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, 1997
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)
109 Northpark Boulevard, Suite 210, Covington, LA 70433
(Address of principal executive offices)
(504) 875-7350
(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, 1997: Common Stock: 4,855,133 shares
Common Stock Warrants: 2,282,525
Transitional Small Business Disclosure Format (check one): YES NO X
<PAGE>
KARTS INTERNATIONAL INCORPORATED
Form 10-QSB for the Quarter ended September 30, 1997
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 20
Part II - Other Information
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 22
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
Part III - Information required by Rule 463 - Report of Offering
of Securities and Use of Proceeds Therefrom 23
2
<PAGE>
Part 1 - Item 1
Financial Statements
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 sheet as of September 30,
1997 of Karts International Incorporated (a Nevada corporation) and Subsidiaries
and the accompanying consolidated statement of operations for the nine and three
months ended September 30, 1997 and 1996 and the consolidated statement of cash
flows for the nine months ended September 30, 1997 and 1996. 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 7, 1997
Use our past to assist your future sm
P. O. Box 820392 o Dallas, Texas 75382-0392 o 214-342-9635
9236 Church Road, Suite 1040 o Dallas, Texas 75231 o 800-244-0639
214-342-9601 (fax) o [email protected] (e-mail)
3
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
<S> <C>
(Unaudited) (Audited)
September 30, December 31,
1997 1996
------------ ------------
Assets
Current Assets
Cash on hand and in banks $ 1,958,821 $ 630,028
Accounts receivable
Trade, net of allowance for doubtful accounts
of $2,447 and $5,000, respectively 500,718 1,795,802
Other 2,348 1,052
Recoverable income taxes 225,000 --
Inventory 1,289,638 958,381
Prepaid expenses 209,312 6,027
------------ ------------
Total current assets 4,185,837 3,391,290
------------ ------------
Property and equipment
Building and improvements 372,509 331,360
Equipment 720,545 317,665
Transportation equipment 76,987 57,050
Furniture and fixtures 77,820 65,299
------------ ------------
1,247,861 771,374
Accumulated depreciation (115,120) (34,598)
------------ ------------
1,132,741 736,776
Land 32,800 32,800
------------ ------------
Net property and equipment 1,165,541 769,576
------------ ------------
Other assets
Goodwill, net of accumulated amortization of
approximately $327,068and $151,286, respectively 5,532,355 5,708,137
Organization costs, net of accumulated amortization
of approximately $33,527 and $17,139, respectively 75,727 92,116
Loan fees, net of accumulated amortization of
approximately $122,033 and $20,120, respectively -- 101,913
Other 6,161 19,060
------------ ------------
Total other assets 5,614,243 5,921,226
------------ ------------
Total Assets $ 10,965,621 $ 10,082,092
============ ============
</TABLE>
- 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
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
September 30, 1997 and December 31, 1996
<S> <C>
(Unaudited) (Audited)
September 30, December 31,
1997 1996
------------ ------------
Liabilities and Shareholders' Equity
Current liabilities
Note payable to a bank $ 7,685 $ 140,020
Current maturities of long-term debt 14,384 116,390
Accounts payable - trade 654,572 766,833
Other accrued liabilities 13,157 90,472
Accrued income taxes payable 76,919 269,217
------------ ------------
Total current liabilities 766,717 1,382,932
------------ ------------
Long-term liabilities
Long-term debt, net of current maturities
Related parties 20,304 3,200,000
Banks and individuals 219,877 132,660
------------ ------------
Total liabilities 1,006,898 4,715,592
------------ ------------
Commitments and contingencies
Convertible preferred stock
$0.001 par value. 25 shares allocated, issued
and outstanding -- 625,000
------------ ------------
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
4,621,633 and 2,717,458 shares
issued and outstanding, respectively 4,622 2,718
Common stock warrants 193,905 --
Additional paid-in capital 11,989,802 6,190,192
Accumulated deficit (2,229,606) (1,451,410)
------------ ------------
Total shareholders' equity 9,958,723 4,741,500
------------ ------------
Total Liabilities and Shareholders' Equity $ 10,965,621 $ 10,082,092
============ ============
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Nine and Three months ended September 30, 1997 and 1996
<S> <C>
