-----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, R/3p2VEj2TI1U9pngjH1h1w+Inu6hO+oZv7366uIjNeJ6b1YwLRtQK0p+xwahZ9R LQBkHhek2LNH/frZdlYDqg== 0001010549-01-500534.txt : 20020410 0001010549-01-500534.hdr.sgml : 20020410 ACCESSION NUMBER: 0001010549-01-500534 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KARTS INTERNATIONAL INC CENTRAL INDEX KEY: 0001010077 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 752639196 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23041 FILM NUMBER: 1778204 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 karts10q93001.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 September 30, 2001 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) (985) 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 6, 2001: Common Stock: 8,079,642 shares Common Stock Warrants: 401,682 warrants Transitional Small Business Disclosure Format (check one): YES NO X --- --- Karts International Incorporated Form 10-QSB for the Quarter ended September 30, 2001 Table of Contents Page ---- Part I - Financial Information Item 1 - Financial Statements 3 Item 2 - Management's Discussion and Analysis or Plan of Operation 25 Part II - Other Information Item 1 - Legal Proceedings 26 Item 2 - Changes in Securities 26 Item 3 - Defaults Upon Senior Securities 26 Item 4 - Submission of Matters to a Vote of Security Holders 26 Item 5 - Other Information 26 Item 6 - Exhibits and Reports on Form 8-K 27 Signatures 27 2
Karts International Incorporated and Subsidiaries Consolidated Balance Sheets September 30, 2001 and 2000 (Unaudited) September 30, September 30, 2001 2000 ------------- ------------- Assets ------ Current Assets Cash on hand and in banks $ 28,872 $ 1,522,946 Accounts receivable Trade, net of allowance for doubtful accounts of $224,042 and $134,708, respectively 588,978 1,216,340 Other 13,910 28,154 Inventory 3,029,682 3,995,869 Prepaid expenses 390,909 837,247 ------------ ------------ Total current assets 4,052,351 7,600,556 ------------ ------------ Property and equipment Building and improvements 1,819,230 1,062,257 Equipment 1,825,422 1,280,870 Transportation equipment 228,607 240,607 Furniture and fixtures 142,198 138,581 ------------ ------------ 4,015,457 2,722,315 Accumulated depreciation (1,151,644) (727,650) ------------ ------------ 2,863,813 1,994,665 Land 32,800 32,800 ------------ ------------ Net property and equipment 2,896,613 2,027,465 ------------ ------------ Other assets Note receivable -- 425,060 Option to acquire unrelated entity -- 138,001 Loan costs, net of accumulated amortization of approximately $94,155 and $27,711, respectively 211,373 277,501 Organization costs, net of accumulated amortization of approximately $109,255 and $99,080, respectively -- 10,175 Covenant not to compete, net of accumulated amortization of approximately $97,222 and $63,889, respectively 2,778 36,111 Other 14,362 2,552 ------------ ------------ Total other assets 228,513 889,400 ------------ ------------ Total Assets $ 7,177,477 $ 10,517,421 ============ ============
- Continued - The financial information presented herein has been prepared by management without audit by independent certified public accountants. The accompanying notes are an integral part of these financial statements. 3 Karts International Incorporated and Subsidiaries Consolidated Balance Sheets - Continued September 30, 2001 and 2000 (Unaudited) September 30, September 30, 2001 2000 ------------- ------------- Liabilities and Shareholders' Equity ------------------------------------ Current liabilities Notes payable to banks and others $ -- $ -- Working capital advances 3,939,152 -- Notes payable to affiliates -- 142,922 Current maturities of long-term debt 35,608 72,273 Accounts payable - trade 1,722,986 2,285,477 Other accrued liabilities 675,075 32,803 Accrued interest payable 20,889 -- Accrued dividends payable 447,272 181,531 Accrued income and franchise taxes payable 32,425 -- ------------ ------------ Total current liabilities 6,873,407 2,715,006 ------------ ------------ Long-term liabilities Long-term debt, net of current maturities Banks and other entities 244,925 230,099 Related parties Debenture payable 2,500,000 2,500,000 Notes payable -- -- ------------ ------------ Total liabilities 9,618,332 5,445,105 ------------ ------------ Commitments and contingencies Shareholders' equity Preferred stock - $0.001 par value 10,000,000 shares authorized 5,638,000 and 5,623,333 shares issued and outstanding 5,638 5,623 Common stock - $0.001 par value 14,000,000 shares authorized 8,079,642 and 7,498,392 shares issued and outstanding 8,079 7,498 Additional paid-in capital 25,045,912 23,965,757 Accumulated deficit (27,500,484) (18,906,562) ------------ ------------ Total shareholders' equity (2,440,855) 5,072,316 ------------ ------------ Total Liabilities and Shareholders' Equity $ 7,177,477 $ 10,517,421 ============ ============ The financial information presented herein has been prepared by management without audit by independent certified public accountants. The accompanying notes are an integral part of these financial statements. 4
Karts International Incorporated and Subsidiaries Consolidated Statements of Operations and Comprehensive Income Nine and Three months ended September 30, 2001 and 2000 (Unaudited) Nine months Nine months Three months Three months ended ended ended ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Revenues Kart sales - net $ 2,200,623 $ 4,894,007 $ 738,147 $ 2,104,600 ----------- ----------- ----------- ----------- Cost of Sales Purchases and direct expenses 4,143,201 5,651,884 1,617,776 2,656,667 Depreciation 229,617 152,843 67,938 54,472 ----------- ----------- ----------- ----------- Total cost of sales 4,372,818 5,804,727 1,685,714 2,711,139 ----------- ----------- ----------- ----------- Gross Profit (2,172,195) (910,720) (947,567) (606,539) ----------- ----------- ----------- ----------- Operating Expenses Research and development expenses 320,804 72,752 107,719 33,150 Selling expenses 155,404 323,436 53,222 196,477 General and administrative expenses 1,806,408 1,880,843 497,576 827,899 Depreciation and amortization 128,006 118,969 42,416 33,455 ----------- ----------- ----------- ----------- Total operating expenses 2,410,622 2,396,000 700,933 1,090,981 ----------- ----------- ----------- ----------- Income (loss) from Operations (4,582,817) (3,306,720) (1,648,500) (1,697,520) Other Income (Expenses) Loss on consigned inventory (143,520) -- (143,520) -- Interest and other miscellaneous 37,639 42,749 4,662 15,332 Interest expense (304,203) (377,900) (128,820) (125,574) ----------- ----------- ----------- ----------- Loss before Income Taxes (4,992,901) (3,641,871) (1,916,178) (1,807,762) Income Tax (Expense) Benefit (2,804) (2,321) (2,804) (2,321) ----------- ----------- ----------- ----------- Net Loss (4,995,705) (3,644,192) (1,918,982) (1,810,083) Other Comprehensive Income -- -- -- -- ----------- ----------- ----------- ----------- Comprehensive Income (Loss) $(4,995,705) $(3,644,192) $(1,918,982) $(1,810,083) =========== =========== =========== =========== Loss per weighted-average share of common stock outstanding - basic and fully diluted $ (0.65) $ (0.54) $ (0.24) $ (0.24) =========== =========== =========== =========== Weighted-average number of shares of common stock outstanding - basic and fully diluted 7,694,271 6,773,944 8,079,642 7,448,283 =========== =========== =========== ===========
