-----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, DLwaS3KJNaUMFAxEuAyeRqoz63EYVOj1/RKlVKr0smOxnu9AwnpW/mQ07dMHhJBB lix5DqwKEqof5Y6R+vZ6iQ== 0001010549-98-000345.txt : 19981201 0001010549-98-000345.hdr.sgml : 19981201 ACCESSION NUMBER: 0001010549-98-000345 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981130 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/A SEC ACT: SEC FILE NUMBER: 000-23041 FILM NUMBER: 98760925 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/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB/A - -------------------------------------------------------------------------------- (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, 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) - -------------------------------------------------------------------------------- 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 11, 1998: Common Stock: 5,036,781 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 September 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 20 Part II - Other Information Item 1 Legal Proceedings 22 Item 2 Changes in Securities 22 Item 3 Defaults Upon Senior Securities 23 Item 4 Submission of Matters to a Vote of Security Holders 23 Item 5 Other Information 23 Item 6 Exhibits and Reports on Form 8-K 23 Part III - Information required by Rule 463 - Report of Offering of Securities and Use of Proceeds Therefrom 23
2 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 sheets of Karts International Incorporated (a Nevada corporation) and Subsidiaries as of September 30, 1998 and 1997 and the accompanying consolidated statement of operations for the nine and three months ended September 30, 1998 and 1997, respectively, and the consolidated statement of cash flows for the nine months ended September 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 November 11, 1998 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 SWHCPA@aol.com 3
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1998 and 1997 (Unaudited) Assets 1998 1997 ------------ ------------ Current Assets Cash on hand and in banks $ 252,138 $ 1,958,821 Accounts receivable Trade, net of allowance for doubtful accounts of $23,000 and $2,447, respectively 1,066,473 500,718 Other -- 2,348 Recoverable income taxes 17,622 225,000 Inventory 2,073,273 1,289,638 Prepaid expenses 360,206 209,312 ------------ ------------ Total current assets 3,769,712 4,185,837 ------------ ------------ Property and equipment Building and improvements 811,253 372,509 Equipment 790,826 720,545 Transportation equipment 125,640 76,987 Furniture and fixtures 134,960 77,820 ------------ ------------ 1,862,679 1,247,861 Accumulated depreciation (230,458) (115,120) ------------ ------------ 1,632,221 1,132,741 Land 32,800 32,800 ------------ ------------ Net property and equipment 1,665,021 1,165,541 ------------ ------------ Other Assets Goodwill, net of accumulated amortization of approximately $561,227and $327,068, respectively 5,298,196 5,532,355 Organization costs, net of accumulated amortization of approximately $55,378 and $33,527, respectively 53,877 75,727 Other 26,720 6,161 ------------ ------------ Total other assets 5,378,793 5,614,243 ------------ ------------ Total Assets $ 10,813,526 $ 10,965,621 ============ ============
- 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 September 30, 1998 and 1997 (Unaudited) Liabilities and Shareholders' Equity ------------------------------------ 1998 1997 ------------ ------------ Current Liabilities Note payable to a finance company $ 892,291 $ 7,685 Current maturities of long-term debt 25,919 14,384 Accounts payable - trade 786,479 654,572 Other accrued liabilities 282,656 13,157 Accrued income taxes payable 14,490 76,919 ------------ ------------ Total current liabilities 2,001,835 766,717 ------------ ------------ Long-term liabilities Long-term debt, net of current maturities Related parties -- 20,304 Banks and individuals 246,153 219,877 ------------ ------------ Total Liabilities 2,247,988 1,006,898 ------------ ------------ 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 and 4,621,633 shares issued and outstanding, respectively 4,854 4,622 Common stock warrants 264,636 193,905 Additional paid-in capital 13,188,866 11,989,802 Accumulated deficit (4,892,818) (2,229,606) ------------ ------------ Total Shareholders' Equity 8,565,538 9,958,723 ------------ ------------ Total Liabilities and Shareholders' Equity $ 10,813,526 $ 10,965,621 ============ ============
