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 March 31, 2000
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)
66204 Commercial Street, P. O. Box 695, 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:
May 12, 2000: Common Stock: 6,304,320 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 March 31, 2000
Table of Contents
Page
----
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 25
Part II - Other Information
Item 1 Legal Proceedings 28
Item 2 Changes in Securities 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 28
Signatures 29
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
Item 1 - Part 1 - Financial Statements
Accountant's Review Report
--------------------------
Board of Directors and Shareholders
Karts International Incorporated
We have reviewed the accompanying consolidated balance sheets as of March 31,
2000 and 1999 of Karts International Incorporated (a Nevada corporation) and
Subsidiaries and the accompanying consolidated statements of operations and
comprehensive income and consolidated statements of cash flows for the three
months ended March 31, 2000 and 1999. These financial statements are prepared in
accordance with the instructions for Form 10-QSB, as issued by the U. S.
Securities and Exchange Commission, and are the sole 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
Dallas, Texas
May 12, 2000
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 [email protected]
3
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets
March 31, 2000 and 1999
(Unaudited)
2000 1999
----------- -----------
<S> <C> <C>
Assets
------
Current Assets
Cash on hand and in banks $ 210,807 $ 102,818
Accounts receivable
Trade, net of allowance for doubtful accounts
of $208,065 and $90,500, respectively 723,836 954,788
Other 75,952 10,750
Inventory 2,588,028 1,829,933
Prepaid expenses 428,565 352,057
----------- -----------
Total current assets 4,027,188 3,250,396
----------- -----------
Property and equipment
Building and improvements 1,031,690 932,437
Equipment 1,104,834 974,636
Transportation equipment 218,618 143,469
Furniture and fixtures 138,392 137,120
----------- -----------
2,493,534 2,187,662
Accumulated depreciation (586,016) (319,084)
----------- -----------
1,907,518 1,868,578
Land 32,800 32,800
----------- -----------
Net property and equipment 1,940,318 1,901,378
----------- -----------
Other assets
Note receivable 425,060 387,432
Option to acquire an unrelated entity 138,001 134,075
Organization costs, net of accumulated amortization
of approximately $88,154 and $66,303, respectively 21,101 42,952
Covenant not to compete, net of accumulated amortization
of approximately $47,222 and $13,889, respectively 52,788 86,111
Other 17,706 53,432
----------- -----------
Total other assets 654,656 704,002
----------- -----------
Total Assets $ 6,622,162 $ 5,855,776
=========== ===========
</TABLE>
- Continued -
See Accountant's Review Report.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets - Continued
March 31, 2000 and 1999
(Unaudited)
2000 1999
------------ ------------
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Cash overdraft $ -- $ 1,047
Notes payable to banks and others 1,949,123 838,135
Notes payable to affiliates -- 333,723
Current maturities of long-term debt 52,274 40,280
Accounts payable - trade 2,165,693 2,837,480
Other accrued liabilities 33,933 415,309
Customer deposits -- 27,900
Accrued income and franchise taxes payable -- --
------------ ------------
Total current liabilities 4,201,023 4,493,874
------------ ------------
Long-term liabilities
Long-term debt, net of current maturities
Banks and other entities 1,751,082 --
Related parties 424,395 244,327
------------ ------------
Total liabilities 6,376,500 4,738,201
------------ ------------
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 --
Common stock - $0.001 par value
14,000,000 shares authorized
6,304,320 and 4,854,133 shares
issued and outstanding 6,304 5,574
Additional paid-in capital 15,915,399 14,377,782
Accumulated deficit (15,677,591) (13,265,781)
------------ ------------
Total shareholders' equity 245,662 1,117,575
------------ ------------
Total Liabilities and Shareholders' Equity $ 6,622,162 $ 5,855,776
============ ============
See Accountant's Review Report.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
Karts International Incorporated and Subsidiaries
Consolidated Statement of Operations and Comprehensive Income
Three months ended March 31, 2000 and 1999
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
2000 1999
----------- -----------
Net Sales $ 948,750 $ 1,203,359
----------- -----------
Cost of sales
Purchases, direct labor and
related costs 818,037 1,321,713
Depreciation 47,579 16,941
----------- -----------
Total cost of sales 865,616 1,338,654
----------- -----------
Gross profit 83,134 (135,295)
----------- -----------
Operating expenses
Research and development expenses 28,945 1,095
Selling expenses 41,051 61,135
General and administrative expenses 498,391 483,400
Depreciation and amortization 55,008 27,462
----------- -----------
Total operating expenses 623,395 573,092
----------- -----------
Income (loss) from operations (540,261) (708,387)
Other income (expense)
Interest expense (140,480) (61,958)
Other 14,239 80,047
----------- -----------
Income before income taxes (666,502) (690,298)
Provision for income taxes -- --
----------- -----------
Net loss (666,502) (690,298)
Other comprehensive income -- --
----------- -----------
Comprehensive income (loss) $ (666,502) $ (690,298)
=========== ===========
Income (loss) per weighted-
average share of common
stock outstanding, computed
on net loss - basic and fully diluted $ (0.12) $ (0.12)
=========== ===========
Weighted-average number
of shares of common stock
outstanding - basic and fully diluted 5,710,904 5,574,298
=========== ===========
See Accountant's Review Report.
