<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1997
REGISTRATION NO. 333-24145
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------------
KARTS INTERNATIONAL INCORPORATED
(Name of Small Business Issuer in its Charter)
-------------------------------
<TABLE>
<S> <C> <C>
NEVADA 3944 75-2639196
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
-------------------------------
<TABLE>
<S> <C>
KARTS INTERNATIONAL INCORPORATED V. LYNN GRAYBILL, CHIEF EXECUTIVE OFFICER
109 NORTHPARK BOULEVARD, SUITE 210 109 NORTHPARK BOULEVARD, SUITE 210
COVINGTON, LOUISIANA 70433 COVINGTON, LOUISIANA 70433
(504) 875-7350 (504) 875-7350
(Address and Telephone Number of Principal Executive (Name, Address and Telephone Number
Offices and Principal Place of Business) of Agent for Service)
</TABLE>
-------------------------------
Copies to:
RICHARD B. GOODNER, ESQ.
LOOPER, REED, MARK & MCGRAW ROBERT E. ALTENBACH, ESQ.
INCORPORATED JOHNSON & MONTGOMERY
4100 THANKSGIVING TOWER ONE BUCKHEAD PLAZA
1601 ELM STREET 3060 PEACHTREE ROAD, N.W., SUITE 400
DALLAS, TEXAS 75201 ATLANTA, GEORGIA 30305
PHONE NO. (214) 954-4135 PHONE NO. (404) 262-1000
FAX NO. (214) 953-1332 FAX NO. (404) 262-1222
-------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
------
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(2), $.001 par value(2) . . . . . . 3,360,000 $5.06 $17,001,600 $5,151.48
- ------------------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase Warrants(3)(5) 1,610,000 $0.125 $201,250 $60.98
- ------------------------------------------------------------------------------------------------------------------------------
Underwriters' Warrants(4)(5) . . . . . . . . . 140,000 $7.52 $1,052,800 $319.00
- ------------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,531.46(6)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c) under the
Securities Act of 1933. The price per share of Common Stock
has been calculated on the basis of the average of the
closing bid and ask prices per share as quoted on the
NASD Electronic Bulletin Board on March 26, 1997, which were
$4.50 and $5.625 per share, respectively.
(2) Includes (i) 1,400,000 shares of Common Stock offered hereby,
(ii) 1,400,000 shares of Common Stock issuable upon exercise
of the Redeemable Common Stock Purchase Warrants (the
"Warrants") offered hereby, (iii) 210,000 shares of Common
Stock subject to the Underwriters' overallotment option,
(iv) 210,000 shares of Common stock issuable upon exercise
of 210,000 Warrants subject to the Underwriters'
overallotment option, and (v) 140,000 shares of Common Stock
issuable upon exercise of 140,000 warrants subject to
Underwriters' Warrants.
(3) Includes 1,400,000 Warrants offered hereby and 210,000
Warrants subject to the Underwriters' over-allotment option.
(4) Underwriters' Warrants to purchase up to 140,000 units
consisting of an aggregate of 140,000 shares of Common
Stock and 140,000 Warrants exercisable at 145% of the
estimated offering prices of the Common Stock and Warrants.
(5) Pursuant to Rule 416, this Registration Statement also covers
such indeterminate number of shares of Common Stock as may be
issuable upon exercise of the referenced warrants pursuant to
antidilution provisions.
(6) The amount of $5,531.46 was previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 19, 1997
PROSPECTUS
KARTS INTERNATIONAL INCORPORATED
1,400,000 SHARES OF COMMON STOCK AND
1,400,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Karts International Incorporated, a Nevada corporation (the "Company"),
hereby offers 1,400,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), and 1,400,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") (the "Offering"). The shares of Common Stock and the Warrants
offered hereby (sometimes hereinafter collectively referred to as the
"Securities") may be purchased separately. The Company anticipates the
Securities will be offered to the public at approximately $4.00 per share of
Common Stock and $0.125 per Warrant. Each Warrant is transferable immediately
upon issuance and entitles the holder thereof to purchase one share of Common
Stock at the initial public offering price per share of Common Stock during the
four-year period commencing on the first anniversary of the effective date of
this Offering (the "First Exercise Date"). The Warrants are redeemable by the
Company at a redemption price of $0.01 per Warrant, at any time after the First
Exercise Date, upon 30 days' written notice to the holders thereof, if the
average closing price of the Common Stock equals or exceeds twice the initial
public offering per share of Common Stock for the 20 consecutive trading days
ending three days prior to the date of the notice of redemption. See
"Description of Securities."
The Company's Common Stock is listed for trading on the Electronic Bulletin
Board of the National Association of Securities Dealers, Inc. (the "NASD") under
the symbol "KINT". On August 15, 1997, the closing bid and ask prices of the
Common Stock were $4.00 and $5.00 per share, respectively. There is no trading
market for the Warrants. The Company has applied to include the shares of Common
Stock and Warrants offered hereby on the Nasdaq SmallCap Market under the
symbols "KINT" and "KINTW," respectively. The Company's Securities have not yet
been approved for quotation on the Nasdaq SmallCap Market and there can be no
assurance that an active trading market will develop or if such market is
developed it will be sustained. See "Common Stock Price Ranges and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK AND WARRANTS OFFERED HEREBY, INCLUDING, WITHOUT LIMITATION, A
RISK THAT THIS PROSPECTUS MAY NOT BE CURRENT DURING THE EXERCISE PERIOD OF THE
WARRANTS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==============================================================================================================
PRICE UNDERWRITING DISCOUNTS PROCEEDS TO
TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of Common Stock.............. $ $ $
- --------------------------------------------------------------------------------------------------------------
Per Warrant............................ $ $ $
- --------------------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $
==============================================================================================================
</TABLE>
(1) Does not include compensation to J.P. Turner & Company, L.L.C. as the
managing underwriter (the "Representative") among the companies underwriting
this Offering (the "Underwriters") in the form of (i) a 3% non-accountable
expense allowance, (ii) warrants to purchase up to 140,000 shares of Common
Stock and 140,000 Warrants exercisable at 145% of the price per share of
Common Stock offered hereby and 145% of the price per warrant offered hereby
(the "Underwriters' Warrants") and (iii) a financial advisory agreement for
the Representative to act as an investment banker for the Company for a
period of two years for an aggregate fee of $48,000 payable at the closing
of the Offering. In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $460,000, including the non-accountable expense allowance payable to the
Underwriters.
(3) The Company has granted the Underwriters a 45-day over-allotment option to
purchase up to 210,000 additional shares of Common Stock and 210,000
additional Warrants on the same terms and conditions as set forth above. If
all such additional shares are purchased by the Underwriters, the total
Price to Public will be $ , the total Underwriting Discounts and
Commissions will be $ and the total Proceeds to the Company will be
$ . See "Underwriting."
---------------------
The Securities offered by this Prospectus are being offered by the
Underwriters named herein on a "firm commitment" basis subject to prior sale,
when, as and if accepted by the Underwriters, approval of certain legal matters
by counsel for the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer without notice and
reject any order in whole or in part. It is expected that delivery of the
certificates representing the Securities will be made at the offices of J.P.
Turner & Company, L.L.C., Atlanta, Georgia on or about , 1997.
[J.P. Turner Logo]
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3
Inside front cover of the Prospectus contains pictures of six different Fun Kart
models offered by the Company as well as a picture of Bobby Labonte, the
Company's spokesperson.
** 1 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK AND THE WARRANTS, INCLUDING BY ENTERING STABILIZING BIDS,
EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed with the U.S. Securities and Exchange Commission
(the "Commission") a Registration Statement on Form SB-2 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered hereby. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the Commission. This
Prospectus contains a summary of the material provisions of all material
contracts, agreements or other documents filed as exhibits to the Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract, agreement or other document referred to herein are necessarily
summaries of the material provisions of such contracts, agreements or other
documents and, where such contract, agreement or other document is an exhibit
to the Registration Statement, each such statement is qualified in all respects
by the provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof. For further information with respect to
the Company and the Securities offered hereby, reference is hereby made to the
Registration Statement and to the schedules and exhibits thereto.
The Registration Statement may be inspected, without charge, and
copies may be obtained, at prescribed rates, at the public reference facilities
of the Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected, without charge, at the Commission's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. In addition, copies of the Registration
Statement may be obtained by mail, at prescribed rates, from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549.
ADDITIONAL INFORMATION
As a result of this Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the public reference facilities and
regional offices referred to above. The Commission also maintains a Web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding issuers of securities which file electronically
with the Commission. The Company intends to furnish its stockholders with
annual reports containing consolidated financial statements certified by its
independent auditors and with quarterly reports for each of the first three
quarters of each fiscal year containing unaudited consolidated financial
information.
-3-
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated
herein, the financial, business activities, management and other pertinent
information herein relates on a consolidated basis to the Company and its
wholly-owned subsidiaries, Brister's Thunder Karts, Inc. and USA Industries,
Inc. Each prospective investor is urged to read this Prospectus in its
entirety and to particularly consider the information set forth under the
heading "RISK FACTORS." Unless otherwise indicated, all Common Stock share and
per share data and information in this Prospectus (i) have been adjusted to
give effect to a two-for-three reverse stock split of the Company's Common
Stock effective March 24, 1997 and a one-for-250 reverse stock split of the
Company's Common Stock on February 23, 1996, (ii) assume the conversion, upon
the closing of the Offering, of all outstanding shares of the Company's
Convertible Preferred Stock, par value $0.001 per share (the "Convertible
Preferred Stock") for $625,000 and the issuance of 104,175 shares of Common
Stock to the holders of the Convertible Preferred Stock, (iii) assume issuance
to Convertible Preferred Stockholders of an additional 333,350 1996 Redeemable
Common Stock Purchase Warrants (the "1996 Warrants") upon the closing of the
Offering, (iv) assume no exercise of outstanding options to purchase an
aggregate of 59,355 shares of Common Stock with an exercise price of $5.63 per
share, (v) assume no exercise of outstanding options to purchase an aggregate
of 66,004 shares of Common Stock with an exercise price of $4.875 per share,
(vi) assume no exercise of outstanding warrants, including Warrants offered
hereby, the 1996 Warrants, the Class A Warrants and the Underwriters' Warrants,
and (vii) assume no exercise of the Underwriters' over-allotment option.
THE COMPANY
Karts International Incorporated, a Nevada corporation (the
"Company"), through its wholly-owned subsidiaries, Brister's Thunder Karts,
Inc., a Louisiana corporation ("Brister's") and USA Industries, Inc., an
Alabama corporation ("USA"), designs, manufactures and distributes recreational
fun karts ("Fun Karts"), also referred to as "go karts." Fun Karts are
four-wheeled, gas-powered vehicles typically equipped with engines of 5 to 8
horsepower and purchased by consumers principally for off-road recreational
use. The Company shipped approximately 17,750 Fun Karts to dealers and mass
merchandisers in 1996, which the Company believes represents approximately 14%
of the total domestic Fun Karts market. Proforma consolidated revenues of the
Company for the fiscal year ended December 31, 1996 were approximately $10.7
million as compared with combined revenues of approximately $8.5 million for
the fiscal year ended December 31, 1995. For the six-month period ended June
30, 1997, the Company's consolidated revenues were approximately $2.5 million,
as compared with combined revenues of approximately $2.3 million for the
six-month period ended June 30, 1996. The Company operates manufacturing
facilities in Roseland, Louisiana and Prattville, Alabama, and maintains its
executive offices in Covington, Louisiana. See "The Company" and "Business."
The karts industry is comprised of three principal segments, Fun
Karts, racing and concession karts. Fun Karts, the largest segment, are karts
sold to consumers for general recreational use. Racing karts are specially
designed for use on established tracks in a controlled racing environment.
Concession karts are designed for use by amusement and entertainment centers
which provide karts and facilities for customers' use on a rental basis.
Management estimates that in 1996 approximately 145,000 karts were sold in the
United States of which approximately 125,000 were Fun Karts, 9,000 racing karts
and 11,000 concession karts. Historically, Brister's and USA have concentrated
their efforts in the Fun Karts market.
The Company offers a complete product line of Fun Karts,
differentiated by drive train, seating capacity, tire size and tread, and frame
size. Thirty-two Fun Kart models are available in three different colors,
black, blue and red, which are sold under the Thunder Karts and USA Fun Karts
brand names. The Company's models offer a wide range of standard and optional
features which enhance the safety, operation, riding comfort and performance of
its Fun Karts. Such features include the exclusive, patented automatic
throttle override; full safety cage; safety flag; three kinds of drive trains,
including live axle, single wheel pull and torque converter; clutch lubrication
system; high speed bearings; adjustable throttle and seats; steel rims; band
and disc brakes; and Briggs & Stratton 5 horsepower engines. The end-users of
the Company's Fun Karts are primarily 7- to 17-year-old males, living with
their parents in suburban and rural markets. Typical Fun Kart purchasers are
parents who purchase Fun Karts for their children.
-4-
<PAGE> 6
The Company relies on a broad and diversified national independent
dealer network and mass merchandisers to sell its Fun Karts. Prior to 1996,
the Company sold its products through its over 700 dealers, primarily lawn and
garden stores, motorcycle outlets, hardware stores and specialty karts dealers,
located in 40 states. The major markets for the Company's Fun Karts are in the
Southeast and Southwest regions of the United States. In 1996, the Company
sold approximately 61% of its Fun Karts to approximately 250 dealers located in
Louisiana, Texas, Mississippi and Florida. Although there are no formal dealer
agreements, the Company, for the benefit of certain of its higher volume
dealers, will agree not to sell to other retailers in a limited geographic area
surrounding the high volume dealer. To become a Fun Kart dealer, the Company
generally requires a retailer to annually purchase six or more Fun Karts.
Dealers usually maintain an inventory of three to five Fun Karts which
increases during the Christmas holiday season. For eligible dealers, the
Company offers a dealer floor plan financing program through an unaffiliated
financial services company.
To broaden its distribution channels, the Company in 1996 began
selling its Fun Karts to two mass merchandisers, Wal-Mart Stores, Inc.
("Wal-Mart") and Sam's Wholesale Club ("Sam's Club"), a division of Wal-Mart
Stores, Inc. In 1996, the Company sold approximately 4,000 of its Fun Karts to
Wal-Mart and Sam's Club, representing approximately 21% of the Company's
proforma revenues for the fiscal year ended December 31, 1996. The Company
anticipates that mass merchandisers will account for approximately 20% of the
Company's 1997 revenues of which sales to Wal-Mart and Sam's Club are projected
to account for approximately 5% and 6%, respectively, of 1997 revenues. The
Company does not believe that any mass merchandiser will account for 10% or
more of the Company's 1997 revenues. Management believes that mass
merchandisers represent a significant untapped market for Fun Karts.
The Company's operating strategy is to increase its sales and market
share by producing safe, high-quality and reliable Fun Karts at competitive
prices; continue to improve manufacturing efficiency; and continue
diversification of domestic distribution channels. The Company's growth
strategy is to increase its brand and product recognition by innovative
marketing to its target users; broaden its product lines through improved
product design and development; and expand its geographic presence and market
share by continued emphasis on expansion of its domestic dealer and mass
merchandiser networks, through further penetration of international markets,
and through acquisitions of manufacturers of karts and related products that
provide synergistic growth opportunities for the Company.
Although the Company is actively seeking acquisitions that will expand
its existing product lines, market share and distribution channels, the Company
currently has no agreements or understandings with respect to any such
acquisitions and there can be no assurance that the Company will be able to
identify and acquire such businesses or obtain necessary financing on favorable
terms.
THE OFFERING
SECURITIES OFFERED
Common Stock . . . . . . . . . . 1,400,000 shares of Common Stock. See
"Description of Securities -- Common
Stock."
Warrants . . . . . . . . . . . . 1,400,000 Warrants. Each Warrant
entitles the holder thereof to
purchase one share of Common Stock at
the initial public offering price per
share of Common Stock during the
four-year period commencing on the
first anniversary of the effective
date of this Offering (the "First
Exercise Date"). The Warrants are
each redeemable by the Company at a
redemption price of $0.01 per Warrant,
at any time after the First Exercise
Date, upon thirty days prior written
notice to the holders thereof, if the
average closing price of the Common
Stock equals or exceeds twice the
initial public offering price per
share of Common Stock for the 20
consecutive trading days ending three
days prior to the date of the notice
of redemption. See "Description of
Securities -- Redeemable Common Stock
Purchase Warrants."
-5-
<PAGE> 7
<TABLE>
<CAPTION>
OUTSTANDING SECURITIES . . . . . . . Securities
Securities Outstanding Upon
Presently Completion of the
Outstanding Offering
----------- ------------------
<S> <C> <C>
Common Stock(1) . . . . . . . . . . . 2,717,458 4,117,458
Warrants . . . . . . . . . . . . . . -0- 1,400,000
Convertible Preferred Stock(2) . . . 25 -0-
1996 Warrants(2) . . . . . . . . . . 166,675 500,025
Class A Warrants(3) . . . . . . . . . 63,334 63,334
Underwriters' Warrants(4) . . . . . . -0- 140,000
</TABLE>
ESTIMATED NET PROCEEDS TO THE
COMPANY . . . . . . . . . . . . . Approximately $4,737,500 if the
Securities are sold, and $5,491,137 if
the over-allotment option is fully
exercised. See "Use of Proceeds."
