10-K 1 koala-10k1201.txt FORN 10-K FOR DECEMBER 31, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K __X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-22464 KOALA CORPORATION (Exact Name of Registrant as Specified in Its Charter) Colorado 84-1238908 -------- ---------- (State of Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 7881 South Wheeling Court Englewood, Colorado 80112 (Address of Principal Executive Offices) (303) 539-8300 -------------- (Registrant Telephone Number, Including Area Code) Securities Registered Under Section 12(b) of the Act: None Securities Registered under Section 12(g) of the Act: Common Stock, $.10 par value ---------------------------- (Title of Class) Common Stock Purchase Rights ---------------------------- (Title of Class) Indicate by checkmark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. _X_ Yes ___ No Indicate by checkmark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ As of March 15, 2002, the aggregate market value of the voting stock held by nonaffiliates of the registrant computed by reference to the last quoted price at which such stock sold on such date as reported by the Nasdaq National Market was $18,280,131. As of March 15, 2002, there were outstanding 6,872,334 shares of the issuer's Common Stock, $.10 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. DESCRIPTION OF BUSINESS This report contains forward-looking statements that describe our business and our expectations. All statements, other than statements of historical facts, 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 Form 10-K, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "believe" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") regarding events, conditions and financial trends that may affect 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, those discussed in "Risk Factors" below. BUSINESS We are a leading designer, producer and worldwide marketer of innovative commercial products, systems and custom solutions that create attractive family-friendly environments for businesses and other public venues. We produce family convenience products, such as baby changing stations and high chairs; children's activity products, such as activity tables, carpets and foam play products; and children's modular play equipment, including interactive water and foam play systems. We intend to continue to capitalize on brand name recognition established through our market-leading Koala Bear Kare(R) 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. Our customers include Walt Disney World, The Mayo Clinic, Target Stores, McDonalds, Pizza Hut, Burger King franchises and many other customers in the retail, health care, supermarket, entertainment venue and numerous other markets. We believe that the Koala Bear Kare brand is widely recognized among family-friendly businesses and their customers. We provide high-quality products with design features that cater to the needs of our customers. We believe that competition in our various product categories is fragmented and that we benefit from offering a broad selection of branded products to our customers. We intend to continue providing family-friendly products, systems and custom solutions through strategic initiatives including: capitalizing on brand recognition; maximizing market penetration; acquiring complementary businesses and products; maintaining low cost, high quality production; developing new solutions and enhanced products; and expanding our international marketing. History We were formed as a Colorado corporation in July 1993. Our predecessor was formed in 1987 to produce and market a newly designed baby changing station. This product established the foundation for our growth, and we believe that we are the market leader in baby changing station products in terms of units sold. During the 1990's, we developed from a single product company into a diversified designer, producer and marketer of family convenience products, children's activity products and children's modular play equipment. We introduced the Child Protection Seat in 1991 and the Infant Seat Kradle in 1993. In 1994, we acquired the rights to the Booster Buddy(R) booster seat. We began offering children's activity systems in 1996, following the acquisition of a producer of activity products. This acquisition initiated the development of the Koala Kare(TM) System, which allows businesses to create custom activity systems to suit individual space requirements and customer needs. We continued to expand our product offerings in 1997 with new products such as the Koala(TM) Highchair, and the acquisition of Delta Play, a custom manufacturer of creatively themed, modular indoor children's play systems. With the acquisition of Park Structures in 1998, we entered the outdoor children's modular play market. We completed several acquisitions of complementary businesses and products in 1999 and 2000. In 1999, we purchased the assets of Superior Foam & Polymers, Inc. and Smart Products, Inc. Superior Foam manufactures and markets children's foam activity products to amusement parks, water parks, shopping malls and retail stores. Smart Products manufactures and distributes child safety and parental convenience products to grocery stores, retailers and restaurants. In 2000, we completed a stock and asset purchase of SCS Interactive, Inc. and an asset purchase of Fibar, Inc. SCS designs, manufactures and markets children's interactive waterplay equipment for use in family entertainment centers, water parks and amusement parks. Fibar markets and distributes playground surfacing systems for use in outdoor playground and equestrian sites. As a result of our product diversification efforts, the Baby Changing Station, while continuing to be a growth opportunity for us, represented less than 15% of our sales in 2001. 2 Industry Overview The Family Convenience and Children's Activity Market. We believe that parents are traveling, shopping and dining out with their children more often due to societal changes and demographic trends, including the strict time constraints of two-income and single parent households. A March 1998 national market research study conducted for us by the Howell Research Group reported that seven out of ten parents (68%) interviewed shopped with their children either all the time (27%) or most of the time (41%). According to the study, the impact of child-friendly facilities is very positive. The majority of women and a large number of the men interviewed said they shopped more frequently and spent more time and money at child-friendly stores. We believe that businesses increasingly need to create an accommodating and positive environment for children in order to attract customers, increase sales and create customer loyalty. We have developed and acquired family convenience and children's activity products to help businesses meet these needs. The United States Department of Justice estimates that there are over 5,000,000 public facilities in the United States that could use our bathroom family convenience products, including restaurants, retail stores and shopping centers. We estimate that the market for our children's activity products includes approximately 1,500,000 facilities. We currently target over 160 categories of facilities to purchase our family convenience and children's activity products, including quick service restaurants, airports, stadiums, convention centers, supermarkets and other retail establishments. The Children's Modular Play Market. The children's modular play market is comprised of indoor and outdoor areas for child play. Customers for indoor children's modular play equipment include many of the same businesses that purchase family convenience and children's activity products. We believe that many of the same demographic trends in the family convenience and children's activity segments are driving demand for indoor children's modular play products. In addition, we believe that customers increasingly are looking for theming and custom-designed equipment in order to create a unique family-friendly atmosphere for their businesses. The children's outdoor modular play market for products produced by Park Structures, Fibar and SCS includes municipalities and other governmental agencies, public parks, public and private water parks, public and private schools, day care centers, developers, apartment complexes, family entertainment centers and amusement parks. We believe that this market has expanded for a number of reasons. As cities across the United States have grown, the trend has been to provide their constituents with better public services, including playground equipment in public parks and recreation centers. Also, many existing outdoor play structures are not accessible to people with disabilities or the structures or their underlying surfaces do not comply with current safety codes. In addition, wood structures, which were popular in the 1970s and 1980s, are not as popular today because of safety and maintenance concerns, and because they tend to deteriorate. Therefore, we believe that municipal risk managers and others who make the buying decisions regarding outdoor play systems are replacing or expanding their existing equipment. Business Strategy Our primary business objective is to grow sales and earnings by continuing to be a leading provider of family-friendly products, systems and solutions. Our key strategic initiatives are summarized below. Operational Restructuring and Consolidation. During the second half of 2001, we initiated an operational restructuring of the Company with the intent of materially reducing operating costs and improving margins. The strategy includes a consolidation of manufacturing and administrative functions into our new Denver headquarters and manufacturing facility, implementation of a new Oracle accounting system, personnel reductions, elimination of certain low margin service offerings and selected price increases. The restructuring is currently being implemented and we expect to complete the process before the end of 2002. Capitalize on Brand Name Recognition. We believe that the Koala Bear Kare brand name has achieved significant recognition with businesses and their customers through the reputation of the Koala Bear Kare Baby Changing Station. We intend to continue to leverage this brand recognition through the marketing and licensing of our Koala Bear Kare brand and our other family convenience and children's activity products and children's modular play systems. In addition, we have begun to pursue licensing the Koala brand to related products. As an example, we recently entered into a product licensing agreement with Associated Hygenic Products to market a disposable diaper changing pad to be sold in the retail market. Maximize Market Penetration. We intend to continue to increase market penetration through an integrated marketing effort that includes manufacturer's representative and dealer sales, direct sales, trade shows and trade magazine advertising. We are continuing our direct telesales programs, which include direct mail campaigns. We also intend to expand the cross selling of products to new and existing customers and to expand the categories of facilities that purchase our products. 3 Acquire Complementary Businesses and Products. We have an established acquisition program and regularly evaluate strategic acquisitions as a means of adding complementary businesses and product lines. We have completed several acquisitions and believe that there are opportunities to acquire other products or business lines that would complement current operations, expand current product offerings and provide additional opportunities to leverage our marketing efforts. We intend to resume our acquisition program when our consolidation and cost restructuring strategy has been fully implemented. Maintain Low Production Costs and High Quality. We practice a "buy or build" philosophy that seeks to maintain low production costs without compromising quality. As a result, a substantial portion of our manufacturing and assembly functions are currently outsourced, and certain design functions are handled by us. We believe that our new office and manufacturing facility provides us with opportunities to vertically integrate operations by acquiring equipment and bringing the manufacturing process in-house. As a result, our reliance on contract manufacturing may decrease and we expect that this would result in meaningful savings and improve overall quality. Develop New Solutions. We seek to develop new solutions in order to meet customer expectations and expand our business. For example, we designed the Koala Highchair with unique features in response to restaurants' concerns about the cleanliness and difficulties using their existing highchairs. We also continually seek to improve and enhance our existing products and systems in response to customer needs. Expand International Marketing. We sell our products worldwide. Sales to customers outside of North America have increased from approximately $1.1 million in 1996 to approximately $3.7 million in 2001. We have hired a sales vice-president who is specifically focused on the international market. In addition, we plan to increase our international sales through increased cross-selling of our products. Products We market our products in two product segments: family convenience and children's activity products, and children's modular play equipment products. These products are sold to businesses and other customers located in all 50 states and in approximately 50 foreign countries. Family Convenience and Children's Activity Products. Our family convenience products include: o the Koala Bear Kare Baby Changing Station o the Koala Bear Kare Child Protection Seat o the Koala Bear Kare Infant Seat Kradle o the Booster Buddy booster seat, and o the Koala Bear Kare Highchair We also market disposable sanitary paper liners to be used with our Baby Changing Stations. All of these products, except for the Infant Seat Kradle and the sanitary paper liners, are constructed out of durable polyethylene plastic and are highly resistant to accidental damage or vandalism. With the acquisition of Smart Products, we added complementary infant safety and customer service products including shopping cart seats, highchairs, and SmartStrap child protection straps. Our children's activity products consist of the Koala Bear Kare Block and Maze Activity Table, Koala Bear Kare Wonder Wall and Koala Bear Kare Activity Center Carpet. These products, which include manipulative activities and colorful blocks, letters, numbers and designs, are designed for use in commercial waiting areas of businesses such as grocery stores, auto dealers, retail stores, physicians and other professional services providers. These products are solidly constructed to withstand heavy use and include hygienic maintenance features. We market these products individually or under the name Koala Kare Systems. The Koala Kare Systems allow businesses to create custom activity systems to suit individual space requirements and customer needs. These systems range from individual activity tables in doctors' offices to large children's activity or play areas in supermarkets comprising several thousand square feet where children are supervised in a controlled environment. Selected activity products with interactive video machines and other interactive products create a children's activity setting that allows parents to shop while their children are entertained in a safe, clean and child-friendly environment. The acquisition of Superior Foam added children's foam activity products to our product offerings. The foam activity products are manufactured using a proprietary process for applying specialized urethane coatings, which make the products durable and resistant to extreme weather conditions. The products are created in a variety of customized themes ranging from zoo animals to pirate ships and are typically sold to water parks, shopping malls and retail stores. 4 Children's Modular Play Equipment. We currently market modular and custom themed children's indoor play equipment. We work with each customer to create custom designs that incorporate traditional modular components such as tunnels, walkways, ladders and ball pits with creative theming, such as a pirate's ship or jungle tree house. These products are designed for use in family entertainment centers, quick-service restaurants and shopping malls. The acquisition of Park Structures in 1998 and Fibar in 2000 expanded our product offerings into children's outdoor modular play equipment and playground surfacing. Park Structures designs, manufactures and markets modular and custom outdoor play equipment for municipalities and other governmental agencies, parks, public and private schools, day care centers, developers and apartment complexes. Park Structures products consist of traditional modular outdoor playground equipment such as decks, elevated climbing areas and slides. These components are available in a wide variety of sizes, configurations and colors. Fibar markets and distributes playground surfacing systems consisting primarily of engineered wood fibers that provide a safe and accessible playground surface at a lower relative cost. SCS manufactures interactive water play equipment such as water cannons and other interactive elements presented in attractive themes and combined with slides, fountains and waterfalls used in water parks. SCS also created a dry variation of its interactive designs marketed as the "foam factory" to family entertainment centers. Marketing and Sales Family Convenience and Children's Activity Products. Our marketing strategy for family convenience and children's activity products consists of extending the Koala Bear Kare brand name, introducing new concepts and creating new groups of customers for our products around a theme For Happy Faces in Public Places(R) to existing and new groups of customers. We use a combination of dealer sales and direct sales to market these products. Since 1995, we have increased our sales and marketing costs in an effort to increase sales to a wider market. Our distribution network consists of manufacturer's sales representatives and dealers. The manufacturer's sales representatives promote our products to the dealers, who purchase the products from us and resell them to customers. The manufacturer's representatives receive commissions from the sale of our products. Most dealers are not granted any exclusive rights for products or territory. We sell products of Smart Products mostly through manufacturer's representatives and dealers. Dealer sales have accounted for a minority of our domestic sales and a majority of our foreign sales. International dealers are currently served by factory sales managers who are experienced in international sales. We intend to continue to expand international marketing activities by adding dealers and by locating Koala employees in selected markets around the world to supervise international sales activity. In addition, we plan to increase international sales of convenience and children's activity products through increased cross-selling of these products. Our direct sales program targets national accounts who prefer to buy directly from manufacturers and other end users that do not qualify as national accounts or are not served by dealers. Superior Foam's unique product offerings are sold by our direct sales staff. In 1999, we broadened our direct sales capabilities with the expansion of our KoalaTel telesales division. The expansion included capital investment in state-of-the-art telecommunications and data equipment designed for managing our telesales and direct mail programs. We support our marketing and sales activities through attendance at national and international industry trade shows in various market segments, and by advertising in trade magazines. Our advertising theme communicates that being family-friendly may increase business through increased customer loyalty. Our active public relations program is aimed at providing information about the concept of being family-friendly and illustrating the benefits of our family convenience and children's activity products. We assist industry publications in creating editorial content or news stories about the emerging trends around families' decisions about where to shop, eat or visit. In addition, our sales managers host educational seminars for decision-makers at key industry trade shows. Children's Modular Play Equipment. We market and sell custom indoor modular play equipment through trade show attendance, trade journal advertising and regular contact by our salespeople with designers of projects in various markets. Park Structures sells outdoor modular play equipment nationwide and internationally through a network of approximately 40 independent dealers and through an in-house sales staff that covers South Florida. Park Structures' marketing programs include attendance at national industry and regional trade shows, a focused media advertising campaign, incentive programs designed to stimulate growth and the publication of a product catalog. Delta Play sells indoor modular play equipment nationwide and internationally through an in-house sales staff. Delta Play's marketing programs include attendance at national and regional industry trade shows, a focused media advertising campaign and publication of a product catalog. Fibar markets playground surfacing products through a network of approximately 42 dealers, most of whom also sell modular playground equipment. SCS's interactive play equipment is marketed and sold through trade show attendance, trade journal advertising and by direct sales staff and designers. We plan to increase our international sales through the marketing of the modular play equipment of Park Structures and SCS. 5 Design and Manufacturing We practice a "buy or build" philosophy in an effort to maintain low production costs either through our personnel or outsourcing where it is more cost-effective and does not compromise quality. As a result, a portion of manufacturing and assembly functions currently are outsourced. We believe that outsourcing to qualified suppliers, where appropriate, enables us to focus our resources on marketing and sales while maintaining quality control through frequent contacts with our suppliers. We actively monitor our supply relationships and will consider shifting the manufacture of key components in-house when strategic and economic factors warrant. As described above, we believe that our new office and manufacturing facility provides us with opportunities to vertically integrate operations by acquiring equipment and bringing the manufacturing in-house. Family Convenience and Children's Activity Products. We develop the concepts for our family convenience and children's activity products in response to the needs of our customers. We outsource the tooling design. In the manufacturing process, components are molded to our specifications using various plastic molding processes and delivered to us for assembly and shipment to customers. We use a number of manufacturers for our products. We believe that adequate alternative sources of supply are available for these products if necessary. Our foam products are manufactured using a proprietary manufacturing process at our plant located near Austin, Texas. Unique designs are sculpted out of foam and are coated with a proprietary coating and application technique resulting in a highly customized and colorful product. The manufacturing process requires minimum training of our personnel and utilizes readily obtainable materials. Children's Modular Play Equipment. Our engineers design children's indoor modular play systems using computer design technologies applied to modular components. We own all of the significant molds and tooling used in the manufacture of specialized components used in the play equipment. Components for these systems are manufactured to our specifications and purchased from outside vendors. We fabricate certain metal and fiberglass components at our plant located near Vancouver, British Columbia, Canada. These components are then assembled by us at the plant and shipped to customers. We believe there are adequate alternative sources of supply for the manufacture of the indoor modular play equipment components. We custom design children's outdoor play systems using the same technology. We subcontract the plastic molding, fabrication and plastisol coating of deck platforms and aluminum casting to third parties. We also own all of the significant molds and tooling for these functions. We fabricate the majority of the steel playground parts and assemble our modular play equipment at our plant located in Coral Springs, Florida. We believe there are adequate alternative sources of supply for the manufacture of the outdoor modular play equipment components. Fibar uses a nationwide network of suppliers that manufacture the engineered wood fibers to our specifications and deliver the product directly to the customer's site for installation. As a result, we maintain very low inventory levels, primarily drainage materials included in certain surfacing systems. We control the quality of the product delivered to the customer by obtaining samples of delivered product and testing compliance with rigid specifications. We believe there are adequate alternative sources of supply for the manufacture of the engineered wood fibers. SCS designs its products using computer design technologies for the modular components. We subcontract the manufacture of plastic molding and certain other raw material components with third parties. We own all of the significant molds and tooling for these functions. We fabricate the structural steel components for water park equipment at our facility located near Portland, Oregon and we use a sub-contractor to manufacture the structural steel components for non-water park equipment. We manufacture the interactive equipment parts at our facility located in Denver, Colorado. We believe there are adequate alternative sources of supply for the manufacture of the modular waterplay equipment components. Competition Family Convenience and Children's Activity Products. We market our family convenience products to businesses rather than to consumers. Presently, the commercial products division of Newell, Inc. and a number of other companies also sell family convenience products to the same commercial markets. We believe that such competition has not had a material impact on us. We are not aware of any companies marketing diaper changing stations intended for the commercial market that have a greater market share than we do. We believe that there is an under-served market for family convenience products. We believe that we are the only company focused on marketing a wide variety of family convenience products to the commercial market. We believe that our Koala Bear Kare products have brand name recognition that provides us with a significant competitive advantage. We compete principally on the basis of brand name recognition, quality, customer service and price. 6 Competition in the children's activity product area is mainly from small businesses that make similar products and from efforts by individual businesses to create their own activity areas. We believe that our ability to offer custom designed products under our Koala Kare Systems program and our product quality and service give us a competitive advantage. We believe that our foam products are unique and that no competitor offers a product that is as soft and durable. Children's Modular Play Equipment. Our primary competitors in children's indoor modular play equipment are Little Tikes Commercial Play Systems, Inc., a unit of Newell, Inc., and Miracle Recreation Equipment Company. We compete in the children's indoor modular play market on the basis of quality, safety, service and our ability to provide a custom themed unit designed to meet the unique needs of the customer. Competition in children's outdoor modular play equipment is primarily from Game Time, Inc., a subsidiary of PlayCore, Inc., Miracle Recreation Equipment Company, Landscape Structures, Inc., Play World Systems and Little Tikes. We believe that Park Structures competes on the basis of design, quality and safety, price and customer service. Competition in playground surfacing is from companies with higher priced products, primarily rubber tiles and poured in place rubber surfaces. Competition in interactive water park equipment is from White Water Industries and from alternative entertainment offerings. SCS competes primarily on the basis of quality and design. Fibar competes primarily on price. Product Warranties and Insurance For family convenience and children's activity products, we provide a replacement guarantee for one year against damage of products from natural disasters or vandalism, subject to a $100 service charge. We also provide a five-year limited warranty on parts and labor covering any defects in workmanship. For children's modular play equipment, we provide warranties ranging from a one year limited warranty on parts and labor covering defects in workmanship to a lifetime warranty on certain metallic parts. Historically, we have experienced minimal returns and warranty claims. We carry product liability insurance in an amount that we believe is adequate. Product liability claims against us to date have been covered by insurance. Patents and Trademarks We own registrations and pending applications for many trademarks, including the "Koala Bear Kare" mark and several variations of the Koala Bear Kare logo that are featured on our products. We believe that the various Koala Bear Kare trademarks are widely recognized and important to our continued success. Each of our products marketed under this trademark prominently display a blue and white sticker with one of our logos. We own utility and design patents for many of our products. These patents deter competitors from duplicating the design elements of our products but, with the exception of SCS, we do not believe that such patents provide significant barriers to entry. We believe that SCS has created an interlocking patent portfolio that creates a barrier to duplicating the primary operating mechanisms of our waterplay equipment. Regulation Some of our products are subject to the Federal Consumer Product Safety Act and the Federal Hazardous Substances Act, among other laws, which empower the Consumer Product Safety Commission (CPSC) to mandate the repair, replacement or refund of the purchase price of products or, in extreme cases, even ban or force a recall of a product that presents a substantial risk of injury to the public. The CPSC may also issue civil and criminal penalties for knowing violations of the Acts. Any such determination by the CPSC is subject to court review. Similar laws exist in some states and cities in the United States and in many jurisdictions throughout the world. Our modular play equipment is designed and inspected to meet the safety guidelines of the CPSC and the American Society for Testing and Materials (ASTM) for commercial playground systems. We conduct in-house testing and inspection to ensure compliance with the CPSC and ASTM guidelines. Park Structures is a member of the International Play Equipment Manufacturers Association, a member-driven international trade organization that represents and promotes an open market for manufacturers of playground equipment. Park Structures also performs manufacturing operations in conformance with the quality control standards required by ISO 9001. Park Structures received ISO 9001 certification in February 2000 and was recertified in December 2001. Our operations in the United States and Canada involve light fabrication activities utilizing paint, metal and fiberglass. We have the necessary permits to conduct these activities, and we believe that we are in material compliance with United States federal and state environmental laws and regulations and Canadian environmental laws and regulations. 7 Many of our customers are required to comply with aspects of the Americans With Disabilities Act (ADA). We provide various ADA compliant products to assist our customers in meeting these requirements. Employees We had approximately 271 full-time employees as of December 31, 2001, with approximately 225 in the United States and 46 in Canada. At March 15, 2002, we had approximately 250 employees. Our United States employees are not covered by any collective bargaining agreements. Our Canadian employees are represented by the International Wood and Allied Workers of Canada. A collective bargaining agreement is currently in place with the International Wood and Allied Workers and is effective until 2004. We believe that relations with our employees are good. Foreign Operations We acquired the assets of Delta Play, a Canadian based provider of modular play equipment, in June 1997. We created a foreign subsidiary to own and operate this business. Delta Play's sales, marketing, administrative, manufacturing and distribution functions are decentralized. The president of Delta Play reports to one of our executive officers. Strategic planning, market development and resource allocation are the responsibility of the president in conjunction with our Chief Executive Officer. We believe that there is no greater risk attendant to the business conducted by Delta Play than to that of our domestic operations. 8 RISK FACTORS In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our recent losses and resulting reduced cash flows could impair our ability to grow at historical rates. We incurred losses and reduced cash flows in 2001 compared to our historical operating results. This could impair our ability to obtain credit from our suppliers, obtain additional credit from other outside sources and fund our internal growth. This could also impact our ability to obtain orders and deposits from our customers. Our growth has strained our resources, and if we are unable to manage our growth, our operating results will be impaired. We have experienced significant growth through acquisitions over the last few years, which has strained our resources. A continuing period of significant additional growth could place more strain on our management, operations and other resources. Our ability to manage growth will require us to continue to invest in operational, financial and information systems and to attract, retain, motivate and effectively manage our employees. The inability of our management to effectively manage growth could have a material adverse effect on our business, financial condition and results of operations. See "Business." We have significant outstanding indebtedness that requires large debt service payments and limits our ability to receive additional financing. In order to finance our acquisition strategy and working capital requirements, we have incurred significant indebtedness. As of December 31, 2001, we had approximately $36.6 million of indebtedness outstanding under our line of credit and term loan. We are currently required to pay approximately $230,000 in interest per month to service such indebtedness and $500,000 per quarter in principal in 2002. In addition, we may be required to make up to an additional $2 million payment in April 2003 if we meet certain EBITDA goals during 2002. Our debt service payment will increase if the prime rate increases. In connection with the line of credit and term loan, we granted to our lenders a security interest in all of our assets. In addition, to the extent that our assets continue to secure debt, such assets will not be available to secure additional indebtedness. 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, 2002, we were again in default of certain covenants under that indebtedness and anticipated, based on our expected results, that we would be in default throughout 2002. 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 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 and the covenants have been reset. The amendment also requires us to make up to $2 million in additional principal payments on April 30, 2003 if we meet certain EBITDA targets for 2002. 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. Any new financing we obtain may significantly dilute our existing common shareholders. We are currently attempting to obtain new financing to reduce our term loan. It is likely that any financing that we obtain will be senior in liquidation preference to our common stock, will dilute the existing common shareholders, and will have a significant impact on the earnings per share available to our common shareholders. This could cause the price of our common stock to fluctuate significantly. Our quarterly operating results have varied significantly. Our sales and earnings have historically and may in the future fluctuate from quarter to quarter based on several factors such as the number of new commercial construction starts, production delays, cost overruns on large projects, public budget processes, supply costs and general economic conditions. Demand for our products can vary significantly from quarter to quarter due to seasonality, revisions in customer budgets or schedules and other factors beyond our control. Due to all of the foregoing factors, our results of operations have and could in the future fall below our estimates and the expectations of securities analysts and investors. In this event, the market price of the common stock has, and could in the future be materially adversely affected. 9 If we do not successfully implement our restructuring, our operating results could be impacted. In the second half of 2001, we began implementing an operational restructuring plan designed to reduce costs and improve our margins. The restructuring is expected to be completed in 2002. If we are not successful in implementing the restrucuring as planned, our operating results could be significantly impacted. If we fail to successfully implement our new company-wide enterprise resource planning software system our business may suffer. Our success depends, in part, on the accuracy and proper utilization of enterprise resource planning software. We currently rely on several different management information systems to assist us in procurement, sales and other decisions. We believe that our current software systems are no longer adequate for our purposes. We are currently in the process of replacing our existing software systems with a new integrated platform. If our new system is not installed in a timely manner or is not sufficient to sustain our operations and our anticipated or actual growth, our purchasing and sales operations and our financial reporting could be disrupted, which could seriously harm our operating results and cause the price of our common stock to decline. In order to ensure the sufficiency of our system, we may need to invest in software enhancements and expanded capabilities, as well as in additional computer hardware, which may be expensive. Our business could be hurt if we make acquisitions that are not successful. An integral part of our business strategy has been to acquire other companies, assets or product lines that complement or expand our existing business. Acquisitions involve a number of risks that could materially affect us, including the diversion of management's attention, the need to assimilate the operations and personnel of the acquired companies, the impairment of acquired intangible assets and the potential loss of key personnel of the acquired companies. Future acquisitions may require the payment of consideration in excess of book value and may result in the issuance of additional shares of our common stock or the incurrence of additional indebtedness, all of which could have a dilutive effect on our net income per share. In addition, products offered following a future acquisition may have lower gross profit margins than our current product lines. There can be no assurance that any acquisitions will not have a material adverse effect on our business, financial condition and results of operations. We currently do not have any agreements or understandings regarding potential acquisitions. See "Business--Business Strategy." We may become subject to product liability claims, which may impact our results. Our products are designed for use with infants and children. The children's modular play equipment industry may be subject to a greater number of claims than the convenience products industry. We carry product liability insurance in an amount that we believe is adequate to cover risks associated with our products. There can be no assurance, however, that existing or future insurance coverage will be sufficient to cover all product liability risks or that such insurance will be available at favorable rates. Defending a product liability claim could significantly divert management's attention. A partially or completely uninsured claim against us, if successful, could have a material adverse effect on our business, financial condition and results of operations. See "Business--Product Warranties and Insurance." We face intense competition. The markets for our products are highly competitive and include numerous domestic and foreign competitors, including well-known manufacturers of consumer and commercial child play equipment, furniture and other juvenile products that are substantially larger and have greater financial, marketing and other resources than we have. There can be no assurance there will not be new entrants into our markets or that we will be able to compete successfully in the future. See "Business--Competition." If we lose our key personnel or cannot recruit additional personnel, our business may suffer. Our future success will depend to a great extent upon the continued service of certain senior management personnel and our continuing ability to attract, assimilate and retain highly qualified personnel. Competition for such personnel is intense, and there can be no assurance that we can retain our key personnel or that we can attract, assimilate and retain such employees in the future. Although we have non-disclosure and non-compete agreements with many of our employees, including our executive officers, we do not have employment agreements with any of our executive officers. We do not maintain key-person life insurance policies on any employees, including Mark A. Betker, our Chairman, Chief Executive Officer and President. The loss of the services of Mr. Betker or other key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse effect upon our business, financial condition and results of operations. 10 If our outside manufacturers fail to supply us in a timely and cost-effective manner, our business may suffer. A large number of the components for our products are manufactured to our specifications by outside suppliers. Our ability to assemble and distribute our products depends upon our ability to obtain an adequate uninterrupted supply of component parts. Although we own the significant tooling and molds used in manufacturing our products, we do not have any long term agreements or contracts with suppliers, most of which are the single source of supply. While we believe that there are adequate alternative sources of such component parts, there can be no assurance that any interruption in the supply of such component parts to us or a change to a new supplier would not have a material adverse effect on our business, financial condition or results of operations. Moreover, if our tooling or molds are damaged, we could suffer additional delays and costs until such tooling or molds are repaired or replaced. Although we have business interruption insurance to protect us against such interruptions, such insurance may not prevent such interruptions from having a material adverse effect upon our business, financial condition and results of operations. See "Business--Design and Manufacturing." We face risks associated with international operations. As part of our growth strategy, we are seeking opportunities to further expand our products and systems distribution into international markets. Sales to customers outside of North America accounted for approximately 6% of sales in 2001. In addition, we operate a manufacturing and assembly facility in Vancouver, British Columbia, Canada. Our international operations are subject to a wide range of general business risks, including: o fluctuations in currency exchange rates; o unexpected changes in legal and regulatory requirements; o export restrictions, tariffs and other trade barriers; o political and economic instability; o restrictions on repatriation of funds or profits from foreign markets; o longer payment cycles and problems in collecting accounts receivable; o difficulty in protecting our intellectual property; o potentially adverse tax consequences, including limitations on our ability to claim a foreign tax credit against our U.S. federal income taxes; and o regulation by foreign regulatory authorities. These and other factors associated with international operations may have a material adverse effect on our business, financial condition and results of operations. We are subject to the Foreign Corrupt Practices Act, which generally prohibits U.S. companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business. We may be exposed to liability under the Foreign Corrupt Practices Act as a result of past or future actions taken without our knowledge by dealers and other intermediaries. Any liability that we incur under the Foreign Corrupt Practices Act could be material. We are subject to burdensome government regulations that could impair our operating results. Some of our products are subject to the provisions of the Federal Consumer Product Safety Act and the Federal Hazardous Substances Act and the regulations promulgated thereunder. The acts authorize the Consumer Product Safety Commission to protect the public from products that present a substantial risk of injury. The Consumer Product Safety Commission can require the repurchase or recall by the manufacturer of articles that are found to be defective and impose fines or penalties on the manufacturer. Similar laws exist in some states and cities and in other countries in which we market our products. Any recall of our products could have a material adverse effect on our business, financial condition and results of operations. To date, we have not recalled any of our products. See "Business--Regulation." We must continue to protect existing, and develop new, intellectual property to remain competitive. We own many trademarks, including the Koala Bear Kare logo, that identify us and our products and believe that such trademarks provide a significant competitive advantage. Although we intend to vigorously defend our trademarks, there is no guarantee that such trademarks can be successfully defended against infringement. Further, although we have design patents that cover the design and appearance of certain of our existing products, such patents may not provide meaningful protection against entry by competitors into our markets. See "Business--Patents and Trademarks." 11 Our stock price has been and may continue to be volatile, which may result in losses to our shareholders. The trading price of our common stock has been and is likely to continue to be volatile and could fluctuate widely in response to many of the following factors, some of which are beyond our control: |X| variations in our operating results; |X| announcements of new product lines by us or our competitors; |X| changes in expectations of our future financial performance, including financial estimates by securities analysts and investors; |X| violations of our debt covenants; |X| changes in operating and stock price performance of our competitors; |X| additions or departures of key personnel; and |X| future sales of equity, incuding sales required by our lenders. Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock. ITEM 2. DESCRIPTION OF PROPERTIES In January 2002, we moved into a new 115,000 square foot office and manufacturing facility in Denver, Colorado. This facility serves as the Company headquarters as well as a manufacturing and assembly facility for interactive play equipment and children's convenience and activity products. The lease on this facility expires in 2012. We lease a 67,000 square foot plant near Vancouver, British Columbia, where we manufacture and assemble indoor modular play equipment. This lease expires in 2003. Our manufacturing and assembly operations of our outdoor modular play equipment are conducted from a leased 90,000 square foot facility in Coral Springs, Florida. This lease expires in 2007, with one option to renew the lease for an additional five-year term. We lease an approximately 11,000 square foot facility near Austin, Texas where we manufacture foam activity products with a lease expiration date in 2002. Our interactive water park equipment is manufactured at a leased 40,000 square foot facility west of Portland, Oregon. This lease expires in 2010. Fibar's sales, marketing and administrative operations are conducted at a leased 3,000 square foot office facility located in Armonk, New York. This lease expires in 2003. We believe that our facilities are adequate for our current needs. ITEM 3. LEGAL PROCEEDINGS We have been a party to litigation in the ordinary course of our businesses. We do not believe that any current litigation will have a material adverse effect upon our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters which were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2001. 12 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock trades on the Nasdaq National Market under the symbol KARE. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock for each quarter within the last two fiscal years as reported by Nasdaq. These quotations reflect inter-dealer prices, without retail markup, markdown or commissions and may not represent actual transactions. SALES PRICE ----------- LOW HIGH --- ---- YEAR ENDED DECEMBER 31, 2000 First quarter ............................................ $ 10.50 $ 17.50 Second quarter ........................................... $ 12.63 $ 15.50 Third quarter ............................................ $ 11.88 $ 16.38 Fourth quarter ........................................... $ 6.50 $ 16.31 YEAR ENDED DECEMBER 31, 2001 First quarter ............................................ $ 3.03 $ 12.00 Second quarter ........................................... $ 3.00 $ 4.25 Third quarter ............................................ $ 0.96 $ 5.40 Fourth quarter ........................................... $ 0.60 $ 1.36 As of March 15, 2002, there were approximately 125 shareholders of record. We have never paid cash dividends on our common stock. Our credit agreement contains a restrictive covenant that prohibits the payment of dividends without the lender's consent. We currently intend to retain any earnings for use in our operations and do not anticipate paying cash dividends in the foreseeable future. 13 ITEM 6. SELECTED FINANCIAL DATA