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) for the period $ (666,502) $ (690,298)
Adjustments to reconcile net income
(loss) to net cash used in operating activities
Depreciation and amortization 110,858 44,403
Bad debt expense 10,000 --
Accrued interest income on note receivable (9,375) (9,319)
(Increase) Decrease in:
Accounts receivable - trade and other 1,692,246 1,385,514
Inventory (373,350) 300,016
Prepaid expenses (77,959) (137,826)
Other -- (32,421)
Increase (Decrease) in:
Accounts payable and other accrued liabilities (474,803) (388,860)
Customer deposits -- 27,900
----------- -----------
Cash flows used in operating activities 211,115 499,109
----------- -----------
Cash flows from investing activities
Cash paid to acquire option to purchase unrelated entity -- (10,531)
Cash paid for property and equipment (34,839) (13,695)
----------- -----------
Cash flows used in investing activities (34,839) (24,226)
----------- -----------
Cash flows from financing activities
Proceeds from private placement of common stock 235,000 --
Decrease in cash overdraft -- (8,106)
Change in note payable to affiliates - net 195,000 209,848
Net activity on bank and other lines of credit (774,882) (726,580)
Principal payments on long-term note payable (20,226) (10,917)
----------- -----------
Cash flows provided by financing activities (365,108) (535,755)
----------- -----------
Increase in cash (188,832) (60,872)
Cash at beginning of period 399,639 163,690
----------- -----------
Cash at end of period $ 210,807 $ 102,818
=========== ===========
</TABLE>
- Continued -
See Accountant's Review Report.
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows - Continued
Three months ended March 31, 2000 and 1999
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 50,732 $ 65,170
======== ========
Income taxes paid (refunded) for the period $ -- $(29,545)
======== ========
Supplemental disclosure of non-cash
investing and financing activities
Payment of preferred stock dividend with 225,022
shares of common stock at $0.31 per share $ 69,756 $ --
======== ========
Transportation equipment purchased with notes payable $ -- $ 17,829
======== ========
</TABLE>
See Accountant's Review Report.
The accompanying notes are an integral part of these consolidated financial
statements.
8
<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.
During interim periods, the Company follows the accounting policies set forth in
its Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934 on Form 10-KSB filed with the U. S. Securities and Exchange Commission.
The information presented herein may not include all disclosures required by
generally accepted accounting principles and the users of financial information
provided for interim periods should refer to the annual financial information
and footnotes contained in its Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 on Form 10-KSB when reviewing the interim
financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the instructions for Form 10-QSB, are unaudited and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of
operations and cash flows of the Company for the respective interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal year
ending December 31, 2000.
9
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note A - Organization and Description of Business - Continued
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.
Note B - Liquidity Contingency
During the four years ended December 31, 1999, the Company has experienced
cumulative net losses from operations and has utilized cash in operating
activities of approximately $7,000,000. The Company's continued existence is
dependent upon its ability to generate sufficient cash flows from operations to
support its daily operations as well as provide sufficient resources to retire
existing liabilities and obligations on a timely basis.
