United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
- --------------------------------------------------------------------------------
(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --------- ACT OF 1934
For the quarterly period ended September 30, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
- --------------------------------------------------------------------------------
Commission File Number: 0-23041
Karts International Incorporated
(Exact name of small business issuer as specified in its charter)
Nevada 75-2639196
(State of incorporation) (IRS Employer ID Number)
62204 Commercial Street, Roseland, LA 70456
(Address of principal executive offices)
(504) 747-1111
(Issuer's telephone number)
- --------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
November 15, 1999: Common Stock: 5,574,298 shares
Common Stock Warrants: 1,782,500
Transitional Small Business Disclosure Format (check one): YES NO X
<PAGE>
Karts International Incorporated
Form 10-QSB for the Quarter ended September 30, 1999
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 27
Part II - Other Information
Item 1 Legal Proceedings 29
Item 2 Changes in Securities 29
Item 3 Defaults Upon Senior Securities 29
Item 4 Submission of Matters to a Vote of Security Holders 29
Item 5 Other Information 30
Item 6 Exhibits and Reports on Form 8-K 30
Signatures 31
2
<PAGE>
S. W. HATFIELD, CPA
certified public accountants
Member: American Institute of Certified Public Accountants
SEC Practice Section
Information Technology Section
Texas Society of Certified Public Accountants
Independent Accountant's Report
Board of Directors and Shareholders
Karts International Incorporated
We have reviewed the accompanying consolidated balance sheets of Karts
International Incorporated (a Nevada corporation) and Subsidiaries as of
September 30, 1999 and 1998 and the accompanying consolidated statement of
operations and comprehensive income for the nine and three months ended
September 30, 1999 and 1998, respectively, and the consolidated statements of
cash flows for the nine months ended September 30, 1999 and 1998. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression on an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
S. W. HATFIELD, CPA
(formerly S. W. HATFIELD + ASSOCIATES)
Dallas, Texas
November 11, 1999
Use our past to assist your future sm
P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor
Dallas, Texas 75382-0395 Dallas, Texas 75243-7212
214-342-9635 (voice) (fax) 214-342-9601
800-244-0639 3 [email protected]
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 1999 and 1998
(Unaudited)
Assets
1999 1998
------------ ------------
<S> <C> <C>
Cash on hand and in banks $ 135,363 $ 252,138
Accounts receivable
Trade, net of allowance for doubtful accounts
of $80,500 and $23,000, respectively 2,132,097 1,066,473
Recoverable income taxes and other 33,919 17,622
Inventory 2,796,715 2,073,273
Prepaid expenses 331,727 360,206
------------ ------------
Total current assets 5,429,821 3,769,712
------------ ------------
Property and equipment
Building and improvements 1,022,518 811,253
Equipment 1,032,922 790,826
Transportation equipment 223,818 125,640
Furniture and fixtures 153,861 134,960
------------ ------------
2,433,119 1,862,679
Accumulated depreciation (461,671) (230,458)
------------ ------------
1,971,448 1,632,221
Land 32,800 32,800
------------ ------------
Net property and equipment 2,004,248 1,665,021
------------ ------------
Other Assets
Note receivable 387,432 --
Option to acquire an unrelated entity 138,021 --
Deferred costs related to financing and capital acquisition 318,679 --
Goodwill, net of accumulated amortization of
approximately $6,414,452 and $561,227, respectively -- 5,298,196
Organization costs, net of accumulated amortization
of approximately $77,229 and $55,378, respectively 32,026 53,877
Covenant not to compete, net of accumulated amortization
of approximately $30,556 and $-0-, respectively 69,444 --
Other 36,797 26,720
------------ ------------
Total other assets 982,399 5,378,793
------------ ------------
Total Assets $ 8,416,468 $ 10,813,526
============ ============
</TABLE>
- Continued -
4
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<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets - Continued
September 30, 1999 and 1998
(Unaudited)
Liabilities and Shareholders' Equity
1999 1998
------------ ------------
<S> <C> <C>
Current Liabilities
Notes payable to banks and others $ 1,867,135 $ 892,291
Notes payable to affiliates 273,154 --
Current maturities of long-term debt 51,595 25,919
Accounts payable - trade 2,605,914 786,479
Other accrued liabilities 90,811 282,656
Accrued income taxes payable 9,090 14,490
------------ ------------
Total current liabilities 4,897,699 2,001,835
------------ ------------
Long-term liabilities
Long-term debt, net of current maturities 275,367 246,153
Debenture payable 1,500,000 --
------------ ------------
Total Liabilities 6,673,066 2,247,988
------------ ------------
Commitments and contingencies
Shareholders' equity
Preferred stock - $0.001 par value
10,000,000 shares authorized
1,550,000 and -0- issued and
outstanding, respectively 1,550,000 --
Common stock - $0.001 par value
14,000,000 shares authorized
5,574,298 and 4,854,133 shares
issued and outstanding, respectively 5,574 4,854
Additional paid-in capital 14,377,782 13,453,502
Accumulated deficit (14,189,954) (4,892,818)
------------ ------------
Total Shareholders' Equity 1,743,402 8,565,538
------------ ------------
Total Liabilities and Shareholders' Equity $ 8,416,468 $ 10,813,526
============ ============
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Nine and Three months ended September 30, 1999 and 1998
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 6,678,886 $ 3,617,510 $ 3,013,124 $ 1,885,571
----------- ----------- ----------- -----------
Cost of sales
Purchases, direct labor
and related costs 6,307,881 3,705,405 2,696,819 2,003,683
Depreciation 101,322 52,740 67,440 16,941
----------- ----------- ----------- -----------
Total cost of sales 6,409,203 3,758,145 2,764,259 2,020,624
----------- ----------- ----------- -----------
Gross profit 269,683 (140,635) 248,865 (135,053)
----------- ----------- ----------- -----------
Operating expenses
Research and development 7,773 22,364 -- 6,985
Selling, general and
administrative expenses 1,680,550 1,589,807 673,516 650,826
Compensation expense related
to common stock issuances
at less than "fair value" for
reorganization, restructuring
and consulting costs -- 413,412 -- --
Depreciation and amortization 113,789 231,979 58,865 77,751
----------- ----------- ----------- -----------
Total operating expenses 1,802,112 2,257,562 732,381 735,562
----------- ----------- ----------- -----------
Income (Loss) from operations (1,532,429) (2,398,197) (483,516) (870,615)
Other income (expense)
Interest expense (225,829) (42,387) (94,651) (7,884)
Other 143,787 50,374 46,941 6,950
----------- ----------- ----------- -----------
Income (Loss) before income taxes (1,614,471) (2,390,210) (531,226) (871,549)
Income taxes
Currently receivable (payable) -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) (1,614,471) (2,390,210) (531,226) (871,549)
Other comprehensive income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income (loss) $(1,614,471) $(2,390,210) $ (531,226) $ (871,549)
=========== =========== =========== ===========
</TABLE>
-Continued -
6
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income - Continued
Nine and Three months ended September 30, 1999 and 1998
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $(1,614,471) $(2,390,210) $ (531,226) $ (871,549)
Other comprehensive income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income (loss) $(1,614,471) $(2,390,210) $ (531,226) $ (871,549)
=========== =========== =========== ===========
Income (loss) per weighted-
average share of common
stock outstanding, calculated
on net loss - basic and fully diluted $(0.29) $(0.49) $(0.10) $(0.18)
==== ==== ==== ====
Weighted-average number
of shares of common
stock outstanding 5,574,298 4,854,133 5,574,298 4,854,133
=========== =========== =========== ===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
1999 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net loss for the period $(1,614,471) $(2,390,210)
Adjustments to reconcile net income
(loss) to net cash used in operating activities
