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 March 31, 2002
--------------
[ ] 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)
7881 South Wheeling Court, Englewood, CO 80112
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(Address of principal executive offices)
(303) 539-8300
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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 May 10, 2002 was 6,872,334 shares.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
KOALA CORPORATION
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CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
------
Current Assets
Cash and cash equivalents $ -- $ --
Trade accounts receivable, net 7,270,079 7,372,667
Unbilled receivables 2,289,436 1,298,404
Tax refund receivable and other receivables 3,073,655 2,845,591
Inventories 10,192,084 10,983,825
Prepaid expenses and other 1,421,778 1,181,091
------------ ------------
Total current assets 24,247,032 23,681,578
------------ ------------
Property and equipment, net 4,188,365 4,184,436
Identifiable intangible assets, net 26,219,644 26,526,264
Goodwill, net 28,493,975 28,601,426
Other 190,361 51,096
------------ ------------
$ 83,339,377 $ 83,044,800
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable $ 4,189,650 $ 2,875,706
Accrued expenses and other 3,184,698 3,146,263
Acquisition liability 557,275 702,130
Current portion of credit facility 3,000,000 2,000,000
------------ ------------
Total current liabilities 10,931,623 8,724,099
------------ ------------
Long Term Liabilities:
Deferred income taxes and other 2,221,180 2,138,657
Credit facility 32,610,000 34,600,000
------------ ------------
Total long term liabilities 34,831,180 36,738,657
------------ ------------
Total liabilities 45,762,803 45,462,756
------------ ------------
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 2002 and 2001 687,233 687,233
Note receivable from officer (715,195) (715,195)
Additional paid-in capital 20,316,740 20,256,774
Accumulated other comprehensive loss (266,424) (194,351)
Retained earnings 17,554,220 17,547,583
------------ ------------
Total shareholders' equity 37,576,574 37,582,044
------------ ------------
$ 83,339,377 $ 83,044,800
============ ============
See Notes to Condensed Consolidated Financial Statements
2
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
2002 2001
------------ ------------
(unaudited) (unaudited)
Sales $ 12,259,823 $ 14,304,135
Cost of sales 6,863,857 7,954,602
------------ ------------
Gross profit 5,395,966 6,349,533
Selling, general and administrative expenses 4,367,469 4,188,548
Amortization of intangibles 321,926 597,477
------------ ------------
Income from operations 706,571 1,563,508
Other (income) expense:
Interest expense 722,033 848,928
Other (income) expense (25,917) (45,306)
------------ ------------
Income before income taxes 10,455 759,886
Provision for income taxes 3,817 284,956
------------ ------------
Net income $ 6,638 $ 474,930
============ ============
Net income per share - basic $ 0.00 $ 0.07
============ ============
Net income per share - diluted $ 0.00 $ 0.07
============ ============
Weighted average shares outstanding - basic 6,872,334 6,872,334
============ ============
Weighted average shares outstanding - diluted 6,887,146 6,897,170
============ ============
See Notes to Condensed Consolidated Financial Statements
3
KOALA CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
2002 2001
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 6,638 $ 474,930
Adjustments to reconcile net income to
net cash provided by(used in) operating activities:
Depreciation 295,637 198,683
Amortization 321,926 597,477
Non-cash compensation expense 60,000 --
Other 11,159 --
Changes in operating assets and liabilities:
Trade accounts receivable and other receivables 42,791 2,046,458
Unbilled receivables (991,032) (878,676)
Inventories 791,741 (281,650)
Prepaid expenses and other (240,698) (1,107,649)
Accounts payable 1,313,943 (2,827,812)
Acquisition liability (144,855) --
Accrued expenses and other (11,490) 245,648
----------- -----------
Net cash provided by (used in) operating activities 1,455,760 (1,532,591)
----------- -----------
Cash flows from investing activities:
Capital expenditures (203,595) (167,134)
Patents and other (88,554) (7,533)
----------- -----------
Net cash used in investing activities (292,149) (174,667)
----------- -----------
Cash flows from financing activities:
Net proceeds (payments) on credit facility (990,000) 1,540,000
Deferred financing costs (68,493) --
----------- -----------
Net cash ( used in) provided by financing activities (1,058,493) 1,540,000
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (105,118) (14,100)
Net change in cash and cash equivalents -- (181,358)
Cash and cash equivalents at beginning of period -- 200,786
----------- -----------
Cash and cash equivalents at end of period $ -- $ 19,428
=========== ===========
See Notes to Condensed Consolidated Financial Statements
4
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(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, 2001 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 March 31, 2002 are not necessarily indicative
of the results for a full year.