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 Nine and Three months ended September 30, 1998 and 1997 (Unaudited) Nine months Nine months Three months Three months ended ended ended ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Net Sales $ 3,617,510 $ 4,365,014 $ 1,885,571 $ 1,849,782 ----------- ----------- ----------- ----------- Cost of sales Purchases, direct labor and related costs 3,705,405 3,389,670 2,003,683 1,238,019 Depreciation 52,740 68,285 16,941 22,717 ----------- ----------- ----------- ----------- Total cost of sales 3,758,145 3,457,955 2,020,624 1,260,736 ----------- ----------- ----------- ----------- Gross profit (140,635) 907,059 (135,053) 589,046 ----------- ----------- ----------- ----------- Operating expenses Research and development 22,364 24,703 6,985 2,846 Selling, general and administrative expenses 1,589,807 1,185,163 650,826 350,362 Compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting costs 413,412 -- -- -- Depreciation and amortization 231,979 222,025 77,751 113,141 ----------- ----------- ----------- ----------- Total operating expenses 2,257,562 1,431,891 735,562 466,349 ----------- ----------- ----------- ----------- Income (Loss) from operations (2,398,197) (524,832) (870,615) 122,697 Other income (expense) Interest expense (42,387) (473,946) (7,884) (137,071) Other 50,374 80,849 6,950 20,027 ----------- ----------- ----------- ----------- Income (Loss) before income taxes (2,390,210) (917,929) (871,549) 5,653 Income taxes Currently receivable (payable) -- 139,733 -- 139,733 ----------- ----------- ----------- ----------- Net income (loss) $(2,390,210) $ (778,196) $ (871,549) $ 145,386 =========== =========== =========== =========== Income (loss) per weighted- average share of common stock outstanding $ (0.49) $ (0.28) $ (0.18) $ 0.05 =========== =========== =========== =========== Weighted-average number of shares of common stock outstanding 4,854,133 2,828,951 4,854,133 3,048,302 =========== =========== =========== ===========
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 Nine months ended September 30, 1998 and 1997 (Unaudited) Nine months Nine months ended ended September 30, September 30, 1998 1997 ------------- ------------- Cash flows from operating activities Net income (loss) for the period $(2,390,210) $ (778,196) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 231,979 384,838 Bad debt reserve 20,000 -- Reorganization and restructuring costs and related effect of common stock issuances at less than "fair value" 413,412 -- (Increase) Decrease in: Accounts receivable (623,428) 1,293,788 Income taxes recoverable 207,378 (225,000) Inventory (1,164,059) (331,257) Prepaid expenses and other (205,936) (190,386) Increase (Decrease) in: Accounts payable and other accrued liabilities 716,478 (189,576) Accrued income taxes payable (123,220) (192,298) ----------- ----------- Cash flows used in operating activities (2,917,606) (228,087) ----------- ----------- Cash flows from investing activities Cash received on sale of property and equipment -- 6,666 Cash paid for property and equipment (505,872) (476,149) ----------- ----------- Cash flows used in investing activities (505,872) (469,483) ----------- ----------- Cash flows from financing activities Net activity on short-term note payable 892,291 (132,335) Principal payments on long-term notes payable (18,421) (2,211,721) Cash paid to retire convertible preferred stock -- (625,000) Proceeds from sale of common stock and warrants -- 6,393,905 Cash paid for costs to sell common stock -- (1,398,486) ----------- ----------- Cash flows provided by financing activities 873,870 2,026,363 ----------- ----------- Increase (Decrease) in cash (2,549,608) 1,328,793 Cash at beginning of period 2,801,746 630,028 ----------- ----------- Cash at end of period $ 252,138 $ 1,958,821 =========== ===========
- 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 Nine months ended September 30, 1998 and 1997 (Unaudited) Nine months Nine months ended ended September 30, September 30, 1998 1997 ------------- ------------- Supplemental disclosure of interest and income taxes paid Interest paid for the period $ 42,387 $ 412,517 ============ ========== Income taxes paid (refunded) for the period $ (207,378) $ 277,565 ============ ========== Supplemental disclosure of non-cash investing and financing activities Transportation equipment purchased with notes payable $ 41,295 $ 17,236 ============ ========== Long-term debt converted to common stock $ -- $1,000,000 ============ ==========
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. 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 had a concentration of key raw material suppliers for kart engines through the second quarter of 1998. During the third quarter of 1998, the Company diversified its engine suppliers and options mitigating the potential effect of a negative economic impact which could result from any disruption in engine availability. 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 September 30, 1998 and 1997, inventory consisted of the following components: 1998 1997 ---------- ----------- Raw materials $1,711,208 $ 851,524 Work in process 272,763 371,430 Finished goods 89,302 66,684 ----------- ----------- $2,073,273 $ 1,289,638 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 nine months ended September 30, 1998 and 1997 was approximately $93,542 and $80,520, 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. 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 adopted the policy of evaluating all qualifying assets as of the end of each reporting quarter. 10 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note B - Summary of significant accounting policies - continued 7. Income taxes ------------ The Company utilizes the asset and liability method of accounting for income taxes. At September 30, 1998 and 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 September 30, 1998 and 1997, respectively. 