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, 2001
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
- --------- 1934
For the transition period from __________ to __________
- --------------------------------------------------------------------------------
Commission File Number: 0-23041
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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 10, 2001: Common Stock: 7,498,392 shares
Common Stock Warrants: 401,682
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
Karts International Incorporated
Form 10-QSB for the Quarter ended June 30, 2001
Table of Contents
Page
----
Part I - Financial Information
Item 1 - Financial Statements 3
Item 2 - Management's Discussion and Analysis or Plan of Operation 26
Part II - Other Information
Item 1 - Legal Proceedings 27
Item 2 - Changes in Securities 27
Item 3 - Defaults Upon Senior Securities 27
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 5 - Other Information 28
Item 6 - Exhibits and Reports on Form 8-K 28
Signatures 28
2
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30, 2001 and 2000
(Unaudited)
June 30, June 30,
2001 2000
----------- -----------
Assets
------
Current Assets
Cash on hand and in banks $ 51,516 $ 22,183
Accounts receivable
Trade, net of allowance for doubtful accounts
of $159,943 and $152,574, respectively 726,022 1,055,822
Other 13,910 20,960
Inventory 3,490,288 2,497,412
Prepaid expenses 443,244 719,337
----------- -----------
Total current assets 4,724,980 4,315,714
----------- -----------
Property and equipment
Building and improvements 1,814,265 1,051,583
Equipment 1,699,974 1,113,198
Transportation equipment 228,607 218,618
Furniture and fixtures 142,198 138,581
----------- -----------
3,885,044 2,521,980
Accumulated depreciation (1,046,299) (653,519)
----------- -----------
2,838,745 1,868,461
Land 32,800 32,800
----------- -----------
Net property and equipment 2,871,545 1,901,261
----------- -----------
Other assets
Note receivable -- 425,060
Option to acquire unrelated entity -- 138,001
Loan costs, net of accumulated amortization
of approximately $49,182 and $12,736, respectively 256,346 292,476
Organization costs, net of accumulated amortization
of approximately $109,255 and $93,617, respectively -- 15,638
Covenant not to compete, net of accumulated amortization
of approximately $88,889 and $55,556, respectively 11,111 44,444
Other 15,838 2,522
----------- -----------
Total other assets 283,295 918,171
----------- -----------
Total Assets $ 7,879,820 $ 7,135,146
=========== ===========
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
3
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets - Continued
June 30, 2001 and 2000
(Unaudited)
June 30, June 30,
2001 2000
------------ ------------
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Notes payable to banks and others $ -- $ --
Working capital advances 2,204,152 --
Notes payable to affiliates -- 142,922
Current maturities of long-term debt 38,757 50,155
Accounts payable - trade 1,700,927 2,013,745
Other accrued liabilities 1,024,757 68,747
Accrued interest payable 21,895 --
Accrued dividends payable 407,147 --
Accrued income and franchise taxes payable 45,100 --
------------ ------------
Total current liabilities 5,442,735 2,275,569
------------ ------------
Long-term liabilities
Long-term debt, net of current maturities
Banks and other entities 268,833 347,915
Related parties
Debenture payable 2,500,000 2,500,000
Notes payable 150,000 --
------------ ------------
Total liabilities 8,361,568 5,123,484
------------ ------------
Commitments and contingencies
Shareholders' equity
Preferred stock - $0.001 par value
10,000,000 shares authorized
5,638,000 and 1,550,000 shares
issued and outstanding 5,638 1,550
Common stock - $0.001 par value
14,000,000 shares authorized
7,498,392 and 7,439,315 shares
issued and outstanding 7,590 7,439
Additional paid-in capital 24,976,651 18,951,120
Accumulated deficit (25,471,627) (16,952,447)
------------ ------------
Total shareholders' equity (481,748) 2,011,662
------------ ------------
Total Liabilities and Shareholders' Equity $ 7,879,820 $ 7,135,146
============ ============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
4
Karts International Incorporated and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Six and Three months ended June 30, 2001 and 2000
(Unaudited)
Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Kart sales - net $ 1,462,476 $ 2,789,407 $ 908,624 $ 1,840,657
----------- ----------- ----------- -----------
Cost of Sales
Purchases and direct expenses 2,525,425 2,995,217 1,503,282 2,177,180
Depreciation 161,679 98,371 88,705 50,792
----------- ----------- ----------- -----------
Total cost of sales 2,687,104 3,093,588 1,591,987 2,227,972
----------- ----------- ----------- -----------
Gross Profit (1,224,628) (304,181) (683,363) (387,315)
----------- ----------- ----------- -----------
Operating Expenses
Research and development expenses 213,085 39,602 157,104 10,657
Selling expenses 102,182 61,460
General and administrative expenses 1,308,832 1,179,903 757,255 640,461
Depreciation and amortization 85,590 85,514 44,424 30,506
----------- ----------- ----------- -----------
Total operating expenses 1,709,689 1,305,019 1,020,243 681,624
----------- ----------- ----------- -----------
Income (loss) from Operations (2,934,317) (1,609,200) (1,703,606) (1,068,939)
Other Income (Expenses)
Interest and other miscellaneous 32,977 27,417 15,300 13,178
Interest expense (175,383) (252,326) (86,804) (111,846)
----------- ----------- ----------- -----------
Loss before Income Taxes (3,076,723) (1,834,109) (1,775,110) (1,167,607)
Income Tax (Expense) Benefit -- -- -- --
----------- ----------- ----------- -----------
Net Loss (3,076,723) (1,834,109) (1,775,110) (1,167,607)
Other Comprehensive Income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive Income (Loss) $(3,076,723) $(1,834,109) $(1,775,110) $(1,167,607)
=========== =========== =========== ===========
Loss per weighted-average share
of common stock outstanding
- basic and fully diluted $ (0.41) $ (0.29) $ (0.24) $ (0.16)
=========== =========== =========== ===========
Weighted-average number
of shares of common
stock outstanding - basic
and fully diluted 7,498,392 6,434,682 7,498,392 7,164,009
=========== =========== =========== ===========
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
5
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000
(Unaudited)
Six months Six months
ended ended
June 30, June 30,
2001 2000
----------- -----------
Cash flows from operating activities
Net income (loss) for the period $(3,076,723) $(1,834,109)
Adjustments to reconcile net income
(loss) to net cash used in operating activities
Depreciation and amortization 247,269 220,058
Accrued interest income on note receivable -- (9,375)
Bad debt expense 341,575 53,060
(Increase) Decrease in:
Accounts receivable-trade and other 1,322,216 1,372,192
Inventory 622,750 (282,734)
Prepaid expenses and other 208,397 (368,731)
Increase (Decrease) in:
Accounts payable and other accrued liabilities (1,283,774) (459,713)
Accrued income taxes payable -- --
----------- -----------
Cash flows used in operating activities (1,618,290) (1,309,352)
----------- -----------
Cash flows from investing activities
Cash paid to acquire option to purchase unrelated entity -- --
Cash paid for property and equipment (664,476) (63,285)
----------- -----------
Cash flows used in investing activities (664,476) (63,285)
----------- -----------
Cash flows from financing activities
Increase in working capital advances 2,204,152 --
Cash paid for preferred stock dividends (84,150) --