2. Revenue Recognition
The Company recognizes revenue for the majority of its operations at either
the time its products are shipped, or when installation is complete in
cases where the Company performs the installation services. At SCS
Interactive (included in the Company's modular play equipment segment) the
percentage of completion method of accounting is utilized because the build
to install timeline of its jobs is of longer duration. The percentage of
completion is measured using actual costs compared to total estimated
costs. Revenues from shipping and handling are included in sales. Shipping
and handling costs are included in cost of sales.
3. Inventory:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory as of March 31, 2002 and December 31, 2001, consists of
the following:
March 31, December 31,
2002 2001
----------- -----------
Raw materials and component parts $3,779,096 $6,457,436
Work in process and finished goods 6,412,988 4,526,389
----------- -----------
$10,192,084 $10,983,825
=========== ===========
4. Credit Facility:
The Company currently has a $14 million revolving credit facility and a
$27.0 million term loan. This facility is secured by substantially all of
the assets of the Company. The availability under the revolving credit
facility is determined by a formula based on inventory and accounts
receivable balances. There are no compensating balance requirements and the
credit facility requires compliance with financial loan covenants related
to leverage, interest coverage, fixed charges and capital expenditures. A
commitment fee of .50% per annum is payable quarterly in arrears based on
the average daily unused portion of the revolving line of credit.
The term loan requires payments of $500,000 per quarter for 2002 (the first
quarter payment was made April 1, 2002), $1 million per quarter from 2003
to September 26, 2004 when the remaining balance is due, and requires $2
million in additional principal payments on April 15, 2003 if the Company
meets certain EBITDA targets for 2002. The Company is also required
5
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
4. Credit Facility (continued):
to obtain $10 million in additional capital by April 1, 2003, which is to
be used to pay down the balance of the term loan.
The interest rate on the revolving line of credit and the term loan is
variable based upon the bank's prime rate. At March 31, 2002 and December
31, 2001 the rate was 7.25%.
5. Earnings per Share:
The following table provides a reconciliation of the numerator and
denominator for earnings per share:
March 31,
---------
2002 2001
---- ----
Net income (loss) $ 6,638 $ 474,930
========= =========
Shares outstanding 6,872,334 6,872,334
Net effect of dilutive options 14,812 24,836
--------- ---------
Dilutive shares outstanding 6,887,146 6,897,170
========= =========
Options outstanding of 1,023,500 and 550,500 at March 31, 2002 and 2001,
respectively, have been excluded from the above calculation because they
were not considered common share equivalents or because their effect would
have been anti-dilutive.
6. 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 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") which is assembled at the
Company's facilities in Colorado. 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 which are manufactured for the Company
primarily in the United States. These products are sold direct and through
distribution channels, both in the United States and internationally.
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 Colorado, British
Columbia, Florida and Oregon. The playground surfacing materials are
manufactured by a
6
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
6. Business Segments (continued):
national network of sub-contractors. These products are sold direct and
through manufacturers' representatives/dealers both in the United States
and internationally.
The Company evaluates the performance of its segments based primarily on
operating profit before amortization of intangibles, 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 (in thousands):
---------------------------------------
Three Months Ended March 31, 2002
---------------------------------------
Convenience Modular
and Activity Play
Products Equipment Total
------------ ----------- ---------
Sales $ 3,792 $ 8,468 $ 12,260
Operating income (loss) 774 (67) 707
Capital expenditures 174 30 204
Total assets 20,345 62,994 83,339
---------------------------------------
Three Months Ended March 31, 2001
---------------------------------------
Convenience Modular
and Activity Play
Products Equipment Total
------------ ----------- ---------
Sales $ 4,145 $10,159 $14,304
Operating income 1,052 512 1,564
Capital expenditures 75 92 167
Total assets 21,517 69,336 90,853
7. New Accounting Pronouncements:
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets"
and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived
Assets." In accordance with SFAS 142, the Company stopped amortizing
goodwill effective January 1, 2002. The Company has also identified certain
of its trademarks as indefinite lived assets and has ceased amortization
for those assets effective January 1, 2002.