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 September 30, 1998 and 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 September 30, 1997 have been reclassified to conform to the presentation for the periods ended September 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). 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. 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. 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 nine months ended September 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 --------------------------------- -------- -------- ------------------ Nine months ended September 30, 1998 Karts International Incorporated $823,842 $1,806 135 Brister's Thunder Karts, Inc. $289,204 $ 601 96 USA Industries, Inc. $157,606 $ 236 177 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
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 September 30, 1998. As of September 30, 1998 and December 31, 1997, the Company had unsecured outstanding reverse repurchase agreements of approximately $-0- and $2,395,000, respectively. The Company has incurred no losses during 1998 or 1997 as a result of any of these unsecured situations. 12 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note D - Note Payable to a Finance Company The Company has two lines of credit with an aggregate face value of $2,000,000. One line of credit note is tied to the Company's accounts receivable balance, not to exceed $1,000,000 (A/R LOC). The second line of credit is tied to the Company's inventory balances, not to exceed $1,000,000 (Inventory LOC). The total amounts which may be outstanding at any one time is tied to the respective "Borrowing Base" calculations contained in the Loan Agreement (Agreement). As of September 30, 1998, an aggregate of approximately $892,291 is outstanding on these lines of credit. The notes bear interest at an initial Contract Rate of 10.25%. In the event that the Company achieves and maintains a annual audited Net Profit, as defined in the Agreement, of at least $200,000, the Company may apply for a reduction in the note's interest rate to the Lender's Base Rate (8.0% at September 30, 1998) plus 1.5%. In the event that the lower interest rate is granted and the $200,000 Net Profit or the Company's audited financial statements are not delivered within 120 days of the Company's year end, the interest rate will immediately revert to the initial Contract Rate. The Agreement requires the payment of a one-time 1.0% commitment fee and the payment of a 1/12% servicing fee per month on the face amount of each line of credit during the term of each respective line of credit. The Agreement contains certain restrictive covenants related to the Company's business operations and financial ratios. As of September 30, 1998, the Company is in compliance with all covenants The Inventory LOC contains a clause that this line of credit must be paid in full and held at a $-0- balance between January 1, 1999 and February 28, 1999 for a period of at least 30 consecutive days. The notes mature in September 1999. Note E - Long-term Debt Long-term debt consists of the following at September 30, 1998 and 1997: 1998 1997 -------- -------- $240,020 mortgage note payable to a bank. Interest at the Bank's Commercial Base Rate (9.50% at September 30, 1998). 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. $219,248 $229,777 $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. 16,028 19,664 13
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note E - Long-term Debt - Continued 1998 1997 --------- --------- $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. 19,637 -- $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. 15,451 -- $9,348 installment note payable to a bank. Interest at 10.0%. Payable in monthly installments of approximately $303, including accrued interest. Final maturity in April 1999. Collateralized by transportation equipment owned by USA Industries, Inc. 1,708 2,056 $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. -- 3,068 -------- -------- Total long-term debt 272,072 254,565 Less current maturities (25,919) (14,384) -------- -------- Long-term portion $246,153 $240,181 ======== ========
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 ======== 14
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note F - Income Taxes The components of income tax (benefit) expense for the nine month periods ended September 30, 1998 and 1997, respectively, are as follows: 1998 1997 -------- --------- Federal $ - $(139,733) State - - -------- --------- Total $ - $(139,733) ======== ========= The Company's income tax expense for the nine month periods ended September 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 $(876,978) $(312,096) Increase (decrease) in income taxes resulting from: State income taxes - - Valuation allowance for deferred tax asset related to net operating loss carryforward 876,978 172,363 ------- ------- Income tax expense $ - $(139,733) ======== =========