The financial information presented herein has been prepared by management without audit by independent certified public accountants. The accompanying notes are an integral part of these financial statements. 5
Karts International Incorporated and Subsidiaries Consolidated Statements of Cash Flows Nine months ended September 30, 2001 and 2000 (Unaudited) Nine months Nine months ended ended September 30, September 30, 2001 2000 ------------- ------------- Cash flows from operating activities Net income (loss) for the period $(4,995,705) $(3,644,192) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 404,072 322,960 Accrued interest income on note receivable -- (9,375) Bad debt expense 259,831 68,060 (Increase) Decrease in: Accounts receivable-trade and other 1,541,004 1,189,480 Inventory 1,083,356 (1,781,191) Prepaid expenses and other 260,732 (486,641) Increase (Decrease) in: Accounts payable and other accrued liabilities (1,612,403) (209,156) Accrued income taxes payable (12,675) -- ----------- ----------- Cash flows used in operating activities (3,071,788) (4,550,055) ----------- ----------- Cash flows from investing activities Cash paid for property and equipment (791,565) (263,620) ----------- ----------- Cash flows used in investing activities (791,565) (263,620) ----------- ----------- Cash flows from financing activities Increase in working capital advances 3,974,760 -- Cash received from sale of Class A Preferred Stock -- 3,000,000 Cash received from sale of Class B Preferred Stock 5,500,000 Cash paid for preferred stock dividends (84,150) (69,750) Cash received from private placement of common stock -- 615,000 Cash paid for loan and capital acquisition costs -- (1,144,355) Change in notes payable to affiliate - net (150,000) (86,473) Net activity on bank and other lines of credit -- (2,724,005) Principal received on long-term debt -- 1,000,000 Principal payments on long-term note payable (80,978) (153,435) ----------- ----------- Cash flows provided by financing activities 3,659,632 5,936,982 ----------- ----------- Increase (Decrease) in cash (203,721) 1,123,307 Cash at beginning of period 232,593 399,639 ----------- ----------- Cash at end of period $ 28,872 $ 1,522,946 =========== ===========
- Continued - The financial information presented herein has been prepared by management without audit by independent certified public accountants. The accompanying notes are an integral part of these financial statements. 6
Karts International Incorporated and Subsidiaries Consolidated Statements of Cash Flows - Continued Nine months ended September 30, 2001 and 2000 (Unaudited) Nine months Nine months ended ended September 30, September 30, 2001 2000 ------------- ------------- Supplemental disclosure of interest and income taxes paid Interest paid for the period $ 323,433 $ 326,752 ========== ========== Income taxes paid (refunded) for the period $ 12,675 $ 2,321 ========== ========== 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 ========== ========== Payment of preferred stock dividend with 581,250 shares of common stock at $0.12 per share $ 69,750 $ -- ========== ==========
The financial information presented herein has been prepared by management without audit by independent certified public accountants. The accompanying notes are an integral part of these financial statements. 7 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 operates through four (4) wholly-owned subsidiaries, Brister's Thunder Karts, Inc., USA Industries, Inc., KINT, L. L. C. and Straight Line Manufacturing, Inc. Brister's Thunder Karts, Inc. (Brister's) (a Louisiana corporation) and USA Industries, Inc. (USA) (an Alabama corporation) manufacture and sell "fun karts" through dealers, distributors and mass merchandisers. KINT, L.L.C. (KINT) (a Louisiana limited liability corporation) was formed as a sales and marketing company focusing on the sale of customized promotional "fun karts" to various national companies. This subsidiary initially conducted business operations under the trade name of "Bird Promotions". In March 1999, Company management ceased these operations and consolidated these sales and marketing efforts within other operating subsidiaries of the Company. During 2000, Company management commenced all operations relating to fun karts utilizing the Polaris Industries, Inc. logo within this subsidiary. Straight Line Manufacturing, Inc. (a Michigan corporation) (Straight Line) principally manufactured large, full suspension "fun karts". During 2000, all operations formerly contained within Straight Line were transferred to other subsidiaries of the Company. 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, 2001. 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. 8 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note A - Organization and Description of Business - Continued The accompanying consolidated financial statements contain the accounts of Karts International Incorporated and its wholly-owned subsidiaries, Brister's Thunder Karts, Inc., USA Industries, Inc., KINT, LLC and Straight Line Manufacturing, Inc. All significant intercompany transactions have been eliminated. The consolidated entities are collectively referred to as Company. For segment reporting purposes, the Company operates in only one industry segment and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole. Note B - Going Concern Uncertainty During the five years ended December 31, 2000, the Company has experienced cumulative net losses from operations and has utilized cash in operating activities of approximately $13,000,000. 