Depreciation and amortization 215,111 231,979
Bad debt reserve 15,000 20,000
Accrued interest income on note receivable (9,319)
Reorganization and restructuring costs and
related effect of common stock issuances
at less than "fair value" -- 413,412
(Increase) Decrease in:
Accounts receivable - trade and other 170,086 (416,050)
Inventory (666,766) (1,164,059)
Prepaid expenses and other (133,810) (205,936)
Increase (Decrease) in:
Accounts payable and other accrued liabilities (944,924) 716,478
Accrued income taxes payable 9,090 (123,220)
----------- -----------
Cash flows used in operating activities (2,960,003) (2,917,606)
----------- -----------
Cash flows from investing activities
Cash paid to acquire option to purchase unrelated entity (14,477) --
Cash paid for property and equipment (196,502) (505,872)
----------- -----------
Cash flows used in investing activities (210,979) (505,872)
----------- -----------
Cash flows from financing activities
Decrease in cash overdraft (9,153) --
Cash received from sale of Convertible Preferred Stock 1,525,000 --
Cash paid for loan and capital acquisition costs (318,679) --
Change in notes payable to affiliates - net 174,279 --
Net activity on bank and other lines of credit 302,420 892,291
Principal received on long-term debt 1,500,000 --
Principal payments on long-term note payable (31,212) (18,421)
----------- -----------
Cash flows provided by financing activities 3,142,655 873,870
----------- -----------
Increase (Decrease) in cash (28,327) (2,549,608)
Cash at beginning of period 163,690 2,801,746
----------- -----------
Cash at end of period $ 135,363 $ 252,138
=========== ===========
</TABLE>
- Continued -
8
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows = Continued
Nine months ended September 30, 1999 and 1998
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 228,807 $ 42,387
========= =========
Income taxes paid (refunded) for the period $ (6,476) $(207,378)
========= =========
Supplemental disclosure of non-cash
investing and financing activities
Transportation equipment purchased with notes payable $ 80,479 $ 41,295
========= =========
Conversion of debt payable to an affiliate into
preferred stock $ 25,000 $ --
========= =========
</TABLE>
9
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Organization and Description of Business
Karts International Incorporated (Company) was originally incorporated on
February 28, 1984 as Rapholz Silver Hunt, Inc. under the laws of the State of
Florida. On February 23, 1996, the Company was reincorporated in the State of
Nevada by means of a merger with and into Karts International Incorporated, a
Nevada corporation incorporated on February 21, 1996. The Company was the
surviving entity and changed its corporate name to Karts International
Incorporated.
The Company's two principal wholly-owned subsidiaries are Brister's Thunder
Karts, Inc. (a Louisiana corporation), located in Roseland, Louisiana and USA
Industries, Inc. (an Alabama corporation), located in Prattville, Alabama. These
two entities manufacture and sell "fun karts" through dealers, distributors and
mass merchandisers.
On January 5, 1998, the Company formed a new limited liability corporation,
KINT, L.L.C. (KINT) as a wholly-owned subsidiary. This entity was activated
during July 1998 for the purpose of creating a sales and marketing company
focusing on the sale of customized promotional "fun karts" to various national
companies. This subsidiary conducted business operations under the trade name of
"Bird Promotions". In March 1999, Company management ceased all operations
within this subsidiary and consolidated these sales and marketing efforts within
other operating subsidiaries of the Company.
On October 27, 1998, effective at the close of business on October 31, 1998, the
Company acquired 100.0% of the issued and outstanding stock of Straight Line
Manufacturing, Inc. (a Michigan corporation) (Straight Line), a manufacturer of
large, full suspension "fun karts" located in Milford, Michigan, for total
consideration of approximately $400,000. This acquisition was accounted for as a
purchase. In addition to the purchase transaction, the Company entered into a
covenant not to compete with the former owner of Straight Line Manufacturing,
Inc. for a period of at least three (3) years for total consideration of
$100,000, consisting of $50,000 cash and a note payable for $50,000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying consolidated financial statements contain the accounts of Karts
International Incorporated and its wholly-owned subsidiaries, Brister's Thunder
Karts, Inc., USA Industries, Inc., KINT, LLC and Straight Line Manufacturing,
Inc. All significant intercompany transactions have been eliminated. The
consolidated entities are collectively referred to as Company.
For segment reporting purposes, the Company operates in only one industry
segment and makes all operating decisions and allocates resources based on the
best benefit to the Company as a whole.
10
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note B - Liquidity Contingency
For the years ended December 31, 1998, 1997, and 1996, the Company experienced
net losses from operations of approximately $3,930,000, $580,000, and $402,000,
respectively and has utilized cash in operating activities of approximately
$3,260,000, $220,000 and $110,000, respectively. The Company has also
experienced senior management team turnover in both January 1997 and 1998. The
Company's former management was unable to operate the Company's facilities in a
manner that would allow the Company meet its order demand for product production
during the fourth quarter of 1998 and, accordingly, incurred short-term
financing from a non-financial institution lender to provide liquidity. Further,
former management spent considerable time and financial resources in exploring
possible merger or acquisition candidates and the results of these efforts were
for the most part unsuccessful and diverted management time and resources from
customer demands for product during the Company's heaviest demand period.
Management has taken the following actions to stabilize the Company's financial
position for future periods: 1) initiated plans to dissolve its separate sales
and marketing company subsidiary which focused on the sale of customized
promotional "fun karts" to various national companies and consolidated this
sales effort into existing functions within the Company; 2) initiated plans to
consider the relocation and/or consolidation of manufacturing or sales
activities within other existing facilities of the Company; 3) initiated cost
control measures related to the use of direct labor and material purchasing to
maximize the utilization of overstocked positions that existed at December 31,
1998; 4) terminated excess management and supervisory personnel hired by former
management and reorganized Company management and operational teams along
consolidated Company lines rather than individual operating subsidiary lines as
implemented by former management and 5) is reevaluating its product lines, costs
of manufacture, selling prices and customer relations to maximize unit sales and
gross profitability during the Company's slower sales seasons of the calendar
year. Management has also completed plans to raise additional capital through
the sale of equity securities which provided additional working capital and
improved liquidity.
Management believes that its successful efforts to raise additional capital
through the sale of equity securities and/or new debt financing have provided
additional cash flows for the liquidation of short-term debt and support of
ongoing operations. The Company continues to maintain a strong consumer demand
for its products and a backlog of orders in excess of the Company's historical
demand.
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
-------------------------
The Company considers all cash on hand and in banks, certificates of
deposit and other highly-liquid investments with maturities of three months
or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2) Accounts and advances receivable
--------------------------------
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United
States and are principally concentrated in the southeastern quadrant of the
country. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts receivable shown on the balance sheet at the date of
non-performance.