Note G - Common stock transactions On February 28, 1997, to be effective on March 24, 1997, the Company's Board of Directors approved a two (2) for three (3) reverse stock split and a corresponding reduction of the authorized shares of common stock in anticipation of a proposed underwritten public offering of the Company's common stock during 1997. This reverse stock split reduced the authorized shares of common stock from 20,000,000 to 14,000,000. The issued and outstanding shares of common stock shown in the accompanying financial statements reflect the ultimate effect of the March 24, 1997 reverse stock split as if this second reverse split had occurred as of the beginning of the first period presented in the accompanying consolidated financial statements. 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 H - 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. 15 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note H - Common Stock Warrants - Continued 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. As of September 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 ========= ======== =========
16 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note I - 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. 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. 17 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note I - Stock Options - Continued The outstanding options as of September 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 -------- ----- ----- -------- September 30, 1998 totals 375,359 - 6,667 368,692 ======== ===== ===== ========
Note J - 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 $54,225 and $54,225 for the nine month periods ended September 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. Note K - 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 September 30, 1998 and 1997, approximately $161,000 and $90,000 has been accrued and charged to operations for anticipated future litigation. 18 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note K - Commitments and contingencies - Continued 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 $44,313 and $30,000 under the terms of this agreement during the nine months ended September 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. 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. 19 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note K - Commitments and Contingencies - Continued Consulting and Patent Licensing - continued - ------------------------------------------- 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 nine month period ended September 30, 1998 and the year ended December 31, 1997, the Company paid or accrued approximately $3,895 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. 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. 20 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note K - Commitments and Contingencies - Continued 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. Note L - Subsequent Event On October 27, 1998, the Company acquired 100% of the issued and outstanding stock of Straight Line Manufacturing, Inc. in exchange for $50,000 cash, a $50,000 promissory note bearing interest at 6.0% payable on March 31, 1999 and 182,648 shares of the Company's restricted, unregistered common stock. The total transaction was valued at approximately $500,000. 21 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, 1998 as compared to the nine months ended September 30, 1997 - -------------------------------------------------------------------------------- The Company experienced net revenues of approximately $3.6 million and $1.8 million for the nine and three months ended September 30, 1998, respectively as compared to approximately $4.4 million and $1.8 million for the comparable nine and three month periods of 1997. These sales results continue to the 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 $907,000 for the first nine months of 1997 to approximately $(141,000) for the same period in 1998. For the third quarter standing alone, the Company experienced gross profit of approximately $(135,000) during the July to September quarter of 1998 as compared to approximately $589,000 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 $1,570,000 and $1,185,000 for the respective nine month periods ended September 30, 1998 and 1997 and approximately $630,000 and $350,000 for the July to September 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 September 30, 1998. For the nine and three month periods ended September 30, 1998, the Company incurred a net loss of approximately $(2,370,000) and $(852,000) as compared to net (losses) income of approximately $(778,000) and $145,000 for the comparable nine and three month periods ended September 30, 1997. 22 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 nine 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 $(0.49) per share for the nine months ended September 30, 1998 and approximately $(0.28) per share for the nine months ended September 30, 1997. For the quarter covering the July to September period for 1998 and 1997, respectively, the primary income (loss) per share was approximately $(0.18) and $0.05 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 $(0.40) and $(0.28) for the nine month period ended September 30, 1998 and 1997. 