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net Sales $ 4,365,014 $ 3,581,286 $ 1,849,782 $ 2,431,133
----------- ----------- ----------- -----------
Cost of sales
Purchases, direct labor and
related costs 3,389,670 2,340,917 1,238,019 1,633,633
Depreciation 68,285 14,331 22,717 3,038
----------- ----------- ----------- -----------
Total cost of sales 3,457,955 2,355,248 1,260,736 1,636,671
----------- ----------- ----------- -----------
Gross profit 907,059 1,226,038 589,046 794,462
----------- ----------- ----------- -----------
Operating expenses
Research and development 24,703 -- 2,846 --
Selling, general and
administrative expenses 1,185,163 679,213 350,362 386,949
Compensation expense related
to common stock issuances
at less than "fair value" for
reorganization, restructuring
and consulting costs -- 1,430,287 -- --
Depreciation and amortization 323,928 116,702 147,112 63,757
----------- ----------- ----------- -----------
Total operating expenses 1,533,794 2,226,202 500,320 450,706
----------- ----------- ----------- -----------
Income (Loss) from operations (626,735) (1,000,164) 88,726 343,756
Other income (expense)
Interest expense (372,043) (230,111) (103,100) (93,937)
Other 80,849 2,118 20,027 6,757
----------- ----------- ----------- -----------
Income before income taxes (917,929) (1,228,157) 5,653 256,576
Income taxes
Currently receivable (payable) 139,733 (77,848) 139,733 (82,153)
----------- ----------- ----------- -----------
Net income (loss) $ (778,196) $(1,306,005) $ 145,386 $ 174,423
=========== =========== =========== ===========
Income (loss) per weighted-
average share of common
stock outstanding $ (0.28) $ (0.76) $ 0.05 $ 0.08
=========== =========== =========== ===========
Weighted-average number
of shares of common
stock outstanding 2,828,951 1,718,235 3,048,302 2,310,987
=========== =========== =========== ===========
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1997 and 1996
<S> <C>
Nine months Nine months
ended ended
September 30, September 30,
1997 1996
------------- -------------
Cash flows from operating activities
Net income (loss) for the period $ (778,196) $(1,306,005)
Adjustments to reconcile net income
(loss) to net cash used in operating activities
Depreciation and amortization 384,838 139,661
Reorganization and restructuring costs and
related effect of common stock issuances
at less than "fair value" -- 1,430,287
Operating expenses paid with common stock -- 15,000
(Increase) Decrease in:
Accounts receivable 1,293,788 (755,005)
Income taxes recoverable (225,000) --
Inventory (331,257) (181,307)
Prepaid expenses (203,285) (276,257)
Organization costs -- (52,690)
Other 12,899 (6,640)
Increase (Decrease) in:
Accounts payable and other accrued liabilities (189,576) 536,238
Accrued income taxes payable (192,298) 81,932
----------- -----------
Cash flows used in operating activities (228,087) (374,786)
----------- -----------
Cash flows from investing activities
Cash acquired in acquisition of Brister's Thunder Karts, Inc. -- 488,047
Cash paid for acquisition of Brister's Thunder Karts, Inc. -- (2,256,065)
Cash received on sale of property and equipment 6,666 --
Cash paid for property and equipment (476,149) (36,185)
----------- -----------
Cash flows used in investing activities (469,483) (1,804,203)
----------- -----------
Cash flows from financing activities
Net activity on short-term note payable (132,335) 100,000
Proceeds from long-term notes payable -- 2,000,000
Principal payments on long-term note payable (2,211,721) (85,446)
Cash paid for loan costs -- (16,783)
Cash paid to retire convertible preferred stock (625,000) --
Proceeds from sale of common stock and warrants 6,393,905 562,389
Cash paid for costs to sell common stock (1,398,486) (163,100)
----------- -----------
Cash flows provided by financing activities 2,026,363 2,397,060
----------- -----------
Increase in cash 1,328,793 218,071
Cash at beginning of period 630,028 --
----------- -----------
Cash at end of period $ 1,958,821 $ 218,071
=========== ===========
</TABLE>
- 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
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Nine months ended September 30, 1997 and 1996
<S> <C>
Nine months Nine months
ended ended
September 30, September 30,
1997 1996
-------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 412,517 $ 221,483
========== ==========
Income taxes paid (refunded) for the period $ 277,565 $ 48,606
========== ==========
Supplemental disclosure of non-cash
investing and financing activities
Acquisition price of Brister's Thunder Karts, Inc.
