United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
- --------------------------------------------------------------------------------
(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ---------- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
- ---------- OF 1934
For the transition period from ___________ to __________
- --------------------------------------------------------------------------------
Commission File Number: 0-23041
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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)
(985) 747-1111
--------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
November 6, 2001: Common Stock: 8,079,642 shares
Common Stock Warrants: 401,682 warrants
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
Karts International Incorporated
Form 10-QSB for the Quarter ended September 30, 2001
Table of Contents
Page
----
Part I - Financial Information
Item 1 - Financial Statements 3
Item 2 - Management's Discussion and Analysis or Plan of Operation 25
Part II - Other Information
Item 1 - Legal Proceedings 26
Item 2 - Changes in Securities 26
Item 3 - Defaults Upon Senior Securities 26
Item 4 - Submission of Matters to a Vote of Security Holders 26
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 27
2
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
2001 2000
------------- -------------
Assets
------
Current Assets
Cash on hand and in banks $ 28,872 $ 1,522,946
Accounts receivable
Trade, net of allowance for doubtful accounts
of $224,042 and $134,708, respectively 588,978 1,216,340
Other 13,910 28,154
Inventory 3,029,682 3,995,869
Prepaid expenses 390,909 837,247
------------ ------------
Total current assets 4,052,351 7,600,556
------------ ------------
Property and equipment
Building and improvements 1,819,230 1,062,257
Equipment 1,825,422 1,280,870
Transportation equipment 228,607 240,607
Furniture and fixtures 142,198 138,581
------------ ------------
4,015,457 2,722,315
Accumulated depreciation (1,151,644) (727,650)
------------ ------------
2,863,813 1,994,665
Land 32,800 32,800
------------ ------------
Net property and equipment 2,896,613 2,027,465
------------ ------------
Other assets
Note receivable -- 425,060
Option to acquire unrelated entity -- 138,001
Loan costs, net of accumulated amortization
of approximately $94,155 and $27,711, respectively 211,373 277,501
Organization costs, net of accumulated amortization
of approximately $109,255 and $99,080, respectively -- 10,175
Covenant not to compete, net of accumulated amortization
of approximately $97,222 and $63,889, respectively 2,778 36,111
Other 14,362 2,552
------------ ------------
Total other assets 228,513 889,400
------------ ------------
Total Assets $ 7,177,477 $ 10,517,421
============ ============
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
3
Karts International Incorporated and Subsidiaries
Consolidated Balance Sheets - Continued
September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
2001 2000
------------- -------------
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Notes payable to banks and others $ -- $ --
Working capital advances 3,939,152 --
Notes payable to affiliates -- 142,922
Current maturities of long-term debt 35,608 72,273
Accounts payable - trade 1,722,986 2,285,477
Other accrued liabilities 675,075 32,803
Accrued interest payable 20,889 --
Accrued dividends payable 447,272 181,531
Accrued income and franchise taxes payable 32,425 --
------------ ------------
Total current liabilities 6,873,407 2,715,006
------------ ------------
Long-term liabilities
Long-term debt, net of current maturities
Banks and other entities 244,925 230,099
Related parties
Debenture payable 2,500,000 2,500,000
Notes payable -- --
------------ ------------
Total liabilities 9,618,332 5,445,105
------------ ------------
Commitments and contingencies
Shareholders' equity
Preferred stock - $0.001 par value
10,000,000 shares authorized
5,638,000 and 5,623,333 shares
issued and outstanding 5,638 5,623
Common stock - $0.001 par value
14,000,000 shares authorized
8,079,642 and 7,498,392 shares
issued and outstanding 8,079 7,498
Additional paid-in capital 25,045,912 23,965,757
Accumulated deficit (27,500,484) (18,906,562)
------------ ------------
Total shareholders' equity (2,440,855) 5,072,316
------------ ------------
Total Liabilities and Shareholders' Equity $ 7,177,477 $ 10,517,421
============ ============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
4
Karts International Incorporated and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Nine and Three months ended September 30, 2001 and 2000
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues
Kart sales - net $ 2,200,623 $ 4,894,007 $ 738,147 $ 2,104,600
----------- ----------- ----------- -----------
Cost of Sales
Purchases and direct expenses 4,143,201 5,651,884 1,617,776 2,656,667
Depreciation 229,617 152,843 67,938 54,472
----------- ----------- ----------- -----------
Total cost of sales 4,372,818 5,804,727 1,685,714 2,711,139
----------- ----------- ----------- -----------
Gross Profit (2,172,195) (910,720) (947,567) (606,539)
----------- ----------- ----------- -----------
Operating Expenses
Research and development expenses 320,804 72,752 107,719 33,150
Selling expenses 155,404 323,436 53,222 196,477
General and administrative expenses 1,806,408 1,880,843 497,576 827,899
Depreciation and amortization 128,006 118,969 42,416 33,455
----------- ----------- ----------- -----------
Total operating expenses 2,410,622 2,396,000 700,933 1,090,981
----------- ----------- ----------- -----------
Income (loss) from Operations (4,582,817) (3,306,720) (1,648,500) (1,697,520)
Other Income (Expenses)
Loss on consigned inventory (143,520) -- (143,520) --
Interest and other miscellaneous 37,639 42,749 4,662 15,332
Interest expense (304,203) (377,900) (128,820) (125,574)
----------- ----------- ----------- -----------
Loss before Income Taxes (4,992,901) (3,641,871) (1,916,178) (1,807,762)
Income Tax (Expense) Benefit (2,804) (2,321) (2,804) (2,321)
----------- ----------- ----------- -----------
Net Loss (4,995,705) (3,644,192) (1,918,982) (1,810,083)
Other Comprehensive Income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive Income (Loss) $(4,995,705) $(3,644,192) $(1,918,982) $(1,810,083)
=========== =========== =========== ===========
Loss per weighted-average share
of common stock outstanding
- basic and fully diluted $ (0.65) $ (0.54) $ (0.24) $ (0.24)
=========== =========== =========== ===========
Weighted-average number
of shares of common
stock outstanding - basic
and fully diluted 7,694,271 6,773,944 8,079,642 7,448,283
=========== =========== =========== ===========
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
5
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2001 2000
------------- -------------
Cash flows from operating activities
Net income (loss) for the period $(4,995,705) $(3,644,192)
Adjustments to reconcile net income
(loss) to net cash used in operating activities
Depreciation and amortization 404,072 322,960
Accrued interest income on note receivable -- (9,375)
Bad debt expense 259,831 68,060
(Increase) Decrease in:
Accounts receivable-trade and other 1,541,004 1,189,480
Inventory 1,083,356 (1,781,191)
Prepaid expenses and other 260,732 (486,641)
Increase (Decrease) in:
Accounts payable and other accrued liabilities (1,612,403) (209,156)
Accrued income taxes payable (12,675) --
----------- -----------
Cash flows used in operating activities (3,071,788) (4,550,055)
----------- -----------
Cash flows from investing activities
Cash paid for property and equipment (791,565) (263,620)
----------- -----------
Cash flows used in investing activities (791,565) (263,620)
----------- -----------
Cash flows from financing activities
Increase in working capital advances 3,974,760 --
Cash received from sale of Class A Preferred Stock -- 3,000,000
