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, 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)
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 10, 2000: Common Stock: 7,498,392 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, 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 27
Part II - Other Information
Item 1 Legal Proceedings 29
Item 2 Changes in Securities 29
Item 3 Defaults Upon Senior Securities 30
Item 4 Submission of Matters to a Vote of Security Holders 30
Item 5 Other Information 30
Item 6 Exhibits and Reports on Form 8-K 31
Signatures 32
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, 2000 and 1999 and the accompanying consolidated statement of
operations and comprehensive income for the nine and three months ended
September 30, 2000 and 1999, respectively, and the consolidated statements of
cash flows for the nine months ended September 30, 2000 and 1999. 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
Dallas, Texas
November 10, 2000
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 [email protected]
3
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 2000 and 1999
(Unaudited)
Assets
------
2000 1999
------------ ------------
<S> <C> <C>
Current Assets
Cash on hand and in banks $ 1,522,946 $ 135,363
Accounts receivable
Trade, net of allowance for doubtful accounts
of $134,708 and $80,500, respectively 1,216,340 2,132,097
Recoverable income taxes and other 28,154 33,919
Inventory 3,995,869 2,796,715
Prepaid expenses 837,247 331,727
------------ ------------
Total current assets 7,600,556 5,429,821
------------ ------------
Property and equipment
Building and improvements 1,062,257 1,022,518
Equipment 1,280,870 1,032,922
Transportation equipment 240,607 223,818
Furniture and fixtures 138,581 153,861
------------ ------------
2,722,315 2,433,119
Accumulated depreciation (727,650) (461,671)
------------ ------------
1,994,665 1,971,448
Land 32,800 32,800
------------ ------------
Net property and equipment 2,027,465 2,004,248
------------ ------------
Other Assets
Note receivable 425,060 387,432
Option to acquire an unrelated entity 138,001 138,021
Deferred costs related to financing and capital acquisition,
net of accumulated amortization of $27,711 and $-0-, respectively 277,501 318,679
Goodwill, net of accumulated amortization of
approximately $6,414,452 and $6,414,452, respectively -- --
Organization costs, net of accumulated amortization
of approximately $99,080 and $77,229, respectively 10,175 32,026
Covenant not to compete, net of accumulated amortization
of approximately $63,889 and $30,556, respectively 36,111 69,444
Other 2,552 36,797
------------ ------------
Total other assets 889,400 982,399
------------ ------------
Total Assets $ 10,517,421 $ 8,416,468
============ ============
</TABLE>
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants. See Accountant's
Review Report. The accompanying notes are an integral part of these financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets - Continued
September 30, 2000 and 1999
(Unaudited)
Liabilities and Shareholders' Equity
------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Current Liabilities
Notes payable to banks and others $ -- $ 1,867,135
Notes payable to affiliates 142,922 273,154
Current maturities of long-term debt 72,273 51,595
Accounts payable - trade 2,285,477 2,605,914
Other accrued liabilities 32,803 90,811
Accrued dividends payable 181,531 --
Accrued income taxes payable -- 9,090
------------ ------------
Total current liabilities 2,715,006 4,897,699
------------ ------------
Long-term liabilities
Long-term debt, net of current maturities 230,099 275,367
Debenture payable 2,500,000 1,500,000
------------ ------------
Total Liabilities 5,445,105 6,673,066
------------ ------------
Commitments and contingencies
Shareholders' equity
Preferred stock - $0.001 par value
10,000,000 shares authorized
5,623,333 and 1,550,000 issued
and outstanding, respectively 5,623 1,550
Common stock - $0.001 par value
14,000,000 shares authorized
7,498,392 and 5,574,298 shares
issued and outstanding, respectively 7,498 5,574
Additional paid-in capital 23,965,757 15,926,232
Accumulated deficit (18,906,562) (14,189,954)
------------ ------------
Total Shareholders' Equity 5,072,316 1,743,402
------------ ------------
Total Liabilities and Shareholders' Equity $ 10,517,421 $ 8,416,468
============ ============
</TABLE>
The financial information presented herein has been prepared by management
without audit by independent certified public accountants. See Accountant's
Review Report. The accompanying notes are an integral part of these financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Nine and Three months ended September 30, 2000 and 1999
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 4,894,007 $ 6,678,886 $ 2,104,600 $ 3,013,124
Cost of sales
Purchases, direct labor
and related costs 5,651,884 6,307,881 2,656,667 2,696,819
Depreciation 152,843 101,322 54,472 67,440
----------- ----------- ----------- -----------
Total cost of sales 5,804,727 6,409,203 2,711,139 2,764,259
----------- ----------- ----------- -----------
Gross profit (910,720) 269,683 (606,539) 248,865
----------- ----------- ----------- -----------
Operating expenses
Research and development 72,752 7,773 33,150 --
Selling, general and
administrative expenses 2,204,279 1,680,550 1,024,376 673,516
Depreciation and amortization 118,969 113,789 33,455 58,865
----------- ----------- ----------- -----------
Total operating expenses 2,396,000 1,802,112 1,090,981 732,381
----------- ----------- ----------- -----------
Income (Loss) from operations (3,306,720) (1,532,429) (1,697,520) (483,516)
Other income (expense)
Interest expense (377,900) (225,829) (125,574) (94,651)
Other 42,749 143,787 15,332 46,941
----------- ----------- ----------- -----------
Income (Loss) before income taxes (3,641,871) (1,614,471) (1,807,762) (531,226)
Provision for income taxes
Current (2,321) -- (2,321) --
----------- ----------- ----------- -----------
Net income (loss) (3,644,192) (1,614,471) (1,810,083) (531,226)
Other comprehensive income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income (loss) $(3,644,192) $(1,614,471) $(1,810,083) $ (531,226)
=========== =========== =========== ===========
</TABLE>
-Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants. See Accountant's
Review Report. The accompanying notes are an integral part of these financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income - Continued
Nine and Three months ended September 30, 2000 and 1999
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $(3,644,192) $(1,614,471) $(1,810,083) $ (531,226)
Other comprehensive income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income (loss) $(3,644,192) $(1,614,471) $(1,810,083) $ (531,226)
=========== =========== =========== ===========
Income (loss) per weighted-
average share of common
stock outstanding, calculated
on net loss - basic and fully diluted $ (0.54) $ (0.29) $ (0.24) $ (0.10)
=========== =========== =========== ===========
Weighted-average number
of shares of common
stock outstanding 6,773,944 5,574,298 7,448,283 5,574,298
=========== =========== =========== ===========
</TABLE>
The financial information presented herein has been prepared by management
without audit by independent certified public accountants. See Accountant's
Review Report. The accompanying notes are an integral part of these financial
statements.