settled with common stock and a note payable $ - $4,100,000
========== ==========
Loan origination fees settled with common stock $ - $ 10,500
========== ==========
Transportation equipment purchased with note payable $ 17,236 $ -
========== ==========
Long-term debt converted to common stock $1,000,000 $ -
========== ==========
</TABLE>
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
<PAGE>
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.
The Company has had no significant business operations since 1989. Prior to that
time, the Company was involved in the mining industry, principally through joint
ventures with related parties involving mining properties located in Colorado.
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. The
reincorporation merger had the effect of a one for 250 reverse split of the
Company's issued and outstanding common stock.
The reincorporation merger also modified the Company's capital structure to
authorize the issuance of up to 20,000,000 shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par value
Preferred Stock. The effect of this transaction has been reflected in the
accompanying financial statements as of the beginning of the first period
presented.
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. 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.
During February and March 1996, the Company sold or issued an aggregate
1,634,650 post-March 24, 1997 reverse split shares of restricted, unregistered
common stock to a former director and a company controlled by a current officer
and director during the Company's reorganization phase. The differential between
the aggregate cash proceeds of approximately $2,039 and the "fair value" of the
shares issued created a one-time accounting charge to operations for
compensation expense related to reorganization, restructuring and consulting
expenses of approximately $1,430,000. These transactions are more fully
discussed in Note J - Common Stock Transactions.
On March 15, 1996, effective at the close of business on March 31, 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 for total consideration of approximately $6,100,000. This
acquisition was accounted for as a purchase.
9
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note A - Organization and description of business - continued
On November 20, 1996, effective at the close of business on November 21, 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 for total consideration of approximately $1,000,000. This
acquisition was accounted for as a purchase.
During interim periods, the Company follows the accounting policies set forth in
its Registration Statement under The Securities Act of 1933 on Form SB-2 filed
with the Securities and Exchange Commission. The December 31, 1996 balance sheet
data was derived from audited financial statements of the Company, but does not
include all disclosures required by generally accepted accounting principles.
Users of financial information provided for interim periods should refer to the
annual financial information and footnotes contained in its Registration
Statement under The Securities Act of 1933 on Form SB-2 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, 1997.
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 has a concentration of key raw material suppliers for kart engines.
In the event of any disruption in engine availability, if any, the Company may
experience a negative economic impact. 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.
10
<PAGE>
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 located in the Southeastern United
States, principally Texas, Louisiana, Mississippi, Alabama, Georgia and
Florida. 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.
During 1996, the Company had an international sale of approximately $35,000
and experienced no credit risk exposure as a result of this transaction.
The Company anticipates continuing international sales in future periods
and is developing credit policies related to this revenue segment.
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.
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. Loan costs
Costs incurred to acquire notes payable and to facilitate the sale of
convertible preferred stock are deferred and amortized as a component of
interest expense over the life of the related financing using the
straight-line method. In the event of debt retirement using the proceeds of
future equity offerings, the related unamortized loan costs will be
reclassified as a cost of capital and offset against additional paid-in
capital related to the specific equity sale proceeds.
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,
commencing March 15, 1996, using the straight-line method.
11
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Summary of significant accounting policies - continued
7. 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.
8. Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes. At September 30, 1997 and December 31, 1996, 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.