Cash received from sale of Class B Preferred Stock 5,500,000
Cash paid for preferred stock dividends (84,150) (69,750)
Cash received from private placement of common stock -- 615,000
Cash paid for loan and capital acquisition costs -- (1,144,355)
Change in notes payable to affiliate - net (150,000) (86,473)
Net activity on bank and other lines of credit -- (2,724,005)
Principal received on long-term debt -- 1,000,000
Principal payments on long-term note payable (80,978) (153,435)
----------- -----------
Cash flows provided by financing activities 3,659,632 5,936,982
----------- -----------
Increase (Decrease) in cash (203,721) 1,123,307
Cash at beginning of period 232,593 399,639
----------- -----------
Cash at end of period $ 28,872 $ 1,522,946
=========== ===========
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
6
Karts International Incorporated and Subsidiaries
Consolidated Statements of Cash Flows - Continued
Nine months ended September 30, 2001 and 2000
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2001 2000
------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 323,433 $ 326,752
========== ==========
Income taxes paid (refunded) for the period $ 12,675 $ 2,321
========== ==========
Supplemental disclosure of non-cash
investing and financing activities
Payment of preferred stock dividend with 225,022
shares of common stock at $0.31 per share $ -- $ 69,756
========== ==========
Payment of preferred stock dividend with 581,250
shares of common stock at $0.12 per share $ 69,750 $ --
========== ==========
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
7
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Organization and Description of Business
Karts International Incorporated (Company) was originally incorporated on
February 28, 1984 as Rapholz Silver Hunt, Inc. under the laws of the State of
Florida. On February 23, 1996, the Company was reincorporated in the State of
Nevada by means of a merger with and into Karts International Incorporated, a
Nevada corporation incorporated on February 21, 1996. The Company was the
surviving entity and changed its corporate name to Karts International
Incorporated.
The Company operates through four (4) wholly-owned subsidiaries, Brister's
Thunder Karts, Inc., USA Industries, Inc., KINT, L. L. C. and Straight Line
Manufacturing, Inc.
Brister's Thunder Karts, Inc. (Brister's) (a Louisiana corporation) and USA
Industries, Inc. (USA) (an Alabama corporation) manufacture and sell "fun karts"
through dealers, distributors and mass merchandisers.
KINT, L.L.C. (KINT) (a Louisiana limited liability corporation) was formed as a
sales and marketing company focusing on the sale of customized promotional "fun
karts" to various national companies. This subsidiary initially conducted
business operations under the trade name of "Bird Promotions". In March 1999,
Company management ceased these operations and consolidated these sales and
marketing efforts within other operating subsidiaries of the Company. During
2000, Company management commenced all operations relating to fun karts
utilizing the Polaris Industries, Inc. logo within this subsidiary.
Straight Line Manufacturing, Inc. (a Michigan corporation) (Straight Line)
principally manufactured large, full suspension "fun karts". During 2000, all
operations formerly contained within Straight Line were transferred to other
subsidiaries of the Company.
During interim periods, the Company follows the accounting policies set forth in
its Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934 on Form 10-KSB filed with the U. S. Securities and Exchange Commission.
The information presented herein may not include all disclosures required by
generally accepted accounting principles and the users of financial information
provided for interim periods should refer to the annual financial information
and footnotes contained in its Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 on Form 10-KSB when reviewing the interim
financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the instructions for Form 10-QSB, are unaudited and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of
operations and cash flows of the Company for the respective interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal year
ending December 31, 2001.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
8
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note A - Organization and Description of Business - Continued
The accompanying consolidated financial statements contain the accounts of Karts
International Incorporated and its wholly-owned subsidiaries, Brister's Thunder
Karts, Inc., USA Industries, Inc., KINT, LLC and Straight Line Manufacturing,
Inc. All significant intercompany transactions have been eliminated. The
consolidated entities are collectively referred to as Company.
For segment reporting purposes, the Company operates in only one industry
segment and makes all operating decisions and allocates resources based on the
best benefit to the Company as a whole.
Note B - Going Concern Uncertainty
During the five years ended December 31, 2000, the Company has experienced
cumulative net losses from operations and has utilized cash in operating
activities of approximately $13,000,000. The Company's continued existence is
dependent upon its ability to generate sufficient cash flows from operations to
support its daily operations as well as provide sufficient resources to retire
existing liabilities and obligations on a timely basis.
During 2000, the Company received $615,000 and $9,600,000 in private
transactions from the sale of common and preferred stock, respectively, to
support Year 2000 operations and retire certain short-term lines of credit from
a non-financial institution lender. Between January and October 2001, the
Company received aggregate funding on working capital advances of approximately
$5,000,000 to provide additional cash resources.
Further, during the first quarter of 2000, the Company acquired an exclusive OEM
licensing agreement to manufacture a line of "sport karts" from Polaris
Industries, Inc., a domestic manufacturer of personal watercraft and off-road
vehicles.
The Company restructured its management during the third and fourth quarter of
2000, which it believes will assist in the refocusing of the Company on
operations with greater opportunity for profitability and is exploring other
opportunities to provide revenues outside its core "fun kart" business to
compensate for seasonal slowdowns.
Current management is of the opinion that these events will allow for the
provision of adequate liquidity for the subsequent 12 month period. However, if
necessary, there can be no assurance that the Company will be able to obtain
additional funding or, that such funding, if available, will be obtained on
terms favorable to or affordable by the Company.
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
-------------------------
The Company considers all cash on hand and in banks, certificates of deposit and
other highly-liquid investments with maturities of three months or less, when
purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of making
bank deposits and releasing checks, in accordance with the Company's cash
management policies.
9
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
2. Accounts and advances receivable
--------------------------------
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United States
and are principally concentrated in the southeastern quadrant of the country.
Because of the credit risk involved, management has provided an allowance for
doubtful accounts which reflects its opinion of amounts which will eventually
become uncollectible. In the event of complete non-performance, the maximum
exposure to the Company is the recorded amount of trade accounts receivable
shown on the balance sheet at the date of non-performance.
