-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V7IytgvYm9kIjiejozNondtTJjOJ6zDGhxb0RWov5AIHkmVPU82qqAT7hLxA5zU0 msyLssRR/qe1GwNzV/dhDA== 0001010549-98-000235.txt : 19980813 0001010549-98-000235.hdr.sgml : 19980813 ACCESSION NUMBER: 0001010549-98-000235 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KARTS INTERNATIONAL INC CENTRAL INDEX KEY: 0001010077 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 752639196 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23041 FILM NUMBER: 98683118 BUSINESS ADDRESS: STREET 1: 109 NORTHPARK BLVD STREET 2: STE 210 CITY: COVINGTON STATE: LA ZIP: 70433 BUSINESS PHONE: 5048757350 MAIL ADDRESS: STREET 1: 109 NORTHPARK BOULEVARD STREET 2: SUITE 210 CITY: COVINGTON STATE: LA ZIP: 70433 10QSB 1 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 June 30, 1998 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) 109 Northpark Boulevard, Suite 210, Covington, LA 70433 (Former address, if changed from last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: June 25, 1998: Common Stock: 4,854,133 shares Common Stock Warrants: 2,282,525 Transitional Small Business Disclosure Format (check one): YES NO X KARTS INTERNATIONAL INCORPORATED Form 10-QSB for the Quarter ended June 30, 1998 Table of Contents Page ---- Part I - Financial Information Item 1 - Financial Statements 3 Item 2 - Management's Discussion and Analysis or Plan of Operation 23 Part II - Other Information Item 1 - Legal Proceedings 25 Item 2 - Changes in Securities 25 Item 3 - Defaults Upon Senior Securities 25 Item 4 - Submission of Matters to a Vote of Security Holders 25 Item 5 - Other Information 25 Item 6 - Exhibits and Reports on Form 8-K 26 Signatures 26 2 Part I - Item 1 Financial Statements S. W. HATFIELD + ASSOCIATES certified public accountants Members: 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 sheet as of June 30, 1998 of Karts International Incorporated (a Nevada corporation) and Subsidiaries and the accompanying consolidated statement of operations for the six and three months ended June 30, 1998 and 1997, respectively, and the consolidated statement of cash flows for the six months ended June 30, 1998 and 1997. 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 + ASSOCIATES Dallas, Texas July 23, 1998 Use our past to assist your future sm P. O. Box 820392 9002 Green Oaks Circle, 2nd Floor Dallas, Texas 75382 Dallas, Texas 75243 214-342-9635 (voice) (fax) 214-342-9601 800-244-0639 SWHCPA@aol.com 3
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1998 and December 31, 1997 (Unaudited) (Audited) June 30, December 31, 1998 1997 ------------ ------------- Assets ------ Current Assets Cash on hand and in banks $ 812,593 $ 2,801,746 Accounts receivable Trade, net of allowance for doubtful accounts of $3,000 and $3,000, respectively 325,708 463,045 Recoverable income taxes 227,000 225,000 Inventory 1,896,170 909,214 Prepaid expenses 249,420 172,139 ------------ ------------ Total current assets 3,510,891 4,571,144 ------------ ------------ Property and equipment Building and improvements 582,182 384,296 Equipment 719,215 670,705 Transportation equipment 125,640 77,820 Furniture and fixtures 128,060 129,951 ------------ ------------ 1,555,097 1,262,772 Accumulated depreciation (197,188) (137,746) ------------ ------------ 1,357,909 1,125,026 Land 32,800 32,800 ------------ ------------ Net property and equipment 1,390,709 1,157,826 ------------ ------------ Other assets Goodwill, net of accumulated amortization of approximately $502,687 and $385,608, respectively 5,356,736 5,473,815 Organization costs, net of accumulated amortization of approximately $49,916 and $38,990, respectively 59,339 70,265 Other 16,482 8,851 ------------ ------------ Total other assets 5,432,557 5,552,931 ------------ ------------ Total Assets $ 10,334,157 $ 11,281,901 ============ ============
- Continued - The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 4
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED June 30, 1998 and December 31, 1997 (Unaudited) (Audited) June 30, December 31, 1998 1997 ------------ ------------ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities Current maturities of long-term debt $ 25,919 $ 18,357 Accounts payable - trade 518,854 292,083 Other accrued liabilities 24,229 60,574 Accrued income and franchise taxes payable 73,579 137,710 ------------ ------------ Total current liabilities 642,581 508,724 ------------ ------------ Long-term liabilities Long-term debt, net of current maturities 254,489 230,841 ------------ ------------ Total liabilities 897,070 739,565 ------------ ------------ Commitments and contingencies Shareholders= equity Preferred stock - $0.001 par value 10,000,000 shares authorized None issued and outstanding -- -- Common stock - $0.001 par value 14,000,000 shares authorized 4,854,133 shares issued and outstanding 4,854 4,854 Additional paid-in capital 13,453,502 13,040,090 Accumulated deficit (4,021,269) (2,502,608) ------------ ------------ Total shareholders' equity 9,437,087 10,542,336 ------------ ------------ Total Liabilities and Shareholders' Equity $ 10,334,157 $ 11,281,901 ============ ============
The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 5