USE OF PROCEEDS . . . . . . . . . . . Debt repayment, conversion of
preferred stock, payment of Brister's
credit line, advertising and marketing,
product development and design,
payment of financial advisory fee to
the Representative, working capital
and other corporate purposes. See
"Use of Proceeds."
RISK FACTORS . . . . . . . . . . . . This Offering involves a high degree
of risk and immediate and substantial
dilution. See "Risk Factors" and
"Dilution."
PROPOSED NASDAQ SYMBOLS(5) . . . . . Common Stock -- KINT
Warrants -- KINTW
- --------------------------
(1) Unless otherwise indicated herein, the information contained in this
Prospectus regarding the Company's outstanding securities does not include
(i) 210,000 shares of Common Stock and 210,000 Warrants issuable upon
exercise of the Underwriters' over-allotment option, (ii) the 140,000
shares of Common Stock and 140,000 Warrants issuable upon exercise of the
Underwriters' Warrants, (iii) the 1,963,359 shares of Common Stock
issuable upon the exercise of the outstanding warrants, including the
Warrants offered hereby, and (iv) 125,359 shares of Common Stock issuable
upon the exercise of stock options granted to certain employees and
officers of the Company. See "Management -- Stock Options," "Principal
Stockholders," "Description of Securities" and "Underwriting."
(2) See "The Company -- Recent Financings" and "Description of Securities --
Convertible Preferred Stock, -- 1996 Warrants, and -- Bridge Financing."
(3) See "The Company -- Recent Financings" and "Description of Securities --
Class A Warrants."
(4) See "Underwriting."
(5) The Company has made application with the NASD for inclusion of the
Securities in the NASD's Automated Quotation System ("Nasdaq") SmallCap
Market. The inclusion of the proposed Nasdaq symbols in this Prospectus
Summary is not meant to imply that a trading market may someday exist for
the Securities offered hereby or that the symbols will be assigned to the
Securities of the Company. The Company's Common Stock currently is quoted
on the NASD Electronic Bulletin Board under the symbol "KINT". See
"Common Stock Price Ranges and Dividends."
-6-
<PAGE> 8
SUMMARY HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
The following table presents summary historical financial data of the
Company on either a consolidated basis as of December 31, 1996, June 30, 1997
and 1996 or a combined basis as of December 31, 1995 and 1994, respectively.
This information has been derived from the Company's audited financial
statements included elsewhere in this Prospectus or other unaudited financial
information provided by the Company. The summary financial information should
be read in conjunction with "Selected Historical Consolidated and Combined
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto appearing elsewhere in this Prospectus. In
the opinion of management, this financial information includes all material
adjustments necessary to present historical results of the Company as if Karts
International Incorporated, Brister's Thunder Karts, Inc. and USA Industries,
Inc. had been a single operating entity as of the first day of the first period
presented. This financial information does not purport to be indicative of the
financial position or the results of operations which would have actually been
obtained if the acquisition transactions had actually been consummated on the
dates indicated. In addition, this financial information does not purport to
be indicative of the financial position or results of operations that may be
obtained in the future.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended (Unaudited) (Unaudited)
December 31, December 31, December 31, Six Months Ended Six Months Ended
1996 1995 1994 June 30, 1997 June 30, 1996
STATEMENT OF OPERATIONS DATA: (Historical) (Combined) (Combined) (Historical) (Historical)
--------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Revenues, net . . . . . . . . . . . . . $ 8,327,316 $ 8,514,460 $ 7,069,500 $ 2,515,232 $ 1,150,153
Cost of goods sold . . . . . . . . . . 5,842,532 6,184,340 5,186,245 2,197,219 718,577
Operating expenses . . . . . . . . . . 1,456,472 1,639,583 1,423,933 1,033,474 345,210
Compensation expense related to common
stock issuances at less than fair
value for reorganization and
restructuring costs(1) . . . . . . 1,430,287 - - - 1,430,287
Income/(loss) from operations . . . . . (401,975) 690,537 459,322 (715,461) (1,343,921)
Interest expense . . . . . . . . . . . 396,589 - - 268,493 136,174
Provision for income taxes . . . . . . 193,575 218,686 216,072 - (4,305)
Net income/(loss) . . . . . . . . . . . (959,566) 355,701 341,036 (923,582) (1,480,429)
Net income per proforma weighted-average
share of common stock outstanding
Primary . . . . . . . . . . . . . . $(0.51) $0.19 $0.18 $(0.37) $(1.04)
Number of weighted-average shares of
common stock outstanding Primary . . 1,892,563 1,892,562 1,892,563 2,509,415 1,418,602
Proforma income assuming use of proceeds
to retire certain outstanding debt . . . $ (659,566) $ (733,582) $(1,370,714)
Proforma earnings per share assuming
retirement of certain outstanding debt
Primary . . . . . . . . . . . . . . $(0.35) $ (0.29) $ (0.97)
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, June 30, June 30,
1996 1995 1995 1997 1997
BALANCE SHEET DATA: (Historical) (Historical) (Combined) (Unaudited) (As adjusted)(2)
----------------------------- -------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Current assets . . . . . . . . . . . . . . $ 3,391,290$ - $ 2,054,177 1,981,807$ 2,594,307
Total assets . . . . . . . . . . . . . . . 10,082,092 - 8,268,481 8,918,387 9,530,887
Current liabilities . . . . . . . . . . . . 1,382,932 4,010 1,335,057 1,126,687 826,687
Total liabilities . . . . . . . . . . . . . 4,715,592 4,010 4,610,490 4,475,469 975,469
Convertible preferred stock . . . . . . . . 625,000 - - 625,000 -
Stockholders' equity . . . . . . . . . . . 4,741,500 (4,010) 3,657,991 3,817,918 8,555,418
Working capital . . . . . . . . . . . . . . 2,008,358 (4,010) 719,120 855,120 1,767,620
</TABLE>
- ------------------------
(1) The Company sold certain securities to a former director of the Company and
to HFG during the Company's reorganization phase in early 1996 prior to the
Brister's Acquisition. Based on the "fair value" of these transactions,
the Company incurred a one-time accounting charge of approximately $1.43
million to earnings for the differential between the fair value of these
transactions and the actual cash proceeds received by the Company. See
"The Company," "Certain Relationships and Related Transactions," "Note A --
Organization and Description of Business of Notes to Consolidated Financial
Statements" and "Note J -- Common Stock Transactions of Notes to
Consolidated Financial Statements."
(2) Adjusted to give effect to (i) the sale of 1,400,000 shares of Common Stock
and 1,400,000 Warrants offered hereby at assumed initial public offering
prices of $4.00 per share of Common Stock and $0.125 per Warrant,
respectively, and the application of the net proceeds therefrom and (ii)
conversion of outstanding shares of Convertible Preferred Stock. See "Use
of Proceeds." No effect has been given to the exercise of (i) any
outstanding warrants, including the Warrants offered hereby and the
Underwriters' Warrants, (ii) the Underwriters' over-allotment option, or
(iii) outstanding options. See "Management -- Stock Options," "Description
of Securities" and "Underwriting."
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<PAGE> 9
RISK FACTORS
An investment in the Securities offered hereby involves a high degree
of risk. Prospective investors should consider carefully the following risk
factors in addition to the other information set forth in this Prospectus.
SUBSTANTIAL OFFERING PROCEEDS ALLOCATED FOR PAYMENT TO DIRECTOR AND
CERTAIN STOCKHOLDERS OF THE COMPANY. As a result of the acquisition of
Brister's (the "Brister's Acquisition"), the Company incurred long-term
indebtedness of approximately $3.2 million of which approximately $1.2 million
(25.3% of net proceeds) will be repaid to Charles Brister, a director and
principal stockholder of the Company, with a portion of the proceeds of the
Offering. The remaining $2 million of long-term debt (42.3% of net proceeds)
will be repaid to the Schlinger Foundation, a principal stockholder of the
Company, upon closing of the Offering. In addition to the $3.2 million debt
repayment (67.6% of net proceeds), the Company will pay to holders of the
Company's Convertible Preferred Stock $625,000 (13.2% of net proceeds) upon the
conversion of the outstanding Convertible Preferred Stock at the closing of the
Offering. After the completion of this Offering, Mr. Brister will have
received approximately $3.2 million from the Company and will own 516,667
shares of Common Stock as a result of the Brister's Acquisition. Upon
conversion of the Convertible Preferred Stock, the holders will receive the
return of their total cash investment while retaining an aggregate of 104,175
shares of Common Stock and 500,025 1996 Warrants at no cost basis. The
purchasers of the Securities in this Offering will have paid a significantly
higher price per share for the Common Stock offered hereby than the holders of
the Convertible Preferred Stock or most of the principal stockholders paid for
their shares of Common Stock, and will have assumed the principal financial
risk for the future success of the Company's business operations. Certain
officers, directors and stockholders of the Company, including Mr. Brister and
the Convertible Preferred Stockholders will enter into lock-up agreements with
the Company and the Representative upon the closing of the Offering for periods
ranging from 18 to 60 months. See "The Company," "Use of Proceeds,"
"Dilution," "Certain Relationships and Related Transactions," "Principal
Stockholders," "Description of Securities -- Convertible Preferred Stock and --
Bridge Financing."
INTEGRATION OF OPERATIONS AS A RESULT OF RECENT ACQUISITIONS. If the
Company is to realize the anticipated benefits of its recent acquisitions,
USA's and Brister's must be integrated and combined efficiently and effectively
with those of the Company. The process of augmenting the manufacturing, supply
and distribution channels, computer and accounting systems and other aspects of
operations, while managing a larger and geographically expanded entity with
additional Fun Kart products, will present a significant challenge to the
Company's management. There can be no assurance that the integration process
will be successful or that the anticipated benefits of these acquisitions will
be fully realized. The dedication of management resources to such integration
may detract attention from the day-to-day business of the Company. The
difficulties of integration may be increased by the necessity of coordinating
geographically separated manufacturing operations, integrating personnel with
disparate business backgrounds and combining different corporate cultures.
There can be no assurance that the Company will be able to achieve any expense
reduction through the removal of duplicative expenses or through economies of
scale, that there will not be substantial costs associated with any such
reductions or that such reductions will not result in a decrease in revenues or
that there will not be other material adverse effects on the Company of these
integrated efforts. Such effects could also materially reduce the short-term
earnings of the Company. See "The Company -- Recent Acquisitions."
RISKS RELATING TO GROWTH AND EXPANSION. Although the Company believes
that the net proceeds from this Offering and projected cash flow from
operations will allow the Company to achieve initial implementation of its
business strategies, there can be no assurance that the Company will have
sufficient funds to completely achieve successful implementation of its plans
to a level that will have a positive effect on its results of operations or
financial condition. The ability of the Company to execute its growth strategy
will also depend on other factors, including ability of sales and marketing
personnel to retain and expand the Company's dealers and mass merchandiser
networks, market acceptance of Company's modified and new products, ability to
further penetrate the Company's target market and increase consumer awareness
of its products by advertising, ability to consummate acquisitions of kart
manufacturers and related businesses, general economic and industry conditions,
and other factors, many of which are beyond the control of the Company. Even
if the Company's revenues and earnings grow rapidly, such growth may
significantly strain the Company's management and its operational and technical
resources. If the Company is successful in obtaining greater market
penetration with
-8-
<PAGE> 10
its products, the Company will be required to deliver increasing volumes of its
products to its customers on a timely basis at a reasonable cost to the
Company. No assurance can be given that the Company can expand its
manufacturing capacity to meet increased product demand or that the Company
will be able to satisfy increased production demands on a timely and
cost-effective basis. There can be no assurance that the Company's growth
strategy will be successful. Further, if one or more of the component parts of
the Company's growth strategy is unsuccessful, there can be no assurance that
such lack of success will not have a material adverse effect on the Company's
results of operations or financial condition. See "Use of Proceeds" and
"Business -- Operating Strategy, -- Growth Strategy and -- Acquisition
Strategy."
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The
Company has historically experienced stronger demand for its products in the
third and fourth quarters of each calendar year. Operating results may
fluctuate due to factors such as the timing of the introduction of new
products, price reductions by the Company and its competitors, demand for the
Company's products, new product mix, delay, cancellation or rescheduling of
orders, performance of third party manufacturers, available inventory levels,
seasonal cost increases and general economic conditions. A significant portion
of the Company's operating expenses are relatively fixed. Since the Company
typically does not obtain long-term purchase orders or commitments from its
customers, it must anticipate the future volume of orders based upon the
historic purchasing patterns of its dealers and mass merchandisers and upon its
discussions with its dealers and representatives of mass merchandisers as to
their future requirements. Cancellations, reductions or delays in orders by a
large customer or group of customers could have a material adverse impact on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Seasonality."
BROAD DISCRETION OVER USE OF PROCEEDS. After debt repayment,
conversion of the outstanding Convertible Preferred Stock and payment of the
expenses of this Offering, the Company intends to use $150,000 for advertising
and marketing expenses (3.2% of net proceeds), $100,000 for product development
and design (2.1% of net proceeds), $48,000 for payment of a financial advisory
fee to the Representative (1.0% of net proceeds) and $314,500 for working
capital (6.6% of net proceeds). Management will have broad discretion in
allocating and applying such proceeds and the Company's stockholders will not
have an opportunity to review or vote upon the terms of these unspecified
expenditures. See "Use of Proceeds."
GROWTH STRATEGY AND RISKS RELATING TO FUTURE ACQUISITIONS. One
element of the Company's growth strategy involves growth through the
acquisition of other companies, assets or product lines that would complement
or expand the Company's business. The Company's ability to grow by acquisition
is dependent upon, and may be limited by, the availability of suitable
acquisition candidates and capital. Future acquisitions by the Company could
result in potentially dilutive issuances of securities, the incurrence of debt
and contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially affect the Company's
profitability. In addition, acquisitions involve risks that could adversely
affect the Company's operating results, including the assimilation of the
operations and personnel of acquired companies, and the potential loss of key
employees of acquired companies. There can be no assurance that the Company
will be able to consummate any acquisitions on suitable terms. No commitments
or binding agreements have been entered into to date and there can be no
assurance that acquisitions, if any, can be completed. Although the Company
does not presently plan to use any of the proceeds from this Offering for
acquisitions, the Company does reserve the right to reallocate such proceeds
for use in an acquisition if management believes such acquisition would be in
the best interest to the Company. Other than as required by the Company's
Articles of Incorporation, Bylaws and applicable laws, stockholders of the
Company generally will not be entitled to vote upon such acquisitions. See
"Use of Proceeds" and "Business -- Growth Strategy and -- Acquisition
Strategy."
ADDITIONAL FINANCING WILL BE NEEDED. Upon completion of this
Offering, the Company will have limited financial resources for acquisitions.
The Company will be dependent upon the proceeds from additional financings,
including receiving proceeds from the future exercise of the Warrants of which
there can be no assurance, to facilitate an acquisition. The Company may also
need additional financing to achieve full implementation of its long-term
growth strategy and for working capital. There can be no assurance that
additional financing will be available, or if available, that such financing
will be on favorable terms. See "Use of Proceeds" and "Business -- Growth
Strategy and -- Acquisition Strategy."
-9-
<PAGE> 11
POTENTIAL PRODUCT LIABILITY AND INSURANCE LIMITS. The nature of the
products manufactured by the Company is such that the products may fail due to
material inadequacies or equipment failures. Such a failure may subject the
Company to the risk of product liability claims and litigation arising from
injuries allegedly caused by the improper functioning or design of its
products. As the Company expands its Fun Karts product lines and distributes
more products into the marketplace, the Company's exposure to such potential
liability will also increase. The Company currently maintains $5 million
occurrence basis product liability insurance with a $50,000 self-insured
retention and $5 million maximum per occurrence coverage. The Company
currently has four pending product liability claims, none of which are expected
to exceed the existing policy limits. The Company has never had a claim that
resulted in an award or settlement in excess of insurance coverage. The
Company believes that as its sales of Fun Karts increase, product liability
claims will be inevitable, particularly given the current litigious nature of
American consumers. There is no assurance that the Company's insurance
coverage 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 insurance coverage or obtain additional
coverage at commercially reasonable rates. 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. See "Business -- Product Liability and
Insurance Limits and -- Legal Proceedings."
PENDING LITIGATION. In addition to product liability claims, the
Company, from time to time, is involved in lawsuits in the ordinary course of
business. On February 4, 1997 a lawsuit was filed in a Mississippi state court
against the Company, Brister's and an unaffiliated insurance broker by the
Company's insurance underwriter to have insurance coverage declared as null and
void for an alleged material misrepresentation on the insurance application.
This action arose as a result of the payment in 1997 by the insurance
underwriter of $700,000 in settlement of a product liability lawsuit against
Brister's and other defendants. The Company intends to file a counterclaim
against the Company's insurance broker relating to possible misrepresentations
made by the insurance broker to the insurance underwriter regarding Brister's
prior product liability claims history. The Company intends to vigorously
defend this lawsuit. The Company is currently engaged in discovery and is
unable to predict the outcome of this litigation. If the Plaintiff is
successful in this litigation and is awarded a judgement for damages, such
judgment could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Legal
Proceedings."
