UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
- --------------------------------------------------------------------------------
(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, 1998
- -------- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
- --------------------------------------------------------------------------------
Commission File Number: 0-23041
-------
KARTS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
Nevada 75-2639196
------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
62204 Commercial Street, Roseland, LA 70456
-------------------------------------------
(Address of principal executive offices)
(504) 747-1111
--------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
November 11, 1998: Common Stock: 5,036,781 shares
Common Stock Warrants: 2,282,525
Transitional Small Business Disclosure Format (check one): YES NO X
KARTS INTERNATIONAL INCORPORATED
Form 10-QSB for the Quarter ended September 30, 1998
Table of Contents
Page
>
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 22
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 27
Item 6 Exhibits and Reports on Form 8-K 27
This amended filing corrects a clerical error whereby the original filing presented
gross revenues for the nine month period ended September 30, 1998
instead of net revenues for the respective period.
This amendment also includes a discussion related to the Registrant's Y2K preparedness.
There are no other changes to this document from the last amended filing.
2
S. W. HATFIELD + ASSOCIATES
certified public accountants
Members: American Institute of Certified Public Accountants
SEC Practice Section
Information Technology Section
Texas Society of Certified Public Accountants
Independent Accountant's Report
Board of Directors and Shareholders
Karts International Incorporated
We have reviewed the accompanying consolidated balance sheets of Karts
International Incorporated (a Nevada corporation) and Subsidiaries as of
September 30, 1998 and 1997 and the accompanying consolidated statement of
operations for the nine and three months ended September 30, 1998 and 1997,
respectively, and the consolidated statement of cash flows for the nine months
ended September 30, 1998 and 1997. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression on an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
November 11, 1998
Use our past to assist your future sm
P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor
Dallas, Texas 75382-0395 Dallas, Texas 75243-7212
214-342-9635 (voice) (fax) 214-342-9601
800-244-0639 SWHCPA@aol.com
3
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
(Unaudited)
Assets
1998 1997
------------ ------------
Current Assets
Cash on hand and in banks $ 252,138 $ 1,958,821
Accounts receivable
Trade, net of allowance for doubtful accounts
of $23,000 and $2,447, respectively 1,066,473 500,718
Other -- 2,348
Recoverable income taxes 17,622 225,000
Inventory 2,073,273 1,289,638
Prepaid expenses 360,206 209,312
------------ ------------
Total current assets 3,769,712 4,185,837
------------ ------------
Property and equipment
Building and improvements 811,253 372,509
Equipment 790,826 720,545
Transportation equipment 125,640 76,987
Furniture and fixtures 134,960 77,820
------------ ------------
1,862,679 1,247,861
Accumulated depreciation (230,458) (115,120)
------------ ------------
1,632,221 1,132,741
Land 32,800 32,800
------------ ------------
Net property and equipment 1,665,021 1,165,541
------------ ------------
Other Assets
Goodwill, net of accumulated amortization of
approximately $561,227and $327,068, respectively 5,298,196 5,532,355
Organization costs, net of accumulated amortization
of approximately $55,378 and $33,527, respectively 53,877 75,727
Other 26,720 6,161
------------ ------------
Total other assets 5,378,793 5,614,243
------------ ------------
Total Assets $ 10,813,526 $ 10,965,621
============ ============
- Continued -
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
4
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
September 30, 1998 and 1997
(Unaudited)
Liabilities and Shareholders' Equity
1998 1997
------------ ------------
Current Liabilities
Note payable to a finance company $ 892,291 $ 7,685
Current maturities of long-term debt 25,919 14,384
Accounts payable - trade 786,479 654,572
Other accrued liabilities 282,656 13,157
Accrued income taxes payable 14,490 76,919
------------ ------------
Total current liabilities 2,001,835 766,717
------------ ------------
Long-term liabilities
Long-term debt, net of current maturities
Related parties -- 20,304
Banks and individuals 246,153 219,877
------------ ------------
Total Liabilities 2,247,988 1,006,898
------------ ------------
Commitments and contingencies
Shareholders' equity Preferred stock - $0.001 par value
10,000,000 shares authorized
None issued and outstanding -- --
Common stock - $0.001 par value
14,000,000 shares authorized
4,854,133 and 4,621,633 shares
issued and outstanding, respectively 4,854 4,622
Common stock warrants 264,636 193,905
Additional paid-in capital 13,188,866 11,989,802
Accumulated deficit (4,892,818) (2,229,606)
------------ ------------
Total Shareholders' Equity 8,565,538 9,958,723
------------ ------------
Total Liabilities and Shareholders' Equity $ 10,813,526 $ 10,965,621
============ ============
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
5
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Nine and Three months ended September 30, 1998 and 1997
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net Sales $ 3,617,510 $ 4,365,014 $ 1,885,571 $ 1,849,782
----------- ----------- ----------- -----------
Cost of sales
Purchases, direct labor and
related costs 3,705,405 3,389,670 2,003,683 1,238,019
Depreciation 52,740 68,285 16,941 22,717
----------- ----------- ----------- -----------
Total cost of sales 3,758,145 3,457,955 2,020,624 1,260,736
----------- ----------- ----------- -----------
Gross profit (140,635) 907,059 (135,053) 589,046
----------- ----------- ----------- -----------
Operating expenses
Research and development 22,364 24,703 6,985 2,846
Selling, general and
administrative expenses 1,589,807 1,185,163 650,826 350,362
Compensation expense related
to common stock issuances
at less than "fair value" for
reorganization, restructuring
and consulting costs 413,412 -- -- --
Depreciation and amortization 231,979 222,025 77,751 113,141
----------- ----------- ----------- -----------
Total operating expenses 2,257,562 1,431,891 735,562 466,349
----------- ----------- ----------- -----------
Income (Loss) from operations (2,398,197) (524,832) (870,615) 122,697
Other income (expense)
Interest expense (42,387) (473,946) (7,884) (137,071)
Other 50,374 80,849 6,950 20,027
----------- ----------- ----------- -----------
Income (Loss) before income taxes (2,390,210) (917,929) (871,549) 5,653
Income taxes
Currently receivable (payable) -- 139,733 -- 139,733
----------- ----------- ----------- -----------
Net income (loss) $(2,390,210) $ (778,196) $ (871,549) $ 145,386
=========== =========== =========== ===========
Income (loss) per weighted-
average share of common
stock outstanding $(0.49) $(0.28) $(0.18) $0.05
====== ====== ====== =====
Weighted-average number
of shares of common
stock outstanding 4,854,133 2,828,951 4,854,133 3,048,302
=========== =========== =========== ===========
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report.
