,896
Total assets 18,815,756 70,207,244 89,023,000
7
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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. Initially,
goodwill acquired prior to June 30, 2001 will be unaffected. Beginning
January 1, 2002, all amortization expense on goodwill and intangible assets
with indefinate lives will stop. During fiscal 2002, the Company will
perform the first of the required impairment tests of goodwill and
indefinate lived intangibles. The Company has not yet determined what
effect these tests or the application of the non-amortization provisions
will have on its net income and financial position.
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, including the impacts of a softening
worldwide economy; the risk associated with the significant outstanding
indebtedness incurred to finance the Company's acquisition strategy; the risks
associated with non-compliance with or default under its credit facility; 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; 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.
Results of Operations
Three Months Ended September 30, 2001 compared to Three Months Ended
September 30, 2000
Sales decreased 1% or $224,422 to $16,174,934 for the three months ended
September 30, 2001 compared to $16,399,356 for the three months ended September
30, 2000. Convenience and activity product segment sales increased 1% or $43,672
to $3,873,860 for the three months ended September 30, 2001 compared to
$3,830,188 for the three months ended September 30, 2000. The Company attributes
the flat sales growth in the convenience and activity segment to the softening
economy which has caused customers to tighten capital spending budgets. Modular
play equipment segment sales decreased 2% or $268,094 to $12,301,074 for the
third quarter of 2001 compared to $12,569,168 for the third quarter of 2000.
Again, the Company attributes the decrease in modular play equipment sales to
the softening economy and the resulting tightened capital spending budgets.
Tightened capital spending budgets affects the customers in the modular play
segment to a greater extent than the convenience segment due to the higher
dollar expenditure for the modular play products. Sales momentum in both
segments was also adversely affected by the terrorist attacks on the United
States on September 11, 2001.
Gross profit for the third quarter of 2001 was $6,249,412 (39% of sales)
compared with $8,121,897 (50% of sales) for the third quarter of 2000. The
decrease in gross profit as a percentage of sales was primarily due to lower
prices obtained on the Company's products in the modular play segment along with
higher manufacturing costs in the modular play segment. The Company's
manufacturing infrastructure was established at a level to support higher sales
volumes, which were adversely effected by the terrorist attacks on the United
States on September 11, 2001. This caused the sales momentum to falter during
the month of September.
Selling, general and administrative expenses increased in the third quarter of
2001 by $634,313 to $4,858,185 (30% of sales) from $4,223,872 (26% of sales) for
the same period in 2000. Sales and marketing expenses increased 45% or $811,384
to $2,610,699 for the third quarter of 2001 compared to $1,799,315 for the third
quarter of 2000. This increase was due primarily to the inclusion of Fibar
Systems for a full quarter in 2001 versus a partial quarter in 2000. General and
administrative expenses decreased 7% or $177,071 to $2,247,486 for the third
quarter of 2001 compared to $2,424,557 for the third quarter of 2000. The
decrease in general and administrative expense was primarily the result of the
administrative staff reductions in the modular play segment.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Three Months Ended September 30, 2001 compared to Three Months Ended
September 30, 2000
Interest expense was $763,439 during the quarter ended September 30, 2001
compared to $841,814 during the quarter ended September 30, 2000. The decrease
in interest expense is due primarily to a decrease in the average interest rate
to 7.8% for the quarter ended September 30, 2001 from 9.5% for the quarter ended
September 30, 2000.
Net income for the third quarter of 2001 was $13,738 (.08% of sales) compared
with $1,567,394 (10% of sales) for the third quarter of 2000. This represents a
$1,553,656 decrease in net income. The decrease in total sales combined with
higher manufacturing costs and selling costs contributed to the decrease in net
income as a percentage of sales. Net income per share (assuming dilution) for
the third quarter of 2001 decreased to $0.00 per share (assuming dilution)
compared to $0.22 per share (assuming dilution) for the third quarter of 2000.
Nine Months Ended September 30, 2001 compared to Nine Months Ended
September 30, 2000
Sales decreased 1% or $622,502 to $44,418,830 for the nine months ended
September 30, 2001 compared to $45,041,332 for the nine months ended September
30, 2000. Convenience and activity product segment sales decreased 12% or
$1,603,026 to $11,242,849 for the nine months ended September 30, 2001 compared
to $12,845,875 for the nine months ended September 30, 2000. The Company
attributes the decrease primarily to the softening economy and resulting
tightened capital spending budgets. Modular play equipment segment sales
increased 3% or $980,524 to $33,175,981 for the nine months ended September 30,
2001 compared to $32,195,457 for the nine months ended September 30, 2000. The
inclusion of Fibar Systems for the full nine month period in 2001 versus a month
and a half period in 2000 is the primary reason for the increase. The benefit
from Fibar Systems sales was offset by lower than expected sales from SCS
Interactive.
Gross profit for the nine months ended September 30, 2001 was $18,764,256 (42%
of sales) compared with $21,822,623 (48% of sales) for the nine months ended
September 30, 2000. The gross profit percentage for the nine months ended
September 30, 2001 decreased from the gross profit percentage achieved for the
nine months ended September 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, as well as the lower prices and the
higher manufacturing and selling costs that occurred during the third quarter of
2001 as discussed above.
Selling, general and administrative expenses for the nine months ended September
30, 2001 increased 26% or $2,863,102 to $13,913,524 (31% of sales) from
$11,050,422 (25% of sales) for the same period in 2000. Sales and marketing
expenses increased 20% or $1,066,023 to $6,278,610 for the nine months ended
September 30, 2001 compared to $5,212,587 for the same period in 2000. This
increase was due primarily to the inclusion of Fibar Systems and SCS
Interactive. General and administrative expenses increased 31% or $1,797,079 to
$7,634,914 for the nine months ended September 30, 2001 compared to $5,837,835
for the same period in 2000. The increase in general and administrative expense
was primarily the result of the inclusion of Fibar Systems and SCS Interactive
for the full nine months of 2001 and legal expenses incurred to protect and
defend the Company's intellectual property.