Cash received from sale of Class A Preferred Stock -- 3,000,000
Cash received from private placement of common stock -- 615,000
Cash paid for loan and capital acquisition costs -- (644,355)
Change in notes payable to affiliate - net -- (86,473)
Net activity on bank and other lines of credit -- (2,724,005)
Principal received on long-term debt -- 1,000,000
Principal payments on long-term note payable (18,313) (164,986)
----------- -----------
Cash flows provided by financing activities 2,101,689 995,181
----------- -----------
Increase (Decrease) in cash (181,077) (377,456)
Cash at beginning of period 232,593 399,639
----------- -----------
Cash at end of period $ 51,516 $ 22,183
=========== ===========
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
6
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows - Continued
Six months ended June 30, 2001 and 2000
(Unaudited)
Six months Six months
ended ended
June 30, June 30,
2001 2000
---------- ----------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 238,580 $ 216,153
========== ==========
Income taxes paid (refunded) for the period $ -- $ --
========== ==========
Supplemental disclosure of non-cash
investing and financing activities
Payment of preferred stock dividend with 225,022
shares of common stock at $0.31 per share $ -- $ 69,756
========== ==========
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
7
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Organization and Description of Business
Karts International Incorporated (Company) was originally incorporated on
February 28, 1984 as Rapholz Silver Hunt, Inc. under the laws of the State of
Florida. On February 23, 1996, the Company was reincorporated in the State of
Nevada by means of a merger with and into Karts International Incorporated, a
Nevada corporation incorporated on February 21, 1996. The Company was the
surviving entity and changed its corporate name to Karts International
Incorporated.
The Company operates through four (4) wholly-owned subsidiaries, Brister's
Thunder Karts, Inc., USA Industries, Inc., KINT, L. L. C. and Straight Line
Manufacturing, Inc.
Brister's Thunder Karts, Inc. (Brister's) (a Louisiana corporation) and USA
Industries, Inc. (USA) (an Alabama corporation) manufacture and sell "fun karts"
through dealers, distributors and mass merchandisers.
KINT, L.L.C. (KINT) (a Louisiana limited liability corporation) was formed as a
sales and marketing company focusing on the sale of customized promotional "fun
karts" to various national companies. This subsidiary initially conducted
business operations under the trade name of "Bird Promotions". In March 1999,
Company management ceased these operations and consolidated these sales and
marketing efforts within other operating subsidiaries of the Company. During
2000, Company management commenced all operations relating to fun karts
utilizing the Polaris Industries, Inc. logo within this subsidiary.
Straight Line Manufacturing, Inc. (a Michigan corporation) (Straight Line)
principally manufactured large, full suspension "fun karts". During 2000, all
operations formerly contained within Straight Line were transferred to other
subsidiaries of the Company.
During interim periods, the Company follows the accounting policies set forth in
its Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934 on Form 10-KSB filed with the U. S. Securities and Exchange Commission.
The information presented herein may not include all disclosures required by
generally accepted accounting principles and the users of financial information
provided for interim periods should refer to the annual financial information
and footnotes contained in its Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 on Form 10-KSB when reviewing the interim
financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the instructions for Form 10-QSB, are unaudited and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of
operations and cash flows of the Company for the respective interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal year
ending December 31, 2001.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
8
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note A - Organization and Description of Business - Continued
The accompanying consolidated financial statements contain the accounts of Karts
International Incorporated and its wholly-owned subsidiaries, Brister's Thunder
Karts, Inc., USA Industries, Inc., KINT, LLC and Straight Line Manufacturing,
Inc. All significant intercompany transactions have been eliminated. The
consolidated entities are collectively referred to as Company.
For segment reporting purposes, the Company operates in only one industry
segment and makes all operating decisions and allocates resources based on the
best benefit to the Company as a whole.
Note B - Going Concern Uncertainty
During the five years ended December 31, 2000, the Company has experienced
cumulative net losses from operations and has utilized cash in operating
activities of approximately $13,000,000. The Company's continued existence is
dependent upon its ability to generate sufficient cash flows from operations to
support its daily operations as well as provide sufficient resources to retire
existing liabilities and obligations on a timely basis.
During 2000, the Company received $615,000 and $9,600,000 in private
transactions from the sale of common and preferred stock, respectively, to
support Year 2000 operations and retire certain short-term lines of credit from
a non-financial institution lender. Between January and May 2001, the Company
received aggregate funding on working capital advances of approximately
$2,200,000 to provide additional cash resources.
Further, during the first quarter of 2000, the Company acquired an exclusive OEM
licensing agreement to manufacture a line of "sport karts" from Polaris
Industries, Inc., a domestic manufacturer of personal watercraft and off-road
vehicles.
The Company restructured its management during the third and fourth quarter of
2000, which it believes will assist in the refocusing of the Company on
operations with greater opportunity for profitability and is exploring other
opportunities to provide revenues outside its core "fun kart" business to
compensate for seasonal slowdowns.
Current management is of the opinion that these events will allow for the
provision of adequate liquidity for the subsequent 12 month period. However, if
necessary, there can be no assurance that the Company will be able to obtain
additional funding or, that such funding, if available, will be obtained on
terms favorable to or affordable by the Company.
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
-------------------------
The Company considers all cash on hand and in banks, certificates of deposit and
other highly-liquid investments with maturities of three months or less, when
purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of making
bank deposits and releasing checks, in accordance with the Company's cash
management policies.
9
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
2. Accounts and advances receivable
--------------------------------
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United States
and are principally concentrated in the southeastern quadrant of the country.
Because of the credit risk involved, management has provided an allowance for
doubtful accounts which reflects its opinion of amounts which will eventually
become uncollectible. In the event of complete non-performance, the maximum
exposure to the Company is the recorded amount of trade accounts receivable
shown on the balance sheet at the date of non-performance.