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 $l0.8 million at September 30, 1998 were approximately $132,000 lower than the $11.0 million at September 30, 1997. This decrease is nominal in comparing the Company's financial condition. Consolidated total liabilities of $2.0 million at September 30, 1998 as compared to approximately $767,000 at September 30, 1997. The principal difference relates to approximately $892,000 in additional liabilities related to the utilization of a new line of credit. 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 September 30, 1998, approximately $145,000 had been expended on this addition. Additionally, approximately $188,000 and $95,000 was expended on additions to office facilities at the Company's Brister's Thunder Karts, Inc. and USA Industries, Inc. subsidiaries during 1998. 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. 23 Capital Requirements - -------------------- During the first six months of 1998, the Company has expended approximately $506,000 for new property and equipment, including approximately $145,000 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%. Further, the Company entered into a new short-term revolving credit facility with a finance company in two segments related to the Company's accounts receivable and inventory. The total aggregate available line of credit is approximately $2,000,000 with approximately $892,000 being funded as of September 30, 1998. In conjunction with the acquisition of Straight Line Manufacturing, Inc., the Company expended $50,000 cash, issued a note payable at 6.0%, due on March 31, 1999, and approximately 182,648 shares of the Company's restricted, unregistered common stock. The total transaction was valued at approximately $500,000. The Company has no further commitments for significant capital requirements during 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. Nine months ended September 30, 1997 as compared to nine months ended September 30, 1996 - -------------------------------------------------------------------------------- The financial information discussed herein is derived from the historical consolidated financial statements of the Company for the respective nine month periods ended September 30, 1997 and 1996. The Company consummated the Brister's Acquisition effective as of the close of business on March 31, 1996. Accordingly, the nine month period ended September 30, 1996 was the first two quarters of control of Brister's by the Company. The Company, through its Brister's and USA subsidiaries, experiences significant seasonality of sales with more than 50.0% of its sales occurring during the fourth quarter of the calendar year. The amounts discussed in this section reflect the consolidated results of the Company's ownership of Brister's from April 1, 1996 through September 30, 1996 and the consolidated results of the Company's ownership of both Brister's and USA for the entire nine month period presented for 1997. The Company experienced gross revenues of approximately $4.4 million for the nine months ended September 30, 1997 compared to $3.6 million for the comparable period of 1996. For the three month period from July to September, the Company experienced gross revenues of approximately $1.8 million for the 1997 period and approximately $2.4 million for the 1996 period. These results continue to reflect weak product demand due primarily to seasonality of sales. Some seasonality effects were mitigated during 1997 through mass merchandiser sales; however, it is improbable that the Company will be able to maintain a significant sales level into the mass merchandiser sales channel for future periods. Management is pursuing additional venues, including other potential mass merchandiser customers, and methods to improve its sales during traditional slow demand periods. Selling, general and administrative expenses were approximately $1.5 million during the nine months ended September 30, 1997 as compared to approximately $2.2 million for the nine months ended September 30, 1996. In the first quarter of 1996, the Company incurred a one time non-cash charge to earnings of approximately $1.43 million related to fair value recognition on common stock sold or issued to a former director and to Halter Financial Group, Inc., an entity related to a current company director, for reorganization and restructuring costs, at less than "fair value" as defined in the appropriate accounting standards. For the period of July to September, 1997 and 1996, respectively, the Company incurred operating expenses of approximately $500,000 and $450,000. The increases during the comparable nine month periods are attributable to the maturation of the Company's operations, including the ownership and operation of the Brister's and USA subsidiaries for the entire period presented during 1997. The cost levels for the June through September periods of both 1997 and 1996 are relatively constant with the principal reason for the approximately $50,000 increase due to the addition of general corporate overhead expenses. Management anticipates that current 1997 expenditure levels will remain relatively constant during future periods. Through the third quarter of 1997, the Company incurred approximately $25,000 in research and development expenses related to new products and improvements to existing products. While specific research and development expenditure levels have not been developed by management, it is anticipated that these types of expenses will be present in future periods at fluctuating levels, primarily dependent upon available resources. 