3. Inventory
----------
Inventory consists of steel, engines and other related raw materials used in the
manufacture of "fun karts". These items are carried at the lower of cost or
market using the first-in, first-out method. As of September 30, 2001 and 2000,
inventory consisted of the following components:
2001 2000
---------- ----------
Raw materials $2,353,975 $3,153,009
Work in process 165,818 354,928
Finished goods 509,889 487,932
---------- ----------
$3,029,682 $3,995,869
========== ==========
4. Property, plant and equipment
-----------------------------
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using the
straight-line method.
Gains and losses from disposition of property and equipment are recognized as
incurred and are included in operations.
5. Covenant not to compete
-----------------------
In conjunction with the acquisition of Straight Line Manufacturing, Inc., the
Company paid $100,000 to the former sole shareholder of Straight Line for a
covenant not to compete for a period of at least three (3) years. The
consideration given was $50,000 cash and a note payable for $50,000. The
covenant is being amortized to operations over a period of three years using the
straight line method.
6. Organization costs
------------------
Costs related to the restructuring and reorganization of the Company have been
capitalized and are being amortized over a five year period using the
straight-line method.
10
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
7. Income taxes
------------
The Company utilizes the asset and liability method of accounting for income
taxes. At September 30, 2001 and 2000, the deferred tax asset and deferred tax
liability accounts, as recorded when material, are entirely the result of
temporary differences. Temporary differences represent differences in the
recognition of assets and liabilities for tax and financial reporting purposes,
primarily accumulated depreciation and amortization. No valuation allowance was
provided against deferred tax assets, where applicable. As of September 30, 2001
and 2000, the deferred tax asset related to the Company's net operating loss
carryforward was fully reserved.
8. Advertising costs
-----------------
The Company does not conduct any direct response advertising activities. For
non-direct response advertising, the Company charges the costs of these efforts
to operations at the first time the related advertising is published. For
various sales publications, catalogs and other sales related items, the Company
capitalizes the development and direct production costs and amortizes these
costs over the estimated useful life of the related materials, not to exceed an
eighteen (18) month period from initial publication of the materials.
9. Income (Loss) per share
-----------------------
Basic earnings (loss) per share is computed by dividing the net income (loss) by
the weighted-average number of shares of common stock and common stock
equivalents (primarily outstanding options and warrants). Common stock
equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method. The
calculation of fully diluted earnings (loss) per share assumes the dilutive
effect of the exercise of outstanding options and warrants at either the
beginning of the respective period presented or the date of issuance, whichever
is later. As of September 30, 2001 and 2000, the outstanding warrants and
options are deemed to be anti-dilutive due to the Company's net operating loss
position.
Note D - Concentrations of Credit Risk
The Company maintains its cash accounts in a financial institution subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the Company and its subsidiaries are entitled to aggregate
coverage of $100,000 per account type per separate legal entity per financial
institution. During the nine months ended September 30, 2001 and 2000,
respectively, respectively, the various operating companies had deposits in a
financial institution with credit risk exposures in excess of statutory FDIC
coverage. The Company has incurred no losses during 2001 or 2000 as a result of
any of these unsecured situations.
Through May 2000, the Company utilized a lockbox system for the collection and
deposit of receipts on trade accounts receivable for each operating subsidiary
for the benefit of its then primary non-financial institution lender.
The Company uses a corporate cash concentration sweep account whereby all excess
cash funds are concentrated into one primary depository account with a financial
institution. The Company and the financial institution then participate in
uncollateralized reverse-repurchase agreements which are settled on a
"next-business day" basis for the investment of surplus cash funds. The Company
continues to have unsecured amounts invested in reverse repurchase agreements on
a daily basis through September 30, 2001. As of September 30, 2001 and 2000,
respectively, the Company had no unsecured outstanding reverse repurchase
agreements outstanding. The Company has not incurred any losses as a result of
any of these unsecured situations.
11
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note E - Property and Equipment
Total depreciation expense charged to operations for the nine months ended
September 30, 2001 and 2000 was approximately $326,435 and $271,812,
respectively.
Note F - Note Receivable
In December 1998, the Company acquired a $375,000 note receivable from an
unrelated individual payable by an unrelated corporation in exchange for 337,838
shares of unregistered, restricted common stock. The note receivable bears
interest at 10.0% and is due and payable 10 days after the expiration of an
option which the Company executed to acquire 100.0% of the issued and
outstanding stock of the unrelated corporation making the note. This note is
unsecured.
During the fourth quarter of 2000, the Company became aware that the maker of
the note was insolvent and that the ultimate realization of the note was
doubtful. Accordingly, the note balance was charged to operations as of December
31, 2000.
Note G - Option to Acquire an Unrelated Entity
Effective December 1, 1998, the Company acquired from an unrelated entity
certain assets for cash of $56,000. The unrelated entity is a concession kart
manufacturer located in Daytona Beach, Florida. The shareholders of the
unrelated entity ( Shareholders) also granted the Company an option (Option) to
acquire 100.0% of the issued and outstanding shares of the unrelated entity's
common stock based on a financial formula defined in the Option.
The Option expires upon the expiration of the 30-day period following the
unrelated entity's fiscal year ending December 31, 2000. The Company issued to
the Shareholders an aggregate of 90,090 shares of Common Stock having a market
value of approximately $100,000 as payment for the Option. The Option also
provides that unrelated entity can require the Company to exercise the Option if
unrelated entity achieves certain financial goals during the Option term. The
Company also has the right during the Option term, subject to certain
conditions, to acquire for $100 certain intellectual property rights related to
the business of the unrelated entity.
The Company and unrelated entity also entered into a manufacturing agreement
(Manufacturing Agreement) which provides that the Company will manufacture, on
an exclusive basis, the unrelated entity's concession karts at a predetermined
per unit price. The Manufacturing Agreement will terminated on March 31, 2001.
During the fourth quarter of 2000, the Company became aware of the insolvency of
the target company and, accordingly, provided for the abandonment and expiration
of this option as of December 31, 2000 in the accompanying statement of
operations.
(Remainder of this page left blank intentionally)
12
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note H - Working Capital Advances
Through September 30, 2001, The Morgan Creek Company (Morgan Creek), an
unrelated party focused on community development and goodwill, has made
short-term, non-interest bearing, working capital advances to the Company of
approximately $3,900,000.
Note I - Long-Term Debt to Related Parties
Long-term debt consists of the following at September 30, 2001 and 2000:
2001 2000
-------- --------
Notes payable to the Company's Chairman of the Board
aggregating $150,000. Interest at 11.5% and 12.0%,
respectively. Accrued interest payable either monthly
($50,000) or quarterly ($150,000), as specified in the
respective note document(s). Principal and accrued,
but unpaid, interest is due on demand. The notes are unsecured $ - $125,582
$73,875 note payable to the former sole shareholder of Straight
Line. Interest at 6.0%. Principal only payment of $15,000
payable by January 31, 1999. Remaining principal and all
accrued, but unpaid, interest is payable subject to the settlement
of a product liability lawsuit against Straight Line Manufacturing,
Inc. incurred prior to the Company's acquisition of Straight Line.