3. Inventory
---------
Inventory consists of steel, engines and other related raw materials used in the
manufacture of "fun karts". These items are carried at the lower of cost or
market using the first-in, first-out method. As of June 30, 2001 and 2000,
inventory consisted of the following components:
2001 2000
---------- ----------
Raw materials $2,615,139 $1,882,511
Work in process 218,147 288,251
Finished goods 657,002 326,650
---------- ----------
$3,490,288 $2,497,412
========== ==========
4. Property, plant and equipment
-----------------------------
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using the
straight-line method.
Gains and losses from disposition of property and equipment are recognized as
incurred and are included in operations.
5. Covenant not to compete
-----------------------
In conjunction with the acquisition of Straight Line Manufacturing, Inc., the
Company paid $100,000 to the former sole shareholder of Straight Line for a
covenant not to compete for a period of at least three (3) years. The
consideration given was $50,000 cash and a note payable for $50,000. The
covenant is being amortized to operations over a period of three years using the
straight line method.
6. Organization costs
------------------
Costs related to the restructuring and reorganization of the Company have been
capitalized and are being amortized over a five year period using the
straight-line method.
10
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
7. Income taxes
------------
The Company utilizes the asset and liability method of accounting for income
taxes. At June 30, 2001 and 2000, the deferred tax asset and deferred tax
liability accounts, as recorded when material, are entirely the result of
temporary differences. Temporary differences represent differences in the
recognition of assets and liabilities for tax and financial reporting purposes,
primarily accumulated depreciation and amortization. No valuation allowance was
provided against deferred tax assets, where applicable. As of June 30, 2001 and
2000, the deferred tax asset related to the Company's net operating loss
carryforward was fully reserved.
8. Advertising costs
-----------------
The Company does not conduct any direct response advertising activities. For
non-direct response advertising, the Company charges the costs of these efforts
to operations at the first time the related advertising is published. For
various sales publications, catalogs and other sales related items, the Company
capitalizes the development and direct production costs and amortizes these
costs over the estimated useful life of the related materials, not to exceed an
eighteen (18) month period from initial publication of the materials.
9. Income (Loss) per share
-----------------------
Basic earnings (loss) per share is computed by dividing the net income (loss) by
the weighted-average number of shares of common stock and common stock
equivalents (primarily outstanding options and warrants). Common stock
equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method. The
calculation of fully diluted earnings (loss) per share assumes the dilutive
effect of the exercise of outstanding options and warrants at either the
beginning of the respective period presented or the date of issuance, whichever
is later. As of June 30, 2001 and 2000, the outstanding warrants and options are
deemed to be anti-dilutive due to the Company's net operating loss position.
Note D - Concentrations of Credit Risk
The Company maintains its cash accounts in a financial institution subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the Company and its subsidiaries are entitled to aggregate
coverage of $100,000 per account type per separate legal entity per financial
institution. During the six months ended June 30, 2001 and 2000, respectively,
respectively, the various operating companies had deposits in a financial
institution with credit risk exposures in excess of statutory FDIC coverage. The
Company has incurred no losses during 2001 or 2000 as a result of any of these
unsecured situations.
Through May 2000, the Company utilized a lockbox system for the collection and
deposit of receipts on trade accounts receivable for each operating subsidiary
for the benefit of its then primary non-financial institution lender.
The Company uses a corporate cash concentration sweep account whereby all excess
cash funds are concentrated into one primary depository account with a financial
institution. The Company and the financial institution then participate in
uncollateralized reverse-repurchase agreements which are settled on a
"next-business day" basis for the investment of surplus cash funds. The Company
continues to have unsecured amounts invested in reverse repurchase agreements on
a daily basis through June 30, 2001. As of June 30, 2001 and 2000, respectively,
the Company had no unsecured outstanding reverse repurchase agreements
outstanding. The Company has not incurred any losses as a result of any of these
unsecured situations.
11
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note E - Property and Equipment
Total depreciation expense charged to operations for the six months ended June
30, 2001 and 2000 was approximately $221,090 and $85,514, respectively.
Note F - Note Receivable
In December 1998, the Company acquired a $375,000 note receivable from an
unrelated individual payable by an unrelated corporation in exchange for 337,838
shares of unregistered, restricted common stock. The note receivable bears
interest at 10.0% and is due and payable 10 days after the expiration of an
option which the Company executed to acquire 100.0% of the issued and
outstanding stock of the unrelated corporation making the note. This note is
unsecured.
During the fourth quarter of 2000, the Company became aware that the maker of
the note was insolvent and that the ultimate realization of the note was
doubtful. Accordingly, the note balance was charged to operations as of December
31, 2000.
Note G - Option to Acquire an Unrelated Entity
Effective December 1, 1998, the Company acquired from an unrelated entity
certain assets for cash of $56,000. The unrelated entity is a concession kart
manufacturer located in Daytona Beach, Florida. The shareholders of the
unrelated entity ( Shareholders) also granted the Company an option (Option) to
acquire 100.0% of the issued and outstanding shares of the unrelated entity's
common stock based on a financial formula defined in the Option.
The Option expires upon the expiration of the 30-day period following the
unrelated entity's fiscal year ending December 31, 2000. The Company issued to
the Shareholders an aggregate of 90,090 shares of Common Stock having a market
value of approximately $100,000 as payment for the Option. The Option also
provides that unrelated entity can require the Company to exercise the Option if
unrelated entity achieves certain financial goals during the Option term. The
Company also has the right during the Option term, subject to certain
conditions, to acquire for $100 certain intellectual property rights related to
the business of the unrelated entity.
The Company and unrelated entity also entered into a manufacturing agreement
(Manufacturing Agreement) which provides that the Company will manufacture, on
an exclusive basis, the unrelated entity's concession karts at a predetermined
per unit price. The Manufacturing Agreement will terminated on March 31, 2001.
During the fourth quarter of 2000, the Company became aware of the insolvency of
the target company and, accordingly, provided for the abandonment and expiration
of this option as of December 31, 2000 in the accompanying statement of
operations.
(Remainder of this page left blank intentionally)
12
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note H - Working Capital Advances
During the first quarter of 2001, The Morgan Creek Company (Morgan Creek), an
unrelated party focused on community development and goodwill, provided
temporary funds to the Company of approximately $2,200,000.