In addition, SFAS 142 changes the way the Company evaluates goodwill for
impairment. Under SFAS 142, the Company is required to split the two
segments, children's activity and
7
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
7. New Accounting Pronouncements (continued):
convenience products and children's modular play equipment, into reporting
units. Goodwill impairment is evaluated separately for each reporting unit
by comparing the fair value of the reporting unit with its underlying book
value at January 1, 2002. If the fair value of the reporting unit is less
than its book value, the Company will be required to perform an additional
test to determine the amount of the impairment. This test will consist of
determining the fair value of all of the assets and liabilities in the
reporting unit, adding the book value of the goodwill, and then comparing
that value to the overall fair value determined above. The impairment
amount for goodwill will consist of any excess of the detailed fair values
plus goodwill over the fair value of the reporting unit. The Company has
until June 30, 2002 to determine if there is an impairment of goodwill and
until December 31, 2002 to determine the amount of the impairment.
Previously filed 2002 quarterly information will be required to be restated
in future filings for any impairments subsequently recognized. The Company
believes that it is likely that it will have an impairment charge for
goodwill related to some of its acquired businesses. The amount of any such
charge has not yet been determined.
SFAS No. 144 requires that the Company evaluate its amortizable identified
intangible assets for impairment based upon undiscounted future cash flow
streams. If an impairment is identified, the amount of the impairment is
determined by comparing the carrying value to its estimated fair market
value. SFAS No. 142 requires that unamortized intangible assets be
evaluated for impairment by comparing the carrying amount with its fair
value. There were no impairments recorded in the first quarter of 2002.
Identifiable intangible assets consist of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Patents $10,820,344 $ 1,488,317 $10,806,015 $ 1,309,509
Trade secrets 5,500,000 549,999 5,500,000 504,166
Product designs 10,044,409 1,310,661 10,044,409 1,217,897
Other 201,750 122,522 201,750 114,238
----------- ----------- ----------- -----------
Total $26,566,503 $ 3,471,499 $26,552,174 $ 3,145,810
=========== =========== =========== ===========
Unamortized intangible assets:
Trademarks $ 3,975,992 $ 851,352 $ 3,971,799 $ 851,899
=========== =========== =========== ===========
At March 31, 2002, the net goodwill included in the convenience and
activities segment was $1,001,566 and the net goodwill included in the
modular play segment was $27,492,409.
Amortization expense was $321,926 and $597,477 for the quarters ended March
31, 2002 and 2001, respectively.
8
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
7. New Accounting Pronouncements (continued):
Estimated amortization expense for each of the five following years ending
December 31 is as follows:
2002 $1,265,000
2003 1,245,000
2004 1,231,000
2005 1,228,000
2006 1,228,000
The following table shows the impact of not amortizing goodwill and the
trademarks in the prior year on net income and earnings per share:
Quarter ended March 31,
-----------------------
2002 2001
---- ----
Reported net income $ 6,638 $ 474,930
Add back goodwill amortization -- 203,127
Add back trademark amortization -- 17,643
--------- -----------
Adjusted net income $ 6,638 $ 695,700
========= ===========
Basic earnings per share:
Reported net income $ 0.00 $ 0.07
Goodwill amortization -- 0.03
Trademark amortization -- 0.00
--------- -----------
Adjusted net income $ 0.00 $ 0.10
========= ===========
Diluted earnings per share:
Reported net income $ 0.00 $ 0.07
Goodwill amortization -- 0.03
Trademark amortization -- 0.00
--------- -----------
Adjusted net income $ 0.00 $ 0.10
========= ===========
8. Reclassifications:
Certain items have been reclassified in the prior year financial statements
to conform to the current year presentation. These consist primarily of a
reclassification of shipping and handling costs out of revenue and into
cost of sales. These reclassifications had no effect on net income or cash
flows.