7
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss for the period $(3,644,192) $(1,614,471)
Adjustments to reconcile net income
(loss) to net cash used in operating activities
Depreciation and amortization 322,960 215,111
Bad debt reserve 68,060 15,000
Accrued interest income on note receivable (9,375) (9,319)
(Increase) Decrease in:
Accounts receivable - trade and other 1,189,480 170,086
Inventory (1,781,191) (666,766)
Prepaid expenses and other (486,641) (133,810)
Increase (Decrease) in:
Accounts payable and other accrued liabilities (209,156) (944,924)
Accrued income taxes payable -- 9,090
----------- -----------
Cash flows used in operating activities (4,550,055) (2,960,003)
----------- -----------
Cash flows from investing activities
Cash paid to acquire option to purchase unrelated entity -- (14,477)
Cash paid for property and equipment (263,620) (196,502)
----------- -----------
Cash flows used in investing activities (263,620) (210,979)
----------- -----------
Cash flows from financing activities
Decrease in cash overdraft -- (9,153)
Cash received from sale of 9.0% Convertible Preferred Stock -- 1,550,000
Cash received from sale of Class A Preferred Stock 3,000,000 --
Cash received from sale of Class B Preferred Stock 5,500,000 --
Cash paid for Preferred Stock dividends (69,750) --
Cash received from private placement of common stock 615,000 --
Cash paid for loan and capital acquisition costs (1,144,355) (343,679)
Change in notes payable to affiliate - net (86,473) 174,279
Net activity on bank and other lines of credit (2,724,005) 302,420
Principal received on long-term debt 1,000,000 1,500,000
Principal payments on long-term note payable (153,435) (31,212)
----------- -----------
Cash flows provided by financing activities 5,936,982 3,142,655
----------- -----------
Increase (Decrease) in cash 1,123,307 (28,327)
Cash at beginning of period 399,639 163,690
----------- -----------
Cash at end of period $ 1,522,946 $ 135,363
=========== ===========
</TABLE>
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants. See Accountant's
Review Report. The accompanying notes are an integral part of these financial
statements.
8
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows - Continued
Nine months ended September 30, 2000 and 1999
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 326,752 $ 228,807
============ =========
Income taxes paid (refunded) for the period $ 2,321 $ (6,476)
============ =========
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 $ -- $ 80,479
============ =========
Conversion of debt payable to an affiliate into
preferred stock $ -- $ 25,000
============ =========
</TABLE>
The financial information presented herein has been prepared by management
without audit by independent certified public accountants. See Accountant's
Review Report. The accompanying notes are an integral part of these financial
statements.
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.
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.
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.
10
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note A - Organization and Description of Business - Continued
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. During the second
quarter of 2000, the Company received proceeds from a new $3,000,000 private
placement of Class A Preferred Stock and an additional $1,000,000 in long-term
debt. During the third quarter of 2000, the Company received proceeds from a new
$5,500,000 private placement of Class B Preferred Stock.
Management estimates that these events will provide for adequate liquidity in
the near term. 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.
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,
2000 and 1999, respectively, inventory consisted of the following
components:
2000 1999
---------- ----------
Raw materials $3,153,009 $2,288,113
Work in process 354,928 96,302
Finished goods 487,932 412,300
---------- ----------
$3,995,869 $2,796,715
========== ==========
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 September 30, 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 September 30, 2000 and 1999, the deferred
tax asset related to the Company's net operating loss carryforward was
fully reserved.
12
<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 September 30, 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 nine months ended September 30, 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
------ -------- -------- --------------
Nine months ended September 30, 2000
------------------------------------
Karts International Incorporated $ 36,336 $ 6,163 8
Brister's Thunder Karts, Inc. $670,193 $ 328 96
USA Industries, Inc. $ 31,206 $ 5,397 4
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
13
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note D - Concentrations of Credit Risk - Continued
Through May 2000, the Company utilized a lockbox system for the collection and
deposit of receipts on trade accounts receivable for each operating subsidiary
for the benefit of its then primary non-financial institution lender.
The Company uses 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 September 30, 2000. As of September 30, 2000 and 1999,
respectively, the Company had an unsecured outstanding reverse repurchase
agreement of approximately $1,448,000 and $23,002, 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 nine months ended
September 30, 2000 and 1999 was approximately $271,812 and $172,930,
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.