Note I - Long-Term Debt to Related Parties
Long-term debt consists of the following at June 30, 2001 and 2000:
2001 2000
--------- ---------
Notes payable to the Company's Chairman of the Board aggregating $150,000
Interest at 11.5% and 12.0%, respectively. Accrued interest payable either
monthly ($50,000) or quarterly ($150,000), as specified in the respective note
document(s). Principal and accrued,
but unpaid, interest is due on demand. The notes are unsecured $ 150,000 $ 125,582
$73,875 note payable to the former sole shareholder of Straight Line. Interest
at 6.0%. Principal only payment of $15,000 payable by January 31, 1999
Remaining principal and all accrued, but unpaid, interest is payable subject to
the settlement of a product liability lawsuit against Straight Line
Manufacturing, Inc. incurred prior to the Company's acquisition of Straight
Line. All principal and accrued, but unpaid, interest is due and payable
30 days after the lawsuit settlement date -- 17,340
--------- ---------
Total related party long-term debt $ 150,000 $ 142,922
========= =========
Note J - Long-Term Debt to Banks and Others
Long-term debt payable to banks and others consist of the following at June 30,
2001 and 2000:
2001 2000
--------- ---------
Thirteen and eleven installment notes or leases payable to banks or finance
companies. Interest ranging from 7.75% to 9.25%. Payable in monthly installments
aggregating approximately $8,974, including accrued interest. Collateralized by
various equipment, vehicles and real estate owned by Karts International
Incorporated,
Brister's Thunder Karts, Inc. or USA Industries, Inc. $ 307,590 $ 398,070
Less current maturities (38,757) (50,155)
--------- ---------
Long-term portion $ 268,833 $ 347,915
========= =========
13
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Long-Term Debt to Banks and Others - Continued
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ ------
2001 $ 56,025
2002 45,417
2003 44,657
2004 38,780
2005 28,260
2006 - 2010 112,765
--------
Totals $325,904
========
Note K - Debenture Payable
On June 3, 1999, the Company consummated a $1.5 million convertible loan
transaction with The Schlinger Foundation (the "Foundation"), who is also a
shareholder in the Company. The Foundation also purchased 500,000 shares of 9%
Preferred Stock at a price of $1.00 per share in the Company's private offering
consummated on June 30, 1999. For his assistance to the Company in arranging
this financing with the Foundation and others, the Company paid Blair L.
benGerald, a former director of the Company, $205,000. Mr. Blair L. benGerald
was not an officer or director of the Company when he received this payment. On
May 17, 2000, the Company and The Foundation entered into an Amended and
Restated Loan Agreement which provided for the additional loan of $1,000,000 to
the Company at an interest rate equal to 3% plus the prime rate as quoted in The
Wall Street Journal. Interest is payable on the $2.5 million Amended and
Restated Term Note ("Term Note") monthly as it accrues commencing on June 30,
2000 and continuing on the last day of each successive month thereafter during
the term of the Term Note with the principal of the Term Note being payable in
one installment of unpaid principal and accrued unpaid interest on May 17, 2005.
The Term Note is secured with guaranty agreements by each of the Company's
wholly-owned subsidiaries, Straight Line Manufacturing, Inc., USA Industries,
Inc., KINT, L.L.C. and Brister's Thunder Karts, Inc. Additionally, the Company
and each of its subsidiaries have pledged substantially all of their assets as
additional collateral for the Term Note.
The debenture may be converted into common stock of the Company at an exchange
rate of $0.375 per share at any time at the option of the debenture holder and
the Company may require conversion if the closing price of the Company's common
stock is in excess of $4.00 per share for 25 consecutive trading days. The
debenture may be prepaid in total or in part on or after the 2nd anniversary
date of the debenture upon 30 days notice being given by the Company and the
payment of a 12.0% liquidation charge of the amount being prepaid.
14
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Income Taxes
The components of income tax (benefit) expense for the six months ended June 30,
2001 and 2000, respectively, are as follows:
2001 2000
------- -------
Federal:
Current $ -- $ --
Deferred -- --
------- -------
-- --
------- -------
State:
Current -- --
Deferred -- --
------- -------
Total $ -- $ --
======= =======
As of December 31, 2000, the Company has a net operating loss carryforward of
approximately $11,000,000 to offset future taxable income. Subject to current
regulations, this carryforward will begin to expire in 2012. The Company's
income tax expense for the three months ended June 30, 2001 and 2000,
respectively, differed from the statutory federal rate of 34 percent as follows:
2001 2000
----------- -----------
Statutory rate applied to earnings (loss) before income taxes $(1,046,086) $ (623,597)
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Other, including reserve for deferred tax asset 1,046,086 623,597
----------- -----------
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 Chairman of the Board,
in addition to being a Company shareholder and director. Concurrent with the
1996 closing of the acquisition of Brister's, the Company and the former owner
executed a lease agreement for a primary two-year term which expiring in 1998
and an additional two-year renewal extension which has expired as of September
30, 2000. The Company currently occupies its primary manufacturing facility on a
month-to-month lease at a monthly lease payment of approximately $6,025 per
month. Total payments under this agreement were approximately $41,357 and
$41,372 for the six months ended June 30, 2001 and 2000, respectively.
15
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Related Party Transactions - Continued
Concurrent with the acquisition of Brister's, the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal Agreement.
This agreement provides that the Company may, at its sole option, purchase the
real property and improvements in Roseland, Louisiana currently utilized by the
Company or its subsidiary for an aggregate purchase price of $550,000. The
option may be exercised commencing on January 1, 1998 and expired on December
31, 2000.
On August 1, 2000, the Company and Charles Brister, the Company's President,
entered into a license agreement (the "License Agreement") for "Accelerator
Pedal Override Apparatus for Self-Propelled Motorized Cart with Aligned Brake
and Accelerated Push-Rod Type Operator Pedals" ("Pedal Override") and for
"Clutch Assembly for Chain Driven Cart" (the "Clutch Lube") which are subject to
certain patent rights owned by Mr. Brister. The term of the License Agreement is
for a period of three (3) years. In August 2000, the Company paid Mr. Brister
$40,000 for arrearage royalty fees covering the Pedal Override and Clutch Lube
under a prior license agreement between the Company and Mr. Brister. Pursuant to
the current License Agreement, the Company has agreed to pay Mr. Brister
royalties as follows: (i) the greater of $20,000 or the sum of a royalty of
$1.00 for each Company product sold by the Company or any of its affiliates or
subsidiaries containing or utilizing the Pedal Override during the period
beginning August 1, 2000 and ending July 31, 2001, and a royalty of $0.50 for
each Company product sold by the Company or any of its affiliates or
subsidiaries containing or utilizing the Clutch Lube during the period beginning
August 1, 2000 and ending July 31, 2001, (ii) the greater of $20,000 or the sum
of a royalty of $1.00 for each Company product sold by the Company or any of its
affiliates or subsidiaries containing or utilizing the Pedal Override during the
period beginning August 1, 2001 and ending July 31, 2002, and a royalty of $0.50
for each Company product sold by the Company or any of its affiliates or
subsidiaries containing or utilizing the Clutch Lube during the period beginning
August 1, 2001 and ending July 31, 2002, and (iii) the greater of $20,000 or the
sum of a royalty of $1.00 for each Company product sold by the Company or any of
its affiliates or subsidiaries containing or utilizing the Pedal Override during
the period beginning August 1, 2002 and ending July 31, 2003, and a royalty of
$0.50 for each Company product sold by the Company or any of its affiliates or
subsidiaries containing or utilizing the Clutch Lube during the period beginning
August 1, 2002 and ending July 31, 2003. The Company shall pay the accrued
royalties on January 1 and July 31 of each year during the term of the License
Agreement. Either party may terminate the License Agreement upon thirty (30)
days written notice to the other party if the other party commits a material
breach of any term of the License Agreement and fails to cure such breach within
the 30-day period. Upon termination of the License Agreement for any reason, the
Company shall return to Mr. Brister the technology and tangible manifestations
or copies thereof relating to the Pedal Override and Clutch Lube and all
licenses granted under the License Agreement will be transferred and assigned by
the Company to Mr. Brister or to his designee.