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a
large degree on its ability to retain the services of its existing management
and to attract and retain qualified personnel as necessary in the future. To
provide for continuity of management, the Company has entered into an
employment agreement with V. Lynn Graybill, Chairman of the Board, President
and Chief Executive Officer of the Company. The loss of the services of any
key management personnel or the inability to recruit and retain qualified
personnel in the future could have a material adverse effect on the Company's
business and results of operations. The Company may obtain key man life
insurance policies on the lives of key management personnel, with the proceeds
of the policies to be payable to the Company. While management of the Company
believes that any such policy proceeds would help the Company recruit and
compensate replacements for such individuals, there can be no assurance that
any such proceeds would offset any resulting financial impact of the death of
any key management personnel. See "Management" and "Certain Relationships and
Related Transactions."
CONFLICTS OF INTEREST. Prior to the Offering, certain officers,
directors and related parties have engaged in business transactions with the
Company. Management believes that the terms of these transactions were as
favorable to the Company as those which could have been obtained from
unaffiliated third parties under similar circumstances. All future
transactions between the Company and its affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the disinterested members of the Board of Directors
of the Company. See "The Company" and "Certain Relationships and Related
Transactions."
THE COMPANY DOES NOT OWN ANY PATENTS; DEPENDENCE ON LICENSE AGREEMENT
WITH DIRECTOR. The Company does not own any patents, trademarks or service
marks. However, Mr. Charles Brister, a director and principal stockholder of
the Company, owns certain patents, technology and trademarks which are licensed
to the Company, which allows the Company to use brand names and utilize the
automatic throttle override system ("ATOS") on its Fun Karts. The Company's
success is dependent upon, among other things, its
-10-
<PAGE> 12
continued ability to use these certain patented items and other proprietary
materials. The three-year license agreement with Mr. Brister provides for a
one-time only $10,000 license fee and a royalty payment of $1.00 for each
Company Fun Kart on which the ATOS is installed during the first year of the
agreement. During the second and third year of the license agreement, the
Company will pay to Mr. Brister each year a royalty of $1.00 for each Company
Fun Kart on which the ATOS is installed or $20,000 annually, whichever is
greater. The license agreement expires March 15, 2000. The termination of the
license agreement with Mr. Brister prior to its term would have an adverse
effect upon the Company's ability to produce its current line of Fun Karts.
Furthermore, there can be no assurance that if the license agreement is
terminated prior to its initial term that the Company could find suitable
substitutions for the licensed items and technology or that its Fun Karts,
produced without the licensed items and technology, would receive the same
market acceptance. Also, there is no assurance that the technology licensed to
the Company, or that the Company might license in the future, will quickly
become obsolete due to the development of other, more advanced technology by
competitors of the Company. See "Business -- Product Lines and -- Patents and
Proprietary Technology" and "Certain Relationships and Related Transactions."
RETENTION OF CONTROL. The Company's officers, directors and principal
stockholders beneficially will own approximately 47% of the outstanding shares
of the Company's Common Stock at the completion of the Offering. As a result,
the officers, directors and principal stockholders of the Company will have the
ability to control the day-to- day affairs and the fundamental policies of the
Company. Voting together such stockholders, including the officers and
directors of the Company, could possibly block any major corporate
transactions, such as a merger or sale of substantially all of the Company's
assets, that under Nevada law requires the affirmative vote of holders of a
majority of the outstanding shares of Common Stock of the Company. See
"Management" and "Principal Stockholders."
CONCENTRATION OF MANUFACTURING FACILITIES. The Company's
manufacturing operations are conducted at, and substantially all of the
Company's inventory is maintained in, two facilities, one in Roseland,
Louisiana and the other in Prattville, Alabama. Any significant casualty loss
to, or extended interruptions of operations at, either facility would have a
material adverse effect on the Company. Replacement of the Company's
manufacturing equipment could take several months and would have a material
adverse effect on the Company. See "Business -- Facilities."
INFORMAL SUPPLY ARRANGEMENTS. Most of the component parts, including
engines, wheels, tires, seats, steering wheels, steering tire rods and other
miscellaneous parts, used in the manufacture of the Company's Fun Karts are
purchased from various domestic vendors under informal arrangements. The
Company currently purchases its engines exclusively from Briggs & Stratton.
Although the Company believes its relationship with its vendors to be
excellent, the loss of any vendor, and in particular Briggs & Stratton, may
cause the Company to experience a temporary delay in the production of the
Company's Fun Karts. The Company believes other engine vendors and suppliers
of other component parts necessary for the production of Fun Karts are readily
available. See "Business -- Manufacturing Operations."
DEPENDENCE ON INDEPENDENT DEALERS. The Company has not entered into
written agreements with its Fun Karts dealers and in turn the dealers are under
no obligation to purchase the Company's Fun Karts. In 1996, approximately 79%
of the Company's combined revenues were the result of sales to its independent
dealers and the Company projects that in 1997 approximately 80% of the
Company's revenues will be attributed to sales to independent dealers.
Although no one dealer or group of affiliated dealers accounted for 10% or more
of the Company's 1996 revenues, sales to lawn and garden stores accounted for
approximately 36% of the Company's 1996 unit sales. While the Company believes
that its relations with its independent dealers are generally good, there can
be no assurance that the Company will be able to maintain these relationships,
that a majority of its dealers will continue to sell the Company's Fun Karts or
that the Company will be able to attract and retain quality independent
dealers. If a significant number of the Company's dealers ceased to order Fun
Karts from the Company or if the Company is unable to expand its dealer network
or if there is a significant decrease in sales in the lawn and garden industry,
the Company's financial condition and results of operations would be adversely
affected. See "Business -- Sales and Marketing."
GEOGRAPHIC CONCENTRATION OF SALES. In 1996, the Company sold
approximately 61% of its Fun Karts to approximately 250 dealers located in
Louisiana, Texas, Mississippi and Florida. Although these states,
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<PAGE> 13
particularly Texas and Florida, have been among the fastest growing areas of
the United States and in recent years have enjoyed general economic growth, if
there is a broad base economic decline in these core market areas, consumer
demand for the Company's products may be adversely affected which may
negatively impact the Company's ability to sustain past levels of sales, or to
continue its sales growth or profitability. See "Business -- Sales and
Marketing."
DEPENDENCE ON MAJOR CUSTOMERS. In 1996, 12% and 9% of the Company's
combined revenues were the result of sales made to Sam's Club and Wal-Mart,
respectively. The Company believes that sales of Fun Karts to mass
merchandisers will account for approximately 20% of the Company's 1997 revenues
with the remaining 80% of 1997 revenues being attributable to sales to
independent dealers. The Company believes that Sam's Club and Wal-Mart will
account for approximately 6% and 5%, respectively, of 1997 revenues. The
Company does not believe that sales to Sam's Club or Wal-Mart will represent a
significant portion of future revenues. The Company does not believe that any
one mass merchandiser or any dealer or group of affiliated dealers will account
for 10% or more of the Company's 1997 revenues. A delay of over 90 days in the
payment of invoices submitted by the Company to any major customer may
adversely affect the Company's working capital. The loss of any customer who
accounts for 10% or more of the Company's revenues would have a material
adverse effect on the financial condition and results of operations of the
Company. See "Business -- Sales and Marketing."
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; MARKET ACCEPTANCE. The
Company believes that the introduction of new, innovative models of Fun Karts
will be important to its future growth, and that it must continue to respond to
changing consumer preferences in the areas of style, function, safety and
technological innovation. Failure by the Company to identify and respond to
such trends could adversely affect consumer acceptance of its product lines
which in turn would adversely affect the Company's results of operations. No
assurances can be given that the Company will be able to successfully develop
new Fun Kart models or that any new or modified Fun Karts will meet with
consumer acceptance in the marketplace or that the Company's current products
will receive continued or increased consumer acceptance. No assurance can be
given that the Company's existing Fun Kart models will continue to be sold at
acceptable margin levels or that the Company will be able to design,
manufacture and distribute new products at acceptable margin levels. See
"Business -- Product Lines."
COMPETITION. The Fun Karts industry is highly competitive, and there
is no assurance that the Company will be able to continue to compete profitably
in this industry in the future. The Company expects that it will continue to
face intense competition as its growth strategy is implemented. Such
competition may result in reduced sales, reduced margins, or both. The Company
is and will be competing with larger, better capitalized companies which may be
better positioned to respond to shifts in consumer demand and other market
based changes. If other companies introduce new and modified products before
the Company achieves significant market expansion, the Company could experience
growth less than its expectations which could have a material adverse effect on
the Company's financial condition and results of operations. The Company's
ability to continue to compete successfully will depend, to a significant
extent, on its ability to continue to enhance its existing products and to
develop and introduce new products which maintain the Company's technological
position, satisfy a wide range of customer safety requirements and maintain or
expand market acceptance of the Company's products. See "Business --
Competition."
COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Management believes certain
states, including California, have proposed legislation involving emission or
other safety standards for the type of gas powered engines installed on the
Company's Fun Karts. The Company is currently unable to predict whether such
legislation will be enacted in the future and, if so, the ultimate impact on
the Company and its operations. Additionally, consumer protection laws exist
in many states in which the Company currently markets its products. Any
violation of such laws or regulations could have a material adverse effect on
the Company. The Company's manufacturing facilities are inspected by the
Occupational Safety and Health Administration. The Company believes that it is
generally in compliance in all material respects with all currently applicable
federal and state laws and regulations. Federal, state and local environmental
regulations are not expected to have a material effect on the Company's
operations. However, if the Company acquires existing manufacturing operations
which
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<PAGE> 14
are in violation of such consumer or environmental laws and regulations, such
violations may have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Government Regulations."
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchase price of the Common
Stock substantially exceeds the net tangible book value of the Common Stock.
Purchasers of the Common Stock will experience an immediate substantial
dilution in the net tangible book value per share of the Common Stock after
this Offering in the amount of $3.31 per share or 82.7% of the price per share
of Common Stock paid by the investors in this Offering (assuming an offering
price of $4.00 per share). See "Dilution."
POTENTIAL ADDITIONAL DILUTION TO PUBLIC INVESTORS. In connection with
the Company's private offering of securities completed on March 31, 1996 (the
"March 1996 Offering"), the Company and Halter Financial Group, Inc. ("HFG"),
a financial consulting company owned and operated by Timothy P. Halter, an
officer and director of the Company, have agreed to issue additional shares of
Common Stock to participants in the March 1996 Offering if on March 31, 1998
(the "Offering Valuation Date") the average closing bid price of the Common
Stock for the ten trading days prior to and including the Offering Valuation
Date (the "Stock Market Value") does not equal or exceed $4.50 per share. If
such an adjustment is required on the Offering Valuation Date, each participant
in the March 1996 Offering will receive for no additional consideration an
additional number of shares of Common Stock necessary to increase the Stock
Market Value per share of the Common Stock acquired in the March 1996 Offering
to $4.50 per share. HFG has placed into escrow 233,333 shares of the
Company's Common Stock (the "HFG Escrow Shares") to be issued to participants
in the March 1996 Offering if an adjustment is required. If on the Offering
Valuation Date the Stock Market Value of the Common Stock is less than $2.25
per share, the Company will be obligated to also issue the number of additional
shares of Common Stock necessary to increase the Stock Market Value per share
of the Common Stock acquired in the March 1996 Offering to $4.50 per share. If
the Company is required to issue additional shares to participants in the March
1996 Offering, investors in this Offering as well as the Company's other
stockholders may incur a significant decrease of their ownership interest in
the Company, with a resulting dilution in the net tangible book value per share
of the Common Stock. See "The Company -- Recent Financings," "Dilution,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations; Additional Operations Information,"
"Certain Relationships and Related Transactions," "Principal Stockholders" and
"Shares Eligible For Future Sale."
ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation and
Bylaws contain provisions that may have the effect of discouraging certain
transactions involving an actual or threatened change of control of the
Company. In addition, the Board of Directors of the Company has the authority
to issue up to 10,000,000 shares of preferred stock in one or more series and
to fix the preferences, rights and limitations of any such series without
stockholder approval. The ability to issue preferred stock could have the
effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to gain control of the Company, or otherwise could
adversely affect the market price of the Common Stock. The Company does not
currently have any plans, arrangements, commitments or understandings to issue
any additional shares of preferred stock. See "Description of Securities."
DIVIDEND POLICY. The Company has not paid or declared any cash
dividends with respect to its Common Stock or Convertible Preferred Stock, nor
does it anticipate any such payments or declarations in the foreseeable future.
Any future dividends will be declared at the discretion of the Board of
Directors of the Company and will depend, among other things, on the Company's
earnings, if any, its financial requirements for future operations and growth,
and such other factors as the Company may then deem appropriate. The Company
has agreed that, for a period of two years from the closing of this Offering,
without the consent of the Representative, it shall not redeem or issue any of
its securities or pay any dividends, or make any other cash distributions in
respect of its securities, in excess of the amount of the Company's current or
retained earnings recognized from and after the closing date of this Offering.
Investors should not rely on the receipt of dividends in the near future or at
any time in the future when evaluating the merits of an investment in the
Securities. See "Dividend Policy" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of
Common Stock in the public market following the completion of the Offering
could have an adverse effect on the market price of the Common Stock.
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<PAGE> 15
There will be approximately 4,221,633 shares of Common Stock outstanding
immediately after the Offering, including the 1,400,000 shares offered hereby
and the 104,175 shares to be issued upon the conversion of the Convertible
Preferred Stock. Upon completion of the Offering, all of the shares of Common
Stock offered hereby and approximately 89,912 shares of Common Stock held by
current stockholders of the Company will be eligible for public sale without
restrictions, except for shares purchased by affiliates (those controlling or
controlled by or under common control with the Company and generally deemed to
include officers and directors) of the Company. The remaining approximately
2,731,721 shares of the Company's Common Stock are "restricted securities" as
that term is defined under Rule 144 promulgated under the Securities Act of
1933, as amended (the "Securities Act"). Subject to the volume and holding
period limitations of Rule 144 and the "lock-up" agreements described below,
2,460,879 outstanding shares of Common Stock are eligible for sale under Rule
144 after the completion of the Offering. None of the Company's currently
outstanding restricted securities are eligible for sale under Rule 144(k).
Holders of approximately 1,376,221 shares of Common Stock, including the
holders of the Convertible Preferred Stock, officers and directors of the
Company, will agree to "lock-up" their shares of Common Stock for periods
ranging from 18 to 60 months after the completion of the Offering. No
prediction can be made as to the effect, if any, that future sales of
additional shares of Common Stock or the availability of such shares for sale
under Rule 144, other applicable exemptions or otherwise will have on the
market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect prevailing market prices of
the Common Stock. See "Principal Stockholders" and "Shares Eligible for Future
Sale."
POSSIBLE SALE OF SHARES OF COMMON STOCK DURING LOCK-UP PERIODS. The
holders of the Convertible Preferred Stock have agreed not to sell or otherwise
dispose of any of the 104,175 shares of Common Stock to be issued upon
conversion of the Convertible Preferred Stock or underlying the 1996 Warrants
for a period of 18 months after the closing of the Offering; provided the
shares of Common Stock issuable upon exercise of the 1996 Warrants may be
subject to demand registration rights and subsequently sold by the holders
thereof if the Company calls for the redemption of the Warrants or 1996
Warrants within 18 months after the completion of this Offering. All officers
and directors of the Company who are current stockholders of the Company have
agreed not to sell or dispose any shares of Common Stock held by them without
the prior written consent of the Representative until two years after the
effective date of this Offering. Furthermore, officers or directors whose
total compensation is more than $100,000 per year, or who own 5% or more of the
Company's outstanding securities, have agreed not to sell or dispose of any
shares of Common Stock held by them without the prior written consent of the
Representative for a period of five years after completion of this Offering.
Officers and directors of the Company who are subject to a five-year lock-up
provision shall have the right to have such restriction released at a rate of
20% per annum during the five year lock-up period based upon the Company's
achievement of certain goals with respect to the following: (i) annual revenue
growth of 20% or more, (ii) annual earnings per share growth of 20% or more,
and (iii) annual price of stock growth of 20% or more. With regard to V. Lynn
Graybill, the Chairman of the Board and Chief Executive Officer of the Company,
the lock-up provisions, to which Mr. Graybill would be subject, will be
terminated after the termination of Mr. Graybill's Employment Agreement, unless
such agreement is otherwise extended. The possibility that substantial amounts
of Common Stock may be sold in the public market prior to the expiration of the
lock-up periods may adversely affect the prevailing market price for the Common
Stock and could impair the Company's ability to raise additional capital
through the sale of its equity securities. See "Shares Eligible for Future
Sale."