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 2000, the Company received $615,000 and $9,600,000 in private transactions from the sale of common and preferred stock, respectively, to support Year 2000 operations and retire certain short-term lines of credit from a non-financial institution lender. Between January and October 2001, the Company received aggregate funding on working capital advances of approximately $5,000,000 to provide additional cash resources. Further, during the first quarter of 2000, the Company acquired an exclusive OEM licensing agreement to manufacture a line of "sport karts" from Polaris Industries, Inc., a domestic manufacturer of personal watercraft and off-road vehicles. The Company restructured its management during the third and fourth quarter of 2000, which it believes will assist in the refocusing of the Company on operations with greater opportunity for profitability and is exploring other opportunities to provide revenues outside its core "fun kart" business to compensate for seasonal slowdowns. Current 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. 9 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note C - 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 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. 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, 2001 and 2000, inventory consisted of the following components: 2001 2000 ---------- ---------- Raw materials $2,353,975 $3,153,009 Work in process 165,818 354,928 Finished goods 509,889 487,932 ---------- ---------- $3,029,682 $3,995,869 ========== ========== 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. 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. 10 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note C - 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, 2001 and 2000, the deferred tax asset and deferred tax liability accounts, as recorded when material, are entirely the result of temporary differences. Temporary differences represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization. No valuation allowance was provided against deferred tax assets, where applicable. As of September 30, 2001 and 2000, the deferred tax asset related to the Company's net operating loss carryforward was fully reserved. 8. Advertising costs ----------------- The Company does not conduct any direct response advertising activities. For non-direct response advertising, the Company charges the costs of these efforts to operations at the first time the related advertising is published. For various sales publications, catalogs and other sales related items, the Company capitalizes the development and direct production costs and amortizes these costs over the estimated useful life of the related materials, not to exceed an eighteen (18) month period from initial publication of the materials. 9. Income (Loss) per share ----------------------- Basic earnings (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method. The calculation of fully diluted earnings (loss) per share assumes the dilutive effect of the exercise of outstanding options and warrants at either the beginning of the respective period presented or the date of issuance, whichever is later. As of September 30, 2001 and 2000, the outstanding warrants and options are deemed to be anti-dilutive due to the Company's net operating loss position. Note D - Concentrations of Credit Risk The Company maintains its cash accounts in a financial institution 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 financial institution. During the nine months ended September 30, 2001 and 2000, respectively, respectively, the various operating companies had deposits in a financial institution with credit risk exposures in excess of statutory FDIC coverage. The Company has incurred no losses during 2001 or 2000 as a result of any of these unsecured situations. Through May 2000, the Company utilized a lockbox system for the collection and deposit of receipts on trade accounts receivable for each operating subsidiary for the benefit of its then primary non-financial institution lender. The Company uses a corporate cash concentration sweep account whereby all excess cash funds are concentrated into one primary depository account with a financial institution. The Company and the financial institution then participate in uncollateralized reverse-repurchase agreements which are settled on a "next-business day" basis for the investment of surplus cash funds. The Company continues to have unsecured amounts invested in reverse repurchase agreements on a daily basis through September 30, 2001. As of September 30, 2001 and 2000, respectively, the Company had no unsecured outstanding reverse repurchase agreements outstanding. The Company has not incurred any losses as a result of any of these unsecured situations. 11 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note E - Property and Equipment Total depreciation expense charged to operations for the nine months ended September 30, 2001 and 2000 was approximately $326,435 and $271,812, 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 fourth quarter of 2000, the Company became aware that the maker of the note was insolvent and that the ultimate realization of the note was doubtful. Accordingly, the note balance was charged to operations as of December 31, 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 terminated on March 31, 2001. During the fourth quarter of 2000, the Company became aware of the insolvency of the target company and, accordingly, provided for the abandonment and expiration of this option as of December 31, 2000 in the accompanying statement of operations. (Remainder of this page left blank intentionally) 12
Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note H - Working Capital Advances Through September 30, 2001, The Morgan Creek Company (Morgan Creek), an unrelated party focused on community development and goodwill, has made short-term, non-interest bearing, working capital advances to the Company of approximately $3,900,000. Note I - Long-Term Debt to Related Parties Long-term debt consists of the following at September 30, 2001 and 2000: 2001 2000 -------- -------- Notes payable to the Company's Chairman of the Board aggregating $150,000. Interest at 11.5% and 12.0%, respectively. Accrued interest payable either monthly ($50,000) or quarterly ($150,000), as specified in the respective note document(s). Principal and accrued, but unpaid, interest is due on demand. The notes are unsecured $ - $125,582 $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. All principal and accrued, but unpaid, interest is due and payable 30 days after the lawsuit settlement date. - 17,340 -------- -------- Total related party long-term debt $ - $142,922 ======== ======== Note J - Long-Term Debt to Banks and Others Long-term debt payable to banks and others consist of the following at September 30, 2001 and 2000: 2001 2000 -------- -------- Thirteen 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. $280,533 $302,372 Less current maturities (35,608) (72,273) -------- -------- Long-term portion $244,925 $230,099 ======== ========