During the first quarter of 2000, the Company has acquired an exclusive OEM
licensing agreement to manufacture a line of "sport karts" for a domestic
manufacturer of personal watercraft and off-road vehicles.
Management is of the opinion that these events will allow for the provision of
adequate liquidity for the subsequent 12 month period. However, if necessary,
there can be no assurance that the Company will be able to obtain additional
funding or, that such funding, if available, will be obtained on terms favorable
to or affordable by the Company.
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.
10
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies
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 March 31, 2000
and 1999, respectively, inventory consisted of the following components:
2000 1999
---------- ----------
Raw materials $1,902,657 $1,600,442
Work in process 219,388 137,151
Finished goods 465,983 92,340
---------- ----------
$2,588,028 $2,129,949
========== ==========
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. Income taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. At March 31, 2000 and 1999, 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 March 31, 2000 and 1999, the deferred tax
asset related to the Company's net operating loss carryforward was fully
reserved.
11
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
8. 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.
9. 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 March 31, 2000 and 1999, the
outstanding warrants and options are deemed to be anti-dilutive due to the
Company's net operating loss position.
10. Reclassifications
-----------------
Certain 1999 amounts have been reclassified to conform to the 2000
financial statement presentations.
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 three months ended March 31, 2000 and 1999,
respectively, the Company and its subsidiaries had credit risk exposures in
excess of the FDIC coverage as follows:
Highest Lowest Number of days
Entity exposure exposure with exposure
- ----------------------------------------- -------- -------- --------------
Quarter ended March 31, 2000
- ----------------------------
Karts International Incorporated $ 9,803 $ 9,803 1
Brister's Thunder Karts, Inc. $244,744 $ 328 20
Quarter ended March 31, 1999
- ----------------------------
Brister's Thunder Karts, Inc. $ 46,451 $ 968 30
USA Industries, Inc. $ 33,253 $ 1,141 19
12
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note D - Concentrations of Credit Risk - Continued
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
continues to have unsecured amounts invested in reverse repurchase agreements on
a daily basis through March 31, 2000. As of March 31, 2000 and 1999,
respectively, the Company had an unsecured outstanding reverse repurchase
agreement of approximately $156,000 and $21,000, respectively. The Company has
not incurred any losses as a result of any of these unsecured situations.
Note E - Property and Equipment
Total depreciation expense charged to operations for the quarters ended March
31, 2000 and 1999 was approximately $102,586 and $30,343, respectively.
Note F - 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.
Note G - 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.
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.
13
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note H - Notes Payable to Banks and Others
The Company has two lines of credit with an aggregate face value of $3,500,000.
One line of credit note is tied to the Company's aggregate trade accounts
receivable balances, not to exceed $2,500,000 (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). During the first quarter of 2000, the lender and the Company
executed two additional term notes in the amount of $300,000 and $930,000,
respectively. These notes are of equal term and language as the lines of credit.
As of March 31, 2000 and 1999 respectively, an aggregate of approximately
$1,949,123 and $773,451 is outstanding on all of these lines of credit and term
notes. 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 interest at the Lender's Base Rate plus 3.0% (11.50% at December
31, 1999). 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 Inventory LOC originally contained a clause that this line of credit must be
paid in full and held at a $-0- balance between January 1, 1999 and February 28,
1999 for a period of at least 30 consecutive days. This condition was not met
and a waiver was granted by the lender. Additionally, the Agreement contains
certain restrictive covenants related to the Company's business operations and
financial ratios. As of December 31, 1999 and 1998, the Company was not in
compliance with all covenants in the Agreement. The lender notified the Company
on February 28, 2000 and February 22, 1999, respectively, of certain defaults on
the Agreement and the lender granted waivers of applicable defaults.
