-----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, SX738sRjJEJZJib+EEqGnNqcEoejniwBHWCQqpm3Ek7RKRSTZtPy+MlS1Lshhmp8 /4lxz9B6kSpycggj13wpwg== 0001010549-99-000260.txt : 19990817 0001010549-99-000260.hdr.sgml : 19990817 ACCESSION NUMBER: 0001010549-99-000260 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99691188 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark one) XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --------- ACT OF 1934 For the quarterly period ended June 30, 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) 62204 Commercial Street, Roseland, LA 70456 ------------------------------------------- (Address of principal executive offices) (504) 747-1111 -------------- (Issuer's telephone number) - -------------------------------------------------------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: August 13, 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 June 30, 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 28 Item 2 - Changes in Securities 28 Item 3 - Defaults Upon Senior Securities 28 Item 4 - Submission of Matters to a Vote of Security Holders 28 Item 5 - Other Information 28 Item 6 - Exhibits and Reports on Form 8-K 29 Signatures 29 2 S. W. HATFIELD, CPA certified public accountants Member: American Institute of Certified Public Accountants SEC Practice Section Information Technology Section Texas Society of Certified Public Accountants Independent Accountant's Report ------------------------------- Board of Directors and Shareholders Karts International Incorporated We have reviewed the accompanying consolidated balance sheets as of June 30, 1999 and 1998 of Karts International Incorporated (a Nevada corporation) and Subsidiaries and the accompanying consolidated statement of operations and comprehensive income for the six and three months ended June 30, 1999 and 1998, respectively, and the consolidated statement of cash flows for the six months ended June 30, 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. S. W. HATFIELD, CPA (formerly S. W. HATFIELD + ASSOCIATES) Dallas, Texas August 12, 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 3 SWHCPA@aol.com
Karts International Incorporated and Subsidiaries Consolidated Balance Sheets June 30, 1999 and 1998 (Unaudited) 1999 1998 ---------------------------- Assets ------ Current Assets Cash on hand and in banks $ 74,325 $ 812,593 Accounts receivable Trade, net of allowance for doubtful accounts of $90,500 and $3,000, respectively 1,608,292 325,708 Other 25,090 227,000 Inventory 1,806,372 1,896,170 Prepaid expenses 357,103 249,420 ------------ ------------ Total current assets 3,871,182 3,510,891 ------------ ------------ Property and equipment Building and improvements 994,269 582,182 Equipment 975,165 719,215 Transportation equipment 148,669 125,640 Furniture and fixtures 152,630 128,060 ------------ ------------ 2,270,733 1,555,097 Accumulated depreciation (349,427) (197,188) ------------ ------------ 1,921,306 1,357,909 Land 32,800 32,800 ------------ ------------ Net property and equipment 1,954,106 1,390,709 ------------ ------------ Other assets Note receivable 396,750 -- Option to acquire unrelated entity 138,021 -- Deferred costs related to financing and capital acquisition 383,060 -- Goodwill, net of accumulated amortization of approximately $502,687 and $502,687, respectively -- 5,356,736 Organization costs, net of accumulated amortization of approximately $71,766 and $49,916, respectively 37,489 59,339 Covenant not to compete, net of accumulated amortization of approximately $22,223 and $-0-, respectively 77,777 -- Other 53,421 16,482 ------------ ------------ Total other assets 1,086,518 5,432,557 ------------ ------------ Total Assets $ 6,911,806 $ 10,334,157 ============ ============
- Continued - 4
Karts International Incorporated and Subsidiaries Consolidated Balance Sheets - Continued June 30, 1999 and 1998 (Unaudited) 1999 1998 ---------------------------- Liabilities and Shareholders' Equity ------------------------------------ Current liabilities Notes payable to banks and others $ 420,205 $ -- Notes payable to affiliates 298,331 -- Current maturities of long-term debt 40,280 25,919 Accounts payable - trade 1,860,306 518,854 Other accrued liabilities 281,102 24,229 Accrued income and franchise taxes payable 700 73,579 ------------ ------------ Total current liabilities 2,900,924 642,581 ------------ ------------ Long-term liabilities Long-term debt, net of current maturities 236,254 254,489 Debenture payable 1,500,000 -- ------------ ------------ Total liabilities 4,637,178 897,070 ------------ ------------ Shareholders' equity Preferred stock - $0.001 par value 10,000,000 shares authorized 1,550,000 and 0 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 13,453,502 Accumulated deficit (13,658,728) (4,021,269) ------------ ------------ Total shareholders' equity 2,274,628 9,437 087 ------------ ------------ Total Liabilities and Shareholders' Equity $ 6,911,806 $ 10,334,157 ============ ============