9. Income (Loss) per share
Primary 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 the conversion factor of outstanding
convertible preferred stock at the highest optional conversion rate. In all
instances, the exercise of outstanding options and warrants and the
conversion of convertible preferred stock is assumed to occur at either the
beginning of the respective period presented or the date of issuance,
whichever is later.
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 February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128).
FAS 128 specifies new standards designed to improve the EPS information
provided in financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of EPS data on an international basis. Some of the changes
made to simplify the EPS computations include: (a) eliminating the
presentation of primary EPS and replacing it with basic EPS, with the
principal difference being that common stock equivalents are not considered
in computing basic EPS, (b) eliminating the modified treasury stock method
and the three percent materiality provision, and (c) revising the
contingent share provisions and the supplemental EPS data requirements.
12
<PAGE>
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
FAS 128 also makes a number of changes to existing disclosure requirements.
FAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company has not yet
determined the impact of the implementation of FAS 128.
Note C - Convertible preferred stock
The Company has 10,000,000 shares of Preferred Stock (Preferred Shares)
authorized for issuance.
In October 1996, the Company's Board of Directors allocated 25 shares of the
authorized number to facilitate the private placement of said shares as a
component of an Equity Unit (Unit) to be sold through a Private Placement
Memorandum (PPM). The PPM was fully subscribed and closed in November 1996. Each
$25,000 Unit consisted of one (1) share of convertible preferred stock and
10,000 redeemable common stock purchase warrants. The PPM raised total gross
proceeds of approximately $625,000 and net proceeds of approximately $530,250 to
the Company.
The Preferred Shares require mandatory conversion upon either the effectiveness
of a public offering of the Company's common stock pursuant to a Registration
Statement or upon the first anniversary date of the PPM closing date. In the
event that the conversion is triggered by a public offering, each Preferred
Share will be converted, at the holder's option, into either $25,000 cash and
the issuance of 6,250 shares of restricted, unregistered common stock or 12,500
shares of restricted, unregistered common stock. In either situation, the holder
retains piggyback registration rights for the shares of common stock issued in
the conversion. In the event that the conversion is triggered by the first
anniversary date of the PPM closing, each Preferred Share will be converted to
12,500 shares of restricted, unregistered common stock, subject to identical
piggyback registration rights.
In January 1997, the Company began undertaking a secondary public offering of
common stock pursuant to a Form SB-2 Registration Statement (secondary
offering). In accordance with guidance and instructions from the National
Association of Securities Dealers (NASD) related to the Company's application
for listing on the "NASDAQ Small-Cap Market", the NASD requested certain
modifications to the terms and conditions underlying the sale and issuance of
the Preferred Shares and their conversion terms.
On March 6, 1997, the Company offered to each holder of the Convertible
Preferred Stock the option of either (i) receiving a refund of $25,000 (the
initial Unit price) plus simple interest at 12.0% per annum as consideration for
assigning their Convertible Preferred Stock and 1996 Warrants to the Company or
(ii) agreeing to the conversion of the Convertible Preferred Stock at the
completion of a pending secondary offering upon the previously agreed terms
along with the issuance of an additional 13,334 1996 Warrants for each share of
Convertible Preferred Stock held as additional consideration for waiving certain
registration rights and agreeing to certain lock-up provisions with respect to
the Common Stock issuable upon conversion of the Convertible Preferred Stock and
the 1996 Warrants.
13
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Convertible preferred stock - Continued
The lock-up agreement requires that the holder must unconditionally agree to a
lock-up of all of the holder's securities (the Preferred Shares and any
securities that the Preferred Shares are convertible into and all originally
issued redeemable common stock purchase warrants) whereby these designated
securities may not be sold by the holder for a period of approximately 18 months
from the closing date of the secondary offering. Upon release of the lock-up
terms, the holder will be permitted to sell the aforementioned securities under
the terms and conditions of Rule 144 of the U. S. Securities and Exchange
Commission. Further, the holder will be deemed to be an affiliate of the
underwriter in the secondary offering and, as such, will not be eligible to
purchase any securities offered in the secondary offering.