Year Ended December 31, (In thousands, except per share data) INCOME STATEMENT DATA: 2001 2000 1999 1998 1997 ~~1996~~ ---- ---- ---- ---- ---- Sales $ 59,~~706~~222 $37 61,~~135~~589 $19 37,~~101~~864 $13 19,~~621~~645 $8 14,~~938~~099 Cost of sales 3237,~~819~~137 1834,~~093~~702 818,~~628~~822 59,~~528~~172 36,~~241~~006 -------- -------- -------- -------- -------- Gross profit 22,085 26,887 19,042 10,473 8,093 ~~5,697~~ Selling, general and administrative expense 19,204 15,955 9,467 5,485 4,231 ~~2,892~~ Amortization of intangibles 2,395 2,085 959 298 201 ~~106~~ -------- -------- -------- -------- -------- Income from operations 486 8,847 8,616 4,690 3,661 ~~2,699~~ Interest expense 3,147 2,919 902 - - -- Other (income) expense 8 (363) (1) (79) (115) ~~159~~ -------- -------- -------- -------- -------- Income (loss) before income taxes (2,669) 6,291 7,715 4,769 3,776 ~~2,540~~Income ~~Provision~~tax ~~for~~(benefit) ~~income~~expense ~~taxes~~(679) 2,259 2,624 1,669 1,340 ~~644~~ -------- -------- -------- -------- -------- Net income (loss) $ (1,990) $ 4,032 $ 5,091 $ 3,100 $ 2,436 ~~$1,896~~ ======== ======== ======== ======== ======== Net income (loss) per share: Basic $ (0.29) $ 0.60 $ 0.81 $ 0.61 $ 0.49 Diluted $ (0.3929) ~~Diluted~~ $ 0.58 $ 0.78 $ 0.60 $ 0.48 ~~$0.38~~ Weighted average common shares outstanding: Basic 6,872 6,770 6,257 5,072 5,007 ~~4,862~~ Diluted 6,872 7,001 6,516 5,198 5,096 ~~5,047~~ BALANCE SHEET DATA: Working capital $ 14,957 $ 19,068 $ 12,629 $ 8,732 $ 3,945 ~~$5,644~~ Total assets 83,045 91,429 48,558 41,605 14,957 ~~10,351~~ Total liabilities 45,463 51,690 18,~~232~~231 20,109 2,107 ~~573~~ Shareholders' equity 37,582 39,739 30,327 21,496 12,850 ~~9,779~~

