-----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, PPeRwlGOFj7uxop9//qrE0xWgtRyPL2kvRSSnlFaYaIYBmEHktHL9rcu2X+JmRyn shksepZAUuyO3bFypjx/Cg== 0001010549-99-000118.txt : 19990517 0001010549-99-000118.hdr.sgml : 19990517 ACCESSION NUMBER: 0001010549-99-000118 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KARTS INTERNATIONAL INC CENTRAL INDEX KEY: 0001010077 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 752639196 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23041 FILM NUMBER: 99623657 BUSINESS ADDRESS: STREET 1: 109 NORTHPARK BLVD STREET 2: STE 210 CITY: COVINGTON STATE: LA ZIP: 70433 BUSINESS PHONE: 5047471111 MAIL ADDRESS: STREET 1: 109 NORTHPARK BOULEVARD STREET 2: SUITE 210 CITY: COVINGTON STATE: LA ZIP: 70433 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB - -------------------------------------------------------------------------------- (Mark one) XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES - --------- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 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) 66204 Commercial Street, P. O. Box 695, 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: May 14, 1999: Common Stock: 5,574,298 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 March 31, 1999 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 29 Item 2 Changes in Securities 29 Item 3 Defaults Upon Senior Securities 29 Item 4 Submission of Matters to a Vote of Security Holders 30 Item 5 Other Information 30 Item 6 Exhibits and Reports on Form 8-K 30 Signatures 30 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 March 31, 1999 and 1998 of Karts International Incorporated (a Nevada corporation) and Subsidiaries and the accompanying consolidated statement of operations and comprehensive income and consolidated statement of cash flows for the three months ended March 31, 1999 and 1998. 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. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has suffered recurring annual losses from operations and experiences seasonality of product demand which is principally focused in the last four (4) months of the calendar year. This seasonality of product demand impacts the Company's cash flows during the first eight (8) months of the calendar year. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. S. W. HATFIELD, CPA (formerly S. W. HATFIELD + ASSOCIATES) Dallas, Texas May 10, 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 March 31, 1999 and 1998 (Unaudited) 1999 1998 ------------ ------------ Assets ------ Current Assets Cash on hand and in banks $ 102,818 $ 2,286,101 Accounts receivable Trade, net of allowance for doubtful accounts of $90,500 and $3,000, respectively 954,788 263,023 Recoverable income taxes 10,750 225,000 Inventory 1,829,933 870,572 Prepaid expenses 352,057 217,803 ------------ ------------ Total current assets 3,250,396 3,862,499 ------------ ------------ Property and equipment Building and improvements 932,437 448,209 Equipment 974,636 671,583 Transportation equipment 143,469 125,640 Furniture and fixtures 137,120 130,747 ------------ ------------ 2,187,662 1,376,179 Accumulated depreciation (319,084) (162,755) ------------ ------------ 1,868,578 1,213,424 Land 32,800 32,800 ------------ ------------ Net property and equipment 1,901,378 1,246,224 ------------ ------------ Other assets Note receivable 387,432 -- Option to acquire an unrelated entity 134,075 -- Goodwill, net of accumulated amortization of approximately $6,414,452 and $444,148, respectively -- 5,415,275 Organization costs, net of accumulated amortization of approximately $66,303 and $44,453, respectively 42,952 64,802 Covenant not to compete, net of accumulated amortization of approximately $13,889 and $ -0-, respectively 86,111 -- Other 53,432 16,283 ------------ ------------ Total other assets 704,002 5,496,360 ------------ ------------ Total Assets $ 5,855,776 $ 10,605,083 ============ ============
- Continued - The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 4
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED March 31, 1999 and 1998 (Unaudited) 1999 1998 ------------ ------------ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities Cash overdraft $ 1,047 $ -- Notes payable to banks and others 838,135 -- Notes payable to affiliates 333,723 -- Current maturities of long-term debt 40,280 26,659 Accounts payable - trade 2,837,480 124,562 Other accrued liabilities 415,309 137,022 Customer deposits 27,900 -- Accrued income and franchise taxes payable -- 139,160 ------------ ------------ Total current liabilities 4,493,874 427,403 ------------ ------------ Long-term liabilities Long-term debt, net of current maturities 244,327 257,317 ------------ ------------ Total liabilities 4,738,201 684,720 ------------ ------------ Commitments and contingencies Shareholders' equity Preferred stock - $0.001 par value 10,000,000 shares authorized None issued and outstanding -- -- Common stock - $0.001 par value 14,000,000 shares authorized 5,574,298 and 4,854,133 shares issued and outstanding 5,574 4,854 Additional paid-in capital 14,377,782 13,040,090 Accumulated deficit (13,265,781) (3,124,581) ------------ ------------ Total shareholders' equity 1,117,575 9,920,363 ------------ ------------ Total Liabilities and Shareholders' Equity $ 5,855,776 $ 10,605,083 ============ ============
The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 5 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME Three months ended March 31, 1999 and 1998 (Unaudited) Three months Three months ended ended March 31, March 31, 1999 1998 ----------- ----------- Net Sales $ 1,203,359 $ 509,205 ----------- ----------- Cost of sales Purchases, direct labor and related costs 1,355,578 694,442 Depreciation 16,941 16,358 ----------- ----------- Total cost of sales 1,372,519 710,800 ----------- ----------- Gross profit (169,160) (201,595) ----------- ----------- Operating expenses Research and development expenses 1,095 2,096 Selling expenses 27,270 17,327 General and administrative expenses 483,400 332,307 Depreciation and amortization 27,462 76,807 ----------- ----------- Total operating expenses 539,227 428,537 ----------- ----------- Income (loss) from operations (708,387) (630,132) Other income (expense) Interest expense (61,958) (20,369) Other 80,047 28,528 ----------- ----------- Income before income taxes (690,298) (621,973) Provision for income taxes -- -- ----------- ----------- Net loss (690,298) (621,973) Other comprehensive income -- -- ----------- ----------- Comprehensive income (loss) $ (690,298) $ (621,973) =========== =========== Income (loss) per weighted- average share of common stock outstanding, computed on net loss - basic and fully diluted $ (0.12) $ (0.13) =========== =========== Weighted-average number of shares of common stock outstanding - basic and fully diluted 5,574,298 4,854,133 =========== =========== The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 6