During the second quarter of 2000, management evaluated the performance and
likelihood of collectability of this note. While management is of the opinion
that the principal will ultimately be collected upon maturity, the accrual of
interest was discontinued retroactively to April 1, 2000.
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.
14
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note H - Notes Payable to Banks and Others
The Company had two lines of credit with an aggregate face value of $3,500,000.
One line of credit note was tied to the Company's aggregate trade accounts
receivable balances, not to exceed $2,500,000 (A/R LOC). The second line of
credit was 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 were of equal term and language as the lines of
credit.
These notes were paid in full during the second quarter of 2000. Accordingly, as
of September 30, 2000 and 1999, respectively, an aggregate of approximately $-0-
and $1,837,135 was outstanding on all of these lines of credit and term notes.
The notes required the interest and fees on the notes to be paid monthly and all
of the Company's trade accounts receivable collections were deposited to the
lender's benefit in a lockbox controlled by the lender.
Note I - Long-Term Debt to Related Parties
Long-term debt consists of the following at September 30, 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 $125,582 $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. 17,340 61,099
-------- --------
Total related party long-term debt $142,922 $273,154
======== ========
</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 September
30, 2000 and 1999:
2000 1999
-------- --------
<S> <C> <C>
Thirteen and Ten installment notes or leases payable,
respectively, to banks or finance companies. Interest
ranging from 7.75% to 9.25%. Payable in monthly
installments aggregating approximately $9,500, 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.. $302,372 $326,962
Less current maturities (72,273) (51,595)
-------- --------
Long-Term portion $230,099 $275,367
======== ========
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
----------- ------
2000 $ 72,273
2001 43,094
2002 32,302
2003 29,283
2004 26,002
2005 - 2009 83,598
2010 - 2014 15,820
--------
Totals $302,372
========
Note K - Debenture Payable
On June 3, 1999, the Company consummated a $1.5 million convertible loan
transaction with The Schlinger Foundation (the "Foundation"), who is also a
shareholder in the Company. The Foundation also purchased 500,000 shares of 9%
Preferred Stock at a price of $1.00 per share in the Company's private offering
consummated on June 30, 1999. For his assistance to the Company in arranging
this financing with the Foundation and others, the Company paid Blair L.
benGerald, a director of the Company, $205,000. Mr. Blair L. benGerald was not
an officer or director of the Company when he received this payment. On May 17,
2000, the Company and The Foundation entered into an Amended and Restated Loan
Agreement which provided for the additional loan of $1,000,000 to the Company at
an interest rate equal to 3% plus the prime rate as quoted in The Wall Street
Journal. Interest is payable on the $2.5 million Amended and Restated Term Note
("Term Note") monthly as it accrues commencing on June 30, 2000 and continuing
on the last day of each successive month thereafter during the term of the Term
Note with the principal of the Term Note being payable in one installment of
unpaid principal and accrued unpaid interest on May 17, 2005. The Term Note is
secured with guaranty agreements by each of the Company's wholly-owned
subsidiaries, Straight Line Manufacturing, Inc., USA Industries, Inc., KINT,
L.L.C. and Brister's Thunder Karts, Inc. Additionally, the Company and each of
its subsidiaries have pledged substantially all of their assets as additional
collateral for the Term Note.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Debenture Payable - continued
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.
Note L - Income Taxes
The components of income tax (benefit) expense for the quarters ended September
30, 2000 and 1999, respectively, are as follows:
2000 1999
------------ -----------
Federal:
Current $ -- $ --
Deferred -- --
------------ ------------
-- --
------------ ------------
State:
Current 2,321 --
Deferred -- --
------------ ------------
2,321 --
------------ ------------
Total $ 2,321 $ --
============ ============
As of June 30, 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 September 30, 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 $(1,238,236) $ (548,920)
Increase (decrease) in income taxes resulting from:
State income taxes 2,321 --
Other including reserve for deferred tax asset 1,238,236 548,920
----------- -----------
Income tax expense $ 2,321 $ --
=========== ===========
</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 1996 closing of the acquisition of Brister's, the Company
and the former owner executed a lease agreement for a primary two-year term
which expiring in 1998 and an additional two-year renewal extension which has
expired as of September 30, 2000. The Company currently occupies its primary
manufacturing facility on a month-to-month lease at a monthly lease payment of
approximately $6,025 per month. Total payments under this agreement were
approximately $62,477 and $54,825 for each of the periods ended September 30,
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.