All issued and outstanding shares of convertible preferred stock were retired
upon the successful completion of a public offering of the Company's common
stock in September 1997.
Note D - Common stock transactions
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
reincorporation merger had the effect of a one for 250 reverse split of the
Company's issued and outstanding common stock.
The reincorporation merger also modified the Company's capital structure to
authorize the issuance of up to 20,000,000 shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par value
Preferred Stock. The effect of this transaction has been reflected in the
accompanying financial statements as of the beginning of the first period
presented.
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 February 20, 1996, the Company sold 18,750,000 restricted, unregistered
pre-reorganization shares of common stock (75,000 equivalent post-reorganization
shares) (50,000 post-March 24, 1997 reverse split shares) to a former Company
director for cash of approximately $938. The transaction was recorded by the
Company based on the imputed "fair value" of the securities issued as required
by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The imputed fair value of this transaction was
calculated at a "fair value" of approximately $1.13 per share or approximately
$56,500. The differential 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 consolidated statement of operations.
14
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note D - Common stock transactions - Continued
On March 7, 1996, the Company sold 1,101,317 restricted, unregistered
post-reorganization shares (734,212 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 $1,101. The transaction was recorded by the Company based
on the imputed "fair value" of the securities issued as required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The imputed fair value of this transaction was calculated at a
"fair value" of approximately $1.13 per share or approximately $829,660. The
differential 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 consolidated statement of operations.
On March 7, 1996, 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 to
satisfy potential future obligations of the Company and the affiliated company
under the private placement memorandum discussed in the following paragraph. Due
to the contingent nature of the ultimate ownership of these shares, these shares
are excluded from the respective earnings per share calculation.
On March 31, 1996, the Company sold 350,000 restricted, unregistered
post-reorganization shares (233,333 post- March 24, 1997 reverse split shares)
of common stock under a Private Placement Memorandum at a price of $1.50 per
share. The total gross proceeds of the offering were $525,000. Certain placement
costs and commissions related to the sale of the Private Placement stock,
totaling approximately $163,100, were deducted from the gross proceeds and
charged against additional paid-in capital.
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, 1996 (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.
On March 15, 1996, the Company issued 105,000 restricted, unregistered
post-reorganization shares (70,000 post- March 24, 1997 reverse split shares) of
common stock to a Foundation as a component of the loan origination costs to
secure the $2,000,000 note payable. The proceeds of this note payable were used
to satisfy the cash component of the Brister's acquisition cost.
15
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note D - Common stock transactions - Continued
On March 15, 1996, the Company acquired 100% of the issued and outstanding stock
of Brister's Thunder Karts, Inc., a Louisiana corporation, in exchange for
$2,000,000 in cash; a subordinated $1,000,000 promissory note payable bearing
variable interest rates, as defined therein, maturing in 2003; and restricted,
unregistered common stock of the Company having an aggregate market value of
$3,100,000, as defined in the Stock Purchase Agreement. The $2,000,000 cash
payment was funded by a promissory note from an unrelated third party bearing
interest at 14.0% per annum and maturing in 2000. Final settlement was satisfied
in July 1996 with the issuance of 775,000 restricted, unregistered
post-reorganization shares (516,667 post-March 24, 1997 reverse stock split
shares) having a market value of $3,100,000, as defined in the related Stock
Purchase Agreement.
On March 15, 1996, the Company issued 725,000 restricted, unregistered
post-reorganization shares (483,333 post-March 24, 1997 reverse stock split
shares) of common stock in settlement of a consulting contract with a company
owned by an officer and director of the Company. The transaction was recorded by
the Company based on the imputed "fair value" of the securities issued as
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The imputed fair value of this transaction was
calculated at a "fair value" of approximately $1.13 per share or approximately
$546,166. The differential between the imputed fair value and the actual cash
paid was recorded as component of compensation expense related to common stock
issuances at less than "fair value" for reorganization, restructuring and
consulting expenses in the accompanying consolidated statement of operations.