The accompanying notes are an integral part of these financial statements.
6
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1997
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
1998 1997
------------- -------------
Cash flows from operating activities
Net income (loss) for the period $(2,390,210) $ (778,196)
Adjustments to reconcile net income
(loss) to net cash used in operating activities
Depreciation and amortization 231,979 384,838
Bad debt reserve 20,000 --
Reorganization and restructuring costs and
related effect of common stock issuances
at less than "fair value" 413,412 --
(Increase) Decrease in:
Accounts receivable (623,428) 1,293,788
Income taxes recoverable 207,378 (225,000)
Inventory (1,164,059) (331,257)
Prepaid expenses and other (205,936) (190,386)
Increase (Decrease) in:
Accounts payable and other accrued liabilities 716,478 (189,576)
Accrued income taxes payable (123,220) (192,298)
----------- -----------
Cash flows used in operating activities (2,917,606) (228,087)
----------- -----------
Cash flows from investing activities
Cash received on sale of property and equipment -- 6,666
Cash paid for property and equipment (505,872) (476,149)
----------- -----------
Cash flows used in investing activities (505,872) (469,483)
----------- -----------
Cash flows from financing activities
Net activity on short-term note payable 892,291 (132,335)
Principal payments on long-term notes payable (18,421) (2,211,721)
Cash paid to retire convertible preferred stock -- (625,000)
Proceeds from sale of common stock and warrants -- 6,393,905
Cash paid for costs to sell common stock -- (1,398,486)
----------- -----------
Cash flows provided by financing activities 873,870 2,026,363
----------- -----------
Increase (Decrease) in cash (2,549,608) 1,328,793
Cash at beginning of period 2,801,746 630,028
----------- -----------
Cash at end of period $ 252,138 $ 1,958,821
=========== ===========
- Continued -
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
7
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Nine months ended September 30, 1998 and 1997
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
1998 1997
------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 42,387 $ 412,517
============ ==========
Income taxes paid (refunded) for the period $ (207,378) $ 277,565
============ ==========
Supplemental disclosure of non-cash
investing and financing activities
Transportation equipment purchased with notes payable $ 41,295 $ 17,236
============ ==========
Long-term debt converted to common stock $ -- $1,000,000
============ ==========
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report.
The accompanying notes are an integral part of these financial statements.
8
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Organization and Description of Business
Karts International Incorporated (formerly Sarah Acquisition Corporation)
(Company) was originally incorporated on February 28, 1984 as Rapholz Silver
Hunt, Inc. under the laws of the State of Florida. In June 1984, April 1986, and
November 1987, respectively, the Company changed its corporate name to Great
Colorado Silver, Inc., Great Colorado Silver Valley Development Company and J.
R. Gold Mines, Inc. In January 1996, the Company changed its corporate name to
Sarah Acquisition Corporation. In December 1995, the Company experienced a
change in control due to the transfer of a controlling position in issued and
outstanding shares of common stock of the Company between unrelated third
parties. It was the intent of the new controlling shareholders and management to
seek a suitable situation for merger or acquisition.
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.
In March 1996, the Company acquired 100.0% of the issued and outstanding stock
of Brister's Thunder Karts, Inc. (a Louisiana corporation), a "fun kart"
manufacturer located in Roseland, Louisiana.
In November 1996, the Company acquired 100.0% of the issued and outstanding
stock of USA Industries, Inc. (an Alabama corporation), a "fun kart"
manufacturer located in Prattville, Alabama.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company had a concentration of key raw material suppliers for kart engines
through the second quarter of 1998. During the third quarter of 1998, the
Company diversified its engine suppliers and options mitigating the potential
effect of a negative economic impact which could result from any disruption in
engine availability. The Company does not anticipate any foreseeable
interruption in engine availability and believes that alternate suppliers are
available.
The accompanying consolidated financial statements contain the accounts of Karts
International Incorporated and its wholly-owned subsidiaries, Brister's Thunder
Karts, Inc. and USA Industries, Inc. All significant intercompany transactions
have been eliminated. The consolidated entities are collectively referred to as
Company.
Note B - 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 B - 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 principally located in the
Southeastern United States. 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,
1998 and 1997, inventory consisted of the following components:
1998 1997
---------- ----------
Raw materials $1,711,208 $ 851,524
Work in process 272,763 371,430
Finished goods 89,302 66,684
---------- ----------
$2,073,273 $1,289,638
========== ==========
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.
Total depreciation expense charged to operations for the nine months ended
September 30, 1998 and 1997 was approximately $93,542 and $80,520,
respectively.
5. Organization costs
------------------
Costs related to the restructuring and reorganization of the Company have
been capitalized and are being amortized over a five year period,
commencing March 15, 1996, using the straight-line method.
6. Goodwill
--------
Goodwill represents the excess of the purchase price of acquired
subsidiaries over the fair value of net assets acquired and is amortized
over 25 years using the straight-line method.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", the Company adopted the policy of evaluating all
qualifying assets as of the end of each reporting quarter.
10
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - 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, 1998 and 1997, 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. The deferred tax asset related to the Company's net operating
loss carryforward has been fully reserved at September 30, 1998 and 1997,
respectively.
8. 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, 1998 and 1997, the
outstanding warrants and options are deemed to be anti-dilutive due to the
Company's net operating loss position.
9. Reclassifications
-----------------
Certain amounts within the accompanying financial statements for the
periods ended September 30, 1997 have been reclassified to conform to the
presentation for the periods ended September 30, 1998.
10. Accounting standards to be adopted
----------------------------------
Upon the adoption of a formal stock compensation plan, the Company
anticipates using the "fair value based method" of accounting for
compensation based stock options pursuant to Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Under the fair value based method, compensation cost will be measured at
the grant date of the respective option based on the value of the award and
will be recognized as a charge to operations over the service period, which
will usually be the respective vesting period of the granted option(s).