On August 1, 2000, the Company and Charles Brister, the Company's President,
entered into a license agreement (the "License Agreement") for "Accelerator
Pedal Override Apparatus for Self-Propelled Motorized Cart with Aligned Brake
and Accelerated Push-Rod Type Operator Pedals" ("Pedal Override") and for
"Clutch Assembly for Chain Driven Cart" (the "Clutch Lube") which are subject to
certain patent rights owned by Mr. Brister. The term of the License Agreement is
for a period of three (3) years. In August 2000, the Company paid Mr. Brister
$40,000 for arrearage royalty fees covering the Pedal Override and Clutch Lube
under a prior license agreement between the Company and Mr. Brister. Pursuant to
the current License Agreement, the Company has agreed to pay Mr. Brister
royalties as follows: (i) the greater of $20,000 or the sum of a royalty of
$1.00 for each Company product sold by the Company or any of its affiliates or
subsidiaries containing or utilizing the Pedal Override during the period
beginning August 1, 2000 and ending July 31, 2001, and a royalty of $0.50 for
each Company product sold by the Company or any of its affiliates or
subsidiaries containing or utilizing the Clutch Lube during the period beginning
August 1, 2000 and ending July 31, 2001, (ii) the greater of $20,000 or the sum
of a royalty of $1.00 for each Company product sold by the Company or any of its
affiliates or subsidiaries containing or utilizing the Pedal Override during the
period beginning August 1, 2001 and ending July 31, 2002, and a royalty of $0.50
for each Company product sold by the Company or any of its affiliates or
subsidiaries containing or utilizing the Clutch Lube during the period beginning
August 1, 2001 and ending July 31, 2002, and (iii) the greater of $20,000 or the
sum of a royalty of $1.00 for each Company product sold by the Company or any of
its affiliates or subsidiaries containing or utilizing the Pedal Override during
the period beginning August 1, 2002 and ending July 31, 2003, and a royalty of
$0.50 for each Company product sold by the Company or any of its affiliates or
subsidiaries containing or utilizing the Clutch Lube during the period beginning
August 1, 2002 and ending July 31, 2003. The Company shall pay the accrued
royalties on January 1 and July 31 of each year during the term of the License
Agreement. Either party may terminate the License Agreement upon thirty (30)
days written notice to the other party if the other party commits a material
breach of any term of the License Agreement and fails to cure such breach within
the 30-day period. Upon termination of the License Agreement for any reason, the
Company shall return to Mr. Brister the technology and tangible manifestations
or copies thereof relating to the Pedal Override and Clutch Lube and all
licenses granted under the License Agreement will be transferred and assigned by
the Company to Mr. Brister or to his designee.
On October 10, 2000, the Company entered into a license agreement with Charles
Brister (the "Technology Agreement") for the right to use a safety fuel tank and
filler cap apparatus on its products (the "Technology") which is owned by Mr.
Brister under certain patents and patent applications. In consideration of the
grant of the license to the Technology, the Company agreed to pay Mr. Brister an
annual license fee of $250,000. The first annual license fee payment is payable
in two equal payments of $125,000 each, with the first $125,000 payment being
paid to Mr. Brister in August 2000 and the second $125,000 payment due on
December 31, 2000. The Technology Agreement is for a period of three (3) years
and shall be automatically renewed annually thereafter unless either of the
parties provides at least sixty (60) days notice of non-renewal prior to the
termination date of the Technology Agreement. The Technology Agreement is
subject to termination for non-payment of the license fee and royalties and for
certain other reasons. In addition to the annual license fee of $250,000, the
Company shall pay Mr. Brister a royalty of $1.00 for each Company product which
utilizes the Technology. However, in no event shall royalties for a calendar
year for use of the Technology on the Company's products be less than $500,000
for the first full year of the Technology Agreement ending on December 31, 2001;
less than $500,000 for the license year ending December 31, 2002 and less than
$1,000,000 for the license year ending December 31, 2003 and thereafter.
18
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Related Party Transactions - continued
In the event that royalties for a license year do not equal the required
minimum, Charles Brister may, at his option, convert the exclusive license
granted to the Company to a non-exclusive license without the right of the
Company to sub-license, by thirty (30) days notice in writing to the Company,
unless such default is cured by the Company within the 30-day notice period.
Subject to the terms of the Technology Agreement, the Company shall have the
right to grant sub-licenses to others for fees or at royalty rates to be
determined by the Company. As sub-license income, the Company has agreed to pay
to Mr. Brister 50% of all license fees, royalties, advance royalties, minimum
royalties or other payments accrued or received in respect to the granting or
maintaining of sub-licenses, provided, however, in no instance shall the amount
paid to Mr. Brister be less than $1.00 for each product which utilizes the
Technology. Additionally, the Company has agreed during the term of the
Technology Agreement to maintain product liability insurance naming Mr. Brister
as an additional insured to provide protection against claims and causes of
action arising out of any defects or failure to perform of the Technology. The
amount of coverage shall be a minimum of $2,000,000 combined single limit, with
a deductible amount not to exceed $100,000 for each single occurrence for bodily
injury and/or property damage.
Note N - Preferred Stock
In May 2000, the Company authorized the issuance of 4,000,000 shares of
Preferred Stock designated as "Series A Preferred Stock". These shares were sold
on May 17, 2000 for total gross proceeds of $3,000,000. The Series A Preferred
Stock bears a dividend at a rate of $0.075 per share per annum, payable on March
31, June 30, September 30 and December 31, commencing on June 30, 2000. These
shares are subject to a liquidation preference equal to the sum of $0.75 per
share plus declared or accrued but unpaid dividends. The Company, at its sole
option, may redeem all or a portion of the issued and outstanding Series A
Preferred Stock on or after May 31, 2003 at a price of $1.50 per share plus all
declared or accrued but unpaid dividends. The holders of the Series A Preferred
Stock have the right to convert the issued and outstanding shares at any time
after the date of issuance at a rate of $0.375 per share plus all declared or
accrued but unpaid dividends. These shares shall automatically be converted into
common stock upon either the Company's sale of common stock with an aggregate
offering price of $10,000,000 and a per share price of $5.00 and the written
consent or agreement of the holders of a majority of the then outstanding shares
of the Series A Preferred Stock. The dividend payable at December 31, 1999 was
paid in February 2000 with the issuance of 225,022 shares of restricted,
unregistered common stock.