On October 10, 2000, the Company entered into a license agreement with Charles
Brister (the "Technology Agreement") for the right to use a safety fuel tank and
filler cap apparatus on its products (the "Technology") which is owned by Mr.
Brister under certain patents and patent applications. In consideration of the
grant of the license to the FTechnology, the Company agreed to pay Mr. Brister
an annual license fee of $250,000. The first annual license fee payment is
payable in two equal payments of $125,000 each, with the first $125,000 payment
being paid to Mr. Brister in August 2000 and the second $125,000 payment due on
December 31, 2000. The Technology Agreement is for a period of three (3) years
and shall be automatically renewed annually thereafter unless either of the
parties provides at least sixty (60) days notice of non-renewal prior to the
termination date of the Technology Agreement. The Technology Agreement is
subject to termination for non-payment of the license fee and royalties and for
certain other reasons. In addition to the annual license fee of $250,000, the
Company shall pay Mr. Brister a royalty of $1.00 for each Company product which
utilizes the Technology. However, in no event shall royalties for a calendar
year for use of the Technology on the Company's products be less than $500,000
for the first full year of the Technology Agreement ending on December 31, 2001;
less than $500,000 for the license year ending December 31, 2002 and less than
$1,000,000 for the license year ending December 31, 2003 and thereafter.
16
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Related Party Transactions - Continued
In the event that royalties for a license year do not equal the required
minimum, Charles Brister may, at his option, convert the exclusive license
granted to the Company to a non-exclusive license without the right of the
Company to sub-license, by thirty (30) days notice in writing to the Company,
unless such default is cured by the Company within the 30-day notice period.
Subject to the terms of the Technology Agreement, the Company shall have the
right to grant sub-licenses to others for fees or at royalty rates to be
determined by the Company. As sub-license income, the Company has agreed to pay
to Mr. Brister 50% of all license fees, royalties, advance royalties, minimum
royalties or other payments accrued or received in respect to the granting or
maintaining of sub-licenses, provided, however, in no instance shall the amount
paid to Mr. Brister be less than $1.00 for each product which utilizes the
Technology. Additionally, the Company has agreed during the term of the
Technology Agreement to maintain product liability insurance naming Mr. Brister
as an additional insured to provide protection against claims and causes of
action arising out of any defects or failure to perform of the Technology. The
amount of coverage shall be a minimum of $2,000,000 combined single limit, with
a deductible amount not to exceed $100,000 for each single occurrence for bodily
injury and/or property damage.
Note N - Preferred Stock
Preferred stock consists of the following as of June 30, 2001 and 2000:
June 30, 2001 June 30, 2000
------------- -------------
# shares Par Value # shares Par Value
--------- --------- --------- ---------
Convertible Preferred Stock 1,550,000 $ 1,550 1,550,000 $ 1,550
Series A Preferred Stock 4,000,000 4,000 -- --
Series B Preferred Stock 88,000 88 -- --
--------- --------- --------- ---------
Total 5,638,000 $ 5,638 1,550,000 $ 1,550
========= ========= ========= =========
Through May 31, 1999, the Company sold $1,550,000 in Convertible Preferred Stock
(Preferred Stock) subject to a Private Placement Memorandum. The Preferred Stock
bears a dividend of 9.0%, payable semi-annually in either cash or common stock
of the Company. The Preferred Stock is convertible into shares of common stock
at a conversion rate of $0.25 per share at the option of the holder at any time
between issuance and June 30, 2003. The Preferred Stock mandatorily converts to
common stock on June 30, 2003. The Preferred Stock is redeemable by the Company
on or after March 31, 2000, in whole or part, at the option of the Company at a
redemption price of 109%, plus accrued dividends, if any. The dividend payable
at December 31, 1999 was paid in February 2000 with the issuance of 225,022
shares of restricted, unregistered common stock.
In May 2000, the Company authorized the issuance of 4,000,000 shares of
Preferred Stock designated as "Series A Preferred Stock". These shares were sold
on May 17, 2000 for total gross proceeds of $3,000,000. The Series A Preferred
Stock bears a dividend at a rate of $0.075 per share per annum, payable on March
31, June 30, September 30 and December 31, commencing on June 30, 2000. These
shares are subject to a liquidation preference equal to the sum of $0.75 per
share plus declared or accrued but unpaid dividends. The Company, at its sole
option, may redeem all or a portion of the issued and outstanding Series A
Preferred Stock on or after May 31, 2003 at a price of $1.50 per share plus all
declared or accrued but unpaid dividends. The holders of the Series A Preferred
Stock have the right to convert the issued and outstanding shares at any time
after the date of issuance at a rate of $0.375 per share plus all declared or
accrued but unpaid dividends. These shares shall automatically be converted into
common stock upon either the Company's sale of common stock with an aggregate
offering price of $10,000,000 and a per share price of $5.00 and the written
consent or agreement of the holders of a majority of the then outstanding shares
of the Series A Preferred Stock. The dividend payable at December 31, 1999 was
paid in February 2000 with the issuance of 225,022 shares of restricted,
unregistered common stock.
17
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note N - Preferred Stock - Continued
In October and November 2000, the Company sold an aggregate 88,000 shares of its
Series B Preferred Stock to the Foundation for $6,600,000 or $75.00 per share.