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", (SFAS130) which established standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS130 is effective for years beginning after December 15,
1997. The Company has no components of comprehensive income that do not
appear in the accompanying consolidated statements of operations and did
experience any impact from this change in presentation of its consolidated
financial statements upon adoption of this standard.
11
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Summary of Significant Accounting Policies - Continued
10. Accounting standards to be adopted - continued
----------------------------------
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information", (SFAS131) which establishes revised
standards for the method in which public business enterprises are to report
information about operating segments in their annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
This statement also revises the related disclosures about products and
services, geographic areas and major customers. SFAS131 replaces the
"industry segment" concept established in Statement of Financial Accounting
Standard No. 14 with a "management approach" concept as the basis for
identifying reportable segments. SFAS131 is effective for financial
statements for years beginning after December 31, 1997 and for interim
periods presented after December 31, 1998. The Company does not anticipate
a material impact from this change in disclosure presentation in its
consolidated financial statements upon adoption of this standard.
Note C - Concentrations of Credit Risk
The Company maintains its cash accounts in financial institutions subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the Company and its subsidiaries are entitled to aggregate
coverage of $100,000 per account type per separate legal entity per individual
financial institution. During the nine months ended September 30, 1998 and the
year ended December 31, 1997, the respective operating companies had credit risk
exposures in excess of statutory FDIC coverage as follows:
Highest Low Number of
Entity exposure exposure days with exposure
------ --------- --------- -------------------
Nine months ended September 30, 1998
Karts International Incorporated $823,842 $1,806 135
Brister's Thunder Karts, Inc. $289,204 $ 601 96
USA Industries, Inc. $157,606 $ 236 177
Year ended December 31, 1997
Karts International Incorporated $1,624,288 $566 146
Brister's Thunder Karts, Inc. $ 830,848 $450 300
USA Industries, Inc. $ 447,918 $ 75 110
Additionally, the Company utilizes a lockbox system for the collection and
deposit of receipts on trade accounts receivable for each operating subsidiary
and a corporate cash concentration sweep account whereby all excess cash funds
are concentrated into one primary depository account with a financial
institution. The Company and the financial institution then participate in
uncollateralized reverse-repurchase agreements which are settled on a "next-
business day" basis for the investment of surplus cash funds. The Company has
had unsecured amounts invested in reverse repurchase agreements on a daily basis
from February 1997 through September 30, 1998. As of September 30, 1998 and
December 31, 1997, the Company had unsecured outstanding reverse repurchase
agreements of approximately $-0- and $2,395,000, respectively. The Company has
incurred no losses during 1998 or 1997 as a result of any of these unsecured
situations.
12
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note D - Note Payable to a Finance Company
The Company has two lines of credit with an aggregate face value of $2,000,000.
One line of credit note is tied to the Company's accounts receivable balance,
not to exceed $1,000,000 (A/R LOC). The second line of credit is tied to the
Company's inventory balances, not to exceed $1,000,000 (Inventory LOC). The
total amounts which may be outstanding at any one time is tied to the respective
"Borrowing Base" calculations contained in the Loan Agreement (Agreement). As of
September 30, 1998, an aggregate of approximately $892,291 is outstanding on
these lines of credit.
The notes bear interest at an initial Contract Rate of 10.25%. In the event that
the Company achieves and maintains a annual audited Net Profit, as defined in
the Agreement, of at least $200,000, the Company may apply for a reduction in
the note's interest rate to the Lender's Base Rate (8.0% at September 30, 1998)
plus 1.5%. In the event that the lower interest rate is granted and the $200,000
Net Profit or the Company's audited financial statements are not delivered
within 120 days of the Company's year end, the interest rate will immediately
revert to the initial Contract Rate.
The Agreement requires the payment of a one-time 1.0% commitment fee and the
payment of a 1/12% servicing fee per month on the face amount of each line of
credit during the term of each respective line of credit.
The Agreement contains certain restrictive covenants related to the Company's
business operations and financial ratios. As of September 30, 1998, the Company
is in compliance with all covenants
The Inventory LOC contains a clause that this line of credit must be paid in
full and held at a $-0- balance between January 1, 1999 and February 28, 1999
for a period of at least 30 consecutive days.
The notes mature in September 1999.
Note E - Long-term Debt
Long-term debt consists of the following at September 30, 1998 and 1997:
1998 1997
-------- --------
$240,020 mortgage note payable to a bank. Interest
at the Bank's Commercial Base Rate (9.50% at
September 30, 1998). Payable in monthly installments
of approximately $2,626, including accrued interest.
Final maturity in August 2010. Collateralized by
land and a building owned by USA Industries, Inc. $219,248 $229,777
$20,770 installment note payable to a bank. Interest
at 7.75%. Payable in monthly installments of
approximately $419, including accrued interest.
Final maturity in May 2002. Collateralized by
a vehicle 16,028 19,664
13
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note E - Long-term Debt - Continued
1998 1997
-------- --------
$23,122 installment note payable to a bank. Interest
at 8.25%. Payable in monthly installments of
approximately $726, including accrued interest.
Final maturity in March 2001. Collateralized by
a vehicle. 19,637 -
$18,198 installment note payable to a bank. Interest
at 8.25%. Payable in monthly installments of
approximately $572, including accrued interest.
Final maturity in March 2001. Collateralized by
a vehicle 15,451 -
$9,348 installment note payable to a bank. Interest
at 10.0%. Payable in monthly installments of
approximately $303, including accrued interest.
Final maturity in April 1999. Collateralized by
transportation equipment owned by USA
Industries, Inc. 1,708 2,056
$27,677 note payable to an individual. Interest
at 7.0%. Payable in semi-monthly installments
of approximately $200, including interest.
