-----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, Wi6Bzvoa/u0CcpVqOVTm3N6Yh6BJ2/fPDeFxJz8tn5hC6Rd5dtwNcID4AZZEPunt 4tvClFtK5ySDPtW7tdjJ3w== /in/edgar/work/20000818/0001010549-00-000532/0001010549-00-000532.txt : 20000922 0001010549-00-000532.hdr.sgml : 20000922 ACCESSION NUMBER: 0001010549-00-000532 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000818 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KARTS INTERNATIONAL INC CENTRAL INDEX KEY: 0001010077 STANDARD INDUSTRIAL CLASSIFICATION: [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: 705884 BUSINESS ADDRESS: STREET 1: 62204 COMMERCIAL STREET STREET 2: PO BOX 695 CITY: ROSELAND STATE: LA ZIP: 70456 BUSINESS PHONE: 5047471111 MAIL ADDRESS: STREET 1: 62204 COMMERCIAL STREET STREET 2: P O BOX 695 CITY: ROSELAND STATE: LA ZIP: 70456 10QSB 1 0001.txt 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, 2000 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE - --------- ACT OF 1934 For the transition period from ______________ to _____________ - -------------------------------------------------------------------------------- Commission File Number: 0-23041 Karts International Incorporated (Exact name of small business issuer as specified in its charter) Nevada 75-2639196 - ---------------------------- ---------------------------- (State of incorporation) (IRS Employer ID Number) 62204 Commercial Street, Roseland, LA 70456 ------------------------------------------- (Address of principal executive offices) (504) 747-1111 -------------- (Issuer's telephone number) - -------------------------------------------------------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: August 15, 1999: Common Stock: 7,439,315 shares Common Stock Warrants: 1,782,500 Transitional Small Business Disclosure Format (check one): YES NO X --- --- Karts International Incorporated Form 10-QSB for the Quarter ended June 30, 2000 Table of Contents Page Part I - Financial Information Item 1 - Financial Statements 3 Item 2 - Management's Discussion and Analysis or Plan of Operation 26 Part II - Other Information Item 1 - Legal Proceedings 28 Item 2 - Changes in Securities 28 Item 3 - Defaults Upon Senior Securities 28 Item 4 - Submission of Matters to a Vote of Security Holders 28 Item 5 - Other Information 28 Item 6 - Exhibits and Reports on Form 8-K 29 Signatures 29 2 S. W. HATFIELD, CPA certified public accountants Member: American Institute of Certified Public Accountants SEC Practice Section Information Technology Section Texas Society of Certified Public Accountants Independent Accountant's Report ------------------------------- Board of Directors and Shareholders Karts International Incorporated We have reviewed the accompanying consolidated balance sheets as of June 30, 2000 and 1999 of Karts International Incorporated (a Nevada corporation) and Subsidiaries and the accompanying consolidated statement of operations and comprehensive income for the six and three months ended June 30, 2000 and 1999, respectively, and the consolidated statements of cash flows for the six months ended June 30, 2000 and 1999. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression on an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. S. W. HATFIELD, CPA Dallas, Texas August 16, 1999 Use our past to assist your future sm P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor Dallas, Texas 75382-0395 Dallas, Texas 75243-7212 214-342-9635 (voice) (fax) 214-342-9601 800-244-0639 SWHCPA@aol.com 3
Karts International Incorporated and Subsidiaries Consolidated Balance Sheets June 30, 2000 and 1999 (Unaudited) June 30, June 30, 2000 1999 ----------- ----------- Assets ------ Current Assets Cash on hand and in banks $ 22,183 $ 74,325 Accounts receivable Trade, net of allowance for doubtful accounts of $152,574 and $90,500, respectively 1,055,822 1,608,292 Other 20,960 25,090 Inventory 2,497,412 1,806,372 Prepaid expenses 719,337 357,103 ----------- ----------- Total current assets 4,315,714 3,871,182 ----------- ----------- Property and equipment Building and improvements 1,051,583 994,269 Equipment 1,113,198 975,165 Transportation equipment 218,618 148,669 Furniture and fixtures 138,581 152,630 ----------- ----------- 2,521,980 2,270,733 Accumulated depreciation (653,519) (349,427) ----------- ----------- 1,868,461 1,921,306 Land 32,800 32,800 ----------- ----------- Net property and equipment 1,901,261 1,954,106 ----------- ----------- Other assets Note receivable 425,060 396,750 Option to acquire unrelated entity 138,001 138,021 Deferred costs related to financing and capital acquisition -- 383,060 Loan costs, net of accumulated amortization of approximately $12,736 and $-0-, respectively 292,476 -- Organization costs, net of accumulated amortization of approximately $93,617 and $71,766, respectively 15,638 37,489 Covenant not to compete, net of accumulated amortization of approximately $55,556 and $22,225, respectively 44,444 77,777 Other 2,552 53,421 ----------- ----------- Total other assets 918,171 1,086,518 ----------- ----------- Total Assets $ 7,135,146 $ 6,911,806 =========== ===========
- Continued - The financial information presented herein has been prepared by management without audit by independent certified public accountants. See Accountant's Review Report. The accompanying notes are an integral part of these financial statements. 4
Karts International Incorporated and Subsidiaries Consolidated Balance Sheets - Continued June 30, 2000 and 1999 (Unaudited) June 30, June 30, 2000 1999 ------------ ------------ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities Notes payable to banks and others $ -- $ 420,205 Notes payable to affiliates 142,922 298,331 Current maturities of long-term debt 50,155 40,280 Accounts payable - trade 2,013,745 1,860,306 Other accrued liabilities 68,747 281,102 Accrued income and franchise taxes payable -- 700 ------------ ------------ Total current liabilities 2,275,569 2,900,924 ------------ ------------ Long-term liabilities Long-term debt, net of current maturities 347,915 236,254 Debenture payable 2,500,000 1,500,000 ------------ ------------ Total liabilities 5,123,484 4,637,178 ------------ ------------ Commitments and contingencies Shareholders' equity Preferred stock - $0.001 par value 10,000,000 shares authorized 9.0% Convertible Preferred Stock 1,550,000 shares issued and outstanding 1,550 1,550 Series A Preferred Stock 4,000,000 shares issued and outstanding 4,000 -- Common stock - $0.001 par value 14,000,000 shares authorized. 7,439,315 and 5,574,298 shares issued and outstanding 7,439 5,574 Additional paid-in capital 18,951,120 15,926,232 Accumulated deficit (16,952,447) (13,658,728) ------------ ------------ Total shareholders' equity 2,011,662 2,274,628 ------------ ------------ Total Liabilities and Shareholders' Equity $ 7,135,146 $ 6,911,806 ============ ============
The financial information presented herein has been prepared by management without audit by independent certified public accountants. See Accountant's Review Report. The accompanying notes are an integral part of these financial statements. 5
Karts International Incorporated and Subsidiaries Consolidated Statements of Operations and Comprehensive Income Six and Three months ended June 30, 2000 and 1999 (Unaudited) Six months Six months Three months Three months ended ended ended ended June 30, June 30, June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- --------- Revenues Kart sales - net $2,789,407 $3,665,762 $1,840,657 $2,462,403 --------- --------- --------- --------- Cost of Sales Purchases and direct expenses 2,995,217 3,519,584 2,177,180 2,197,871 Depreciation 98,371 33,882 50,792 16,941 --------- --------- --------- --------- Total cost of sales 3,093,588 3,553,466 2,227,972 2,214,812 --------- --------- --------- --------- Gross Profit (304,181) 112,296 (387,315) 247,591 --------- --------- --------- --------- Operating Expenses Research and development expenses 39,602 7,773 10,657 6,678 Selling, general and administrative expenses 1,179,903 1,098,512 640,461 553,977 Depreciation and amortization 85,514 54,924 30,506 27,462 --------- --------- --------- --------- Total operating expenses 1,305,019 1,161,209 681,624 588,117 --------- --------- --------- --------- Income (loss) from Operations (1,609,200) (1,048,913) (1,068,939) (340,526) Other Income (Expenses) Interest and other miscellaneous 27,417 96,846 13,178 16,799 Interest expense (252,326) (131,178) (111,846) (69,220) --------- --------- --------- --------- Loss before Income Taxes (1,834,109) (1,083,245) (1,167,607) (392,947) Income Tax (Expense) Benefit - - - - --------- --------- --------- --------- Net Loss (1,834,109) (1,083,245) (1,167,607) (392,947) Other Comprehensive Income - - - - --------- --------- --------- --------- Comprehensive Income (Loss) $(1,834,109) $(1,083,245) $(1,167,607) $ (392,947) ========= ========= ========= ========= Loss per weighted-average share of common stock outstanding - basic and fully diluted $(0.29) $(0.19) $(0.16) $(0.07) ==== ==== ==== ==== Weighted-average number of shares of common stock outstanding - basic and fully diluted 6,434,682 5,574,298 7,164,009 5,574,298 ========= ========= ========= =========