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 1999 and 1998 (Unaudited) Three months Three months ended ended March 31, March 31, 1999 1998 ----------- ----------- Cash flows from operating activities Net income (loss) for the period $ (690,298) $ (621,973) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 44,403 93,165 Accrued interest income on note receivable (9,319) -- (Increase) Decrease in: Accounts receivable 1,355,869 200,022 Income taxes recoverable 29,645 -- Inventory 300,016 38,642 Prepaid expenses (137,826) (45,664) Other (32,421) (7,432) Increase (Decrease) in: Accounts payable and other accrued liabilities (388,860) (91,073) Customer deposits 27,900 -- Accrued income taxes payable -- 1,450 ----------- ----------- Cash flows used in operating activities 499,109 (432,863) ----------- ----------- Cash flows from investing activities Cash paid to acquire option to purchase unrelated entity (10,531) -- Cash paid for property and equipment (13,695) (76,265) ----------- ----------- Cash flows used in investing activities (24,226) (76,265) ----------- ----------- Cash flows from financing activities Decrease in cash overdraft (8,106) -- Change in note payable to affiliates - net 209,848 -- Net activity on bank and other lines of credit (726,580) -- Principal payments on long-term note payable (10,917) (6,517) ----------- ----------- Cash flows provided by financing activities (535,755) (6,517) ----------- ----------- Increase in cash (60,872) (515,645) Cash at beginning of period 163,690 2,801,746 ----------- ----------- Cash at end of period $ 102,818 $ 2,286,101 =========== ===========
- Continued - The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 7
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Three months ended March 31, 1999 and 1998 (Unaudited) Three months Three months ended ended March 31, March 31, 1999 1998 -------- -------- Supplemental disclosure of interest and income taxes paid Interest paid for the period $ 65,170 $ 20,369 ======== ======== Income taxes paid (refunded) for the period $(29,645) $ -- ======== ======== Supplemental disclosure of non-cash investing and financing activities Transportation equipment purchased with notes payable $ 17,829 $ 41,295 ======== ========
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. 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. 9 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - GOING CONCERN For the years ended December 31, 1998, 1997, and 1996, the Company experienced net losses from operations of approximately $3,930,000, $580,000, and $402,000, respectively and has utilized cash in operating activities of approximately $3,260,000, $220,000 and $110,000, respectively. The Company has also experienced senior management team turnover in both January 1997 and 1998. The Company's former management was unable to operate the Company's facilities in a manner that would allow the Company meet its order demand for product production during the fourth quarter of 1998 and, accordingly, incurred short-term financing from a non-financial institution lender to provide liquidity. Further, former management spent considerable time and financial resources in exploring possible merger or acquisition candidates and the results of these efforts were for the most part unsuccessful and diverted management time and resources from customer demands for product during the Company's heaviest demand period. During the first quarter of 1999, the Company experienced positive cash flows from operations of approximately $499,000 and reduced its short-term borrowings from a non-financial institution lender by approximately $686,000. The Company's working capital deteriorated from approximately $(392,000) at December 31, 1998 to approximately $(1,243,000) at March 31, 1999; principally due to accounts receivable collections, which were used to reduce short-term debt and provide seasonal liquidity. 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. Management has taken the following actions to stabilize the Company's financial position for future periods: 1) initiated plans to dissolve its separate sales and marketing company subsidiary which focused on the sale of customized promotional "fun karts" to various national companies and consolidated this sales effort into existing functions within the Company; 2) initiated plans to consider the relocation and/or consolidation of manufacturing or sales activities within other existing facilities of the Company; 3) initiated cost control measures related to the use of direct labor and material purchasing to maximize the utilization of overstocked positions that existed at December 31, 1998; 4) terminated excess management and supervisory personnel hired by former management and reorganized Company management and operational teams along consolidated Company lines rather than individual operating subsidiary lines as implemented by former management and 5) is reevaluating its product lines, costs of manufacture, selling prices and customer relations to maximize unit sales and gross profitability during the Company's slower sales seasons of the calendar year. Management has also initiated plans to raise additional capital through the sale of equity securities to provide additional working capital and improve liquidity. Management believes that its efforts to raise additional capital through the sale of equity securities and/or new debt financing will provide additional cash flows. However, 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. 10 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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. The Company had no significant international sales during 1999 and 1998, respectively. The Company anticipates continuing international sales in future periods and is continuing to develop credit policies related to this revenue source. 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 March 31, 1999 and 1998, inventory consisted of the following components: 1999 1998 ---------- ---------- Raw materials $1,600,442 $ 772,722 Work in process 137,151 49,035 Finished goods 92,340 48,815 ---------- ---------- $2,129,949 $ 870,572 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. 11 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. Goodwill -------- Goodwill represents the excess of the purchase price of acquired subsidiaries over the fair value of net assets acquired and was being amortized over 25 years using the straight-line method. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company follows the policy of evaluating all qualifying assets as of the end of each reporting quarter. For the year ended December 31, 1997, no charges to operations were made for impairments in the recoverability of goodwill. Current management, effective December 31, 1998, upon the realization that 1998 operational objectives were not met, recorded an impairment of future recoverability of goodwill equivalent to 100.0% of the unamortized goodwill incurred at the acquisition of Brister's Thunder Karts, Inc., USA Industries, Inc. and Straight Line Manufacturing, Inc. 8. Income taxes ------------ The Company utilizes the asset and liability method of accounting for income taxes. At March 31, 1999 and 1998, 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 March 31, 1999 and 1998, the deferred tax asset related to the Company's net operating loss carryforward was fully reserved. 9. 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. 12 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 10. 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 March 31, 1999 and 1998, 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 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 quarters ended March 31, 1999 and 1998, the separate operating entities of the Company had credit risk exposures in excess of the FDIC coverage as follows: Highest Lowest Number of days Entity exposure exposure with exposure -------------------------- -------- -------- -------------- Quarter ended March 31, 1999 - ---------------------------- Brister's Thunder Karts, Inc. $ 46,451 $ 968 30 USA Industries, Inc. $ 33,253 $ 1,141 19 Quarter ended March 31, 1998 - ---------------------------- Karts International Incorporated $ 21,278 $ 21,278 1 Brister's Thunder Karts, Inc. $162,063 $ 12,115 33 USA Industries, Inc. $ 73,714 $ 3,953 73 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 had unsecured amounts invested in reverse repurchase agreements on a daily basis from February 1997 through March 31, 1999. As of March 31, 1999 and 1998, the Company had an unsecured outstanding reverse repurchase agreement of approximately $21,000 and $2,215,000, respectively. The Company incurred no losses during 1999 and 1998 as a result of any of these unsecured situations. NOTE E - PROPERTY AND EQUIPMENT Total depreciation expense charged to operations for the quarters ended March 31, 1999 and 1998 was approximately $30,343 and $25,795, respectively. 13 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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. 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. During the first quarter of 1999, the Company paid an additional $10,531 in costs related to the acquisition of this option to acquire this entity. 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. NOTE H - NOTES PAYABLE TO BANKS AND OTHERS The Company has two lines of credit with an aggregate face value of $2,000,000. One line of credit note is tied to the Company's aggregate trade accounts receivable balances, not to exceed $1,000,000 (A/R LOC). The second line of credit is 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). As of March 31, 1999, an aggregate of approximately $773,451 is outstanding on these lines of credit. The notes require the interest and fees on the notes to be paid monthly and all of the Company's trade accounts receivable collections are deposited to the lender's benefit to a lockbox controlled by the lender. The notes mature in September 1999. 14 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - NOTES PAYABLE TO BANKS AND OTHERS - Continued The notes bear a default interest of 15.0% (Lender's Base Rate of 8.0% plus 7.0%). In the event that the Company's pending equity offering raises a minimum of $1.5 million, the interest rate will be reduced to the Lender's Base Rate plus 3.0%. Further, the Agreement requires the payment of a one-time 1.0% commitment fee and the payment of a 1/12% servicing fee per month on the face amount of each line of credit during the term of each respective line of credit. The Agreement contains certain restrictive covenants related to the Company's business operations and financial ratios. As of December 31, 1998, the Company was not in compliance with all covenants in the Agreement. The lender notified the Company on February 22, 1999 of certain defaults on the Agreement and the lender granted a waiver of the notified defaults on March 8, 1999. On March 9, 1999, the Company and the lender executed an amendment to the Company's loan agreement with the lender whereby the Company must obtain a minimum of $1.5 million of new equity capital by May 6, 1999. If a violation by the Company of any of the loan covenants occurs or any other default by the Company on its obligations under these credit lines, including failure to raise the $1.5 million in new equity capital, the lender could, at its sole discretion, could declare the then outstanding indebtedness to be immediately due and payable. The lender could then foreclose on a significant portion of the Company's assets, which could have a material adverse effect on the Company's financial condition and operations. The Company's Straight Line subsidiary has two separate term lines of credit: A $60,000 corporate line of credit payable to a bank with an outstanding balance of approximately $55,359 at March 31, 1999. This line of credit bears interest at the Bank's base rate plus 1.0% (8.75% at March 31, 1999). This line of credit requires monthly payments of approximately 2.0% of the outstanding principal plus all accrued, but unpaid, interest and fees. This line of credit is secured by a first mortgage on residential property owned by the former sole shareholder of Straight Line and the personal guaranty of the former sole shareholder and matures in November 1999. A $10,000 personal line of credit payable to a bank with an outstanding balance of approximately $9,325 at March 31, 1999. This line of credit bears at the Bank's base rate plus 3.0% (10.75% at March 31, 1999). This line of credit requires monthly payments of 1.8% of the outstanding principal balance plus all accrued, but unpaid, interest and fees. This line of credit is subject to the collateralization discussed above and this line of credit matures in November 1999. A recap of notes payable consist of the following: 1999 1998 -------- -------- Inventory line of credit $526,625 $ -- Accounts receivable line of credit 246,826 -- $60,000 corporate line of credit 55,359 -- $10,000 personal line of credit 9,325 -- -------- -------- Total notes payable $838,135 $ -- ======== ======== 15
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE J - NOTES PAYABLE TO AFFILIATES 1999 1998 -------- -------- $225,000 note 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 at the earlier of the receipt of proceeds from an anticipated equity offering or three months from March 17, 1999. The loan is unsecured $225,000 $ -- $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. Management anticipates restructuring this note on or before its scheduled maturity date 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 58,723 -- -------- -------- Total related party long-term debt $333,723 $ -- ======== ========