11
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - continued
3) Inventory
---------
Inventory consists of steel, engines and other related raw materials used
in the manufacture of "fun karts". These items are carried at the lower of
cost or market using the first-in, first-out method. As of September 30,
1999 and 1998, inventory consisted of the following components:
1999 1998
---------- ----------
Raw materials $2,288,113 $1,711,208
Work in process 96,302 272,763
Finished goods 412,300 89,302
---------- ----------
$2,796,715 $2,073,273
========== ==========
4) Property, plant and equipment
-----------------------------
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets,
generally 3 to 25 years, using the straight-line method.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5) Covenant not to compete
-----------------------
In conjunction with the acquisition of Straight Line Manufacturing, Inc.,
the Company paid $100,000 to the former sole shareholder of Straight Line
for a covenant not to compete for a period of at least three (3) years. The
consideration given was $50,000 cash and a note payable for $50,000. The
covenant is being amortized to operations over a period of three years
using the straight line method.
6) Organization costs
------------------
Costs related to the restructuring and reorganization of the Company have
been capitalized and are being amortized over a five year period using the
straight-line method.
7) Goodwill
--------
Goodwill represents the excess of the purchase price of acquired
subsidiaries over the fair value of net assets acquired and was being
amortized over 25 years using the straight-line method.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", the Company follows the policy of evaluating all
qualifying assets as of the end of each reporting quarter. For the year
ended December 31, 1997, no charges to operations were made for impairments
in the recoverability of goodwill. Current management, effective December
31, 1998, upon the realization that 1998 operational objectives were not
met, recorded an impairment of future recoverability of goodwill equivalent
to 100.0% of the unamortized goodwill incurred at the acquisition of
Brister's Thunder Karts, Inc., USA Industries, Inc. and Straight Line
Manufacturing, Inc.
12
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - continued
8) Income taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. At September 30, 1999 and 1998, the deferred tax asset and
deferred tax liability accounts, as recorded when material, are entirely
the result of temporary differences. Temporary differences represent
differences in the recognition of assets and liabilities for tax and
financial reporting purposes, primarily accumulated depreciation and
amortization. No valuation allowance was provided against deferred tax
assets, where applicable. As of September 30, 1999 and 1998, the deferred
tax asset related to the Company's net operating loss carryforward was
fully reserved.
9. Advertising
-----------
The Company does not conduct any direct response advertising activities.
For non-direct response advertising, the Company charges the costs of these
efforts to operations at the first time the related advertising is
published. For various sales publications, catalogs and other sales related
items, the Company capitalizes the development and direct production costs
and amortizes these costs over the estimated useful life of the related
materials, not to exceed an eighteen (18) month period from initial
publication of the materials.
10. Income (Loss) per share
-----------------------
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and common
stock equivalents (primarily outstanding options and warrants). Common
stock equivalents represent the dilutive effect of the assumed exercise of
the outstanding stock options and warrants, using the treasury stock
method. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of
issuance, whichever is later. As of September 30, 1999 and 1998, the
outstanding warrants and options are deemed to be anti-dilutive due to the
Company's net operating loss position.
Note D - Concentrations of Credit Risk
The Company maintains its cash accounts in financial institutions subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the Company and its subsidiaries are entitled to aggregate
coverage of $100,000 per account type per separate legal entity per individual
financial institution. During the quarters ended September 30, 1999 and 1998,
the separate operating entities of the Company had credit risk exposures in
excess of the FDIC coverage as follows:
13
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note D - Concentrations of Credit Risk - continued
Highest Lowest Number of days
Entity exposure exposure with exposure
--------------------------------- -------- -------- --------------
<S> <C> <C> <C>
Nine months ended September 30, 1999
Karts International Incorporated $155,329 $4,301 19
Brister's Thunder Karts, Inc. $158,853 $ 968 81
USA Industries, Inc. $181,416 $ 400 89
Nine months ended September 30, 1998
Karts International Incorporated $823,842 $1,806 135
Brister's Thunder Karts, Inc. $289,204 $ 601 96
USA Industries, Inc. $157,606 $ 236 177
</TABLE>
Additionally, the Company utilizes a lockbox system for the collection and
deposit of receipts on trade accounts receivable for each operating subsidiary
and a corporate cash concentration sweep account whereby all excess cash funds
are concentrated into one primary depository account with a financial
institution. The Company and the financial institution then participate in
uncollateralized reverse-repurchase agreements which are settled on a "next-
business day" basis for the investment of surplus cash funds. The Company had
unsecured amounts invested in reverse repurchase agreements on a daily basis
from February 1997 through September 30, 1999. As of September 30, 1999 and
1998, the Company had an unsecured outstanding reverse repurchase agreement of
approximately $23,002 and $-0-, respectively. The Company incurred no losses
during 1999 and 1998 as a result of any of these unsecured situations.
Note E - Fair Value of Financial Instruments
The carrying amount of cash, trade accounts receivable, notes receivable, trade
accounts payable and other accrued liabilities are reasonable estimates of their
fair value because of the short maturity of these items. The carrying amounts of
the Company's credit facilities approximate fair value due to the relationship
between current market interest rates and the either the stated rate in vehicle
and equipment loans or the variable rate on the Company's long-term mortgage
loan.
Note F - Property and Equipment
Total depreciation expense charged to operations for the quarters ended
September 30, 1999 and 1998 was approximately $172,930 and $93,542,
respectively.
Note G - Note Receivable
In December 1998, the Company acquired a $375,000 note receivable from an
unrelated individual payable by an unrelated corporation in exchange for 337,838
shares of unregistered, restricted common stock. The note receivable bears
interest at 10.0% and is due and payable 10 days after the expiration of an
option which the Company executed to acquire 100.0% of the issued and
outstanding stock of the unrelated corporation making the note. This note is
unsecured.
14
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note H - Option to Acquire an Unrelated Entity
Effective December 1, 1998, the Company acquired from an unrelated entity
certain assets for cash of $56,000. The unrelated entity is a concession kart
manufacturer located in Daytona Beach, Florida. The shareholders of the
unrelated entity ( Shareholders) also granted the Company an option (Option) to
acquire 100.0% of the issued and outstanding shares of the unrelated entity's
common stock based on a financial formula defined in the Option.
During the nine months ended September 30, 1999, the Company paid an additional
$14,477 in costs related to the acquisition of this option to acquire this
entity.
The Option expires upon the expiration of the 30-day period following the
unrelated entity's fiscal year ending December 31, 2000. The Company issued to
the Shareholders an aggregate of 90,090 shares of Common Stock having a market
value of approximately $100,000 as payment for the Option. The Option also
provides that unrelated entity can require the Company to exercise the Option if
unrelated entity achieves certain financial goals during the Option term. The
Company also has the right during the Option term, subject to certain
conditions, to acquire for $100 certain intellectual property rights related to
the business of the unrelated entity.
The Company and unrelated entity also entered into a manufacturing agreement
(Manufacturing Agreement) which provides that the Company will manufacture, on
an exclusive basis, the unrelated entity's concession karts at a predetermined
per unit price. The Manufacturing Agreement will terminate on the later of March
31, 2001 or the date that the Option is terminated or exercised.
Note I - Notes Payable to Banks and Other
The Company has two lines of credit with an aggregate face value of $2,000,000.