All principal and accrued, but unpaid, interest is due and payable
30 days after the lawsuit settlement date. - 17,340
-------- --------
Total related party long-term debt $ - $142,922
======== ========
Note J - Long-Term Debt to Banks and Others
Long-term debt payable to banks and others consist of the following at September
30, 2001 and 2000:
2001 2000
-------- --------
Thirteen installment notes or leases payable to banks
or finance companies. Interest ranging from 7.75%
to 9.25%. Payable in monthly installments aggregating
approximately $8,974, including accrued interest.
Collateralized by various equipment, vehicles and
real estate owned by Karts International Incorporated,
Brister's Thunder Karts, Inc. or USA Industries, Inc. $280,533 $302,372
Less current maturities (35,608) (72,273)
-------- --------
Long-term portion $244,925 $230,099
======== ========
13
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Long-Term Debt to Banks and Others - Continued
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ ---------
2001 $ 56,025
2002 45,417
2003 44,657
2004 38,780
2005 28,260
2006 - 2010 112,765
---------
Totals $ 325,904
=========
Note K - Debenture Payable
As of September 30, 2001, the Company has an aggregate $2,500,000 debenture
payable outstanding.
On June 3, 1999, the Company consummated a $1,500,000 convertible loan
transaction with The Schlinger Foundation (the "Foundation"), who is also a
shareholder in the Company. The Foundation also purchased 500,000 shares of 9%
Preferred Stock at a price of $1.00 per share in the Company's private offering
consummated on June 30, 1999. For his assistance to the Company in arranging
this financing with the Foundation and others, the Company paid Blair L.
benGerald, a former director of the Company, $205,000. Mr. Blair L. benGerald
was not an officer or director of the Company when he received this payment. On
May 17, 2000, the Company and The Foundation entered into an Amended and
Restated Loan Agreement which provided for the additional loan of $1,000,000 to
the Company at an interest rate equal to 3% plus the prime rate as quoted in The
Wall Street Journal. Interest is payable on the $2.5 million Amended and
Restated Term Note ("Term Note") monthly as it accrues commencing on June 30,
2000 and continuing on the last day of each successive month thereafter during
the term of the Term Note with the principal of the Term Note being payable in
one installment of unpaid principal and accrued unpaid interest on May 17, 2005.
The Term Note is secured with guaranty agreements by each of the Company's
wholly-owned subsidiaries, Straight Line Manufacturing, Inc., USA Industries,
Inc., KINT, L.L.C. and Brister's Thunder Karts, Inc. Additionally, the Company
and each of its subsidiaries have pledged substantially all of their assets as
additional collateral for the Term Note.
The debenture may be converted into common stock of the Company at an exchange
rate of $0.375 per share at any time at the option of the debenture holder and
the Company may require conversion if the closing price of the Company's common
stock is in excess of $4.00 per share for 25 consecutive trading days. The
debenture may be prepaid in total or in part on or after the 2nd anniversary
date of the debenture upon 30 days notice being given by the Company and the
payment of a 12.0% liquidation charge of the amount being prepaid.
14
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Income Taxes
The components of income tax (benefit) expense for the nine months ended
September 30, 2001 and 2000, respectively, are as follows:
2001 2000
----------- -----------
Federal:
Current $ - $ -
Deferred - -
----------- -----------
- -
----------- -----------
State:
Current 2,804 2,321
Deferred - -
----------- -----------
Total $ 2,804 $ 2,321
=========== ===========
As of December 31, 2000, the Company has a net operating loss carryforward of
approximately $11,000,000 to offset future taxable income. Subject to current
regulations, this carryforward will begin to expire in 2012. The Company's
income tax expense for the nine months ended September 30, 2001 and 2000,
respectively, differed from the statutory federal rate of 34 percent as follows:
2001 2000
----------- -----------
Statutory rate applied to earnings (loss) before income taxes $(1,698,540) $(1,238,236)
Increase (decrease) in income taxes resulting from:
State income taxes 2,804 2,321
Other, including reserve for deferred tax asset 1,698,540 1,238,236
----------- -----------
Income tax expense $ 2,804 $ 2,321
=========== ===========
Note M - Related Party Transactions
The Company leases its manufacturing facilities under an operating lease with
the former owner of Brister's, who is also the Company's Chairman of the Board,
in addition to being a Company shareholder and director. Concurrent with the
1996 closing of the acquisition of Brister's, the Company and the former owner
executed a lease agreement for a primary two-year term which expiring in 1998
and an additional two-year renewal extension which has expired as of September
30, 2000. The Company currently occupies its primary manufacturing facility on a
month-to-month lease at a monthly lease payment of approximately $6,025 per
month. Total payments under this agreement were approximately $60,000 and
$62,000 for the nine months ended September 30, 2001 and 2000, respectively.
15
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Related Party Transactions - Continued
Concurrent with the acquisition of Brister's, the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal Agreement.
This agreement provides that the Company may, at its sole option, purchase the
real property and improvements in Roseland, Louisiana currently utilized by the
Company or its subsidiary for an aggregate purchase price of $550,000. The
option could have been exercised commencing on January 1, 1998 and expired on
December 31, 2000.