The Company's Straight Line subsidiary had two separate term lines of credit
open at March 31, 1999:
A $60,000 corporate line of credit payable to a bank with an outstanding
balance of approximately $55,359 at March 31, 1999. This line of credit bore
interest at the Bank's base rate plus 1.0%. This line of credit requires
monthly payments of approximately 2.0% of the outstanding principal plus all
accrued, but unpaid, interest and fees. This line of credit is secured by a
first mortgage on residential property owned by the former sole shareholder
of Straight Line and the personal guaranty of the former sole shareholder.
This note was paid in full during Calendar 1999.
A $10,000 personal line of credit payable to a bank with an outstanding
balance of approximately $9,325 at March 31, 1999. This line of credit bore
at the Bank's base rate plus 3.0%. This line of credit requires monthly
payments of 1.8% of the outstanding principal balance plus all accrued, but
unpaid, interest and fees. This line of credit is subject to the
collateralization discussed above. This note was paid in full during Calendar
1999.
A recap of notes payable outstanding at March 31, 2000 and 1999, respectively,
consist of the following:
2000 1999
---------- ----------
Lines of credit and term loans $1,949,123 $ 773,451
$60,000 corporate line of credit -- 55,359
$10,000 personal line of credit -- 9,325
---------- ----------
Total notes payable $1,949,123 $ 838,135
========== ==========
14
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note I - Long-Term Debt to Related Parties
Long-term debt consists of the following at March 31, 2000 and 1999,
respectively:
2000 1999
-------- --------
<S> <C> <C>
Two notes 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 on demand.
The loan is unsecured $407,055 $225,000
$50,000 note payable to the former sole shareholder
of Straight Line. Interest at 6.0%. Principal and
all accrued, but unpaid, interest is due at maturity
in March 1999. Secured by the Company's
interest in the issued and outstanding stock
of Straight Line Manufacturing, Inc. - 50,000
$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 StraightLine. 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. 17,340 58,723
-------- --------
Total related party long-term debt $424,395 $333,723
======== ========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Long-Term Debt to Banks and Others
Long-term debt payable to banks and others consist of the following at March 31,
2000 and 1999:
2000 1999
-------- --------
<S> <C> <C>
Eleven and Eight installment notes or leases payable
to banks or finance companies. Interest ranging
from 7.75% to 9.25%. Payable in monthly installments
aggregating approximately $8,974, including accrued
interest. Collateralized by various equipment, vehicles
and real estate owned by Karts International Incorporated,
Brister's Thunder Karts, Inc. or USA Industries, Inc.. $303,356 $284,607
Less current maturities (52,274) (40,280)
-------- --------
Long-Term portion $251,082 $244,327
======== ========
</TABLE>
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
2000 $ 57,483
2001 43,094
2002 32,302
2003 29,283
2004 26,002
2005 - 2009 115,238
2010 - 2014 20,180
--------
Totals $323,582
========
Note K - 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.
16
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Income Taxes
The components of income tax (benefit) expense for the quarters ended March 31,
2000 and 1999, respectively, are as follows:
2000 1999
----------- -----------
Federal:
Current $ - $ -
Deferred - -
----------- -----------
- -
----------- -----------
State:
Current - -
Deferred - -
----------- -----------
- -
----------- -----------
Total $ - $ -
=========== ===========
As of March 31, 2000, the Company has a net operating loss carryforward of
approximately $5,000,000 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 March 31, 2000 and 1999,
respectively, differed from the statutory federal rate of 34 percent as follows:
2000 1999
--------- ---------
<S> <C> <C>
Statutory rate applied to earnings (loss) before income taxes $(226,611) $(234,701)
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Other including reserve for deferred tax asset 226,611 234,701
--------- ---------
Income tax expense $ -- $ --
========= =========
</TABLE>
Note M - 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
$20,275 and $18,075 for each of the periods ended March 31, 2000 and 1999,
respectively.
17
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Related Party Transactions - Continued
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 N - 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. The dividend payable
at December 31, 1999 was paid in February 2000 with the issuance of 225,022
shares of restricted, unregistered common stock.
Note O - 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.
Warrants Warrants
originally outstanding at
issued March 31, 2000 Exercise price
---------- -------------- ---------------
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 March 31, 2000 2,504,185 2,437,518
========= =========
18
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note O - Common Stock Warrants - Continued
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.