Secured by equipment owned by Brister's. - 3,068
-------- ---------
Total long-term debt 272,072 254,565
Less current maturities (25,919) (14,384)
-------- --------
Long-term portion $246,153 $240,181
======== ========
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ ----------
1998 $ 25,919
1999 27,846
2000 30,346
2001 21,099
2002 15,159
2003-2007 95,172
2008-2010 64,867
Totals $280,408
========
14
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note F - Income Taxes
The components of income tax (benefit) expense for the nine month periods ended
September 30, 1998 and 1997, respectively, are as follows:
1998 1997
--------- ---------
Federal $ - $(139,733)
State - -
-------- ---------
Total $ - $(139,733)
======== =========
The Company's income tax expense for the nine month periods ended September 30,
1998 and 1997, respectively, differed from the statutory federal rate of 34
percent as follows:
1998 1997
--------- ---------
Statutory rate applied to earnings (loss) before income taxes $(876,978) $(312,096)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Valuation allowance for deferred tax asset
related to net operating loss carryforward 876,978 172,363
--------- ---------
Income tax expense $ - $(139,733)
========= =========
Note G - Common stock transactions
On February 28, 1997, to be effective on March 24, 1997, the Company's Board of
Directors approved a two (2) for three (3) reverse stock split and a
corresponding reduction of the authorized shares of common stock in anticipation
of a proposed underwritten public offering of the Company's common stock during
1997. This reverse stock split reduced the authorized shares of common stock
from 20,000,000 to 14,000,000. The issued and outstanding shares of common stock
shown in the accompanying financial statements reflect the ultimate effect of
the March 24, 1997 reverse stock split as if this second reverse split had
occurred as of the beginning of the first period presented in the accompanying
consolidated financial statements.
On September 16, 1997, the Company issued 250,000 shares of restricted,
unregistered common stock to a Foundation as settlement of $1,000,000 in then
outstanding long-term debt.
On September 16, 1997 and November 24, 1997, the Company sold an aggregate
1,550,000 and 232,500 shares of common stock and warrants pursuant to a
Registration Statement filed on Form SB-2. This transaction generated gross
proceeds to the Company of approximately $7,352,813.
Note H - Common Stock Warrants
In July 1996, pursuant to Rule 504 of The Securities Act of 1933, the Company
sold 5,000 Units which included 100,000 Class A common stock warrants (Class A
Warrants) (66,667 post-March 24, 1997 reverse stock split warrants), as
discussed in previous footnotes. Each warrant entitles the holder to purchase
one (1) share of common stock at an adjusted price of $5.25 per share. These
warrants originally were to expire on December 31, 1997 and the exercise period
was extended by the Company through December 31, 1998.
15
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - Common Stock Warrants - Continued
In November 1996, the Company privately sold 25 units which included 250,000
Redeemable Common Stock Purchase Warrants (1996 Warrants) (166,668 post-March
24, 1997 reverse stock split warrants), as discussed in previous footnotes).
Each warrant entitles the holder to purchase one (1) share of common stock at
$3.00 per share ($4.50 post-March 24, 1997 reverse split), subject to adjustment
in certain circumstances, for a period of 42 months from the closing date of the
offering. The 1996 Warrants are redeemable by the Company at a price of $0.01
per Warrant at any time after one (1) year from the offering closing date when
the average of the daily closing bid price of the Company's common stock equals
$6.00 or more per share on any 20 consecutive trading days ending within 15 days
of the date on which notice of redemption is given to the holders. The Company
will provide holders of the 1996 Warrants with at least 30 days written notice
of the Company's intent to redeem the Warrants.
In September 1996, concurrent with the redemption of the issued and outstanding
convertible preferred stock, the Company issued an additional aggregate 333,350
1996 Warrants to the holders of the convertible preferred stock. This
transaction was valued at the equivalent selling price of $0.125 per warrant, or
$41,669, and was charged as a component of cost of capital related to the sale
of an aggregate 1,782,500 shares of common stock and deducted from the
additional paid-in capital related to the gross proceeds of the offering.
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.
As of September 30, 1998, the Company's warrants are as follows:
Warrants Warrants Warrants
granted exercised outstanding Exercise price
--------- --------- ----------- ---------------
1996 issuances
Class A Warrants 66,667 3,334 63,333 $5.25 per share
1996 Warrants 166,668 - 166,668 $4.50 per share
--------- -------- -------
233,335 - 230,001
========= ======== --------
1997 issuances
1996 Warrants 333,350 - 333,350 $4.50 per share
Underwriter's Warrants 155,000 - 155,000 $4.00 per share
1997 Warrants 1,782,500 - 1,782,500 $4.00 per share
--------- -------- ---------
2,270,850 - 2,500,851
========= ======== =========
16
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Stock Options
The Company's Board of Directors has allocated an aggregate 188,066 shares of
the Company's common stock (125,377 post-March 24, 1997 reverse stock split
shares) for unqualified stock option plans for the benefit of employees of the
Company and its subsidiaries.
During 1996, the Company granted options to purchase 89,032 shares (59,355
post-March 24, 1997 reverse stock split shares) of the Company's common stock to
employees of the Company and its operating subsidiaries at an exercise price of
$3.75 per share ($5.63 post-March 24, 1997 reverse split). 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 post-reverse
split 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 then Corporate Vice
President of Marketing, who is now solely the Vice President of Sales and
Marketing for the Brister's Thunder Karts, Inc. subsidiary (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.
Effective January 31, 1998, the Company engaged an individual to function as
President of the Company. A component of the President's employment package was
the granting of options to purchase up to 200,000 shares of the Company's common
stock at an exercise price of $3.25 per share. The options vest as follows:
100,000 shares as of January 30, 1999; 50,000 shares as of January 31, 2000;
50,000 shares as of January 31, 2001. All unvested options vest immediately upon
the termination of the Agreement if termination is for reason other than "for
cause", and all unexercised options expire on January 31, 2003. The President
may also receive annual performance based stock options to purchase up to 50,000
shares of the Company's common stock at a price equal to the market value of the
Company's common stock on the date of issuance, as determined by the Company's
Board of Directors
In March 1998, the Company granted options to purchase an aggregate 20,000
shares of the Company's common stock to employees of the Company and its
operating subsidiaries at an exercise price of $3.50. These options vest on the
first anniversary date of their grant and expire on the earlier of five years
from the date of their grant or upon termination of the option holder as an
employee of the Company.
In April 1998, the Company granted options to purchase an aggregate 10,000
shares of the Company's common stock to an employee at an exercise price of
$2.75 per share. These options vest on the first anniversary date of their grant
and expire on the earlier of five years from the date of their grant or upon
termination of the option holder as an employee of the Company.