16
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - LONG TERM DEBT TO BANKS AND OTHERS Long-term debt payable to banks and others consist of the following at March 31, 1999 and 1998: 1999 1998 --------- --------- $20,770 installment note payable to a bank. Interest at 7.75%. Payable in monthly installments of approximately $419, including accrued interest. Final maturity in May 2002. Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. $ 14,099 $ 17,876 $23,122 installment note payable to a bank. Interest at 8.25% Payable in monthly installments of approximately $726, including accrued interest. Final maturity in March 2001 Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. 16,021 23,097 $17,829 installment note payable to a bank. Interest at 8.25% Payable in monthly installments of approximately $561, including accrued interest. Final maturity in January 2002 Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. 16,496 -- $27,677 note payable to an individual. Interest at 7.0%. Payable in semi-monthly installments of approximately $200, including interest. Secured by equipment owned by Brister's Thunder Karts, Inc. -- 740 $240,020 mortgage note payable to a bank. Interest at the Bank's Commercial Base Rate (9.25% at March 31, 1999). Payable in monthly installments of approximately $2,626, including accrued interest. Final maturity in August 2010. Collateralized by land and a building owned by USA Industries, Inc. 213,995 220,703 $9,348 installment note payable to a bank. Interest at 10.0% Payable in monthly installments of approximately $303, including accrued interest. Final maturity in April 1999 Collateralized by transportation equipment owned by USA Industries, Inc. 233 3,387 $18,198 installment note payable to a bank. Interest at 8.25% Payable in monthly installments of approximately $572, including accrued interest. Final maturity in March 2001 Collateralized by transportation equipment owned by USA Industries, Inc. 12,601 18,173 $14,000 installment note payable to an equipment finance company. Payable in monthly installments of approximately $345, including accrued interest. Final maturity in May 2002 Collateralized by equipment owned by USA Industries, Inc. 11,162 -- --------- --------- Total long-term debt to banks and others 284,607 283,976 Less current maturities (40,280) (26,659) --------- --------- Long-term portion $ 244,327 $ 257,317 ========= =========
17
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - LONG-TERM DEBT TO BANKS AND OTHERS - Continued Future maturities of long-term debt are as follows: Year ending December 31, Amount -------------- -------------- 1999 $ 40,280 2000 41,342 2001 33,054 2002 20,052 2003 17,249 2004 - 2008 114,603 2009 - 2013 18,027 -------- Totals $ 284,607 ======== NOTE L - INCOME TAXES The components of income tax (benefit) expense for the quarters ended March 31, 1999 and 1998, respectively, are as follows: 1999 1998 -------------- -------------- Federal: Current $ - $ - Deferred - - ----------- ----------- - - ----------- ----------- State: Current - - Deferred - - ----------- ----------- - - ----------- ----------- Total $ - $ - =========== =========== As of March 31, 1999, the Company has a net operating loss carryforward of approximately $3,000,000 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 March 31, 1999 and 1998, respectively, differed from the statutory federal rate of 34 percent as follows: 1999 1998 -------------- -------------- Statutory rate applied to earnings (loss) before income taxes $ (234,701) $ (211,471) Increase (decrease) in income taxes resulting from: State income taxes -- -- Other including reserve for deferred tax asset 234,701 211,471 ----------- ----------- Income tax expense $ -- $ -- =========== ==========
18 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 $18,075 for each of the quarters ended March 31, 1999 and 1998, respectively. Concurrent with the acquisition of Brister's, the Company and the former owner of Brister's entered into a Real Estate Option Right of First Refusal Agreement. This agreement provides that the Company may, at its sole option, purchase the real property and improvements in Roseland, Louisiana currently utilized by the Company or its subsidiary for an aggregate purchase price of $550,000. The option may be exercised commencing on January 1, 1998 and expires on December 31, 2000. NOTE N - COMMON STOCK TRANSACTIONS The terms of a March 31, 1996 private placement memorandum required the Company and/or a company owned by a current officer and director to issue additional shares to the original investors in the private placement memorandum in the event that the Company's securities, as listed on a published exchange or electronic bulletin board, did not equal$4.50 per share on March 31, 1998 (the second anniversary date of the closing of the private placement memorandum offering). The issuance of additional shares, if any is required, to the original investors will be done without additional compensation to the Company. To facilitate this contingency, the Company sold 233,333 restricted, unregistered shares of common stock to an entity owned by an officer and director of the Company for cash of approximately $350. These shares were placed into an escrow account for the benefit of the original investors. In the event that no additional shares are required to be issued to the original investors, the shares held in escrow will be returned to the company owned by a current officer and director of the Company. At the close of business on March 31, 1998, the Company's common stock, as quoted on the NASDAQ Small-Cap Market, closed below the required strike price of $4.50 per share. Accordingly, during the second quarter of 1998, effective April 1, 1998, the entity owned by an officer and director of the Company released approximately 95,624 of the 233,333 shares being held in escrow for the settlement of the contingency related to the March 31, 1996 private placement memorandum. The remaining approximate 137,709 shares were released from the escrow agreement and returned to the entity owned by an officer and director of the Company. The April 1, 1998 transactions were recorded by the Company based on the imputed "fair value" of the securities released from escrow upon the ultimate settlement of the March 31, 1996 contingent issuance as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The imputed "fair value" of the 95,624 shares was calculated as approximately $227,904 based upon the Company's closing stock price on March 31, 1998. This imputed charge was offset against the imputed additional paid-in capital generated as a result of this accounting transaction as a cost of raising the initial capital in the original March 31, 1996 transaction. The imputed "fair value" of the residual 137,709 shares was calculated as approximately $413,412, net of the initial cash paid of $350, based upon the Company's closing stock price on March 31, 1998. This difference between the imputed fair value and the actual cash paid was recorded as a component of compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting expenses in the accompanying statement of operations. 