In conjunction with the $300,000 and $930,000 term notes executed in the first
quarter of 2000, the Company issued and additional 50,000 warrants to the
non-financial institution lender at a price of $0.54 per share on terms
identical to those discussed above.
Note P - 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.
19
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note P - Stock Options - Continued
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.
During the fourth quarter of 1999, the Company granted options to its President,
Vice President of Operations and various employees. These options vested in
various amounts over a period from grant through three years from the grant
date. These options, if not exercised, expire between the fourth and fifth
anniversary date of the option grant. These options are summarized as follows:
Options granted Exercise price
--------------- ----------------
President options 400,000 $0.375 per share
Vice President of Operations options 225,000 $0.375 per share
Employee options 3,000 $0.375 per share
Employee options 117,000 $0.31 per share
There were no exercise of any options during the periods ended March 31, 2000
and 1999, respectively. The following table summarizes all options granted from
1996 to March 31, 2000:
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
--------- --------- ---------- ----------- --------------
1996 options 59,335 - - 59,335 $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 810,000 - - 810,000 $0.31 - $1.06
--------- --------- ---------- ----------- --------------
Totals 1,200,339 - 216,667 983,672
========= ========= ========== =========== ==============
The weighted average exercise price of all issued and outstanding options at
March 31, 2000 and 1999, respectively, was $1.07 and $3.32.
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 March 31, 2000 and 1999,
respectively.
20
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note P - Stock Options - Continued
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.
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.
21
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note P - Stock Options - Continued
1998 Compensation Plan - continued
- ----------------------
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 845,000 shares of Common Stock at
prices ranging from $0.31 to $2.98 per share.
Note Q - Commitments and Contingencies
Litigation
- ----------
The Company and/or it's operating subsidiaries are as defendant(s) 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 March 31, 2000. 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.
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.
22
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note Q - Commitments and Contingencies
Consulting and Patent Licensing - continued
- -------------------------------
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 year ended December 30, 1999 and
1998, respectively, the Company paid or accrued approximately $15,242 and
$20,000 under this Agreement.
Employment agreements
- ---------------------
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 this 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. This 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.
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.
23
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note Q - Commitments and Contingencies - Continued
Employment agreements - continued
- ---------------------
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.
On October 19, 1999, the Company's Board of Directors ratified an Employment
Agreement (Agreement) with an individual to serve as the Company's President and
Chief Executive Officer. The Agreement term was effective as of February 1, 1999
and expires on the third anniversary date of the Agreement with an automatic one
year extension unless either the Company or the President provides a thirty (30)
day written notice not to continue the Agreement. This Agreement provides the
President with an annual salary of $150,000 per year, payable in either common
stock of the Company or cash. At the end of each calendar quarter during the
first calendar year of this Agreement, the Company shall pay the President a
cash portion to satisfy the President's estimated federal and state tax
liability and the balance shall be paid in shares of common stock calculated
based on the closing bid price of the Company's common stock as quoted at the
end of each quarter. Further, the President was granted 450,000 options to
purchase shares of the Company's common stock at 100% of the closing bid price
of the Company's common stock on the ratification date and the options vest as
follows: 100,000 at the ratification date of this Agreement; 150,000 on the
second anniversary date of this Agreement; and 200,000 on the third anniversary
date of this Agreement. Additionally, the President may be eligible to receive
an annual bonus which shall be in the form of (a) options to purchase up to
50,000 shares of the Company's common stock, which shall vest immediately upon
grant and expire five years from the grant date and (b) cash, not to exceed 15%
of the President's base salary.
(Remainder of this page left blank intentionally.)
24
<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
- ---------------------
Three months ended March 31, 2000 as compared to the three months ended March
31, 1999
The Company experienced net sales of approximately $948,800 for the three months
ended March 31, 2000 as compared to net sales of approximately $1,203,400 for
the three months ended March 31, 1999. The decrease in sales was primarily due
to a decrease in the number of promotional karts sold during the first quarter
of the current year. This was a result of the restructuring of the Company's
business that occurred during the second half of last year whereby the Company
refocused its attention on its core fun kart business in order to improve
margins. As a result of this restructuring, the Company withdrew, at least
temporarily, from its pursuit of promotional kart sales.