On October 9, 2000, the Company sold 73,333 shares of its Series B Preferred
Stock to the Foundation for $5,500,000 or $75.00 per share. Each share of Series
B Preferred Stock is convertible at the option of the holder into 200 shares of
Common Stock of the Company. Each outstanding share of Series B Preferred Stock
has the right to 200 votes at any meeting of the stockholders of the Company.
The Company and the Foundation have entered into a Registration Rights Agreement
dated May 17, 2000, and as amended on October 9, 2000 which granted certain
registration rights to the Foundation for the shares of Common Stock of the
Company to be issued to the Foundation upon conversion of the Series A and
Series B Preferred Stock.
19
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note O - Common Stock
During the first six months of 2000, the Company sold an aggregate 1,639,995
shares of restricted, unregistered common stock pursuant to a private placement
memorandum for gross proceeds of approximately $613,360. Each share was
accompanied by a Warrant to purchase one additional share of restricted,
unregistered common stock at a price of $0.50 per share. These warrants expire
on May 31, 2005.
In September 2000, the Company issued approximately 59,077 shares of restricted,
unregistered common stock in settlement of outstanding invoices for legal
services with the Company's corporate product liability counsel in the aggregate
amount of approximately $14,700, which approximates the "fair value" of the
number of shares issued in this transaction.
Note P - 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.
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.
20
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note P - Common Stock Warrants - continued
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.
In conjunction with a private placement of common stock during the first six
months of 2000, the Company issued 1,639,995 Warrants to purchase an equivalent
share of common stock at a price of $0.50 per share. These warrants are
redeemable by the Company at a price of $0.01 per Warrant at any time after the
first anniversary of the "Final Closing Date" upon 30 days written notice to the
Warrant holders, if the average closing price of the Company's common stock
equals or exceeds $1.50 per share for the 20 consecutive trading days ending
three days prior to the date of the notice of redemption. These Warrants expire
on May 31, 2005.
Warrants Warrants
originally outstanding at
issued September 30, 2000 Exercise price
---------- ------------------ --------------
<S> <C> <C> <C>
Underwriter's Warrants 155,000 155,000 $4.00 per share
1997 Warrants 1,782,500 1,782,500 $4.00 per share
Lender's Warrants 150,000 150,000 $0.54 per share
2000 Warrants 1,639,995 1,639,995 $0.50 per share
--------- ---------
Totals at September 30, 2000 3,727,495 3,727,495
========= =========
Note Q- 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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note Q- Stock Options - continued
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.
During the fourth quarter of 1999, the Company granted options to its President,
Vice President of Administration 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 450,000 $0.375 per share
Vice President of Administration options 225,000 $0.375 per share
Employee options 3,000 $0.375 per share
Employee options 117,000 $0.31 per share
Concurrent with a settlement and release agreement reached with the Company's
former Vice President of Administration in the third quarter of 2000, 125,000 of
the granted 1999 options were terminated.
There have been no exercise of any options during the periods ended September
30, 2000 and 1999, respectively. The following table summarizes all options
granted from 1996 to September 30, 2000:
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
------- --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1996 options 59,359 - 32,652 26,707 $0.375
1997 VP options 13,334 - 6,667 6,667 $0.375
1997 options 52,670 - 39,091 13,579 $0.375
1998 options 265,000 - 230,000 35,000 $0.375
1999 options 810,000 - 133,000 677,000 $0.3125 - $1.06
Totals 1,200,363 - 441,410 758,953
========= ========= ========= =========
</TABLE>
During the third quarter, the Company's Board of Directors repriced all 1996
through 1998 options to an exercise price of $0.375. The weighted average
exercise price of all issued and outstanding options at September 30, 2000 was
$0.39.
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 equal to the market price at the grant
date.
22
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note Q- Stock Options - continued
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 September 30, 2000, 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.
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.
23
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note Q - 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 R - 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 insurance coverage to cover these
exposures with a $50,000 per claim deductible as of September 30, 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.
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.
24
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Commitments and Contingencies - Continued
Employment agreements - continued
---------------------
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.
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 Charles Brister 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.
25
<PAGE>
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Commitments and Contingencies - Continued
Employment agreements - continued
---------------------
On June 1, 2000, the Company and Charles Brister entered into an Employment
Agreement and as amended on October 23, 2000 (the "June Employment Agreement")
which superceded the Employment Agreement discussed in the preceding paragraph.
Under the June Employment Agreement, Mr. Brister will serve the Company as
President and Chief Executive Officer for a period of three years beginning June
1, 2000 with an automatic one- year extension unless either the Company or Mr.
Brister provides a 30day written notice not to continue the June Employment
Agreement. The June Employment Agreement provides Mr. Brister with an annual
salary of $200,000 per year payable in cash in accordance with the Company's
established payroll procedures which may be increased at any time at the sole
discretion of the Board of Directors of the Company. Additionally, Mr. Brister
was granted 350,000 options to purchase shares of the Company's Common Stock at
the closing bid price of the Company's Common Stock as of August 21, 2000. The
options vest and are exercisable as follows: (a) options to purchase 100,000
shares vested on August 21, 2000 at an exercise price of $0.375 per share; (b)
options to purchase 100,000 shares shall vest and be exercisable upon the second
anniversary date of the June Employment Agreement; and (c) options to purchase
150,000 shares shall vest and be exercisable upon the third anniversary date of
the June Employment Agreement. The options expire June 1, 2005. Additionally,
Mr. Brister 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 options shall vest immediately upon issuance and shall expire five
(5) years from the date of grant, and (b) cash in an amount established by an
annual performance-based management bonus program which will be approved by the
Board of Directors. Subject to certain exceptions, if the June Employment
Agreement is terminated by the Company or Mr. Brister as a result of a change in
control (as defined in the June Employment Agreement), Mr. Brister shall be
entitled to a cash payment of $200,000 and the immediate vesting of all options
granted but not yet vested at the effective date of such change in control, as
full and final satisfaction of all obligations due and owing to Mr. Brister by
the Company under the terms of the June Employment Agreement.