Each share of Series B Preferred Stock is convertible at the option of the
holder into 200 shares of Common Stock of the Company. Each outstanding share of
Series B Preferred Stock has the right to 200 votes at any meeting of the
stockholders of the Company.
The Company and the Foundation have entered into a Registration Rights Agreement
dated May 17, 2000, and as amended on October 9, 2000 which granted certain
registration rights to the Foundation for the shares of Common Stock of the
Company to be issued to the Foundation upon conversion of the Series A and
Series B Preferred Stock.
Note O - Common Stock Transactions
During the first six months of 2000, the Company sold an aggregate 1,639,995
shares of restricted, unregistered common stock pursuant to a private placement
memorandum for gross proceeds of approximately $613,360. Each share was
accompanied by a Warrant to purchase one additional share of restricted,
unregistered common stock at a price of $0.50 per share. These warrants expire
on May 31, 2005.
In February 2000, the Company issued 225,022 shares of restricted, unregistered
common stock for the payment of the approximate $69,757 dividend payable at
December 31, 1999 on the Company's Convertible Preferred Stock.
In September 2000, the Company issued approximately 59,077 shares of restricted,
unregistered common stock in settlement of outstanding invoices for legal
services with the Company's corporate product liability counsel in the aggregate
amount of approximately $14,700, which approximates the "fair value" of the
number of shares issued in this transaction.
Note P - Common Stock Warrants
In September 1997, the Company sold 155,000 Underwriter's Warrants for an
aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2.
Each warrant allows the Underwriter to purchase one share of the Company's
common stock at $6.00 per share and one (1) 1997 Warrant at a price of $0.1875
per share. The 1997 warrants are described in detail in the next paragraph.
These warrants 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.
18
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note P - Common Stock Warrants - Continued
On March 9, 1999, the Company, as compensation for waiving certain events of
default and the amendment to the Company's loan agreement with a non-financial
institution lender, granted the lender a stock warrant to purchase 100,000
shares of the Company's restricted, unregistered common stock at a price of
$0.54 per share. This warrant is exercisable at any time after its issuance and
expires four (4) years from its issuance.
In conjunction with the $300,000 and $930,000 term notes executed in the first
quarter of 2000, the Company issued and additional 50,000 warrants to the
non-financial institution lender at a price of $0.54 per share on terms
identical to those discussed above.
In conjunction with a private placement of common stock during the first six
months of 2000, the Company issued 1,639,995 Warrants to purchase an equivalent
share of common stock at a price of $0.50 per share. These warrants are
redeemable by the Company at a price of $0.01 per Warrant at any time after the
first anniversary of the "Final Closing Date" upon 30 days written notice to the
Warrant holders, if the average closing price of the Company's common stock
equals or exceeds $1.50 per share for the 20 consecutive trading days ending
three days prior to the date of the notice of redemption. These Warrants expire
on May 31, 2005.
Warrants Warrants
originally outstanding at
issued June 30, 2001 Exercise price
--------- ------------- ---------------
Underwriter's Warrants 155,000 155,000 $4.00 per share
1997 Warrants 1,782,500 1,782,500 $4.00 per share
Lender's Warrants 150,000 150,000 $0.54 per share
2000 Warrants 1,639,995 1,639,995
$0.50 per share --------- ---------
Totals at June 30, 2001 3,727,495 3,727,495
========= =========
19
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options
The Company's Board of Directors has allocated an aggregate 125,377 shares of
the Company's common stock for unqualified stock option plans for the benefit of
employees of the Company and its subsidiaries.
During 1996, the Company granted options to purchase 59,355 shares of the
Company's common stock to employees of the Company and its operating
subsidiaries at an exercise price of $5.63 per share. These options expire at
various times during 2001.
On January 30, 1997, the Board of Directors of the Company adopted a stock
option plan providing for the reservation of an additional 66,667 shares of
common stock for options to be granted to employees of the Company. Concurrent
with this action, the Company granted options to purchase 6,667 shares of the
Company's common stock at a price of $4.875 per shares to the Company's then
Chief Financial Officer and the Company's Vice President of Marketing (VP
Options). These options are exercisable after January 30, 1998 and expire on
January 30, 2002. The options granted to the Company's former Chief Financial
Officer expired concurrent with his termination in the first quarter of 1998.
Further, on January 30, 1997, the Company granted options to purchase an
aggregate 52,670 shares of the Company's common stock to employees of the
Company and its operating subsidiaries at an exercise price of $4.875 per
post-split share. These options are exercisable after January 30, 1998 and
expire on January 30, 2002.
During 1998, the Company granted an aggregate 265,000 options to purchase an
equivalent number of shares of restricted, unregistered common stock to officers
and employees in conjunction with the employment of such officers and employees.
These options are exercisable at prices ranging from $1.06 per share to $3.50
per share. Concurrent with the termination of a Company officer, 210,000 of the
granted 1998 options terminated. The remaining options are exercisable between
March 1999 and December 1999 and expire between March 2003 and December 2003.
In January 1999, as part of the Separation Agreement between the Company and its
then President and Chief Executive Officer, the Company issued this individual
options to purchase 15,000 shares of Common Stock at an option exercise price of
$1.06 per share. This option was granted to replace options to purchase 200,000
shares of common stock which were effectively canceled at separation. These
options are vested and expire on January 20, 2004.
During the fourth quarter of 1999, the Company granted options to its President,
Vice President of Administration and various employees. These options vested in
various amounts over a period from grant through three years from the grant
date. These options, if not exercised, expire between the fourth and fifth
anniversary date of the option grant. These options are summarized as follows:
Options granted Exercise price
--------------- ----------------
President options 450,000 $0.375 per share
Vice President of Administration options 225,000 $0.375 per share
Employee options 3,000 $0.375 per share
Employee options 117,000 $0.31 per share
Concurrent with a settlement and release agreement reached with the Company's
former Vice President of Administration in the third quarter of 2000, 125,000 of
the granted 1999 options were terminated.
20
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options - Continued
The options that were granted to employees during 1996 and 1997 to purchase
46,953 shares of Common Stock originally were issued at per share exercisable
prices of $4.88 to $5.63 and expire periodically at various times until January
31, 2003. The exercise price of these options was reduced to $0.375 per share by
the Board of Directors on August 21, 2000.
There were no exercise of any options during the years ended December 31, 2000
and 1999. The following table summarizes all options granted from 1996 to June
30, 2001.