17
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Stock Options - Continued
The outstanding options as of September 30, 1998 and December 31, 1997 are as
follows:
Options Options Options Options
granted exercised terminated outstanding Exercise price
------- --------- ---------- ----------- ----------------
1996 options 59,355 - - 59,355 $5.63 per share
1997 VP options 13,334 - 6,667 6,667 $4.875 per share
1997 options 52,670 - - 52,670 $4.875 per share
------- ------- ------- -------
December 31, 1997 totals 125,359 - 6,667 118,692
President's options 200,000 - - 200,000 $3.25 per share
1998 employee options (3/98) 20,000 - - 20,000 $3.50 per share
1998 employee options (4/98) 10,000 - - 10,000 $2.75 per share
------- ------- ------- -------
September 30, 1998 totals 375,359 - 6,667 368,692
======= ======= ======= =======
Note J - Related Party Transactions
The Company leases its manufacturing facilities under an operating lease with
the former owner of Brister's, who is also a Company shareholder and director.
Concurrent with the closing of the acquisition of Brister's, the Company and the
former owner executed a new lease agreement for a primary two-year term expiring
in 1998 and an additional two-year renewal option. The monthly lease payment
will remain at $6,025 per month with annual adjustments for increases based upon
the Consumer Price Index. Total payments under this agreement were approximately
$54,225 and $54,225 for the nine month periods ended September 30, 1998 and
1997, respectively.
Concurrent with the acquisition of Brister's, the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal Agreement.
This agreement provides that the Company may, at its sole option, purchase the
real property and improvements in Roseland, Louisiana currently utilized by the
Company or its subsidiary for an aggregate purchase price of $550,000. The
option may be exercised commencing on January 1, 1998 and expires on December
31, 2000.
Note K - Commitments and contingencies
Litigation
- ----------
Brister's is named as defendant in several product liability lawsuits related to
its "fun karts". The Company has had and continues to have commercial liability
coverage to cover these exposures with a $50,000 per claim self-insurance clause
as of June 30, 1998 and December 31, 1997. 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. As of
September 30, 1998 and 1997, approximately $161,000 and $90,000 has been accrued
and charged to operations for anticipated future litigation.
18
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Commitments and contingencies - Continued
On February 4, 1997, litigation was filed against the Company and Brister's in
an action to have Brister's product liability insurance coverage (discussed in
the preceding paragraph) declared null and void as a result of a payment by
Brister's insurance underwriter in settlement of a product liability lawsuit.
Legal counsel is of the opinion that this action has questionable merit and the
determination of an outcome, if any, is unpredictable at this time. The Company
is vigorously defending the action. Additionally, the Company is pursuing a
counteraction against the underwriter's agent for potential misrepresentations
made by the agent to the underwriter regarding Brister's during the acquisition
of the aforementioned commercial liability insurance coverage. The Company is
currently engaged in discovery and is unable to predict the ultimate outcome of
this litigation.
The Company anticipates no material impact to either the results of operations,
its financial condition or liquidity based on the uncertainty of outcome, if
any, of existing litigation, either collectively and/or individually, at this
time.
Consulting and Patent Licensing
- -------------------------------
Pursuant to the acquisition of Brister's, the Company entered into a Consulting
Agreement with the former owner of Brister's. The former owner will provide
certain consulting services to the Company or any subsidiary thereof, which
services will not exceed 8 eight-hour work days per month. As consideration for
such services, the former owner will receive $400 per day for consulting
services provided at the Company's principal place of business and $800 per day
for consulting services provided while traveling in connection with Company
business. The former owner is required to maintain the confidentiality of all
Company information. The Company paid the former owner approximately $44,313 and
$30,000 under the terms of this agreement during the nine months ended September
30, 1998 and the year ended December 31, 1997, respectively.
Pursuant to the acquisition of Brister's, the Company and the former owner of
Brister's entered into a Non-Competition Agreement. The former owner has agreed
not to compete with the Company or any of its subsidiaries for a period of five
years in any jurisdiction in which the Company or any subsidiary is duly
qualified to conduct business or within any marketing area in which the Company
is doing a substantial amount of business or is engaged in a business similar to
that currently operated by the Company. Additionally, the former owner agreed
that during the same five-year period not to interfere with the employment
relationship between the Company and any of its other employees by soliciting
any of such individuals to participate in individual business ventures.
At the closing of the Brister's acquisition, the Company entered into a
Licensing Agreement with the former owner of Brister's. This agreement provides
that the former owner will (1) license to the Company all of the Intellectual
Property (as defined) currently owned by the former owner and being used by the
Company or any subsidiary at terms at least as favorable as the former owner has
received or could have received in arms-length transactions with third parties
and (2) for a period of five years from the execution of the Licensing Agreement
will license to the Company, at the Company's sole option, all Intellectual
Property developed or owned by the former owner at any time subsequent to the
Closing Date. The license referenced in section (2) above shall be exclusive to
the Company and free of charge for the first year from the date of invention and
thereafter at terms at least as favorable as the former owner has received or
could have received in arms-length transactions with third parties. Intellectual
Property is defined in the Stock Purchase Agreement as all domestic and foreign
letters patent, patents, patent applications, patent licenses, software licenses
and know-how licenses, trade names, trademarks, copyrights, unpatented
inventions, service marks, trademark registrations and applications, service
mark registrations and applications and copyright registrations and applications
owned or used by the Company or any subsidiary in the operation of its business.
19
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Commitments and Contingencies - Continued
Consulting and Patent Licensing - continued
- -------------------------------------------
On March 15, 1997, the Company and the former owner amended this Licensing
Agreement and executed a related Royalty Agreement, for a three (3) year term,
which provides for the payment of a one-time license fee and a "per unit"
royalty fee. Upon execution, the Company paid an initial license fee of $10,000
and agreed to pay a royalty of $1.00 per unit on which the existing intellectual
property is installed. For the second and third years of the Agreement, the
Company will pay the greater of $20,000 per year or $1.00 per unit on which the
existing intellectual property is installed. During the nine month period ended
September 30, 1998 and the year ended December 31, 1997, the Company paid or
accrued approximately $3,895 and $21,000, respectively, under this Agreement.