One line of credit note is tied to the Company's aggregate trade accounts
receivable balances, not to exceed $1,000,000 (A/R LOC). The second line of
credit is tied to the Company's aggregate inventory balances, not to exceed
$1,000,000 (Inventory LOC). The total amounts which may be outstanding at any
one time, and the corresponding note principal advances, are tied to the
respective "Borrowing Base" calculations contained in the Loan Agreement
(Agreement). As of June 30, 1999, an aggregate of approximately $1,867,135 is
outstanding on these lines of credit. The notes require the interest and fees on
the notes to be paid monthly and all of the Company's trade accounts receivable
collections are deposited to the lender's benefit to a lockbox controlled by the
lender.
The notes bear a default interest of 15.0% (Lender's Base Rate of 8.0% plus
7.0%). Upon the Company's equity offering of $1.5 million, the interest rate was
reduced to the Lender's Base Rate plus 3.0%. Further, the Agreement requires the
payment of a one-time 1.0% commitment fee and the payment of a 1/12% servicing
fee per month on the face amount of each line of credit during the term of each
respective line of credit.
The Agreement contains certain restrictive covenants related to the Company's
business operations and financial ratios. As of December 31, 1998, the Company
was not in compliance with all covenants in the Agreement. The lender notified
the Company on February 22, 1999 of certain defaults on the Agreement and the
lender granted a waiver of the notified defaults on March 8, 1999.
15
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Notes Payable to Affiliates
1999 1998
--------------------------------
<S> <C> <C>
$225,000 note payable to the Company's President and Chief Executive Officer.
Interest at 8.0%. Accrued interest payable monthly. Principal and accrued,
but unpaid, interest is due at the earlier of the receipt of proceeds from an
anticipated equity offering or three months from March 17,
1999. The loan is unsecured $212,055 $ -
$73,875 note payable to the former sole shareholder of Straight Line. Interest
at 6.0%. Principal only payment of $15,000 payable by January 31, 1999.
Remaining principal and all accrued, but unpaid, interest is payable subject
to the settlement of a product liability lawsuit against Straight Line
Manufacturing, Inc. incurred prior to the Company's acquisition of Straight
Line. If the lawsuit is settled prior to March 31, 1999; 50.0% of the
principal and all accrued, but unpaid, interest will be due on October 1,
1999 and the balance will be due and payable on March 31, 2000. If the
lawsuit is settled between March 31, 1999 and March 31, 2000, all principal
and accrued, but unpaid, interest will be due and payable 210 days after the
lawsuit settlement date or March 31, 2000, which ever is earlier. If the
lawsuit is settled after March 31, 2000, all principal and accrued, but
unpaid, interest is due and payable
30 days after the lawsuit settlement date. 61,099 -
-------- ----------
Total related party long-term debt $273,154 $ -
======== ==========
Note K - Long-Term Debt to Banks and Others
1999 1998
-----------------------------
$20,770 installment note payable to a bank. Interest at 7.75%.
Payable in monthly installments of approximately $419,
including accrued interest. Final maturity in May 2002.
Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. $ 12,102 $ 16,028
$23,122 installment note payable to a bank. Interest at 8.25%.
Payable in monthly installments of approximately $726,
including accrued interest. Final maturity in March 2001.
Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. 12,264 19,637
$17,829 installment note payable to a bank. Interest at 8.25%.
Payable in monthly installments of approximately $561,
including accrued interest. Final maturity in January 2002.
Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. 14,231 -
16
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Long-Term Debt to Banks and Others
1999 1998
-----------------------------
$20,000 installment note payable to a bank. Interest at 8.0%.
Payable in monthly installments of approximately $406,
including accrued interest. Final maturity in June 2004.
Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. 19,156 -
$20,000 installment note payable to a bank. Interest at 8.0%.
Payable in monthly installments of approximately $406, including
accrued interest. Final maturity in July 2004. Collateralized
by a vehicle owned by Brister's Thunder Karts, Inc. 19,420 -
$22,650 installment note payable to a bank. Interest at 8.5%.
Payable in monthly installments of approximately $466, including
accrued interest. Final maturity in October 2004. Collateralized
by a vehicle owned by Brister's Thunder Karts, Inc. 22,650 -
$240,020 mortgage note payable to a bank. Interest at the Bank's
Commercial Base Rate (9.25% at March 31, 1999). Payable in
monthly installments of approximately $2,626, including accrued
interest. Final maturity in August 2010. Collateralized by land
and a building owned by USA Industries, Inc. 208,160 219,248
$9,348 installment note payable to a bank. Interest at 10.0%.
Payable in monthly installments of approximately $303,
including accrued interest. Final maturity in April 1999.
Collateralized by transportation equipment owned by USA
Industries, Inc. - 1,708
$18,198 installment note payable to a bank. Interest at 8.25%.
Payable in monthly installments of approximately $572,
including accrued interest. Final maturity in March 2001.
Collateralized by transportation equipment owned by USA
Industries, Inc. 9,154 15,451
$14,000 installment note payable to an equipment finance
company. Payable in monthly installments of approximately
$345, including accrued interest. Final maturity in May 2002.
Collateralized by equipment owned by USA Industries, Inc. 9,825 -
---------- -------
Total long-term debt to banks and others 326,962 272,072
Less current maturities (51,595) (25,919)
--------- --------
Long-term portion $275,367 $246,153
======== =======
</TABLE>
17
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Long-Term Debt to Banks and Others - continued
Future maturities of long-term debt are as follows:
12 months ending
September 30, Amount
------------- --------------
2000 $ 51,595
2001 47,919
2002 36,073
2003 30,497
2004 31,311
2005 - 2009 93,554
2010 - 2014 36,013
---------
Totals $ 326,962
==========
Note L - Debenture Payable
On June 3, 1999, the Company issued a $1,500,000 debenture payable to a
foundation who is also a shareholder in the Company. The debenture matures on
May 31, 2004 and bears interest at 12.0%. The debenture requires monthly
payments of interest only. The debenture may be converted into common stock of
the Company at an exchange rate of $0.375 per share at any time at the option of
the debenture holder and the Company may require conversion if the closing price
of the Company's common stock is in excess of $4.00 per share for 25 consecutive
trading days. The debenture may be prepaid in total or in part on or after the
2nd anniversary date of the debenture upon 30 days notice being given by the
Company and the payment of a 12.0% liquidation charge of the amount being
prepaid. The debenture is collateralized by all cash, accounts receivable,
inventory and equipment owned by the Company and its subsidiaries, subordinate
to the Company's line of credit facility with a non-financial institution
lender.
All parties to the debenture agreement have agreed to defer the effective date
of any conversion feature until such time that the conversion provisions are
approved at the next annual shareholders' meeting, which is currently scheduled
for August 31, 1999. The conversion measure was approved at the Company's annual
shareholder's meeting.
Note M - Income Taxes
The components of income tax (benefit) expense for the quarters ended September
30, 1999 and 1998, respectively, are as follows:
1999 1998
----------- ------------
Federal:
Current $ - $ -
Deferred - -
----------- -----------
- -
----------- -----------
State:
Current - -
Deferred - -
----------- -----------
- -
----------- -----------
Total $ - $ -
=========== ============
18
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Income Taxes - continued
As of September 30, 1999, the Company has a net operating loss carryforward of
approximately $3,000,000 to offset future taxable income. Subject to current
regulations, this carryforward will begin to expire in 2012.