On August 1, 2000, the Company and Charles Brister, the Company's then President
and current Chairman of the Board, entered into a license agreement (the
"License Agreement") for "Accelerator Pedal Override Apparatus for
Self-Propelled Motorized Cart with Aligned Brake and Accelerated Push-Rod Type
Operator Pedals" ("Pedal Override") and for "Clutch Assembly for Chain Driven
Cart" (the "Clutch Lube") which are subject to certain patent rights owned by
Mr. Brister. The term of the License Agreement is for a period of three (3)
years. In August 2000, the Company paid Mr. Brister $40,000 for arrearage
royalty fees covering the Pedal Override and Clutch Lube under a prior license
agreement between the Company and Mr. Brister. Pursuant to the current License
Agreement, the Company has agreed to pay Mr. Brister royalties as follows: (i)
the greater of $20,000 or the sum of a royalty of $1.00 for each Company product
sold by the Company or any of its affiliates or subsidiaries containing or
utilizing the Pedal Override during the period beginning August 1, 2000 and
ending July 31, 2001, and a royalty of $0.50 for each Company product sold by
the Company or any of its affiliates or subsidiaries containing or utilizing the
Clutch Lube during the period beginning August 1, 2000 and ending July 31, 2001,
(ii) the greater of $20,000 or the sum of a royalty of $1.00 for each Company
product sold by the Company or any of its affiliates or subsidiaries containing
or utilizing the Pedal Override during the period beginning August 1, 2001 and
ending July 31, 2002, and a royalty of $0.50 for each Company product sold by
the Company or any of its affiliates or subsidiaries containing or utilizing the
Clutch Lube during the period beginning August 1, 2001 and ending July 31, 2002,
and (iii) the greater of $20,000 or the sum of a royalty of $1.00 for each
Company product sold by the Company or any of its affiliates or subsidiaries
containing or utilizing the Pedal Override during the period beginning August 1,
2002 and ending July 31, 2003, and a royalty of $0.50 for each Company product
sold by the Company or any of its affiliates or subsidiaries containing or
utilizing the Clutch Lube during the period beginning August 1, 2002 and ending
July 31, 2003. The Company shall pay the accrued royalties on January 1 and July
31 of each year during the term of the License Agreement. Either party may
terminate the License Agreement upon thirty (30) days written notice to the
other party if the other party commits a material breach of any term of the
License Agreement and fails to cure such breach within the 30-day period. Upon
termination of the License Agreement for any reason, the Company shall return to
Mr. Brister the technology and tangible manifestations or copies thereof
relating to the Pedal Override and Clutch Lube and all licenses granted under
the License Agreement will be transferred and assigned by the Company to Mr.
Brister or to his designee.
On October 10, 2000, the Company entered into a license agreement with Charles
Brister (the "Technology Agreement") for the right to use a safety fuel tank and
filler cap apparatus on its products (the "Technology") which is owned by Mr.
Brister under certain patents and patent applications. In consideration of the
grant of the license to the Technology, the Company agreed to pay Mr. Brister an
annual license fee of $250,000. The first annual license fee payment is payable
in two equal payments of $125,000 each, with the first $125,000 payment being
paid to Mr. Brister in August 2000 and the second $125,000 payment due on
December 31, 2000. The Technology Agreement is for a period of three (3) years
and shall be automatically renewed annually thereafter unless either of the
parties provides at least sixty (60) days notice of non-renewal prior to the
termination date of the Technology Agreement. The Technology Agreement is
subject to termination for non-payment of the license fee and royalties and for
certain other reasons. In addition to the annual license fee of $250,000, the
Company shall pay Mr. Brister a royalty of $1.00 for each Company product which
utilizes the Technology. However, in no event shall royalties for a calendar
year for use of the Technology on the Company's products be less than $500,000
for the first full year of the Technology Agreement ending on December 31, 2001;
less than $500,000 for the license year ending December 31, 2002 and less than
$1,000,000 for the license year ending December 31, 2003 and thereafter.
16
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Related Party Transactions - Continued
In the event that royalties for a license year do not equal the required
minimum, Charles Brister may, at his option, convert the exclusive license
granted to the Company to a non-exclusive license without the right of the
Company to sub-license, by thirty (30) days notice in writing to the Company,
unless such default is cured by the Company within the 30-day notice period.
Subject to the terms of the Technology Agreement, the Company shall have the
right to grant sub-licenses to others for fees or at royalty rates to be
determined by the Company. As sub-license income, the Company has agreed to pay
to Mr. Brister 50% of all license fees, royalties, advance royalties, minimum
royalties or other payments accrued or received in respect to the granting or
maintaining of sub-licenses, provided, however, in no instance shall the amount
paid to Mr. Brister be less than $1.00 for each product which utilizes the
Technology. Additionally, the Company has agreed during the term of the
Technology Agreement to maintain product liability insurance naming Mr. Brister
as an additional insured to provide protection against claims and causes of
action arising out of any defects or failure to perform of the Technology. The
amount of coverage shall be a minimum of $2,000,000 combined single limit, with
a deductible amount not to exceed $100,000 for each single occurrence for bodily
injury and/or property damage.
Note N - Preferred Stock
Preferred stock consists of the following as of September 30, 2001 and 2000:
September 30, 2001 September 30, 2000
------------------ ------------------
# shares Par Value # shares Par Value
-------- --------- -------- ---------
Convertible Preferred Stock 1,550,000 $ 1,550 1,550,000 $ 1,550
Series A Preferred Stock 4,000,000 4,000 4,000,000 4,000
Series B Preferred Stock 88,000 88 73,333 73
--------- --------- --------- ---------
Total 5,638,000 $ 5,638 5,623,333 $ 5,623
========= ========= ========= =========
Through May 31, 1999, the Company sold $1,550,000 in Convertible Preferred Stock
(Preferred Stock) subject to a Private Placement Memorandum. The Preferred Stock
bears a dividend of 9.0%, payable semi-annually in either cash or common stock
of the Company. The Preferred Stock is convertible into shares of common stock
at a conversion rate of $0.25 per share at the option of the holder at any time
between issuance and June 30, 2003. The Preferred Stock mandatorily converts to
common stock on June 30, 2003. The Preferred Stock is redeemable by the Company
on or after March 31, 2000, in whole or part, at the option of the Company at a
redemption price of 109%, plus accrued dividends, if any. The dividend payable
at December 31, 1999 was paid in February 2000 with the issuance of 225,022
shares of restricted, unregistered common stock. The dividend payable at June
30, 2001 was paid in August 2001 with 581,250 shares of restricted, unregistered
common stock.
In May 2000, the Company authorized the issuance of 4,000,000 shares of
Preferred Stock designated as "Series A Preferred Stock". These shares were sold
on May 17, 2000 for total gross proceeds of $3,000,000. The Series A Preferred
Stock bears a dividend at a rate of $0.075 per share per annum, payable on March
31, June 30, September 30 and December 31, commencing on June 30, 2000. These
shares are subject to a liquidation preference equal to the sum of $0.75 per
share plus declared or accrued but unpaid dividends. The Company, at its sole
option, may redeem all or a portion of the issued and outstanding Series A
Preferred Stock on or after May 31, 2003 at a price of $1.50 per share plus all
declared or accrued but unpaid dividends. The holders of the Series A Preferred
Stock have the right to convert the issued and outstanding shares at any time
after the date of issuance at a rate of $0.375 per share plus all declared or
accrued but unpaid dividends. These shares shall automatically be converted into
common stock upon either the Company's sale of common stock with an aggregate
offering price of $10,000,000 and a per share price of $5.00 and the written
consent or agreement of the holders of a majority of the then outstanding shares
of the Series A Preferred Stock. The dividend payable at December 31, 1999 was
paid in February 2000 with the issuance of 225,022 shares of restricted,
unregistered common stock.