Contingent stock issuances
- --------------------------
The terms of the March 31, 1996 private placement memorandum require the Company
and/or a company owned by a current officer and director to issue additional
shares to the original investors in the private placement memorandum in the
event that the Company's securities, as listed on a published exchange or
electronic bulletin board, does not equal $3.00 per share ($4.50 per share, as
adjusted by the March 24, 1997 reverse stock split) on March 31, 1998 (the
second anniversary date of the closing of the private placement memorandum
offering). The issuance of additional shares, if any is required, to the
original investors will be done without additional compensation to the Company.
To facilitate this contingency, the Company sold 350,000 restricted,
unregistered post-reorganization shares (233,333 post-March 24, 1997 reverse
split shares) of common stock to an entity owned by an officer and director of
the Company for cash of approximately $350. These shares were placed into an
escrow account for the benefit of the original investors. In the event that no
additional shares are required to be issued to the original investors, the
shares held in escrow will be returned to the company owned by a current officer
and director of the Company.
At the close of business on March 31, 1998, the Company's common stock, as
quoted on the NASDAQ Small-Cap Market, closed below the required strike price of
$4.50 per share. Accordingly, during the second quarter of 1998, effective April
1, 1998, the entity owned by an officer and director of the Company released
approximately 82,874 of the 233,333 shares being held in escrow for the
settlement of the contingency related to the March 31, 1996 private placement
memorandum. The remaining approximate 150,459 shares were released from the
escrow agreement and returned to the entity owned by an officer and director of
the Company.
The April 1, 1998 transactions were recorded by the Company based on the imputed
"fair value" of the securities released from escrow upon the ultimate settlement
of the March 31, 1996 contingent issuance as required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The
imputed "fair value" of the 82,874 shares was calculated as approximately
$227,904 based upon the Company's closing stock price on March 31, 1998. This
imputed charge was offset against the imputed additional paid-in capital
generated as a result of this accounting transaction as a cost of raising the
initial capital in the original March 31, 1996 transaction. The imputed "fair
value" of the residual 150,459 shares was calculated as approximately $413,412,
net of the initial cash paid of $350, based upon the Company's closing stock
price on March 31, 1998. This difference between the imputed fair value and the
actual cash paid was recorded as a component of compensation expense related to
common stock issuances at less than "fair value" for reorganization,
restructuring and consulting expenses in the accompanying statement of
operations for the second quarter of 1998.
20
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Commitments and Contingencies - Continued
Employment Agreement
- --------------------
Effective January 30, 1998, the Company entered into an Employment Agreement
(Agreement) with an individual to serve as the Company's President and Chief
Executive Officer (President). The Agreement is for a term of three (3) years
and provides the President with an annual base salary of $150,000. Upon
execution of the Agreement, the President received options to purchase up to
200,000 shares of the Company's common stock at an exercise price of $3.25 per
share. The options vest as follows: 100,000 shares as of January 30, 1999;
50,000 shares as of January 31, 2000; 50,000 shares as of January 31, 2001. All
unvested options vest immediately upon the termination of the Agreement if
termination is for reason other than "for cause", and all unexercised options
expire on January 31, 2003. The President may also receive annual performance
based stock options to purchase up to 50,000 shares of the Company's common
stock at a price equal to the market value of the Company's common stock on the
date of issuance, as determined by the Company's Board of Directors, and an
annual cash bonus not to exceed 15.0% of the annual base salary.
Note L - Subsequent Event
On October 27, 1998, the Company acquired 100% of the issued and outstanding
stock of Straight Line Manufacturing, Inc. in exchange for $50,000 cash, a
$50,000 promissory note bearing interest at 6.0% payable on March 31, 1999 and
182,648 shares of the Company's restricted, unregistered common stock. The total
transaction was valued at approximately $500,000.
21
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, 1998 as compared to the nine months ended
September 30, 1997
- --------------------------------------------------------------------------------
The Company experienced net revenues of approximately $3.6 million and $1.8
million for the nine and three months ended September 30, 1998, respectively as
compared to approximately $4.4 million and $1.8 million for the comparable nine
and three month periods of 1997. These sales results continue to the seasonality
of product demand at the consumer level. Additionally, sales to mass
merchandisers ceased during the second quarter of 1997 and these mass
merchandiser sales mitigated some the seasonality effects during the first
quarter of 1997. Current Company management has furthered the installation of
various sales and marketing strategies, including the pursuit of additional
distribution channels, including potential mass merchandiser or buying group
customers, and additional geographic areas which management believes are under
served, to improve its sales during the Company's traditional slow demand
periods.
Due to the decline in unit sales to mass merchandisers and related effect on net
sales dollars, the Company was unable to completely absorb its fixed
manufacturing overhead expenses. Accordingly, the Company experienced a decline
in gross profit from approximately $907,000 for the first nine months of 1997 to
approximately $(141,000) for the same period in 1998. For the third quarter
standing alone, the Company experienced gross profit of approximately $(135,000)
during the July to September quarter of 1998 as compared to approximately
$589,000 for the same period in 1997. Current management continues to refine the
Company's purchasing and manufacturing processes to minimize expenses related to
costs of sales and to maximize production efficiencies.
Selling, general and administrative expenses, including depreciation and
amortization, were approximately $1,570,000 and $1,185,000 for the respective
nine month periods ended September 30, 1998 and 1997 and approximately $630,000
and $350,000 for the July to September quarters in 1998 and 1997, respectively.
The Company continues to experience a maturation and stabilization of the
Company's operating expenses. The change in Company management during the first
quarter of 1998 has caused increases in both administrative personnel and
related expenses. Management anticipates that current expenditure levels will
remain relatively constant during periods subsequent to September 30, 1998.
For the nine and three month periods ended September 30, 1998, the Company
incurred a net loss of approximately $(2,370,000) and $(852,000) as compared to
net (losses) income of approximately $(778,000) and $145,000 for the comparable
nine and three month periods ended September 30, 1997.
22
The recognition of the "fair value" charge related to the release of escrow of
approximately 233,333 shares of common stock upon settlement of the contingency
related to the March 31, 1996 private placement memorandum sale of common stock
generated a one-time non-cash charge of approximately $413,000 to operations
during the second quarter of 1998. Further, management attributes the increase
in the net loss for the first nine months of 1998 compared to the comparable
period of 1997 to decreased unit sales volume levels which did not allow for the
complete absorption of all fixed manufacturing overhead costs and selling,
general and administrative expenses during the quarter.