As a result of the Company's restructuring and correction of its product pricing
structure, gross profit for the three months ended March 31, 2000 increased by
approximately $218,400 to $83,100 from a gross loss of approximately $(135,300)
for the same period in 1999. While the Company has been pleased with the
improvement in gross margins, management realizes that it must continue to focus
on increasing its production and sales levels during the early part of the year.
Continued improvements in gross margins will be largely dependent on spreading
its fixed overhead over more production units. Additionally, management believes
that increased utilization of its existing production capacity during the first
and second quarters will allow the Company to significantly increase its annual
sales without having to materially expand its facilities.
Selling, general and administrative expenses increased to approximately $623,400
for the three months ended March 31, 2000 from approximately $573,100 for the
three months ended March 31, 1999. The Company increased its research and
development expense during the three months ended March 31, 2000 by
approximately $28,000 compared to the same three months in 1999. This was due to
costs associated with the Company obtaining an exclusive three year license with
Polaris Industries, Inc. to design, produce and sell a new line of Polaris
go-karts. Polaris Industries, Inc. is the world's largest producer of
snowmobiles and one of the largest producers of ATV and personal watercraft in
the United States.
Interest expense for the three months ended March 31, 2000 was approximately
$140,500 compared to approximately $62,000 for the three months ended March 31,
1999. The increase was a result of a higher level of borrowing on the Company's
working capital lines of credit and the $1.5 million subordinated, convertible
debenture incurred in June, 1999.
The Company experienced a net loss of approximately $(666,500) for the three
months ended March 31, 2000 compared to a net loss of approximately $(690,300)
for the three months ended March 31, 1999. Net loss per share was $(0.12) for
both the three months ended March 31, 2000 and 1999. The weighted average number
of shares outstanding increased to 5,710,904 for the three months ended March
31, 2000 compared to 5,574,298 for the same period during 1999.
25
<PAGE>
Additional Operational Information
- ----------------------------------
The Company currently has approximately five 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 Capital Resources
- -------------------------------
As of March 31, 2000, the Company had positive (negative) working capital of
approximately $(174,000) as compared to approximately $(1,243,000) at March 31,
1999. During the first quarter of 2000, the Company experienced positive cash
flows from operations of approximately $211,000 as compared to $499,000 during
the first quarter of 1999. The Company's net loss for the three months ended
March 31, 2000 and its build up of inventory was funded by the collection of
year end accounts receivable.
During the first quarter of 2000, the Company expended approximately $35,000 on
additions to its manufacturing equipment to support the new Polaris program.
While the Company is not anticipating any additional equipment will be needed
for this program, the Company is in process of relocating its USA Industries,
Inc. subsidiary to Roseland, Louisiana and will experience additional capital
expenditures during the second and third quarter to support the move.
The Company has been awarded an Economic Development grant for $300,000 for the
State of Louisiana through the Town of Roseland. This grant, other smaller
grant(s) and investment by the Town of Roseland are expected to cover the
majority of the cost for the new 40,000 square foot facility.
Additional funds will be needed by the Company to support this move and to
provide working capital. The Company began a private placement of its common
stock during the first quarter and is currently negotiating with its lenders to
provide the necessary working capital. The Company is confident that during the
second quarter sufficient funding will be procured to allow it to carry out its
business plan for 2000.
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.
Three months ended March 31, 1999 as compared to the three months ended March
31, 1998
The Company experienced net sales of approximately $1.2 million for the three
months ended March 31, 1999 as compared to net sales of approximately $509,000
for the three months ended March 31, 1998. Sales have increased due to
management efforts to create retail product demand and the creation of various
promotional products and pricing for the first quarter of 1999. The Company's
sales demand remains highly seasonal. Current Company management has instituted
various sales and marketing strategies, including the pursuit of additional
distribution channels, including potential mass merchandiser or buying group
customers, and geographic areas which management believes are under served, to
improve its sales during the Company's traditional slow demand periods.
Additionally, the Company continues to explore contract manufacturing
opportunities to attempt to better utilize the Company's facilities and
equipment during the first six months of the year.