On March 15, 1996, in accordance with a January 1996 letter of intent, the
Company issued 210,000 restricted, unregistered post-reorganization shares
(140,000 post-March 24, 1997 reverse split shares) of common stock to the
Company's chief executive officer, valued at $15,000, as additional
consideration for the execution of an employment agreement.
In July 1996, pursuant to Rule 504 of The Securities Act of 1933, the Company
sold 5,000 Units, consisting of 5,000 post-reorganization shares of common stock
(3,334 post-March 24, 1997 reverse split shares) and 100,000 Class A common
stock warrants (66,667 post-March 24, 1996 reverse stock split warrants) for
approximately $17,500 to an unaffiliated investor. The Class A common stock
warrants may be exercised to purchase one (1) post-reorganization share of the
Company's common stock at a price of $3.50 per share ($5.25 per share, post-
March 24, 1997 reverse stock split). The Class A common stock warrants were
assigned no value in the accompanying consolidated financial statements. In
August 1996, 5,000 warrants (3,334 post-March 24, 1997 reverse split warrants)
were exercised for total proceeds of $17,500. The total effect of this
transaction was the sale of 10,000 post-reorganization shares (6,667 post-March
24, 1997 reverse split shares) for a total price of $35,000.
On November 20, 1996, Company acquired 100% of the issued and outstanding stock
of USA Industries, Inc. an Alabama corporation, in exchange for $250,000 in cash
and 250,000 restricted, unregistered post-reorganization shares (166,667
post-March 24, 1997 reverse split shares) of restricted, unregistered common
stock of the Company having an aggregate market value of $750,000.
On September 16, 1997, the Company successfully completed a public offering of
1,550,000 shares of common stock and 1,550,000 Warrants generating approximately
$6,400,000 in gross proceeds to the Company. Each warrant allows the holder to
purchase one (1) share of common stock at the initial public offering price
($4.00) per share of Common Stock during a four year period commencing on the
first anniversary date of the offering. The Warrants are redeemable by the
Company at a price of $0.01 at any time after the first anniversary date upon
written notice as defined in the offering.
16
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note E - 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 through
December 31, 1997.
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. Additionally, an additional
333,350 1996 Warrants were issued to the holders of the Company's convertible
preferred stock upon the redemption of these securities.
In September 1997, the Company sold 1,550,000 warrants at an offering price of
$0.125 per warrant. Each warrant allows the holder to purchase one (1) share of
common stock at the initial public offering price ($4.00) per share of Common
Stock during a four year period commencing on the first anniversary date of the
offering. The Warrants are redeemable by the Company at a price of $0.01 at any
time after the first anniversary date upon written notice as defined in the
offering.
<TABLE>
<S> <C>
Warrants Warrants Warrants
granted exercised outstanding Exercise price
Class A Warrants 66,667 3,334 63,333 $5.25 per share
1996 Warrants 166,668 - 166,668 $4.50 per share
------- ------ -------
December 31, 1996 Totals 233,335 3,334 230,001
1996 Warrants issued for
Convertible Preferred Stock
redemption 333,350 - 333,350 $4.50 per share
1997 Warrants sold in
secondary stock offering 1,550,000 - 1,550,000 $4.00 per share
--------- --------- ---------
September 30, 1997 totals 2,116,685 3,334 2,113,351
========= ========= =========
</TABLE>
17
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note F - 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.
During 1997, the Company granted options to purchase up to 59,337 post-March 24,
1997 reverse stock split shares of the Company's common stock to officers and
employees of the Company and its operating subsidiaries at an exercise price of
$4.875 per share. These options are exercisable after January 30, 1998 and
expire on January 30, 2002.
<TABLE>
<S> <C>
Options Options Options
granted exercised outstanding Exercise price
1996 options 59,355 - 59,355 $5.63 per share
1997 options 59,337 - 59,337 $4.875 per share
------- -------- -------
Total options 118,692 - 118,692 $5.63 per share
======= ======== =======
Total shares allocated 125,377
=======
Unallocated shares 6,685
=======
</TABLE>
Note G - 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 December 31, 1996. 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, 1997,
approximately $143,465 has been accrued and charged to operations for
anticipated future litigation.