19 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N - COMMON STOCK TRANSACTIONS - Continued In December 1998, the Company issued an aggregate 90,090 shares of unregistered, restricted common stock, valued at approximately $100,000, to acquire an option to acquire 100.0% of the issued and outstanding stock of an unrelated entity engaged in the manufacture of concession karts. In December 1998, the Company issued 337,838 shares of unregistered, restricted common stock valued at approximately $375,000 to acquire a note receivable from the unrelated entity discussed above with a face amount of $375,000 from an unrelated individual. On December 14, 1998, the Company issued 109,589 shares of unregistered, restricted common stock valued at approximately $50,000 in settlement of a contract for consulting services of equal value related to various business acquisition activities. The $50,000 has been charged to operations in the accompanying financial statements. 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. 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 Warrants originally outstanding at issued March 31, 1999 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 March 31, 1999 2,504,185 2,437,518 ========= ========= 20 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE O - 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. 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. NOTE Q - STOCK OPTIONS The Company's Board of Directors has allocated an aggregate 125,377 shares of the Company's common stock for unqualified stock option plans for the benefit of employees of the Company and its subsidiaries. During 1996, the Company granted options to purchase 59,355 shares of the Company's common stock to employees of the Company and its operating subsidiaries at an exercise price of $5.63 per share. These options expire at various times during 2001. On January 30, 1997, the Board of Directors of the Company adopted a stock option plan providing for the reservation of an additional 66,667 shares of common stock for options to be granted to employees of the Company. Concurrent with this action, the Company granted options to purchase 6,667 shares of the Company's common stock at a price of $4.875 per shares to the Company's then Chief Financial Officer and the Company's Vice President of Marketing (VP Options). These options are exercisable after January 30, 1998 and expire on January 30, 2002. The options granted to the Company's former Chief Financial Officer expired concurrent with his termination in the first quarter of 1998. Further, on January 30, 1997, the Company granted options to purchase an aggregate 52,670 shares of the Company's common stock to employees of the Company and its operating subsidiaries at an exercise price of $4.875 per post-split share. These options are exercisable after January 30, 1998 and expire on January 30, 2002. 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. 21
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE Q - STOCK OPTIONS 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. There were no exercise of any options during the quarters ended March 31, 1999 and 1998 or for either of the years ended December 31, 1998 and 1997. The following table summarizes all options granted from 1996 to March 31, 1999. Options Options Options Options Exercise price granted exercised terminated outstanding per share ------------ ------------- ------------- ------------- ---------------- 1996 options 59,355 - -- 59,355 $ 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 15,000 - -- 15,000 $ 1.06 ------- ------- ------- ------- Totals 405,359 -- 216,667 133,692 ======= ======= ======= =======
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. 22 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE Q - STOCK OPTIONS - Continued 1998 Compensation Plan - continued - ---------------------- Incentive stock options may be granted only to employees of the Company or a subsidiary who, in the judgment of the Committee, are responsible for the management or success of the Company or a subsidiary and who, at the time of the granting of the incentive stock option, are either an employee of the Company or a subsidiary. No incentive stock option may be granted under the 1998 Plan to any individual who would, immediately before the grant of such incentive stock option, directly or indirectly, own more than ten percent (10%) of the total combined voting power of all classes of stock of the Company unless (i) such incentive stock option is granted at an option price not less than one hundred ten percent (110%) of the fair market value of the shares on the date the incentive stock option is granted and (ii) such incentive stock option expires on a date not later than five years from the date the incentive stock option is granted. The purchase price of the shares of the Common Stock offered under the 1998 Plan must be one hundred percent (100%) of the fair market value of the Common Stock at the time the option is granted or such higher purchase price as may be determined by the Committee at the time of grant; provided, however, if an incentive stock option is granted to an individual who would, immediately before the grant, directly or indirectly own more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, the purchase price of the shares of the Common Stock covered by such incentive stock option may not be less than one hundred ten percent (110%) of the fair market value of such shares on the day the incentive stock option is granted. If the Common Stock is listed upon an established stock exchange or exchanges, the fair market value of the Common Stock shall be the highest closing price of the Common Stock on the day the option is granted or, if no sale of the Common Stock is made on an established stock exchange on such day, on the next preceding day on which there was a sale of such stock. If there is no market price for the Common Stock, then the Board of Directors and the Committee may, after taking all relevant facts into consideration, determine the fair market value of the Common Stock. 