24 For the nine month period ended September 30, 1997, the Company incurred a net loss of approximately $917,000 as compared to a net loss of approximately $1.23 million, including the one-time accounting charge discussed above, for the comparable nine month period ended September 30, 1996. For the three month period from July through September 1997, the Company experienced a net income before income taxes of approximately $5,600 as compared to net income before income taxes of approximately $256,000 for the comparable three month period ended September 30, 1996. Management attributes the increase in the net loss for the first nine months of Fiscal 1997 compared to the comparable period of Fiscal 1996 to increased general corporate overhead expenses, an adjustment to the Company's standard cost model for cost of goods sold in 1997 and the overall seasonality of market demand for the Company's products. Primary earnings (loss) per share were approximately $(0.28) per share for the nine months ended September 30, 1997 and approximately $(0.76) per share for the nine months ended September 30, 1996. Excluding the one time accounting charge, the nine months ended September 30, 1996 had a proforma earnings per share of approximately $0.07 per share. For the three month period from June through September 1997 and 1996, the Company experienced net income per weighted-average share of approximately $0.05 and $0.08 per share, respectively. Additional Operations information. - ---------------------------------- In 1997, the Company settled several product liability lawsuits with a cumulative charge to operations of approximately $44,000. The Company currently has 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 $l0.9 million at September 30, 1997 were $809 thousand higher than the $10.1 million at December 31, 1996. This increase was principally attributable to an increase in current assets of $575 thousand and an increase in net property and equipment of $395 thousand. Consolidated liabilities of $1.1 million at September 30, 1997 were $3.6 million lower than the year end balance of $4.7 million. The decrease was primarily the result of the payoff of the Company's long term debt by way of its successful secondary public offering completed in September 1997. The proceeds from the public offering also were the reason the cash balance increased by $1.3 million from December 31, 1997 to September 30, 1997. Although Karts International Incorporated is a seasonal business with 50% or more of its sales being historically recorded in the fourth calendar quarter, management believes its cash reserves and inventory levels are sufficient to insure adequate manufacturing and shipment of finished goods. Additionally, management feels its 1997 plant additions insures the company has sufficient capacity to meet the holiday product demands. 25 Capital Requirements - -------------------- During the first nine months of 1997, the Company has invested approximately $476,000 in new property and equipment, principally in the USA facility in Prattville, Alabama. It is anticipated that these additions will improve product quality and increase daily production capacity during peak production periods during the fourth calendar quarter of the year. 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 On October 27, 1998, the Company issued 182,648 shares of the Company's restricted, unregistered common stock, valued at $400,000, in conjunction with the acquisition of 100.0% of the issued and outstanding stock of Straight Line Manufacturing, Inc. Item 3 - Defaults on Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders The Company has held no regularly scheduled, called or special meetings of shareholders during the reporting period. Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K None 26 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 11 , 1998 /s/ Timothy P. Halter ------ --------------------------------------- Timothy P. Halter Chairman of the Board, and Chief Accounting Officer November 11 , 1998 /s/ Robert M. Aubrey ------ ----------------------------------------- Robert M. Aubrey President 27 EX-27 2 FDS
5 1010077 Karts International Incorporated 1 US Dollars 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 1 252138 0 1089473 23000 2073273 3769712 1895479 230458 10813526 2001835 0 0 0 4854 8560684 10813526 3648059 3648059 3758145 2257562 0 0 42387 (2390210) 0 (2390210) 0 0 0 (2390210) (0.49) (0.49)
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