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
----------- ----------- ----------- ----------- -----------
1996 options 59,335 -- 37,411 21,924 $ 0.375
1997 VP options 13,334 -- 6,667 6,667 $ 0.375
1997 options 52,670 -- 41,777 10,893 $ 0.375
1998 options 265,000 -- 230,000 35,000 $ 0.375
1999 options 810,000 -- 135,000 675,000 $0.31 - $0.688
----------- ----------- ----------- -----------
Totals 1,200,339 -- 450,855 53,484
=========== =========== =========== ===========
The weighted average exercise price of all issued and outstanding options at
June 30, 2001 is approximately $0.35.
Had compensation cost for options granted been determined based on the fair
values at the grant dates, as prescribed by SFAS 123, the Company's net loss and
net loss per share would not have changed significantly as the exercise price of
the options was relatively equivalent to the market price at the grant date.
The calculations to estimate the fair value of the options were made using the
Black-Scholes pricing model which required making significant assumptions. These
assumptions include the expected life of the options, which was determined to be
one year, the expected volatility, which was based on fluctuations of the stock
price over a 12 month period, the expected dividends, determined to be zero
based on past performance, and the risk free interest rate, which was estimated
using the bond equivalent yield of 6.0% at December 31, 2000 and 1999,
respectively.
1998 and 2000 Stock Compensation Plan
- -------------------------------------
On May 27, 1998, the stockholders of the Company approved the 1998 Stock
Compensation Plan of Karts International Incorporated (the "1998 Plan") and
reserved 1,000,000 shares of Common Stock for issuance under the plan. The 1998
Plan terminates on April 1, 2008 unless previously terminated by the Board. On
December 12, 2000, the stockholders of the Company approved the 2000 Stock
Compensation Plan (the "2000 Plan"), which initially reserves 750,000 shares of
Common Stock for issuance under the 2000 Plan. The 2000 Plan was effective on
October 19, 2000 and terminates on October 19, 2010. The 1998 Plan and 2000 Plan
are both administered by the Compensation Committee (the "Committee") or the
entire Board.
The 1998 and 2000 Plans have similar terms. Eligible participants in the both
the 1998 and 2000 Plans include full time employees, directors and advisors of
the Company and its subsidiaries. Options granted under the 1998 and 2000 Plans
are intended to qualify as "incentive stock options" pursuant to the provisions
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
options which do not constitute incentive stock options ("nonqualified options")
as determined by the Committee.
21
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options - Continued
Under the 1998 and 2000 Plans the Company may also grant "Restricted Stock"
awards. "Restricted Stock" represents shares of Common Stock issued to eligible
participants under the 1998 and 2000 Plans 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 or
2000 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 and
2000 Plans 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 incFentive 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 and the Committee may, after taking all relevant facts
into consideration, determine the fair market value of the Common Stock.
Under the 1998 and 2000 Plans, 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.
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 has 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.
22
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options - Continued
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.
There presently are outstanding options granted under the 1998 Plan to purchase
710,000 shares of Common Stock at prices ranging from $0.3125 to $3.50 per
share, which options expire periodically from August 21, 2001 to December 31,
2005. On August 21, 2000, the Board of Directors approved lowering to $0.375 per
share the exercise price on all outstanding employee options that were
exercisable at a price greater than $0.375 per share. The Board believed this
action was in the best interest of the Company since substantially all of the
outstanding employee options were granted at per share exercisable prices
significantly greater than the current market price of the Company's Common
Stock, which has ranged from $.25 to $.50 per share.
As of June 30, 2000, no options have been granted under the 2000 Plan.
Note S - Commitments and Contingencies
Building Lease
- --------------
On May 16, 2000, the Company executed a lease agreement with the Town of
Roseland Louisiana for a new production facility. The Company paid or accrued,
upon execution, approximately $200,000, which constitutes 100.0% of the required
lease payments for both the initial lease term from October 1, 2000 through
September 30, 2007 and the option lease term from October 1, 2007 through
September 30, 2009. The unamortized portion of this agreement is reflected as a
component of prepaid expenses in the accompanying financial statements.
Litigation
- ----------
The Company and/or it's operating subsidiaries are as defendant(s) in several
product liability lawsuits related to its "fun karts". The Company has had and
continues to have commercial liability insurance coverage to cover these
exposures with a $50,000 per claim deductible as of June 30, 2001. The Company
is vigorously contesting each lawsuit and has accrued management's estimation of
the Company's exposure in each situation. Additionally, the Company maintains a
reserve for future litigation equal to the "per claim" self-insurance amount
times the four- year rolling average of lawsuits filed naming the Company as a
defendant.
The Company anticipates no material impact to either the results of operations,
its financial condition or liquidity based on the uncertainty of outcome, if
any, of existing litigation, either collectively and/or individually, at this
time.
23
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note S - Commitments and Contingencies - Continued
Employment agreements
- ---------------------
On October 19, 1999, the Company's Board of Directors ratified an Employment
Agreement (Agreement) with Charles Brister to serve as the Company's President
and Chief Executive Officer. The Agreement term was effective as of February 1,
1999 and expires on the third anniversary date of the Agreement with an
automatic one year extension unless either the Company or the President provides
a thirty (30) day written notice not to continue the Agreement. This Agreement
provides the President with an annual salary of $150,000 per year, payable in
either common stock of the Company or cash. At the end of each calendar quarter
during the first calendar year of this Agreement, the Company shall pay the
President a cash portion to satisfy the President's estimated federal and state
tax liability and the balance shall be paid in shares of common stock calculated
based on the closing bid price of the Company's common stock as quoted at the
end of each quarter. Further, the President was granted 450,000 options to
purchase shares of the Company's common stock at 100% of the closing bid price
of the Company's common stock on the ratification date and the options vest as
follows: 100,000 at the ratification date of this Agreement; 150,000 on the
second anniversary date of this Agreement; and 200,000 on the third anniversary
date of this Agreement. Additionally, the President may be eligible to receive
an annual bonus which shall be in the form of (a) options to purchase up to
50,000 shares of the Company's common stock, which shall vest immediately upon
grant and expire five years from the grant date and (b) cash, not to exceed 15%
of the President's base salary.
On June 1, 2000, and as amended on October 23, 2000, Charles Brister and the
Company executed an Amended Employment Agreement which superceded the October
19, 1999 Agreement discussed above. Under the Amended Employment Agreement, Mr.