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Six and Three months ended June 30, 1998 and 1997 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Six months Six months Three months Three months ended ended ended ended June 30, June 30, June 30, June 30, 1998 1997 1998 1997 ----------- ----------- ----------- ------------ Revenues Kart sales - net $ 1,731,939 $ 2,515,232 $ 1,222,734 $ 1,214,448 ----------- ----------- ----------- ----------- Cost of Sales Purchases and direct expenses 1,701,722 2,151,651 1,007,280 1,018,704 Depreciation 35,799 45,568 19,441 24,085 ----------- ----------- ----------- ----------- Total cost of sales 1,737,521 2,197,219 1,026,721 1,042,789 ----------- ----------- ----------- ----------- Gross Profit (5,582) 318,013 196,013 171,659 ----------- ----------- ----------- ----------- Operating Expenses Research and development expenses 15,379 21,857 13,283 21,857 Selling, general and administrative expenses 938,981 834,801 589,347 353,273 Compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting costs 413,412 -- 413,412 -- Depreciation and amortization 154,228 176,816 77,421 97,163 ----------- ----------- ----------- ----------- Total operating expenses 1,522,000 1,033,474 1,093,463 472,293 ----------- ----------- ----------- ----------- Income (loss) from Operations (1,527,582) (715,461) (897,450) (300,634) Other Income (Expenses) Interest and other miscellaneous 43,424 60,822 14,896 9,536 Interest expense (34,503) (268,943) (14,134) (113,595) ----------- ----------- ----------- ----------- Loss before Income Taxes (1,518,661) (923,582) (896,688) (404,693) Income Tax (Expense) Benefit -- -- -- ----------- ----------- ----------- ----------- Net Loss $(1,518,661) $ (923,582) $ (896,688) $ (404,693) =========== =========== =========== =========== Loss per share of common stock outstanding $(0.31) $(0.37) $(0.18) $(0.16) ====== ====== ====== ====== Weighted-average number of shares outstanding 4,854,133 2,509,415 4,854,133 2,509,415 =========== =========== =========== ===========
The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 6
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 1998 and 1997 Six months Six months ended ended June 30 June 30, 1998 1997 ----------- ----------- Cash flows from operating activities Net income (loss) for the period $(1,518,661) $ (923,582) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 154,228 240,296 Compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting costs 413,412 -- (Increase) Decrease in: Accounts receivable 137,337 1,484,067 Income taxes recoverable (2,000) -- Inventory (986,956) 14,410 Prepaid expenses (77,281) (308,886) Other (7,631) -- Increase (Decrease) in: Accounts payable and other accrued liabilities 190,426 (528,721) Accrued income taxes payable (64,131) -- ----------- ----------- Cash flows used in operating activities (1,761,257) (22,416) ----------- ----------- Cash flows from investing activities Proceeds from sale of property and equipment -- 6,666 Cash paid for property and equipment (217,811) (428,635) ----------- ----------- Cash flows used in investing activities (217,811) (421,969) ----------- ----------- Cash flows from financing activities Net activity on bank line of credit -- 288,598 Principal payments on long-term note payable (10,085) -- ----------- ----------- Cash flows provided by financing activities (10,085) 288,598 ----------- ----------- Increase in cash (1,989,153) (155,787) Cash at beginning of period 2,801,746 630,028 ----------- ----------- Cash at end of period $ 812,593 $ 474,241 =========== ===========
- Continued - The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 7 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Six months ended June 30, 1998 and 1997 Six months Six months ended ended June 30 June 30, 1998 1997 ---------- ---------- Supplemental disclosure of interest and income taxes paid Interest paid for the period $ 34,503 $284,130 ======== ======== Income taxes paid (refunded) for the period $ 2,000 $184,175 ======== ======== Supplemental disclosure of non-cash investing and financing activities Transportation equipment purchased with notes payable $ 41,295 $ -- ======== ======== 8 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS Karts International Incorporated (formerly Sarah Acquisition Corporation) (Company) was originally incorporated on February 28, 1984 as Rapholz Silver Hunt, Inc. under the laws of the State of Florida. In June 1984, April 1986, and November 1987, respectively, the Company changed its corporate name to Great Colorado Silver, Inc., Great Colorado Silver Valley Development Company and J. R. Gold Mines, Inc. In January 1996, the Company changed its corporate name to Sarah Acquisition Corporation. In December 1995, the Company experienced a change in control due to the transfer of a controlling position in issued and outstanding shares of common stock of the Company between unrelated third parties. It was the intent of the new controlling shareholders and management to seek a suitable situation for merger or acquisition. 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. In March 1996, the Company acquired 100.0% of the issued and outstanding stock of Brister's Thunder Karts, Inc. (a Louisiana corporation), a "fun kart" manufacturer located in Roseland, Louisiana. In November 1996, the Company acquired 100.0% of the issued and outstanding stock of USA Industries, Inc. (an Alabama corporation), a "fun kart" manufacturer located in Prattville, Alabama. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company has a concentration of key raw material suppliers for kart engines. In the event of any disruption in engine availability, if any, the Company may experience a negative economic impact. The Company does not anticipate any foreseeable interruption in engine availability and believes that alternate suppliers are available. The accompanying consolidated financial statements contain the accounts of Karts International Incorporated and its wholly-owned subsidiaries, Brister's Thunder Karts, Inc. and USA Industries, Inc. All significant intercompany transactions have been eliminated. The consolidated entities are collectively referred to as Company. NOTE B - 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. 9 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 2. Accounts and advances receivable -------------------------------- In the normal course of business, the Company extends unsecured credit to virtually all of its customers which are principally located in the Southeastern United States. 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. 