Notes: The Company has completed a number of acquisitions during the above periods as described below. See MD&A for further discussion of the impact of these acquisitions. (A) SCS Interactive and Fibar were acquired during 2000. (B) Superior Foam and Smart Products were acquired during 1999. (C) Park Structures was acquired during 1998. (D) Delta Play was acquired during 1997. (E) Shipping and handling costs have been reclassified out of sales and into cost of sales for all prior periods in order to be consistent with the 2001 presentation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With the exception of historical matters, the matters discussed herein are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements concerning anticipated trends in sales and net income, the mix of our sales, projections concerning operations and available cash flow. Our actual results could differ materially from the results discussed in such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed in "Risk Factors" and elsewhere in this Form 10-K. 14 Koala Overview We are a leading designer, producer and worldwide marketer of innovative commercial products, systems and custom solutions that create attractive family-friendly environments for businesses and other public venues. 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 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. Our sales have grown from $3.8 million in 1993 to $59.2 million in 2001, with sales growth generated by both the acquisition of seven businesses and the internal growth achieved by these businesses during this period. Prior to 1996, our sales were derived primarily from the sale of family convenience products, which include Baby Changing Stations, disposable sanitary liners for the Baby Changing Stations, Child Protection Seats, Infant Seat Kradles and Booster Buddy Seats. One of our strategies has been to reduce our dependence on Baby Changing Stations through the acquisition and development of complementary products. In furtherance of this strategy, we acquired the following businesses: o Activities Unlimited, a manufacturer of commercial-use children's activities products in March 1996; o Delta Play, a provider of custom children's indoor modular play equipment in June 1997; o Park Structures, a producer of children's outdoor modular play equipment in December 1998; o Superior Foam, a manufacturer of children's foam activity products in March 1999; o Smart Products, a provider of children's safety and parental convenience products in September 1999; o SCS, a manufacturer of children's interactive water play equipment in March 2000; and o Fibar, a marketer and distributor of playground surfacing systems in August 2000. As a result of these acquisitions and introduction of new products, Baby Changing Stations represented less than 15% of our sales in 2001. 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. Since 1995, we have increased our sales and marketing efforts through the addition of manufacturer's sales representatives, dealers and sales representatives. Our gross profit margins are affected by product mix, with the Baby Changing Station and other family convenience products and the children's activity products typically providing higher gross profit margins than the children's modular play equipment. The children's modular play equipment, however, has higher average selling prices and contributes to our sales growth. In addition, sales made through dealers provide lower gross profit margins than direct sales due to the expense associated with the manufacturer's sales representatives and dealers. To the extent we acquire additional companies or product lines, our gross profit margins may be lower than those currently achieved from sales of our current product lines due to a number of factors that may include products with higher average selling prices but lower gross margin percentages. Although our acquisitions have decreased the overall gross profit margin percentages, we believe that the addition of new products and products lines provides opportunities for revenue diversification and increased long-term profitability, while also reducing our reliance on the Baby Changing Station. Components of Sales and Expense We recognize sales 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 the modular play segment), we use the percentage of completion method of accounting because the build-to-install timeline of their jobs is of longer duration. Revenues from shipping and handling are included in sales. Cost of sales consists of components manufactured for us and direct labor and overhead incurred by us. With the exception of the foam activity products and baby changing stations, all major components for the family convenience products and children's activity products currently are manufactured and assembled by outside vendors. We fabricate and assemble most of our modular play products. Cost of sales also includes shipping and handling costs. Selling, general and administrative expense consists primarily of commissions paid to manufacturer's sales representatives and other selling expenses, executive, sales, engineering and design, and office salaries, related payroll taxes, advertising expenses and depreciation on office equipment and computer hardware and software. We provide limited warranties for our products. We have experienced minimal returns and warranty claims, and therefore no accrual has been made for future claims except for SCS, where a reserve of .75% of SCS's 2001 annual sales has been recorded. 15 Critical Accounting Policies and Estimates In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, bad debts, inventories, intangible assets, income taxes, warranty operations and contingencies and litigation. We base our estimates and judgments on historical experience and other factors. Actual results could differ from our estimates. Following is a discussion of some of our more critical accounting policies and judgments. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make judgments regarding these allowances based on our knowledge of the customer, historical patterns and other factors. We have not established reserves for excess or obsolete inventories at any of our locations because we believe that all of our existing inventory is saleable for a price in excess of its carrying value. We specifically identify inventory that we believe do not meet this criteria when we perform physical inventories and assign a carrying value based on our best estimate of net realizable value. We exercise judgment in evaluating our intangible assets for impairment. We have used estimates of future cash flows which take into account our anticipated results of operations. Key assumptions that we have used to develop these cash flows include estimates with respect to future sales volumes, margins and other expenses. We believe our businesses will generate sufficient cash flow to recover the goodwill under existing accounting rules and other intangible assets we have recorded as a result of acquisitions. In 2002, we will be required to adopt Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets (SFAS 142). See "New Accounting Standards" below for further discussion of the impact of this implementation. Revenue at our SCS division is recognized on the percentage of completion basis. Under this method, we make estimates with respect to the percentage of completion of individual jobs and recognize revenue accordingly. We do not maintain a warranty reserve at any of our divisions other than SCS. We make judgements about the amount of warranty claims based on our knowledge of historical warranty claims. We make judgments regarding the amount to record for future loss contingencies related to legal actions and other disputes based on the available information and consultation with our legal counsel. The determination of our tax provision is complex and requires a number of judgments about the recoverability of deferred tax assets, including our ability to generate future taxable income. New Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB)issued SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. We will apply SFAS 142 beginning in the first quarter of 2002. Application of the nonamortization provisions of SFAS 142 is expected to result in an increase in net income of approximately $700,000 ($.10 per share) in 2002. We will test goodwill for impairment using the two-step process prescribed in SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We expect to complete the first step by June 30, 2002. Based on steps we have taken to prepare for the adoption of SFAS 142, it is possible that a portion of the unamortized goodwill will be impaired using the impairment measurement methodology required by SFAS 142. We have not yet determined the amount of the potential impairment loss, if any. Any impairment that is required to be recognized when adopting SFAS 142 will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. We will complete measurement of any impairment loss upon the initial adoption of SFAS 142 by December 31, 2002. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 144 supercedes SFAS 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, 16 Reporting the Results of Operations - Reporting the Effects Of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. We will adopt SFAS 144 as of January 1, 2002 and do not anticipate any immediate impact from the adoption of this statement. In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We will adopt SFAS 143 in 2003. We are evaluating the impact of the adoption of SFAS 143 on our consolidated financial statements. Results of Operations The following table sets forth certain income statement data stated as a percentage of sales:

Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Sales ...................................... 100.0% 100.0% 100.0% Cost of sales .............................. 62.7 56.3 49.7 ----- ----- -----~~------~~ ~~Quarter~~Gross ~~Ended~~profit ~~(unaudited~~............................... ~~and~~37.3 in43.7 ~~thousands~~50.3 Selling, ~~except~~general ~~per~~and ~~share~~administrative ~~data)~~expenses 32.5 25.9 25.0 Amortization of intangibles ................ 4.0 3.4 2.5 ----- ----- -----~~------------------------------------------~~ ~~2000~~Income ~~Mar~~from operations ..................... 310.8 ~~June~~14.4 3022.8 ~~Sept~~Interest expense ........................... 305.3 ~~Dec~~4.7 312.4 ~~----~~Other ~~-------~~income ............................... 0 (0.5) 0 ------- -----~~---~~ ------- ~~Sales~~Income ~~$11,480~~(loss) ~~$17,162~~before ~~$16,399~~income ~~$14,665~~taxes ~~Gross~~.......... ~~profit~~ (4.5~~,705~~) ~~7,996~~10.2 ~~8,122~~20.4 ~~5,064~~Income ~~Net~~tax ~~income~~ (~~loss~~benefit) ~~1,263~~expense ~~1,883~~............... ~~1,567~~ (~~681~~1.1) ~~Basic earnings (loss) per share~~ 3.197 7.280 ~~.23~~----- ~~(.10)~~----- ~~Diluted~~----- ~~earnings~~Net income (loss) ~~per share~~ .19 .27 .22....................... (3.104)% 6.5% 13.4% ===== ===== =====