13 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note J - Long-Term Debt to Banks and Others - Continued Future maturities of long-term debt are as follows: Year ending December 31, Amount ------------ --------- 2001 $ 56,025 2002 45,417 2003 44,657 2004 38,780 2005 28,260 2006 - 2010 112,765 --------- Totals $ 325,904 ========= Note K - Debenture Payable As of September 30, 2001, the Company has an aggregate $2,500,000 debenture payable outstanding. On June 3, 1999, the Company consummated a $1,500,000 convertible loan transaction with The Schlinger Foundation (the "Foundation"), who is also a shareholder in the Company. The Foundation also purchased 500,000 shares of 9% Preferred Stock at a price of $1.00 per share in the Company's private offering consummated on June 30, 1999. For his assistance to the Company in arranging this financing with the Foundation and others, the Company paid Blair L. benGerald, a former director of the Company, $205,000. Mr. Blair L. benGerald was not an officer or director of the Company when he received this payment. On May 17, 2000, the Company and The Foundation entered into an Amended and Restated Loan Agreement which provided for the additional loan of $1,000,000 to the Company at an interest rate equal to 3% plus the prime rate as quoted in The Wall Street Journal. Interest is payable on the $2.5 million Amended and Restated Term Note ("Term Note") monthly as it accrues commencing on June 30, 2000 and continuing on the last day of each successive month thereafter during the term of the Term Note with the principal of the Term Note being payable in one installment of unpaid principal and accrued unpaid interest on May 17, 2005. The Term Note is secured with guaranty agreements by each of the Company's wholly-owned subsidiaries, Straight Line Manufacturing, Inc., USA Industries, Inc., KINT, L.L.C. and Brister's Thunder Karts, Inc. Additionally, the Company and each of its subsidiaries have pledged substantially all of their assets as additional collateral for the Term Note. 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. 14
Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note L - Income Taxes The components of income tax (benefit) expense for the nine months ended September 30, 2001 and 2000, respectively, are as follows: 2001 2000 ----------- ----------- Federal: Current $ - $ - Deferred - - ----------- ----------- - - ----------- ----------- State: Current 2,804 2,321 Deferred - - ----------- ----------- Total $ 2,804 $ 2,321 =========== =========== As of December 31, 2000, the Company has a net operating loss carryforward of approximately $11,000,000 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 nine months ended September 30, 2001 and 2000, respectively, differed from the statutory federal rate of 34 percent as follows: 2001 2000 ----------- ----------- Statutory rate applied to earnings (loss) before income taxes $(1,698,540) $(1,238,236) Increase (decrease) in income taxes resulting from: State income taxes 2,804 2,321 Other, including reserve for deferred tax asset 1,698,540 1,238,236 ----------- ----------- Income tax expense $ 2,804 $ 2,321 =========== ===========
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 Chairman of the Board, in addition to being a Company shareholder and director. Concurrent with the 1996 closing of the acquisition of Brister's, the Company and the former owner executed a lease agreement for a primary two-year term which expiring in 1998 and an additional two-year renewal extension which has expired as of September 30, 2000. The Company currently occupies its primary manufacturing facility on a month-to-month lease at a monthly lease payment of approximately $6,025 per month. Total payments under this agreement were approximately $60,000 and $62,000 for the nine months ended September 30, 2001 and 2000, respectively. 15 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 could have been exercised commencing on January 1, 1998 and expired on December 31, 2000. On August 1, 2000, the Company and Charles Brister, the Company's then President and current Chairman of the Board, entered into a license agreement (the "License Agreement") for "Accelerator Pedal Override Apparatus for Self-Propelled Motorized Cart with Aligned Brake and Accelerated Push-Rod Type Operator Pedals" ("Pedal Override") and for "Clutch Assembly for Chain Driven Cart" (the "Clutch Lube") which are subject to certain patent rights owned by Mr. Brister. The term of the License Agreement is for a period of three (3) years. In August 2000, the Company paid Mr. Brister $40,000 for arrearage royalty fees covering the Pedal Override and Clutch Lube under a prior license agreement between the Company and Mr. Brister. Pursuant to the current License Agreement, the Company has agreed to pay Mr. Brister royalties as follows: (i) the greater of $20,000 or the sum of a royalty of $1.00 for each Company product sold by the Company or any of its affiliates or subsidiaries containing or utilizing the Pedal Override during the period beginning August 1, 2000 and ending July 31, 2001, and a royalty of $0.50 for each Company product sold by the Company or any of its affiliates or subsidiaries containing or utilizing the Clutch Lube during the period beginning August 1, 2000 and ending July 31, 2001, (ii) the greater of $20,000 or the sum of a royalty of $1.00 for each Company product sold by the Company or any of its affiliates or subsidiaries containing or utilizing the Pedal Override during the period beginning August 1, 2001 and ending July 31, 2002, and a royalty of $0.50 for each Company product sold by the Company or any of its affiliates or subsidiaries containing or utilizing the Clutch Lube during the period beginning August 1, 2001 and ending July 31, 2002, and (iii) the greater of $20,000 or the sum of a royalty of $1.00 for each Company product sold by the Company or any of its affiliates or subsidiaries containing or utilizing the Pedal Override during the period beginning August 1, 2002 and ending July 31, 2003, and a royalty of $0.50 for each Company product sold by the Company or any of its affiliates or subsidiaries containing or utilizing the Clutch Lube during the period beginning August 1, 2002 and ending July 31, 2003. The Company shall pay the accrued royalties on January 1 and July 31 of each year during the term of the License Agreement. Either party may terminate the License Agreement upon thirty (30) days written notice to the other party if the other party commits a material breach of any term of the License Agreement and fails to cure such breach within the 30-day period. Upon termination of the License Agreement for any reason, the