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 June 30, 1998 and December 31, 1997, inventory consisted of the following components: June 30, December 31, 1998 1997 ---------- ------------ Raw materials $1,700,411 $765,674 Work in process 112,069 127,780 Finished goods 83,690 15,760 ---------- -------- $1,896,170 $909,214 ========== ======== 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 using the straight-line method. Gains and losses from disposition of property and equipment are recognized as incurred and are included in operations. Total depreciation expense charged to operations for the six months ended June 30, 1998 and 1997 was approximately $58,655 and $53,510, respectively. 5. Organization costs ------------------ Costs related to the restructuring and reorganization of the Company have been capitalized and are being amortized over a five year period, commencing March 15, 1996, using the straight-line method. 10 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 6. Goodwill -------- Goodwill represents the excess of the purchase price of acquired subsidiaries over the fair value of net assets acquired and is amortized over 25 years using the straight-line method. In accordance with Statement of Financial Accounting Standards No. 121, ""Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company follows the policy of evaluating all qualifying assets as of the end of each reporting quarter. For the periods ended June 30, 1998 and 1997, no charges to operations were made for impairments in the recoverability of goodwill. 7. Income taxes ------------ The Company utilizes the asset and liability method of accounting for income taxes. At June 30, 1998 and December 31, 1997, 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. The deferred tax asset related to the Company's net operating loss carryforward has been fully reserved at June 30, 1998 and December 31, 1997. 8. 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 June 30, 1998 and December 31, 1997, the outstanding warrants and options are deemed to be anti-dilutive due to the Company's net operating loss position. 9. Reclassifications ----------------- Certain amounts within the accompanying financial statements for the periods ended June 30, 1997 have been reclassified to conform to the presentation for the periods ended June 30, 1998. 10. Accounting standards to be adopted ---------------------------------- Upon the adoption of a formal stock compensation plan, the Company anticipates using the "fair value based method" of accounting for compensation based stock options pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". Under the fair value based method, compensation cost will be measured at the grant date of the respective option based on the value of the award and will be recognized as a charge to operations over the service period, which will usually be the respective vesting period of the granted option(s). 11 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 10. Accounting standards to be adopted - continued ---------------------------------- In June 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", (SFAS130) which established standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS130 is effective for years beginning after December 15, 1997. The Company has no components of comprehensive income that do not appear in the accompanying consolidated statements of operations and did experience any impact from this change in presentation of its consolidated financial statements upon adoption of this standard. In June 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information", (SFAS131) which establishes revised standards for the method in which public business enterprises are to report information about operating segments in their annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. This statement also revises the related disclosures about products and services, geographic areas and major customers. SFAS131 replaces the "industry segment' concept established in Statement of Financial Accounting Standard No. 14 with a "management approach" concept as the basis for identifying reportable segments. SFAS131 is effective for financial statements for years beginning after December 31, 1997 and for interim periods presented after December 31, 1998. The Company does not anticipate a material impact from this change in disclosure presentation in its consolidated financial statements upon adoption of this standard. NOTE C - 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 six months ended June 30, 1998 and the year ended December 31, 1997, the respective operating companies had credit risk exposures in excess of statutory FDIC coverage as follows: Highest Low Number of Entity exposure exposure days with exposure --------------------------------- ---------- -------- ------------------ Six months ended June 30, 1998 Karts International Incorporated $121,321 $1,806 95 Brister's Thunder Karts, Inc. $289,204 $ 601 83 USA Industries, Inc. $ 73,714 $ 984 132 Year ended December 31, 1997 Karts International Incorporated $1,624,288 $566 146 Brister's Thunder Karts, Inc. $ 830,848 $450 300 USA Industries, Inc. $ 447,918 $ 75 110
12 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - CONCENTRATIONS OF CREDIT RISK - Continued Additionally, the Company utilizes a lockbox system for the collection and deposit of receipts on trade accounts receivable for each operating subsidiary and a corporate cash concentration sweep account whereby all excess cash funds are concentrated into one primary depository account with a financial institution. The Company and the financial institution then participate in uncollateralized reverse-repurchase agreements which are settled on a "next-business day" basis for the investment of surplus cash funds. The Company has had unsecured amounts invested in reverse repurchase agreements on a daily basis from February 1997 through June 30, 1998. As of June 30, 1998 and December 31, 1997, the Company had unsecured outstanding reverse repurchase agreements of approximately $670,000 and $2,395,000, respectively. The Company incurred no losses during 1997 or 1998 as a result of any of these unsecured situations.