(Remainder of this page intentionally left blank)
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, 2000 as compared to the nine months ended
September 30, 1999
The Company recorded net revenues of approximately $4.9 million and $2.1 million
for the nine and three months ended September 30, 2000, respectively as compared
to approximately $6.7 million and $3.0 million for the comparable nine and three
month periods of 1999. The current year's net revenues for the nine and three
months ended September 30, 2000 represented a 26.9% and 30.0% decrease,
respectively, over the same periods of the previous year. The decrease in
revenues is largely attributed to the Company's decision to no longer sell to
one mass merchandiser account and to temporarily withdraw from the promotional
and concession kart markets to allow it to focus its resources on expediting the
design, marketing and production of a new line of karts under an exclusive
license agreement with Polaris Industries, Inc.
Gross profit was negatively impacted by the decrease in volume and additional
costs associated with bringing the new Polaris Trail Kart line into production.
As a result, the Company suffered a gross loss of approximately $(911,000) and
$(607,000), respectively for the nine month and three month periods ended
September 30, 2000, as compared to a gross profit of $269,000 and $248,000,
respectively, during the same period of the previous year.
Selling, general and administrative expenses were approximately $2.2 million and
$1.7 million for the respective nine month periods ended September 30, 2000 and
1999 and approximately $1.0 million and $674,000 for the third quarter only in
2000 and 1999, respectively. The increase of approximately $500,000 between the
respective nine month periods resulted from increases in bad debt expense,
increased administrative payroll costs and other general and administrative
overhead items. Research and development expenses totaled approximately $73,000
for the nine months ended September 30, 2000 compared to approximately $8,000
for the same period during 1999. These Fiscal 2000 costs were associated with
the design, prototyping and development and of the Polaris Trail Kart and other
new models for the Company's product line. Depreciation and amortization were
approximately $119,000 and $33,000, respectively, for the nine and three month
periods ended September 30, 2000 compared with approximately $114,000 and
$59,000 for the same periods last year.
Other income (expense) was approximately $43,000 and $15,000 for the respective
nine and three month periods ended September 30, 2000 as compared to
approximately $(144,000) and $(47,000) 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. In addition, the Company had recognized a
positive reorganization reserve adjustment of approximately $55,000 during the
nine months ended September 30, 1999.
For the nine months ended September 30, 2000, the Company incurred a net loss of
approximately $(3,644,000) compared to a net loss of approximately $(1,614,000)
for the same period in 1999. The Company incurred a net loss of approximately
$(1,810,000) and $(531,000), respectively for the three months ended September
30, 2000 and 1999.
27
<PAGE>
Liquidity and Financial Condition
---------------------------------
As of September 30, 2000, the Company had positive working capital of
approximately $5.0 million as compared to approximately $532,000 at September
30, 1999. During the first nine months of 2000 and 1999, the Company experienced
negative cash flows from operations of approximately $(4,550,000) and
$(2,960,000), respectively.
To improve the Company's working capital position, the Company sold
approximately $615,000 of common stock through a private placement offering,
$3,000,000 of Series A Preferred Stock, and restructured its debt during the
first and second quarters of 2000. In the third quarter of 2000, the company
sold $5,500,000 of Series B Preferred Stock. Proceeds from the Company's
financing activities were used to reduce its trade accounts payable and provide
additional working capital.
The Company estimates that the proceeds from the sale of its common and
preferred stock, from the restructuring of its debt and its aggressive
receivables management policy will provide adequate resources to provide a
supply of critical manufacturing components and supplies and sufficient working
capital to meet the Company's operational requirements as it enters a
historically active sales and manufacturing season during the fourth quarter of
the Company's fiscal year.
The lease for the Company's primary manufacturing facility in Roseland,
Louisiana expired during 2000 and is currently on a month-to-month basis at a
monthly rental of approximately $6,025 per month. The Company and Mr. Brister
are currently negotiating the terms for a new lease for the facility which the
Company expects will provide for a modest increase in the monthly lease payment.
Capital Requirements
--------------------
The Company expended cash of approximately $263,000 in additions to property and
equipment during the first nine months of 2000. Minor improvements were made to
the Brister's facility to accommodate the addition some equipment from the
Company's USA Industries' facility in Prattville, Alabama. The Company is in the
process of relocating its USA Industries, Inc. subsidiary to a new 40,000 square
foot facility in Roseland, Louisiana. The building will be owned by the Town of
Roseland with funding being provided by a State of Louisiana Economic
Development grant, the Town of Roseland and the Company. The Company has signed
a nine-year prepaid lease with the Town for the facility. The Company believes
the new facility will be ready for initial operations late in the fourth quarter
and should drive a significant increase in production capacity. Product cost
reduction should be achieved through improved production flow and consolidated
management oversight. An additional sale of Series B Preferred Stock is planned
for the fourth quarter with proceeds to be used for state-of-the-art computer
controlled manufacturing equipment for the new facility.
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 returning the Company to
profitability.
Year 2000 Considerations
------------------------
The Year 2000 (Y2K) date change was believed to affect virtually all computers
and organizations. The Company has 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.