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Karts International Incorporated and Subsidiaries Consolidated Statements of Operations and Comprehensive Income Six and Three months ended June 30, 1999 and 1998 (Unaudited) Six months Six months Three months Three months ended ended ended ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues Kart sales - net $ 3,665,762 $ 1,731,939 $ 2,462,403 $ 1,222,734 ----------- ----------- ----------- ----------- Cost of Sales Purchases and direct expenses 3,611,062 1,701,722 2,255,484 1,007,280 Depreciation 33,882 35,799 16,941 19,441 ----------- ----------- ----------- ----------- Total cost of sales 3,644,944 1,737,521 2,272,425 1,026,721 ----------- ----------- ----------- ----------- Gross Profit 20,818 (5,582) 189,978 196,013 ----------- ----------- ----------- ----------- Operating Expenses Research and development expenses 7,773 15,379 6,678 13,283 Selling, general and administrative expenses 1,007,034 938,981 496,364 589,347 Compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting costs -- 413,412 -- 413,412 Depreciation and amortization 54,924 154,228 27,462 77,421 ----------- ----------- ----------- ----------- Total operating expenses 1,069,731 1,522,000 530,504 1,093,463 ----------- ----------- ----------- ----------- Income (loss) from Operations (1,048,913) (1,527,582) (340,526) (897,450) Other Income (Expenses) Interest and other miscellaneous 96,846 43,424 16,799 14,896 Interest expense (131,178) (34,503) (69,220) (14,134) ----------- ----------- ----------- ----------- Loss before Income Taxes (1,083,245) (1,518,661) (392,947) (896,688) Income Tax (Expense) Benefit -- -- -- -- ----------- ----------- ----------- ----------- Net Loss (1,083,245) (1,518,661) (392,947) (896,688) Other Comprehensive Income -- -- -- -- ----------- ----------- ----------- ----------- Comprehensive Income (Loss) $(1,083,245) $(1,518,661) $ (392,947) $ (896,688) =========== =========== =========== =========== Loss per weighted-average share of common stock outstanding - basic and fully diluted $(0.19) $(0.31) $(0.07) $(0.18) ===== ===== ===== ===== Weighted-average number of shares of common stock outstanding - basic and fully diluted 5,574,298 4,854,133 5,574,298 4,854,133 =========== =========== =========== ===========
6
Karts International Incorporated and Subsidiaries Consolidated Statements of Cash Flows Six months ended June 30, 1999 and 1998 (Unaudited) Six months Six months ended ended June 30 June 30, 1999 1998 ----------- ----------- Cash flows from operating activities Net income (loss) for the period $(1,083,245) $(1,518,661) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 54,924 154,228 Accrued interest income on note receivable (18,637) -- Compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting costs -- 413,412 (Increase) Decrease in: Accounts receivable-trade and other 717,720 135,337 Inventory 323,577 (986,956) Prepaid expenses and other (175,545) (84,912) Increase (Decrease) in: Accounts payable and other accrued liabilities (1,500,241) 190,426 Accrued income taxes payable 700 (64,131) ----------- ----------- Cash flows used in operating activities (1,680,747) (1,761,257) ----------- ----------- Cash flows from investing activities Cash paid to acquire option to purchase unrelated entity (14,477) -- Cash paid for property and equipment (62,884) (217,811) ----------- ----------- Cash flows used in investing activities (77,361) (217,811) ----------- ----------- Cash flows from financing activities Decrease in cash overdraft (9,153) -- Cash received from sale of Convertible Preferred Stock 1,550,000 -- Cash paid for loan and capital acquisition costs (383,060) -- Change in notes payable to affiliate - net 174,456 -- Net activity on bank and other lines of credit (1,144,510) -- Principal received on long-term debt 1,500,000 -- Principal payments on long-term note payable (18,990) (10,085) ----------- ----------- Cash flows provided by financing activities 1,668,743 (10,085) ----------- ----------- Increase (Decrease) in cash (89,365) (1,989,153) Cash at beginning of period 163,690 2,801,746 ----------- ----------- Cash at end of period $ 74,325 $ 812,593 =========== ===========
- Continued - 7
Karts International Incorporated and Subsidiaries Consolidated Statements of Cash Flows Six months ended June 30, 1999 and 1998 (Unaudited) Six months Six months ended ended June 30 June 30, 1999 1998 ----------- ----------- Supplemental disclosure of interest and income taxes paid Interest paid for the period $ 135,713 $ 34,503 ========= ========= Income taxes paid (refunded) for the period $ (700) $ 2,000 ========= ========= 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 - Liquidity Contingency 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. 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 completed plans to raise additional capital through the sale of equity securities which provided additional working capital and improved liquidity. Management believes that its successful efforts to raise additional capital through the sale of equity securities and/or new debt financing have provided additional cash flows for the liquidation of short-term debt and support of ongoing operations. The Company continues to maintain a strong consumer demand for its products and a backlog of orders in excess of the Company's historical demand. Note C - Summary of Significant Accounting Policies 1. Cash and cash equivalents ------------------------- The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. Cash overdraft positions may occur from time to time due to the timing of making bank deposits and releasing checks, in accordance with the Company's cash management policies. 2) Accounts and advances receivable -------------------------------- In the normal course of business, the Company extends unsecured credit to virtually all of its customers which are located throughout the United States and are principally concentrated in the southeastern quadrant of the country. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. 