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Sales decreased 3.8%, or $2.4 million, to $59.2 million for the year ended December 31, 2001 compared to $61.6 million for the year ended December 31, 2000. Sales for the fourth quarter of 2001 were $12.3 million as compared to $15.4 million in 2000. In the family convenience and children's activity segment, sales declined from $17.7 million in 2000 to $14.9 million in 2001. Sales for the fourth quarter of 2001 were $3.0 million compared to $4.3 million in 2000. We believe the factors that contributed to this decline included a slowing economy and tightened capital budgets for our customers, a cutback in purchases by our customers as a result of the events of September 11 and a falloff in sales of baby changing stations and other activity products that we believe is related to reductions in our direct mail program in the fourth quarter of 2001 due to the anthrax scare. We resumed direct mailings in January of 2002. In the modular play equipment segment, sales increased from $43.9 million in 2000 to $44.3 million in 2001. Sales for the fourth quarter of 2001 were $9.3 million compared to $11.1 million in 2000. The increase for the year is primarily due to the inclusion of Fibar results for a full year in 2001 as compared to four months in 2000, partially offset by a slowing economy, the impacts of the September 11 events on the fourth quarter and a significant reduction in the higher end themed sales in the water play division. We believe results were negatively impacted due to poor weather and reduced attendance at water parks in 2000, which caused this segment of the market to significantly reduce their capital spending for 2001. 17 Gross profit decreased 17.9%, or $4.8 million, to $22.1 million for the year ended December 31, 2001 compared to $26.9 million for the year ended December 31, 2000. The decrease was due to the decrease in sales and a change in the sales mix, with a higher proportion of the sales coming from the modular play segment in 2001 as compared to 2000, which has lower margins than the convenience segment. As a percentage of sales, gross profit decreased to 37.3% of sales in 2001 compared to 43.7% of sales in 2000 primarily because of the impact of the lower sales relative to our fixed production costs. Offsetting this were the impacts of the personnel reductions from the operational restructuring described below. Selling, general and administrative expense increased 20.4%, or $3.2 million to $19.2 million for the year ended December 31, 2001 compared to $16.0 million for the year ended December 31, 2000. The majority of the increase was due to the inclusion of SCS and Fibar for a full year in 2001 versus ten months and four months, respectively, in 2000. Selling, general and administrative expense as a percentage of sales increased to 32.5% of sales in 2001 compared to 25.9% in 2000 primarily due to the lower sales. Sales and marketing expense increased 19%, or $1.4 million to $8.6 million for the year ended December 31, 2001 compared to $7.2 million for the year ended December 31, 2000. These cost increases were primarily due to the inclusion of the sales and marketing costs of the newly acquired businesses noted above. General and administrative expense increased 20%, or $1.8 million, to $10.6 million for the year ended December 31, 2001 compared to $8.8 million for the year ended December 31, 2000. Once again, the increase was primarily the result of the inclusion of a full year of the newly acquired businesses in 2001. Amortization expense from intangible assets increased from $2.1 million in 2000 to $2.4 million in 2001. This increase is primarily due to a full year of amortization of goodwill and other identifiable intangible assets acquired in the acquisitions of SCS and Fibar in 2000. We used debt to finance the acquisitions of Park Structures in December 1998, Superior Foam and Smart Products in 1999, and SCS and Fibar in 2000. As a result, we incurred interest expense of $3.1 million during the year ended December 31, 2001 compared to $2.9 million during the year ended December 31, 2000. The increase in interest expense as a result of the increased borrowings was partially offset by lower average interest rates during 2001. Our effective tax rate was (25.4)% and 35.9% for the years ended December 31, 2001 and 2000, respectively. In 2001, we have a tax benefit due to our operating losses. The decline in our effective tax rate for 2001 is due primarily to the relationship of our non-deductible goodwill to our taxable loss. Because the loss for 2001 is less than our pre-tax income in 2000, the effect of the fixed amount of non-deductible goodwill is relatively larger on the effective tax rate. As a result of the factors discussed above, we incurred a net loss of $2.0 million for the year ended December 31, 2001 compared to net income of $4.0 million for the year ended December 31, 2000. During the second half of 2001, we initiated an operational restructuring with the intent of materially reducing operating costs and improving margins. The strategy includes a consolidation of manufacturing and administrative functions into our new Denver headquarters and manufacturing facility, personnel reductions, elimination of certain low margin service offerings and selected price increases. The restructuring is currently being implemented and we expect to complete the process before the end of 2002. During 2001, we reduced our workforce by approximately 124 employees, or 31%. We expect to make additional reductions during 2002 as we consolidate additional functions into the Denver facility. The costs associated with the reduction of our workforce in 2001 are included in selling, general and administrative expenses and were not significant. No costs have been accrued for the potential 2002 employee reductions. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Sales increased 62.5%, or $23.7 million, to $61.6 million for the year ended December 31, 2000 compared to $37.9 million for the year ended December 31, 1999. A majority of the increase resulted from sales of interactive water play equipment, playground surfacing products and foam activity products included in product lines acquired in 1999 and 2000. Sales in the modular play segment accounted for $22.9 million of the $23.7 million increase. Sales in the convenience and activity segment accounted for $.8 million of the increase. The smaller contribution by the convenience and activity segment was due primarily to the discontinuance of several children's activity products where gross margins had fallen below the targeted threshold for this segment as well as the effect of the general slowdown in orders during the fourth quarter of 2000 due to a softening of the economy, offset by increases in revenues from acquired product lines. Gross profit increased 42%, or $7.9 million, to $26.9 million for the year ended December 31, 2000 compared to $19.0 million for the year ended December 31, 1999. As noted above, the majority of the increase in gross profit resulted from sales of products of the newly acquired businesses. As a percentage of sales, gross profit decreased to 43.7% of sales in the 2000 period compared to 50.3% of sales in the 1999 period primarily because of a change in product mix that included a higher proportion of sales of children's 18 modular play equipment. The gross profit percentage was also negatively impacted by higher than expected costs incurred in the modular play equipment segment, including cost overruns on several large jobs, and higher labor costs incurred in the fourth quarter and the addition of quality assurance personnel for the ISO 9001 program that was certified in early 2000. Selling, general and administrative expense increased 68.5%, or $6.5 million to $16.0 million for the year ended December 31, 2000 compared to $9.5 million for the year ended December 31, 1999. Selling, general and administrative expense as a percentage of sales increased to 25.9% of sales in the 2000 period compared to 25.0% in the 1999 period primarily due to the addition of sales, legal and engineering personnel and increased product liability insurance premiums incurred as a result of higher levels of product liability insurance coverage. Sales and marketing expense increased 33.3%, or $1.8 million to $7.2 million for the year ended December 31, 2000 compared to $5.4 million for the year ended December 31, 1999. These cost increases were primarily due to the inclusion of the sales and marketing costs of the newly acquired businesses noted above. Higher expenses for various marketing programs and salaries of sales and marketing personnel added subsequent to the 1999 period also contributed to the increase. General and administrative expense increased 114.6%, or $4.7 million, to $8.8 million for the year ended December 31, 2000 compared to $4.1 million for the year ended December 31, 1999. Once again, the increase was primarily the result of the inclusion of the newly acquired businesses in 1999 and 2000. Amortization expense from intangible assets increased from $1.0 million in 1999 to $2.1 million in 2000. This increase is primarily due to the amortization of goodwill and other identifiable intangible assets acquired in the acquisitions of Superior Foam and Smart Products in 1999 and SCS and Fibar in 2000. We used debt to finance the acquisitions of Park Structures in December 1998, Superior Foam and Smart Products in 1999, as well as the acquisitions of SCS and Fibar in 2000. As a result, we incurred interest expense of $2.9 million during the year ended December 31, 2000 compared to $.9 million during the year ended December 31,1999. Our effective tax rate was 35.9% and 34.0% for the years ended December 31, 2000 and 1999, respectively. The increase in our worldwide effective rate was primarily due to the inclusion of a number of new state tax jurisdictions and non-deductible goodwill as a result of the acquisition of SCS, offset by an increase in export sales that qualify for the benefit provided by our foreign sales corporation and a one-time net operating loss carryback at Delta Play. Net income decreased 20.8%, or $1.1 million, to $4.0 million for the year ended December 31, 2000 compared to $5.1 million for the year ended December 31, 1999. As a percentage of sales, net income declined during the 2000 period compared to the 1999 period primarily due to the inclusion of a larger proportion of the children's modular play equipment line in the product mix. Net income per share (diluted) decreased 25.6%, or $.20, to $.58 for the year ended December 31, 2000 compared to $.78 for the year ended December 31, 1999. The percentage decrease in net income per share (diluted) was greater than the percentage decrease in net income as a result of an increase of .5 million shares in the weighted average number of shares outstanding. Seasonality and Quarterly Financial Information (unaudited): Our business is seasonal due primarily to the slowdown of new construction and inability to install outdoor modular play equipment and surfacing during the winter months in many parts of the country and the general slowdown of purchasing by retailers during their busy holiday season. As a result, we typically have lower sales and gross profit in the fourth and first calendar quarters. The following table sets forth selected unaudited quarterly financial information for the years ended December 31, 2001 and 2000. The information has been derived from unaudited statements of operations data that we believe are stated on a basis consistent with the audited financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information in accordance with accounting principles generally accepted in the United States. Our results of operations for any quarter are not necessarily indicative of the results to be expected in any future period. Shipping and handling costs in the first three quarters of 2001 and all quarters in 2000 have been reclassified from revenues to cost of sales to be consistent with the current year end presentation. These reclassifications had no impact on net income or cash flows. 19

----------------------------------------------------------- Quarter Ended (unaudited and in thousands, except per share data) ----------------------------------------------------------- ~~1999~~2001 Mar. 31 June 30 Sept. 30 Dec. 31 ---- ------- ------- -------- ------- Sales $714,~~299~~304 $915,~~151~~411 $1017,~~544~~169 $1012,~~141~~338 Gross profit 36,~~693~~350 46,~~753~~165 56,~~301~~249 53,~~295~~321 Net income ~~949~~(loss) ~~1,266~~475 ~~1,477~~(57) 114 (2,~~399~~422) Basic earnings (loss) per share .1607 (.2001) .2300 (.2235) Diluted earnings (loss) per share .1507 (.1901) .2200 (.2135)

~~KOALA CORPORATION~~ -----------------------------------------------------------~~-------------------------------------------~~ ~~CONSOLIDATED~~Quarter ~~BALANCE~~Ended ~~SHEETS December 31, 2000 1999 ---- ---- ASSETS ------ Current Assets Cash and cash equivalents $ 200,786 $ 173,936 Accounts receivable, trade~~ (~~less~~unaudited ~~allowance for doubtful accounts of $387,456 in 2000~~ and ~~$131,030~~ in ~~1999) 13~~thousands,~~636,044~~ ~~9,234,685~~except ~~Tax~~per ~~refund~~share receivable and other receivables 2,221,741 - Inventories 12,653,750 5,137,791 Prepaid expenses and other 1,421,280 1,249,384 ----------- ----------- Total current assets 30,133,601 15,795,796 Property and equipment (net of accumulated depreciation of $1,849,685 in 2000 and $1,060,038 in 1999data) 4,129,646 3,213,980 Identifiable intangible assets (net of accumulated amortization of $2,626,228 in 2000 and $1,371,326 in 1999) 27,762,155 18,709,242 Goodwill (net of accumulated amortization of $1,212,083 in 2000 and $381,019 in 1999) 29,403,998 10,839,282 ----------- ----------- ~~$91,429,400 $48,558,300 =========== =========== LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 7,345,889 $ 2,210,583 Accrued expenses and other 3,719,554 955,731~~ ----------- ----------- ~~Total current liabilities 11,065,443 3,166,314~~ ----------- ----~~-------~~ ~~Long~~2000 ~~Term~~Mar. ~~Liabilities:~~31 ~~Deferred~~June ~~income~~30 ~~taxes~~Sept. ~~and~~30 ~~other~~Dec. ~~1,634,699~~31 ~~1,086,270 Acquisition liability 1,000,000~~ - ~~Credit facility 37,990,000 13,979,000~~ ---~~--------~~ -------~~----~~ ~~Total long term liabilities 40,624,699 15,065,270~~ -------~~----~~ --------~~---~~ ~~Total liabilities 51,690,142 18,231,584~~ -------~~----~~ ~~-----------~~Sales ~~Commitments and contingencies Shareholders' Equity: Preferred stock~~$11,646 ~~no par value~~$17,352 1$17,~~000,000~~227 ~~shares authorized; no shares issued and outstanding - - Common stock,~~ $~~.10 par value~~15,364 ~~10,000,000~~Gross ~~shares~~profit ~~authorized; issued and outstanding 6~~5,~~872,334~~705 ~~in 2000 and 6~~7,~~397,128~~996 ~~in 1999 687~~8,~~233~~122 ~~639~~5,~~713~~064 ~~Notes~~Net ~~receivable~~income ~~from officer~~ (~~695,171~~loss) ~~(383~~1,~~505)~~263 ~~Additional paid-in capital 20~~1,~~256,774~~883 141,~~596,294~~567 ~~Accumulated~~(681) ~~other~~Basic ~~comprehensive~~earnings ~~loss~~ (~~47,234~~loss) ~~(31,038)~~per ~~Retained~~share ~~earnings~~ .19~~,537,656~~ ~~15,505,252~~.28 ~~-----------~~.23 ~~-----------~~(.10) ~~Total~~Diluted ~~shareholders'~~earnings ~~equity~~(loss) ~~39,739,258~~per ~~30,326,716~~share ~~-----------~~.19 ~~-----------~~.27 ~~$91,429,400~~.22 ~~$48,558,300 =========== ===========~~(.10)