NOTE D - LONG-TERM DEBT Long-term debt consists of the following: June 30, December 31, 1998 1997 --------- ------------ $240,020 mortgage note payable to a bank. Interest at the Bank's Commercial Base Rate (9.75% at December 31, 1996). Payable in monthly installments of approximately $2,626, including accrued interest. Final maturity in August 2010. Collateralized by land and a building owned by USA Industries, Inc. $221,048 $224,295 $20,770 installment note payable to a bank. Interest at 7.75%. Payable in monthly installments of approximately $419, including accrued interest. Final maturity in May 2002. Collateralized by a vehicle 17,267 18,781 $23,122 installment note payable to a bank. Interest at 8.25%. Payable in monthly installments of approximately $726, including accrued interest. Final maturity in March 2001. Collateralized by a vehicle. 21,957 - $18,198 installment note payable to a bank. Interest at 8.25%. Payable in monthly installments of approximately $572, including accrued interest. Final maturity in March 2001. Collateralized by a vehicle 17,278 - 13 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE D - LONG-TERM DEBT - Continued June 30, December 31, 1998 1997 -------- ------------ $9,348 installment note payable to a bank. Interest at 10.0%. Payable in monthly installments of approximately $303, including accrued interest. Final maturity in April 1999. Collateralized by transportation equipment owned by USA Industries, Inc. 2,858 4,208 $27,677 note payable to an individual. Interest at 7.0%. Payable in semi-monthly installments of approximately $200, including interest. Secured by equipment owned by Brister's. - 1,914 -------- -------- Total long-term debt 280,408 249,198 Less current maturities (25,919) (18,357) -------- -------- Long-term portion $254,489 $230,841 ======== ========
Future maturities of long-term debt are as follows: Year ending December 31, Amount ------------ ---------- 1998 $ 25,919 1999 27,846 2000 30,346 2001 21,099 2002 15,159 2003-2007 95,172 2008-2010 64,867 ------- Totals $280,408 ======= NOTE H - INCOME TAXES The components of income tax (benefit) expense for the six month periods ended June 30, 1998 and 1997, respectively, are as follows: 1998 1997 --------- --------- Federal $ - $ - State - - -------- --------- Total $ - $ - ======== ========= 14 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE H - INCOME TAXES - Continued The Company's income tax expense for the six month periods ended June 30, 1998 and 1997, respectively, differed from the statutory federal rate of 34 percent as follows: 1998 1997 --------- --------- Statutory rate applied to earnings (loss) before income taxes $(516,345) $(314,018) Increase (decrease) in income taxes resulting from: State income taxes - - Valuation allowance for deferred tax asset related to net operating loss carryforward 516,345 314,018 --------- --------- Income tax expense $ - $ - ========= =========
NOTE I - RELATED PARTY TRANSACTIONS The Company leases its manufacturing facilities under an operating lease with the former owner of Brister's, who is also a Company shareholder and director. Concurrent with the closing of the acquisition of Brister's, the Company and the former owner executed a new lease agreement for a primary two-year term expiring in 1998 and an additional two-year renewal option. The monthly lease payment will remain at $6,025 per month with annual adjustments for increases based upon the Consumer Price Index. Total payments under this agreement were approximately $36,150 and $36,150 for the six month periods ended June 30, 1998 and 1997, respectively. 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. In January 1996, concurrent with the execution of a letter of intent related to a Stock Purchase Agreement whereby the Company acquired 100.0% of the issued and outstanding stock of Brister's, the Company entered into a consulting contract with a company owned by an officer and director of the Company whereby the consulting company would provide all necessary legal, capital and other related professional services, exclusive of accounting and auditing services, related to the reorganization, recapitalization and consummation of the acquisition of Brister's for a fee of $15,000. The payment of the fee was contingent upon the successful consummation of the Brister's acquisition. The fee was ultimately settled with the differential between 1,000,000 shares escrowed to close the acquisition of Brister's and the actual number of shares to be issued to the then owners of Brister's, pursuant to the applicable settlement terms of the Stock Purchase Agreement and the consulting contract. Upon final settlement, the $15,000 fee was paid through the issuance of approximately 483,333 shares to the consulting company. 15 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE J - CONVERTIBLE PREFERRED STOCK The Company has 10,000,000 shares of Preferred Stock (Preferred Shares) authorized for issuance. In October 1996, the Company's Board of Directors allocated 25 shares of the authorized number to facilitate the private placement of said shares as a component of an Equity Unit (Unit) to be sold through a Private Placement Memorandum (PPM). The PPM was fully subscribed and closed in November 1996. Each $25,000 Unit consisted of one (1) share of convertible preferred stock and 10,000 redeemable common stock purchase warrants. The PPM raised total gross proceeds of approximately $625,000 and net proceeds of approximately $530,250 to the Company. The Preferred Shares require mandatory conversion upon either the effectiveness of a public offering of the Company's common stock pursuant to a Registration Statement or upon the first anniversary date of the PPM closing date. In the event that the conversion is triggered by a public offering, each Preferred Share will be converted, at the holder's option, into either $25,000 cash and the issuance of 6,250 shares of restricted, unregistered common stock or 12,500 shares of restricted, unregistered common stock. In either situation, the holder retains piggyback registration rights for the shares of common stock issued in the conversion. In the event that the conversion is triggered by the first anniversary date of the PPM closing, each Preferred Share will be converted to 12,500 shares of restricted, unregistered common stock, subject to identical piggyback registration rights. In January 1997, the Company began undertaking a secondary public offering of common stock pursuant to a Form SB-2 Registration Statement (secondary offering). In accordance with guidance and instructions from the National Association of Securities Dealers (NASD) related to the Company's application for listing on the "NASDAQ Small-Cap Market", the NASD requested certain modifications to the terms and conditions underlying the sale and issuance of the Preferred Shares and their conversion terms. On March 6, 1997, the Company offered to each holder of the Convertible Preferred Stock the option of either (i) receiving a refund of $25,000 (the initial Unit