10 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note C - Summary of Significant Accounting Policies - continued 3) Inventory --------- Inventory consists of steel, engines and other related raw materials used in the manufacture of "fun karts". These items are carried at the lower of cost or market using the first-in, first-out method. As of June 30, 1999 and 1998, inventory consisted of the following components: 1999 1998 ---------- ---------- Raw materials $1,607,785 $1,700,411 Work in process 96,991 127,780 Finished goods 101,596 15,760 ---------- ---------- $1,806,372 $1,896,170 4) Property, plant and equipment ----------------------------- Property and equipment are recorded at historical cost. These costs are depreciated over the estimated useful lives of the individual assets, generally 3 to 25 years, using the straight-line method. Gains and losses from disposition of property and equipment are recognized as incurred and are included in operations. 5) Covenant not to compete ----------------------- In conjunction with the acquisition of Straight Line Manufacturing, Inc., the Company paid $100,000 to the former sole shareholder of Straight Line for a covenant not to compete for a period of at least three (3) years. The consideration given was $50,000 cash and a note payable for $50,000. The covenant is being amortized to operations over a period of three years using the straight line method. 6) Organization costs ------------------ Costs related to the restructuring and reorganization of the Company have been capitalized and are being amortized over a five year period using the straight-line method. 7) 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. 11 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note C - Summary of Significant Accounting Policies - continued 8) Income taxes ------------ The Company utilizes the asset and liability method of accounting for income taxes. At June 30, 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 June 30, 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. 10. Fair Value of Financial Instruments ----------------------------------- The carrying value of cash, accounts receivable, accounts payable and short and long-term debt approximates the fair market value due to either their short term maturities and/or the proximity of current market positions as compared to the market values at the time the transactions were entered into . 11. Income (Loss) per share ----------------------- Basic earnings (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method. The calculation of fully diluted earnings (loss) per share assumes the dilutive effect of the exercise of outstanding options and warrants at either the beginning of the respective period presented or the date of issuance, whichever is later. As of June 30, 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 June 30, 1999 and 1998, the separate operating entities of the Company had credit risk exposures in excess of the FDIC coverage as follows: 12
Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note D - Concentrations of Credit Risk - continued Highest Lowest Number of days Entity exposure exposure with exposure -------------------------------- -------- ---------- -------------- Six months ended June 30, 1999 - ------------------------------ Karts International Incorporated $155,329 $4,301 19 Brister's Thunder Karts, Inc. $149,897 $ 968 51 USA Industries, Inc. $181,416 $1,141 46 Six months ended June 30, 1998 - ------------------------------ Karts International Incorporated $121,321 $1,806 95 Brister's Thunder Karts, Inc. $289,204 $ 601 83 USA Industries, Inc. $ 73,714 $ 984 132
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 June 30, 1999. As of June 30, 1999 and 1998, the Company had an unsecured outstanding reverse repurchase agreement of approximately $75,000 and $670,000, 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 June 30, 1999 and 1998 was approximately $60,686 and $58,655, 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. 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 six months of 1999, the Company paid an additional $14,477 in costs related to the acquisition of this option to acquire this entity. 13 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note G - Option to Acquire an Unrelated Entity - continued 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 Other 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 June 30, 1999, an aggregate of approximately $420,205 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 bear a default interest of 15.0% (Lender's Base Rate of 8.0% plus 7.0%). Upon the Company's equity offering of $1.5 million, the interest rate was 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. 14 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. $212,055 $ - $50,000 note payable to the former sole shareholder of Straight Line. Interest at 6.0%. Principal and all accrued, but unpaid, interest is due at maturity in March 1999. Secured by the Company's interest in the issued and outstanding stock of Straight Line Manufacturing, Inc. 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. 36,276 - -------- ------- Total related party long-term debt $298,331 $ - ======== ======= 15 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. $ 13,110 $ 17,267 $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. 14,162 21,957 $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. 15,592 - $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. 210,594 221,048 $9,348 installment note payable to a bank. Interest at 10.0%. Payable in monthly installments of approximately $303, including accrued interest. Final maturity in April 1999. Collateralized by transportation equipment owned by USA Industries, Inc. - 2,858 $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. 11,114 17,278 $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. 11,962 - -------- ------- Total long-term debt to banks and others 276,534 280,408 Less current maturities (40,280) (25,919) -------- ------- Long-term portion $236,254 $254,489 ======= =======