Due to the increase in unit sales during the first quarter of 1999 as compared
to the first quarter of 1998, the Company was better able to absorb its fixed
manufacturing costs and experienced an improvement in its gross profit margin
from approximately $(202,000) in the first quarter of 1998 as compared to
approximately $(169,000) for the first quarter of 1999. The Company has added no
significant capital assets to its production facilities and the charge to cost
of sales for depreciation remains relatively constant during the respective
first quarters of 1999 and 1998. Total cost of sales expenses rose from
approximately $694,000 to approximately $1.356 million predominately as a result
of the increased material usage and direct labor related to the increase in unit
sales.
26
<PAGE>
Operating expenses have increased by approximately $111,000 from the first
quarter of 1998 to the first quarter of 1999. This change relates predominately
to increases in general and administrative salaries during the respective
quarters of approximately $291,000 for the first quarter of 1999 and
approximately $149,000 during the first quarter of 1998. The Company also
experienced lesser increases in selling expenses and other general and
administrative costs. Management consistently monitors corporate overhead
expenses at each operating subsidiary level and further anticipates that current
expenditure levels will remain relatively constant during future periods.
For the three months ended March 31, 1999, the Company incurred a net loss of
approximately $(690,000) as compared to approximately $(622,000) for the three
months ended March 31, 1998. Contributing to this approximate $(68,000) increase
in the net loss is the increase in interest expense of approximately $42,000
related to the Company's continued use of short-term financing from a
non-financial institution lender which began at the end of the third quarter of
1998.
Additional Operations information.
- ---------------------------------
The Company currently has approximately ten 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. However, 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 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 Capital Resources
- -------------------------------
As of March 31, 1999, the Company had positive (negative) working capital of
approximately $(1.243) million as compared to approximately $ 3.435 million at
March 31, 1998. During the first quarter of 1999, the Company experienced
positive cash flows from operations of approximately $499,000 as compared to
using cash in operations during the first quarter of 1998 of approximately
$(432,000). This improvement in cash flows was due to the collection of
approximately $1.3 million in accounts receivable and the utilization of excess
inventories of raw materials carried forward from the fourth quarter of 1998 of
approximately $300,000. However, this improvement in operating cash flows also
caused a negative change in working capital from approximately $(392,000) at
December 31, 1998 to approximately $(1,243,000) at March 31, 1999 as a result of
the aforementioned collection of accounts receivable and utilization of
inventory.
During the first quarter of 1999, the Company expended cash of approximately
$14,000 in additions to property and equipment. Further, the Company incurred
long-term installment debt of approximately $18,000 for transportation equipment
which was financed through the Company's primary financial institution. The
long-term debt is collateralized by the related transportation equipment, is for
a term of three years and bears interest at 8.25%.
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.
Year 2000 Considerations
- ------------------------
The Year 2000 (Y2K) date change was believed to affect virtually all computers
and organizations. The Company has undertook a comprehensive review of its
information systems, including personal computers, software and peripheral
devices, and its general communications systems during 1999 and made all
necessary modifications, upgrades or replacements that it believed were
necessary to address its potential internal Y2K exposures.
27
<PAGE>
The Company had no Y2K impact in any manufacturing equipment. The Company also
held discussions with its significant suppliers, shippers, customers and other
external business partners related to their readiness for the Y2K date change.
The costs associated with the Y2K date change compliance did not have a material
effect on the Company's financial position or its results of operations. The
Company has experienced no negative impact from any potential Y2K issues through
March 31, 2000. However, there can be no continued assurance that all of the
Company's systems and the systems of its suppliers, shippers, customers or other
external business partners will continue 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
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
--------
None
b) Reports on Form 8-K
-------------------
None
- --------------------------------------------------------------------------------
(Remainder of this page left blank intentionally.)
28
<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
May 15 , 2000 /s/ Charles Brister
------ -------------------------------------
Charles Brister
President, Chief Executive Officer and Director
May 15 , 2000 /s/ Richard N. Jones
------ ----------------------------------------
Richard N. Jones
Vice President - Administration and Finance
29
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