9
KOALA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
9. Comprehensive Income:
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, requires the disclosure of comprehensive income/loss,
which includes, in addition to net income, other comprehensive income/loss
consisting of foreign currency translation adjustments, which are not
included in the traditional statement of operations. A reconciliation of
net income to comprehensive income is as follows:
Quarter ended March 31,
-----------------------
2002 2001
---- ----
Net income $ 6,638 $ 474,930
Foreign currency translation adjustment (72,073) (22,113)
--------- ---------
Total comprehensive income (loss) $(65,435) $ 452,817
========= =========
10. Subsequent Event:
On April 29, 2002, Mark Betker, the Company's Chief Executive Officer,
resigned from the Company and entered into a Memorandum of Understanding
(Memorandum) that outlines the terms of Mr. Betker's discontinuation of
service and is anticipated to replace the separation agreement, executed on
August 29, 2001, between Mr. Betker and the Company. Some of the key terms
of the Memorandum are as follows:
o The Company will repurchase from Mr. Betker 14,000 shares of common
stock for $1.69 per share, the market price on April 29, 2002.
o The Company will pay Mr. Betker severance of $250,000 over the next
twelve months.
o The Company will forgive a promissory note from Mr. Betker for
$715,195 on the date it becomes due (April 29, 2003) provided that he
returns the 80,000 shares he purchased with part of the proceeds of
such note and provided that he remains in material compliance with the
terms of the agreement.
o For a period of two years, Mr. Betker agrees not to compete with the
Company or to solicit any employees of the Company.
o The parties agree to enter into a consulting agreement whereby Mr.
Betker will provide consulting services at the request of the Board of
Directors.
The Company expects to record a pre-tax expense of approximately $900,000 to
recognize this transaction during the second quarter of 2002, of which
approximately $600,000 represents a non-cash charge related to the forgiveness
of the note.
10
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that describe our business and
our expectations. All statements, other than statements of historical fact,
included in this report that address activities, events or developments that we
expect, believe, intend or anticipate will or may occur in the future, are
forward-looking statements. When used in this report, 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 and Section 21E
of the Securities Exchange Act of 1934 regarding events, conditions and
financial trends that may affect our future plan of operations, business,
strategy, operating results and financial position. 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 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 Jim Zazenski, our chief operating officer;
substantial competition from larger companies with greater financial and other
resources than the Company; the risk associated with the Company's significant
outstanding indebtedness; our dependence on suppliers for manufacture of some of
our 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 our existing and future products. See "Risk Factors" in Form
10-K for the year ended December 31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are 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. Our sales
are derived from two business segments, family convenience and children's
activity products and children's modular play equipment. Our family convenience
and activity products include baby changing stations and high chairs, activity
tables, carpets and foam play products. Children's modular play equipment
includes indoor and outdoor playground equipment, outdoor playground surfacing
and interactive play equipment used in water parks, family entertainment centers
and amusement parks. We intend to capitalize on brand name recognition
established through our market-leading Koala Bear Kare Baby Changing Station.
We market our 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. We market our products through an integrated
program of direct sales and distribution through a network of independent
manufacturer's sales representatives and dealers. We are continually working to
expand our sales and marketing efforts through the addition of manufacturer's
sales representatives, dealers and Company sales representatives.
We recognize revenue for the majority of our operations at either the time our
products are shipped, or when installation is complete in cases where we perform
the installation services. At SCS Interactive (included in our modular play
equipment segment) the percentage of completion method of accounting is utilized
because the build to install timeline of its jobs is of longer duration. The
percentage of completion is measured using actual costs compared to total
estimated costs. Revenues from shipping and handling are included in sales.
Shipping and handling costs are included in cost of sales.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For a discussion of other accounting policies that we believe are material to
our business see "Critical Accounting Policies and Estimates" in our Form 10-K
for the year ended December 31, 2001.
Our quarterly revenues and net income are subject to fluctuation based on
customer order patterns and our 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 March 31, 2002 compared to Three Months Ended March 31, 2001
(dollars in thousands).
Sales decreased 14.3% to $12,260 for the three months ended March 31, 2002
compared to $14,304 for the three months ended March 31, 2001. Convenience and
activity product segment sales decreased 8.5% to $3,792 for the three months
ended March 31, 2002 compared to $4,145 for the three months ended March 31,
2001. The decrease was due primarily to softening economic conditions. Modular
play equipment segment sales decreased 16.6% to $8,468 for the first quarter of
2002 compared to $10,159 for the first quarter of 2001. The decrease was due to
the softening economic conditions described above, a delay in mailing the
catalog at our Park Structures division and timing delays in certain large
orders at SCS.