The Company's income tax expense for the quarters ended September 30, 1999 and
1998, respectively, differed from the statutory federal rate of 34 percent as
follows:
<TABLE>
1999 1998
---------- ---------
<S> <C> <C>
Statutory rate applied to earnings (loss) before income taxes $(548,920) $(876,978)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other including reserve for deferred tax asset 548,920 876,978
--------- -------
Income tax expense $ - $ -
========= =========
</TABLE>
Note N - Related Party Transactions
The Company leases its manufacturing facilities under an operating lease with
the former owner of Brister's, who is also the Company's President and Chief
Operating Officer, in addition to being a Company shareholder and director.
Concurrent with the closing of the acquisition of Brister's, the Company and the
former owner executed a new lease agreement for a primary two-year term expiring
in 1998 and an additional two-year renewal option. The monthly lease payment
will remain at $6,025 per month with annual adjustments for increases based upon
the Consumer Price Index. Total payments under this agreement were approximately
$54,825 for each of the nine months ended September 30, 1999 and 1998.
Concurrent with the acquisition of Brister's, the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal Agreement.
This agreement provides that the Company may, at its sole option, purchase the
real property and improvements in Roseland, Louisiana currently utilized by the
Company or its subsidiary for an aggregate purchase price of $550,000. The
option may be exercised commencing on January 1, 1998 and expires on December
31, 2000.
Note O - Convertible Preferred Stock
Through May 31, 1999, the Company sold $1,550,000 in Convertible Preferred Stock
(Preferred Stock) subject to a Private Placement Memorandum. The Preferred Stock
bears a dividend of 9.0%, payable semi-annually in either cash or common stock
of the Company. The Preferred Stock is convertible into shares of common stock
at a conversion rate of $0.25 per share at the option of the holder at any time
between issuance and June 30, 2003. The Preferred Stock mandatorily converts to
common stock on June 30, 2003. The Preferred Stock is redeemable by the Company
on or after March 31, 2000, in whole or part, at the option of the Company at a
redemption price of 109%, plus accrued dividends, if any.
All parties to the Preferred Stock issue have agreed to defer the effective date
of any conversion feature until such time that the conversion provisions are
approved at the next annual shareholders' meeting, which is currently scheduled
for August 31, 1999. These provisions were approved at the Company's annual
shareholder's meeting.
19
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note P - Common Stock Transactions
The terms of a March 31, 1996 private placement memorandum required the Company
and/or a company owned by a current officer and director to issue additional
shares to the original investors in the private placement memorandum in the
event that the Company's securities, as listed on a published exchange or
electronic bulletin board, did not equal $4.50 per share on March 31, 1998 (the
second anniversary date of the closing of the private placement memorandum
offering). The issuance of additional shares, if any is required, to the
original investors will be done without additional compensation to the Company.
To facilitate this contingency, the Company sold 233,333 restricted,
unregistered shares of common stock to an entity owned by an officer and
director of the Company for cash of approximately $350. These shares were placed
into an escrow account for the benefit of the original investors. In the event
that no additional shares are required to be issued to the original investors,
the shares held in escrow will be returned to the company owned by a current
officer and director of the Company.
At the close of business on March 31, 1998, the Company's common stock, as
quoted on the NASDAQ Small-Cap Market, closed below the required strike price of
$4.50 per share. Accordingly, during the second quarter of 1998, effective April
1, 1998, the entity owned by an officer and director of the Company released
approximately 95,624 of the 233,333 shares being held in escrow for the
settlement of the contingency related to the March 31, 1996 private placement
memorandum. The remaining approximate 137,709 shares were released from the
escrow agreement and returned to the entity owned by an officer and director of
the Company.
The April 1, 1998 transactions were recorded by the Company based on the imputed
"fair value" of the securities released from escrow upon the ultimate settlement
of the March 31, 1996 contingent issuance as required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The
imputed "fair value" of the 95,624 shares was calculated as approximately
$227,904 based upon the Company's closing stock price on March 31, 1998. This
imputed charge was offset against the imputed additional paid-in capital
generated as a result of this accounting transaction as a cost of raising the
initial capital in the original March 31, 1996 transaction. The imputed "fair
value" of the residual 137,709 shares was calculated as approximately $413,412,
net of the initial cash paid of $350, based upon the Company's closing stock
price on March 31, 1998. This difference between the imputed fair value and the
actual cash paid was recorded as a component of compensation expense related to
common stock issuances at less than "fair value" for reorganization,
restructuring and consulting expenses in the accompanying statement of
operations.
In December 1998, the Company issued an aggregate 90,090 shares of unregistered,
restricted common stock, valued at approximately $100,000, to acquire an option
to acquire 100.0% of the issued and outstanding stock of an unrelated entity
engaged in the manufacture of concession karts.
In December 1998, the Company issued 337,838 shares of unregistered, restricted
common stock valued at approximately $375,000 to acquire a note receivable from
the unrelated entity discussed above with a face amount of $375,000 from an
unrelated individual.
On December 14, 1998, the Company issued 109,589 shares of unregistered,
restricted common stock valued at approximately $50,000 in settlement of a
contract for consulting services of equal value related to various business
acquisition activities. The $50,000 has been charged to operations in the
accompanying financial statements.
20
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note Q - Common Stock Warrants
In September 1997, the Company sold 155,000 Underwriter's Warrants for an
aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2.
Each warrant allows the Underwriter to purchase one share of the Company's
common stock at $6.00 per share and one (1) 1997 Warrant at a price of $0.1875
per share. The 1997 warrants are described in detail in the next paragraph.
These warrants expire on September 9, 2002 if not exercised by the Underwriter.
In September and November 1997, the Company sold, pursuant to a Registration
Statement on Form SB-2, an aggregate 1,782,500 warrants (1997 Warrants) at
$0.125 each for gross proceeds of $222,813. Each warrant entitles the holder to
purchase one (1) share of the Company's common stock at a price of $4.00 per
share during the four year period commencing on September 9, 1998. These
warrants are redeemable by the Company at a redemption price of $0.01 per
warrant, at any time after September 9, 1998 upon thirty (30) days written
notice to the respective warrant holders if the average closing price of the
Company's common stock equals or exceeds $8.00 per share for the 20 consecutive
trading days ending three (3) days prior to the notice of redemption.
<TABLE>
Warrants Warrants
originally outstanding at
issued September 30, 1999 Exercise price
------------- ------------------
<S> <C> <C> <C>
1996 Warrants 500,018 500,018 $4.50 per share
Underwriter's Warrants 155,000 155,000 $4.00 per share
1997 Warrants 1,782,500 1,782,500 $4.00 per share
--------- ---------
Totals at September 30, 1999 2,504,185 2,437,518
========= =========
</TABLE>
On March 9, 1999, the Company, as compensation for waiving certain events of
default and the amendment to the Company's loan agreement with a non-financial
institution lender, granted the lender a stock warrant to purchase 100,000
shares of the Company's restricted, unregistered common stock at a price of
$0.54 per share. If the Company fully repays the outstanding indebtedness to the
lender within ninety (90) days of the warrant date, the number of shares subject
to the warrant reduces to 50,000. If and only if there is no total retirement of
the indebtedness to the lender, the number of shares subject to the warrant
reduces based upon the Company's net income achieved during Calendar 1999. The
number of shares subject to the warrant based upon the Company's net income in
the event of a non-retirement of the indebtedness is as follows:
Net income # of shares
$975,000 50,000
$877,500 60,000
$780,000 75,000
This warrant is exercisable at any time after its issuance and expires four (4)
years from its issuance.