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 35,000 shares of Common Stock at prices ranging from $1.06 to $2.98 per share. 23 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE R - COMMITMENTS AND CONTINGENCIES Litigation - ---------- Brister's is named as defendant in several product liability lawsuits related to its "fun karts". The Company has had and continues to have commercial liability coverage to cover these exposures with a $25,000 per claim self-insurance clause as of December 31, 1998. 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. On February 4, 1997, litigation was filed against the Company and Brister's in an action to have Brister's product liability insurance coverage (discussed in the preceding paragraph) declared null and void as a result of a payment by Brister's insurance underwriter in settlement of a product liability lawsuit. Legal counsel is of the opinion that this action has questionable merit and the determination of an outcome, if any, is unpredictable at this time. The Company is vigorously defending the action. Additionally, the Company is pursuing a counteraction against the underwriter's agent for potential misrepresentations made by the agent to the underwriter regarding Brister's during the acquisition of the aforementioned commercial liability insurance coverage. During 1998, a summary judgment was granted in favor of Brister's dismissing the claim. The plaintiff has appealed the summary judgment decision and the Company and Brister's are of the opinion that the initial decision of the Court will be upheld. The Company anticipates no material impact to either the results of operations, its financial condition or liquidity based on the uncertainty of outcome, if any, of existing litigation, either collectively and/or individually, at this time. Consulting and Patent Licensing - ------------------------------- 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 quarters ended March 31, 1999 and 1998, respectively, the Company paid or accrued approximately $638 and $640 under this Agreement. 24 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE R - COMMITMENTS AND CONTINGENCIES - Continued Employment agreement - -------------------- Effective January 30, 1998, the Company entered into an Employment Agreement (Agreement) with an individual to serve as the Company's President and Chief Executive Officer (President). The Agreement is for a term of three (3) years and provides the President with an annual base salary of $150,000. Upon execution of the Agreement, the President received options to purchase up to 200,000 shares of the Company's common stock at an exercise price of $3.25 per share. The options vest as follows: 100,000 shares as of January 30, 1999; 50,000 shares as of January 31, 2000; 50,000 shares as of January 31, 2001. All unvested options vest immediately upon the termination of the Agreement if termination is for reason other than "for cause", and all unexercised options expire on January 31, 2003. The President may also receive annual performance based stock options to purchase up to 50,000 shares of the Company's common stock at a price equal to the market value of the Company's common stock on the date of issuance, as determined by the Company's Board of Directors, and an annual cash bonus not to exceed 15.0% of the annual base salary. 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. The Agreement provides that the Company shall forgive up to $19,000 of non-reimbursable expenses incurred by the individual and pay to for one week of earned vacation. In consideration for the foregoing, the former President agreed to adhere to the non-competition and non-solicitation covenants set forth in the Employment Agreement until January 13, 2001. As part of his separation from the Company, the Company issued to the individual options to purchase 15,000 shares of Common Stock at an option exercise price of $1.06 per share which were granted to replace the options to purchase 200,000 shares of common stock which were effectively canceled at separation. These options are vested and expire on January 20, 2004. On October 27, 1998, the Company entered into an Employment Agreement (Agreement) with the former sole shareholder of Straight Line for the individual to serve as the President of the Straight Line subsidiary (Straight Line President). The Agreement is for a term of three (3) years with an automatic one year extension unless either the Company or the Straight Line President provides a thirty (30) day written notice not to continue the Agreement. This Agreement provides the Straight Line President with an annual base salary of $80,000. Upon execution of this Agreement, the Straight Line President received options to purchase up to 10,000 shares of the Company's common stock at an exercise price equal to the closing bid price of the Company's common stock as quoted on the NASDAQ SmallCap market. The Straight Line President may also receive, at the discretion of the Company's Board of Directors, annual performance based stock options to purchase up to 10,000 shares of the Company's common stock at a price equal to the market value of the Company's common stock on the date of issuance, as determined by the Company's Board of Directors, and an annual cash bonus not to exceed 15.0% of the annual base salary. NOTE S - SIGNIFICANT CUSTOMERS During the quarters ended March 31, 1999 and 1998, the Company has no single or group of affiliated customers that are responsible for more than 10.0% of total net sales. 25 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 - --------------------- Three months ended March 31, 1999 as compared to the three months ended March 31, 1998 - -------------------------------------------------------------------------------- The Company experienced net sales of approximately $1.2 million for the three months ended March 31, 1999 as compared to net sales of approximately $509,000 for the three months ended March 31, 1998. Sales have increased due to management efforts to create retail product demand and the creation of various promotional products and pricing for the first quarter of 1999. The Company's sales demand remains highly seasonal. Current Company management has instituted various sales and marketing strategies, including the pursuit of additional distribution channels, including potential mass merchandiser or buying group customers, and geographic areas which management believes are under served, to improve its sales during the Company's traditional slow demand periods. Additionally, the Company continues to explore contract manufacturing opportunities to attempt to better utilize the Company's facilities and equipment during the first six months of the year. Due to the increase in unit sales during the first quarter of 1999 as compared