The financial information presented herein has been prepared by management without audit by independent certified public accountants. See Accountant's Review Report. The accompanying notes are an integral part of these financial statements. 6
Karts International Incorporated and Subsidiaries Consolidated Statements of Cash Flows Six months ended June 30, 2000 and 1999 (Unaudited) Six months Six months ended ended June 30, June 30, 2000 1999 ----------- ----------- Cash flows from operating activities Net income (loss) for the period $(1,834,109) $(1,083,245) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 220,058 54,924 Accrued interest income on note receivable (9,375) (18,637) Bad debt expense 53,060 -- (Increase) Decrease in: Accounts receivable-trade and other 1,372,192 717,720 Inventory (282,734) 323,577 Prepaid expenses and other (368,731) (175,545) Increase (Decrease) in: Accounts payable and other accrued liabilities (459,713) (1,500,241) Accrued income taxes payable -- 700 ----------- ----------- Cash flows used in operating activities (1,309,352) (1,680,747) ----------- ----------- Cash flows from investing activities Cash paid to acquire option to purchase unrelated entity -- (14,477) Cash paid for property and equipment (63,285) (62,884) ----------- ----------- Cash flows used in investing activities (63,285) (77,361) ----------- ----------- Cash flows from financing activities Decrease in cash overdraft -- (9,153) Cash received from sale of 9.0% Convertible Preferred Stock -- 1,550,000 Cash received from sale of Class A Preferred Stock 3,000,000 -- Cash received from private placement of common stock 615,000 -- Cash paid for loan and capital acquisition costs (644,355) (383,060) Change in notes payable to affiliate - net (86,473) 174,456 Net activity on bank and other lines of credit (2,724,005) (1,144,510) Principal received on long-term debt 1,000,000 1,500,000 Principal payments on long-term note payable (164,986) (18,990) ----------- ----------- Cash flows provided by financing activities 995,181 1,668,743 ----------- ----------- Increase (Decrease) in cash (377,456) (89,365) Cash at beginning of period 399,639 163,690 ----------- ----------- Cash at end of period $ 22,183 $ 74,325 =========== ===========
- Continued - The financial information presented herein has been prepared by management without audit by independent certified public accountants. See Accountant's Review Report. The accompanying notes are an integral part of these financial statements. 7
Karts International Incorporated and Subsidiaries Consolidated Statements of Cash Flows - Continued Six months ended June 30, 2000 and 1999 (Unaudited) Six months Six months ended ended June 30, June 30, 2000 1999 ----------- ----------- Supplemental disclosure of interest and income taxes paid Interest paid for the period $ 216,153 $ 135,713 =========== =========== Income taxes paid (refunded) for the period $ -- $ (700) =========== =========== Supplemental disclosure of non-cash investing and financing activities Payment of preferred stock dividend with 225,022 shares of common stock at $0.31 per share $ 69,756 $ -- =========== =========== Transportation equipment purchased with notes payable $ -- $ 17,829 =========== ===========
The financial information presented herein has been prepared by management without audit by independent certified public accountants. See Accountant's Review Report. The accompanying notes are an integral part of these financial statements. 8 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements Note A - Organization and Description of Business Karts International Incorporated (Company) was originally incorporated on February 28, 1984 as Rapholz Silver Hunt, Inc. under the laws of the State of Florida. On February 23, 1996, the Company was reincorporated in the State of Nevada by means of a merger with and into Karts International Incorporated, a Nevada corporation incorporated on February 21, 1996. The Company was the surviving entity and changed its corporate name to Karts International Incorporated. The Company's two principal wholly-owned subsidiaries are Brister's Thunder Karts, Inc. (a Louisiana corporation), located in Roseland, Louisiana and USA Industries, Inc. (an Alabama corporation), located in Prattville, Alabama. These two entities manufacture and sell "fun karts" through dealers, distributors and mass merchandisers. On January 5, 1998, the Company formed a new limited liability corporation, KINT, L.L.C. (KINT) as a wholly-owned subsidiary. This entity was activated during July 1998 for the purpose of creating a sales and marketing company focusing on the sale of customized promotional "fun karts" to various national companies. This subsidiary conducted business operations under the trade name of "Bird Promotions". In March 1999, Company management ceased all operations within this subsidiary and consolidated these sales and marketing efforts within other operating subsidiaries of the Company. On October 27, 1998, effective at the close of business on October 31, 1998, the Company acquired 100.0% of the issued and outstanding stock of Straight Line Manufacturing, Inc. (a Michigan corporation) (Straight Line), a manufacturer of large, full suspension "fun karts" located in Milford, Michigan, for total consideration of approximately $400,000. This acquisition was accounted for as a purchase. In addition to the purchase transaction, the Company entered into a covenant not to compete with the former owner of Straight Line Manufacturing, Inc. for a period of at least three (3) years for total consideration of $100,000, consisting of $50,000 cash and a note payable for $50,000. During interim periods, the Company follows the accounting policies set forth in its Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 on Form 10-KSB filed with the U. S. Securities and Exchange Commission. The information presented herein may not include all disclosures required by generally accepted accounting principles and the users of financial information provided for interim periods should refer to the annual financial information and footnotes contained in its Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 on Form 10-KSB when reviewing the interim financial results presented herein. In the opinion of management, the accompanying interim financial statements, prepared in accordance with the instructions for Form 10-QSB, are unaudited and contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective interim periods presented. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending December 31, 2000. 9 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note A - Organization and Description of Business - Continued The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying consolidated financial statements contain the accounts of Karts International Incorporated and its wholly-owned subsidiaries, Brister's Thunder Karts, Inc., USA Industries, Inc., KINT, LLC and Straight Line Manufacturing, Inc. All significant intercompany transactions have been eliminated. The consolidated entities are collectively referred to as Company. For segment reporting purposes, the Company operates in only one industry segment and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole. Note B - Liquidity Contingency During the four years ended December 31, 1999, the Company has experienced cumulative net losses from operations and has utilized cash in operating activities of approximately $7,000,000. The Company's continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis. During the first quarter of 2000, the Company has acquired an exclusive OEM licensing agreement to manufacture a line of "sport karts" for a domestic manufacturer of personal watercraft and off-road vehicles. During the second quarter of 2000, the Company received proceeds from a new $3,000,000 private placement of Class A Preferred Stock and an additional $1,000,000 in long-term debt. Management is of the opinion that these events will allow for the provision of adequate liquidity for the subsequent 12 month period. However, if necessary, there can be no assurance that the Company will be able to obtain additional funding or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company. Note C - Summary of Significant Accounting Policies 1. Cash and cash equivalents ------------------------- The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. Cash overdraft positions may occur from time to time due to the timing of making bank deposits and releasing checks, in accordance with the Company's cash management policies. 