17
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note N - Preferred Stock - Continued
In October and November 2000, the Company sold an aggregate 88,000 shares of its
Series B Preferred Stock to the Foundation for $6,600,000 or $75.00 per share.
Each share of Series B Preferred Stock is convertible at the option of the
holder into 200 shares of Common Stock of the Company. Each outstanding share of
Series B Preferred Stock has the right to 200 votes at any meeting of the
stockholders of the Company.
The Company and the Foundation have entered into a Registration Rights Agreement
dated May 17, 2000, and as amended on October 9, 2000 which granted certain
registration rights to the Foundation for the shares of Common Stock of the
Company to be issued to the Foundation upon conversion of the Series A and
Series B Preferred Stock.
Note O - Common Stock Transactions
In August 2001, the Company's Board of Directors authorized the issuance of an
aggregate 581,250 shares of restricted, unregistered common stock in payment of
the semi-annual dividend payable on the 9.0% Convertible Preferred Stock.
During the first nine months of 2000, the Company sold an aggregate 1,639,995
shares of restricted, unregistered common stock pursuant to a private placement
memorandum for gross proceeds of approximately $613,360. Each share was
accompanied by a Warrant to purchase one additional share of restricted,
unregistered common stock at a price of $0.50 per share. These warrants expire
on May 31, 2005.
In February 2000, the Company issued 225,022 shares of restricted, unregistered
common stock for the payment of the approximate $69,757 dividend payable at
December 31, 1999 on the Company's Convertible Preferred Stock.
In September 2000, the Company issued approximately 59,077 shares of restricted,
unregistered common stock in settlement of outstanding invoices for legal
services with the Company's corporate product liability counsel in the aggregate
amount of approximately $14,700, which approximates the "fair value" of the
number of shares issued in this transaction.
Note P - Common Stock Warrants
In September 1997, the Company sold 155,000 Underwriter's Warrants for an
aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2.
Each warrant allows the Underwriter to purchase one share of the Company's
common stock at $6.00 per share and one (1) 1997 Warrant at a price of $0.1875
per share. The 1997 warrants are described in detail in the next paragraph.
These warrants expired on September 9, 2002.
In September and November 1997, the Company sold, pursuant to a Registration
Statement on Form SB-2, an aggregate 1,782,500 warrants (1997 Warrants) at
$0.125 each for gross proceeds of $222,813. Each warrant entitles the holder to
purchase one (1) share of the Company's common stock at a price of $4.00 per
share during the four year period commencing on September 9, 1998. These
warrants are redeemable by the Company at a redemption price of $0.01 per
warrant, at any time after September 9, 1998 upon thirty (30) days written
notice to the respective warrant holders if the average closing price of the
Company's common stock equals or exceeds $8.00 per share for the 20 consecutive
trading days ending three (3) days prior to the notice of redemption.
18
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note P - Common Stock Warrants - Continued
On March 9, 1999, the Company, as compensation for waiving certain events of
default and the amendment to the Company's loan agreement with a non-financial
institution lender, granted the lender a stock warrant to purchase 100,000
shares of the Company's restricted, unregistered common stock at a price of
$0.54 per share. This warrant is exercisable at any time after its issuance and
expires four (4) years from its issuance.
In conjunction with the $300,000 and $930,000 term notes executed in the first
quarter of 2000, the Company issued and additional 50,000 warrants to the
non-financial institution lender at a price of $0.54 per share on terms
identical to those discussed above.
In conjunction with a private placement of common stock during the first six
months of 2000, the Company issued 1,639,995 Warrants to purchase an equivalent
share of common stock at a price of $0.50 per share. These warrants are
redeemable by the Company at a price of $0.01 per Warrant at any time after the
first anniversary of the "Final Closing Date" upon 30 days written notice to the
Warrant holders, if the average closing price of the Company's common stock
equals or exceeds $1.50 per share for the 20 consecutive trading days ending
three days prior to the date of the notice of redemption. These Warrants expire
on May 31, 2005.
Warrants Warrants
originally outstanding at
issued September 30, 2001 Exercise price
---------- ------------------ ---------------
Underwriter's Warrants 155,000 - $4.00 per share
1997 Warrants 1,782,500 1,782,500 $4.00 per share
Lender's Warrants 150,000 150,000 $0.54 per share
2000 Warrants 1,639,995 1,639,995 $0.50 per share
--------- ---------
Totals at September 30, 2001 3,727,495 3,572,495
========= =========
Note R - Stock Options
The Company's Board of Directors has allocated an aggregate 125,377 shares of
the Company's common stock for unqualified stock option plans for the benefit of
employees of the Company and its subsidiaries.
During 1996, the Company granted options to purchase 59,355 shares of the
Company's common stock to employees of the Company and its operating
subsidiaries at an exercise price of $5.63 per share. These options expire at
various times during 2001.
On January 30, 1997, the Board of Directors of the Company adopted a stock
option plan providing for the reservation of an additional 66,667 shares of
common stock for options to be granted to employees of the Company. Concurrent
with this action, the Company granted options to purchase 6,667 shares of the
Company's common stock at a price of $4.875 per shares to the Company's then
Chief Financial Officer and the Company's Vice President of Marketing (VP
Options). These options are exercisable after January 30, 1998 and expire on
January 30, 2002. The options granted to the Company's former Chief Financial
Officer expired concurrent with his termination in the first quarter of 1998.
Further, on January 30, 1997, the Company granted options to purchase an
aggregate 52,670 shares of the Company's common stock to employees of the
Company and its operating subsidiaries at an exercise price of $4.875 per
post-split share. These options are exercisable after January 30, 1998 and
expire on January 30, 2002.
19
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options - Continued
During 1998, the Company granted an aggregate 265,000 options to purchase an
equivalent number of shares of restricted, unregistered common stock to officers
and employees in conjunction with the employment of such officers and employees.
These options are exercisable at prices ranging from $1.06 per share to $3.50
per share. Concurrent with the termination of a Company officer, 210,000 of the
granted 1998 options terminated. The remaining options are exercisable between
March 1999 and December 1999 and expire between March 2003 and December 2003.
In January 1999, as part of the Separation Agreement between the Company and its
then President and Chief Executive Officer, the Company issued this individual
options to purchase 15,000 shares of Common Stock at an option exercise price of
$1.06 per share. This option was granted to replace options to purchase 200,000
shares of common stock which were effectively canceled at separation. These
options are vested and expire on January 20, 2004.