Company shall return to Mr. Brister the technology and tangible manifestations or copies thereof relating to the Pedal Override and Clutch Lube and all licenses granted under the License Agreement will be transferred and assigned by the Company to Mr. Brister or to his designee. On October 10, 2000, the Company entered into a license agreement with Charles Brister (the "Technology Agreement") for the right to use a safety fuel tank and filler cap apparatus on its products (the "Technology") which is owned by Mr. Brister under certain patents and patent applications. In consideration of the grant of the license to the Technology, the Company agreed to pay Mr. Brister an annual license fee of $250,000. The first annual license fee payment is payable in two equal payments of $125,000 each, with the first $125,000 payment being paid to Mr. Brister in August 2000 and the second $125,000 payment due on December 31, 2000. The Technology Agreement is for a period of three (3) years and shall be automatically renewed annually thereafter unless either of the parties provides at least sixty (60) days notice of non-renewal prior to the termination date of the Technology Agreement. The Technology Agreement is subject to termination for non-payment of the license fee and royalties and for certain other reasons. In addition to the annual license fee of $250,000, the Company shall pay Mr. Brister a royalty of $1.00 for each Company product which utilizes the Technology. However, in no event shall royalties for a calendar year for use of the Technology on the Company's products be less than $500,000 for the first full year of the Technology Agreement ending on December 31, 2001; less than $500,000 for the license year ending December 31, 2002 and less than $1,000,000 for the license year ending December 31, 2003 and thereafter. 16 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note M - Related Party Transactions - Continued In the event that royalties for a license year do not equal the required minimum, Charles Brister may, at his option, convert the exclusive license granted to the Company to a non-exclusive license without the right of the Company to sub-license, by thirty (30) days notice in writing to the Company, unless such default is cured by the Company within the 30-day notice period. Subject to the terms of the Technology Agreement, the Company shall have the right to grant sub-licenses to others for fees or at royalty rates to be determined by the Company. As sub-license income, the Company has agreed to pay to Mr. Brister 50% of all license fees, royalties, advance royalties, minimum royalties or other payments accrued or received in respect to the granting or maintaining of sub-licenses, provided, however, in no instance shall the amount paid to Mr. Brister be less than $1.00 for each product which utilizes the Technology. Additionally, the Company has agreed during the term of the Technology Agreement to maintain product liability insurance naming Mr. Brister as an additional insured to provide protection against claims and causes of action arising out of any defects or failure to perform of the Technology. The amount of coverage shall be a minimum of $2,000,000 combined single limit, with a deductible amount not to exceed $100,000 for each single occurrence for bodily injury and/or property damage. Note N - Preferred Stock Preferred stock consists of the following as of September 30, 2001 and 2000: September 30, 2001 September 30, 2000 ------------------ ------------------ # shares Par Value # shares Par Value -------- --------- -------- --------- Convertible Preferred Stock 1,550,000 $ 1,550 1,550,000 $ 1,550 Series A Preferred Stock 4,000,000 4,000 4,000,000 4,000 Series B Preferred Stock 88,000 88 73,333 73 --------- --------- --------- --------- Total 5,638,000 $ 5,638 5,623,333 $ 5,623 ========= ========= ========= ========= 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. The dividend payable at June 30, 2001 was paid in August 2001 with 581,250 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. The dividend payable at December 31, 1999 was paid in February 2000 with the issuance of 225,022 shares of restricted, unregistered common stock. 17 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note N - Preferred Stock - Continued In October and November 2000, the Company sold an aggregate 88,000 shares of its Series B Preferred Stock to the Foundation for $6,600,000 or $75.00 per share. Each share of Series B Preferred Stock is convertible at the option of the holder into 200 shares of Common Stock of the Company. Each outstanding share of Series B Preferred Stock has the right to 200 votes at any meeting of the stockholders of the Company. The Company and the Foundation have entered into a Registration Rights Agreement dated May 17, 2000, and as amended on October 9, 2000 which granted certain registration rights to the Foundation for the shares of Common Stock of the Company to be issued to the Foundation upon conversion of the Series A and Series B Preferred Stock. Note O - Common Stock Transactions In August 2001, the Company's Board of Directors authorized the issuance of an aggregate 581,250 shares of restricted, unregistered common stock in payment of the semi-annual dividend payable on the 9.0% Convertible Preferred Stock. During the first nine months of 2000, the Company sold an aggregate 1,639,995 shares of restricted, unregistered common stock pursuant to a private placement memorandum for gross proceeds of approximately $613,360. Each share was accompanied by a Warrant to purchase one additional share of restricted, unregistered common stock at a price of $0.50 per share. These warrants expire on May 31, 2005. In February 2000, the Company issued 225,022 shares of restricted, unregistered common stock for the payment of the approximate $69,757 dividend payable at December 31, 1999 on the Company's Convertible Preferred Stock. In September 2000, the Company issued approximately 59,077 shares of restricted, unregistered common stock in settlement of outstanding invoices for legal services with the Company's corporate product liability counsel in the aggregate amount of approximately $14,700, which approximates the "fair value" of the number of shares issued in this transaction. Note P - Common Stock Warrants In September 1997, the Company sold 155,000 Underwriter's Warrants for an aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2. Each warrant allows the Underwriter to purchase one share of the Company's common stock at $6.00 per share and one (1) 1997 Warrant at a price of $0.1875 per share. The 1997 warrants are described in detail in the next paragraph. These warrants expired on September 9, 2002. 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. 18
Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note P - Common Stock Warrants - Continued On March 9, 1999, the Company, as compensation for waiving certain events of default and the amendment to the Company's loan agreement with a non-financial institution lender, granted the lender a stock warrant to purchase 100,000 shares of the Company's restricted, unregistered common stock at a price of $0.54 per share. 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. In conjunction with a private placement of common stock during the first six months of 2000, the Company issued 1,639,995 Warrants to purchase an equivalent share of common stock at a price of $0.50 per share. These warrants are redeemable by the Company at a price of $0.01 per Warrant at any time after the first anniversary of the "Final Closing Date" upon 30 days written notice to the Warrant holders, if the average closing price of the Company's common stock equals or exceeds $1.50 per share for the 20 consecutive trading days ending three days prior to the date of the notice of redemption. These Warrants expire on May 31, 2005. Warrants Warrants originally outstanding at issued September 30, 2001 Exercise price ---------- ------------------ --------------- Underwriter's Warrants 155,000 - $4.00 per share 1997 Warrants 1,782,500 1,782,500 $4.00 per share Lender's Warrants 150,000 150,000 $0.54 per share 2000 Warrants 1,639,995 1,639,995 $0.50 per share --------- --------- Totals at September 30, 2001 3,727,495 3,572,495 ========= =========
Note R - Stock Options The Company's Board of Directors has allocated an aggregate 125,377 shares of the Company's common stock for unqualified stock option plans for the benefit of employees of the Company and its subsidiaries. During 1996, the Company granted options to purchase 59,355 shares of the Company's common stock to employees of the Company and its operating subsidiaries at an exercise price of $5.63 per share. These options expire at various times during 2001. On January 30, 1997, the Board of Directors of the Company adopted a stock option plan providing for the reservation of an additional 66,667 shares of common stock for options to be granted to employees of the Company. Concurrent with this action, the Company granted options to purchase 6,667 shares of the Company's common stock at a price of $4.875 per shares to the Company's then Chief Financial Officer and the Company's Vice President of Marketing (VP Options). These options are exercisable after January 30, 1998 and expire on January 30, 2002. The options granted to the Company's former Chief Financial Officer expired concurrent with his termination in the first quarter of 1998. Further, on January 30, 1997, the Company granted options to purchase an aggregate 52,670 shares of the Company's common stock to employees of the Company and its operating subsidiaries at an exercise price of $4.875 per post-split share. These options are exercisable after January 30, 1998 and expire on January 30, 2002. 19
Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note R - Stock Options - Continued During 1998, the Company granted an aggregate 265,000 options to purchase an equivalent number of shares of restricted, unregistered common stock to officers and employees in conjunction with the employment of such officers and employees. These options are exercisable at prices ranging from $1.06 per share to $3.50 per share. Concurrent with the termination of a Company officer, 210,000 of the granted 1998 options terminated. The remaining options are exercisable between March 1999 and December 1999 and expire between March 2003 and December 2003. In January 1999, as part of the Separation Agreement between the Company and its then President and Chief Executive Officer, the Company issued this individual options to purchase 15,000 shares of Common Stock at an option exercise price of $1.06 per share. This option was granted to replace options to purchase 200,000 shares of common stock which were effectively canceled at separation. These options are vested and expire on January 20, 2004. During the fourth quarter of 1999, the Company granted options to its President, Vice President of Administration and various employees. These options vested in various amounts over a period from grant through three years from the grant date. These options, if not exercised, expire between the fourth and fifth anniversary date of the option grant. These options are summarized as follows: Options granted Exercise price --------------- ---------------- President options 450,000 $0.375 per share Vice President of Administration options 225,000 $0.375 per share Employee options 3,000 $0.375 per share Employee options 117,000 $0.31 per share Concurrent with a settlement and release agreement reached with the Company's former Vice President of Administration in the third quarter of 2000, 125,000 of the granted 1999 options were terminated. The options that were granted to employees during 1996 and 1997 to purchase 46,953 shares of Common Stock originally were issued at per share exercisable prices of $4.88 to $5.63 and expire periodically at various times until January 31, 2003. The exercise price of these options was reduced to $0.375 per share by the Board of Directors on August 21, 2000. There were no exercise of any options during the years ended December 31, 2000 and 1999. The following table summarizes all options granted from 1996 to September 30, 2001. Options Options Options Options Exercise price granted exercised terminated outstanding per share ----------- ----------- ----------- ----------- --------------- 1996 options 59,335 - 37,411 21,924 $ 0.375 1997 VP options 13,334 - 6,667 6,667 $ 0.375 1997 options 52,670 - 41,777 10,893 $ 0.375 1998 options 265,000 - 230,000 35,000 $ 0.375 1999 options 810,000 - 135,000 675,000 $ 0.31 - $0.688 ----------- ----------- ----------- ----------- Totals 1,200,339 - 450,855 753,484 =========== =========== =========== ===========