Liquidity and Capital Resources We have financed our operations primarily from cash provided by operating activities and from cash advanced under our revolving bank line of credit. In addition, we have financed various acquisitions using cash advanced under the line of credit. We increased the maximum amount available under our secured line of credit with U.S. Bank N.A., agent for various lenders, to $45.0 million on November 17, 2000. The interest rate on amounts borrowed under the line of credit was based on the applicable Reserve Adjusted LIBOR rate or the bank's prime rate. At December 31, 2000, the Reserve Adjusted LIBOR rate was 9.19% while the bank's prime rate was 9.5%, compared to 8.18% and 8.5% at December 31, 1999, respectively. In the third quarter of 2001, we amended and restated our existing credit facility and established a revolving credit facility in the amount of $14 million and a term loan in the amount of $28 million (the "New Credit Facility"). This facility is secured by substantially all of our assets and requires compliance with financial loan covenants related to leverage, interest coverage, fixed charges and capital expenditures. Availability under the revolving credit facility is determined by a formula based on inventory and accounts receivable balances. A commitment fee of .50% per annum is payable quarterly based on the average daily unused portion of the revolving line of credit. The interest rate on this facility is the bank's prime rate plus 2.5%. The bank's prime rate was 4.75% at December 31, 2001. The term loan is due September 26, 2004. The revolving credit facility is due September 26, 2002. There was $36.6 million outstanding under the credit facility as of December 31, 2001, and $38.0 million outstanding as of December 31, 2000. At September 30, 2001, we were not in compliance with the financial covenants for maximum leverage ratio and minimum interest coverage ratio. 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 amounts outstanding under the term loan, and sets new covenants. At December 31, 2002, we were again in default of certain covenants under that indebtedness and anticipated, based on our expected results, that we would be in default throughout 2002. 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 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 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 during 2002. We have engaged an investment banker to assist us with raising the additional financing. Cash provided by (used in) operating activities for 2001, 2000 and 1999 was $2.7 million, $(.4) million and $3.7 million, respectively. The increase in cash provided by operating activities for the year ended December 31, 2001 compared to the year ended December 31, 2000 resulted primarily from changes in working capital items as a result of our focus on improving collections and reducing inventories. The decrease for the year ended December 31, 2000 resulted primarily from funding higher levels of working capital required to support our growth, primarily inventory and overpayment of estimated tax installments in 2000. 20 Working capital as of December 31, 2001 and December 31, 2000 was $15.0 million and $19.1 million, respectively, and cash balances were $0 and $.2 million for 2001 and 2000. The relatively low cash balances are the result of our practice of applying all excess cash against the line of credit to minimize interest expense payable on the line of credit. We have used our operating cash flow and borrowings under our line of credit primarily for the expansion of sales and marketing activities, the acquisition and development new products and product lines, capital expenditures and working capital. Net cash used in investing activities was $1.6 million for the year ended December 31, 2001, $23.6 million for the year ended December 31, 2000 and $26.6 million for the year ended December 31, 1999. In 2001, we made payments of $.5 million for holdbacks and earnouts on prior acquisitions. In 2000, $22.3 million was used to purchase SCS and Fibar. In 1999, $25.4 million was used to purchase the assets of Park Structures, Superior Foam and Smart Products. The balance was primarily devoted to capital expenditures for fixed assets, intellectual property and an advance in 2000 to one of our officers related to the exercise of stock options in 1999. Net cash provided by (used in) financing activities was $(1.4) million, $24.0 million and $16.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. The use of funds in 2001 primarily represents the net payments on our line of credit and term loan. We funded the cash portion of the purchase price in 2000 for SCS and Fibar with the revolving credit facility from the bank. We funded the acquisition of Park Structures in 1999 through a combination of existing cash balances and borrowings under the revolving credit facility. In 1999, we received approximately $2.6 million in proceeds from the exercise of the underwriter's over-allotment option on a secondary offering we completed in 1998. Our backlog of orders is comprised primarily of orders from our customers in the modular play equipment segment. The amount of backlog at any given point in time will vary due to customers' seasonal buying patterns and our production capacity. The backlog of orders was $4.0 million at December 31, 2001 and approximately $6.4 million at December 31, 2000. We were not materially affected by changing raw materials prices except for polyethylene prices in 2000, which increased materially due to the increase in costs for all petroleum based products experienced in the United States during the year. 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. The table below summarizes these future obligations.

~~KOALA~~Contractual ~~CORPORATION~~Obligations Total Less than 1 1-3 years 4-5 years After 5 years ----- ------------ --------- --------- -------------~~------------------------------------------~~ ~~CONSOLIDATED~~year ~~STATEMENTS OF INCOME Years ended December 31, 2000 1999 1998~~ ----~~--------~~ ~~------------~~Revolving ~~------------~~line ~~Sales~~of credit $ 599,~~706~~600,~~017~~000 $ ~~37,134,712~~0 $ 199,~~100~~600,~~765~~000 ~~Cost~~$ of0 ~~sales~~$ ~~32,818,990~~0 ~~18,092,588~~Term ~~8,627,979~~loan ~~------------ ------------ ------------ Gross profit 26~~27,~~887~~000,~~027~~000 192,~~042~~000,~~124~~000 1025,~~472~~000,~~786~~000 ~~Selling,~~0 ~~general~~0 ~~and~~Capital ~~administrative~~leases ~~expenses 15~~164,~~955,129~~356 954,~~467,210~~784 5109,~~485,198~~572 ~~Amortization~~0 of0 ~~intangibles~~Acquisition ~~2,084,505~~payments ~~958~~702,~~524~~130 ~~297~~702,~~600~~130 ~~------------~~0 ~~------------~~0 ~~------------~~0 ~~Income~~Operating ~~from~~leases ~~operations 8~~10,~~847~~228,~~393~~400 81,~~616~~519,~~390~~800 42,~~689~~290,~~988~~800 ~~Other (income) expense: Interest expense~~ 2,~~919~~104,~~465~~200 ~~902~~4,~~169 -- Interest income (10~~313,~~138)~~600 ~~(1,362) (78,712) Other income (352,735)~~ -- -- -------~~-----~~ ------------ ------------ ~~Income before income taxes 6,290,801 7,715,583 4,768,700 Provision for income taxes 2,258,397 2,624,459 1,669,044~~ ------------ ------------ ~~------------~~Total ~~Net income~~ $ 447,~~032~~694,~~404~~886 $ 54,~~091~~276,~~124~~714 $ 337,~~099~~000,~~656~~372 ~~============ ============ ============ Net income per share - basic~~ $ ~~0.60 $ 0.81 $ 0.61 ============ ============ ============ Net income per share - diluted $ 0.58 $ 0.78 $ 0.60 ============ ============ ============ Weighted average shares outstanding - basic 6~~2,~~769~~104,~~508~~200 6$4,~~256~~313,~~729~~600 ~~5,072,116~~ ============ ============ ============ ~~Weighted average shares outstanding - diluted 7,000,986 6,516,075 5,198,010~~ ============ ==========~~== ============~~

In addition to the above, our term loan requires additional payments of up to $2 million by April 15, 2003 if we meet certain EBITDA targets for 2002 and requires payments of up to 75% of our excess cash flow as defined. 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 for the next twelve months. 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. 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. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market rate risk for changes in interest rates is related primarily to our line of credit, which accrues interest at an adjustable rate. We do not believe that the future market risks will have material adverse impact on our financial position, results of operations or liquidity. For purposes of interest rate sensitivity, a variance in the interest rate of 1/4% will result in a change in diluted earnings per share of approximately $0.01 per share. 21 Delta Play is located in Canada near Vancouver, British Columbia. Delta Play's sales to customers outside Canada and a certain amount of our raw material purchases are transacted in United States dollars. Sales to customers within Canada, labor costs and certain raw material purchases are transacted in Canadian dollars. The fluctuation in the exchange rate between United States dollars and Canadian dollars during 2001 and 2000 did not materially affect our business during 2001 or 2000 and we do not believe, based on historical trends, that future exchange rate fluctuations will have a material adverse impact on our financial position, results of operations or liquidity. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Financial Statements beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to our proxy statement for our 2002 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended December 31, 2001. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to our proxy statement for our 2002 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended December 31, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to our proxy statement for our 2002 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended December 31, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to our proxy statement for our 2002 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended December 31, 2001. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial Statements The Financial Statement Index is on Page F-1. Financial Statement Schedules 22 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Year Ended December 31, Deducted from asset accounts: 2001 2000 1999 ---- ---- ---- Allowance for doubtful accounts Balance at beginning of period $ 387,456 $ 131,030 $ 111,144 Charged to expense 357,322 285,460 155,395 Amount from acquisition -- 85,000 -- Deducted (298,977) (114,034) (135,509) --------- --------- --------- Balance at end of period $ 445,801 $ 387,456 $ 131,030 ========= ========= ========= Exhibits and Reports on Form 8-K Exhibit No. Description 3.1 Articles of Incorporation of Koala Corporation (5) 3.2Bylaws of Koala Corporation (5) 4.1Specimen Common Stock Certificate (1) 10.1 Incentive Stock Option Plan dated August 19, 1993 (1) 10.2 Koala Corporation 1995 Stock Option Plan, as amended (5) Industrial Lease dated August 1, 1996 between Buckhead Industrial Properties, Inc. and Koala 10.3 Corporation (2) 10.4 Credit Agreement with U.S. Bank National Association (4) 10.5 Agreement for Sale and Purchase of Assets dated June 23, 1997 between Delta Play, Ltd., et al and Koala Corporation (3) 10.6 Registration Rights Agreement dated June 23, 1997 between Delta Play, Ltd., and Koala Corporation (4) 10.7 Agreement for Sale and Purchase of Assets dated August 14, 1998 between Park Structures, Inc. et al and Koala Corporation (5) 10.8 Indenture dated March 31, 1998 among Vanac Development Corp., Delta Play Company and Koala Corporation 10.9 Form of Revolving Credit Agreement, dated November 17, 2000, between Koala Corporation and U.S. Bank National Association (5) 10.10 Agreement for Sale and Purchase of Assets dated March 26, 1999, by and among Superior Foam & Polymers, Inc., James T. New, Jr., Kevin C. Brown and Koala Corporation (6) 10.11 Lease Agreement Dated March 16, 2000 between Dove Valley Business Center, LLP and Koala Corporation 10.12 Amended and Restated Revolving Credit Agreement among Koala Corporation, U.S. Bank National Association, as agent for the lenders, and Other Lenders Party Hereto, dated September 26, 2001. (7) 10.13 Amendment No. 1 to the Amended and Restated Revolving Credit, Term Loan and Security Agreement (8) 10.14 Waiver and Amendment No. 2 to the Amended and Restated Revolving Credit, Term Loan and Security Agreement (9) 21.1 Subsidiaries 23.1 Consent of Independent Auditors (1) Incorporated by reference to the exhibits included in the Company's Registration Statement on Form SB-2, Registration No. 33-68482C. (2) Incorporated by reference to Exhibit 10.11 of the Company's Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K/A filed on September 8, 1997. (4) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K/A filed on September 8, 1997. (5) Incorporated by reference to the exhibits included in the Company's Registration Statement on Form SB-2, Registration No. 333-61551. (6) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on April 2, 1999. (7) Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on October 4, 2001 (8) Incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended September 30, 2001. (9) Filed herewith. (b) Reports on Form 8-K |X| October 4, 2001 |X| October 26, 2001 23 SIGNATURES In accordance with Section 13 of the Securities and Exchange Act of 1934, the registrant caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. KOALA CORPORATION Date: April 1, 2002 By: /s/ Mark A. Betker ------------- ------------------- Mark A. Betker, Chairman, Chief Executive Officer and President Date: April 1, 2002 By: /s/ Jeffrey L. Vigil ------------- --------------------- Jeffrey L. Vigil Vice President of Finance and Administration (Principal Financial and Accounting Officer) In accordance with the Exchange Act, this report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ Mark A. Betker Chairman, Chief Executive Officer April 1, 2002 -------------------------- and President (Principal Executive Mark A. Betker Officer) and Director /s/ Michael C. Franson Director April 1, 2002 -------------------------- Michael C. Franson /s/ John T. Pfannenstein Director April 1, 2002 -------------------------- John T. Pfannenstein /s/ Nancy Pierce -------------------------- Director April 1, 2002 Nancy Pierce /s/ Randy Stein Director April 1, 2002 -------------------------- Randy Stein 24 KOALA CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Auditors F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1 SHAREHOLDERS AND BOARD OF DIRECTORS KOALA CORPORATION REPORT OF INDEPENDENT AUDITORS We have audited the accompanying consolidated balance sheets of KOALA CORPORATION (a Colorado corporation) as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included financial statement schedule II. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KOALA CORPORATION at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Denver, Colorado April 1, 2002 F-2

KOALA CORPORATION -------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS December 31, 2001 2000 ------------ ------------~~--------~~ ~~CONSOLIDATED~~ASSETS ~~STATEMENTS~~Current OFAssets ~~SHAREHOLDERS'~~Cash ~~EQUITY~~and ~~Accumulated~~cash ~~Common~~equivalents ~~Note~~$ ~~Additional~~0 ~~Other~~$ ~~Common~~200,786 ~~Stock~~Accounts ~~Stock~~receivable, totrade ~~Receivable~~(less ~~Paid-In~~allowance ~~Retained~~for ~~Comprehensive~~doubtful ~~Shares~~accounts ~~Amount~~of be$445,801 ~~Issued~~in ~~Officer~~2001 ~~Capital~~and ~~Earnings~~$387,456 ~~Income~~in ~~(Loss~~2000) ~~Total~~7,372,667 ~~---------~~10,187,172 ~~--------~~Unbilled ~~----------~~receivables ~~---------~~1,298,404 3,448,872 Tax refund and other receivables 2,845,591 2,221,741 Inventories 10,983,825 12,653,750 Prepaid expenses and other 1,181,091 1,421,280 ---------- --~~--------~~ ------------- ~~----------~~Total ~~Balance,~~current ~~December~~assets 3123,681,578 ~~1997 5~~30,~~054~~133,~~724~~601 ~~$505,472~~Property $and -equipment $(net -of ~~$5,055,252~~accumulated depreciation of $72,~~314~~753,~~472~~808 ~~($25,124)~~in 2001 and $121,~~850~~849,~~072~~685 ~~Net~~in ~~income~~2000) 34,~~099~~184,~~656~~436 34,~~099~~129,~~656~~646 ~~Foreign~~Identifiable ~~currency~~intangible ~~translation~~assets ~~adjustment~~ (~~96,036)~~net ~~(96,036)~~of ~~----------~~accumulated ~~Comprehensive~~amortization ~~income~~of $3,~~003~~997,~~620~~709 ~~Issuance~~in of2001 ~~common~~and ~~stock~~$2,626,228 ~~for~~in ~~secondary~~2000) ~~offering~~26,526,264 27,762,155 Goodwill (net of ~~expense~~accumulated ~~640,000~~amortization ~~64,000~~of 4$2,~~280~~232,~~186~~669 ~~4,344,186~~in ~~Common~~2001 ~~stock~~and to$1,212,083 bein ~~issued~~2000) ~~for~~28,601,426 ~~acquisition~~29,285,910 ofOther ~~Park Structures 1~~51,~~297,903~~096 1118,~~297,903~~088 ------------ ------------~~-------------------------------------------------------------------------~~ ~~Balance,~~$ ~~December 31~~83,044,800 ~~1998~~$ 591,~~694~~429,~~724~~400 ~~569,472~~============ 1============ LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 2,~~297~~875,~~903~~706 -$ 97,~~335~~345,~~438~~889 10Accrued expenses and other 3,~~414~~146,~~128~~263 ~~(121~~3,~~160) 21~~219,~~495,781~~554 ~~Net~~Acquisition ~~income~~liability 5702,~~091,124~~130 5500,~~091,124~~000 ~~Foreign~~Current ~~currency~~portion ~~translation~~of ~~adjustment~~credit ~~90,122~~facility 902,~~122~~000,000 -- ------------ ~~Comprehensive~~------------ ~~income~~Total ~~5,181,246~~current ~~Issuance~~liabilities ~~of common stock for cash~~8, ~~net of expenses 360~~724,~~000~~099 3611,~~000 2~~065,~~564,996~~443 ~~2,600,996~~------------ ~~Issuance~~------------ ofLong ~~common~~Term ~~stock~~Liabilities: ~~for~~Deferred ~~acquisitions~~income ~~257,754~~taxes ~~25,776~~and ~~(1,297,903)~~other 2,~~332~~138,~~829~~657 1,~~060~~634,~~702~~699 ~~Issuance~~Acquisition ofliability, ~~common~~less ~~stock~~current ~~for~~portion ~~stock~~-- ~~options 84~~1,~~650 8~~000,~~465~~000 ~~363,031~~Credit ~~371,496~~facility ~~Note receivable from officer~~34, ~~including accrued interest (383~~600,~~505)~~000 ~~(383~~37,~~505)~~990,000 ------------ ------------ Total long term liabilities 36,738,657 40,624,699 ------------ ------------ Total liabilities 45,462,756 51,690,142 ------------ ------------~~-------------------------~~ ~~Balance,~~Commitments ~~December~~and ~~31,~~contingencies ~~1999~~Shareholders' ~~6,397,128~~Equity: ~~639,713~~Preferred ~~- (383~~stock,~~505)~~ ~~14,596,294~~no ~~15,505,252~~par ~~(31~~value,~~038)~~ 301,~~326~~000,~~716~~000 ~~Net~~shares ~~income~~authorized; ~~4,032,404~~no ~~4,032,404~~shares ~~Foreign~~issued ~~currency~~and ~~translation~~outstanding ~~adjustment (16,196) (16,196)~~ -- --~~------~~ ~~Comprehensive~~Common ~~income~~stock, 4$.10 par value,~~016~~ 10,~~208~~000,000 ~~Issuance~~shares ofauthorized; ~~common~~issued ~~stock~~and ~~for~~outstanding ~~acquisitions 475~~6,~~206 47~~872,~~520~~334 5in 2001 and 2000 687,~~660,480~~233 5687,~~708,000~~233 ~~Note~~Notes receivable from officer (715,195) ~~including~~(695,171) ~~accrued~~Additional ~~interest~~paid-in capital 20,256,774 20,256,774 Accumulated other comprehensive loss (~~311~~194,~~666~~351) (~~311~~47,~~666~~234) Retained earnings 17,547,583 19,537,656 ------------ ------------ Total shareholders' equity 37,582,044 39,739,258 ------------ ------------~~-------------------------------------------------~~ ~~Balance, December 31, 2000 6,872,334~~ $~~687,233~~ ~~$ - ($695~~83,~~171) $20~~044,~~256,774~~800 $~~19,537,656~~ ~~($47~~91,~~234) $39~~429,~~739,258~~400 ============ ============~~=========================================================================~~