During the fourth quarter of 1999, the Company granted options to its President,
Vice President of Administration and various employees. These options vested in
various amounts over a period from grant through three years from the grant
date. These options, if not exercised, expire between the fourth and fifth
anniversary date of the option grant. These options are summarized as follows:
Options granted Exercise price
--------------- ----------------
President options 450,000 $0.375 per share
Vice President of Administration options 225,000 $0.375 per share
Employee options 3,000 $0.375 per share
Employee options 117,000 $0.31 per share
Concurrent with a settlement and release agreement reached with the Company's
former Vice President of Administration in the third quarter of 2000, 125,000 of
the granted 1999 options were terminated.
The options that were granted to employees during 1996 and 1997 to purchase
46,953 shares of Common Stock originally were issued at per share exercisable
prices of $4.88 to $5.63 and expire periodically at various times until January
31, 2003. The exercise price of these options was reduced to $0.375 per share by
the Board of Directors on August 21, 2000.
There were no exercise of any options during the years ended December 31, 2000
and 1999. The following table summarizes all options granted from 1996 to
September 30, 2001.
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
----------- ----------- ----------- ----------- ---------------
1996 options 59,335 - 37,411 21,924 $ 0.375
1997 VP options 13,334 - 6,667 6,667 $ 0.375
1997 options 52,670 - 41,777 10,893 $ 0.375
1998 options 265,000 - 230,000 35,000 $ 0.375
1999 options 810,000 - 135,000 675,000 $ 0.31 - $0.688
----------- ----------- ----------- -----------
Totals 1,200,339 - 450,855 753,484
=========== =========== =========== ===========
20
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note R - Stock Options - Continued
The weighted average exercise price of all issued and outstanding options at
September 30, 2001 is approximately $0.35.
Had compensation cost for options granted been determined based on the fair
values at the grant dates, as prescribed by SFAS 123, the Company's net loss and
net loss per share would not have changed significantly as the exercise price of
the options was relatively equivalent to the market price at the grant date.
The calculations to estimate the fair value of the options were made using the
Black-Scholes pricing model which required making significant assumptions. These
assumptions include the expected life of the options, which was determined to be
one year, the expected volatility, which was based on fluctuations of the stock
price over a 12 month period, the expected dividends, determined to be zero
based on past performance, and the risk free interest rate, which was estimated
using the bond equivalent yield of 6.0% at December 31, 2000 and 1999,
respectively.
Stock Compensation Plans
- ------------------------
On May 27, 1998, the stockholders of the Company approved the 1998 Stock
Compensation Plan of Karts International Incorporated (the "1998 Plan") and
reserved 1,000,000 shares of Common Stock for issuance under the plan. The 1998
Plan terminates on April 1, 2008 unless previously terminated by the Board. The
Plan is administered by the Compensation Committee of the Board of Directors
(the "Committee") or the entire Board of Directors..
On December 12, 2000, the stockholders of the Company approved the 2000 Stock
Compensation Plan (the "2000 Plan"), which initially reserves 750,000 shares of
Common Stock for issuance under the 2000 Plan. The 2000 Plan was effective on
October 19, 2000 and was terminated by the Company's Board of Directors on July
10, 2001 There were no options granted under the 2000 Plan.
There presently are outstanding options granted under the 1998 Plan to purchase
710,000 shares of Common Stock at prices ranging from $0.3125 to $3.50 per
share, which options expire periodically from August 21, 2001 to December 31,
2005. On August 21, 2000, the Board of Directors approved lowering to $0.375 per
share the exercise price on all outstanding employee options that were
exercisable at a price greater than $0.375 per share. The Board believed this
action was in the best interest of the Company since substantially all of the
outstanding employee options were granted at per share exercisable prices
significantly greater than the current market price of the Company's Common
Stock, which has ranged from $.25 to $.50 per share.
Note S - Commitments and Contingencies
Building Lease
- --------------
On May 16, 2000, the Company executed a lease agreement with the Town of
Roseland Louisiana for a new production facility. The Company paid or accrued,
upon execution, approximately $200,000, which constitutes 100.0% of the required
lease payments for both the initial lease term from October 1, 2000 through
September 30, 2007 and the option lease term from October 1, 2007 through
September 30, 2009. The unamortized portion of this agreement is reflected as a
component of prepaid expenses in the accompanying financial statements.
21
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note S - Commitments and Contingencies - Continued
Litigation
- ----------
The Company and/or it's operating subsidiaries are as defendant(s) in several
product liability lawsuits related to its "fun karts". The Company has had and
continues to have commercial liability insurance coverage to cover these
exposures with a $50,000 per claim deductible as of September 30, 2001. The
Company is vigorously contesting each lawsuit and has accrued management's
estimation of the Company's exposure in each situation. Additionally, the
Company maintains a reserve for future litigation equal to the "per claim"
self-insurance amount times the four- year rolling average of lawsuits filed
naming the Company as a defendant.
The Company anticipates no material impact to either the results of operations,
its financial condition or liquidity based on the uncertainty of outcome, if
any, of existing litigation, either collectively and/or individually, at this
time.
Employment agreements
- ---------------------
On October 19, 1999, the Company's Board of Directors ratified an Employment
Agreement (Agreement) with Charles Brister to serve as the Company's President
and Chief Executive Officer. The Agreement term was effective as of February 1,
1999 and expires on the third anniversary date of the Agreement with an
automatic one year extension unless either the Company or the President provides
a thirty (30) day written notice not to continue the Agreement. This Agreement
provides the President with an annual salary of $150,000 per year, payable in
either common stock of the Company or cash. At the end of each calendar quarter
during the first calendar year of this Agreement, the Company shall pay the
President a cash portion to satisfy the President's estimated federal and state
tax liability and the balance shall be paid in shares of common stock calculated
based on the closing bid price of the Company's common stock as quoted at the
end of each quarter. Further, the President was granted 450,000 options to
purchase shares of the Company's common stock at 100% of the closing bid price
of the Company's common stock on the ratification date and the options vest as
follows: 100,000 at the ratification date of this Agreement; 150,000 on the
second anniversary date of this Agreement; and 200,000 on the third anniversary
date of this Agreement. Additionally, the President may be eligible to receive
an annual bonus which shall be in the form of (a) options to purchase up to
50,000 shares of the Company's common stock, which shall vest immediately upon
grant and expire five years from the grant date and (b) cash, not to exceed 15%
of the President's base salary.
On June 1, 2000, and as amended on October 23, 2000, Charles Brister and the
Company executed an Amended Employment Agreement which superceded the October
19, 1999 Agreement discussed above. Under the Amended Employment Agreement, Mr.