EXERCISE OF UNDERWRITERS' WARRANTS. In connection with this Offering,
the Company will sell to the Underwriters, for nominal consideration, warrants
(the "Underwriters' Warrants") to purchase an aggregate of 140,000 shares of
Common Stock and 140,000 Warrants. The Underwriters' Warrants will be
exercisable commencing one year after the date of this Prospectus (the
"Effective Date") and ending five years after such date at an exercise price of
145% of the price per share of the Common Stock and 145% of the price per
Warrant offered hereby. The terms of the Warrants underlying the Underwriters'
Warrants shall be the same as those Warrants offered to the public, except such
Warrants are not subject to redemption. The holders of the Underwriters'
Warrants will have the opportunity to profit from a rise in the market price of
the Common Stock, if any, without assuming the risk of ownership. At any time
when the holders of the Underwriters' Warrants might be expected to exercise
them, the Company probably would be able to obtain additional equity capital on
terms more favorable than those provided by the Underwriters' Warrants. The
Company may find it more difficult to raise additional equity capital if it
should be needed for the business of the Company while the
-14-
<PAGE> 16
Underwriters' Warrants are outstanding. To the extent that any of the
Underwriters' Warrants are exercised, the ownership interest of the Company's
stockholders may be diluted. The Company also has granted registration rights
to the Underwriters with respect to the 140,000 shares of the Common Stock, the
140,000 Warrants and the 140,000 shares of Common Stock issuable upon exercise
of the 140,000 Warrants. See "Underwriting."
IMPACT ON MARKET OF WARRANT EXERCISE. In the event of the exercise of
a substantial number of the outstanding warrants of the Company, including the
Warrants offered hereby, within a reasonably short period of time after the
right to exercise commences, the resulting increase in the amount of Common
Stock of the Company in the trading market could substantially affect the
market price of the Common Stock. See "Description of Securities -- Redeemable
Common Stock Purchase Warrants, -- 1996 Warrants and -- Class A Warrants" and
"Underwriting."
ADJUSTMENTS TO OUTSTANDING WARRANTS EXERCISE PRICE AND EXERCISE DATE.
The Company, in its sole discretion, may reduce the exercise price of the
outstanding warrants of the Company, including the Warrants offered hereby,
and/or extend the time within which such warrants may first be exercised.
Further, in the event the Company issues certain securities or makes certain
distributions to holders of its Common Stock, the exercise price of such
warrants may be reduced. Any such price reduction in the exercise price of
outstanding warrants will provide less money for the Company and possibly
adversely affect the market price of the Securities. See "Description of
Securities -- Redeemable Common Stock Purchase Warrants, -- 1996 Warrants and
- -- Class A Warrants."
REDEMPTION OF WARRANTS. The Warrants are subject to redemption by the
Company, at any time after the First Exercise Date at a price of $0.01 per
Warrant, upon 30 days prior written notice to the holders thereof, if the
average closing bid price for the Common Stock equals or exceeds twice the
initial public offering price per share of Common Stock for the 20 consecutive
trading days ending on the third day prior to the date of notice of redemption.
In the event that the Warrants are called for redemption by the Company,
Warrantholders will have 30 days during which they may exercise their rights to
purchase shares of Common Stock. In the event a current prospectus is not
available, the Warrants may not be exercised and the Company will be precluded
from redeeming the Warrants. If holders of the Warrants elect not to exercise
them upon notice of redemption thereof, and the Warrants are subsequently
redeemed prior to exercise, the holders thereof will lose the benefit of the
difference between the market price of the underlying Common Stock as of such
date and the exercise price of such Warrants, as well as any possible future
price appreciation in the Common Stock. As the result of an exercise of the
Warrants, existing stockholders would be diluted and the market price of the
Common Stock may be adversely affected. If a Warrantholder fails to exercise
his rights under the Warrants prior to the date set for redemption, then the
Warrantholder will be entitled to receive only the redemption price, $0.01 per
Warrant. The 1996 Warrants are subject to redemption by the Company upon the
same terms as the Warrants at any time after November 15, 1997 until May 15,
2000 when the 1996 Warrants expire. See "Description of Securities --
Redeemable Common Stock Purchase Warrants and -- 1996 Warrants" and "Shares
Eligible for Future Sale -- Lock-up Agreements."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH
THE EXERCISE OF THE WARRANTS. The Company will be able to issue shares of its
Common Stock upon the exercise of the Warrants only if (i) there is a current
prospectus relating to the Common Stock issuable upon exercise of the Warrants
under an effective registration statement filed with the Commission and (ii)
such Common Stock is then qualified for sale or exempt therefrom under
applicable state securities laws of the jurisdiction in which the various
holders of Warrants reside. Although the Company has undertaken to use its
best efforts to maintain the effectiveness of a current prospectus covering the
Common Stock subject to the Warrants offered hereby, there can be no assurance
that the Company will be successful in doing so. After a registration
statement becomes effective, it may require continuous updating by the filing
of post-effective amendments. A post-effective amendment is required (i) when,
for a prospectus that is used more than nine months after the effective date of
the registration statement the information contained therein (including the
certified financial statements) is as of a date more than 16 months prior to
the use of the prospectus, (ii) when facts or events have occurred which
represent a fundamental change in the information contained in the registration
statement, or (iii) when any material change occurs in the information relating
to the plan of distribution of the securities registered by such registration
statement. The Company anticipates that this Registration Statement will
remain effective for a least nine months
-15-
<PAGE> 17
following the date of this Prospectus, assuming a post-effective amendment is
not filed by the Company. The Company intends to qualify the sale of the
Securities in a limited number of states, although certain exemptions under
certain state securities laws may permit the Warrants to be transferred to
purchasers in states other than those in which the Warrants were initially
qualified. The Company will be prevented, however, from issuing Common Stock
upon exercise of the Warrants in those states where exemptions are unavailable
and the Company has failed to qualify the Common Stock issuable upon exercise
of the Warrants. The Company may decide not to seek, or may not be able to
obtain qualification of the issuance of such Common Stock in all of the states
in which the ultimate purchasers of the Warrants reside. In such case, the
Warrants of those purchasers will expire and have no value if such Warrants
cannot be exercised or sold. Accordingly, the market for the Warrants may be
limited because of the foregoing requirements. See "Description of Securities
- -- Redeemable Common Stock Purchase Warrants."
NO ASSURANCE OF ACTIVE PUBLIC MARKET; POSSIBLE VOLATILITY OF COMMON
STOCK. Although the Common Stock is quoted on the NASD Electronic Bulletin
Board and the Company has made application to have the Common Stock and
Warrants listed on the Nasdaq SmallCap Market, there can be no assurance that
an active public market for the Common Stock or the Warrants will develop or be
sustained after the Offering. The offering price of the Securities offered
hereby has been determined by negotiations among the Company and the
Representative based upon the trading market of the Company's Common Stock on
the NASD Electronic Bulletin Board. The trading price of the Common Stock and
Warrants could be subject to wide fluctuations in response to quarter to
quarter variations in operating results, announcements of innovations or new
products by the Company or its competitors, and other events or factors. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations which affects the market price of securities of publicly
traded companies and which have often been unrelated to the operating
performance of these companies. Broad market fluctuations may adversely affect
the market price of the Common Stock and Warrants. See "Common Stock Price
Ranges and Dividends," "Description of Securities," "Shares Eligible for Future
Sale" and "Underwriting".
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP MARKET AND RISKS
OF COMMON STOCK TRADING BELOW $5.00 PER SHARE. Nasdaq recently approved
changes to the standards for companies to remain listed on the SmallCap Market,
including, without limitation, new corporate governance standards, a new
requirement that a listed company have net tangible assets of $2,000,000,
market capitalization of $35,000,000 or net income of $500,000 and other
qualitative requirements. The Company's securities have not been approved for
listing on the Nasdaq SmallCap Market and there can be no assurance that an
active trading market will develop or if such market is developed it will be
sustained. If the Company's securities are listed and the Company then became
unable to satisfy the requirements for continued quotation on Nasdaq SmallCap
Market, trading in the Common Stock and Warrants offered hereby would be
conducted in the over-the- counter market in what are commonly referred to as
the "pink sheets" or on the NASD Electronic Bulletin Board. As a result, an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the price of the Common Stock and Warrants offered hereby. In addition,
if the Common Stock and Warrants are suspended or terminated from Nasdaq
SmallCap Market and at such time the Common Stock has a market price of less
than $5.00 per share, then the sale of such securities would become subject to
certain regulations adopted by the Commission which imposes sales practice
requirements on broker-dealers. For example, broker-dealers selling such
securities must, prior to effecting the transaction, provide their customers
with a document which discloses the risks of investing in the Common Stock and
Warrants. Furthermore, if the person purchasing the securities is someone
other than an accredited investor or an established customer of the
broker-dealer, the broker-dealer must also approve the potential customer's
account by obtaining information concerning the customer's financial situation,
investment experience and investment objectives. The broker-dealer must also
make a determination whether the transaction is suitable for the customer and
whether the customer has sufficient knowledge and experience in financial
matters to be reasonably expected to be capable of evaluating the risk of
transactions in the security. Accordingly, if the Common Stock and Warrants
are suspended or terminated from Nasdaq SmallCap Market and are trading for
less than $5.00 per share, the Commission's rules may limit the number of
potential purchasers of the securities.
CONTINUING RELATIONSHIP WITH REPRESENTATIVE; POTENTIAL INFLUENCE. In
connection with this Offering, the Company will have certain continuing
relationships with the Representative, some of which may adversely affect the
Company's results of operations. The Company has agreed with the
Representative that (i) it will sell to the Underwriters the Underwriters'
Warrant (including the grant of "piggyback" and demand registration
-16-
<PAGE> 18
rights), (ii) it will pay, under certain conditions, to the Underwriters a
warrant solicitation fee equal to 5% of the exercise price of the Warrants
exercised, (iii) it will use its best efforts to cause the election to its
Board of Directors one designee of the Representative, and (iv) it will enter
into a financial advisory agreement with the Representative for financial
consulting services for a two year period for aggregate fees of $48,000, to be
prepaid in full at the closing of the Offering. Additionally, the
Representative will be entitled to a finder's fee if it originates a financing
or other business transaction for the Company. Any of the foregoing
relationships may adversely impact the Company's business, operating results or
financial condition, or its ability to raise additional capital for its
business should the need arise during the term of the above agreements. See
"Use of Proceeds" and "Underwriting."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. Management believes
that this Prospectus contains forward- looking statements, including statements
regarding, among other items, the Company's future plans and growth strategies
and anticipated trends in the industry in which the Company operates. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond
the Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described herein,
including, among others, regulatory or economic influences. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this Prospectus will in fact transpire or prove to be
accurate.
-17-
<PAGE> 19
THE COMPANY
HISTORICAL
The 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 name
to Great Colorado Silver, Inc., Great Colorado Silver Valley Development
Company and J.R. Gold Mines, Inc., respectively. In January 1996, the Company
changed its name to Sarah Acquisition Corporation. In 1987, the Company
completed an initial public offering of its securities and was engaged in the
mining industry, principally through joint ventures with related parties
involving mining properties located in Colorado. In 1989, the Company began
experiencing financial difficulties and did not have sufficient cash flow to
meet its obligations as they became due. By December 31, 1989, the Company had
liquidated substantially all of its assets and ceased its business operations.
From December 1989 until March 31, 1996, the Company had no
significant assets, liabilities or business operations. On December 15, 1995,
a former director of the Company and Halter Financial Group, Inc. ("HFG"), a
financial consulting firm owned by Timothy P. Halter, an officer and director
of the Company, each acquired for $10,000, 15,776 and 15,858 shares of Common
Stock, respectively (or an aggregate of 31,634 shares for approximately $0.63
per share), from the then controlling stockholders of the Company.
Subsequently, on February 20, 1996, the Company sold 50,000 restricted shares
of its Common Stock to a former unaffiliated director of the Company for $938
cash. On March 7, 1996, the Company sold an additional 967,545 restricted
shares of Common Stock to HFG for $1,451 cash. Of the 967,545 shares acquired
by HFG, 233,333 shares represent the HFG Escrow Shares which were placed into
escrow under the terms of the Company's March 1996 private offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations; Additional Operations Information,"
"Management," "Certain Relationship and Related Transactions" and "Principal
Stockholders."
On February 23, 1996, the Company was reincorporated in the State of
Nevada through a merger with 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 also had the effect of a one-for-250 reverse split of
the Company's issued and outstanding Common Stock.
On February 28, 1997, to be effective on March 24, 1997, the Company's
Board of Directors approved a two-for- three reverse stock split and a
corresponding reduction of the authorized shares of Common Stock. The issued
and outstanding shares of Common Stock shown in the historical consolidated and
combined financial statements included elsewhere in this Prospectus reflect the
effect of the March 24, 1997 reverse stock split as if this reverse stock split
had occurred as of the beginning of the first period presented.
RECENT FINANCINGS
HFG and a former director of the Company acquired control of the
Company in December 1995 in order to utilize it as a suitable entity for a
possible merger or acquisition of a company that offered growth potential in a
manufacturing industry. In January 1996, HFG identified Brister's Thunder
Karts, Inc., a Louisiana corporation ("Brister's"), a manufacturer of Fun
Karts, as a possible acquisition candidate. On March 31, 1996, the Company
concluded the private sale of 233,333 shares of Common Stock to 13 investors
for aggregate gross proceeds of $525,000 (the "March 1996 Offering").
Additionally, on March 15, 1996, the Company obtained a $2 million loan (the
"Schlinger Note") from The Schlinger Foundation (the "Foundation") which
provides for interest at 14% per annum with interest only payable until March
14, 1999. Principal payments of $399,996 are due on March 14, 1999 and March
14, 2000 with a final principal payment of $1,200,008 due on March 14, 2001.
The Schlinger Note is secured by accounts receivable, inventory, property and
equipment owned or acquired by the Company. The Company paid the Foundation
$21,000, consisting of $10,500 cash and the issuance of 70,000 shares of Common
Stock, as additional consideration for the loan. The proceeds from the private
offer and sale of securities and the loan proceeds from the Schlinger Note were
utilized by the Company to fund the acquisition of Brister's (the "Brister's
Acquisition") and pay related expenses. The Schlinger Note will be paid with a
portion of the proceeds from this Offering. See "Risk
-18-
<PAGE> 20
Factors -- Potential Additional Dilution to Public Investors," "-- Brister's
Acquisition," "Use of Proceeds," "Management," "Certain Relationships and
Related Transactions" and "Principal Stockholders."
On July 2, 1996, the Company sold to an unaffiliated investor 3,334
shares of Common Stock and 66,667 Class A Warrants for a total consideration of
$17,500. Each Class A Warrant entitles the holder to purchase one share of
Common Stock at an exercise price of $5.25 per share until December 31, 1997.
The proceeds from this offering were utilized by the Company for working
capital. See "Description of Securities -- Class A Warrants."
On November 15, 1996, the Company completed a private offer and sale
of 25 Units to 17 accredited investors for total proceeds of $625,000 (the
"Bridge Financing"). Each Unit consisted of one share of Convertible Preferred
Stock and 6,667 1996 Warrants. Each 1996 Warrant entitles the holder to
purchase, for a period of 42 months after November 15, 1996 one share of the
Company's Common Stock at an exercise price of $4.50 per 1996 Warrant subject
to further adjustment in certain circumstances. Argent Securities, Inc. acted
as placement agent for the Company in this offering and received certain
compensation. On March 6, 1997, the Company offered to each holder of the
Convertible Preferred Stock the option of either (i) receiving a refund of
their cash investment with interest at 12% 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 this Offering upon previously agreed terms along with the
issuance of an additional 13,334 1996 Warrants for each share of Convertible
Preferred Stock held as further 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. The Company has been advised by all the holders of the Convertible
Preferred Stock that they will accept the latter option. See "Description of
Securities -- Convertible Preferred Stock, -- 1996 Warrants and -- Bridge
Financing."
ACQUISITIONS
BRISTER'S ACQUISITION. Effective at the close of business on March
31, 1996, the Company acquired all of the issued and outstanding shares of
common stock of Brister's from Charles Brister, a director and principal
stockholder of the Company, in exchange for $2 million cash; a subordinated $1
million promissory note with variable interest rates, maturing in 2003 and a
$200,000 promissory note bearing 10% interest, with interest and principal
payable quarterly beginning April 1, 1997 with a maturity date of April 1, 1998
or upon successful completion of an underwritten public offering of the
Company's securities (collectively, the "Brister Notes"); and 516,667 shares of
Common Stock of the Company with an aggregate market value of $3.1 million or
$6.00 per share. The $6.00 price per share was the average of the closing bid
and ask prices of the Company's Common Stock as quoted on the NASD Electronic
Bulletin Board on the 30th day after the Company's Common Stock was listed on
the NASD Electronic Bulletin Board. Additionally, the Company entered into (i)
a Consulting Agreement with Mr. Brister which expired on December 31, 1996,
(ii) a five-year License Agreement under which the Company received the right
to use certain intellectual property owned and developed by Mr. Brister and
(iii) a five-year Non-Competition Agreement with Mr. Brister. Brister's has
been manufacturing Fun Karts in Roseland, Louisiana since 1959. The Company
will pay the Brister Notes with a portion of the proceeds of this Offering.
See "Use of Proceeds," "Business -- Patents and Proprietary Technology,"
"Management," "Certain Relationships and Related Transactions" and "Principal
Stockholders."