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 Y2K issues to date. 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 to function adequately.
28
<PAGE>
Part II - Other Information
---------------------------
Item 1 - Legal Proceedings
The Company currently has approximately four product liability lawsuits
outstanding, none of which are expected to exceed the 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 however, 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. The Company prides itself on being an earlier
adopter and pioneer of industry safety innovations. To the extent product
liability losses are beyond the limits or scope of the Company's insurance
coverage, the Company could experience a materially adverse effect upon its
business, operations, profitability and assets.
The Consumer Product Safety Commission (CPSC) recently announced that it had
directed one of the Company's competitors to recall approximately 91,000 of
its karts due to a safety concern. Karts International is considered by many
in the industry to be a leader in kart safety with a record of introducing or
being one of the first to install new safety features. The Company is not
aware of any incidents involving its karts that were caused by factors
similar to those that lead the CPSC to issue the order for recall. The
Company does not expect to be directly affected by this situation.
The Company is also the subject of two general civil lawsuits. The first
involves a purported material breach of contract. The company is under the
advice of legal counsel and is in settlement discussions with the aggrieved
party. Should an agreeable settlement not be reached, the parties have agreed
to submit the case to binding arbitration. This matter is expected to be
resolved in the fourth quarter 2000 or the first quarter 2001. The Company
has provided for its best estimate of any potential, if any, costs, charges
or findings in the Company's financial statements as of September 30, 2000.
The other suit involves a claim of failure to deliver purchased product by
Straight Line Manufacturing, Inc., a subsidiary company. The claims alleged
in the lawsuit occurred prior to the purchase of Straight Line by Karts
International. Consequently, a portion of the purchase price of Straight
Line, in the form of a note payable to the former owner of Straight Line, was
reserved to cover any potential damages that Karts International may suffer
as a result of this litigation.
Item 2 - Changes in Securities
In May 2000, the Company authorized the issuance of 4,000,000 shares of
Preferred Stock designated as "Series A Preferred Stock". These shares were
sold on May 17, 2000 for gross proceeds of $3,000,000. The Series A Preferred
Stock requires a dividend of $0.075 per share per year, payable on March 31,
June 30, September 30 and December 31, starting on June 30, 2000. These
shares are subject to a liquidation preference equal to $0.75 per share plus
accrued but unpaid dividends. The Company, at its sole option, may redeem all
or part of the issued and outstanding Series A Preferred Stock on or after
May 31, 2003 at a price of $1.50 per share plus any accrued but unpaid
dividends. The holders of the Series A Preferred Stock have the right to
convert the issued and outstanding shares at any time after the date of
issuance at a rate of $0.375 per share plus all accrued but unpaid dividends.
The shares will automatically be converted into common stock if the Company
sells common stock with an aggregate offering price of $10,000,000 and a per
share price of $5.00, and the written consent or agreement of the holders of
a majority of the outstanding shares of the Series A Preferred Stock is
granted. The holder of each share of Series A Preferred Stock shall have the
right to one vote for each share of Common Stock into which the Series A
Preferred Stock could be converted.
During the first nine months of 2000, the Company sold an aggregate 1,639,995
shares of restricted, unregistered common stock through a private placement
for gross proceeds of approximately $615,000 (or approximately $0.38 per
share), which approximates the "fair value" of the securities at the time of
issuance.
29
<PAGE>
In February 2000, the Company issued 225,022 shares of restricted,
unregistered common stock for payment of dividends on the issued and
outstanding 9.0% Convertible Preferred Stock of approximately $69,757 (or
$0.31 per share), which approximates the "fair value" of the securities at
the time of issuance.
In September 2000, the Company issued 59,077 shares of restricted,
unregistered common stock for payment of legal fees incurred in 1999.
On October 9, 2000, the Company sold 73,333 shares of a newly designated
"Series B Preferred Stock" for gross proceeds of $5,500,000 or $75.00 per
share. The Series B Preferred Stock has no dividend provision, however each
share of the Series B Preferred Stock is convertible at the option of the
holder into 200 shares of the Common Stock of the Company. On or after May
31, 2003, the Company may redeem all or a portion of the Series B Preferred
Stock in multiples of $1,000,000, by paying cash of $150 per share of the
Series B Preferred Stock, subject to the prior written consent of at least a
majority of the Series A Preferred Stockholders. Each outstanding share of
Series B Preferred Stock has the right to 200 votes at any meeting of the
stockholders of the Company. The funding on this transaction was received
prior to September 30, 2000 and is included in the accompanying financial
statements.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The following items are scheduled for a vote at the annual shareholders meeting
planned for December 12, 2000.
1) To elect four members of the Board of Directors for the term of one year or
until the next Annual Meeting of Shareholders.
2) To approve an amendment to the Company's Articles of Incorporation to
increase the number of authorized shares of $0.001 par value common stock
which can be issued from 35,000,000 shares to 90,000,000 shares.
3) To approve the Karts International Incorporated 2000 Stock Compensation
Plan.
4) To transact such other business as may properly come before the Meeting or
any adjournments thereof.