price) plus simple interest at 12.0% per annum as consideration for assigning their Convertible Preferred Stock and 1996 Warrants to the Company or (ii) agreeing to the conversion of the Convertible Preferred Stock at the completion of a pending secondary offering upon the previously agreed terms along with the issuance of an additional 13,334 1996 Warrants for each share of Convertible Preferred Stock held as additional consideration for waiving certain registration rights and agreeing to certain lock-up provisions with respect to the Common Stock issuable upon conversion of the Convertible Preferred Stock and the 1996 Warrants. The lock-up agreement requires that the holder must unconditionally agree to a lock-up of all of the holder's securities (the Preferred Shares and any securities that the Preferred Shares are convertible into and all originally issued redeemable common stock purchase warrants) whereby these designated securities may not be sold by the holder for a period of approximately 18 months from the closing date of the secondary offering. Upon release of the lock-up terms, the holder will be permitted to sell the aforementioned securities under the terms and conditions of Rule 144 of the U.S. Securities and Exchange Commission. Further, the holder will be deemed to bean affiliate of the underwriter in the secondary offering and, as such, will not be eligible to purchase any securities offered in the secondary offering. On September 19, 1997, concurrent with a successful sale of common stock and warrants pursuant to a Registration Statement on Form SB-2, the Company paid $625,000 to redeem the outstanding convertible preferred stock and issued an aggregate 104,175 shares of restricted, unregistered common stock and an aggregate 333,350 1996 Warrants to the holders of the convertible preferred stock as a component of the redemption. 16 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - COMMON STOCK TRANSACTIONS On September 16, 1997, the Company issued 250,000 shares of restricted, unregistered common stock to a Foundation as settlement of $1,000,000 in then outstanding long-term debt. On September 16, 1997 and November 24, 1997, the Company sold an aggregate 1,550,000 and 232,500 shares of common stock and warrants pursuant to a Registration Statement filed on Form SB-2. This transaction generated gross proceeds to the Company of approximately $7,352,813. NOTE L - COMMON STOCK WARRANTS In July 1996, pursuant to Rule 504 of The Securities Act of 1933, the Company sold 5,000 Units which included 100,000 Class A common stock warrants (Class A Warrants) (66,667 post-March 24, 1997 reverse stock split warrants), as discussed in previous footnotes. Each warrant entitles the holder to purchase one (1) share of common stock at an adjusted price of $5.25 per share. These warrants originally were to expire on December 31, 1997 and the exercise period was extended by the Company through December 31, 1998. In November 1996, the Company privately sold 25 units which included 250,000 Redeemable Common Stock Purchase Warrants (1996 Warrants) (166,668 post-March 24, 1997 reverse stock split warrants), as discussed in previous footnotes). Each warrant entitles the holder to purchase one (1) share of common stock at $3.00 per share ($4.50 post-March 24, 1997 reverse split), subject to adjustment in certain circumstances, for a period of 42 months from the closing date of the offering. The 1996 Warrants are redeemable by the Company at a price of $0.01 per Warrant at any time after one (1) year from the offering closing date when the average of the daily closing bid price of the Company's common stock equals $6.00 or more per share on any 20 consecutive trading days ending within 15 days of the date on which notice of redemption is given to the holders. The Company will provide holders of the 1996 Warrants with at least 30 days written notice of the Company's intent to redeem the Warrants. In September 1996, concurrent with the redemption of the issued and outstanding convertible preferred stock, the Company issued an additional aggregate 333,350 1996 Warrants to the holders of the convertible preferred stock. This transaction was valued at the equivalent selling price of $0.125 per warrant, or $41,669, and was charged as a component of cost of capital related to the sale of an aggregate 1,782,500 shares of common stock and deducted from the additional paid-in capital related to the gross proceeds of the offering. 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. 17 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - COMMON STOCK WARRANTS - Continued As of June 30, 1998, the Company's warrants are as follows: Warrants Warrants Warrants granted exercised outstanding Exercise price --------- --------- ----------- --------------- 1996 issuances Class A Warrants 66,667 3,334 63,333 $5.25 per share 1996 Warrants 166,668 - 166,668 $4.50 per share --------- -------- ------- 233,335 - 230,001 ========= ======== ------- 1997 issuances 1996 Warrants 333,350 - 333,350 $4.50 per share Underwriter's Warrants 155,000 - 155,000 $4.00 per share 1997 Warrants 1,782,500 - 1,782,500 $4.00 per share --------- -------- --------- 2,270,850 - 2,500,851 ========= ======== =========
NOTE M - STOCK OPTIONS The Company's Board of Directors has allocated an aggregate 188,066 shares of the Company's common stock (125,377 post-March 24, 1997 reverse stock split shares) for unqualified stock option plans for the benefit of employees of the Company and its subsidiaries. During 1996, the Company granted options to purchase 89,032 shares (59,355 post-March 24, 1997 reverse stock split shares) of the Company's common stock to employees of the Company and its operating subsidiaries at an exercise price of $3.75 per share ($5.63 post-March 24, 1997 reverse split). 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 post-reverse split 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 then Corporate Vice President of Marketing, who is now solely the Vice President of Sales and Marketing for the Brister's Thunder Karts, Inc. subsidiary (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. 18 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - STOCK OPTIONS - Continued Effective January 31, 1998, the Company engaged an individual to function as President of the Company. A component of the President's employment package was the granting of 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 In March 1998, the Company granted options to purchase an aggregate 20,000 shares of the Company's common stock to employees of the Company and its operating subsidiaries at an exercise price of $3.50. These options vest on the first anniversary date of their grant and expire on the earlier of five years from the date of their grant or upon termination of the option holder as an employee of the Company. In April 1998, the Company granted options to purchase an aggregate 10,000 shares of the Company's common stock to an employee at an exercise price of $2.75 per share. These options vest on the first anniversary date of their grant and expire on the earlier of five years from the date of their grant or upon termination of the option holder as an employee of the Company. The outstanding options as of June 30, 1998 and December 31, 1997 are as follows: Options Options Options Options granted exercised terminated outstanding Exercise price -------- --------- ---------- ----------- -------------- 1996 options 59,355 - - 59,355 $5.63 per share 1997 VP options 13,334 - 6,667 6,667 $4.875 per share 1997 options 52,670 - - 52,670 $4.875 per share ------- ----- ----- ------- December 31, 1997 totals 125,359 - 6,667 118,692 President's options 200,000 - - 200,000 $3.25 per share 1998 employee options (3/98) 20,000 - - 20,000 $3.50 per share 1998 employee options (4/98) 10,000 - - 10,000 $2.75 per share ------- ----- ----- ------- June 30, 1998 totals 375,359 - 6,667 368,692 ======= ===== ===== =======