USA ACQUISITION. Effective at the close of business on November 21,
1996, the Company acquired all of the issued and outstanding shares of common
stock of USA Industries, Inc. ("USA"), a Fun Karts manufacturer located in
Prattville, Alabama, for $250,000 cash and the issuance of 166,667 restricted
shares of Common Stock valued by the USA shareholders and the Company at an
aggregate of $750,000 or $4.50 per share (the "USA Acquisition"). Each USA
shareholder, Jerry Michael Allen, Angela T. Allen, Johnny C. Tucker and Carol
Y. Tucker, received $62,500 cash and 41,667 restricted shares of the Company's
Common Stock. The price per share of the Company's Common Stock issued to the
USA shareholders was based on the closing bid price per share of the Company's
Common Stock on the closing date of the USA Acquisition. See "Note B --
Acquisition of Subsidiaries of Notes to Consolidated Financial Statements" and
"Note I -- Capital Stock Transactions of Notes to Consolidated Financial
Statements."
The purchase price paid by the Company for the acquisition of
Brister's and USA was determined as a result of arms-length negotiations
between unrelated representatives of the Company and the then shareholders
-19-
<PAGE> 21
of Brister's and USA, respectively. In negotiating and agreeing upon the
respective purchase price of Brister's and USA, Company management (i)
evaluated the respective market share, geographic markets and the condition and
capacity of each entities' manufacturing facility; (ii) analyzed the economic
benefits and feasibility of each entity's product lines, management of each
respective entity, the overall growth strategy of the Company and any potential
economies of scale which could result from each respective acquisition; and
(iii) projected future product demand, estimated the fair market value of
Brister's and USA's tangible assets and liabilities, reviewed historical book
value of each entity, and the historical results of operations and the overall
market position of each respective entity.
Unless otherwise indicated herein, the financial, business activities,
management and other pertinent information herein relates on a consolidated
basis to the Company and its wholly-owned subsidiaries, Brister's and USA. The
Brister's and USA Acquisitions were accounted for using the purchase method of
accounting for business combinations. The Company has 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 has
been recorded as goodwill. The financial and other information regarding the
Company set forth herein reflects, for the periods presented, either the
consolidated or combined results of operations of the Company, Brister's and
USA as if the respective acquisitions had occurred on January 1, 1994 (the
first day of the first financial period presented herein). See "Selected
Historical Consolidated and Combined Financial Information."
The address of the Company's principal executive office is 109
Northpark Boulevard, Suite 210, Covington, Louisiana 70433, and its telephone
number is (504) 875-7350. The Company maintains manufacturing facilities at
202 Challenge Avenue, Prattville, Alabama 36067 and Highway 51 South, Roseland,
Louisiana 70456.
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<PAGE> 22
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's Common Stock is traded on the NASD Electronic Bulletin
Board under the symbol "KINT". The following table sets forth the range of
high and low closing bid prices for the Common Stock for the periods indicated
as reported by the National Quotation Bureau, Incorporated. These prices
represent inter-dealer prices, without adjustment for retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
Bid Price(1)
---------------------------------
Calendar Year 1997 Low High
------------------ ---------------- ---------------
<S> <C> <C>
First Quarter $4.13 $4.88
Second Quarter $4.00 $4.50
Third Quarter (through August 14) $4.00 $5.00
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Bid Price
---------------------------------
Calendar Year 1996 Low High
------------------ ---------------- ---------------
<S> <C> <C>
Second Quarter(2) $5.63 $5.63
Third Quarter $4.13 $5.63
Fourth Quarter $4.13 $4.88
</TABLE>
- ------------------------------------
(1) Prices have been adjusted to reflect a two-for-three reverse stock split
of the Company's Common Stock effective March 24, 1997.
(2) The Common Stock began trading on the NASD Electronic Bulletin Board on
June 27, 1996.
On August 15, 1997, the closing bid and ask prices for the Common
Stock were $4.00 and $5.00, respectively, per share. As of August 15, 1997,
2,717,458 shares of Common Stock were issued and outstanding. The Company
believes that its Common Stock is held of record and beneficially by
approximately 350 to 400 persons and believes that upon completion of this
Offering, it will have in excess of 500 stockholders. See "Shares Eligible for
Future Sale."
DIVIDEND POLICY
The Company has not paid or declared any dividends with respect to its
Common Stock or Convertible Preferred Stock, nor does it anticipate paying any
cash dividends or other distributions on its Common Stock in the foreseeable
future. Any future dividends will be declared at the discretion of the Board
of Directors of the Company and will depend, among other things, on the
Company's earnings, if any, its financial requirements for future operations
and growth and such other facts as the Company may then deem appropriate. The
Company has agreed that, for a period of two years from the closing of this
Offering, without the consent of the Representative, it shall not redeem or
issue any of its securities or pay any dividends, or make any other cash
distributions in respect of its securities, in excess of the amount of the
Company's current or retained earnings recognized from and after the closing
date of this Offering. See "Underwriting."
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<PAGE> 23
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,400,000 shares of the Common Stock and 1,400,000 Warrants offered hereby are
estimated to be approximately $4,737,500 (based on an assumed public offering
price of $4.00 per share of Common Stock and $0.125 per Warrant or
approximately $5,491,137 if the Underwriters' over- allotment option is
exercised in full) after deducting Underwriters' discounts and commission and
estimated offering expenses. The Company intends to use the net proceeds from
the sale of the Securities offered hereby (assuming no exercise of the
Underwriters' over-allotment option) for the purposes and in the approximate
percentages as set forth in the following table:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage
Application of Proceeds(1) Dollar Amount of Net Proceeds
-------------------------- --------------- ------------------
<S> <C> <C>
Payment of Schlinger Note (2) . . . . . . . . . . . . . . . . . . . . . $2,000,000 42.3%
Payment of Brister Notes(3) . . . . . . . . . . . . . . . . . . . . . . 1,200,000 25.3
Payment of Brister's Credit Line(4) . . . . . . . . . . . . . . . . . . 300,000 6.3
Conversion of Preferred Stock . . . . . . . . . . . . . . . . . . . . . 625,000 13.2
Advertising and Marketing(5) . . . . . . . . . . . . . . . . . . . . . 150,000 3.2
Product Development and Design(6) . . . . . . . . . . . . . . . . . . . 100,000 2.1
Payment of Financial Advisory Fee(7) . . . . . . . . . . . . . . . . . 48,000 1.0
Working Capital and General Corporate Purposes(8) . . . . . . . . . . . 314,500 6.6
---------- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,737,500 100.0%
========= =====
</TABLE>
- ----------------------------
(1) Proceeds, if any, received upon the exercise of the Underwriters'
over-allotment option will be used for working capital and general
corporate purposes.
(2) See "The Company -- Recent Financings," "Certain Relationships and Related
Transactions" and "Principal Stockholders."
(3) Charles Brister, a director and principal stockholder of the Company, is
the holder of the Brister Notes. See "The Company -- Acquisitions; Brister
Acquisition," "Management," "Certain Relationships and Related
Transactions" and "Principal Stockholders."
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
(5) The Company intends to increase its penetration of its target market by
enhancing potential customers' awareness of its products by advertising in
youth-oriented magazines, motorcycle, lawn and garden, hardware and outdoor
power equipment trade magazines, establishment of a Company home page on
the Internet, displaying and promoting the Company's products at NASCAR
races and related events and traditional print, billboard and, to a lesser
extent, television and radio media. See "Business -- Growth Strategy;
Increasing Brand and Product Recognition by Innovative Marketing to Target
Users and -- Sales and Marketing."
(6) In 1997, the Company will introduce its new Big Thunder Kart line which
will utilize a torque converter, new tire design and existing standard
features of the Company's Fun Karts. The Company also intends to develop
and distribute additional optional Fun Kart parts and accessories which can
be sold by dealers to customers at the point of sale. The Company may also
develop a line of helmets, jackets, boots and other related items for its
dealers and mass merchandisers to complement sales of Fun Karts. See
"Business -- Growth Strategy; Improve Product Design and Development and --
Product Lines."
(7) The Company will enter into a financial advisory agreement with the
Representative for financial consulting services for a two year period for
aggregate fees of $48,000 to be prepaid in full at the closing of the
Offering. Additionally, the Representative will be entitled to a finder's
fee if it originates a financing or other business transactions for the
Company. See "Underwriting."
(8) Working capital will be increased to $1,068,137 if the Underwriters'
over-allotment option is exercised. Working capital includes, but is not
limited to, carrying additional receivables associated with increased
sales, costs for expansion of existing facilities, personnel costs related
to expansion of Company's product lines and increased sales, acquisition
expenses and other general and administrative expenses.
The Company may find it necessary or advisable to reallocate the net
proceeds within the categories described above if its assumptions regarding
present plans and future revenues and expenditures prove inaccurate. Any
change in the allocation of funds will be at the discretion of the Company's
Board of Directors. The Company believes that the net proceeds of the Offering
will be adequate to fund the proposed business operations of the Company for
approximately 12 to 18 months. Proceeds, if any, from the exercise of the
-22-
<PAGE> 24
Warrants are currently intended to be used for general corporate purposes. The
Company also reserves the right to allocate a portion of the net proceeds for
acquisitions and the payment of legal, accounting and other expenses associated
with acquisitions. No commitments or binding agreements have been entered into
by the Company for any such acquisitions. Until the proceeds of this Offering
are used for the purposes stated above, the Company may invest them temporarily
in interest-bearing securities such as certificates of deposit, United States
governmental obligations or money market funds or instruments.
-23-
<PAGE> 25
DILUTION
At June 30, 1997, the Company had a negative net tangible book value
of approximately $(1.90) million or approximately $(0.70) per share of Common
Stock. Net tangible book value per share of Common Stock equals the tangible
assets of the Company, less all liabilities, divided by the total number of
shares of Common Stock outstanding, without giving effect to the possible
exercise of outstanding stock options and warrants. After giving effect to the
sale of the 1,400,000 shares of Common Stock offered hereby (at an assumed
offering price of $4.00 per share) and the 1,400,000 Warrants offered hereby
(at an assumed offering price of $0.125 per Warrant) and the receipt of the
estimated net proceeds therefrom, the proforma net tangible book value of the
Company as of June 30, 1997 would have been approximately $2.83 million or
approximately $0.69 per share, representing an immediate increase in net
tangible book value of $1.39 per share to existing stockholders, and an
immediate dilution in net tangible book value of $3.31 per share to purchasers
of the Securities offered hereby. The following table illustrates the
resulting dilution with respect to the Common Stock offered hereby:
<TABLE>
<S> <C> <C>
Public offering price (per share of Common Stock)(1) . . . . . . . . $4.00
Net tangible book value per share as of June 30, 1997 . . . $(0.70)
Increase per share attributable to new investors . . . . . . 1.39
------
Proforma net tangible book value per share after the Offering(2) . . 0.69
------
Dilution of net tangible book value per share to new investors
attributable to purchase of Common Stock by new investors . . . $ 3.31
======
</TABLE>
- --------------------------------
(1) Represents the anticipated public offering price per share of Common Stock
(excluding Warrants) before deduction of underwriting discounts and
commissions and estimated expenses of the Offering.
(2) Assuming no exercise of outstanding warrants or options, including the
Warrants offered hereby and the Underwriters' Warrants or the exercise of
the Underwriters' over-allotment option. See "Description of Securities"
and "Underwriting."
The following table sets forth the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price per share by existing stockholders and new investors purchasing
shares of Common Stock in this Offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------------- ------------------------- Average Price
Amount Percent Amount Percent Per Share
--------- ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders . . 2,717,458 66.0% $4,289,789 43.4% $1.58
New investors . . . . . . 1,400,000 34.0 5,600,000 56.6 $4.00
--------- ------ ---------- ------
Total . . . . . 4,117,458 100.0% $ 9,889,789 100.0%
========= ===== ========== ======
</TABLE>
The foregoing table gives effect to the sale of the shares of Common
Stock offered hereby (assuming an offering price of $4.00 per share and without
giving effect to the underwriting discount and expenses of the Offering) and
does not give effect to the exercise of any warrants or options, including the
Warrants offered hereby, or the exercise of the Underwriters' over-allotment
option. See "The Company," "Management -- Stock Options," "Certain
Relationships and Related Transactions," "Principal Stockholders" and
"Description of Securities."
-24-
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 and as adjusted giving effect to the sale by the Company of
1,400,000 shares of Common Stock (assuming an offering price of $4.00 per
share) and 1,400,000 Warrants (assuming an offering price of $0.125 per
Warrant) and by giving effect to the anticipated use of proceeds derived
therefrom. This table has not been adjusted to give effect to the exercise of
the Underwriters' over- allotment option, the exercise of any outstanding
warrants or options, including the Warrants offered hereby and the
Underwriters' Warrants. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------
Actual Adjustments(1) As Adjusted
----------- --------------- -------------
<S> <C> <C>
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 417,690 $ (300,000) $ 117,690
Current maturities of long-term debt . . . . . . . . . . . . 111,196 -- 111,196
Long-term debt(2) . . . . . . . . . . . . . . . . . . . . . . 3,348,782 (3,200,000) 148,782
Convertible Preferred Stock, $0.001 par value; 25 shares
issued and outstanding; none as adjusted(3) . . . . . . . . 625,000 (625,000) --
---------- -------------- ------------
Total debt and debt equivalents . . . . . . . . . . . . . . 4,502,668 (4,125,000) 377,668
---------- -------------- ------------
Common Stock, $0.001 par value; 2,717,458 shares
issued and outstanding; 4,221,633 as adjusted(3) . . . . . 2,718 1,400 4,118
Additional paid-in capital . . . . . . . . . . . . . . . . . 6,190,192 4,561,100 10,751,292
Common stock warrants; 563,359 warrants issued
and outstanding; 1,963,359 as adjusted . . . . . . . . . . -- 175,000 175,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (2,374,992) -- (2,374,992)
---------- -------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . 3,817,918 4,737,500 8,555,418
---------- -------------- ------------
Total capitalization . . . . . . . . . . . . . . . . . . . $8,320,586 $ 612,500 $ 8,933,086
========= ============= ===========
</TABLE>
- -----------------------------------
(1) As adjusted giving effect to the sale by the Company of the 1,400,000
shares of Common Stock and 1,400,000 Warrants offered hereby and the
application of the proceeds therefrom. See "Use of Proceeds," "Description
of Securities" and "Underwriting."
(2) For a description of the Brister Notes and Schlinger Note to be paid with a
portion of the proceeds of this Offering, see "The Company," "Certain
Relationships and Related Transactions" and "Note F -- Long-Term Debt of
Notes to Consolidated Financial Statements."
(3) Assumes conversion of all outstanding shares of Convertible Preferred Stock
for $625,000 and the issuance of 104,175 shares of Common Stock. See "The
Company -- Recent Financings" and "Description of Securities -- Bridge
Financing."
-25-
<PAGE> 27
SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
The following selected financial information has been presented in a
consolidated format for the periods ended December 31, 1996, June 30, 1997 and
1996 and a combined format for the periods ended December 31, 1995 and 1994,
respectively. This information has been derived from the audited financial
statements of the Company and Brister's. The information pertaining to USA is
unaudited. The Company was dormant from 1989 until the first quarter of 1996.
The Company's purchase of 100% of the issued and outstanding stock of Brister's
was effective April 1, 1996. The Company's purchase of 100% of the issued and
outstanding stock of USA was effective November 22, 1996. The information
presented herein reflects either the consolidated or combined results of
operations of all entities as if the respective acquisitions had occurred on
January 1, 1994 (the first day of the first period presented). In the opinion
of management, this financial information includes all material adjustments
necessary to present historical results of the Company as if Karts
International Incorporated, Brister's Thunder Karts, Inc. and USA Industries,
Inc. had been a single operating entity as of the first day of the first period
presented. This financial information does not purport to be indicative of the
financial position or the results of operations which would have actually been
obtained if the acquisition transactions had actually been consummated on the
dates indicated. In addition, this financial information does not purport to
be indicative of the financial position or results of operations that may be
obtained in the future. This financial information should be read in
conjunction with the historical consolidated financial statements and notes
thereto of the Company and its wholly-owned subsidiaries, Brister's and USA,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended (Unaudited) (Unaudited)
December 31, December 31, December 31, Six Months Ended Six Months Ended
1996 1995 1994 June 30, 1997 June 30, 1996
STATEMENT OF OPERATIONS DATA: (Historical) (Combined) (Combined) (Historical) (Historical)
-------------------------- ------------ ----------------------------------
<S> <C>
Revenues, net . . . . . . . . . . . . $ 8,327,316 $ 8,514,460 $ 7,069,500 $ 2,515,232 $ 1,150,153
Cost of goods sold . . . . . . . . . 5,842,532 6,184,340 5,186,245 2,197,219 718,577
Operating expenses . . . . . . . . . 1,456,472 1,639,583 1,423,933 1,033,474 345,210
Compensation expense related to common
stock issuances at less than fair
value for reorganization and
restructuring costs(1) . . . . . . . 1,430,287 - - - 1,430,287
Income/(loss) from operations . . . . (401,975) 690,537 459,322 (715,461) (1,343,921)
Interest expense . . . . . . . . . . 396,589 - - 268,493 136,174
Provision for income taxes . . . . . 193,575 218,686 216,072 - (4,305)
Net income/(loss) . . . . . . . . . . (959,566) 355,701 341,036 (923,582) (1,480,429)
Net income per proforma weighted-
average share of common stock
outstanding Primary . . . . . . . . $(0.51) $0.19 $0.18 $(0.37) $(1.04)
Number of weighted-average shares
of common stock outstanding
Primary . . . . . . . . . . . . . 1,892,563 1,892,563 1,895,265 2,509,415 1,418,602
Proforma income assuming use of
proceeds to retire certain
outstanding debt . . . . . . . . . $ (659,566) $ (733,582)$ (1,370,714)
Proforma earnings per share assuming
retirement of certain outstanding
debt
Primary . . . . . . . . . . . $ (0.35) $(0.29) $(0.97)
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, June 30, June 30,
1996 1995 1995 1997 1997
BALANCE SHEET DATA: (Historical) (Historical) (Combined) (Unaudited) (As adjusted)(2)
---------------- ------------------------------------------------- -------------------
<S> <C> <C> <C>
Current assets . . . . . . . . . $ 3,391,290 $ - $ 2,054,177 $ 1,981,807 $ 2,594,307
Total assets . . . . . . . . . . 10,082,092 - 8,268,481 8,918,387 9,530,887
Current liabilities . . . . . . . 1,382,932 4,010 1,335,057 1,126,687 826,687
Total liabilities . . . . . . . . 4,715,592 4,010 4,610,490 4,475,469 975,469
Convertible preferred stock . . . 625,000 - - 625,000 -
Stockholders' equity . . . . . . 4,741,500 (4,010) 3,657,991 3,817,918 8,555,418
Working capital . . . . . . . . . 2,008,358 (4,010) 719,120 855,120 1,767,620
</TABLE>
- --------------------------------
(1) The Company sold certain securities to a former director of
the Company and to HFG during the Company's reorganization
phase in early 1996 prior to the Brister's Acquisition. Based
on the "fair value" of these transactions, the Company
incurred a one-time accounting charge of approximately $1.43
million to earnings for the differential between the fair
value of these transactions and the actual cash proceeds
received by the Company. See "The Company," "Certain
Relationships and Related Transactions," "Note A --
Organization and Description of Business of Notes to
Consolidated Financial Statements" and "Note J -- Common Stock
Transactions of Notes to Consolidated Financial Statements."