21
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options
The Company's Board of Directors has allocated an aggregate 125,377 shares of
the Company's common stock for unqualified stock option plans for the benefit of
employees of the Company and its subsidiaries.
During 1996, the Company granted options to purchase 59,355 shares of the
Company's common stock to employees of the Company and its operating
subsidiaries at an exercise price of $5.63 per share. These options expire at
various times during 2001.
On January 30, 1997, the Board of Directors of the Company adopted a stock
option plan providing for the reservation of an additional 66,667 shares of
common stock for options to be granted to employees of the Company. Concurrent
with this action, the Company granted options to purchase 6,667 shares of the
Company's common stock at a price of $4.875 per shares to the Company's then
Chief Financial Officer and the Company's Vice President of Marketing (VP
Options). These options are exercisable after January 30, 1998 and expire on
January 30, 2002. The options granted to the Company's former Chief Financial
Officer expired concurrent with his termination in the first quarter of 1998.
Further, on January 30, 1997, the Company granted options to purchase an
aggregate 52,670 shares of the Company's common stock to employees of the
Company and its operating subsidiaries at an exercise price of $4.875 per
post-split share. These options are exercisable after January 30, 1998 and
expire on January 30, 2002.
During 1998, the Company granted an aggregate 265,000 options to purchase an
equivalent number of shares of restricted, unregistered common stock to officers
and employees in conjunction with the employment of such officers and employees.
These options are exercisable at prices ranging from $1.06 per share to $3.50
per share. Concurrent with the termination of a Company officer, 210,000 of the
granted 1998 options terminated. The remaining options are exercisable between
March 1999 and December 1999 and expire between March 2003 and December 2003.
In January 1999, as part of the Separation Agreement between the Company and its
then President and Chief Executive Officer, the Company issued this individual
options to purchase 15,000 shares of Common Stock at an option exercise price of
$1.06 per share. This option was granted to replace options to purchase 200,000
shares of common stock which were effectively canceled at separation. These
options are vested and expire on January 20, 2004.
There were no exercise of any options during the nine months ended September 30,
1999 and 1998 or for either of the years ended December 31, 1998 and 1997. The
following table summarizes all options granted from 1996 to September 30, 1999.
<TABLE>
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
------- --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1996 options 59,355 - - 59,355 $5.63
1997 VP options 13,334 - 6,667 6,667 $4.875
1997 options 52,670 - - 52,670 $4.875
1998 options 265,000 - 210,000 55,000 $1.06 - $3.50
1999 options 15,000 - - 15,000 $1.06
-------- ----- ------ -------
Totals 405,359 - 216,667 133,692
======= ===== ======= =======
</TABLE>
22
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options - Continued
Had compensation cost for options granted been determined based on the fair
values at the grant dates, as prescribed by SFAS 123, the Company's net loss and
net loss per share would not have changed due to the fact that the exercise
price of the options was substantially higher than the market price at the grant
date.
The calculations to estimate the fair value of the options were made using the
Black-Scholes pricing model which required making significant assumptions. These
assumptions include the expected life of the options, which was determined to be
one year, the expected volatility, which was based on fluctuations of the stock
price over a 12 month period, the expected dividends, determined to be zero
based on past performance, and the risk free interest rate, which was estimated
using the bond equivalent yield of 6.0% at December 31, 1998 and 1997,
respectively.
1998 Compensation Plan
- ----------------------
On May 27, 1998, the stockholders of the Company approved the 1998 Stock
Compensation Plan of Karts International Incorporated (1998 Plan) and reserved
1,000,000 shares of Common Stock for issuance under the plan. The 1998 Plan
terminates on April 1, 2008 unless previously terminated by the Board of
Directors. The 1998 Plan is administered by the Compensation Committee
(Committee) or the entire Board of Directors as determined by the Board of
Directors.
Eligible participants in the 1998 Plan include full time employees, directors
and advisors of the Company and its subsidiaries. Options granted under the 1998
Plan are intended to qualify as "incentive stock options" pursuant to the
provisions of Section 422 of the Internal Revenue Code of 1986, as amended
(Code), or options which do not constitute incentive stock options (nonqualified
options) as determined by the Committee.
Under the 1998 Plan the Company may also grant "Restricted Stock" awards.
"Restricted Stock" represents shares of Common Stock issued to eligible
participants under the 1998 Plan subject to the satisfaction by the recipient of
certain conditions and enumerated in the specific Restricted Stock grant.
Conditions which may be imposed include, but are not limited to, specified
periods of employment, attainment of personal performance standards or the
overall performance of the Company. The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1998 Plan to promote
the development of the Company, and may be used by the Company as another means
of attracting and retaining qualified individuals to serve as employees of the
Company or its subsidiaries.
Incentive stock options may be granted only to employees of the Company or a
subsidiary who, in the judgment of the Committee, are responsible for the
management or success of the Company or a subsidiary and who, at the time of the
granting of the incentive stock option, are either an employee of the Company or
a subsidiary. No incentive stock option may be granted under the 1998 Plan to
any individual who would, immediately before the grant of such incentive stock
option, directly or indirectly, own more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company unless (i) such
incentive stock option is granted at an option price not less than one hundred
ten percent (110%) of the fair market value of the shares on the date the
incentive stock option is granted and (ii) such incentive stock option expires
on a date not later than five years from the date the incentive stock option is
granted.
23
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options - Continued
1998 Compensation Plan - continued
- ----------------------
The purchase price of the shares of the Common Stock offered under the 1998 Plan
must be one hundred percent (100%) of the fair market value of the Common Stock
at the time the option is granted or such higher purchase price as may be
determined by the Committee at the time of grant; provided, however, if an
incentive stock option is granted to an individual who would, immediately before
the grant, directly or indirectly own more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company, the purchase price
of the shares of the Common Stock covered by such incentive stock option may not
be less than one hundred ten percent (110%) of the fair market value of such
shares on the day the incentive stock option is granted. If the Common Stock is
listed upon an established stock exchange or exchanges, the fair market value of
the Common Stock shall be the highest closing price of the Common Stock on the
day the option is granted or, if no sale of the Common Stock is made on an
established stock exchange on such day, on the next preceding day on which there
was a sale of such stock. If there is no market price for the Common Stock, then
the Board of Directors and the Committee may, after taking all relevant facts
into consideration, determine the fair market value of the Common Stock.
Options are exercisable in whole or in part as provided under the terms of the
grant, but in no event shall an option be exercisable after the expiration of
ten years from the date of grant. Except in case of disability or death, no
option shall be exercisable after an optionee ceases to be an employee of the
Company, provided that the Committee shall have the right to extend the right to
exercise for a period not longer than three months following the date of
termination of an optionee's employment. If an optionee's employment is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year following the date of termination of the
optionee's employment. If an optionee dies while in the employ of the Company
and shall not have fully exercised his options, the options may be exercised in
whole or in part at any time within one year after the optionee's death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.