16 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 9,954 --------- Totals $276,534 ========= Note L - Debenture Payable On June 3, 1999, the Company issued a $1,500,000 debenture payable to a foundation who is also a shareholder in the Company. The debenture matures on May 31, 2004 and bears interest at 12.0%. The debenture requires monthly payments of interest only. The debenture may be converted into common stock of the Company at an exchange rate of $0.375 per share at any time at the option of the debenture holder and the Company may require conversion if the closing price of the Company's common stock is in excess of $4.00 per share for 25 consecutive trading days. The debenture may be prepaid in total or in part on or after the 2nd anniversary date of the debenture upon 30 days notice being given by the Company and the payment of a 12.0% liquidation charge of the amount being prepaid. The debenture is collateralized by all cash, accounts receivable, inventory and equipment owned by the Company and its subsidiaries, subordinate to the Company's line of credit facility with a non-financial institution lender. All parties to the debenture agreement have agreed to defer the effective date of any conversion feature until such time that the conversion provisions are approved at the next annual shareholders' meeting, which is currently scheduled for August 31, 1999. Note M - Income Taxes The components of income tax (benefit) expense for the quarters ended June 30, 1999 and 1998, respectively, are as follows: 1999 1998 ----------- ------------ Federal: Current $ - $ - Deferred - - ----------- ----------- - - ----------- ----------- State: Current - - Deferred - - ----------- ----------- - - ----------- ----------- Total $ - $ - =========== =========== 17 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note M - Income Taxes - continued As of June 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 June 30, 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 $(368,303) $(314,018) Increase (decrease) in income taxes resulting from: State income taxes - - Other including reserve for deferred tax asset 368,303 314,018 --------- --------- Income tax expense $ - $ - ========= =========
Note M - Related Party Transactions The Company leases its manufacturing facilities under an operating lease with the former owner of Brister's, who is also the Company's President and Chief Operating Officer, in addition to being a Company shareholder and director. Concurrent with the closing of the acquisition of Brister's, the Company and the former owner executed a new lease agreement for a primary two-year term expiring in 1998 and an additional two-year renewal option. The monthly lease payment will remain at $6,025 per month with annual adjustments for increases based upon the Consumer Price Index. Total payments under this agreement were approximately $36,150 for each of the six months ended June 30, 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 - Convertible Preferred Stock On June 30, 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. All parties to the Preferred Stock issue have agreed to defer the effective date of any conversion feature until such time that the conversion provisions are approved at the next annual shareholders' meeting, which is currently scheduled for August 31, 1999. 18 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note O - 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. 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. 19 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued 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 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 June 30, 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 June 30, 1999 2,504,185 2,437,518 ========= =========
On March 9, 1999, the Company, as compensation for waiving certain events of default and the amendment to the Company's loan agreement with a non-financial institution lender, granted the lender a stock warrant to purchase 100,000 shares of the Company's restricted, unregistered common stock at a price of $0.54 per share. If the Company fully repays the outstanding indebtedness to the lender within ninety (90) days of the warrant date, the number of shares subject to the warrant reduces to 50,000. If and only if there is no total retirement of the indebtedness to the lender, the number of shares subject to the warrant reduces based upon the Company's net income achieved during Calendar 1999. The number of shares subject to the warrant based upon the Company's net income in the event of a non-retirement of the indebtedness is as follows: Net income # of shares $975,000 50,000 $877,500 60,000 $780,000 75,000 This warrant is exercisable at any time after its issuance and expires four (4) years from its issuance. 20 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued 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. 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 six months ended June 30, 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 June 30, 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 ======== ===== ========= ========