20 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note R - Stock Options - Continued The weighted average exercise price of all issued and outstanding options at September 30, 2001 is approximately $0.35. 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 significantly as the exercise price of the options was relatively equivalent to 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 December 31, 2000 and 1999, respectively. Stock Compensation Plans - ------------------------ On May 27, 1998, the stockholders of the Company approved the 1998 Stock Compensation Plan of Karts International Incorporated (the "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. The Plan is administered by the Compensation Committee of the Board of Directors (the "Committee") or the entire Board of Directors.. On December 12, 2000, the stockholders of the Company approved the 2000 Stock Compensation Plan (the "2000 Plan"), which initially reserves 750,000 shares of Common Stock for issuance under the 2000 Plan. The 2000 Plan was effective on October 19, 2000 and was terminated by the Company's Board of Directors on July 10, 2001 There were no options granted under the 2000 Plan. There presently are outstanding options granted under the 1998 Plan to purchase 710,000 shares of Common Stock at prices ranging from $0.3125 to $3.50 per share, which options expire periodically from August 21, 2001 to December 31, 2005. On August 21, 2000, the Board of Directors approved lowering to $0.375 per share the exercise price on all outstanding employee options that were exercisable at a price greater than $0.375 per share. The Board believed this action was in the best interest of the Company since substantially all of the outstanding employee options were granted at per share exercisable prices significantly greater than the current market price of the Company's Common Stock, which has ranged from $.25 to $.50 per share. Note S - Commitments and Contingencies Building Lease - -------------- On May 16, 2000, the Company executed a lease agreement with the Town of Roseland Louisiana for a new production facility. The Company paid or accrued, upon execution, approximately $200,000, which constitutes 100.0% of the required lease payments for both the initial lease term from October 1, 2000 through September 30, 2007 and the option lease term from October 1, 2007 through September 30, 2009. The unamortized portion of this agreement is reflected as a component of prepaid expenses in the accompanying financial statements. 21 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note S - Commitments and Contingencies - Continued Litigation - ---------- The Company and/or it's operating subsidiaries are as defendant(s) in several product liability lawsuits related to its "fun karts". The Company has had and continues to have commercial liability insurance coverage to cover these exposures with a $50,000 per claim deductible as of September 30, 2001. The Company is vigorously contesting each lawsuit and has accrued management's estimation of the Company's exposure in each situation. Additionally, the Company maintains a reserve for future litigation equal to the "per claim" self-insurance amount times the four- year rolling average of lawsuits filed naming the Company as a defendant. The Company anticipates no material impact to either the results of operations, its financial condition or liquidity based on the uncertainty of outcome, if any, of existing litigation, either collectively and/or individually, at this time. Employment agreements - --------------------- On October 19, 1999, the Company's Board of Directors ratified an Employment Agreement (Agreement) with Charles Brister to serve as the Company's President and Chief Executive Officer. The Agreement term was effective as of February 1, 1999 and expires on the third anniversary date of the Agreement with an automatic one year extension unless either the Company or the President provides a thirty (30) day written notice not to continue the Agreement. This Agreement provides the President with an annual salary of $150,000 per year, payable in either common stock of the Company or cash. At the end of each calendar quarter during the first calendar year of this Agreement, the Company shall pay the President a cash portion to satisfy the President's estimated federal and state tax liability and the balance shall be paid in shares of common stock calculated based on the closing bid price of the Company's common stock as quoted at the end of each quarter. Further, the President was granted 450,000 options to purchase shares of the Company's common stock at 100% of the closing bid price of the Company's common stock on the ratification date and the options vest as follows: 100,000 at the ratification date of this Agreement; 150,000 on the second anniversary date of this Agreement; and 200,000 on the third anniversary date of this Agreement. Additionally, the President may be eligible to receive an annual bonus which shall be in the form of (a) options to purchase up to 50,000 shares of the Company's common stock, which shall vest immediately upon grant and expire five years from the grant date and (b) cash, not to exceed 15% of the President's base salary. On June 1, 2000, and as amended on October 23, 2000, Charles Brister and the Company executed an Amended Employment Agreement which superceded the October 19, 1999 Agreement discussed above. Under the Amended Employment Agreement, Mr. Brister will serve the Company as President and Chief Executive Officer for a period of three years beginning June 1, 2000 with an automatic one-year extension unless either the Company or Mr. Brister provides a 30-day written notice not to continue the Amended Employment Agreement. The Amended Employment Agreement provides Mr. Brister with an annual salary of $200,000 per year payable in cash in accordance with the Company's established payroll procedures, which may be increased at any time at the sole discretion of the Board of Directors of the Company. Additionally, Mr. Brister was granted 350,000 options to purchase shares of the Company's Common Stock at the closing bid price of the Company's Common Stock as of August 21, 2000. The options vest and are exercisable as follows: (a) options to purchase 100,000 shares vested on August 21, 2000 at an exercise price of $0.375 per share; (b) options to purchase 100,000 shares shall vest and be exercisable upon the second anniversary date of the Amended Employment Agreement; and (c) options to purchase 150,000 shares shall vest and be exercisable upon the third anniversary date of the Amended Employment Agreement. The options expire June 1, 2005. 