On February 7, 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.
18
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note G - Commitments and contingencies - Continued
Litigation - continued
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.
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. The Company is unable to predict the fair value of
these shares placed into escrow or the impact, if any, that such valuation will
have on the Company's Statement of Income for the period ending March 31, 1998.
Note H - Subsequent Event
On October 24, 1997, the Company closed the Underwriter's over-allotment option
on its secondary stock offering. This option sold an additional 232,500 shares
of common stock at $4.00 per share and 232,500 Common Stock Warrants at $0.125
per warrant. This transaction generated approximately $959,000 in gross proceeds
to the Company.
19
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company had no significant business operations from 1989 through March 1996.
Prior to that time, the Company was engaged in the mining industry, principally
through joint ventures with related parties involving mining properties located
in Colorado. The Company is in the business of manufacturing and marketing Fun
Karts for the consumer market.
Effective at the close of business on March 31, 1996, the Company purchased 100%
of the issued and outstanding stock of Brister's Thunder Karts, Inc.
(Brister's), a Louisiana corporation organized on August 2, 1976, from Charles
Brister, a director and principal stockholder of the Company, for a total
purchase price of $6.3 million (the Brister's Acquisition) The purchase price
was paid with $2.0 million cash, $1.2 million in notes payable to Mr. Brister
(the Brister Notes) and the issuance to Mr. Brister of 516,667 shares of
restricted Common Stock valued at $3.1 million. The Brister's Acquisition was
accounted for using the purchase method of accounting for business combinations.
The Company allocated the total purchase price to assets acquired based on their
relative fair values. Any excess of the purchase price over the fair value of
the assets acquired was recorded as goodwill. Results of operations of Brister's
are included in the Company's consolidated financial statements beginning on the
effective date of the Brister' s Acquisition
Effective at the close of business on November 21, 1996, the Company purchased
100.0% of the issued and outstanding stock of USA Industries, Inc. (USA), an
Alabama corporation organized on January 2, 1992, from four USA shareholders for
a total purchase price of $1,000,000 (the USA Acquisition). The purchase price
was paid with $250,000 in cash and the issuance to the USA shareholders of an
aggregate 166,667 restricted shares of the Company's Common Stock valued at
$750,000. The USA Acquisition was accounted for using the purchase method of
accounting for business combinations. The Company allocated the total purchase
price to assets acquired based on their relative fair value. Any excess of the
purchase price over the fair value of the assets acquired was recorded as
goodwill. Results of operations of USA are included in the Company's
consolidated financial statements beginning on the effective date of the USA
Acquisition.
The following discussion reflects historical consolidated financial data for the
periods ended September 30, 1997, and 1996, respectively.
Results of Operations
Nine months ended September 30, 1997 as compared to nine months ended
September 30, 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.
20
<PAGE>
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.
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,
21
<PAGE>
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.
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.
Part II - Other Information
Item 1 - Legal Proceedings
See accompanying notes to the consolidated financial statements
Item 2 - Changes in Securities
On September 16, 1997, the Company successfully completed the offering and sale
of 1,550,000 shares of common stock and 1,550,000 warrants at $4.00 and $0.125
per share/warrant, respectively. Further, the Company sold 155,000 Underwriter's
Warrants for $155. The total offering raised gross proceeds of approximately
$6,393,905.
On October 24, 1997, the Company closed the Underwriter's over-allotment option
on its secondary stock offering. This option sold an additional 232,500 shares
of common stock at $4.00 per share and 232,500 Common Stock Warrants at $0.125
per warrant. This transaction generated approximately $959,000 in gross proceeds
to the Company.