21 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note Q - Stock Options - Continued Had compensation cost for options granted been determined based on the fair values at the grant dates, as prescribed by SFAS 123, the Company's net loss and net loss per share would not have changed due to the fact that the exercise price of the options was substantially higher than the market price at the grant date. The calculations to estimate the fair value of the options were made using the Black-Scholes pricing model which required making significant assumptions. These assumptions include the expected life of the options, which was determined to be one year, the expected volatility, which was based on fluctuations of the stock price over a 12 month period, the expected dividends, determined to be zero based on past performance, and the risk free interest rate, which was estimated using the bond equivalent yield of 6.0% at December 31, 1998 and 1997, respectively. 1998 Compensation Plan On May 27, 1998, the stockholders of the Company approved the 1998 Stock Compensation Plan of Karts International Incorporated (1998 Plan) and reserved 1,000,000 shares of Common Stock for issuance under the plan. The 1998 Plan terminates on April 1, 2008 unless previously terminated by the Board of Directors. The 1998 Plan is administered by the Compensation Committee (Committee) or the entire Board of Directors as determined by the Board of Directors. Eligible participants in the 1998 Plan include full time employees, directors and advisors of the Company and its subsidiaries. Options granted under the 1998 Plan are intended to qualify as "incentive stock options" pursuant to the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (Code), or options which do not constitute incentive stock options (nonqualified options) as determined by the Committee. Under the 1998 Plan the Company may also grant "Restricted Stock" awards. "Restricted Stock" represents shares of Common Stock issued to eligible participants under the 1998 Plan subject to the satisfaction by the recipient of certain conditions and enumerated in the specific Restricted Stock grant. Conditions which may be imposed include, but are not limited to, specified periods of employment, attainment of personal performance standards or the overall performance of the Company. The granting of Restricted Stock represents an additional incentive for eligible participants under the 1998 Plan to promote the development of the Company, and may be used by the Company as another means of attracting and retaining qualified individuals to serve as employees of the Company or its subsidiaries. Incentive stock options may be granted only to employees of the Company or a subsidiary who, in the judgment of the Committee, are responsible for the management or success of the Company or a subsidiary and who, at the time of the granting of the incentive stock option, are either an employee of the Company or a subsidiary. No incentive stock option may be granted under the 1998 Plan to any individual who would, immediately before the grant of such incentive stock option, directly or indirectly, own more than ten percent (10%) of the total combined voting power of all classes of stock of the Company unless (i) such incentive stock option is granted at an option price not less than one hundred ten percent (110%) of the fair market value of the shares on the date the incentive stock option is granted and (ii) such incentive stock option expires on a date not later than five years from the date the incentive stock option is granted. 22 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note Q - Stock Options - Continued 1998 Compensation Plan - continued The purchase price of the shares of the Common Stock offered under the 1998 Plan must be one hundred percent (100%) of the fair market value of the Common Stock at the time the option is granted or such higher purchase price as may be determined by the Committee at the time of grant; provided, however, if an incentive stock option is granted to an individual who would, immediately before the grant, directly or indirectly own more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, the purchase price of the shares of the Common Stock covered by such incentive stock option may not be less than one hundred ten percent (110%) of the fair market value of such shares on the day the incentive stock option is granted. If the Common Stock is listed upon an established stock exchange or exchanges, the fair market value of the Common Stock shall be the highest closing price of the Common Stock on the day the option is granted or, if no sale of the Common Stock is made on an established stock exchange on such day, on the next preceding day on which there was a sale of such stock. If there is no market price for the Common Stock, then the Board of Directors and the Committee may, after taking all relevant facts into consideration, determine the fair market value of the Common Stock. Options are exercisable in whole or in part as provided under the terms of the grant, but in no event shall an option be exercisable after the expiration of ten years from the date of grant. Except in case of disability or death, no option shall be exercisable after an optionee ceases to be an employee of the Company, provided that the Committee shall have the right to extend the right to exercise for a period not longer than three months following the date of termination of an optionee's employment. If an optionee's employment is terminated by reason of disability, the Committee may extend the exercise period for a period not in excess of one year following the date of termination of the optionee's employment. If an optionee dies while in the employ of the Company and shall not have fully exercised his options, the options may be exercised in whole or in part at any time within one year after the optionee's death by the executors or administrators of the optionee's estate or by any person or persons who acquired the option directly from the optionee by bequest or inheritance. Under the 1998 Plan, an individual may be granted one or more options, provided that the aggregate fair market value (determined at the time the option is granted) of the shares covered by incentive options which may be exercisable for the first time during any calendar year shall not exceed $100,000. There presently are outstanding options to purchase 35,000 shares of Common Stock at prices ranging from $1.06 to $2.98 per share. 