(2) Adjusted to give effect to (i) the sale of 1,400,000 shares of
Common Stock and 1,400,000 Warrants offered hereby at assumed
initial public offering prices of $4.00 per share of Common
Stock and $0.125 per Warrant, respectively, and the
application of the net proceeds therefrom and (ii) conversion
of outstanding shares of Convertible Preferred Stock. See
"Use of Proceeds." No effect has been given to the exercise
of (i) any outstanding warrants, including the Warrants
offered hereby and the Underwriters' Warrants, (ii) the
Underwriters' over-allotment option, or (iii) outstanding
options. See "Management -- Stock Options," "Description of
Securities" and "Underwriting."
-26-
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed
under "Risk Factors -- Forward-Looking Statements and Associated Risk."
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. See "The
Company" and "Business."
Effective at the close of business on March 31, 1996, the Company
purchased 100% of the issued and outstanding stock of 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 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 is 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. See "The Company -- Acquisitions; Brister Acquisition,"
"Management," "Certain Relationships and Related Transactions" and "Principal
Stockholders."
Effective at the close of business on November 21, 1996, the Company
purchased 100% of the issued and outstanding stock of 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 of 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 is 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 December 31, 1996, June 30, 1997 and 1996 and
reflects combined financial information for the periods ended December 31, 1995
and 1994, respectively. In the opinion of management, the financial
information presented herein includes all material adjustments necessary to
present historical results of the Company as if the Company, Brister's and USA
had been a single operating entity as of the first day of the first period
presented. The financial information presented herein and the accompanying
discussion does not purport to be indicative of the financial position or the
results of operations which would have been obtained if the acquisition
transactions had actually been consummated on the dates indicated. See
"Selected Historical Consolidated and Combined Financial Information."
RESULTS OF OPERATIONS
SIX-MONTH PERIOD ENDED JUNE 30, 1997 AS COMPARED TO SIX-MONTH PERIOD
ENDED JUNE 30, 1996. The financial information discussed herein is derived
from the historical consolidated financial statements of the Company for the
respective six-month periods ended June 30, 1997 and 1996. The Company
consummated the acquisition of Brister's effective as of the close of business
on March 31, 1996. Accordingly, the three-month period ended June 30, 1996 was
the first inclusive quarter of control of Brister's by the Company. The
Company, through its Brister's and USA subsidiaries, experiences significant
seasonality of sales with
-27-
<PAGE> 29
more than 50% 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 June 30,
1996 and the consolidated results of the Company's ownership of both Brister's
and USA for the entire six-month period presented for 1997.
The Company experienced gross revenues of approximately $2.5 million
for the six months ended June 30, 1997 compared to $1.1 million for the
comparable period of 1996. For the three-month period from April to June, the
Company experienced gross revenues of approximately $1.2 million for the 1997
period and approximately $1.1 million for the 1996 period. These results
continue to reflect weak product demand due primarily to seasonality of sales.
Some seasonality was mitigated by 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
$834,000 during the first six months ended June 30, 1997 as compared to
approximately $292,000 for the first six months ended June 30, 1996. For the
period of April to June 1997 and 1996, respectively, the Company incurred
operating expenses of approximately $353,000 and $289,000. These increases
during the comparable six-month periods are attributable to the maturation of
the Company's operations, including the full ownership and operation of the
Brister's and USA subsidiaries for the entire period presented during 1997.
The cost levels for the April through June periods of both 1997 and 1996 are
relatively constant with the principal reason for the approximately $64,000
increase due to the addition of general corporate overhead expenses.
Management anticipates that current 1997 expenditure levels will remain
relatively constant during future periods.
During the second quarter of 1997, the Company incurred approximately
$22,000 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.
In the first quarter of 1996, the Company incurred a one-time only
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
HFG, for reorganization and restructuring costs, at less than "fair value" as
defined in the appropriate accounting standards.
For the six-month period ended June 30, 1997, the Company incurred a
net loss of approximately $923,000 as compared to a net loss of approximately
$1.48 million, including the one-time accounting charge discussed above, for
the comparable six month period ended June 30, 1996. For the three month
period from April through June 1997, the Company experienced a net loss of
approximately $404,000 as compared to a net loss of approximately $32,000 for
the comparable three month period ended June 30, 1996. Management attributes
the increases in the net loss for the 1997 periods compared to the 1996 periods
to increased general corporate overhead expenses, the adjustment to the
Company's standard cost model
-28-
<PAGE> 30
for cost of goods sold and the overall seasonability of market demand for the
Company's products.
Primary earnings (loss) per share were approximately $(0.37) for the
six months ended June 30, 1997 and approximately $(1.04) for the six months
ended June 30, 1996. Excluding the one-time accounting charge, the six months
ended June 30, 1996 had a proforma earnings per share of approximately $0.04
per share. For the three month period from April through June 1997 and 1996,
the Company experienced a loss per share of approximately $(0.16) and $(0.01),
respectively.
CONSOLIDATED FISCAL YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO
COMBINED FISCAL YEAR ENDED DECEMBER 31, 1995. The Company, on a consolidated
basis, realized net sales for the year ended December 31, 1996 of approximately
$10.7 million as compared to combined revenues of approximately $8.5 million
for the year ended December 31, 1995 or an increase of approximately 25%.
Management attributes the increase in sales primarily to the continued
development of the Brister's and USA dealer base and the addition of two mass
merchandisers as a distribution channel. Management estimates that unit sales
growth in the Fun Kart industry has been in the 12% to 15% range from 1991
through 1995. In 1996, industry-wide unit sales were relatively stagnant.
Management believes the stagnant unit sales in 1996 were the result of high
consumer debt, less than anticipated retail Christmas sales, unusual national
weather patterns and weak sales performance in the lawn and garden industry, a
principal network of dealers for Fun Karts.
Prior to the USA Acquisition, USA had revenues of approximately $1.4
million and incurred a net loss of approximately $227,000 for the period from
January 1, 1996 to November 21, 1996. Management anticipates that USA will
increase its Fun Kart sales to approximately $2.2 million with a resulting
income before tax of approximately $150,000 for 1997. Management attributes
the anticipated increase in sales volume and income for USA during 1997 to
sales of Fun Karts to mass merchandisers and expense controls and monitoring
procedures installed by Company management at the USA facilities. As a result
of the USA Acquisition, the Company improved its geographic market penetration,
manufacturing capacity, product line and dealer network which management
believes will result in additional sales of Fun Karts during 1997.
The Company incurred cost of sales of approximately $7.6 million for
1996 as compared to approximately $6.2 million in 1995. These costs allowed
the Company to achieve a gross margin of approximately $3.1 million in 1996 and
approximately $2.3 million in 1995 or approximately 28% and 27%, respectively.
Management continues to focus on expanding its distribution channels to include
the optimum balance among dealers (lawn/garden, hardware, cycle stores, etc.),
mass merchandisers, home centers, farm stores and other distribution channels.
In addition, management has restructured its cost accounting system to more
effectively manage costs at each of its subsidiary manufacturing locations.
Operating expenses for 1996 and 1995, respectively, were approximately
$2.1 million and $1.8 million. Key expense increases from 1995 to 1996 were
related to (i) interest expense which increased approximately $302,000 due to
costs related to the Brister's Acquisition, (ii) product liability insurance
expenses which increased approximately $265,000 due to increased sales volume
and increased coverage required by the Company's major customers, and goodwill
amortization expenses related to the Brister's and USA Acquisitions increased
approximately $172,000. All other operating expenses were maintained at the
same relative levels as the previous year by improved cost controls.
-29-
<PAGE> 31
Operating expenses reflect historical levels even though significant
interest, insurance and amortization expenses were added in 1996. Additional
sales volume and effective management control of variable operating expenses
contributed to maintaining the relatively constant operating expense
relationship to sales on a percentage basis.
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 HFG, for
reorganization and restructuring costs, at less than "fair value" as defined in
the appropriate accounting standards, resulting in a net loss of $(959,566) for
the year ended December 31, 1996. See "Additional Operations Information"
below.
COMBINED FISCAL YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO COMBINED
FISCAL YEAR ENDED DECEMBER 31, 1994. The Company realized combined net sales
for the year ended December 31, 1995 of approximately $8.5 million as compared
to approximately $7.0 million combined net sales for the year ended 1994 or an
increase of approximately 13%. Management attributes the increase in sales to
the addition of approximately 80 dealers during 1995 and the implementation of
a qualified dealer floor plan financing program.
The Company incurred cost of sales of approximately $6.2 million for
1995 compared to approximately $5.1 million in 1994. The Company achieved a
gross margin of approximately $2.3 million in 1995 and approximately $1.9
million in 1994 or approximately 27% and 26%, respectively. Costs of sales
increased in 1995 as compared to 1994 as a direct result of increased unit
sales in 1995.
Operating expenses for 1995 and 1994, respectively, were approximately
$1.8 million and $1.6 million. Operating expenses in 1995 were maintained at
approximately the same relative percent of sales as in previous years due to
management monitoring of expenses during the period.
ADDITIONAL OPERATIONS INFORMATION. In 1996 the Company settled
several product liability lawsuits with a cumulative charge to operations of
approximately $44,000. The Company currently has four 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. See "Business -- Product Liability and
Insurance Limits and -- Legal Proceedings."
The Company sold certain securities to a former director of the
Company and to HFG during the Company's reorganization phase in early 1996
prior to the Brister's Acquisition. Based on the "fair value" of these
transactions, the Company incurred an accounting charge of approximately $1.43
million to earnings for the differential between the fair value of these
transactions and the actual cash proceeds received. Further, the HFG Escrow
Shares, which were originally purchased by HFG in March 1996 for $350, or
$0.0015 per share, will be subject to re-evaluation as to these shares
respective "fair value" on March 31, 1998 when the HFG Escrow Shares are
released from escrow. The Company is unable to predict the fair value of the
HFG Escrow Shares on March 31, 1998 or the impact that such valuation will have
on the Company's Statement of Income for the period ended March 31, 1998.
Future charges of this type may also occur based on future exercise of
outstanding stock options and/or stock warrants and the market price of the
Company's securities at the date of exercise. See "Risk Factors -- Potential
Additional Dilution to Public Investors," "The Company," "Certain Relationships
and Related Transactions," "Note A -- Organization and Description of Business
of Notes to Consolidated Financial Statements" and "Note J -- Common Stock
Transactions of Notes to Consolidated Financial Statements" and "Note M --
Commitments and Contingencies of Notes to Consolidated Financial Statements."
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SEASONALITY
The Company experiences significant seasonality in its sales pattern
with only approximately 26% of its sales recognized in the first half of the
year. Historically, approximately 28% and 46% of total sales are realized in
the third and fourth quarters, respectively. Sales of Fun Karts are generally
the lowest during the first quarter of each year. Since the Company typically
does not obtain long-term purchase orders or commitments from its customers, it
must anticipate the future volume of orders based upon the historic purchasing
patterns of its dealers and mass merchandisers and upon its discussions with
its dealers and representatives of mass merchandisers as to their future
requirements. Cancellations, reductions or delays by a large volume dealer or
mass merchandiser could have a material adverse impact on the Company's
business, financial condition and results of operations.
Traditionally, many dealers have sold Fun Karts only during the
Christmas holiday season. Recent market growth can be attributed to many of
these dealers beginning to sell Fun Karts year round. The Company believes
that if its business strategies are successfully implemented in 1997 and future
years, there will be some additional mitigation of the seasonality aspect of
the Company's Fun Karts sales. The Company also intends to offset the seasonal
aspects of its current business operations through acquisitions of
manufacturers of product lines that are compatible with the Company's business
objectives and offer product diversity which have year round demand.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company acquired Brister's and USA with approximately
$2,250,000 cash, issuance of approximately $3.2 million in promissory notes and
issuance of approximately 683,334 shares of Common Stock. The Company intends
to retire the Brister Notes and the Schlinger Note, totalling $3.2 million,
with a portion of the proceeds of this Offering.
As of December 31, 1996 and December 31, 1995, respectively, the
Company had positive working capital of approximately $4.7 million and $0.7
million, respectively. The Company experienced negative cash flow from
operations of approximately $223,000 for calendar 1996. This deficiency was
principally caused by increases in trade accounts receivable attributable to
sales to mass merchandisers. An aggregate of approximately $535,000 in cash
resided in Brister's and USA as of their respective acquisition effective
dates which in turn offset this deficiency. The Company also received
approximately $123,000 in trade accounts receivable receipts from mass
merchandiser customers on January 2, 1997.
Additionally, the Company spent approximately $533,642 during 1996 in
indirect costs associated with the acquisition of Brister's and USA. These
amounts were funded through the private placement of Company securities in
March 1996 and November 1996 and are not anticipated to recur in future
periods.
During the years ended December 31, 1996 and 1995, respectively, the
Company expended approximately $72,000 and $113,000 for capital assets and/or
improvements. As of June 30, 1997, the Company has expended approximately
$429,000 for capital assets, including the purchase of a powder paint system
and tube bending machine for its manufacturing facility in Prattville, Alabama.
USA has currently available to it a $500,000 revolving line of credit
from Deposit Guaranty National Bank of Louisiana ("Deposit Guaranty"), which
matures on September 30, 1997. The credit line is secured with certain
purchase orders and accounts receivable due USA on its Wal-Mart accounts
receivable. The interest rate on the revolving line is at the lending
institution's prime rate (8.5% at June 30, 1997). There was an outstanding
balance of $100,000 on the credit facility at June 30, 1997. The USA credit
line is guaranteed by the Company. During the term of the credit line, the
Company must maintain a net worth of not less than $2.5 million and a ratio of
current assets to current liabilities of not less than 1.5 to 1.0 as of the
last day of each fiscal quarter. As of June 30, 1997, the Company was in
compliance with all material covenants, financial ratios and restrictions under
the loan agreement between USA, the Company and Deposit Guaranty. It is
management's opinion that the USA revolving credit facility is renewable under
similar terms and will be adequate for any anticipated short-term credit
requirements for USA.
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Brister's has a $300,000 revolving credit line with Deposit Guaranty
which matures on October 10, 1997. The credit line is secured with certain
accounts receivables due Brister's. The Company has guaranteed payment of the
Brister's credit line. The interest rate on the Brister's credit line is 8.25%
per annum. Management believes that the Brister's credit facility is renewable
under similar terms and will be adequate for short-term credit requirements for
Brister's. At June 30, 1997, the Brister's credit line balance was $300,000.
It is anticipated that the net proceeds from this Offering will be
used to repay $3.2 million in long-term indebtedness, the $300,000 Brister's
credit line and $150,000 in special marketing promotions. The repayment of the
Company's long-term debt will yield interest expense reductions of
approximately $400,000 during the 12 month period after retirement of the debt.
These interest savings will generate additional working capital resources for
the Company. The proforma effect of these savings for the year ended December
31, 1996 yields additional after-tax income of approximately $198,000 or $0.10
per share. See "Use of Proceeds."
The Company expects that its cash flow from operations, along with its
currently available lines of credit, will be sufficient to meet its financing
requirements over the next 12 to 18 months. This is a projection, however, and
no assurance can be given that the Company's cash flow from operations and from
its available lines of credit will be available to meet the Company's cash
requirements over the next 12 to 18 months. See "Risk Factors" and "Use of
Proceeds" for a discussion of certain important factors that could materially
impact this projection.