19 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N - COMMITMENTS AND CONTINGENCIES Litigation - ---------- Brister's is named as defendant in several product liability lawsuits related to its "fun karts". The Company has had and continues to have commercial liability coverage to cover these exposures with a $50,000 per claim self-insurance clause as of June 30, 1998 and December 31, 1997. 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. As of June 30, 1998 and December 31, 1997, approximately $120,000 and $160,000 has been accrued and charged to operations for anticipated future litigation. On February 4, 1997, litigation was filed against the Company and Brister's in an action to have Brister's product liability insurance coverage (discussed in the preceding paragraph) declared null and void as a result of a payment by Brister's insurance underwriter in settlement of a product liability lawsuit. Legal counsel is of the opinion that this action has questionable merit and the determination of an outcome, if any, is unpredictable at this time. The Company is vigorously defending the action. Additionally, the Company is pursuing a counteraction against the underwriter's agent for potential misrepresentations made by the agent to the underwriter regarding Brister's during the acquisition of the aforementioned commercial liability insurance coverage. The Company is currently engaged in discovery and is unable to predict the ultimate outcome of this litigation. The Company anticipates no material impact to either the results of operations, its financial condition or liquidity based on the uncertainty of outcome, if any, of existing litigation, either collectively and/or individually, at this time. Consulting and Patent Licensing - ------------------------------- Pursuant to the acquisition of Brister's, the Company entered into a Consulting Agreement with the former owner of Brister's. The former owner will provide certain consulting services to the Company or any subsidiary thereof, which services will not exceed 8 eight-hour work days per month. As consideration for such services, the former owner will receive $400 per day for consulting services provided at the Company's principal place of business and $800 per day for consulting services provided while traveling in connection with Company business. The former owner is required to maintain the confidentiality of all Company information. The Company paid the former owner approximately $19,940 and $30,000 under the terms of this agreement during the six months ended June 30, 1998 and the year ended December 31, 1997, respectively. Pursuant to the acquisition of Brister's, the Company and the former owner of Brister's entered into a Non-Competition Agreement. The former owner has agreed not to compete with the Company or any of its subsidiaries for a period of five years in any jurisdiction in which the Company or any subsidiary is duly qualified to conduct business or within any marketing area in which the Company is doing a substantial amount of business or is engaged in a business similar to that currently operated by the Company. Additionally, the former owner agreed that during the same five-year period not to interfere with the employment relationship between the Company and any of its other employees by soliciting any of such individuals to participate in individual business ventures. 20 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N - COMMITMENTS AND CONTINGENCIES - Continued Consulting and Patent Licensing - continued - ------------------------------------------- At the closing of the Brister's acquisition, the Company entered into a Licensing Agreement with the former owner of Brister's. This agreement provides that the former owner will (1) license to the Company all of the Intellectual Property (as defined) currently owned by the former owner and being used by the Company or any subsidiary at terms at least as favorable as the former owner has received or could have received in arms-length transactions with third parties and (2) for a period of five years from the execution of the Licensing Agreement will license to the Company, at the Company's sole option, all Intellectual Property developed or owned by the former owner at any time subsequent to the Closing Date. The license referenced in section (2) above shall be exclusive to the Company and free of charge for the first year from the date of invention and thereafter at terms at least as favorable as the former owner has received or could have received in arms-length transactions with third parties. Intellectual Property is defined in the Stock Purchase Agreement as all domestic and foreign letters patent, patents, patent applications, patent licenses, software licenses and know-how licenses, trade names, trademarks, copyrights, unpatented inventions, service marks, trademark registrations and applications, service mark registrations and applications and copyright registrations and applications owned or used by the Company or any subsidiary in the operation of its business. On March 15, 1997, the Company and the former owner amended this Licensing Agreement and executed a related Royalty Agreement, for a three (3) year term, which provides for the payment of a one-time license fee and a "per unit" royalty fee. Upon execution, the Company paid an initial license fee of $10,000 and agreed to pay a royalty of $1.00 per unit on which the existing intellectual property is installed. For the second and third years of the Agreement, the Company will pay the greater of $20,000 per year or $1.00 per unit on which the existing intellectual property is installed. During the six month period ended June 30, 1998 and the year ended December 31, 1997, the Company paid or accrued approximately $2,660 and $21,000, respectively, under this Agreement. Contingent stock issuances - -------------------------- The terms of the March 31, 1996 private placement memorandum require the Company and/or a company owned by a current officer and director to issue additional shares to the original investors in the private placement memorandum in the event that the Company's securities, as