Primary (loss) per share was approximately $(0.49) per share for the nine months
ended September 30, 1998 and approximately $(0.28) per share for the nine months
ended September 30, 1997. For the quarter covering the July to September period
for 1998 and 1997, respectively, the primary income (loss) per share was
approximately $(0.18) and $0.05 per share. Included in the 1998 quarterly
calculation is the inclusion of approximately $(0.09) per share attributed to
the one-time non-cash charge of approximately $413,000. Comparing comparable
operating results, excluding the one-time non-cash charge, primary loss per
share was approximately $(0.40) and $(0.28) for the nine month period ended
September 30, 1998 and 1997.
Additional Operations information.
- ----------------------------------
The Company currently has approximately six product liability lawsuits
outstanding, none of which are expected to exceed existing product liability
insurance policy limits. The Company has never had a claim that resulted in an
award or settlement in excess of insurance coverage.
There is no assurance that the Company's insurance coverage of $5,000,000 per
occurrence and $5,000,000 aggregate will be sufficient to fully protect the
business and assets of the Company from all claims, nor can any assurances be
given that the Company will be able to maintain the existing coverage or obtain
additional coverage at commercially reasonable rates. Management believes that
it has process controls on its product operations, product labeling, operator's
manuals, and design features which will assist in a successful defense of any
present or future product liability claim. To the extent product liability
losses are beyond the limits or scope of the Company's insurance coverage, the
Company could experience a material adverse effect upon its business,
operations, profitability and assets.
Liquidity and Financial Condition
- ---------------------------------
With respect to the comparative balance sheet, consolidated assets of $l0.8
million at September 30, 1998 were approximately $132,000 lower than the $11.0
million at September 30, 1997. This decrease is nominal in comparing the
Company's financial condition. Consolidated total liabilities of $2.0 million at
September 30, 1998 as compared to approximately $767,000 at September 30, 1997.
The principal difference relates to approximately $892,000 in additional
liabilities related to the utilization of a new line of credit.
Although Karts International Incorporated is a seasonal business with 50% or
more of its sales being historically recorded in the fourth calendar quarter of
each year, management believes its cash reserves and inventory levels are
sufficient to insure adequate manufacturing and shipment of finished goods.
Additionally, management is of the opinion that the 1997 plant additions will
insure that the Company will have sufficient capacity to meet peak product
demands. Further, the Company, during the first quarter of 1998, began
construction on an administrative office addition adjacent to the Roseland,
Louisiana manufacturing facility. As of September 30, 1998, approximately
$145,000 had been expended on this addition. Additionally, approximately
$188,000 and $95,000 was expended on additions to office facilities at the
Company's Brister's Thunder Karts, Inc. and USA Industries, Inc. subsidiaries
during 1998. Management is of the opinion that the occupation of this facility
during the second quarter of 1998 will contribute to future corporate overhead
expense savings and allow for better corporate management oversight of the daily
operations.
23
Capital Requirements
- --------------------
During the first six months of 1998, the Company has expended approximately
$506,000 for new property and equipment, including approximately $145,000 for
the construction of an administrative office addition adjacent to the Roseland,
Louisiana manufacturing facility. Further, the Company incurred long-term
installment debt of approximately $41,000 for transportation equipment which was
financed through the Company's primary financial institution. The long-term debt
is collateralized by the related transportation equipment, is for a term of
three years and bears interest at 8.25%. Further, the Company entered into a new
short-term revolving credit facility with a finance company in two segments
related to the Company's accounts receivable and inventory. The total aggregate
available line of credit is approximately $2,000,000 with approximately $892,000
being funded as of September 30, 1998.
In conjunction with the acquisition of Straight Line Manufacturing, Inc., the
Company expended $50,000 cash, issued a note payable at 6.0%, due on March 31,
1999, and approximately 182,648 shares of the Company's restricted, unregistered
common stock. The total transaction was valued at approximately $500,000.
The Company has no further commitments for significant capital requirements
during the current operating year. Liquidity requirements mandated by future
business expansions or acquisitions, if any are specifically identified or
undertaken, are not readily determinable at this time as no substantive plans
have been formulated by management.
Nine months ended September 30, 1997 as compared to nine months ended
September30, 1996
- ---------------------------------------------------------------------
The financial information discussed herein is derived from the historical
consolidated financial statements of the Company for the respective nine month
periods ended September 30, 1997 and 1996. The Company consummated the Brister's
Acquisition effective as of the close of business on March 31, 1996.
Accordingly, the nine month period ended September 30, 1996 was the first two
quarters of control of Brister's by the Company. The Company, through its
Brister's and USA subsidiaries, experiences significant seasonality of sales
with more than 50.0% of its sales occurring during the fourth quarter of the
calendar year. The amounts discussed in this section reflect the consolidated
results of the Company's ownership of Brister's from April 1, 1996 through
September 30, 1996 and the consolidated results of the Company's ownership of
both Brister's and USA for the entire nine month period presented for 1997.
The Company experienced gross revenues of approximately $4.4 million for the
nine months ended September 30, 1997 compared to $3.6 million for the comparable
period of 1996. For the three month period from July to September, the Company
experienced gross revenues of approximately $1.8 million for the 1997 period and
approximately $2.4 million for the 1996 period. These results continue to
reflect weak product demand due primarily to seasonality of sales. Some
seasonality effects were mitigated during 1997 through mass merchandiser sales;
however, it is improbable that the Company will be able to maintain a
significant sales level into the mass merchandiser sales channel for future
periods. Management is pursuing additional venues, including other potential
mass merchandiser customers, and methods to improve its sales during traditional
slow demand periods.
Selling, general and administrative expenses were approximately $1.5 million
during the nine months ended September 30, 1997 as compared to approximately
$2.2 million for the nine months ended September 30, 1996. In the first quarter
of 1996, the Company incurred a one time non-cash charge to earnings of
approximately $1.43 million related to fair value recognition on common stock
sold or issued to a former director and to Halter Financial Group, Inc., an
entity related to a current company director, for reorganization and
restructuring costs, at less than "fair value" as defined in the appropriate
accounting standards. For the period of July to September, 1997 and 1996,
respectively, the Company incurred operating expenses of approximately $500,000
and $450,000. The increases during the comparable nine month periods are
attributable to the maturation of the Company's operations, including the
ownership and operation of the Brister's and USA subsidiaries for the entire
period presented during 1997. The cost levels for the June through September
periods of both 1997 and 1996 are relatively constant with the principal reason
for the approximately $50,000 increase due to the addition of general corporate
overhead expenses. Management anticipates that current 1997 expenditure levels
will remain relatively constant during future periods.