22
<PAGE>
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
<TABLE>
<S> <C>
Part III - Information required by Rule 463
Report of Offering of Securities and Use of Proceeds Therefrom
1a. Effective date of Registration Statement filed on Form SB-2 September 9, 1997
1b. SEC file number assigned to Registration Statement: 333-24143
1c. CUSIP number assigned 485766-20-8
2. Has the offering commenced? If yes, date commenced. Yes, on September 9, 1997
3. Did the offering terminate before any securities were sold? No
4. Did the offering terminate prior to the sale of all securities registered? No
5. Name of managing underwriter J. P. Turner & Company, LLC
6a. Title and code of each class of securities registered Common Stock-EQ
Redeemable
Common Stock
Warrants-OT
6b. Describe the class of securities categorized as "other" Each warrant is transferrable
immediately upon issuance
and entitles the holder to
purchase one share of
Common Stock at a price of
$4.00 per share during the four
year period following the first
anniversary date of the
offering.
</TABLE>
23
<PAGE>
7. Indicate the amount and aggregate offering price of securities registered
and sold to date for the account of the issuer and for the account of any
selling security holder(s)
<TABLE>
<S> <C>
Aggregate price Aggregate
Title of Amount of offering Amount offering price
security registered amount registered sold of amount sold
-------- ---------- ----------------- ------ ---------------
FOR THE ACCOUNT OF THE ISSUER
- -----------------------------
Common stock 1,550,000 shares $6,200,000 1,550,000 shares $6,200,000
Common stock
Warrants 1,550,000 warrants $193,750 1,550,000 warrants $193,750
Underwriter's
Warrants 155,000 warrants $155 155,000 warrants $155
FOR THE ACCOUNT OF ANY SELLING SECURITY HOLDER(S) - None
8. State the amount of expenses incurred for the issuer's account in
connection with the issuance and distribution of the securities registered
for each category listed below: Direct or indirect payments to others
Underwriting discounts and commissions $ 831,187
Expenses paid to or for Underwriters 48,000
Other expenses 371,010
Total expenses $1,250,197
9. Indicate net offering proceeds to the issuer after expenses in Item 8. $5,143,708
10. State the amount of net offering proceeds to the issuer used for each of
of the purposes listed below:
Repayment of indebtedness $2,550,000
Redemption of convertible preferred stock 625,000
Financial advisory fee 48,000
Product development 200,000
Advertising and marketing 400,000
11. Do the use of proceeds in Item 10 represent a material change in the use(s)
of proceeds described in the prospectus? No
</TABLE>
(Remainder of this page left blank intentionally)
24
<PAGE>
<TABLE>
<S> <C>
12. Report of Sales of Securities and Use of Proceeds Therefrom
Gross proceeds from
Sale of common stock $6,200,000
Sale of common stock warrants 193,905
6,393,905
Expenditures from gross proceeds
Underwriter's commissions and discounts 831,187
Payment of financial advisory fee 48,000
Retirement of Schlinger Note payable and accrued interest 1,005,833
Retirement of Brister Notes payable and accrued interest 1,155,958
Retirement of Bank lines of credit and accrued interest 410,587
Redemption of convertible preferred stock 625,000
Legal and accounting fees 515,801
Printing expenses 135,000
Acquisition of equipment 400,000
----------
Total expenditures through September 30, 1997 5,127,366
---------
Remaining proceeds as of September 30, 1997 $1,266,539
=========
</TABLE>
25
<PAGE>
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 , 1997 /s/ V. Lynn Graybill
------ --------------------------------
V. Lynn Graybill
Chairman of the Board,
President and Director
November 11 , 1997 /s/ John V. Callegari, Jr.
------ ---------------------------------
John V. Callegari, Jr.
Chief Financial Officer
26
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FORM
10-QSB FOR THE QUARTER ENDED 9/30/97 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FORM 10-QSB.
</LEGEND>
<CIK> 1010077
<NAME> KARTS INTERNATIONAL INCORPORATED
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-01-1997
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<CASH> 1958821
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<ALLOWANCES> 2447
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0
0
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<INCOME-PRETAX> (917929)
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