listed on a published exchange or electronic bulletin board, does not equal $3.00 per share ($4.50 per share, as adjusted by the March 24, 1997 reverse stock split) on March 31, 1998 (the second anniversary date of the closing of the private placement memorandum offering). The issuance of additional shares, if any is required, to the original investors will be done without additional compensation to the Company. To facilitate this contingency, the Company sold 350,000 restricted, unregistered post-reorganization shares (233,333 post-March 24, 1997 reverse split shares) of common stock to an entity owned by an officer and director of the Company for cash of approximately $350. These shares were placed into an escrow account for the benefit of the original investors. In the event that no additional shares are required to be issued to the original investors, the shares held in escrow will be returned to the company owned by a current officer and director of the Company. At the close of business on March 31, 1998, the Company's common stock, as quoted on the NASDAQ Small-Cap Market, closed below the required strike price of $4.50 per share. Accordingly, during the second quarter of 1998, effective April 1, 1998, the entity owned by an officer and director of the Company released approximately 82,874 of the 233,333 shares being held in escrow for the settlement of the contingency related to the March 31, 1996 private placement memorandum. The remaining approximate 150,459 shares were released from the escrow agreement and returned to the entity owned by an officer and director of the Company. 21 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N - COMMITMENTS AND CONTINGENCIES - Continued Contingent stock issuances - continued - -------------------------------------- The April 1, 1998 transactions were recorded by the Company based on the imputed "fair value" of the securities released from escrow upon the ultimate settlement of the March 31, 1996 contingent issuance as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The imputed "fair value" of the 82,874 shares was calculated as approximately $227,904 based upon the Company's closing stock price on March 31, 1998. This imputed charge was offset against the imputed additional paid-in capital generated as a result of this accounting transaction as a cost of raising the initial capital in the original March 31, 1996 transaction. The imputed "fair value" of the residual 150,459 shares was calculated as approximately $413,412, net of the initial cash paid of $350, based upon the Company's closing stock price on March 31, 1998. This difference between the imputed fair value and the actual cash paid was recorded as a component of compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting expenses in the accompanying statement of operations for the second quarter of 1998. Employment Agreement - -------------------- Effective January 30, 1998, the Company entered into an Employment Agreement (Agreement) with an individual to serve as the Company's President and Chief Executive Officer (President). The Agreement is for a term of three (3) years and provides the President with an annual base salary of $150,000. Upon execution of the Agreement, the President received options to purchase up to 200,000 shares of the Company's common stock at an exercise price of $3.25 per share. The options vest as follows: 100,000 shares as of January 30, 1999; 50,000 shares as of January 31, 2000; 50,000 shares as of January 31, 2001. All unvested options vest immediately upon the termination of the Agreement if termination is for reason other than "for cause", and all unexercised options expire on January 31, 2003. The President may also receive annual performance based stock options to purchase up to 50,000 shares of the Company's common stock at a price equal to the market value of the Company's common stock on the date of issuance, as determined by the Company's Board of Directors, and an annual cash bonus not to exceed 15.0% of the annual base salary. 22 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 - --------------------- Six months ended June 30, 1998 as compared to the six months ended June 30, 1997 The Company experienced net revenues of approximately $1.7 million and $1.2 million for the six and three months ended June 30, 1998, respectively as compared to approximately $2.5 million and $1.2 million for the comparable six and three month periods of 1997. These sales results continue to reflect weak product demand during the first quarter of the Company's operating year due primarily to seasonality of product demand at the consumer level. Additionally, sales to mass merchandisers ceased during the second quarter of 1997 and these mass merchandiser sales mitigated some the seasonality effects during the first quarter of 1997. Current Company management has furthered the installation of various sales and marketing strategies, including the pursuit of additional distribution channels, including potential mass merchandiser or buying group customers, and additional geographic areas which management believes are under served, to improve its sales during the Company's traditional slow demand periods. Due to the decline in unit sales to mass merchandisers and related effect on net sales dollars, the Company was unable to completely absorb its fixed manufacturing overhead expenses. Accordingly, the Company experienced a decline in gross profit from approximately $318,000 for the first six months of 1997 to approximately $(5,600) for the same period in 1998. For the second quarter standing alone, the Company experienced gross profit of approximately $196,000 during the April to June quarter of 1998 as compared to approximately $172,000 for the same period in 1997. Current management continues to refine the Company's purchasing and manufacturing processes to minimize expenses related to costs of sales and to maximize production efficiencies. Selling, general and administrative expenses, including depreciation and amortization, were approximately $939,000 and $835,000 for the respective six month periods ended June 30, 1998 and 1997 and approximately $589,000 and $353,000 for the April to June quarters in 1998 and 1997, respectively. The Company continues to experience a maturation and stabilization of the Company's operating expenses. The change in Company management during the first quarter of 1998 has caused increases in both administrative personnel and related expenses. Management anticipates that current expenditure levels will remain relatively constant during periods subsequent to June 30, 1998. For the six and three month periods ended June 30, 1998, the Company incurred a net loss of approximately $(1,519,000) and $(897,000) as compared to net losses of approximately $(924,000) and $(405,000) for the comparable six and three month periods ended June 30, 1997. 