Gross profit for the first quarter of 2002 was $5,396 (44.0% of sales) compared
with $6,350 (44.4% of sales) for the first quarter of 2001. The decrease in
gross profit as a percentage of sales was primarily because of the impact of the
lower sales relative to our fixed production costs. This was offset by our
overall lower level of costs resulting from the operational restructuring and
workforce reductions we undertook in the fourth quarter of 2001.
Selling, general and administrative expenses increased for the first quarter of
2002 to $4,367 (35.6% of sales) from $4,189 (29.3% of sales) for the same period
in 2001. Sales and marketing expenses decreased $444 to $1,328 for the first
quarter of 2002 compared to $1,772 for the first quarter of 2001. This decrease
was due primarily to the lower sales and resulting lower sales commissions.
General and administrative expenses increased $622 to $3,039 for the first
quarter of 2002 compared to $2,417 for the first quarter of 2001. The increase
in general and administrative expense was primarily the result of higher legal
and accounting costs and costs associated with the implementation of our new
Oracle accounting system, offset by the employee reductions discussed above.
Amortization expense from intangible assets decreased for the first quarter of
2002 to $322 from $597 for the same period of 2001. This decrease is due to the
fact that we stopped amortizing goodwill and trademarks effective January 1,
2002 with the adoption of SFAS 142. See Note 7 to the condensed consolidated
financial statements for further discussion.
We incurred interest expense of $722 during the quarter ended March 31, 2002
compared to $849 during the quarter ended March 31, 2001. The decrease in
interest expense is due to a lower average interest rate and lower borrowings in
the first quarter of 2002 compared to 2001.
Net income decreased 98.6% in the first quarter of 2002 to $6 (0% of sales) from
$475 (3.3% of sales) for the first quarter of 2001. The decrease is due
primarily to the lower level of sales compared to 2001, offset by the employee
reductions that we made in the fourth quarter of 2001, as well as the higher
level of selling, general and administrative expenses discussed above, incurred
in the Company's seasonally lowest sales quarter. Net income per share (assuming
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
dilution) for the first quarter of 2002 decreased to $0.00 per share (assuming
dilution) compared to $0.07 per share (assuming dilution) for the first quarter
of 2001.
Liquidity and Capital Resources
We finance our business activities primarily from cash provided by operating
activities and from borrowings on our credit facility. Cash provided by (used
in) operating activities for the three months ended March 31, 2002 and 2001 was
$1,456 and $(1,533), respectively. The increase in cash provided by operating
activities for the three months ended March 31, 2002 compared to the three
months ended March 31, 2001 is due primarily to changes in working capital
items. Lower inventory balances resulted in additional cash from operations in
2002 as we continued to focus on reducing inventories. In addition, our accounts
payable balances increased in 2002 as we withheld payments pending resolution of
the amendment to our credit facility.
At March 31, 2002 and December 31, 2001, working capital was $13,315 and
$14,957, and cash balances were $0 and $0, respectively. The low cash balances
are due to our practice of applying all excess cash against the line of credit
to minimize interest expense payable on line of credit balances.
We have used our operating cash flow and our credit facility primarily for the
expansion of sales and marketing activities, the development of new products,
capital expenditures and working capital. Net cash used in investing activities
was $292 and $175 for the three months ended March 31, 2002 and 2001,
respectively. The increase in cash used in investing activities was primarily
due to capital expenditures associated with the move into our new headquarters
and manufacturing facility in January 2002.
Net cash used in financing activities was $1,058 in 2002 compared to net cash
provided by financing activities of $1,540 in 2001. The use of cash in 2002 is
primarily due to payments on our revolving credit facility. We currently have a
$14 million revolving credit facility and a $27.0 million term loan. This
facility is secured by substantially all of our assets. The availability under
the revolving credit facility is determined by a formula based on inventory and
accounts receivable balances. In conjunction with the Amendment to the credit
facility discussed below, the bank fixed the borrowing base at March 31, 2002 at
$10.3 million. At March 31, 2002, we had approximately $1.7 million available
under the revolving line of credit facility. At April 30, 2002, the borrowing
base was approximately $9.2 million and we had approximately $1.0 million
available. There are no compensating balance requirements and the credit
facility requires compliance with financial loan covenants related to leverage,
interest coverage, fixed charges and capital expenditures. A commitment fee of
...50% per annum is payable quarterly in arrears based on the average daily unused
portion of the revolving line of credit.