to the first quarter of 1998, the Company was better able to absorb its fixed manufacturing costs and experienced an improvement in its gross profit margin from approximately $(202,000) in the first quarter of 1998 as compared to approximately $(169,000) for the first quarter of 1999. The Company has added no significant capital assets to its production facilities and the charge to cost of sales for depreciation remains relatively constant during the respective first quarters of 1999 and 1998. Total cost of sales expenses rose from approximately $694,000 to approximately $1.356 million predominately as a result of the increased material usage and direct labor related to the increase in unit sales. Operating expenses have increased by approximately $111,000 from the first quarter of 1998 to the first quarter of 1999. This change relates predominately to increases in general and administrative salaries during the respective quarters of approximately $291,000 for the first quarter of 1999 and approximately $149,000 during the first quarter of 1998. The Company also experienced lesser increases in selling expenses and other general and administrative costs. Management consistently monitors corporate overhead expenses at each operating subsidiary level and further anticipates that current expenditure levels will remain relatively constant during future periods. 26 For the three months ended March 31, 1999, the Company incurred a net loss of approximately $(690,000) as compared to approximately $(622,000) for the three months ended March 31, 1998. Contributing to this approximate $(68,000) increase in the net loss is the increase in interest expense of approximately $42,000 related to the Company's continued use of short-term financing from a non-financial institution lender which began at the end of the third quarter of 1998. Additional Operations information. - ---------------------------------- The Company currently has approximately ten 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. However, 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 design features which will assist in a successful defense of any present or future product liability claim. To the extent product liability losses are beyond the limits or scope of the Company's insurance coverage, the Company could experience a material adverse effect upon its business, operations, profitability and assets. Liquidity and Capital Resources - ------------------------------- As of March 31, 1999, the Company had positive (negative) working capital of approximately $(1.243) million as compared to approximately $ 3.435 million at March 31, 1998. During the first quarter of 1999, the Company experienced positive cash flows from operations of approximately $499,000 as compared to using cash in operations during the first quarter of 1998 of approximately $(432,000). This improvement in cash flows was due to the collection of approximately $1.3 million in accounts receivable and the utilization of excess inventories of raw materials carried forward from the fourth quarter of 1998 of approximately $300,000. However, this improvement in operating cash flows also caused a negative change in working capital from approximately $(392,000) at December 31, 1998 to approximately $(1,243,000) at March 31, 1999 as a result of the aforementioned collection of accounts receivable and utilization of inventory. During the first quarter of 1999, the Company expended cash of approximately $14,000 in additions to property and equipment. Further, the Company incurred long-term installment debt of approximately $18,000 for transportation equipment which was financed through the Company's primary financial institution. The long-term debt is collateralized by the related transportation equipment, is for a term of three years and bears interest at 8.25%. The Company has identified no further significant capital requirements for 1999. 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. Three months ended March 31, 1998 as compared to the three months ended March 31, 1997 - -------------------------------------------------------------------------------- The Company experienced net revenues of approximately $509,000 for the three months ended March 31, 1998 compared to approximately $1.3 million for the comparable period of 1997. These sales results continue to reflect weak product demand during the first quarter of the Company's operating year due primarily to seasonality of product demand at the consumer level. Additionally, sales to mass merchandisers ceased during the second quarter of 1997 and these mass merchandiser sales mitigated some the seasonality effects during the first quarter of 1997. Current Company management has instituted various sales and marketing strategies, including the pursuit of additional distribution channels, including potential mass merchandiser or buying group customers, and geographic areas which management believes are under served, to improve its sales during the Company's traditional slow demand periods. Due to the decline in unit sales to mass merchandisers and related effect on net sales dollars, the Company was unable to completely absorb its fixed manufacturing overhead expenses. Accordingly, the Company experienced a decline in gross profit from approximately $146,000 for the first quarter of 1997 to approximately $(202,000) for the comparable period of 1998. 27 Selling, general and administrative expenses, including depreciation and amortization, were approximately $428,000 during the three months ended March 31, 1998 as compared to approximately $556,000 for the three months ended March 31, 1997. The Company continues to experience a maturation and stabilization of the Company's operations and the results of management oversight of corporate overhead expenses during 1998. Management anticipates that current expenditure levels will remain relatively constant during future periods. For the three month period ended March 31, 1998, the Company incurred a net loss of approximately $622,000 as compared to a net loss of approximately $489,000 for the comparable three month period ended March 31, 1997. Management attributes the increase in the net loss for the first three months of 1998 compared to the comparable period of 1997 to decreased unit sales volume levels which did not allow for the complete absorption of all fixed manufacturing overhead costs during the quarter. Primary earnings (loss) per share were approximately $(0.13) per share for the three months ended March 31, 1998 and approximately $(0.18) per share for the three months ended March 31, 1997. Additional Operations information. - ---------------------------------- The Company currently has approximately six product liability lawsuits outstanding, none of which are expected to exceed existing