2. Accounts and advances receivable -------------------------------- In the normal course of business, the Company extends unsecured credit to virtually all of its customers which are located throughout the United States and are principally concentrated in the southeastern quadrant of the country. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. 10 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note C - Summary of Significant Accounting Policies 3. Inventory --------- Inventory consists of steel, engines and other related raw materials used in the manufacture of "fun karts". These items are carried at the lower of cost or market using the first-in, first-out method. As of June 30, 2000 and 1999, respectively, inventory consisted of the following components: 2000 1999 ---------- ---------- Raw materials $1,882,511 $1,607,785 Work in process 288,251 96,991 Finished goods 326,650 101,596 ---------- ---------- $2,497,412 $1,806,372 ========== ========== 4. Property, plant and equipment ----------------------------- Property and equipment are recorded at historical cost. These costs are depreciated over the estimated useful lives of the individual assets (generally 3 to 25 years) using the straight-line method. Gains and losses from disposition of property and equipment are recognized as incurred and are included in operations. 5. Covenant not to compete ----------------------- In conjunction with the acquisition of Straight Line Manufacturing, Inc., the Company paid $100,000 to the former sole shareholder of Straight Line for a covenant not to compete for a period of at least three (3) years. The consideration given was $50,000 cash and a note payable for $50,000. The covenant is being amortized to operations over a period of three years using the straight line method. 6. Organization costs ------------------ Costs related to the restructuring and reorganization of the Company have been capitalized and are being amortized over a five year period using the straight-line method. 7. Income taxes ------------ The Company utilizes the asset and liability method of accounting for income taxes. At June 30, 2000 and 1999, the deferred tax asset and deferred tax liability accounts, as recorded when material, are entirely the result of temporary differences. Temporary differences represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization. No valuation allowance was provided against deferred tax assets, where applicable. As of June 30, 2000 and 1999, the deferred tax asset related to the Company's net operating loss carryforward was fully reserved. 11 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note C - Summary of Significant Accounting Policies - Continued 8. Advertising ----------- The Company does not conduct any direct response advertising activities. For non-direct response advertising, the Company charges the costs of these efforts to operations at the first time the related advertising is published. For various sales publications, catalogs and other sales related items, the Company capitalizes the development and direct production costs and amortizes these costs over the estimated useful life of the related materials, not to exceed an eighteen (18) month period from initial publication of the materials. 9. Income (Loss) per share ----------------------- Basic earnings (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method. The calculation of fully diluted earnings (loss) per share assumes the dilutive effect of the exercise of outstanding options and warrants at either the beginning of the respective period presented or the date of issuance, whichever is later. As of June 30, 2000 and 1999, the outstanding warrants and options are deemed to be anti-dilutive due to the Company's net operating loss position. 10. Reclassifications ----------------- Certain 1999 amounts have been reclassified to conform to the 2000 financial statement presentations. Note D - Concentrations of Credit Risk The Company maintains its cash accounts in financial institutions subject to insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC). Under FDIC rules, the Company and its subsidiaries are entitled to aggregate coverage of $100,000 per account type per separate legal entity per individual financial institution. During the six months ended June 30, 2000 and 1999, respectively, the Company and its subsidiaries had credit risk exposures in excess of the FDIC coverage as follows: Highest Lowest Number of days Entity exposure exposure with exposure ------------------------------------ -------- -------- -------------- Six months ended June 30, 2000 - ------------------------------ Karts International Incorporated $ 36,336 $ 9,803 6 Brister's Thunder Karts, Inc. $244,744 $ 328 53 USA Industries, Inc. $ 31,206 $10,472 3 Six months ended June 30, 1999 - ------------------------------ Karts International Incorporated $155,329 $ 4,301 19 Brister's Thunder Karts, Inc. $149,897 $ 968 51 USA Industries, Inc. $181,416 $ 1,141 46 12 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note D - Concentrations of Credit Risk - Continued Additionally, the Company utilizes a lockbox system for the collection and deposit of receipts on trade accounts receivable for each operating subsidiary and a corporate cash concentration sweep account whereby all excess cash funds are concentrated into one primary depository account with a financial institution. The Company and the financial institution then participate in uncollateralized reverse-repurchase agreements which are settled on a "next-business day" basis for the investment of surplus cash funds. The Company continues to have unsecured amounts invested in reverse repurchase agreements on a daily basis through June 30, 2000. As of June 30, 2000 and 1999, respectively, the Company had an unsecured outstanding reverse repurchase agreement of approximately $-0- and $75,000, respectively. The Company has not incurred any losses as a result of any of these unsecured situations. Note E - Property and Equipment Total depreciation expense charged to operations for the six months ended June 30, 2000 and 1999 was approximately $85,514 and $60,686, respectively. Note F - Note Receivable In December 1998, the Company acquired a $375,000 note receivable from an unrelated individual payable by an unrelated corporation in exchange for 337,838 shares of unregistered, restricted common stock. The note receivable bears interest at 10.0% and is due and payable 10 days after the expiration of an option which the Company executed to acquire 100.0% of the issued and outstanding stock of the unrelated corporation making the note. This note is unsecured. During the second quarter of 2000, management evaluated the performance and likelihood of collectability of this note. While management is of the opinion that the principal will ultimately be collected upon maturity, the accrual of interest was discontinued retroactively to April 1, 2000. Note G - Option to Acquire an Unrelated Entity Effective December 1, 1998, the Company acquired from an unrelated entity certain assets for cash of $56,000. The unrelated entity is a concession kart manufacturer located in Daytona Beach, Florida. The shareholders of the unrelated entity ( Shareholders) also granted the Company an option (Option) to acquire 100.0% of the issued and outstanding shares of the unrelated entity's common stock based on a financial formula defined in the Option. The Option expires upon the expiration of the 30-day period following the unrelated entity's fiscal year ending December 31, 2000. The Company issued to the Shareholders an aggregate of 90,090 shares of Common Stock having a market value of approximately $100,000 as payment for the Option. The Option also provides that unrelated entity can require the Company to exercise the Option if unrelated entity achieves certain financial goals during the Option term. The Company also has the right during the Option term, subject to certain conditions, to acquire for $100 certain intellectual property rights related to the business of the unrelated entity. The Company and unrelated entity also entered into a manufacturing agreement (Manufacturing Agreement) which provides that the Company will manufacture, on an exclusive basis, the unrelated entity's concession karts at a predetermined per unit price. The Manufacturing Agreement will terminate on the later of March 31, 2001 or the date that the Option is terminated or exercised. 13
Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note H - Notes Payable to Banks and Others The Company had two lines of credit with an aggregate face value of $3,500,000. One line of credit note was tied to the Company's aggregate trade accounts receivable balances, not to exceed $2,500,000 (A/R LOC). The second line of credit was tied to the Company's aggregate inventory balances, not to exceed $1,000,000 (Inventory LOC). The total amounts which may be outstanding at any one time, and the corresponding note principal advances, are tied to the respective "Borrowing Base" calculations contained in the Loan Agreement (Agreement). During the first quarter of 2000, the lender and the Company executed two additional term notes in the amount of $300,000 and $930,000, respectively. These notes are of equal term and language as the lines of credit. These notes were paid in full during the second quarter of 2000. Accordingly, as of June 30, 2000 and 1999, respectively, an aggregate of approximately $-0- and $420,205 was outstanding on all of these lines of credit and term notes. The notes required the interest and fees on the notes to be paid monthly and all of the Company's trade accounts receivable collections were deposited to the lender's benefit in a lockbox controlled by the lender. Note I - Long-Term Debt to Related Parties Long-term debt consists of the following at June 30, 2000 and 1999, respectively: 2000 1999 -------- -------- Two notes payable to the Company's President and Chief Executive Officer. Interest at 8.0%. Accrued interest payable monthly. Principal and accrued, but unpaid, interest is due on demand. The loan is unsecured $125,582 $212,055 $50,000 note payable to the former sole shareholder of Straight Line. Interest at 6.0%. Principal and all accrued, but unpaid, interest is due at maturity in March 1999. Secured by the Company's interest in the issued and outstanding stock of Straight Line Manufacturing, Inc. - 50,000 $73,875 note payable to the former sole shareholder of Straight Line. Interest at 6.0%. Principal only payment of $15,000 payable by January 31, 1999. Remaining principal and all accrued, but unpaid, interest is payable subject to the settlement of a product liability lawsuit against Straight Line Manufacturing, Inc. incurred prior to the Company's acquisition of Straight Line. If the lawsuit is settled prior to March 31, 1999; 50.0% of the principal and all accrued, but unpaid, interest will be due on October 1, 1999 and the balance will be due and payable on March 31, 2000. If the lawsuit is settled between March 31, 1999 and March 31, 2000, all principal and accrued, but unpaid, interest will be due and payable 210 days after the lawsuit settlement date or March 31, 2000, which ever is earlier. If the lawsuit is settled after March 31, 2000, all principal and accrued, but unpaid, interest is due and payable 30 days after the lawsuit settlement date. 17,340 36,276 -------- -------- Total related party long-term debt $142,922 $298,331 ======== ========
14
Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note J - Long-Term Debt to Banks and Others Long-term debt payable to banks and others consist of the following at June 30, 2000 and 1999: 2000 1999 -------- --------- Eleven and Eight installment notes or leases payable to banks or finance companies. Interest ranging from 7.75% to 9.25%. Payable in monthly installments aggregating approximately $8,974, including accrued interest. Collateralized by various equipment, vehicles and real estate owned by Karts International Incorporated, Brister's Thunder Karts, Inc. or USA Industries, Inc.. $398,070 $276,534 Less current maturities (50,155) (40,280) -------- -------- Long-Term portion $347,915 $236,254 ======== ======== Future maturities of long-term debt are as follows: Year ending December 31, Amount ----------- -------- 2000 $ 57,483 2001 43,094 2002 32,302 2003 29,283 2004 26,002 2005 - 2009 115,238 2010 - 2014 20,180 --------- Totals $323,582 ========
Note K - Debenture Payable On June 3, 1999, the Company issued a $1,500,000 debenture payable to a foundation who is also a shareholder in the Company. The debenture matures on May 31, 2004 and bears interest at 12.0%. The debenture requires monthly payments of interest only. The debenture may be converted into common stock of the Company at an exchange rate of $0.375 per share at any time at the option of the debenture holder and the Company may require conversion if the closing price of the Company's common stock is in excess of $4.00 per share for 25 consecutive trading days. The debenture may be prepaid in total or in part on or after the 2nd anniversary date of the debenture upon 30 days notice being given by the Company and the payment of a 12.0% liquidation charge of the amount being prepaid. The debenture is collateralized by all cash, accounts receivable, inventory and equipment owned by the Company and its subsidiaries, subordinate to the Company's line of credit facility with a non-financial institution lender. On May 17, 2000, the Company and the Shareholder amended and restated the governing agreement into an Amended and Restated Loan Agreement in the principal amount of $2,500,000. The note matures on May 17, 2005 and bears interest at Prime + 3.0%. All other terms and conditions of the initial document, except for the conversion to common stock feature discussed above, remained the same. 15
Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note L - Income Taxes The components of income tax (benefit) expense for the quarters ended June 30, 2000 and 1999, respectively, are as follows: 2000 1999 ----------- ----------- Federal: Current $ - $ - Deferred - - ----------- ----------- - - ----------- ----------- State: Current - - Deferred - - ----------- ----------- - - ----------- ----------- Total $ - $ - =========== =========== As of June 30, 2000, the Company has a net operating loss carryforward of approximately $5,000,000 to offset future taxable income. Subject to current regulations, this carryforward will begin to expire in 2012. The Company's income tax expense for the quarters ended June 30, 2000 and 1999, respectively, differed from the statutory federal rate of 34 percent as follows: 2000 1999 --------- --------- Statutory rate applied to earnings (loss) before income taxes $(623,597) $(368,303) Increase (decrease) in income taxes resulting from: State income taxes - - Other including reserve for deferred tax asset 623,597 368,303 --------- --------- Income tax expense $ - $ - ========= =========
Note M - Related Party Transactions The Company leases its manufacturing facilities under an operating lease with the former owner of Brister's, who is also the Company's President and Chief Operating Officer, in addition to being a Company shareholder and director. Concurrent with the closing of the acquisition of Brister's, the Company and the former owner executed a new lease agreement for a primary two-year term expiring in 1998 and an additional two-year renewal option. The monthly lease payment will remain at $6,025 per month with annual adjustments for increases based upon the Consumer Price Index. Total payments under this agreement were approximately $41,372 and $36,150 for each of the periods ended June 30, 2000 and 1999, respectively. 16 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note M - Related Party Transactions - Continued Concurrent with the acquisition of Brister's, the Company and the former owner of Brister's entered into a Real Estate Option Right of First Refusal Agreement. This agreement provides that the Company may, at its sole option, purchase the real property and improvements in Roseland, Louisiana currently utilized by the Company or its subsidiary for an aggregate purchase price of $550,000. The option may be exercised commencing on January 1, 1998 and expires on December 31, 2000. Note N - Convertible Preferred Stock Through May 31, 1999, the Company sold $1,550,000 in Convertible Preferred Stock (Preferred Stock) subject to a Private Placement Memorandum. The Preferred Stock bears a dividend of 9.0%, payable semi-annually in either cash or common stock of the Company. The Preferred Stock is convertible into shares of common stock at a conversion rate of $0.25 per share at the option of the holder at any time between issuance and June 30, 2003. The Preferred Stock mandatorily converts to common stock on June 30, 2003. The Preferred Stock is redeemable by the Company on or after March 31, 2000, in whole or part, at the option of the Company at a redemption price of 109%, plus accrued dividends, if any. The dividend payable at December 31, 1999 was paid in February 2000 with the issuance of 225,022 shares of restricted, unregistered common stock. In May 2000, the Company authorized the issuance of 4,000,000 shares of Preferred Stock designated as "Series A Preferred Stock". These shares were sold on May 17, 2000 for total gross proceeds of $3,000,000. The Series A Preferred Stock bears a dividend at a rate of $0.075 per share per annum, payable on March 31, June 30, September 30 and December 31, commencing on June 30, 