Item 5 - Other Information
On August 1, 2000, the Company and Charles Brister entered into a license
agreement for "Accelerator Pedal Override Apparatus for Self-Propelled Motorized
Cart with Aligned Brake and Accelerated Push-Rod Type Operator Pedals" (throttle
override system), and for "Clutch Assembly for Chain Driven Cart" (clutch lube
system), which are subject to certain patent rights owned by Mr. Brister. The
term of the License Agreement is for a period of three (3) years. In August
2000, the Company paid Mr. Brister $40,000 for arrearage royalty fees covering
the Pedal Override and Clutch Lube under a prior license agreement between the
Company and Mr. Brister. Pursuant to the current License Agreement, the Company
has agreed to pay Mr. Brister royalties as follows: (i) the greater of $20,000
or the sum of a royalty of $1.00 for each Company product sold by the Company or
any of its affiliates or subsidiaries containing or utilizing the Pedal Override
during the period beginning August 1, 2000 and ending July 31, 2001, and a
royalty of $0.50 for each Company product sold by the Company or any of its
affiliates or subsidiaries containing or utilizing the Clutch Lube during the
period beginning August 1, 2000 and ending July 31, 2001, (ii) the greater of
$20,000 or the sum of a royalty of $1.00 for each Company product sold by the
Company or any of its affiliates or subsidiaries containing or utilizing the
Pedal Override during the period beginning August 1, 2001 and ending July 31,
2002, and a royalty of $0.50 for each Company product sold by the Company or any
of its affiliates or subsidiaries containing or utilizing the Clutch Lube during
the period beginning August 1, 2001 and ending July 31, 2002, and (iii) the
greater of $20,000 or the sum of a royalty of $1.00 for each Company product
sold by the Company or any of its affiliates or subsidiaries containing or
utilizing the Pedal Override during the period beginning August 1, 2002 and
ending July 31, 2003, and a royalty of $0.50 for each Company product sold by
the Company or any of its affiliates or subsidiaries containing or utilizing the
Clutch Lube during the period beginning August 1, 2002 and ending July 31, 2003.
The Company shall pay the accrued royalties on January 1 and July 31 of each
year during the term
30
<PAGE>
of the License Agreement. Either party may terminate the License Agreement upon
thirty (30) days written notice to the other party if the other party commits a
material breach of any term of the License Agreement and fails to cure such
breach within the 30-day period. Upon termination of the License Agreement for
any reason, the Company shall return to Mr. Brister the technology and tangible
manifestations or copies thereof relating to the Pedal Override and Clutch Lube
and all licenses granted under the License Agreement will be transferred and
assigned by the Company to Mr. Brister or to his designee.
On October 10, 2000, the Company entered into a license agreement with Charles
Brister for the right to use a safety fuel tank and filler cap apparatus on its
products which is owned by Mr. Brister under certain patents and patent
applications. In consideration of the grant of the license to the Technology,
the Company agreed to pay Mr. Brister an annual license fee of $250,000. The
first annual license fee payment is payable in two equal payments of $125,000
each, with the first $125,000 payment being paid to Mr. Brister in August 2000
and the second $125,000 payment due on December 31, 2000. The License Agreement
is for a period of three (3) years and shall be automatically renewed annually
thereafter unless either of the parties provides at least sixty (60) days notice
of non-renewal prior to the termination date of the Technology Agreement. The
Technology Agreement is subject to termination for non-payment of the license
fee and royalties and for certain other reasons. In addition to the annual
license fee of $250,000, the Company shall pay Mr. Brister a royalty of $1.00
for each Company product which utilizes the Technology. However, in no event
shall royalties for a calendar year for use of the Technology on the Company's
products be less than $500,000 for the first full year of the Technology
Agreement ending on December 31, 2001; less than $500,000 for the license year
ending December 31, 2002 and less than $1,000,000 for the license year ending
December 31, 2003 and thereafter. In the event that royalties for a license year
do not equal the required minimum, Charles Brister may, at his option, convert
the exclusive license granted to the Company to a non-exclusive license without
the right of the Company to sub-license, by thirty (30) days notice in writing
to the Company, unless such default is cured by the Company within the 30-day
notice period. Subject to the terms of the Technology Agreement, the Company
shall have the right to grant sub-licenses to others for fees or at royalty
rates to be determined by the Company. As sub-license income, the Company has
agreed to pay to Mr. Brister 50% of all license fees, royalties, advance
royalties, minimum royalties or other payments accrued or received in respect to
the granting or maintaining of sub-licenses, provided, however, in no instance
shall the amount paid to Mr. Brister be less than $1.00 for each product which
utilizes the Technology. Additionally, the Company has agreed during the term of
the Technology Agreement to maintain product liability insurance naming Mr.
Brister as an additional insured to provide protection against claims and causes
of action arising out of any defects or failure to perform of the Technology.
The amount of coverage shall be a minimum of $2,000,000 combined single limit,
with a deductible amount not to exceed $100,000 for each single occurrence for
bodily injury and/or property damage. The Company intends to aggressively market
this safety product in the small engine marketplace, and expects the royalties
generated from licensing the product to contribute a significant addition to its
revenue stream in future periods.
On October 11, 2000, the Company listed for sale with a commercial real estate
broker its former USA Industries' manufacturing facility in Prattville, Alabama.
All manufacturing operations in the facility ceased in the first quarter when
they were transferred to the Company's Roseland, Louisiana manufacturing
facilities. Until its sale, the facility is serving as a temporary warehousing
facility.
On November 7, 2000, Mr. Gary C. Evans, a director of the Company since July
1996, tendered his resignation as a director of the Company. Mr. Evans'
resignation was for personal reasons.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
None
31
<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 13, 2000 /s/ Charles Brister
------------------------------------
Charles Brister
President, Chief Executive Officer
and Director
November 13, 2000 /s/ Edward H. Cook
------------------------------------
Edward H. Cook
Chief Accounting Officer
32