23 The recognition of the "fair value" charge related to the release of escrow of approximately 233,333 shares of common stock upon settlement of the contingency related to the March 31, 1996 private placement memorandum sale of common stock generated a one-time non-cash charge of approximately $413,000 to operations during the second quarter of 1998. Further, management attributes the increase in the net loss for the first six months of 1998 compared to the comparable period of 1997 to decreased unit sales volume levels which did not allow for the complete absorption of all fixed manufacturing overhead costs and selling, general and administrative expenses during the quarter. Primary (loss) per share was approximately $(0.31) per share for the six months ended June 30, 1998 and approximately $(0.37) per share for the six months ended June 30, 1997. For the quarter covering the April to June period for 1998 and 1997, respectively, the primary loss per share was approximately $(0.18) and $(0.16) per share. Included in the 1998 quarterly calculation is the inclusion of approximately $(0.09) per share attributed to the one-time non-cash charge of approximately $413,000. Comparing comparable operating results, excluding the one-time non-cash charge, primary loss per share was approximately $(0.22) and $(0.37) for the six month period ended June 30, 1998 and 1997 and approximately $(0.09) and $(0.16) per share for the April to June quarter of 1998 and 1997, respectively. Additional Operations information - --------------------------------- The Company currently has approximately six product liability lawsuits outstanding, none of which are expected to exceed existing product liability insurance policy limits. The Company has never had a claim that resulted in an award or settlement in excess of insurance coverage. There is no assurance that the Company's insurance coverage of $5,000,000 per occurrence and $5,000,000 aggregate will be sufficient to fully protect the business and assets of the Company from all claims, nor can any assurances be given that the Company will be able to maintain the existing coverage or obtain additional coverage at commercially reasonable rates. Management believes that it has process controls on its product operations, product labeling, operator's manuals, and design features which will assist in a successful defense of any present or future product liability claim. To the extent product liability losses are beyond the limits or scope of the Company's insurance coverage, the Company could experience a material adverse effect upon its business, operations, profitability and assets. Liquidity and Financial Condition - --------------------------------- With respect to the comparative balance sheet, consolidated assets of $l0.3 million at June 30, 1998 were approximately $948,000 lower than the $11.3 million at December 31, 1997. This decrease is principally attributable to an decrease in current assets related to the collection of accounts receivable and the utilization of cash resources for fixed asset additions (approximately $218,000) and the use of cash in operating activities of approximately $1.7 million. Consolidated total liabilities of $897,000 at June 30, 1998 were comparable to the year end balance of approximately $740,000. The increase was primarily due to an increase in trade accounts payable due to the increase in raw material inventory during the second quarter of 1998 and increases in long-term debt arising from the purchase of transportation equipment during the first quarter of 1998. Although Karts International Incorporated is a seasonal business with 50% or more of its sales being historically recorded in the fourth calendar quarter of each year, management believes its cash reserves and inventory levels are sufficient to insure adequate manufacturing and shipment of finished goods. Additionally, management is of the opinion that the 1997 plant additions will insure that the Company will have sufficient capacity to meet peak product demands. Further, the Company, during the first quarter of 1998, began construction on an administrative office addition adjacent to the Roseland, Louisiana manufacturing facility. As of June 30, 1998, approximately $113,000 had been expended on this addition. Management is of the opinion that the occupation of this facility during the second quarter of 1998 will contribute to future corporate overhead expense savings and allow for better corporate management oversight of the daily operations at the Company's Roseland Louisiana facility. 24 Capital Requirements - -------------------- During the first six months of 1998, the Company has expended approximately $218,000 for new property and equipment, including approximately $113,000 for the construction of an administrative office addition adjacent to the Roseland, Louisiana manufacturing facility. Further, the Company incurred long-term installment debt of approximately $41,000 for transportation equipment which was financed through the Company's primary financial institution. The long-term debt is collateralized by the related transportation equipment, is for a term of three years and bears interest at 8.25%. The Company has identified no further significant capital requirements for the current operating year. 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. Part II - Other Information Item 1 - Legal Proceedings See accompanying notes to the consolidated financial statements Item 2 - Changes in Securities None Item 3 - Defaults on Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders On May 27, 1998, the Company held its 1998 Annual Meeting of Shareholders in Dallas, Texas. The following items were submitted to a vote of the Security Holders: For Against Abstain --------- ------- ------- a) Election of Directors: Robert M. Aubrey 4,046,801 308 67,440 Timothy P. Halter 4,046,801 308 67,440 Charles Brister 4,046,801 308 67,440 Gary C. Evans 4,046,801 3,642 67,440 Joseph R. Mannes 4,046,801 308 67,440 Ronald C. Morgan 4,046,801 308 67,440 Other nominees -0- -0- -0- 2) Ratification and Approval of Karts International Incorporated 1998 Stock Compensation Plan: 2,200,513 219,453 11,727 3) Ratification and Selection of Accountants: 3,958,613 111,008 7,150 No other matters were submitted to or voted upon by the Security Holders at this meeting. Item 5 - Other Information None 25 Item 6 - Exhibits and Reports on Form 8-K 1) Exhibits -------- None 2) Reports on Form 8-K -------------------- None SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KARTS INTERNATIONAL INCORPORATED August 14 , 1998 /s/ Robert M. Aubrey ------ -------------------------------------- Robert M. Aubrey President, Chief Executive Officer and Director August 14 , 1998 /s/ Timothy P. Halter ------ --------------------------------------- Timothy P. Halter Chief Accounting Officer and Director EX-27 2 FDS
5 1010077 Karts International Incorporated 1 US Dollars 3-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 812593 0 328708 3000 1896170 3510891 1587897 197188 10334157 642581 0 0 0 4854 9432233 10334157 1731939 1731939 1737521 1522000 0 0 34503 (1518661) 0 (1518661) 0 0 0 (1518661) (0.31) (0.31)
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