See notes to consolidated financial statements F-3

KOALA CORPORATION --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF ~~CASH~~OPERATIONS ~~FLOWS~~ Years ended December 31, 2001 2000 1999 ~~1998~~ ------------------ ----------------- ----------------- ~~Cash~~Sales ~~flows from operating activities: Net income~~ $ 459,~~032~~221,~~404~~705 $ 561,~~091~~588,~~124~~714 $ 337,~~099~~863,~~656~~770 ~~Adjustments~~Cost toof ~~reconcile~~sales ~~net income to net cash provided by (used in) operating activities: Depreciation 789~~37,~~647 500~~137,~~970~~044 ~~238~~34,~~269 Amortization 2~~701,~~084,505~~687 ~~958~~18,~~524 297~~821,~~600~~646 ~~Deferred income taxes 424,580 410,613 222,267 Accrued interest on notes receivable from officer (68,666) (13,505)~~ -- ~~Changes in operating assets and liabilities: Accounts receivable, trade (98,511) (2,786,346) (1,439,825) Tax refund receivable and other receivables (2,221,741) (144,980)~~ -- Inventories (6,134,713) (958,852) (910,071) Prepaid expenses and other 114,698 (280,382) (250,959) Accounts payable 3,780,931 425,737 342,466 Accrued expenses, income taxes, and unearned revenue (3,084,970) 514,701 86,217 -------------- ----------------- ----------------- ~~Net~~Gross ~~cash~~profit ~~provided~~22,084,661 by26,887,027 ~~(used~~19,042,124 ~~in)~~Selling, ~~operating~~general ~~activities~~and ~~(381~~administrative expenses 19,~~836)~~204,007 315,~~717~~955,~~604~~129 19,~~685~~467,~~620~~210 Amortization of intangibles 2,395,091 2,084,505 958,524 ------------------ ----------------- ----------------- ~~Cash~~Income ~~flows~~ from ~~investing~~operations ~~activities: Capital expenditures (798~~485,~~364)~~563 (18,~~106~~847,~~736)~~393 ~~(519~~8,~~918) Acquisitions~~616,390 ~~net~~Other of(income) ~~cash~~expense: ~~acquired~~Interest ~~(22~~expense 3,~~339~~147,~~742)~~327 ~~(25~~2,~~391~~919,~~976)~~465 ~~(741~~902,~~627)~~169 ~~Intangibles~~Interest ~~and~~income ~~other~~ (~~205~~18,~~012~~808) (~~130~~10,~~169~~138) (891,~~869~~362) ~~Advance~~Other to25,906 ~~officer~~ (~~243~~352,~~000~~735) -- -- ------------ ----~~--------~~ ------------ ~~Net cash used in investing activities (23,586,118) (26,628,881) (1,351,414)~~ -----~~-------~~ ------------ -----~~-------~~ ~~Cash~~Income ~~flows~~(loss) ~~from~~before ~~financing~~income ~~activities:~~taxes ~~Sale of common stock~~(2,668,862) ~~net of expenses -- 2~~6,~~600~~290,~~996~~801 47,~~344~~715,~~186~~583 ~~Net~~Income ~~proceeds~~tax ~~from~~(benefit) ~~credit~~expense ~~facility~~(678,789) 242,~~011~~258,~~000~~397 132,~~979~~624,~~000~~459 -- ------------ ----~~--------~~ ------------ ~~Net cash provided by financing activities 24,011,000 16,579,996 4,344,186~~ -----~~-------~~ ------------ -----~~-------~~ ~~Effect~~Net ofincome ~~exchange~~(loss) ~~rate~~($1,990,073) ~~changes~~$4,032,404 on$5,091,124 ~~cash~~================== ~~and~~================= ~~cash~~================= ~~equivalents~~Net income (~~16,196~~loss) ~~11,647~~per share - basic (~~17,499~~$0.29) $0.60 $0.81 ================== ================= ================= Net ~~increase~~income (~~decrease~~loss) inper ~~cash~~share ~~and~~- ~~cash~~diluted ~~equivalents 26,850~~ (~~6,319,634~~$0.29) ~~4,660,893~~$0.58 ~~Cash~~$0.78 ~~and~~================== ~~cash~~================= ~~equivalents~~================= atWeighted ~~beginning~~average ofshares ~~period~~outstanding ~~173~~- basic 6,~~936~~872,334 6,~~493~~769,~~570~~508 16,~~832~~256,~~677~~729 ~~------------~~================== ~~------------~~================= ~~------------~~================= ~~Cash~~Weighted ~~and~~average ~~cash~~shares ~~equivalents~~outstanding at- ~~end~~diluted ~~of period $ 200~~6,~~786~~872,334 ~~$ 173~~7,~~936~~000,986 $ 6,~~493~~516,~~570~~075 ================== ================= =================

See notes to consolidated financial statements F-4

~~Number~~KOALA ofCORPORATION ~~Weighted~~----------------------------------------------------------------------------------------------------------------------------------- ~~Average~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Common Note Additional Other Common Stock Stock to Receivable Paid-In Comprehensive Retained Shares ~~Exercise~~Amount ~~Price~~be ~~Price~~Issued Officer Capital Loss Earnings Total ------ -------------- -------------------------------------------------------------------------------- ~~Outstanding~~Balance, December 31, ~~1997~~1998 ~~566~~5,~~000~~694,724 $ ~~5.76~~569,472 $~~4.63~~ to1,297,903 $~~7.50~~ ~~Granted~~- ~~260,000~~ $ 9~~.31~~,335,438 ($~~7.25~~121,160) to$10,414,128 $~~11.50~~ ~~Forfeited~~21,495,781 ~~(20~~Net income 5,091,124 5,091,124 Foreign currency translation adjustment 90,122 90,122 ------------ Comprehensive income 5,181,246 Issuance of common stock for cash, net of expenses 360,000 36,000 2,564,996 2,600,996 Issuance of common stock for acquisitions 257,754 25,776 (1,297,903) $2,332,829 ~~6.50~~1,060,702 $Issuance ~~6.50~~of common stock for stock options 84,650 8,465 363,031 371,496 Note receivable from officer, including accrued interest (383,505) (383,505) ----------------------------------------------------------------------------------------------------- ~~Outstanding~~Balance, December 31, ~~1998~~1999 ~~806~~6,~~000~~397,128 $639,713 ~~6.89~~- ~~$4.63~~(383,505) to14,596,294 ~~$11.50~~(31,038) ~~Granted~~15,505,252 ~~261~~30,~~000~~326,716 $Net ~~12.20~~income ~~$9.69~~4,032,404 to4,032,404 ~~$16.38~~Foreign ~~Exercised~~currency translation adjustment (~~102~~16,~~000~~196) $(16,196) ~~5.43~~------------ $Comprehensive income 4~~.63~~,016,208 toIssuance ~~$9.00~~of common stock for acquisitions 475,206 47,520 5,660,480 5,708,000 Note receivable from officer, including accrued interest (311,666) (311,666) ----------------------------------------------------------------------------------------------------- ~~Outstanding~~Balance, December 31, ~~1999~~2000 ~~965~~6,~~000~~872,334 $687,233 8.- (695,171) 20,256,774 (47,234) ~~$4.63~~19,537,656 to39,739,258 ~~$16.38~~Net ~~Granted~~loss ~~128~~(1,~~500~~990,073) $(1,990,073) ~~12.99~~Foreign ~~$10.00~~currency totranslation ~~$15.00~~adjustment ~~Forfeited~~(147,117) (39147,~~000~~117) $------------ ~~10.51~~Comprehensive ~~$7.25~~loss to(2,137,190) ~~$16.00~~Note receivable from officer, including accrued interest (20,024) (20,024) ----------------------------------------------------------------------------------------------------- ~~Outstanding~~Balance, December 31, ~~2000~~2001 16,~~054~~872,~~500~~334 $687,233 ~~8.95~~$ - ($~~4.63~~715,195) to$20,256,774 ($~~16.38~~194,351) $17,547,583 $ 37,582,044 ====================================================================================================

See notes to consolidated financial statements F-5

~~Outstanding~~KOALA ~~Options~~CORPORATION ~~Exercisable~~---------------------------------------------------------------------------------------------------------------------------- ~~Options~~CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2001 2000 1999 ------------------- ------------------ ----------------- ~~Weighted~~Cash ~~Average~~flows ~~Weighted~~from ~~Weighted~~operating ~~Remaining~~activities: ~~Average~~Net ~~Average~~income ~~Contractual~~(loss) ~~Exercise~~($1,990,073) ~~Exercise~~$4,032,404 ~~Price~~$5,091,124 ~~Number~~Adjustments ~~Life~~to ~~Price~~reconcile ~~Number~~net ~~Price~~income (loss) to net cash provided by (used in) operating activities: Depreciation 920,379 789,647 500,970 Amortization 2,395,091 2,084,505 958,524 Deferred income tax expense 348,834 424,580 410,613 Accrued interest on notes receivable from officer (20,024) (68,666) (13,505) Changes in operating assets and liabilities: Accounts receivable, trade 2,707,590 3,350,161 (2,786,346) Unbilled receivables 2,150,468 (3,448,872) - Tax refund receivable and other receivables (1,208,156) (2,221,741) (144,980) Inventories 1,526,783 (6,134,713) (958,852) Prepaid expenses and other 301,992 114,698 (280,382) Accounts payable (4,433,996) 3,780,931 425,737 Accrued expenses, income taxes, and other (34,405) (3,084,970) 514,701 ------------------ ------------------ ----------------- Net cash provided by (used in) operating activities 2,664,483 (381,836) 3,717,604 ------------------ ------------------ ----------------- ~~$4.63~~Cash flows from investing activities: Capital expenditures (815,361) (798,364) (1,106,736) Acquisitions, net of cash acquired (470,580) (22,339,742) (25,391,976) Intangibles and other (303,207) (205,012) (130,169) Advance to ~~$7.50~~officer ~~484~~- (243,000) 5.- ------------------ ------------------ ----------------- Net cash used in investing activities (1,589,148) (23,586,118) (26,628,881) ------------------ ------------------ ----------------- Cash flows from financing activities: Sale of common stock, net of expenses - - 2,600,996 ~~years~~Principal $payments ~~5.98~~on ~~456~~capital leases (41,392) - - Net proceeds from (repayments on) credit facility (1,390,000) $24,011,000 ~~5.91~~13,979,000 ~~$8.00~~------------------ to------------------ $----------------- Net cash provided by (used in) financing activities (1,431,392) 24,011,000 16,579,996 ------------------ ------------------ ----------------- Effect of exchange rate changes on cash and cash equivalents 155,271 (16,196) 11~~.50~~,647 ~~272~~Net increase (decrease) in cash and cash equivalents (200,~~500~~786) 7.26,850 (6,319,634) ~~years~~Cash $and ~~9.91~~cash 90equivalents,~~800~~ $at ~~9.71~~beginning ~~$12.50~~of toperiod ~~$16.38~~200,786 ~~298~~173,~~000~~936 ~~8.8~~6,493,570 ~~years~~------------------ $------------------ ~~12.91~~----------------- 68Cash and cash equivalents,~~000~~ at end of period $0 ~~12.51~~$200,786 $173,936 ================== ================== =================