Under the 1998 Plan, an individual may be granted one or more options, provided
that the aggregate fair market value (determined at the time the option is
granted) of the shares covered by incentive options which may be exercisable for
the first time during any calendar year shall not exceed $100,000. There
presently are outstanding options to purchase 35,000 shares of Common Stock at
prices ranging from $1.06 to $2.98 per share.
Note S - Commitments and Contingencies
Litigation
- ----------
Brister's is named as defendant in several product liability lawsuits related to
its "fun karts". The Company has had and continues to have commercial liability
coverage to cover these exposures with a $25,000 per claim self-insurance clause
as of September 30, 1999. The Company is vigorously contesting each lawsuit and
has accrued management's estimation of the Company's exposure in each situation.
Additionally, the Company maintains a reserve for future litigation equal to the
"per claim" self-insurance amount times the four-year rolling average of
lawsuits filed naming the Company as a defendant.
The Company anticipates no material impact to either the results of operations,
its financial condition or liquidity based on the uncertainty of outcome, if
any, of existing litigation, either collectively and/or individually, at this
time.
24
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note S - Commitments and Contingencies - continued
Consulting and Patent Licensing
- -------------------------------
The Company and the former owner executed a Licensing Agreement and a related
Royalty Agreement. These agreements provide that the former owner will (1)
license to the Company all of the Intellectual Property (as defined) currently
owned by the former owner and being used by the Company or any subsidiary at
terms at least as favorable as the former owner has received or could have
received in arms-length transactions with third parties and (2) for a period of
five years from the execution of the Licensing Agreement will license to the
Company, at the Company's sole option, all Intellectual Property developed or
owned by the former owner at any time subsequent to the Closing Date. The
license referenced in section (2) above shall be exclusive to the Company.
Intellectual Property is defined in the Stock Purchase Agreement as all domestic
and foreign letters patent, patents, patent applications, patent licenses,
software licenses and know-how licenses, trade names, trademarks, copyrights,
unpatented inventions, service marks, trademark registrations and applications,
service mark registrations and applications and copyright registrations and
applications owned or used by the Company or any subsidiary in the operation of
its business.
The Agreements are for a three (3) year term, which provides for the payment of
a one-time license fee and a "per unit" royalty fee. Upon execution, the Company
was obligated to pay an initial license fee of $10,000 and agreed to pay a
royalty of $1.00 per unit on which the existing intellectual property is
installed. For the second and third years of the Agreement, the Company will pay
the greater of $20,000 per year or $1.00 per unit on which the existing
intellectual property is installed. During the nine months ended September 30,
1999 and 1998, respectively, the Company paid or accrued approximately $7,942
and $5,622 under this Agreement.
Employment agreement
- --------------------
Effective January 30, 1998, the Company entered into an Employment Agreement
(Agreement) with an individual to serve as the Company's President and Chief
Executive Officer (President). The Agreement is for a term of three (3) years
and provides the President with an annual base salary of $150,000. Upon
execution of the Agreement, the President received options to purchase up to
200,000 shares of the Company's common stock at an exercise price of $3.25 per
share. The options vest as follows: 100,000 shares as of January 30, 1999;
50,000 shares as of January 31, 2000; 50,000 shares as of January 31, 2001. All
unvested options vest immediately upon the termination of the Agreement if
termination is for reason other than "for cause", and all unexercised options
expire on January 31, 2003. The President may also receive annual performance
based stock options to purchase up to 50,000 shares of the Company's common
stock at a price equal to the market value of the Company's common stock on the
date of issuance, as determined by the Company's Board of Directors, and an
annual cash bonus not to exceed 15.0% of the annual base salary.
In January 1999, this individual resigned as President, Chief Executive Officer
and as a director of the Company and the Company and the individual entered into
a Settlement Agreement and Full and Final Release of All Claims (Agreement) for
the purpose of satisfying and discharging all obligations of the Company to the
individual under the Agreement. The Agreement provides that the Company shall
forgive up to $19,000 of non-reimbursable expenses incurred by the individual
and pay to for one week of earned vacation. In consideration for the foregoing,
the former President agreed to adhere to the non-competition and
non-solicitation covenants set forth in the Employment Agreement until January
13, 2001. As part of his separation from the Company, the Company issued to the
individual options to purchase 15,000 shares of Common Stock at an option
exercise price of $1.06 per share which were granted to replace the options to
purchase 200,000 shares of common stock which were effectively canceled at
separation. These options are vested and expire on January 20, 2004.
25
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note S - Commitments and Contingencies - continued
Employment agreement
- --------------------
On October 27, 1998, the Company entered into an Employment Agreement
(Agreement) with the former sole shareholder of Straight Line for the individual
to serve as the President of the Straight Line subsidiary (Straight Line
President). The Agreement is for a term of three (3) years with an automatic one
year extension unless either the Company or the Straight Line President provides
a thirty (30) day written notice not to continue the Agreement. This Agreement
provides the Straight Line President with an annual base salary of $80,000. Upon
execution of this Agreement, the Straight Line President received options to
purchase up to 10,000 shares of the Company's common stock at an exercise price
equal to the closing bid price of the Company's common stock as quoted on the
NASDAQ SmallCap market.
The Straight Line President may also receive, at the discretion of the Company's
Board of Directors, annual performance based stock options to purchase up to
10,000 shares of the Company's common stock at a price equal to the market value
of the Company's common stock on the date of issuance, as determined by the
Company's Board of Directors, and an annual cash bonus not to exceed 15.0% of
the annual base salary.
Note T - Significant Customers
During the nine months ended September 30, 1999 and 1998, the Company has no
single or group of affiliated customers that are responsible for more than 10.0%
of total net sales.
(Remainder of this page left blank intentionally)
26
<PAGE>
Part I - Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Caution Regarding Forward-Looking Information
- ---------------------------------------------
This quarterly report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
Results of Operations
- ---------------------
Nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998
- --------------------------------------------------------------------------------
The Company experienced net revenues of approximately $6.7 million and $3.0
million for the nine and three months ended September 30, 1999, respectively as
compared to approximately $3.6 million and $1.9 for the comparable nine and
three month periods of 1998. The current year's net revenues for the nine and
three months ended September 30, 1999 represented a 85% and 60% increase,
respectively, over the same periods last year. The Company is encouraged by the
growing demand for its products experienced during the first nine months of the
year as a result of its increased distribution channels and expansion of the
geographic areas where its products are being distributed. The majority of the
increase in net revenues was attributable to increased sales to mass
merchandisers.
Gross profit was positively impacted by both the increase in volume which
provided for higher plant utilization and increased selling prices which began
to take effect late in the second quarter. As a result, the Company earned a
gross profit (loss) of approximately $270,000 and $248,000, respectively for the
nine month and three month periods ended September 30, 1999, as compared to
$(141,000) and $(135,000) respectively, during the same period last year.
Management expects its gross profit to continue to improve as production levels
and average selling prices increase and overhead costs are reduced further.
Operating expenses, including depreciation and amortization, were approximately
$1,802,000 and $2,258,000 for the respective nine month periods ended September
30, 1999 and 1998 and approximately $732,000 and $736,000 for the third quarter
in 1999 and 1998, respectively. The Company's plan for reducing operating
expenses has been successful in significantly reducing expenses from the levels
which were being incurred during the third and fourth quarters of 1998.