22 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note S - Commitments and Contingencies - Continued Employment agreements - continued - --------------------------------- Additionally, Mr. Brister may be eligible to receive an annual bonus which shall be in the form of (a) options to purchase up to 50,000 shares of the Company's Common Stock, which options shall vest immediately upon issuance and shall expire five (5) years from the date of grant, and (b) cash in an amount established by an annual performance-based management bonus program which will be approved by the Board of Directors. Subject to certain exceptions, if the Amended Employment Agreement is terminated by the Company or Mr. Brister as a result of a change in control (as defined in the Amended Employment Agreement), Mr. Brister shall be entitled to a cash payment of $200,000 and the immediate vesting of all options granted but not yet vested at the effective date of such change in control, as full and final satisfaction of all obligations due and owing to Mr. Brister by the Company under the terms of the Amended Employment Agreement. Mr. Brister resigned as President and Chief Executive Officer on February 5, 2001 and was elected to serve as Chairman of the Board. This resignation voluntarily terminated this employment agreement. Letter of Credit - ---------------- On March 1, 2001, the Company executed a $12,000 letter of credit in favor of a utility company to secure service to the Company's new facility in Roseland, Louisiana. Note T - Subsequent Events During October 2001, the Company received additional working capital advances of approximately $965,000 from The Morgan Creek Company. (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 - --------------------- Nine months ended September 30, 2001 as compared to the nine months ended - -------------------------------------------------------------------------------- September 30, 2000 - ------------------ The Company recorded net revenues of approximately $2,200,000 for the nine months ended September 30, 2001 as compared to approximately $4,900,000 for the comparable nine month period of 2000. The current year's net revenues for the nine months ended September 30, 2001 represented a 55.03% decrease from the same period of the previous year. The decrease in revenues is attributed to increased competition in the funkart market, and soft demand for product which resulted in a significant decrease in units sold from the same period of the previous year. This soft demand is attributed to the continuation of soft sales from the fourth quarter of Calendar 2000 which resulted in the Company's distribution channels being overstocked with product carried over from Calendar 2000. Additionally, the Company was behind schedule on releasing its new product line which has resulted in decreased sales. Gross profit was negatively impacted by the decrease in sales volume and additional costs associated with corporate initiatives to restructure the Company's management team. As a result, the Company realized a negative gross profit of approximately $(2,200,000) for the nine month period ended September 30, 2001 as compared to a gross profit of approximately $(910,000) for the same period of the previous year. Selling, general and administrative expenses were approximately $2,000,000 and $2,200,000 for the respective nine month periods ended September 30, 2001 and 2000. The decrease of approximately $200,000 between the respective nine month periods resulted from the differences between increases in bad debt expense and decreases in administrative payroll costs and other general and administrative overhead items. Research and development expenses totaled approximately $321,000 for the nine months ended September 30, 2001 compared to approximately $73,000 for the same period during 2000. The year-to-date 2000 costs were associated with the design, prototyping and development of the Polaris Trail Kart and other new models for the Company's product line. The year-to-date 2001 costs were associated with the Company's development of new high-performance models to supplement the Company's product line. Other income (expense) was approximately $38,000 and $43,000 for the respective nine month periods ended September 30, 2001 and 2000, respectively. These amounts are anticipated to remain relatively constant in future periods. Interest expense for the nine months ended September 30, 2001 and 2000 was approximately $300,000 and $378,000, respectively. For the nine months ended September 30, 2001, the Company incurred a net loss of approximately $(5,000,000), or approximately $(0.65) per share, as compared to a net loss of approximately $(3,600,000), or approximately ($0.54) per share, for the same nine month period in 2000. 24 Liquidity and Financial Condition - --------------------------------- As of September 30, 2001, the Company had positive (negative) working capital of approximately $(2,821,000) as compared to approximately $4,886,000 at September 30, 2000 and $2,860,000 as of December 31, 2000. During the first nine months of 2001 and 2000, the Company experienced negative cash flows from operations of approximately $(3,100,000) and $(4,550,000), respectively. To support the Company's working capital through October 2001, the Company received short-term non-interest bearing working capital advances from The Morgan Creek Company of approximately $5,000,000. The Morgan Creek Company is an unrelated private eleemosynary corporation serving as a trustee in a number of faith-based endeavors focused on community development and goodwill throughout the world. Proceeds from the Company's financing activities were used to support the Company's operations. In August 2001, the Company's Board of Directors authorized the issuance of an aggregate 581,250 shares of restricted, unregistered common stock in payment of the semi-annual dividend payable on the 9.0% Convertible Preferred Stock. Capital Requirements - -------------------- The Company expended cash of approximately $792,000 in additions to property and equipment during the first nine months of 2001. Liquidity requirements mandated by future business expansions or acquisitions, if any are specifically identified or undertaken, are not readily determinable at this time as no substantive plans have been formulated by management. The focus of current management continues to be returning the Company to profitability. Part II - Other Information Item 1 - Legal Proceedings See accompanying notes to the consolidated financial statements Item 2 - Changes in Securities In August 2001, the Company's Board of Directors authorized the issuance of an aggregate 581,250 shares of restricted, unregistered common stock in payment of the semi-annual dividend payable on the 9.0% Convertible Preferred Stock. Item 3 - Defaults on Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None. Item 5 - Other Information None 25 Item 6 - Exhibits and Reports on Form 8-K a) Exhibits - None -------- b) Reports on Form 8-K - None ------------------- - -------------------------------------------------------------------------------- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Karts International Incorporated November 6 , 2001 /s/ Timotheus benHarold ----- -------------------------------------------- Timotheus benHarold President, Chief Executive Officer Chief Accounting Officer and Director 26 -----END PRIVACY-ENHANCED MESSAGE-----