product liability insurance policy limits. The Company has never had a claim that resulted in an award or settlement in excess of insurance coverage. There is no assurance that the Company's insurance coverage of $5,000,000 per occurrence and $5,000,000 aggregate will be sufficient to fully protect the business and assets of the Company from all claims, nor can any assurances be given that the Company will be able to maintain the existing coverage or obtain additional coverage at commercially reasonable rates. Management believes that it has process controls on its product operations, product labeling, operator's manuals, and design features which will assist in a successful defense of any present or future product liability claim. To the extent product liability losses are beyond the limits or scope of the Company's insurance coverage, the Company could experience a material adverse effect upon its business, operations, profitability and assets. Liquidity and Capital Resources - ------------------------------- With respect to the comparative balance sheet, consolidated assets of $l0.6 million at March 31, 1998 were approximately $700,000 lower than the $11.3 million at December 31, 1997. This decrease is principally attributable to an decrease in current assets related to the collection of accounts receivable and the utilization of cash resources for fixed asset additions (approximately $76,000) and the use of cash in operating activities of approximately $433 thousand. Consolidated liabilities of $684,000 at March 31, 1998 were comparable to the year end balance of approximately $740,000. The decrease was primarily due to a reduction in trade accounts payable and offsetting increases in long-term debt arising from the purchase of transportation equipment during the first quarter of 1998. Although Karts International Incorporated is a seasonal business with 50% or more of its sales being historically recorded in the fourth calendar quarter, management believes its cash reserves and inventory levels are sufficient to insure adequate manufacturing and shipment of finished goods. Additionally, management is of the opinion that the 1997 plant additions will insure that the Company will have sufficient capacity to meet peak product demands. Further, the Company, during the first quarter of 1998, began construction on an administrative office addition adjacent to the Roseland, Louisiana manufacturing facility. As of March 31, 1998, approximately $63,000 had been expended on this addition. Management is of the opinion that the occupation of this facility during the second quarter of 1998 will contribute to future corporate overhead expense savings and allow for better corporate management oversight of the daily operations at the Company's Roseland Louisiana facility. Capital Requirements - -------------------- During the first three months of 1998, the Company has expended approximately $76,000 for new property and equipment, including approximately $63,000 for the construction of an administrative office addition adjacent to the Roseland, Louisiana manufacturing facility. Further, the Company incurred long-term installment debt of approximately $41,000 for transportation equipment which was financed through the Company's primary financial institution. The long-term debt is collateralized by the related transportation equipment, is for a term of three years and bears interest at 8.25%. 28 The Company has identified no further significant capital requirements for the current operating year. Liquidity requirements mandated by future business expansions or acquisitions, if any are specifically identified or undertaken, are not readily determinable at this time as no substantive plans have been formulated by management. Year 2000 Considerations - ------------------------ The Year 2000 (Y2K) date change is believed to affect virtually all computers and organizations. The Company has undertaken a comprehensive review of its information systems, including personal computers, software and peripheral devices, and its general communications systems. The Company has no direct electronic links with any customer or supplier. In addition, the Company has held discussions with certain of its software suppliers with respect to the Y2K date change. While the Company has not completed its detailed review, as a preliminary assessment, the Company believes, as of the date of this filing, that it will not be required to modify or replace significant portions of its software and any such modifications or replacements are, or will be, readily available. The Company completed its detailed review by March 31, 1999 and anticipates completing any modifications, upgrades or replacements during the second quarter of 1999. As of March 31, 1999, the Company anticipates that the total expenditures related to Y2K matters to be less than $10,000. The Company has no Y2K impact in any manufacturing equipment. The Company is also planning to hold discussions with its significant suppliers, shippers, customers and other external business partners related to their readiness for the Y2K date change. The Company does not expect the costs associated with the Y2K date change compliance to have a material effect on its financial position or its results of operations. There can be no assurance until January 1, 2000, however, that all of the Company's systems, and the systems of its suppliers, shippers, customers or other external business partners will function adequately. Part II - Other Information Item 1 - Legal Proceedings See accompanying notes to the consolidated financial statements Item 2 - Changes in Securities None Item 3 - Defaults on Senior Securities None 29 Item 4 - Submission of Matters to a Vote of Security Holders The Company has held no regularly scheduled, called or special meetings of shareholders during the reporting period. Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K a) Exhibits -------- None b) Reports on Form 8-K ------------------- January 13, 1999 Reporting the resignation of Robert M. Aubrey, President, Chief Executive Officer and Member of the 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 May 14 , 1999 /s/ Charles Brister ------ ----------------------------------------------- Charles Brister President, Chief Executive Officer and Director May 14 , 1999 /s/ Richard N. Jones ------ ----------------------------------------------- Richard N. Jones Chief Accounting Officer 30 EX-27 2 FDS
5 1010077 Karts International Corporation 1 US Dollars 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 102818 0 1045288 90500 1829933 3250396 2220462 319084 5855776 4493874 0 0 0 5574 1112001 5855776 1203359 1203359 1372519 539227 0 0 61958 (690298) 0 (690298) 0 0 0 (690298) (0.12) (0.12)
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