Brister will serve the Company as President and Chief Executive Officer for a
period of three years beginning June 1, 2000 with an automatic one-year
extension unless either the Company or Mr. Brister provides a 30-day written
notice not to continue the Amended Employment Agreement. The Amended Employment
Agreement provides Mr. Brister with an annual salary of $200,000 per year
payable in cash in accordance with the Company's established payroll procedures,
which may be increased at any time at the sole discretion of the Board of
Directors of the Company. Additionally, Mr. Brister was granted 350,000 options
to purchase shares of the Company's Common Stock at the closing bid price of the
Company's Common Stock as of August 21, 2000. The options vest and are
exercisable as follows: (a) options to purchase 100,000 shares vested on August
21, 2000 at an exercise price of $0.375 per share; (b) options to purchase
100,000 shares shall vest and be exercisable upon the second anniversary date of
the Amended Employment Agreement; and (c) options to purchase 150,000 shares
shall vest and be exercisable upon the third anniversary date of the Amended
Employment Agreement. The options expire June 1, 2005. Additionally, Mr. Brister
may be eligible to receive an annual bonus which shall be in the form of (a)
options to purchase up to 50,000 shares of the Company's Common Stock, which
options shall vest immediately upon issuance and shall expire five (5) years
from the date of grant, and (b) cash in an amount established by an annual
performance-based management bonus program which will be approved by the Board
of Directors. Subject to certain exceptions, if the Amended Employment Agreement
is terminated by the Company or Mr. Brister as a result of a change in control
(as defined in the Amended Employment Agreement), Mr. Brister shall be entitled
to a cash payment of $200,000 and the immediate vesting of all options granted
but not yet vested at the effective date of such change in control, as full and
final satisfaction of all obligations due and owing to Mr. Brister by the
Company under the terms of the Amended Employment Agreement. Mr. Brister
resigned as President and Chief Executive Officer on February 5, 2001 and was
elected to serve as Chairman of the Board. This resignation voluntarily
terminated this employment agreement.
24
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note S - Commitments and Contingencies - Continued
Letter of Credit
- ----------------
On March 1, 2001, the Company executed a $12,000 letter of credit in favor of a
utility company to secure service to the Company's new facility in Roseland,
Louisiana.
Note T - Subsequent Events
In August 2001, the Company's Board of Directors authorized the issuance of an
aggregate 581,250 shares of restricted, unregistered common stock in payment of
the semi-annual dividend payable on the 9.0% Convertible Preferred Stock.
On August 2, 2001, the Company received an additional $800,000 working capital
advance from The Morgan CrFeek Company.
(Remainder of this page left blank intentionally)
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, 2001 as compared to the six months ended June 30, 2000
- --------------------------------------------------------------------------------
The Company recorded net revenues of approximately $1,462,000 for the six months
ended June 30, 2001 as compared to approximately $2,789,000 for the comparable
six-month period of 2000. The current year's net revenues for the six months
ended June 30, 2001 represented a 47.58% decrease from the same period of the
previous year. The decrease in revenues is attributed to increased competition
in the funkart market, and soft demand for product which resulted in a
significant decrease in units sold from the same period of the previous year.
This soft demand is attributed to the continuation of soft sales from the fourth
quarter of Calendar 2000 which resulted in the Company's distribution channels
being overstocked with product carried over from Calendar 2000. Additionally,
the Company is behind schedule on releasing its new product line which has
resulted in decreased sales.
Gross profit was negatively impacted by the decrease in sales volume and
additional costs associated with corporate initiatives to restructure the
Company's management team. As a result, the Company realized a negative gross
profit of approximately $(1,224,000) for the six month period ended June 30,
2001 as compared to a gross profit of approximately $(304,000) for the same
period of the previous year.
Selling, general and administrative expenses were approximately $1,308,000 and
$1,180,000 for the respective six-month periods ended June 30, 2001 and 2000.
The increase of approximately $128,000 between the respective six month periods
resulted from increases in bad debt expense, increased administrative payroll
costs and other general and administrative overhead items. Research and
development expenses totaled approximately $213,000 for the six months ended
June 30, 2001 compared to approximately $40,000 for the same period during 2000.
The year-to-date 2000 costs were associated with the design, prototyping and
development and of the Polaris Trail Kart and other new models for the Company's
product line. The year-to-date 2001 costs were associated with the Company's
development of new high-performance models to supplement the Company's product
line.
Other income (expense) was approximately $33,000 and $27,000 for the respective
six month periods ended June 30, 2001 and 2000, respectively. These amounts are
anticipated to remain relatively constant in future periods. Interest expense
for the six months ended June 30, 2001 and 2000 was approximately $175,000 and
$252,000, respectively.
For the six months ended June 30, 2001, the Company incurred a net loss of
approximately $(3,077,000), or approximately $(0.41) per share, as compared to a
net loss of approximately $(1,834,000), or approximately ($0.29) per share, for
the same six period in 2000.
26
Liquidity and Financial Condition
- ---------------------------------
As of June 30, 2001, the Company had positive (negative) working capital of
approximately $(718,000) as compared to approximately $2,040,000 at June 30,
2000 and $2,860,000 million as of December 31, 2000. During the first six months
of 2001 and 2000, the Company experienced negative cash flows from operations of
approximately $(1,618,000) and $(1,309,000), respectively.
To improve the Company's working capital position in the second quarter, the
Company received short-term non- interest bearing working capital advances from
The Morgan Creek Company of $1,341,875. The Morgan Creek Company is an unrelated
private eleemosynary corporation serving as a trustee in a number of faith-based
endeavors focused on community development and goodwill throughout the world.
The Company received additional funding of approximately $1,060,000 in advances
during July and August 2001. Proceeds from the Company's financing activities
were used to reduce its trade accounts payable and provide additional working
capital.
In August 2001, the Company's Board of Directors authorized the issuance of an
aggregate 581,250 shares of restricted, unregistered common stock in payment of
the semi-annual dividend payable on the 9.0% Convertible Preferred Stock.
Capital Requirements
- --------------------
The Company expended cash of approximately $664,000 in additions to property and
equipment during the second quarter of 2001.
Liquidity requirements mandated by future business expansions or acquisitions,
if any are specifically identified or undertaken, are not readily determinable
at this time as no substantive plans have been formulated by management. The
focus of current management continues to be returning the Company to
profitability.
Part II - Other Information
Item 1 - Legal Proceedings
See accompanying notes to the consolidated financial statements
Item 2 - Changes in Securities
In August 2001, the Company's Board of Directors authorized the issuance of
an aggregate 581,250 shares of restricted, unregistered common stock in
payment of the semi-annual dividend payable on the 9.0% Convertible
Preferred Stock.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None.
27
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits - None
--------
b) Reports on Form 8-K - None
-------------------
- --------------------------------------------------------------------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Karts International Incorporated
August 10 , 2001 /s/ Timotheus benHarold
---- -------------------------------------
Timotheus benHarold
President, Chief Executive Officer
Chief Accounting Officer and Director
28