Management will continue to monitor operating expenses to keep them in line with
anticipated sales and production volumes.
Other income (expense) was approximately $(82,000) and $(48,000) for the
respective nine and three month periods ended September 30, 1999 as compared to
approximately $8,000 and $(1,000) for the same periods last year. The change is
chiefly due to an increase in interest expense during both the nine and three
month periods resulting from higher levels of borrowing to fund the Company's
working capital needs.
For the nine months ended September 30, 1999, the Company incurred a net loss of
approximately $(1,614,000) compared to a net loss of approximately $(2,390,000)
for the same period in 1998. The Company incurred a net loss of approximately
$(531,000) and $(872,000), respectively for the three months ended September 30,
1999 and 1998. Company's management expects results of operations to continue to
improve throughout the balance of the year as the Company enters into its
traditionally busy season.
27
<PAGE>
Additional Operations information.
The Company currently has approximately eight product liability lawsuits
outstanding, none of which are expected to exceed existing product liability
insurance policy limits. The Company has never had a claim that resulted in an
award or settlement in excess of insurance coverage.
There is no assurance that the Company's insurance coverage of $5,000,000 per
occurrence and $6,000,000 aggregate will be sufficient to fully protect the
business and assets of the Company from all claims, nor can any assurances be
given that the Company will be able to maintain the existing coverage or obtain
additional coverage at commercially reasonable rates. Management believes that
it has process controls on its product operations, product labeling, operator's
manuals and videos and design features which will assist in a successful defense
of any present or future product liability claim. To the extent product
liability losses are beyond the limits or scope of the Company's insurance
coverage, the Company could experience a material adverse effect upon its
business, operations, profitability and assets.
Liquidity and Financial Condition
- ---------------------------------
As of September 30, 1999, the Company had positive working capital of
approximately $532,000 as compared to approximately $1,768,000 at September 30,
1998. During the first nine months of 1999 and 1998, the Company experienced
negative cash flows from operations of approximately $(2,960,000) and
$(1,279,000), respectively.
In order to alleviate the severe working capital shortage facing it at the
beginning of 1999, the Company sold $1,550,000 of preferred stock through a
private placement and issued $1,500,000 of convertible subordinated debentures
during the second quarter of 1999. Additionally, the Company incurred
approximately $225,000 of debt from an affiliate to fund its short-term cash
requirements. Proceeds from the Company's financing activities were used to
reduce its trade accounts payable and provide additional working capital. The
Company believes that the proceeds from the sale of its preferred stock and from
the issuance of the convertible debenture assured that a supply of critical
manufacturing components and supplies.
During the third quarter, the Company began to experience its normal increase in
inventory and accounts receivable as a result of the upcoming holiday sales
season. This increase has been funded through increased borrowing on the
Company's line of credit facilities. During October, the Company requested an
increase in it's A/R line of credit limit in response to increased sales
activity. The Company's lender has been receptive to the request and is working
with the Company's management to insure that the increase will be sufficient to
meet the Company's requirements for the balance of the year.
Capital Requirements
- --------------------
The Company expended cash of approximately $197,000 in additions to property and
equipment, of which approximately $52,000 was for additions to its Prattville,
Alabama facility, $40,000 for additions to its Roseland, Louisiana facility,
$45,000 for manufacturing equipment and $30,000 for upgrades and modifications
to the Company's computer systems related to Y2K preparedness, during the first
nine months of 1999. Management believes that the additions to its manufacturing
facilities will ensure sufficient production capacity and improved production
flow efficiency to more timely meet the increased consumer demand for the
Company's products. The Company has identified no further significant capital
requirements for 1999.
Liquidity requirements mandated by future business expansions or acquisitions,
if any are specifically identified or undertaken, are not readily determinable
at this time as no substantive plans have been formulated by management. The
focus of current management continues to be on returning the Company to
profitability.
28
<PAGE>
Year 2000 Considerations
- ------------------------
The Year 2000 (Y2K) date change is believed to affect virtually all computers
and organizations. The Company has undertaken a comprehensive review of its
information systems, including personal computers, software and peripheral
devices, and its general communications systems. The Company has no direct
electronic links with any customer or supplier. In addition, the Company has
held discussions with certain of its software suppliers with respect to the Y2K
date change. While the Company has not completed its detailed review, as a
preliminary assessment, the Company believes, as of the date of this filing,
that it will not be required to modify or replace significant portions of its
software and any such modifications or replacements are, or will be, readily
available. The Company completed any necessary modifications, upgrades or
replacements by September 30, 1999. As of September 30, 1999, the Company
incurred total expenditures related to Y2K matters of approximately $30,000.
The Company has no Y2K impact in any manufacturing equipment. The Company
continues to hold discussions with its significant suppliers, shippers,
customers and other external business partners related to their readiness for
the Y2K date change.
The Company does not expect the costs associated with the Y2K date change
compliance to have a material effect on its financial position or its results of
operations. There can be no assurance until January 1, 2000, however, that all
of the Company's systems, and the systems of its suppliers, shippers, customers
or other external business partners will function adequately.
Part II - Other Information
Item 1 - Legal Proceedings
See accompanying notes to the consolidated financial statements
Item 2 - Changes in Securities
None
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
On August 31, 1999, the Company held its 1999 Annual Meeting of Shareholders in
Dallas, Texas. The following items were submitted to a vote of and approved by
the Company's security holders:
a) PROPOSAL NO. 1 For Against Abstain
--- ------- -------
Election of Directors:
Timothy P. Halter 4,963,170 61,378 10,750
Charles Brister 4,965,700 59,428 10,750
Gary C. Evans 4,963,170 61,378 10,750
Joseph R. Mannes 4,963,170 61,378 10,750
Ronald C. Morgan 4,963,170 61,378 10,750
Other Nominees -0- -0- -0-
29
<PAGE>
<TABLE>
<S> <C> <C> <C>
b) PROPOSAL NO. 2
Ratification of private placement
of Preferred Stock and issuance
of Common Stock upon conversion
thereof 3,003,380 75,256 14,226
c) PROPOSAL NO. 3
Ratification of $1.5 million
Convertible Term Loan from
The Schlinger Foundation 3,028,468 59,203 5,191
d) PROPOSAL NO. 4
Ratification of Amendment to
Articles of Incorporation to
increase authorized common
stock 2,955,675 110,444 26,743
e) PROPOSAL NO. 5
Ratification of Amendment to
Articles of Incorporation to
effect a three-for-one reverse
stock split 4,743,866 274,243 17,189
f) PROPOSAL NO. 6
Selection of Auditors 4,996,119 23,292 15,887
</TABLE>
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
1) Exhibits
--------
27 - Financial Data Schedule
2) Reports on Form 8-K
-------------------
August 31, 1999 - Report of results of Annual Shareholders' Meeting as
discussed in Item 4 above.
30
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KARTS INTERNATIONAL INCORPORATED
November 15 , 1999 /s/ Charles Brister
------ --------------------------------------
Charles Brister
President, Chief Executive Officer
and Director
November 15 , 1999 /s/ Richard N. Jones
------ --------------------------------------
Richard N. Jones
Chief Accounting Officer
31
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