The Company's management does not believe that inflation has had a
significant effect on the Company's operations during the last several years.
The Company's management believes that USA and Brister's have historically been
able to pass on increased costs of production to the price charged for their
products; however, no assurance can be given that the Company will continue to
be able to pass on such increased costs in the future.
Liquidity requirements mandated by future business acquisitions or
expansions, if any are specifically identified or undertaken, are not readily
determinable at this time as no substantive plans have been formulated by
management. Upon completion of this Offering, the Company will have limited
financial resources for acquisitions. The Company will be dependent upon the
proceeds from additional financings, including receiving proceeds from the
future exercise of the Warrants of which there can be no assurance, to
facilitate an acquisition. The Company may also need additional financing to
achieve full implementation of its long-term growth strategy and for working
capital. There can be no assurance that additional financing will be
available, or if available, that such financing will be on favorable terms.
See "Use of Proceeds" and "Business -- Growth Strategy and -- Acquisition
Strategy."
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BUSINESS
GENERAL
The Company, through its wholly-owned subsidiaries, Brister's and USA,
designs, manufactures and distributes Fun Karts, also referred to as "go
karts." Fun Karts are four-wheeled, gas-powered vehicles typically equipped
with engines of 5 to 8 horsepower and purchased by consumers principally for
off-road recreational use. The Company shipped approximately 17,750 Fun Karts
to dealers and mass merchandisers in 1996, which the Company believes
represents approximately 14% of the total domestic Fun Karts market. Proforma
consolidated revenues of the Company for the fiscal year ended December 31,
1996 were approximately $10.7 million as compared with revenues of
approximately $8.5 million for the fiscal year ended December 31, 1995. For
the six-month period ended June 30, 1997, the Company's revenues were
approximately $2.5 million as compared with combined revenues of approximately
$2.3 million for the six-month period ended June 30, 1996. The Company
operates manufacturing facilities in Roseland, Louisiana and Prattville,
Alabama, and maintains its executive offices in Covington, Louisiana.
The karts industry is comprised of three principal segments, Fun
Karts, racing and concession karts. Fun Karts, the largest segment, are karts
sold to consumers for general recreational use. Racing karts are specially
designed for use on established tracks in a controlled racing environment.
Concession karts are designed for use by amusement and entertainment centers
which provide karts and facilities for customers' use on a rental basis.
Management estimates that in 1996 approximately 145,000 karts were sold in the
United States of which approximately 125,000 were Fun Karts, 9,000 racing karts
and 11,000 concession karts. Historically, Brister's and USA have concentrated
their efforts in the Fun Karts market.
The Company offers a complete product line of Fun Karts,
differentiated by drive train, seating capacity, tire size and tread design.
Thirty-two Fun Kart models are available in three different colors, black, blue
and red, which are sold under the Thunder Karts and USA Fun Karts brand names.
The Company's models offer a wide range of standard and optional features which
enhance the safety, operation, riding comfort and performance of its Fun Karts.
Such features include the exclusive, patented automatic throttle override; full
safety cage; safety flag; three kinds of drive trains, including live axle,
single wheel pull and torque converter; clutch lubrication system; high speed
bearings; adjustable throttle and seats; steel rims; band and disc brakes; and
Briggs & Stratton 5 horsepower engines. The end-users of the Company's Fun
Karts are primarily 7- to 17-year-old males, living with their parents in
suburban and rural markets. Typical Fun Kart purchasers are parents who
purchase Fun Karts for their children.
The Company relies on a broad and diversified national independent
dealer network and mass merchandisers to sell its Fun Karts. Prior to 1996,
the Company sold its products through its over 700 dealers, primarily lawn and
garden stores, motorcycle outlets, hardware stores and specialty karts dealers,
located in 40 states. The major markets for the Company's Fun Karts are in the
Southeast and Southwest regions of the United States. In 1996, the Company
sold approximately 61% of its Fun Karts to approximately 250 dealers located in
Louisiana, Texas, Mississippi and Florida. Although there are no formal dealer
agreements, the Company, for the benefit of certain of its higher volume
dealers, will agree not to sell to other retailers in a limited geographic area
surrounding the high volume dealer. To become a Fun Kart dealer, the Company
generally requires a retailer to annually purchase six or more Fun Karts.
Dealers usually maintain an inventory of three to five Fun Karts which
increases during the Christmas holiday season. For eligible dealers, the
Company offers a dealer floor plan financing program through an unaffiliated
financial services company.
To broaden its distribution channels, the Company in 1996 began
selling its Fun Karts to two mass merchandisers, Wal-Mart Stores, Inc.
("Wal-Mart") and Sam's Wholesale Club ("Sam's Club"), a division of Wal-Mart
Stores, Inc. In 1996, the Company sold approximately 4,000 of its Fun Karts to
Wal-Mart and Sam's Club, representing approximately 21% of the Company's
revenues for the fiscal year ended December 31, 1996. The Company anticipates
that mass merchandisers will account for approximately 20% of the Company's
1997 revenues of which sales to Wal-Mart and Sam's Club are projected to
account for approximately 5% and 6%, respectively, of 1997 revenues. The
Company does not believe that any mass merchandiser will account for 10% or
more of the Company's 1997 revenues. Management believes that mass
merchandisers represent a significant untapped market for Fun Karts.
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The Company's operating strategy is to increase its sales and market
share by producing safe, high-quality and reliable Fun Karts at competitive
prices; continue to improve manufacturing efficiency; and continue
diversification of domestic distribution channels. The Company's growth
strategy is to increase its brand and product recognition by innovative
marketing to its target users; broaden its product lines through improved
product design and development; and expand its geographic presence and market
share by continued emphasis on expansion of its domestic dealer and mass
merchandiser networks, through further penetration of international markets,
and through acquisitions of manufacturers of karts and related products that
provide synergistic growth opportunities for the Company.
Although the Company is actively seeking acquisitions that will expand
its existing product lines, market share and distribution channels, the Company
currently has no agreements or understandings with respect to any such
acquisitions and there can be no assurance that the Company will be able to
identify and acquire such businesses or obtain necessary financing on favorable
terms.
INDUSTRY OVERVIEW
Management does not believe that specific reliable public information
with respect to Fun Kart sales is available since the go-kart industry is
substantially composed of private, family-owned manufacturers which are not
required to publicly report financial and operational information. Management
has, instead, relied upon reports of kart engine sales from Briggs & Stratton,
the industry's primary source for engines, and information obtained from Kart
Marketing International ("KMI"), a kart industry marketing publication.
The karts industry consists of three major segments: Fun Karts, used
for private recreational activities; racing karts, raced by competitors on an
estimated 550 kart racing tracks in the United States; and concession karts,
sold to family amusement and entertainment centers for use as rental units.
Management believes the history of karts dates to 1956, when a
hobbyist built the first kart, which consisted of a 2-cycle, 2- 1/2 horsepower
engine, a tubular chassis and semi-pneumatic tires. Karts were initially sold
for approximately $150 each. During 1957, Rod and Custom Magazine coined the
name "go-kart." In December 1957, the Go-Kart Club of America was formed,
which set chassis requirements and created racing classes. By 1960, there were
an estimated 100 kart manufacturers in the United States, which were mostly
small family-owned businesses. The Company believes there are currently four
principal Fun Kart manufacturers in the United States, which includes the
Company, Carter Brothers Manufacturing, Manco Products and Ken-Bar
Manufacturing. Management estimates that the Company, which had approximately
14% market share, plus its three primary competitors accounted for over 60% of
the Fun Karts sold in the United States in 1996.
In 1995, there were an estimated 70,000 kart racers and significantly
more Fun Kart enthusiasts in the United States and Canada, according to KMI.
Annually, according to KMI, nearly 20 million Americans ride concession karts
at tracks and family entertainment centers. Kart racing was a contributor to
the development of various NASCAR and IndyCar drivers, including Al Unser Jr.,
Michael Andretti, Jeff Gordon, Emerson Fittipaldi, and Bobby Labonte, who began
their driving careers as kart racers. During 1997, Bobby Labonte has committed
to endorse and promote the Company's products and will appear at various
Company-sponsored and other events to promote the Company's Fun Karts. See "--
Sales and Marketing."
In 1996, management believes, as a result of its research,
approximately 125,000 Fun Karts were sold in the United States as compared with
1995 sales of approximately 124,000 Fun Karts, while 1995 sales represented an
approximate 13% increase over 1994 sales of approximately 110,000 Fun Karts.
Sales in 1994 represented an 11% increase over 1993 sales of approximately
98,000 Fun Karts. In 1996, the Company sold approximately 17,750 Fun Karts,
which represents approximately 14% of the Fun Karts market as compared with
1995 sales of approximately 13,000 Fun Karts or approximately 11% of the Fun
Kart market.
The other two industry segments, racing and concession karts, are
significantly smaller than the Fun Karts market. Sales of racing karts, karts
used by racers on established tracks, were estimated by KMI at approximately
9,000 in 1995. Concession karts, used by commercial providers of tracks for
entertainment, were estimated at approximately 10,500 units in 1995, according
to KMI. Management believes that 1996 sales of
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concession and racing karts were similar to 1995 sales. Each of these segments
is addressed by different manufacturers than those manufacturing Fun Karts.
The typical end-user customer of the Company's Fun Karts is a 7-17
year old male, living with his parents primarily in the suburban and rural
markets. The Company believes that at least 90% of its end users are young
males. This is a significant sector of the population, as the 7-17 year old
male population in 1995, according to the Bureau of the Census, was estimated
at 22 million. Typical Fun Karts purchasers are the parents, who buy Fun Karts
as gifts for their children.
Although annual industry-wide sales of Fun Karts increased
significantly during 1994 and 1995, there was a nominal increase in unit sales
industry wide during 1996. Management believes the nominal increase in unit
sales industry wide during 1996 was the result of high consumer debt, less than
anticipated retail Christmas sales, unusual national weather patterns and weak
sales performance in the lawn and garden industry, a principal network of
dealers for Fun Karts. Management believes there are several key factors which
may increase industry wide Fun Kart demand and accordingly sales in future
periods:
o UNDERPENETRATED MARKET. According to census estimates, the
target market of 7- to 17-year-old males is projected to grow
from 22 million in 1995 to 25 million in the year 2000.
Annual Fun Karts sales are only to approximately 0.6% of the
total 7- to 17-year-old male population.
o GROWTH IN DISTRIBUTION CHANNELS. Management believes that
mass merchandisers and international dealers represent
significant untapped markets for Fun Karts. Additionally,
management believes independent dealer distribution channels,
consisting primarily of lawn and garden stores, hardware
stores, motorcycle dealers and automotive parts stores, remain
underpenetrated; for example, the Company believes that less
than 5% of the motorcycle dealers and less than 10% of the
lawn and garden stores located in the United States sell Fun
Karts.
o ASSOCIATION WITH MOTORSPORTS. The Company believes that the
association of Fun Karts with the dynamic motorsports industry
will increase consumer interest in these products.
Motorsports is the fastest growing spectator sport segment in
the United States. Attendance at the Winston Cup series of
races has more than tripled since 1980. More than 80 million
households watched live television motor races during 1995.
Sales of NASCAR licensed goods, which have grown nine-fold
since 1990 to over $500 million, are expected to reach $1
billion in two years.
SEASONALITY
Most Fun Karts are sold during the last quarter of the year and are
typically purchased as Christmas gifts by parents for their children. Sales of
Fun Karts are generally the lowest during the first quarter of each year.
Since the Company typically does not obtain long-term purchase orders or
commitments from its customers, it must anticipate the future volume of orders
based upon the historic purchasing patterns of its dealers and mass
merchandisers and upon its discussions with its dealers and representatives of
mass merchandisers as to their future requirements. Cancellations, reductions
or delays by a major customer could have a material adverse impact on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Independent Dealers; Dependence on Major Customers."
Traditionally, many dealers have sold Fun Karts only during the
Christmas holiday season. Recent market growth can be attributed to many of
these dealers beginning to sell Fun Karts year round. The Company believes
that if its business strategies are successfully implemented in 1997 and future
years, there will be some mitigation of the seasonality aspect of the Company's
Fun Karts sales. The Company also intends to offset the seasonal aspects of
its current business operations through acquisitions of manufacturers of
product lines that are compatible with the Company's business objectives and
offer product diversity which have year round demand.
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OPERATING STRATEGY
PRODUCE SAFE, HIGH QUALITY AND RELIABLE FUN KARTS AT COMPETITIVE
PRICES. The Company believes that it is one of the leaders in the development
of safety-related features for Fun Karts, which, along with price, is a key
consideration for the Fun Kart purchaser, the parent of the 7- to 17-year-old
male. The Company believes it was the first manufacturer in the Fun Karts
industry to provide full safety cages and adjustable seats, which are now
standard features on most Fun Karts. The Company is the exclusive Fun Kart
manufacturer installing its patented automatic throttle override system on Fun
Karts. Producing high quality, reliable products increases customer
satisfaction, and the Company believes this is one of the key elements of its
success in the highly competitive karts industry. The Company believes its
strategy of selling its Fun Karts through independent dealers and selected mass
merchandisers helps to ensure that the Company's products are competitive with
those of other manufacturers in terms of safety, consumer acceptability,
product design, quality and price. See "-- Product Lines."
CONTINUE TO IMPROVE MANUFACTURING EFFICIENCY. Management believes
that greater productivity will reduce operating costs. By installing a
standard single Briggs & Stratton 5 horsepower engine on all of its Fun Karts,
the Company expects to reduce volume purchase prices and decrease assembly
costs. The Company believes that modernization of its manufacturing facilities
is essential to improving the quality of the Company's products and promoting
the price competitiveness of its Fun Karts. The Company intends to expand and
renovate, as necessary, its manufacturing facilities, purchase new equipment
and maintain strict cost controls as a means to enhance the production of high
quality Fun Karts. In 1997, the Company made capital expenditures of
approximately $400,000 for the installation of a powder paint system and tube
bending machine at its manufacturing plant in Prattville, Alabama. Management
continuously reviews the floor plan of its manufacturing facilities to
determine revisions that will enhance manufacturing efficiency. The Company
believes that the maximum annual capacity of its manufacturing facilities is
approximately 28,000 Fun Karts. Management believes it would be necessary to
increase its manufacturing and shipping personnel from approximately 80
employees to 150 employees to achieve maximum annual capacity of the Company's
manufacturing facilities. Additional labor at reasonable costs is readily
available in the vicinity of the Company's manufacturing facilities.
Management believes that with limited expansion of its current facilities, the
Company will be able to meet projected increased customer demand for the
Company's products for the foreseeable future. See "-- Manufacturing
Operations."
DIVERSIFICATION OF DOMESTIC DISTRIBUTION CHANNELS. The historical
marketing strategy of Brister's and USA has been to build a broad and diverse
independent dealer base, primarily in Louisiana, Texas, Mississippi and Florida
by offering safe, high quality and reliable Fun Karts that are competitively
priced and timely delivered. To broaden its distribution channels, the
Company, in 1996, began selling its Fun Karts to two mass merchandisers,
Wal-Mart and Sam's Club. The Company's future marketing efforts are designed
to maintain and expand its independent dealer network in the South and West
regions of the United States through direct communications with dealers,
engaging independent sales representatives and attendance at industry trade
shows. The Company also plans to assist dealers with their selling and
marketing efforts with Company-sponsored seminars, discount or rebate programs
and advertising, including product videos and brochures, leaflets, posters,
signs and other miscellaneous promotional items for use by dealers. The
Company will also seek to increase sales to mass merchandisers with direct
communication and the engagement of independent sales representatives.
Although the Company believes that sales to mass merchandisers offers a
significant growth opportunity, the Company will seek to obtain a reasonable
balance between its dealer and mass merchandiser distribution networks and will
attempt to avoid a high concentration of sales to any one or group of dealers
or mass merchandisers. See "Risk Factors -- Dependence on Independent Dealers;
Dependence on Major Customers" and "-- Sales and Marketing."
GROWTH STRATEGY
INCREASING BRAND AND PRODUCT RECOGNITION BY INNOVATIVE MARKETING TO
TARGET USERS. In 1995, the Fun Kart industry's sales were made to only
approximately 0.6% of the estimated 22 million 7- to 17-year-old males in the
United States, the Company's target users. The Company believes that if it is
to further penetrate its target market, the Company must advertise in media
easily accessible by this group and attractively and prominently display its
Fun Karts in locations and at events frequented by young males and their
parents. The
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Company intends to increase its penetration of this market by enhancing
potential customers' awareness of its products by advertising in youth-oriented
publications, as well as motor racing and motorcycle publications,
establishment of a Company home page on the World Wide Web portion of the
Internet, displaying and promoting the Company's products at NASCAR races,
which may include appearances by NASCAR driver Bobby Labonte pursuant to his
promotional agreement with the Company, and traditional print, billboard and to
a lesser extent, television and radio media.