Through the third quarter of 1997, the Company incurred approximately $25,000 in
research and development expenses related to new products and improvements to
existing products. While specific research and development expenditure levels
have not been developed by management, it is anticipated that these types of
expenses will be present in future periods at fluctuating levels, primarily
dependent upon available resources.
24
For the nine month period ended September 30, 1997, the Company incurred a net
loss of approximately $917,000 as compared to a net loss of approximately $1.23
million, including the one-time accounting charge discussed above, for the
comparable nine month period ended September 30, 1996. For the three month
period from July through September 1997, the Company experienced a net income
before income taxes of approximately $5,600 as compared to net income before
income taxes of approximately $256,000 for the comparable three month period
ended September 30, 1996. Management attributes the increase in the net loss for
the first nine months of Fiscal 1997 compared to the comparable period of Fiscal
1996 to increased general corporate overhead expenses, an adjustment to the
Company's standard cost model for cost of goods sold in 1997 and the overall
seasonality of market demand for the Company's products.
Primary earnings (loss) per share were approximately $(0.28) per share for the
nine months ended September 30, 1997 and approximately $(0.76) per share for the
nine months ended September 30, 1996. Excluding the one time accounting charge,
the nine months ended September 30, 1996 had a proforma earnings per share of
approximately $0.07 per share. For the three month period from June through
September 1997 and 1996, the Company experienced net income per weighted-average
share of approximately $0.05 and $0.08 per share, respectively.
Additional Operations information.
- ----------------------------------
In 1997, the Company settled several product liability lawsuits with a
cumulative charge to operations of approximately $44,000. The Company currently
has six product liability lawsuits outstanding, none of which are expected to
exceed existing product liability insurance policy limits. The Company has never
had a claim that resulted in an award or settlement in excess of insurance
coverage.
There is no assurance that the Company's insurance coverage of $5,000,000 per
occurrence and $5,000,000 aggregate will be sufficient to fully protect the
business and assets of the Company from all claims, nor can any assurances be
given that the Company will be able to maintain the existing coverage or obtain
additional coverage at commercially reasonable rates. Management believes that
it has process controls on its product operations, product labeling, operator's
manuals, and design features which will assist in a successful defense of any
present or future product liability claim. To the extent product liability
losses are beyond the limits or scope of the Company's insurance coverage, the
Company could experience a material adverse effect upon its business,
operations, profitability and assets.
Liquidity and Financial Condition
- ---------------------------------
With respect to the comparative balance sheet, consolidated assets of $l0.9
million at September 30, 1997 were $809 thousand higher than the $10.1 million
at December 31, 1996. This increase was principally attributable to an increase
in current assets of $575 thousand and an increase in net property and equipment
of $395 thousand. Consolidated liabilities of $1.1 million at September 30, 1997
were $3.6 million lower than the year end balance of $4.7 million. The decrease
was primarily the result of the payoff of the Company's long term debt by way of
its successful secondary public offering completed in September 1997. The
proceeds from the public offering also were the reason the cash balance
increased by $1.3 million from December 31, 1997 to September 30, 1997.
Although Karts International Incorporated is a seasonal business with 50% or
more of its sales being historically recorded in the fourth calendar quarter,
management believes its cash reserves and inventory levels are sufficient to
insure adequate manufacturing and shipment of finished goods. Additionally,
management feels its 1997 plant additions insures the company has sufficient
capacity to meet the holiday product demands.
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Capital Requirements
- --------------------
During the first nine months of 1997, the Company has invested approximately
$476,000 in new property and equipment, principally in the USA facility in
Prattville, Alabama. It is anticipated that these additions will improve product
quality and increase daily production capacity during peak production periods
during the fourth calendar quarter of the year.
The Company has identified no further significant capital requirements for the
current operating year. Liquidity requirements mandated by future business
expansions or acquisitions, if any are specifically identified or undertaken,
are not readily determinable at this time as no substantive plans have been
formulated by management.
Year 2000 Considerations
- ------------------------
The Year 2000 (Y2K) date change is believed to affect virtually all computers
and organizations. The Company has undertaken a comprehensive review of its
information systems, including personal computers, software and peripheral
devices, and its general communications systems. The Company has no direct
electronic links with any customer or supplier. In addition, the Company has
held discussions with certain of its software suppliers with respect to the Y2K
date change. While the Company has not completed its detailed review, as a
preliminary assessment, the Company believes, as of the date of this filing,
that it will not be required to modify or replace significant portions of its
software and any such modifications or replacements are, or will be, readily
available. The Company anticipates that it will complete its detailed review by
March 31, 1999 and complete any modifications, upgrades or replacements during
the second quarter of 1999.
The Company has no Y2K impact in any manufacturing equipment. The Company is
also planning to hold discussions with its significant suppliers, shippers,
customers and other external business partners related to their readiness for
the Y2K date change.
The Company does not expect the costs associated with the Y2K date change
compliance to have a material effect on its financial position or its results of
operations. There can be no assurance until January 1, 2000, however, that all
of the Company's systems, and the systems of its suppliers, shippers, customers
or other external business partners will function adequately.
Part II - Other Information
Item 1 - Legal Proceedings
See accompanying notes to the consolidated financial statements
Item 2 - Changes in Securities
On October 27, 1998, the Company issued 182,648 shares of the Company's
restricted, unregistered common stock, valued at $400,000, in conjunction
with the acquisition of 100.0% of the issued and outstanding stock of
Straight Line Manufacturing, Inc.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
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 11 , 1998 /s/ Timothy P. Halter
------ --------------------------------
Timothy P. Halter
Chairman of the Board,
and Chief Accounting Officer
November 11 , 1998 /s/ Robert M. Aubrey
------ --------------------------------
Robert M. Aubrey
President
27