2000. These shares are subject to a liquidation preference equal to the sum of $0.75 per share plus declared or accrued but unpaid dividends. The Company, at its sole option, may redeem all or a portion of the issued and outstanding Series A Preferred Stock on or after May 31, 2003 at a price of $1.50 per share plus all declared or accrued but unpaid dividends. The holders of the Series A Preferred Stock have the right to convert the issued and outstanding shares at any time after the date of issuance at a rate of $0.375 per share plus all declared or accrued but unpaid dividends. These shares shall automatically be converted into common stock upon either the Company's sale of common stock with an aggregate offering price of $10,000,000 and a per share price of $5.00 and the written consent or agreement of the holders of a majority of the then outstanding shares of the Series A Preferred Stock. Note O - Common Stock Warrants In September 1997, the Company sold 155,000 Underwriter's Warrants for an aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2. Each warrant allows the Underwriter to purchase one share of the Company's common stock at $6.00 per share and one (1) 1997 Warrant at a price of $0.1875 per share. The 1997 warrants are described in detail in the next paragraph. These warrants expire on September 9, 2002 if not exercised by the Underwriter. 17 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note O - Common Stock Warrants - Continued In September and November 1997, the Company sold, pursuant to a Registration Statement on Form SB-2, an aggregate 1,782,500 warrants (1997 Warrants) at $0.125 each for gross proceeds of $222,813. Each warrant entitles the holder to purchase one (1) share of the Company's common stock at a price of $4.00 per share during the four year period commencing on September 9, 1998. These warrants are redeemable by the Company at a redemption price of $0.01 per warrant, at any time after September 9, 1998 upon thirty (30) days written notice to the respective warrant holders if the average closing price of the Company's common stock equals or exceeds $8.00 per share for the 20 consecutive trading days ending three (3) days prior to the notice of redemption. Warrants originally Warrants issued outstanding at March 31, 2000 Exercise price -------------- -------------- 1996 Warrants 500,018 500,018 $4.50 per share Underwriter's Warrants 155,000 155,000 $4.00 per share 1997 Warrants 1,782,500 1,782,500 $4.00 per share --------- --------- Totals at June 30, 2000 2,504,185 2,437,518 ========= ========= On March 9, 1999, the Company, as compensation for waiving certain events of default and the amendment to the Company's loan agreement with a non-financial institution lender, granted the lender a stock warrant to purchase 100,000 shares of the Company's restricted, unregistered common stock at a price of $0.54 per share. If the Company fully repays the outstanding indebtedness to the lender within ninety (90) days of the warrant date, the number of shares subject to the warrant reduces to 50,000. If and only if there is no total retirement of the indebtedness to the lender, the number of shares subject to the warrant reduces based upon the Company's net income achieved during Calendar 1999. The number of shares subject to the warrant based upon the Company's net income in the event of a non-retirement of the indebtedness is as follows: Net income # of shares ---------- ----------- $975,000 50,000 $877,500 60,000 $780,000 75,000 This warrant is exercisable at any time after its issuance and expires four (4) years from its issuance. In conjunction with the $300,000 and $930,000 term notes executed in the first quarter of 2000, the Company issued and additional 50,000 warrants to the non-financial institution lender at a price of $0.54 per share on terms identical to those discussed above. Note P - Stock Options The Company's Board of Directors has allocated an aggregate 125,377 shares of the Company's common stock for unqualified stock option plans for the benefit of employees of the Company and its subsidiaries. During 1996, the Company granted options to purchase 59,355 shares of the Company's common stock to employees of the Company and its operating subsidiaries at an exercise price of $5.63 per share. These options expire at various times during 2001. 18 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note P - Stock Options - Continued On January 30, 1997, the Board of Directors of the Company adopted a stock option plan providing for the reservation of an additional 66,667 shares of common stock for options to be granted to employees of the Company. Concurrent with this action, the Company granted options to purchase 6,667 shares of the Company's common stock at a price of $4.875 per shares to the Company's then Chief Financial Officer and the Company's Vice President of Marketing (VP Options). These options are exercisable after January 30, 1998 and expire on January 30, 2002. The options granted to the Company's former Chief Financial Officer expired concurrent with his termination in the first quarter of 1998. Further, on January 30, 1997, the Company granted options to purchase an aggregate 52,670 shares of the Company's common stock to employees of the Company and its operating subsidiaries at an exercise price of $4.875 per post-split share. These options are exercisable after January 30, 1998 and expire on January 30, 2002. During 1998, the Company granted an aggregate 265,000 options to purchase an equivalent number of shares of restricted, unregistered common stock to officers and employees in conjunction with the employment of such officers and employees. These options are exercisable at prices ranging from $1.06 per share to $3.50 per share. Concurrent with the termination of a Company officer, 210,000 of the granted 1998 options terminated. The remaining options are exercisable between March 1999 and December 1999 and expire between March 2003 and December 2003. In January 1999, as part of the Separation Agreement between the Company and its then President and Chief Executive Officer, the Company issued this individual options to purchase 15,000 shares of Common Stock at an option exercise price of $1.06 per share. This option was granted to replace options to purchase 200,000 shares of common stock which were effectively canceled at separation. These options are vested and expire on January 20, 2004. During the fourth quarter of 1999, the Company granted options to its President, Vice President of Administration and various employees. These options vested in various amounts over a period from grant through three years from the grant date. These options, if not exercised, expire between the fourth and fifth anniversary date of the option grant. These options are summarized as follows: Options granted Exercise price --------------- ---------------- President options 400,000 $0.375 per share Vice President of Administration options 225,000 $0.375 per share Employee options 3,000 $0.375 per share Employee options 117,000 $0.31 per share There were no exercise of any options during the periods ended June 30, 2000 and 1999, respectively. The following table summarizes all options granted from 1996 to June 30, 2000: Options Options Options Options Exercise price granted exercised terminated outstanding per share --------- --------- ---------- ----------- -------------- 1996 options 59,335 - - 59,335 $5.63 1997 VP options 13,334 - 6,667 6,667 $4.875 1997 options 52,670 - - 52,670 $4.875 1998 options 265,000 - 210,000 55,000 $1.06 - $3.50 1999 options 810,000 - - 810,000 $0.31 - $1.06 --------- --------- ---------- ----------- Totals 1,200,339 - 216,667 983,672 ========= ========= ========== =========== 19 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note P - Stock Options - Continued The weighted average exercise price of all issued and outstanding options at June 30, 2000 and 1999, respectively, was $1.07 and $3.32. Had compensation cost for options granted been determined based on the fair values at the grant dates, as prescribed by SFAS 123, the Company's net loss and net loss per share would not have changed due to the fact that the exercise price of the options was substantially higher than the market price at the grant date. The calculations to estimate the fair value of the options were made using the Black-Scholes pricing model which required making significant assumptions. These assumptions include the expected life of the options, which was determined to be one year, the expected volatility, which was based on fluctuations of the stock price over a 12 month period, the expected dividends, determined to be zero based on past performance, and the risk free interest rate, which was estimated using the bond equivalent yield of 6.0% at March 31, 2000 and 1999, respectively. 