Amortization expense from intangible assets increased for the nine months ended
September 30, 2001 to $1,798,006 from $1,530,028 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Nine Months Ended September 30, 2001 compared to Nine Months Ended
September 30, 2000
The Company used debt to finance the acquisitions of SCS Interactive and Fibar
Systems. As a result, the Company incurred interest expense of $2,404,088 during
the nine months ended September 30, 2001 compared to $2,035,386 during the nine
months ended September 30, 2000.
Net income for the nine months ended September 30, 2001 was $431,204 (1% of
sales) compared with $4,713,771 (10% of sales) for the nine months ended
September 30, 2000. This represents a 91% decrease in net income. The lower
level of sales in the convenience and activity segment resulted in a larger
proportion of sales from the modular play segment which has inherently lower
margins. This, combined with higher manufacturing costs in the modular play
segment during the third quarter, contributed to the decrease in net income as a
percentage of sales. Net income per share (assuming dilution) for the nine
months ended September 30, 2001 decreased 91% to $0.06 per share (assuming
dilution) compared to $0.67 per share (assuming dilution) for the nine months
ended September 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 $3,999,843 to $2,865,629 for the nine months
ended September 30, 2001 from $6,865,472 for the nine months ended September 30,
2000. The Company's free cash flow declined primarily because of the decrease in
net income. The Company finances its business activities primarily from cash
provided by operating activities and from borrowings on its credit facility.
Cash provided by operating activities for the nine months ended September 30,
2001 and 2000 was $43,474 and $1,554,949, respectively. The decrease in cash
provided by operating activities for the nine months ended September 30, 2001
compared to the nine months ended September 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.
At September 30, 2001 and December 31, 2000, working capital was ($17,931,504)
and $19,068,158, and cash balances were $215,267 and $200,786, respectively. The
negative working capital at September 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 $825,582 and $24,780,501 for the nine months ended
September 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, and Fibar in August 2000. Capital expenditures were $630,293 for
the nine months ended September 30, 2001 compared to $905,896 of the same period
of 2000. The decrease was due primarily to molds and tools purchased in 2000.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Liquidity and Capital Resources (continued)
On September 26, 2001, based on projections submitted to the bank early in the
third quarter of 2001, the Company and its senior lenders amended and restated
its existing $45.0 million revolving credit facility and established a revolving
credit facility ("Revolving Credit") in the amount of $14.0 million and a term
loan ("Term Credit") in the amount of $28.0 million (together, the "New Credit
Facility"). The New Credit Facility is secured by substantially all of the
assets of the Company. There are no compensating balance requirements and the
New Credit Facility requires compliance with financial loan covenants related to
leverage, interest coverage, fixed charges and capital expenditures. The
Revolving Credit may be used for short-term working capital needs. Availability
under the Revolving Credit is governed by a monthly borrowing base formula based
on levels of inventory and accounts receivable. A commitment fee in the amount
of .50% per annum is payable quarterly in arrears based on the average daily
unused portion of the Revolving Credit.
At September 30, 2001, the Company is not in compliance with the financial
covenants for maximum leverage ratio and minimum interest coverage ratio, due
primarily to the fall off of sales in September 2001. The Company obtained a
waiver of such non-compliance, which is contained in Amendment No. 1 to the New
Credit Facility. The waiver requires, among other things, the infusion of $10.0
million of capital into the Company by March 31, 2002 to be used for senior debt
reduction and the waiver resets the financial covenants. Accordingly, the
Company is in the process of engaging an investment banking firm to assist it in
the evaluation and execution of strategic financing alternatives. If the Company
utilizes equity or convertible debt to satisfy the capital requirement, there
would likely be substantial dilution to the Company's current shareholders. It
is uncertain whether the Company will be able to satisfy the terms of the
waiver.
With the receipt of the waiver from its senior lenders and the successful
fulfillment of the terms of such waiver, the Company believes that cash flow
from operations and the unused capacity available under the revolving credit
facility will be adequate to finance future business activities for the next
twelve month period. In an effort to maintain cash flow levels, in October,
2001, the Company conducted a staff reduction that affected approximately 20% of
its work force. In addition, the Company is formulating a plan for a corporate
and operations consolidation to be implemented in 2002.
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PART II - OTHER INFORMATION
Item 1-2. None
Item 3. Defaults on Senior Securities
As of September 30, 2001, the Company is not in compliance with
certain financial covenants in the New Credit Facility for maximum
leverage ratio and minimum interest coverage ratio. These ratios are
tested as of the end of each fiscal quarter, and require that the
Company maintain certain EBITDA levels in relation to the amount of
debt owed by the Company, and the amount of interest payable by the
Company, respectively. The Company has received a waiver of such
non-compliance
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1. Amended and Restated Revolving Credit, Term Loan and
Security Agreement dated September 26, 2001 between Koala
Corporation and U.S. Bank National Association, as Agent for the
Lenders, incorporated herein by reference to the Company's form
8-K filed on October 4, 2001.
10.2 Amendment No. 1 to the Amended and Restated Revolving
Credit, Term Loan and Security Agreement
(b) Reports on Form 8-K
On September 12, 2001, a report was filed reporting items 5 and 7.
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
November 14, 2001 /s/ Mark A. Betker
- ----------------------- ---------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
November 14, 2001 /s/ Jeffrey L. Vigil
- ----------------------- ---------------------------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
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