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. 23 Karts International Incorporated and Subsidiaries Notes to Consolidated Financial Statements - Continued Note R - Commitments and Contingencies Litigation - Continued On February 4, 1997, litigation was filed against the Company and Brister's in an action to have Brister's product liability insurance coverage (discussed in the preceding paragraph) declared null and void as a result of a payment by Brister's insurance underwriter in settlement of a product liability lawsuit. Legal counsel is of the opinion that this action has questionable merit and the determination of an outcome, if any, is unpredictable at this time. The Company is vigorously defending the action. Additionally, the Company is pursuing a counteraction against the underwriter's agent for potential misrepresentations made by the agent to the underwriter regarding Brister's during the acquisition of the aforementioned commercial liability insurance coverage. During 1998, a summary judgment was granted in favor of Brister's dismissing the claim. The plaintiff appealed the summary judgment decision. On June 16, 1999, the United States Court of Appeals - Fifth Circuit affirmed the initial trial findings in favor of the Company and Brister's with no further exposure to the Company or Brister's as a result of this litigation. The Company anticipates no material impact to either the results of operations, its financial condition or liquidity based on the uncertainty of outcome, if any, of existing litigation, either collectively and/or individually, at this time. Consulting and Patent Licensing 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 June 30, 1999 and 1998, respectively, the Company paid or accrued approximately $3,984 and $2,660 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 six months ended June 30, 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 Six months ended June 30, 1999 as compared to the six months ended June 30, 1998 The Company experienced net revenues of approximately $3.7 million and $2.5 million for the six and three months ended June 30, 1999, respectively as compared to approximately $1.7 million and $1.2 for the comparable six and three month periods of 1998. The current year's net revenues for the six and three months ended June 3O, 1999 represented a 118% and 108% increase, respectively, over the same periods last year. The Company is encouraged by the growing demand for its products experienced during the first six months of the year as a result of increased distribution channels and expansion of the geographic areas where its products are being distributed. The increase in net revenues was attributable to increased sales to mass merchandisers, sales of promotional karts and rental karts. Gross profit was positively impacted by both the increase in volume which provided for higher plant utilization and increased selling prices which began to take effect late in the second quarter. As a result, the Company earned a gross profit of approximately $20,800 and $190,000, respectively for the six month and three month periods ended June 30, 1999, as compared to $(5,600) and $196,000, respectively, during the same period last year. Management expects its gross profit to continue to improve as production levels and average selling prices increase and overhead costs are reduced further. Operating expenses, including depreciation and amortization, were approximately $1,070,000 and $1,522,000 for the respective six month periods ended June30, 1999 and 1998 and approximately $530,000 and $1,093,000 for the second quarter in 1999 and 1998, respectively. The majority of the reduction in operating expenses resulted from the recording of a one-time non-cash charge of approximately $413,000 during the second quarter of 1998. The Company's plan for reducing operating expenses has been successful in significantly reducing expenses from the levels which were being incurred during the third and fourth quarters of 1998. Management will continue to monitor operating expenses to keep them in line with anticipated sales and production volumes. Other income (expense) was approximately $(34,000) and $(52,000) for the respective six and three month periods ended June 30, 1999 as compared to approximately $9,000 and $1,000 for the same periods last year. The change is chiefly due to an increase m interest expense during both the six and three month periods resulting from higher levels of borrowing to fund the Company's working capital needs. 