See notes to consolidated financial statements F-6 KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1. Summary of significant accounting policies: Nature of operations: Koala Corporation and its wholly owned subsidiaries (the "Company") is a leading designer, producer and worldwide marketer of innovative commercial products, systems and custom solutions that create attractive family-friendly environments for businesses and other public venues. The Company produces family convenience and activity products, children's indoor and outdoor modular play equipment and playground surfacing systems. The consolidated financial statements include the accounts of Koala Corporation and all subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. During 2001, the Company recorded a loss which caused it to be in default on certain of its debt covenants for the quarters ended June 30, September 30, and December 31, 2001. Based upon its estimated results for 2002, the Company anticipated that it would be in violation of the covenants again during 2002. As a result, as discussed in Note 3, the Company entered into an agreement with its lenders on April 1, 2002 which waives the existing violations of those covenants and modifies the covenants and payment terms for 2002. The Company believes that the debt modifications will allow it to be in compliance with the covenants during 2002 and that it will have sufficient cash flows to maintain its operations through at least December 31, 2002. If it appears that the Company will not meet the covenant targets, it will consider taking additional cost reduction steps which could include employee reductions and other spending cuts. Use of estimates: Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenue and expenses. Actual results could vary from the estimates that were used. Financial instruments: The fair value of financial instruments, consisting of investments in cash, cash equivalents, receivables, obligations under accounts payable, and debt instruments, is based on interest rates available to the Company and comparisons to quoted prices. At December 31, 2001 and 2000, the fair value of these financial instruments approximates carrying value. Cash and cash equivalents include cash on hand, demand deposits, savings accounts, and short-term investments with original maturities of three months or less. Cash and cash equivalents include financial instruments that potentially subject the Company to a concentration of credit risk. The Company places its cash and temporary cash investments with high credit quality institutions. At times, cash held in the Company's primary bank may be in excess of the FDIC insurance limit. Cash in money market mutual funds is not federally insured. The Company performs periodic evaluations of the relative credit standing of these financial institutions. As of December 31, 2000, cash and cash equivalents consisted solely of cash in the primary banking institution. At December 31, 2001, cash overdrafts of $ 131,800 have been recorded as a liability. F-7 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1. Summary of significant accounting policies (continued): Inventories: Inventories are stated at the lower of cost (including overhead) or market (first-in, first-out). As of December 31, 2001 and 2000, inventories consisted of the following: 2001 2000 ---- ---- Raw materials $ 6,457,436 $ 5,327,158 Work-in-process and finished goods 4,526,389 7,326,592 ------------ ------------ $ 10,983,825 $ 12,653,750 Property and equipment: Property and equipment is stated at the lower of depreciated cost or net realizable value. Depreciation and amortization is being provided on the straight-line method over the estimated useful life of the asset. The following is a schedule of estimated useful lives of property and equipment: Furniture and fixtures 7 years Tooling and molds 6-10 years Software 3-5 years Shop and office equipment 3-10 years Leasehold improvements 3-5 years Property and equipment consist of the following at December 31: 2001 2000 ---- ---- Tooling and molds $2,165,085 $1,978,584 Office equipment and software 2,830,922 1,554,257 Leasehold improvements 771,186 1,072,648 Furniture and fixtures 624,459 651,752 Shop equipment 546,592 722,090 ---------- ---------- 6,938,244 5,979,331 Less: accumulated depreciation 2,753,808 1,849,685 ---------- ---------- $4,184,436 $4,129,646 Goodwill and identifiable intangible assets: The excess of acquisition cost over fair value of net tangible and identifiable intangible assets of businesses acquired in purchase transactions, has been included in goodwill and is being amortized on a straight-line basis over 30 years. Identifiable intangible assets include patents, trademarks, trade names, proprietary trade secrets, proprietary product designs, customer lists and non-compete agreements and are being amortized over the lesser of the assets' legal life (if applicable) or their estimated economic lives, ranging from 5 to 40 years. F-8 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1. Summary of significant accounting policies (continued): The Company's policy is to account for goodwill and identifiable intangible assets at the lower of amortized cost or net realizable value. As part of an ongoing review of the valuation and amortization of intangible assets, management assesses the carrying value of the Company's intangible assets to determine if changes in facts and circumstances suggest that they may be impaired. If this review indicates that there may be an impairment, as determined by an undiscounted cash flow analysis over the remaining amortization period, the carrying value of the Company's intangibles would be reduced to its estimated fair market value. No impairment of the value of the intangible assets was recorded in the accompanying consolidated financial statements during the years ended December 31, 2001, 2000 or 1999. In June of 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) 142 "Goodwill and Other Intangible Assets" (SFAS 142). This statement will change the way the Company accounts for goodwill and other intangible assets beginning in 2002. Under SFAS 142, the Company will stop amortizing goodwill beginning January 1, 2002. This is expected to result in a reduction in amortization of approximately $1 million per year. In addition, the implementation of SFAS 142 will change the way the Company evaluates goodwill for impairment. Under SFAS 142, the Company will be required to split the two segments; children's activity and convenience products and children's modular play equipment, into reporting units. Goodwill impairment will be evaluated separately for each reporting unit by comparing the fair value of the reporting unit with its underlying book value. 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 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. Identifiable intangible assets consist of the following at December 31: 2001 2000 ---- ---- Trademarks $ 3,971,799 $ 3,971,799 Patents 10,806,015 10,666,259 Trade secrets 5,500,000 5,500,000 Product designs 10,044,409 10,044,409 Other 201,750 205,916 ----------- ----------- Total 30,523,973 30,388,383 Less accumulated amortization 3,997,709 2,626,228 ----------- ----------- $26,526,264 $27,762,155 SFAS 142 is required to be implemented as of January 1, 2002. However, the Company will have 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 for any impairments subsequently recognized. F-9 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1. Summary of significant accounting policies (continued): Revenue recognition: The Company recognizes revenues 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. Advertising costs: Advertising costs, except for the preparation of catalog materials, are expensed when incurred. Costs of preparing catalog materials are deferred and amortized over the life of the catalog, typically one year. Advertising expenses for the periods ended December 31, 2001, 2000 and 1999 were $1,684,525, $1,810,500 and $1,301,422, respectively. Income taxes: The Company provides for deferred taxes on temporary differences arising from assets and liabilities whose bases are different for financial reporting and state, federal and foreign income tax purposes. The differences relate primarily to depreciable and amortizable assets, certain accrued expenses and the allowance for uncollectible accounts. For foreign corporate income taxes paid, the Company will utilize a foreign tax credit against the federal corporate income tax liability. Foreign currency translation: The financial statements of the Company's subsidiaries located outside the United States are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average rates of exchange. The resultant translation adjustments are included in equity adjustment from translation, a separate component of shareholders' equity. Gains and losses on foreign currency transactions are included in operations. The net foreign exchange loss for the year ended December 31, 2001 was $195,234. Amounts in prior years were not significant. F-10 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1. Summary of significant accounting policies (continued): Earnings per share The following table provides a reconciliation of the numerator and denominator for earnings per share: December 31 ----------- 2001 2000 1999 ---- ---- ---- Net income (loss) $(1,990,073) $ 4,032,404 $ 5,091,124 =========== =========== =========== Shares outstanding 6,872,334 6,769,508 6,256,729 Net effect of dilutive options -- 231,478 259,346 ----------- ----------- ----------- Dilutive shares outstanding 6,872,334 7,000,986 6,516,075 =========== =========== =========== Options outstanding of 1,044,500, 43,750, and 127,125 at December 31, 2001, 2000 and 1999, respectively, have been excluded from the above calculation because they were not considered common share equivalents or because their effect would be anti-dilutive. Stock Split: On October 8, 1999, the Company's Board of Directors approved a two-for-one stock split effected as a stock dividend. All amounts in the accompanying financial statements and related footnotes have been restated to reflect this stock split. New Accounting Pronouncements: In June 2001, the FASB issued SFAS 141, Business Combinations. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. The FASB also adopted SFAS 142, Goodwill and Other Intangible Assets, as previously discussed. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations - Reporting the Effects Of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The Company will adopt SFAS 144 as of January 1, 2002 and does not anticipate any immediate impact from the adoption of this statement. In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. F-11 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1. Summary of significant accounting policies (continued): The Company will adopt SFAS 143 in 2003. The Company does not believe the adoption of SFAS 143 will have a material impact on the consolidated financial statements. 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. 2. Debt: The following is a summary of the Company's debt as of December 31:

~~-------------------------------------------------~~2001 2000 ---- ----~~-----------------------------------------~~ ~~Federal~~$14.0 ~~Foreign~~million ~~State~~revolving ~~Total~~credit ~~Current~~facility, ~~tax~~maturing ~~expense~~April 15, 2003, interest payable monthly at bank's prime rate plus a variable margin, effective rate at December 31, 2001 and 2000 was 7.25% and 9.5%, respectively $19,~~694~~600,~~268~~000 $37,990,000 0Term $loan, ~~139~~maturing on September 26,~~549~~ 2004, quarterly principal payments of $1500,~~833~~000 through December 31,~~817~~ ~~Deferred~~2002, ~~tax~~interest ~~expense~~payable ~~413~~monthly at bank's prime rate plus a variable margin,~~557~~ 0effective 11rate at December 31,~~023~~ ~~424~~2001 was 7.25% 27,~~580~~000,000 -~~---------~~ ---------- ---------- -~~---------~~ ~~Provision for income taxes~~ $236,~~107~~600,~~825~~000 $ ~~0 $ 150~~37,~~572 $2~~990,~~258,397~~000 ========== =~~=========~~ ========== =~~=========~~

The Company increased its secured line of credit with a bank from $15.0 million at December 1999 to $45.0 million on November 17, 2000. The interest rate on amounts borrowed under the line of credit was based on the applicable Reserve Adjusted LIBOR rate, or the commercial bank's prime rate. In the third quarter of 2001, the Company amended and restated its existing $45 million revolving credit facility and established a revolving credit facility in the amount of $14 million and a term loan in the amount of $28 million (the "New Credit Facility"). This facility is secured by substantially all of the assets of the Company and requires compliance with financial loan covenants related to leverage, interest coverage, fixed charges and capital expenditures. Availability under the revolving credit facility is determined by a formula based on inventory and accounts receivable balances. A commitment fee of .50% per annum is payable quarterly based on the average daily unused portion of the revolving line of credit. 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 F-12 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 2. Debt (continued): 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 amounts outstanding under the term loan, and sets new covenants. At December 31, 2001, the Company was again in default of certain covenants under that indebtedness and anticipated, based on expected results, that it would be in default throughout 2002. On April 1, 2002, the Company 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 the line of credit has been extended to April 15, 2003, the date to 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 and the covenants have been reset. The amendment also requires the Company to make up to $2 million in additional principal payments on April 15, 2003 if certain EBITDA targets are met for 2002. The Company has engaged an investment banker to assist with raising the additional financing. The following is a summary of the debt maturities as of December 31, 2001 2002 $2,000,000 2003 13,600,000 2004 21,000,000 ---------- Total $36,600,000 =========== 3. Supplemental financial information: 2001 2000 1999 ---- ---- ---- Interest received $ 16,248 $ 21,044 $ 8,586 ========== ========== ========== Interest paid $3,236,001 $2,932,413 $ 772,074 ========== ========== ========== Income taxes paid $ 149,508 $3,272,029 $2,370,282 ========== ========== ========== 4. Capital lease: The Company entered into a capital lease for certain equipment and software in 2001. The amounts are included in equipment and accumulated depreciation as follows: December 31, ------------ 2001 ---- Equipment $183,996 Accumulated depreciation 19,582 F-13 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 4. Capital lease (continued): Amortization expense for this lease for the year ended December 31, 2001 was $19,582. Future payments due under this lease at December 31, 2001 are as follows: 2002 $ 72,318 2003 72,318 2004 72,318 --------- Total 216,954 Less amounts representing interest 52,598 --------- Total $ 164,356 ========= Current portion $ 54,784 ========= Non-current portion $ 109,572 ========= 5. Commitments and contingencies: Operating leases: The Company has entered into operating leases for facilities located in Denver, Colorado, Coral Springs, Florida, Tillamook, Oregon, Armonk, New York, Wimberley, Texas, and Delta, British Columbia, Canada. The Company has other operating leases for equipment and furniture and fixtures. The lease terms vary and run through December 31, 2012. One of the leases contains a five year renewal option. All of the building leases call for monthly base rents, with the Company responsible for its share of common building operating costs, payable on a monthly basis. Rent expense was $1,132,800, $968,200 and $695,900 for the years ended December 31, 2001, 2000 and 1999, respectively. Total minimum operating lease commitments are as follows: Year Ending December 31, Amount ------------------------ ------------ 2002 $ 1,519,800 2003 1,211,000 2004 1,079,800 2005 1,053,300 2006 1,050,900 Thereafter 4,313,600 ------------ $ 10,228,400 ============ Warranties: For family convenience and children's activity products, the Company provides a replacement guarantee for one year from purchase protecting against damage from natural disasters or vandalism subject to a $100 deductible. The Company also provides a five-year warranty on parts and labor covering any defects in workmanship. For F-14 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 5. Commitments and contingencies (continued): modular play equipment, the Company provides warranties ranging from a one year limited warranty on parts and labor covering defects in workmanship to a lifetime warranty on certain metal parts. The Company has experienced minimal returns and warranty claims, except for SCS Interactive where a warranty accrual of .75% of 2001 and 2000 sales has been recorded. 6. Stock options: The Company adopted a Stock Option Plan (1993 Plan) in August 1993. The 1993 Plan provides that options to purchase up to 200,000 shares of common stock may be granted. The Company adopted a second plan in November 1995 (1995 Plan) which provides that additional options to purchase up to 800,000 shares of common stock may be granted. The exercise price of each option is equal to the market price of the Company's stock on the date of grant. The option term varies, as well as the vesting periods, at the discretion of the Board of Directors. In January 1998, the Company authorized the amendment and restatement of the 1995 Plan to grant an additional 500,000 shares and allow the transfer of non-qualified stock options to family members without Board of Directors' approval or to non-employees with Board of Directors' approval. The amendment and restatement was approved by the Company's shareholders' at its annual shareholders' meeting in May 1998. The fair value of each option granted is estimated on the grant date using the Black-Scholes Model. The following assumptions were made in estimating fair value: Assumption 2001 2000 1999 ---------- ---- ---- ---- Dividend yield 0.0% 0.0% 0.0% Risk-free interest rate - 5 year 4.51% 5.00% 6.25% Expected life 5 years 5 years 5 years Expected volatility 89.80% 47.20% 42.50% F-15 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 5. Stock options (continued): The Company applies the intrinsic value method as defined by APB Opinion 25 and its interpretations in accounting for its stock based compensation plans. Accordingly, no compensation cost has been recognized for the plans in 2001, 2000 or 1999. FASB Statement No. 123, Accounting for Stock Compensation, requires certain disclosures as if stock compensation had been determined using fair value methodologies. Had compensation cost been determined on the basis of fair value pursuant to FASB Statement No. 123, net income (loss) and earnings (loss) per share would have been presented as follows:

~~-------------------------------------------------~~Net income (loss) 2001 2000 1999 ------------------- ---- ---- ----~~------------------~~ ~~Federal~~As ~~Foreign~~reported ~~State Total Current tax expense~~ $(1,~~903~~990,~~943~~073) $ ~~155~~4,~~129 $ 154~~032,~~774~~404 $25,~~213~~091,~~846~~124 ~~Deferred~~=========== ~~tax~~========== ~~expense~~========== ~~366,565~~Pro --forma 44(FASB 123) $(2,~~048~~432,156) ~~410~~$3,~~613~~471,723 ~~----------~~$4,721,877 ~~----------~~============ ~~----------~~========== ~~----------~~========== ~~Provision~~Basic ~~for~~earnings ~~income~~(loss) ~~taxes~~per ~~$2,270,508~~share $As ~~155,129~~reported $(.29) ~~198,822~~$.60 $~~2,624,459~~.81 ===== ==== ==== Pro forma (FASB 123) $(.35) $.51 $.75 ===== ==== ==== Diluted earnings (loss) per share As reported $(.29) $.58 $.78 ===== ==== ==== Pro forma (FASB 123) $(.35) $.50 $.72 ===== ==== ====

Following is a summary of the status of the plans during 2001, 2000 and 1999:

~~-------------------------------------------------~~2001 ~~1998~~2000 ~~-------------------------------------------------~~1999 ~~Federal Foreign State Total Current tax expense $1,153,496 $ 234,048 $ 59,233 $1,446,777 Deferred tax expense 216,860~~ -- ~~5,407 222,267~~ --~~--------~~ ----~~------~~ ----~~------~~ ~~----------~~Options ~~Provision~~exercisable ~~for income taxes $1~~707,~~370,356~~700 ~~$ 234~~614,~~048~~800 ~~$ 64~~422,~~640~~000 ~~$1,669,044~~ =======~~===~~ ======= === ==== Weighted average fair value of options granted during the year $1.50 $6.84 $5.65 ====== ===== =====

F-16 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 6. Stock options (continued): Following is a summary of the status of the plans for the years ended December 31, 2001, 2000 and 1999:

~~2000~~Number ~~1999~~of ~~1998~~Weighted Average Shares Exercise Price Price ----------- ---------------- ---------------- ~~Federal~~Outstanding, ~~statutory~~December ~~rate~~31, 341998 806,000 $6.0%89 34$4.0%63 34to $11.0%50 ~~Foreign~~Granted ~~taxes~~261,000 in$12.20 ~~excess~~$9.69 ofto ~~federal~~$16.38 ~~statutory~~Exercised ~~rate~~(102,000) 0$5.043 ~~2.0~~ $4.63 to $9.00 ~~Tax~~--------- ~~benefit~~Outstanding, ofDecember ~~foreign~~31, ~~tax~~1999 ~~credit~~965,000 (0$8.0)47 (2$4.0)63 (4to $16.9)38 ~~State~~Granted ~~income~~128,500 ~~taxes~~$12.99 -10.00 ~~net~~to of$15.00 ~~federal~~Forfeited ~~effect~~(39,000) 2$10.551 1$7.325 to $16.800 ~~Effect~~-------- ofOutstanding, ~~difference~~December in31, ~~tax~~2000 ~~basis of goodwill~~ 1.5,054,500 (0$8.5)95 (0$4.8)63 ~~Foreign~~to ~~sales~~$16.38 ~~corporation~~Granted ~~benefit~~36,000 ($1.8)97 ($1.3)06 (1to $3.1)25 ~~Miscellaneous~~Forfeited ~~tax adjustments~~ (.346,000) $12.554 2$6.150 ~~----~~to $13.88 ---- ---- ~~Effective~~Outstanding, ~~tax~~December ~~rate~~31, 352001 1,044,500 $8.9%56 34$1.0%06 35to $16.0%38 ==== ==== =~~===~~

F-17 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 6. Stock options (continued): A summary of the status of fixed options outstanding at December 31, 2001 is as follows:

~~-------------------------------------------------------------------~~Outstanding ~~Quarter~~Options ~~Ended~~Exercisable Options -------------------------- ------------------------~~-----------------~~ ~~2000~~Weighted ~~March~~Average 31Weighted ~~June~~Weighted 30Remaining ~~September~~Average 30Average ~~December~~Contractual 31Exercise ~~----~~Exercise Price Number Life Price Number Price -----~~---~~ ------- ---- -----~~---~~ ------ ----- ~~Sales~~ $~~11,480~~1.06 ~~$17,162~~to $~~16,399~~4.63 ~~$14~~156,~~665~~000 ~~Gross~~3.45 ~~profit~~years ~~5,705~~$4.01 7120,~~996~~000 ~~8,122~~$4.63 $5~~,064~~.63 ~~Net~~to ~~income~~$7.50 ~~(loss) 1~~362,~~263~~000 ~~1,883~~4.22 ~~1,567~~years ~~(681)~~$6.42 ~~Basic~~346,000 ~~earnings~~$6.39 ~~(loss)~~$8.00 ~~per~~to ~~share~~$11.50 270,500 6.1959 years $9.2892 142,500 $9.2382 ($12.~~10)~~50 ~~Diluted~~to ~~earnings~~$16.38 ~~(loss)~~256,000 ~~per~~7.78 ~~share~~years $12.1990 ~~.27~~99,200 $12.~~22 (.10)~~71

7. Income taxes: The components of the provision for income tax were:

--------------------------------------------------------~~-----------~~ ~~Quarter~~2001 ~~Ended~~ ------------------------------------------------------- Federal Foreign State Total Current tax expense (benefit) $(1,027,623) $ - $ -~~----------~~ ~~1999~~$(1,027,623) ~~March~~Deferred 31tax ~~June~~expense 30(benefit) ~~September~~399,430 30- ~~December~~(50,596) 31348,834 ---- -------- ------- ---- ----------- ----------- ~~Sales~~Income ~~$7,299~~tax ~~$9,151~~benefit $10 (628,~~544~~193) $~~10,141~~ ~~Gross~~- ~~profit~~$ 3(50,~~693~~596) ~~4,753~~$ 5(678,~~301~~789) ~~5,295~~=========== ~~Net~~=========== ~~income~~=========== ~~949 1,266 1,477 1,399 Basic earnings per share .16 .20 .23 .22 Diluted earnings per share .15 .19 .22 .21~~===========

~~Subsidiaries of the Company Name of Subsidiary Jurisdiction of Incorporation Percentage Ownership~~ ------------------ -------------------------------------- 2000 ------------------------------------------------------- ~~Delta~~Federal ~~Play~~Foreign ~~(US),~~State ~~Inc.~~Total ~~State~~Current oftax ~~Colorado~~expense ~~100%~~$ ~~Delta~~1,694,268 ~~Play~~$ ~~Company~~- ~~Province~~$ of139,549 ~~Nova~~$ ~~Scotia~~1,833,817 ~~Canada~~Deferred ~~100%~~tax PSexpense ~~Florida~~413,557 ~~Inc.~~- ~~State~~11,023 of424,580 ~~Colorado~~----------- ~~100%~~----------- ~~Koala~~----------- ~~Foreign~~----------- ~~Sales~~Income ~~Corporation~~tax ~~Barbados~~expense ~~100%~~$ ~~SCS Interactive~~2,107,825 ~~Inc.~~$ ~~State~~- of$ ~~Oregon~~150,572 ~~100%~~$ ~~Koala Surfaces~~2,258,397 ~~Inc.~~=========== ~~State~~=========== of=========== ~~Colorado 100%~~===========

F-18 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 7. Income taxes (continued): The tax effects of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities at December 31, 2001 and 2000 are as follows: 2001 2000 ---- ---- Deferred tax assets: Allowance for doubtful accounts $ 161,538 $ 140,634 State operating loss carryforwards 50,596 -- Other 2,541 -- ---------- ---------- 214,675 140,634 ---------- ---------- Deferred tax liabilities: Depreciation 281,134 340,000 Amortization 1,721,911 1,242,000 ---------- ---------- 2,003,045 1,582,000 ---------- ---------- Net deferred tax liability $1,788,370 $1,441,366 ========== ========== The components of income (loss) before income taxes for the years ended December 31 are as follows: 2001 2000 1999 ---- ---- ---- Foreign $ (746,000) $ (595,000) $ 503,000 US (1,923,000) 6,886,000 7,213,000 ----------- ----------- ----------- Total $(2,669,000) $ 6,291,000 $ 7,716,000 =========== =========== =========== The effective tax rate differs from the statutory rate as follows: 2001 2000 1999 ---- ---- ---- Federal statutory rate (34.0)% 34.0% 34.0% Foreign taxes in excess of federal statutory rate 3.7 0.0 2.0 Tax benefit of foreign tax credit 0.0 0.0 (2.0) State income taxes - net of federal effect (1.9) 2.5 1.3 Effect of difference in tax basis of goodwill 5.1 1.5 (0.5) Foreign sales corporation 1.4 (1.8) (1.3) Miscellaneous tax adjustments .3 (.3) .5 ------ ------ ------ Effective tax rate (25.4)% 35.9% 34.0% ====== ====== ====== 8. Major suppliers: For the years ended December 31, 2001, 2000, and 1999 the Company purchased a significant amount of component parts from three, three and four vendors, which accounted for approximately 9%, 14% and 17% of the Company's total cost of sales, respectively. F-19 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 9. 401(k) Plan: Effective January 1997, the Company adopted a 401(k) Plan for the benefit of substantially all of its U.S. employees meeting specified eligibility requirements. The Plan permits contributions by the Company but does not require them. The Company made no material contributions to the Plan during 2001, 2000 or 1999. The Company also maintained a second plan in 2000 and 2001 that related to the purchase of SCS Interactive on March 1, 2000. Contributions to this plan were matched up to 3% of the participants' deferred compensation. This plan was merged into the Koala plan effective March 1, 2001. During the years ended December 31, 2001 and 2000, the Company contributed $18,827 and $67,783, respectively, to this 401(k) profit sharing plan. 10. Preferred stock and shareholder rights plan: During 1996, the shareholders voted to amend the Articles of Incorporation to provide for the issuance of 1,000,000 shares of no par value preferred stock. At December 31, 2001 and 2000, none were outstanding. The Board of Directors is granted authority to determine dividends and other rights and preferences for the preferred stock. On October 31, 2000, the Board of Directors declared, to shareholders of record at the close of business on November 13, 2000, a dividend of one right to purchase preferred stock (a "Right") for each outstanding share of common stock, par value $.10 per share, of the Company. As a result, there are 35,000 shares of preferred stock reserved for issuance relating to such rights. Each share of subsequently issued common stock also incorporates one Right. The Rights will expire on November 7, 2010. Each Right entitles shareholders, in certain circumstances, to buy one one-thousandth of a newly issued share of Series A Junior Participating Preferred Stock (the"Junior Preferred Shares") of the Company at the initial purchase price of $50.00 per one one-thousandth of a Junior Preferred Share. The Rights are exercisable and transferable apart from the common stock only if a person or group (other than certain exempt persons) acquires beneficial ownership of 20% or more of the common stock, or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 20% or more of the common stock. The Company is generally entitled to redeem the Rights at $.001 per Right at any time until a person or group has become the beneficial owner of 20% or more of the common stock. Under the Rights "flip-in" feature, if any such person or group becomes the beneficial owner of 20% or more of the common stock, then each Right not owned by such person or group will entitle its holder to purchase, at the Right's then current purchase price, shares of common stock having a market value of two times the purchase price of the Right. Under the Rights "flip-over" provision, if, after any person or group (other than certain exempt persons) becomes the beneficial owner of 20% or more of the common stock, the Company is involved in a merger or other business combination transaction with another person, or sells 50% or more of its assets or earning power in one or more transactions, each Right will entitle its holder to purchase, at the Right's then current purchase price, shares of common stock of such other person having a market value of twice the Right's purchase price. F-20 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 10. Preferred stock and shareholder rights plan (continued): The Junior Preferred Stock will not be redeemable and, unless otherwise provided in connection with the creation of a subsequent series of preferred stock, will be subordinate to all other series of the Company's preferred stock. Each share of Junior Preferred Stock will represent the right to receive, when and if declared, a quarterly dividend at an annual rate equal to the greater of $0.01 per share or 1,000 times the quarterly per share cash dividends declared on the common stock during the immediately preceding fiscal year. In addition, each share of Junior Preferred Stock will represent the right to receive 1,000 times any non-cash dividends (other than dividends payable in common stock) declared on the common stock, in like kind. In the event of the liquidation, dissolution, or winding up of the Company, each share of Junior Preferred Stock will represent the right to receive a liquidation payment in an amount equal to the greater of $1.00 per share or 1,000 times the liquidation payment made per share of common stock. Each share of Junior Preferred Stock will have 1,000 votes, voting together with the common stock. In the event of any merger, consolidation, or other transaction in which common shares are exchanged, each share of Junior Preferred Stock will represent the right to receive 1,000 times the amount received per share of common stock. The rights of the Junior Preferred Stock as to dividends, liquidation, voting rights and merger participation are protected by anti-dilution provisions. 11. Geographic and 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. These products are sold direct and through distribution channels, both in the United States and internationally. The Company recognizes sales of products from this business segment at the time the products are shipped. 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 national network of sub-contractors. These products are sold direct and through manufacturers' representatives/dealers both in the United States and internationally. The Company recognizes revenue at the time its products are shipped or, in cases where the Company performs the installation, when installation is complete, at the majority of its operations. At the Company's SCS Interactive division, the percentage of completion method of accounting is used for those projects where the build to install timeline is of longer duration. F-21 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 11. Geographic and business segments (continued): The Company evaluates the performance of its segments based primarily on operating profit before acquisition intangible amortization, corporate expenses and interest income and expense. The Company allocates corporate expenses to individual segments based on segment sales. Corporate expenses are primarily labor costs of executive management and shareholder relation costs. The following table presents sales and other financial information by business segment (in thousands): ------------------------------------------------------------------------------- 2001 ------------------------------------------------------------------------------- Convenience and Activity Modular Play Products Equipment Total -------- ------------ --------- Sales $ 14,911 $ 44,311 $ 59,222 Operating income 1,762 (1,276) 486 Depreciation and amortization 764 2,551 3,315 Capital expenditures 290 525 815 Total assets 18,333 64,712 83,045 ------------------------------------------------------------------------------- 2000 ------------------------------------------------------------------------------- Convenience and Activity Modular Play Products Equipment Total -------- ------------ --------- Sales $ 17,681 $ 43,908 $ 61,589 Operating income 4,482 4,365 8,847 Depreciation and amortization 730 2,144 2,874 Capital expenditures 289 509 798 Total assets 21,037 70,392 91,429 F-22 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 11. Geographic and business segments (continued): ------------------------------------------------------------------------------- 1999 ------------------------------------------------------------------------------- Convenience and Activity Modular Play Products Equipment Total -------- ------------ --------- Sales $ 16,838 $ 21,026 $ 37,864 Operating income 5,076 3,540 8,616 Depreciation and amortization 592 868 1,460 Capital expenditures 779 328 1,107 Total assets 18,865 29,693 48,558 Geographic area data: Geographically, sales, operating income and identifiable assets for non-domestic entities for the years ended December 31, 2001, 2000 and 1999 were as follows (in thousands): 2001 2000 1999 ---- ---- ---- Sales $6,569 $4,270 $7,205 Operating income (loss) 218 (350) 924 Identifiable assets 3,064 3,582 3,701 There were no material amounts of sales or transfers among geographic areas during 2001, 2000 or 1999. Revenues from sales to customers outside the United States were (in thousands): $4,726, $4,888 and $4,927, for the years ended December 31, 2001, 2000 and 1999, respectively. 12. Quarterly financial data - unaudited (in thousands, except per share data):

F-23 ================================================================================ KOALA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -------------------------------------------------------------------------------- 12. Quarterly financial data - unaudited (in thousands, except per share data) (continued):

Shipping and handling costs in the first three quarters of 2001 and all quarters in 2000 have been reclassified from revenues to cost of sales to be consistent with the current year end presentation. These reclassifications had no impact on net income or cash flows. 13. Notes receivable from officer: During the third and fourth quarters of 1999 and the second quarter of 2000, the Company made secured loans to an officer of the Company for the purpose of the officer's exercise of vested stock options. In August 2001, the Company and the officer executed a new note. The note bears interest at 3.78%, is due at the earlier of August 30, 2004 or one year from the date the officer's employment with the Company is terminated and is secured by all of the shares of common stock beneficially owned by the officer. At December 31, 2001 and 2000, the Company had a receivable of $715,195 and $695,171 from this officer, including accrued interest. The notes have been recorded as a reduction of shareholders' equity in the Company's balance sheet at December 31, 2001 and 2000. As a result of the issuance of the new note, the Company will account for the option using variable accounting. Under variable accounting, the Company will recognize an expense to the extent the share price of the Company's common stock exceeds $2.20 at the end of any quarterly period until the note is paid. F-24 ================================================================================ EXHIBIT 21.1 Subsidiaries of the Company Percentage Name of Subsidiary Jurisdiction of Incorporation Ownership ------------------ ----------------------------- ---------- Delta Play (US), Inc. State of Colorado 100% Delta Play Company Province of Nova Scotia, Canada 100% PS Florida, Inc. State of Colorado 100% SCS Interactive, Inc. State of Oregon 100% Koala Surfaces, Inc. State of Colorado 100% EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the 1995 Stock Option Plan of Koala Corporation of our Report dated April 1, 2002, with respect to the consolidated financial statements and schedule of Koala Corporation included in the Annual Report on Form 10-K for the year ended December 31, 2001. /s/ Ernst & Young LLP Denver, Colorado April 1, 2002

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