1998 Compensation Plan - ---------------------- On May 27, 1998, the stockholders of the Company approved the 1998 Stock Compensation Plan of Karts International Incorporated (1998 Plan) and reserved 1,000,000 shares of Common Stock for issuance under the plan. The 1998 Plan terminates on April 1, 2008 unless previously terminated by the Board of Directors. The 1998 Plan is administered by the Compensation Committee (Committee) or the entire Board of Directors as determined by the Board of Directors. Eligible participants in the 1998 Plan include full time employees, directors and advisors of the Company and its subsidiaries. Options granted under the 1998 Plan are intended to qualify as "incentive stock options" pursuant to the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (Code), or options which do not constitute incentive stock options (nonqualified options) as determined by the Committee. Under the 1998 Plan the Company may also grant "Restricted Stock" awards. "Restricted Stock" represents shares of Common Stock issued to eligible participants under the 1998 Plan subject to the satisfaction by the recipient of certain conditions and enumerated in the specific Restricted Stock grant. Conditions which may be imposed include, but are not limited to, specified periods of employment, attainment of personal performance standards or the overall performance of the Company. The granting of Restricted Stock represents an additional incentive for eligible participants under the 1998 Plan to promote the development of the Company, and may be used by the Company as another means of attracting and retaining qualified individuals to serve as employees of the Company or its subsidiaries. Incentive stock options may be granted only to employees of the Company or a subsidiary who, in the judgment of the Committee, are responsible for the management or success of the Company or a subsidiary and who, at the time of the granting of the incentive stock option, are either an employee of the Company or a subsidiary. No incentive stock option may be granted under the 1998 Plan to any individual who would, immediately before the grant of such incentive stock option, directly or indirectly, own more than ten percent (10%) of the total combined voting power of all classes of stock of the Company unless (i) such incentive stock option is granted at an option price not less than one hundred ten percent (110%) of the fair market value of the shares on the date the incentive stock option is granted and (ii) such incentive stock option expires on a date not later than five years from the date the incentive stock option is granted. 20 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note P - Stock Options - Continued 1998 Compensation Plan - continued - ---------------------- The purchase price of the shares of the Common Stock offered under the 1998 Plan must be one hundred percent (100%) of the fair market value of the Common Stock at the time the option is granted or such higher purchase price as may be determined by the Committee at the time of grant; provided, however, if an incentive stock option is granted to an individual who would, immediately before the grant, directly or indirectly own more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, the purchase price of the shares of the Common Stock covered by such incentive stock option may not be less than one hundred ten percent (110%) of the fair market value of such shares on the day the incentive stock option is granted. If the Common Stock is listed upon an established stock exchange or exchanges, the fair market value of the Common Stock shall be the highest closing price of the Common Stock on the day the option is granted or, if no sale of the Common Stock is made on an established stock exchange on such day, on the next preceding day on which there was a sale of such stock. If there is no market price for the Common Stock, then the Board of Directors and the Committee may, after taking all relevant facts into consideration, determine the fair market value of the Common Stock. Options are exercisable in whole or in part as provided under the terms of the grant, but in no event shall an option be exercisable after the expiration of ten years from the date of grant. Except in case of disability or death, no option shall be exercisable after an optionee ceases to be an employee of the Company, provided that the Committee shall have the right to extend the right to exercise for a period not longer than three months following the date of termination of an optionee's employment. If an optionee's employment is terminated by reason of disability, the Committee may extend the exercise period for a period not in excess of one year following the date of termination of the optionee's employment. If an optionee dies while in the employ of the Company and shall not have fully exercised his options, the options may be exercised in whole or in part at any time within one year after the optionee's death by the executors or administrators of the optionee's estate or by any person or persons who acquired the option directly from the optionee by bequest or inheritance. Under the 1998 Plan, an individual may be granted one or more options, provided that the aggregate fair market value (determined at the time the option is granted) of the shares covered by incentive options which may be exercisable for the first time during any calendar year shall not exceed $100,000. There presently are outstanding options to purchase 845,000 shares of Common Stock at prices ranging from $0.31 to $2.98 per share. Note Q - Commitments and Contingencies Litigation - ---------- The Company and/or it's operating subsidiaries are as defendant(s) in several product liability lawsuits related to its "fun karts". The Company has had and continues to have commercial liability coverage to cover these exposures with a $25,000 per claim self-insurance clause as of June 30, 2000. The Company is vigorously contesting each lawsuit and has accrued management's estimation of the Company's exposure in each situation. Additionally, the Company maintains a reserve for future litigation equal to the "per claim" self-insurance amount times the four-year rolling average of lawsuits filed naming the Company as a defendant. The Company anticipates no material impact to either the results of operations, its financial condition or liquidity based on the uncertainty of outcome, if any, of existing litigation, either collectively and/or individually, at this time. 21 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note Q - Commitments and Contingencies - Continued Consulting and Patent Licensing - ------------------------------- The Company and the former owner executed a Licensing Agreement and a related Royalty Agreement. These agreements provide that the former owner will (1) license to the Company all of the Intellectual Property (as defined) currently owned by the former owner and being used by the Company or any subsidiary at terms at least as favorable as the former owner has received or could have received in arms-length transactions with third parties and (2) for a period of five years from the execution of the Licensing Agreement will license to the Company, at the Company's sole option, all Intellectual Property developed or owned by the former owner at any time subsequent to the Closing Date. The license referenced in section (2) above shall be exclusive to the Company. Intellectual Property is defined in the Stock Purchase Agreement as all domestic and foreign letters patent, patents, patent applications, patent licenses, software licenses and know-how licenses, trade names, trademarks, copyrights, unpatented inventions, service marks, trademark registrations and applications, service mark registrations and applications and copyright registrations and applications owned or used by the Company or any subsidiary in the operation of its business. The Agreements are for a three (3) year term, which provides for the payment of a one-time license fee and a "per unit" royalty fee. Upon execution, the Company was obligated to pay an initial license fee of $10,000 and agreed to pay a royalty of $1.00 per unit on which the existing intellectual property is installed. For the second and third years of the Agreement, the Company will pay the greater of $20,000 per year or $1.00 per unit on which the existing intellectual property is installed. During the year ended December 30, 1999 and 1998, respectively, the Company paid or accrued approximately $15,242 and $20,000 under this Agreement. Employment agreements - --------------------- Effective January 30, 1998, the Company entered into an Employment Agreement (Agreement) with an individual to serve as the Company's President and Chief Executive Officer (President). The Agreement is for a term of