26 For the six months ended June 30, 1999, the Company incurred a net loss of approximately $(1,083,O00) compared to a net loss of approximately $(1,519,000) for the same period in 1998. The Company incurred a net loss of approximately $(393,000) and $(897,00O), respectively for the three months ended June 30,1999 and 1998. Company's management expects results of operations to continue to improve throughout the balance of the year as the Company enters into its traditionally busy season Additional Operations information. The Company currently has approximately eight product liability lawsuits outstanding, none of which are expected to exceed existing product liability insurance policy limits. The Company has never had a claim that resulted in an award or settlement in excess of insurance coverage. There is no assurance that the Company's insurance coverage of $5,000,000 per occurrence and $6,000,000 in the 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 he able to maintain the existing coverage or obtain additional coverage at commercially reasonable rates. Management believes that it has process controls on its product operations, product labeling, operator's manuals and videos and design features which will assist in a successful defense of any present or future product liability claim. To the extent product liability losses are beyond the limits or scope of the Company's insurance coverage, the Company could experience a material adverse effect upon its business, operations, profitability and assets. Liquidity and Financial Condition As of June 30, 1999, the Company had positive working capital of approximately $970,000 as compared to approximately $2,868,000 at June 30, 1998. During the first six months of 1999 and 1998, the Company experienced negative cash flows from operations of approximately $( 1,681,000) and $( 1,761,000), respectively. Cash used to bind the Company's operating loss and to reduce accounts payable and other liabilities was mitigated by a reduction in excess inventory carried into the beginning of the year and collections of accounts receivable during the six months ended June 30, 1999. In order to alleviate the severe working capital shortage facing the Company at the beginning of 1999, the Company sold approximately $1,550,000 of preferred stock through a private placement and issued $1,500,000 of convertible subordinated debentures during the second quarter of 1999. Additionally, the Company incurred approximately $225,000 of debt from an affiliate to fund its short term cash requirements. Proceeds from the Company's financing activities were used to reduce its trade accounts payable and provide additional working capital. The Company believes that the proceeds from the sale of preferred stock and from the issuance of the convertible debenture assured that a supply of critical manufacturing components and supplies and sufficient working capital will be available to meet the Company's operational requirements as it enters its historically profitable season. Capital Requirements The Company expended cash of approximately $63,000 in additions to property and equipment, of which approximately $52,000 was for additions to its Prattville, Alabama facility and approximately $8,000 for upgrades and modifications to the Company's computer systems related to Y2K preparedness, during the first six months of 1999. Management believes that the additions to the Prattville, Alabama facility will ensure sufficient production capacity and improved production flow efficiency to more timely meet the increased consumer demand for the Company's products produced in this facility. 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. The focus of current management continues to be on returning the Company to profitability. 27 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 has its detailed review and taken steps to upgrade and modify its computer hardware and software as of June 30, 1999. The Company anticipates completing any further modifications, upgrades or replacements by September 30, 1999. As of June 30, 1999, the Company anticipates that the total expenditures related to Y2K matters to be approximately $10,000., of which approximately $8,000 has been expended through June 30, 1999. 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 On June 30, 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. All parties to the Preferred Stock issue have agreed to defer the effective date of any conversion feature until such time that the conversion provisions are approved at the next annual shareholders' meeting, which is currently scheduled for August 31, 1999. Item 3 - Defaults on Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None. Item 5 - Other Information None 28 Item 6 - Exhibits and Reports on Form 8-K 1) Exhibits -------- 27-Financial Data Schedule 2) Reports on Form 8-K ------------------- June 30, 1999 - Reporting of the issuance of 9.0% Cumulative Convertible Preferred Stock and $1.5 million Convertible Term Loan from The Schlinger Foundation - -------------------------------------------------------------------------------- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KARTS INTERNATIONAL INCORPORATED August 13 , 1999 /s/ Charles Brister ------ ---------------------------------- Charles Brister President, Chief Executive Officer and Director August 13 , 1999 /s/ Richard N. Jones ------ ---------------------------------- Richard N. Jones Chief Accounting Officer 29 EX-27 2 FDS
5 1010077 Karts International Corporation 1 US Dollars 3-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 74325 0 1698792 90500 1806372 3871182 2303533 349427 6911806 2900924 0 0 1550000 5574 719054 6911806 3665762 3665762 3644944 1069731 0 0 131178 (1083245) 0 (1083245) 0 0 0 (1083245) (0.19) (0.19)
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