Brister will serve the Company as President and Chief Executive Officer for a
period of three years beginning June 1, 2000 with an automatic one-year
extension unless either the Company or Mr. Brister provides a 30-day written
notice not to continue the Amended Employment Agreement. The Amended Employment
Agreement provides Mr. Brister with an annual salary of $200,000 per year
payable in cash in accordance with the Company's established payroll procedures,
which may be increased at any time at the sole discretion of the Board of
Directors of the Company. Additionally, Mr. Brister was granted 350,000 options
to purchase shares of the Company's Common Stock at the closing bid price of the
Company's Common Stock as of August 21, 2000. The options vest and are
exercisable as follows: (a) options to purchase 100,000 shares vested on August
21, 2000 at an exercise price of $0.375 per share; (b) options to purchase
100,000 shares shall vest and be exercisable upon the second anniversary date of
the Amended Employment Agreement; and (c) options to purchase 150,000 shares
shall vest and be exercisable upon the third anniversary date of the Amended
Employment Agreement. The options expire June 1, 2005.
22
Karts International Incorporated and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note S - Commitments and Contingencies - Continued
Employment agreements - continued
- ---------------------------------
Additionally, Mr. Brister may be eligible to receive an annual bonus which shall
be in the form of (a) options to purchase up to 50,000 shares of the Company's
Common Stock, which options shall vest immediately upon issuance and shall
expire five (5) years from the date of grant, and (b) cash in an amount
established by an annual performance-based management bonus program which will
be approved by the Board of Directors. Subject to certain exceptions, if the
Amended Employment Agreement is terminated by the Company or Mr. Brister as a
result of a change in control (as defined in the Amended Employment Agreement),
Mr. Brister shall be entitled to a cash payment of $200,000 and the immediate
vesting of all options granted but not yet vested at the effective date of such
change in control, as full and final satisfaction of all obligations due and
owing to Mr. Brister by the Company under the terms of the Amended Employment
Agreement. Mr. Brister resigned as President and Chief Executive Officer on
February 5, 2001 and was elected to serve as Chairman of the Board. This
resignation voluntarily terminated this employment agreement.
Letter of Credit
- ----------------
On March 1, 2001, the Company executed a $12,000 letter of credit in favor of a
utility company to secure service to the Company's new facility in Roseland,
Louisiana.
Note T - Subsequent Events
During October 2001, the Company received additional working capital advances of
approximately $965,000 from The Morgan Creek Company.
(Remainder of this page left blank intentionally)
23
Part I - Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Caution Regarding Forward-Looking Information
- ---------------------------------------------
This quarterly report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
Results of Operations
- ---------------------
Nine months ended September 30, 2001 as compared to the nine months ended
- --------------------------------------------------------------------------------
September 30, 2000
- ------------------
The Company recorded net revenues of approximately $2,200,000 for the nine
months ended September 30, 2001 as compared to approximately $4,900,000 for the
comparable nine month period of 2000. The current year's net revenues for the
nine months ended September 30, 2001 represented a 55.03% decrease from the same
period of the previous year. The decrease in revenues is attributed to increased
competition in the funkart market, and soft demand for product which resulted in
a significant decrease in units sold from the same period of the previous year.
This soft demand is attributed to the continuation of soft sales from the fourth
quarter of Calendar 2000 which resulted in the Company's distribution channels
being overstocked with product carried over from Calendar 2000. Additionally,
the Company was behind schedule on releasing its new product line which has
resulted in decreased sales.
Gross profit was negatively impacted by the decrease in sales volume and
additional costs associated with corporate initiatives to restructure the
Company's management team. As a result, the Company realized a negative gross
profit of approximately $(2,200,000) for the nine month period ended September
30, 2001 as compared to a gross profit of approximately $(910,000) for the same
period of the previous year.
Selling, general and administrative expenses were approximately $2,000,000 and
$2,200,000 for the respective nine month periods ended September 30, 2001 and
2000. The decrease of approximately $200,000 between the respective nine month
periods resulted from the differences between increases in bad debt expense and
decreases in administrative payroll costs and other general and administrative
overhead items. Research and development expenses totaled approximately $321,000
for the nine months ended September 30, 2001 compared to approximately $73,000
for the same period during 2000. The year-to-date 2000 costs were associated
with the design, prototyping and development of the Polaris Trail Kart and other
new models for the Company's product line. The year-to-date 2001 costs were
associated with the Company's development of new high-performance models to
supplement the Company's product line.
Other income (expense) was approximately $38,000 and $43,000 for the respective
nine month periods ended September 30, 2001 and 2000, respectively. These
amounts are anticipated to remain relatively constant in future periods.
Interest expense for the nine months ended September 30, 2001 and 2000 was
approximately $300,000 and $378,000, respectively.
For the nine months ended September 30, 2001, the Company incurred a net loss of
approximately $(5,000,000), or approximately $(0.65) per share, as compared to a
net loss of approximately $(3,600,000), or approximately ($0.54) per share, for
the same nine month period in 2000.
24
Liquidity and Financial Condition
- ---------------------------------
As of September 30, 2001, the Company had positive (negative) working capital of
approximately $(2,821,000) as compared to approximately $4,886,000 at September
30, 2000 and $2,860,000 as of December 31, 2000. During the first nine months of
2001 and 2000, the Company experienced negative cash flows from operations of
approximately $(3,100,000) and $(4,550,000), respectively.
To support the Company's working capital through October 2001, the Company
received short-term non-interest bearing working capital advances from The
Morgan Creek Company of approximately $5,000,000. The Morgan Creek Company is an
unrelated private eleemosynary corporation serving as a trustee in a number of
faith-based endeavors focused on community development and goodwill throughout
the world. Proceeds from the Company's financing activities were used to support
the Company's operations.
In August 2001, the Company's Board of Directors authorized the issuance of an
aggregate 581,250 shares of restricted, unregistered common stock in payment of
the semi-annual dividend payable on the 9.0% Convertible Preferred Stock.
Capital Requirements
- --------------------
The Company expended cash of approximately $792,000 in additions to property and
equipment during the first nine months of 2001.
Liquidity requirements mandated by future business expansions or acquisitions,
if any are specifically identified or undertaken, are not readily determinable
at this time as no substantive plans have been formulated by management. The
focus of current management continues to be returning the Company to
profitability.
Part II - Other Information
Item 1 - Legal Proceedings
See accompanying notes to the consolidated financial statements
Item 2 - Changes in Securities
In August 2001, the Company's Board of Directors authorized the issuance of
an aggregate 581,250 shares of restricted, unregistered common stock in
payment of the semi-annual dividend payable on the 9.0% Convertible Preferred
Stock.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None
25
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits - None
--------
b) Reports on Form 8-K - None
-------------------
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Karts International Incorporated
November 6 , 2001 /s/ Timotheus benHarold
----- --------------------------------------------
Timotheus benHarold
President, Chief Executive Officer
Chief Accounting Officer and Director
26