three (3) years and provides the President with an annual base salary of $150,000. Upon execution of this Agreement, the President received options to purchase up to 200,000 shares of the Company's common stock at an exercise price of $3.25 per share. The options vest as follows: 100,000 shares as of January 30, 1999; 50,000 shares as of January 31, 2000; 50,000 shares as of January 31, 2001. All unvested options vest immediately upon the termination of the Agreement if termination is for reason other than "for cause", and all unexercised options expire on January 31, 2003. The President may also receive annual performance based stock options to purchase up to 50,000 shares of the Company's common stock at a price equal to the market value of the Company's common stock on the date of issuance, as determined by the Company's Board of Directors, and an annual cash bonus not to exceed 15.0% of the annual base salary. In January 1999, this individual resigned as President, Chief Executive Officer and as a director of the Company and the Company and the individual entered into a Settlement Agreement and Full and Final Release of All Claims (Agreement) for the purpose of satisfying and discharging all obligations of the Company to the individual under the Agreement. This Agreement provides that the Company shall forgive up to $19,000 of non-reimbursable expenses incurred by the individual and pay to for one week of earned vacation. In consideration for the foregoing, the former President agreed to adhere to the non-competition and non-solicitation covenants set forth in the Employment Agreement until January 13, 2001. As part of his separation from the Company, the Company issued to the individual options to purchase 15,000 shares of Common Stock at an option exercise price of $1.06 per share which were granted to replace the options to purchase 200,000 shares of common stock which were effectively canceled at separation. These options are vested and expire on January 20, 2004. 22 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note Q - Commitments and Contingencies - Continued Employment agreements - continued - --------------------- On October 27, 1998, the Company entered into an Employment Agreement (Agreement) with the former sole shareholder of Straight Line for the individual to serve as the President of the Straight Line subsidiary (Straight Line President). The Agreement is for a term of three (3) years with an automatic one year extension unless either the Company or the Straight Line President provides a thirty (30) day written notice not to continue the Agreement. This Agreement provides the Straight Line President with an annual base salary of $80,000. Upon execution of this Agreement, the Straight Line President received options to purchase up to 10,000 shares of the Company's common stock at an exercise price equal to the closing bid price of the Company's common stock as quoted on the NASDAQ SmallCap market. The Straight Line President may also receive, at the discretion of the Company's Board of Directors, annual performance based stock options to purchase up to 10,000 shares of the Company's common stock at a price equal to the market value of the Company's common stock on the date of issuance, as determined by the Company's Board of Directors, and an annual cash bonus not to exceed 15.0% of the annual base salary. On October 19, 1999, the Company's Board of Directors ratified an Employment Agreement (Agreement) with an individual to serve as the Company's President and Chief Executive Officer. The Agreement term was effective as of February 1, 1999 and expires on the third anniversary date of the Agreement with an automatic one year extension unless either the Company or the President provides a thirty (30) day written notice not to continue the Agreement. This Agreement provides the President with an annual salary of $150,000 per year, payable in either common stock of the Company or cash. At the end of each calendar quarter during the first calendar year of this Agreement, the Company shall pay the President a cash portion to satisfy the President's estimated federal and state tax liability and the balance shall be paid in shares of common stock calculated based on the closing bid price of the Company's common stock as quoted at the end of each quarter. Further, the President was granted 450,000 options to purchase shares of the Company's common stock at 100% of the closing bid price of the Company's common stock on the ratification date and the options vest as follows: 100,000 at the ratification date of this Agreement; 150,000 on the second anniversary date of this Agreement; and 200,000 on the third anniversary date of this Agreement. Additionally, the President may be eligible to receive an annual bonus which shall be in the form of (a) options to purchase up to 50,000 shares of the Company's common stock, which shall vest immediately upon grant and expire five years from the grant date and (b) cash, not to exceed 15% of the President's base salary. (Remainder of this page left blank intentionally) 23 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, 2000 as compared to the six months ended June 30, 1999 - -------------------------------------------------------------------------------- The Company recorded net revenues of approximately $2.8 million and $1.8 million for the six and three months ended June 30, 2000, respectively as compared to approximately $3.7 million and $2.5 for the comparable six and three month periods of 1999. The current year's net revenues for the six and three months ended June 30, 2000 represented a 24% and 25% decrease, respectively, over the same periods last year. The decrease in revenues is largely attributed to the Company's decision to no longer sell to one mass merchandiser account and to temporarily withdraw from the promotional and concession kart markets to allow it to focus its resources on expediting the design, marketing and production of a new line of karts under an exclusive license agreement with Polaris Industries, Inc. Gross profit was negatively impacted by the decrease in volume and additional costs associated with bringing the new Polaris Trail Kart line into production. As a result, the Company suffered a gross loss of approximately $(304,000) and $(387,000), respectively for the six month and three month periods ended June 30, 2000, as compared to a gross profit of $112,000 and $248,000 respectively, during the same period last year. Management expects its gross profit to improve over the remainder of the year as production levels increase and average contribution per unit sold improves as a result of newly introduced models. Selling, general and administrative expenses were approximately $1,180,000 and $1,099,000 for the respective six month periods ended June 30, 2000 and 1999 and approximately $640,000 and $554,000 for the second quarter in 2000 and 1999, respectively. The increase of approximately $80,000 for the six month period resulted from increases in bad debt expense, royalties and cash management charges. Research and development expenses totaled approximately $40,000 for the six months ended June 30, 2000 compared to approximately $8,000 for the same period during 1999. These costs were associated with the design and prototype of the Polaris Trail Kart line. Depreciation and amortization were approximately $86,000 and $31,000, respectively, for the six and three month periods ended June 30, 2000 compared with approximately $55,000 and $27,000 for the same periods last year. Other income (expense) was approximately $(225,000) and $(99,000) for the respective six and three month periods ended June 30, 2000 as compared to approximately $(34,000) and $(52,000) for the same periods last year. The change is chiefly due to an increase in interest expense during both the six and three month periods resulting from higher levels of borrowing to fund the Company's working capital needs. In addition, the Company had recognized a positive reorganization reserve adjustment of approximately $55,000 during the six months ended June 30, 1999. 