The term loan requires payments of $500,000 per quarter for 2002 (the first
quarter payment was made on April 1, 2002), $1 million per quarter from 2003 to
September 26, 2004 when the remaining balance is due, and requires $2 million in
additional principal payments on April 15, 2003 if we meet certain EBITDA
targets for 2002. We are also required to obtain $10 million in additional
capital by April 1, 2003, which is to be used to pay down the balance of the
term loan. The interest rate on the revolving line of credit and the term loan
is variable based upon the bank's prime rate. At March 31, 2002 and December 31,
2001 the rate was 7.25%.
We were in default of certain covenants under that indebtedness at September 30,
2001. We obtained a waiver of such non-compliance which is contained in
Amendment No. 1 to the new credit facility. The waiver required, among other
things, the infusion of $10 million of capital into the Company by March 31,
2002, which would be used to reduce the balance outstanding under our term loan.
At December 31, 2001 and March 31, 2002, we were again in default of certain
covenants under that indebtedness. On April 1, 2002, we obtained a waiver of
such non-compliance which is contained in Amendment No. 2 to the new credit
facility. Under the amendment, the due date of our line of credit has been
extended to April 15, 2003, the date to
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
obtain the $10 million of additional capital is changed to April 1, 2003, the
quarterly payments for 2002 have been reduced to $500,000 per quarter for 2002
(the first payment was made on April 1, 2002), and the covenants have been
reset. The amendment also requires us to make up to $2 million in additional
principal payments on April 15, 2003 if we meet certain EBITDA targets for 2002.
Our revolving line of credit and term loan will require significant cash
payments in the future. We have various other contractual obligations, primarily
lease agreements, that also require significant future cash payments. These
obligations have not materially changed from those disclosed in our report on
Form 10-K for the year ended December 31, 2001.
We believe that our cash flow from operations and the unused capacity under our
revolving line of credit will be sufficient to fund our operations through at
least March 31, 2003. We are required under our amended loan agreements to
obtain an additional $10 million of capital by April 1, 2003 to reduce amounts
currently outstanding under our term loan. We have engaged an investment banker
to assist us with raising the additional financing. If we are unable to obtain
the additional financing, the bank could take additional steps with regard to
their loans to us, which could include declaring us in default, forcing us to
sell assets, limiting our borrowing capacity or foreclosure. If it appears that
we will not meet the covenant targets, we will consider taking additional cost
reduction steps which could include employee reductions and other spending cuts.
On April 29, 2002, Mark Betker, our Chief Executive Officer, resigned from the
Company and entered into a Memorandum of Understanding (Memorandum) that
outlines the terms of Mr. Betker's discontinuation of service and is anticipated
to replace the separation agreement, executed on August 29, 2001, between Mr.
Betker and the Company. Some of the key terms of the Memorandum are as follows:
o We will repurchase from Mr. Betker 14,000 shares of common stock for
$1.69 per share, the market price on April 29, 2002.
o We will pay Mr. Betker severance of $250,000 over the next twelve
months.
o We will forgive a promissory note from Mr. Betker for $715,195 on the
date it becomes due (April 29, 2003) provided that he returns the
80,000 shares he purchased with part of the proceeds of such note and
provided that he remains in material compliance with the terms of the
agreement.
o For a period of two years, Mr. Betker agrees not to compete with the
Company or to solicit any employees of the Company.
o The parties agree to enter into a consulting agreement whereby Mr.
Betker will provide consulting services at the request of the Board of
Directors.
We expect to record a pre-tax expense of approximately $900,000 to recognize
this transaction during the second quarter of 2002, of which approximately
$600,000 represents a non-cash charge related to the forgiveness of the note.
14
PART II - OTHER
INFORMATION
Item 1 - 5. None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
None
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
May 15, 2002 /s/James A. Zazenski
- -------------------- -----------------------------------------
President and Chief Operating Officer
(Principal Executive Officer)
May 15, 2002 /s/Jeffrey L. Vigil
- -------------------- -----------------------------------------
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
15