24 For the six months ended June 30, 2000, the Company incurred a net loss of approximately $(1,834,000) compared to a net loss of approximately $(1,083,000) for the same period in 1999. The Company incurred a net loss of approximately $(1,168,000) and $(393,000), respectively for the three months ended June 30, 2000 and 1999. Additional Operational Information - ---------------------------------- The Company currently has approximately four product liability lawsuits outstanding, none of which are expected to exceed existing product liability insurance policy limits. The Company has never had a claim that resulted in an award or settlement in excess of insurance coverage. There is no assurance that the Company's insurance coverage of $5,000,000 per occurrence and $6,000,000 aggregate will be sufficient to fully protect the business and assets of the Company from all claims, nor can any assurances be given that the Company will be able to maintain the existing coverage or obtain additional coverage at commercially reasonable rates. Management believes that it has process controls on its product operations, product labeling, operator's manuals and videos and design features which will assist in a successful defense of any present or future product liability claim. To the extent product liability losses are beyond the limits or scope of the Company's insurance coverage, the Company could experience a material adverse effect upon its business, operations, profitability and assets. The Consumer Product Safety Commission (the "CPSC") recently announced that it had directed one of the Company's competitors to recall approximately 91,000 of its karts due to a safety concern. The Company is considered by many in the industry to be a leader in kart safety with a record of introducing or being one of the first to install new safety features. The Company is not aware of any incidents involving its karts that were caused by factors similar to those that lead the CPSC to issue the order for recall. The Company does not expect to be directly affected by this situation. Liquidity and Financial Condition - --------------------------------- As of June 30, 2000, the Company had positive working capital of approximately $2.040,000 as compared to approximately $970,000 at June 30, 1999. During the first six months of 2000 and 1999, the Company experienced negative cash flows from operations of approximately $(1,309,000) and $(1,681,000), respectively. Cash used to bind the Company's operating loss and to reduce accounts payable and other liabilities was mitigated by a reduction in excess inventory carried into the beginning of the year and collections of accounts receivable during the six months ended June 30, 2000. In order to improve the Company's working capital, the Company sold approximately $615,000 of common stock through a private placement, sold $3,000,000 of preferred stock and restructured its debt during the first and second quarters of 2000. Proceeds from the Company's financing activities were used to reduce its trade accounts payable and provide additional working capital. The Company believes that the proceeds from the sale of its common and preferred stock and from the restructuring of its debt assured that a supply of critical manufacturing components and supplies and sufficient working capital will be available to meet the Company's operational requirements as it enters its historically profitable season. Capital Requirements - -------------------- The Company expended cash of approximately $63,000 in additions to property and equipment during the first six months of 2000. Minor improvements were made to the Brister's facility to accommodate the addition some equipment from the Company's USA Industries' facility in Prattville, Alabama. The Company is in the process of relocating its USA Industries, Inc. subsidiary into a new 40,000 sq. ft. facility in Roseland, Louisiana. The building will be owned by the Town of Roseland with funding being provided by a Louisiana Economic Development grant, the Town of Roseland and the Company. Once the building is completed, the Company will lease the building for a original term of five (5) years with an option to extend the lease for an additional two (2) year period. Consideration to the Town of Roseland during the seven year lease term will be the Company's investment in the project. The Company believes that the new facility will be ready late in its third quarter and will significantly increase its production capacity and reduce costs through improved production flow and consolidated management oversight. The Company plans to move its equipment out of the Prattville, Alabama location into the new facility and will also investigate purchasing or leasing additional production equipment. 25 Liquidity requirements mandated by future business expansions or acquisitions, if any are specifically identified or undertaken, are not readily determinable at this time as no substantive plans have been formulated by management. The focus of current management continues to be on returning the Company to profitability. Year 2000 Considerations - ------------------------ The Year 2000 (Y2K) date change was believed to affect virtually all computers and organizations. The Company has undertook a comprehensive review of its information systems, including personal computers, software and peripheral devices, and its general communications systems during 1999 and made all necessary modifications, upgrades or replacements that it believed were necessary to address its potential internal Y2K exposures. The Company had no Y2K impact in any manufacturing equipment. The Company also held discussions with its significant suppliers, shippers, customers and other external business partners related to their readiness for the Y2K date change. The costs associated with the Y2K date change compliance did not have a material effect on the Company's financial position or its results of operations. The Company has experienced no negative impact from any potential Y2K issues through June 30, 2000. However, there can be no continued assurance that all of the Company's systems and the systems of its suppliers, shippers, customers or other external business partners will continue function adequately. Part II - Other Information Item 1 - Legal Proceedings See accompanying notes to the consolidated financial statements Item 2 - Changes in Securities In May 2000, the Company authorized the issuance of 4,000,000 shares of Preferred Stock designated as "Series A Preferred Stock". These shares were sold on May 17, 2000 for total gross proceeds of $3,000,000. The Series A Preferred Stock bears a dividend at a rate of $0.075 per share per annum, payable on March 31, June 30, September 30 and December 31, commencing on June 30, 2000. These shares are subject to a liquidation preference equal to the sum of $0.75 per share plus declared or accrued but unpaid dividends. The Company, at its sole option, may redeem all or a portion of the issued and outstanding Series A Preferred Stock on or after May 31, 2003 at a price of $1.50 per share plus all declared or accrued but unpaid dividends. The holders of the Series A Preferred Stock have the right to convert the issued and outstanding shares at any time after the date of issuance at a rate of $0.375 per share plus all declared or accrued but unpaid dividends. These shares shall automatically be converted into common stock upon either the Company's sale of common stock with an aggregate offering price of $10,000,000 and a per share price of $5.00 and the written consent or agreement of the holders of a majority of the then outstanding shares of the Series A Preferred Stock. During the first six months, the Company sold an aggregate 1,639,995 shares of restricted, unregistered common stock for aggregate gross proceeds of approximately $615,000 (or approximately $0.38 per share), which approximates the "fair value" of the securities at the time of issuance. In February 2000, the Company issued an aggregate 225,022 shares of restricted, unregistered common stock for payment of dividends on the issued and outstanding 9.0% Convertible Preferred Stock of approximately $69,757 (or $0.31 per share), which approximates the "fair value" of the securities at the time of issuance. Item 3 - Defaults on Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None. 26 Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K a) Exhibits -------- 27 - Financial Data Schedule b) Reports on Form 8-K ------------------- May 17, 2000 - Discussion of sale of 4,000,000 shares of Series A voting, convertible preferred stock for $3,000,000 cash; increase in long-term debt by $1,000,000 and changes in the members of the Company's Board of Directors. - -------------------------------------------------------------------------------- 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 17 , 1999 /s/ Charles Brister ------ ---------------------------------- Charles Brister President, Chief Executive Officer and Director August 17 , 1999 /s/ Richard N. Jones ------ ---------------------------------- Richard N. Jones Chief Accounting Officer 27 EX-27 2 0002.txt FDS
5 1010077 Karts International Corporation 1 US Dollars 3-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 22183 0 1,208,396 152,574 2,497,412 4,315,714 2,554,780 653,519 7,135,146 2,275,569 0 0 5,550 7,439 1,993,123 7,129,596 2,789,407 2,789,407 3,093,588 1,305,019 0 0 252,326 (1,834,109) 0 (1,834,109) 0 0 0 (1,834,109) (0.29) (0.29)
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