IMPROVE PRODUCT DESIGN AND DEVELOPMENT. Historically, Brister's has
been a leader within the Fun Karts industry in the development of safety and
performance enhancing items for Fun Karts. One of the benefits of the
acquisition of USA was the addition of a line of torque converter Fun Karts,
which are being sold under the USA brand name. In 1997, the Company will
introduce its new Big Thunder Kart line which will utilize a torque converter,
new tire design and existing standard features of the Company's Fun Karts,
including large custom seats and 3400 rpm 5 horsepower Briggs & Stratton
engines. The Company also intends to develop and distribute additional
optional Fun Kart parts and accessories which can be sold by dealers to
customers at the point of sale of the Company's Fun Karts. Such accessories
may include face shields, repair and lube kits, caps and tee-shirts. The
Company may also develop a line of helmets, jackets, boots and other related
items for its dealers and mass merchandisers to complement sales of Fun Karts.
EXPANSION OF GEOGRAPHIC PRESENCE. The Company intends to expand its
geographic presence and increase its market share within and outside of its
core and contiguous markets by continued emphasis on the development and
expansion of its dealer and mass merchandiser networks, establishing
relationships with independent sales representatives to serve regions of the
United States which are currently underpenetrated by the Company and possible
acquisition of kart manufacturers and related businesses that offer synergistic
growth opportunities for the Company. Also during calendar 1996, the Company
had its first shipment of Fun Karts of approximately 70 Karts into the
international market, and believes international sales offer a significant
market for the Company's products. Although the Company is actively seeking
acquisitions that would meet its strategic objectives, it currently has no
agreements or understandings with respect to any such acquisition and there can
be no assurance that the Company will be successful in its acquisition efforts.
Further, the ability of the Company to effect its strategic plans will be
dependent upon its obtaining financing for such acquisitions, which there can
be no assurance will be available.
ACQUISITION STRATEGY
The Company continually evaluates acquisition opportunities of
operating entities or product lines compatible with its current operations.
Target companies will be in the Fun Karts or related business or will provide
the Company with complementary capabilities such as manufacturing, distribution
or shipping. Acceptable acquisition candidates are expected to be (i)
companies having three or more years operating history and annual revenues from
$5 to $15 million, (ii) businesses with different or expanded distribution
channels through which the Company may market its current and/or future
products, and (iii) companies with existing manufacturing capabilities which
may allow the Company greater operating efficiencies through vertical
integration of its manufacturing and assembly functions. There are no present
agreements, commitments, letters of intent or understandings with any
acquisition candidates. The Company intends to aggressively pursue growth
through acquisitions, subject to financial and managerial resources.
Management believes that it will be necessary to obtain additional
financing prior to a major acquisition. The Company anticipates that the
financing of any acquisition will be paid in cash, issuance of capital stock or
debt instruments, or a combination thereof. To the extent that the Company
issues capital stock in any acquisition, purchasers of the Securities in this
Offering may incur dilution in their investment in the Company. The issuance
of debt to finance acquisitions may result in the encumbrance of Company
assets, impede the Company's ability to obtain bank financing, decrease the
Company's liquidity and adversely affect the Company's ability to declare
dividends to its stockholders.
PRODUCT LINES
The Company produces a full line of Fun Karts, currently consisting of
32 models which are variations on 15 different frames available in three
different colors, black, blue and red. The models are differentiated by
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drive train (single wheel pull, live axle or torque converter), seating (single
or double), tires (standard or custom) and frame size. The Company markets its
Fun Karts under the brand names of Thunder Karts and USA Fun Karts, which
includes the Blackhawk, Coyote, Eagle, Cobra and Land Runner models. The
Company's Fun Karts are sold at suggested retail prices ranging from $599 to
$1,399. The Company's Thunder Kart SLXL, Thunder Kart XL700, Thunder Kart
Blackhawk and USA Cobra models accounted for 24%, 17%, 14% and 9%,
respectively, of the Company's 1996 unit sales.
The Company believes its Fun Karts enjoy a premier image in its core
markets and that its Fun Karts have a reputation for quality, performance,
style, comfort, ride and handling. The Company's models offer a wide range of
standard and optional features which enhance the operation, safety, riding
comfort and performance of its Fun Karts. Such features include band brakes, 5
horsepower Briggs & Stratton engine, automatic throttle override system, full
safety cage, automatic clutch lubrication system, powder paint, high speed
bearings and safety flag. The Company's USA Coyote Fun Kart has oversize
wheels and has the added features of a torque converter and disc brakes.
The Company believes that it is a leader in the development of safety
features for its Fun Karts, due primarily to its emphasis on continuous
research and development of safety related items. The Company, principally
through the efforts of Charles Brister, a director and principal stockholder of
the Company, has developed a number of technological advances, including the
automatic throttle override and automatic clutch lubrication systems, which
have significantly improved its products. Mr. Brister will continue to devote
a portion of his time on a project basis for the development of innovative
safety and technological features for the Company's Fun Karts. See "The
Company -- Acquisitions; Brister's Acquisition," "Management," "Certain
Relationships and Related Transactions" and "Principal Stockholders."
The Company's patented, exclusive automatic throttle override system
was named the 1995 Product of the Year for the recreational kart industry by
Kart Marketing International, a trade magazine for the kart industry. This
safety feature prohibits throttling and braking at the same time, regardless of
the position of the gas pedal. If the brake pedal is depressed slightly, the
engine will revert to the idle position immediately, and will not let
throttling engage until the pedal is released. Significant benefits of this
system include virtual elimination of throttle runaways; enhancement of safety
for inexperienced drivers; stopping of simultaneous braking and throttling;
easier braking; and extended brake life. The Company has an exclusive license
from Mr. Brister to use the automatic throttle override system on its Fun
Karts. See "-- Patents and Proprietary Technology" and "Certain Relationships
and Related Transactions."
The Company believes it was the first manufacturer in the Fun Karts
industry to provide safety cages and adjustable seats, which are now standard
features on most Fun Karts. Further, the Company is the only manufacturer in
the industry that has an automatic chain adjuster, a spring activated device
that constantly puts tension on the chain. Because a chain typically lengthens
as it heats up, this product reduces the chance of the chain disconnecting from
the sprocket and causing injury to the operator. The Company was also one of
the first Fun Karts manufacturers to introduce the powder paint process, which
significantly reduces harmful emissions during the painting process. The
Company believes it is currently the only major Fun Karts manufacturer using
the automatic throttle override system. Additionally, the Company has its own
custom designed tire treads manufactured to its specifications. Introduced in
1994, the Company's automatic clutch lubrication system releases grease as
needed to the clutch bushing on Fun Karts, which reduces wear and extends the
life of the clutch. This system was licensed by Mr. Charles Brister, a
director of the Company, to Briggs & Stratton, prior to the Brister
Acquisition, and is being installed on the Company's Fun Karts as well as
certain of its competitors.
MANUFACTURING OPERATIONS
The Company, through its two wholly-owned subsidiaries, operates
manufacturing facilities in Roseland, Louisiana and Prattville, Alabama. The
Company's manufacturing facilities include a 48,000 square foot building in
Roseland and a 20,000 square foot facility located in Prattville. The
management of the Company's manufacturing facilities typically consists of a
plant manager, a production manager, a material manager and a quality control
manager. These mid-level managers control operations of the respective
manufacturing facilities,
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with assistance and guidance from the Company's executive officers. The
Roseland facility is leased from Mr. Charles Brister, a director of the
Company, and the Company owns the Prattville facility which includes a two-acre
tract of land. See "Facilities" and "Certain Relationships and Related
Transactions."
Management believes the Prattville facility could be expanded to a
40,000 square foot facility on the existing land. The Company has an option to
acquire two acres adjacent to its Prattville facility for future expansion.
The Prattville plant is located in a planned industrial park with adequate
support utilities and freight services. Future expansion of the Roseland
facility would be limited due to the unavailability of adjacent real estate.
See "Facilities."
Fun Kart production levels at the Company's manufacturing plants
varies depending on the season. Between January and May, the Company generally
utilizes a ten-hour work day four days a week at its plants. In June, the work
week expands to five days and peaks in November at six days. From June through
December, daily output is approximately 125 to 150 Fun Karts. The Company
believes that the maximum annual capacity of its manufacturing facilities is
approximately 28,000 Fun Karts. The Company believes it would be necessary to
increase its manufacturing and shipping personnel from approximately 80
employees to 150 employees to achieve maximum annual capacity of the Company's
manufacturing facilities. Additional labor at reasonable costs is readily
available in the vicinity of the Company's manufacturing facilities.
Management believes that with limited expansion of its current facilities, the
Company will be able to meet projected increased customer demand for the
Company's products for the foreseeable future.
The Fun Karts manufacturing process is primarily one of welding and
assembly at various work stations. The Company buys directly from mills both
pre-cut and uncut tubular steel used in the manufacturing of the frames. Since
the price differential between pre-cut and uncut tubular steel is relatively
small, it is more cost-effective, particularly for pieces that are certain not
to change, to purchase pre-cut tubular steel. The steel is cut and bent during
the manufacturing process to the frame specifications for the Company's various
Fun Kart models. Most of the other Fun Karts component parts, including
engines, wheels, tires, seats, steering wheels, steering tie rods and
miscellaneous parts, are purchased from various domestic vendors. The Company
depends on Briggs & Stratton for its engines, and the loss of this vendor may
cause the Company to experience a temporary delay in the production of the
Company's Fun Karts. The Company believes other engine vendors and suppliers
of other component parts necessary for the production of Fun Karts are readily
available.
QUALITY CONTROL, WARRANTIES AND SERVICE
The Company adheres to strict quality standards and continuously
refines its production procedures to increase productivity and reduce warranty
costs. Each Fun Kart is inspected and numbered during assembly for compliance
with certain quality control standards. The Company provides the purchaser of
its Fun Karts with a 90-day limited warranty against certain manufacturing
defects in the Fun Kart's construction. There are also direct warranties that
are provided by the manufacturer of the engine and certain component parts.
The Company's Fun Karts are usually serviced by the dealers. Neither Brister's
nor USA have historically incurred any significant warranty claims and have
never had a recall of any of their products.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company does not own any patents, trademarks or service marks.
However, Charles Brister, a director of the Company, owns certain patents and
trademarks which are licensed to the Company and which allows the Company to
use certain brand names and utilize the automatic throttle override system
("ATOS") on its Fun Karts. The Company's success is dependent upon, among
other things, its continued ability to use these certain patented items and
trademarks. There can be no assurance that any patents or trademarks which may
be issued to the Company, or which the Company may license from third parties
or Mr. Brister, will not be challenged, invalidated or circumvented, or that
any rights granted thereunder would provide proprietary protection to the
Company. The Company will continue to implement protective measures and
intends to aggressively defend its proprietary rights. See "Certain
Relationships and Related Transactions."
The Company, in March 1996, entered into a license agreement with
Charles Brister under which Mr. Brister has licensed to the Company for a
period of five years (at no cost to the Company during the first year)
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<PAGE> 41
all of the Intellectual Property (as hereinafter defined), which was owned by
Mr. Brister on March 15, 1996, and all Intellectual Property developed and/or
owned by Mr. Brister at any time subsequent to March 15, 1996. After the first
year of the license agreement, the Company and Mr. Brister agreed to enter into
subsequent agreements defining the license fee and royalty payments based on
terms at least as favorable as Mr. Brister has received, or could have
received, in arms'-length transactions with third parties. "Intellectual
Property" is defined as all domestic and foreign letters, 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 registration and applications and
copyright registration and applications owned or used by Brister's in the
operation of its business.
On March 15, 1997, the Company and Mr. Brister entered in an addendum
to the License Agreement and a related Royalty Agreement which provides for the
payment of a one-time license fee and future royalties, respectively, by the
Company to Mr. Brister for the use by the Company for a three-year period of
the ATOS developed and patented by Mr. Brister. The Company has paid Mr.
Brister an initial $10,000 license fee and agreed during the first year of the
three year extension to pay him a royalty of $1.00 for each Company Fun Kart on
which the ATOS was installed. During the second and third year of the
agreement, the Company agreed to pay during each year a royalty of $1.00 for
each Company Fun Kart on which the ATOS was installed or $20,000 annually
whichever is greater.
SALES AND MARKETING
SALES. The Company primarily relies on a broad and diversified
national independent dealer network to sell its Fun Karts. The Company sells
directly to approximately 700 dealers located in 40 states, with most dealers
concentrated in the Southeast and Southwest regions of the United States. In
1996, the Company sold approximately 61% of its Fun Karts to approximately 250
dealers in Louisiana, Texas, Mississippi and Florida. The Company continues to
expand its dealer network, with 82 dealers added in 1995 and 15 dealers added
in 1996.
The Company believes that its independent dealer network enables the
Company to achieve broader distribution of its products than if the Company
operated its own retail outlets. Selling through independent dealers also
allows the Company to avoid the substantial investment in management and
overhead associated with the operation of company-owned retail stores. In
addition, the Company's strategy of selling its products through independent
dealers helps to ensure that the Company's Fun Karts are competitive with those
of other manufacturers in terms of consumer acceptability, product design,
quality and price. Accordingly, a component of the Company's business strategy
is to continually strengthen its dealer relations. The Company believes its
relations with its independent dealers are good.
While there are no formal dealer agreements, the Company, for the
benefit of certain of its higher volume dealers, will agree not to sell to
other dealers in a limited geographic area surrounding the location of a high
volume dealer. To become a dealer, the Company generally requires a retailer
to annually purchase six or more Fun Karts. Most dealers keep an inventory of
three to five Fun Karts, which increases during the Christmas holiday season.
Credit terms are 30 days with no discount. For dealers who meet certain credit
requirements, the Company offers a dealer floor plan financing program through
an unaffiliated financial services company. The floor plan agreement may be
terminated at any time by the Company or the financial services company with 30
days written notice to the other party and may be terminated by the financial
services company upon an event of default by the Company, which includes
failure by the Company to pay any amounts owed to the lender when due,
cessation of business or bankruptcy of the Company or a material adverse change
in the Company's financial condition. The Company, at its option, will allow
approved dealers up to 120 days of interest-free financing under the floor plan
agreement. The floor plan arrangements require the Company to repurchase units
in the event of dealer default. The Company does not currently have any
significant contingent liability under the repurchase obligation of the floor
plan agreement.
In 1996, the Company emphasized both the retention of existing dealers
through Company-sponsored seminars and the expansion of its dealer network.
For the first time in the Company's history, in 1996, 70 Fun Karts were
exported to a foreign market, the United Kingdom. Other foreign dealer
prospects are being investigated by the Company in Canada, Brazil, Austria,
Germany, Australia and Argentina. Typical domestic dealers include lawn and
garden shops, hardware stores, motorcycle shops, automobile parts stores and
specialty
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<PAGE> 42
karts dealers. The Company believes the dealer distribution channel is
underpenetrated. The Company estimates that less than 10% of the lawn and
garden stores and less than 5% of the motorcycle dealers in the United States
sell Fun Karts. Dealer sales are made through Company personnel under the
supervision of Mr. Lawrence E. Schwall, III, the Company's Sales and Marketing
Vice President. The Company does not currently engage independent
manufacturers representatives; however, it is investigating the possibility of
contracting with such representatives for the purpose of servicing
underpenetrated regions of the United States as well as foreign markets. In
1995, substantially all of the Company's product sales were to independent
dealers. See "Management."
To broaden its distribution channels, the Company in 1996 began
selling its Fun Karts to mass merchandisers, Wal-Mart and Sam's Club. Wal-Mart
purchased approximately 1,500 Fun Karts, while Sam's Club purchased
approximately 2,500 Fun Karts, collectively representing approximately 21% of
the Company's 1996 unit sales. Sales to lawn and garden stores, motorcycle
shops, karts specialty stores, automobile parts dealers, hardware stores and
other dealers accounted for 36.3%, 13.9%, 7.4%, 6.5%, 6.3 and 7%, respectively,
of the Company's 1996 unit sales. The Company estimates that sales of its
products to independent dealers and mass merchandisers will be approximately
80% and 20%, respectively, in 1997. The Company anticipates that sales to
Sam's Club and Wal-Mart will represent approximately 5% and 6%, respectively,
of the Company's 1997 revenues with approximately 9% of 1997 revenues being
attributed to other mass merchandisers. The Company does not anticipate that
sales to Sam's Club or Wal-Mart will represent a significant portion of the
Company's future revenues. Although the Company believes that sales to mass
merchandisers offers a significant growth opportunity, the Company will seek to
obtain a reasonable balance between its dealer and mass merchandisers
distribution networks and will attempt to avoid a high concentration of sales
to any one or group of dealers or mass merchandisers. See "Risk Factors --
Dependence on Independent Dealers; Dependence on Major Customers."
The Company has two main modes of delivery to its dealers. The
Company delivers directly to Louisiana and Alabama dealers, using four pickup
trucks with trailers that can carry 27 Fun Karts per truck. All Louisiana and
Alabama delivery routes are designed to be completed during a single day. All
other dealers and mass merchandisers receive their Fun Karts by common carrier,
collected F.O.B. dealer. The typical turnaround from order date to shipment is
one to two days in the off season, and three to seven days in peak season. Fun
Karts are delivered completely assembled, except for the installation of the
accompanying safety cages.
MARKETING. The historical marketing strategy of Brister's and USA has
been to build a broad and diverse independent dealer base, primarily in the
Southeast and Southwest regions of the United States, by offering safe, high-
quality and reliable Fun Karts that are competitively priced and timely
delivered. To improve its market share position, in 1996, the Company added 15
new dealers and two mass merchandisers to its existing distribution channels.
The Company's future marketing efforts are designed to maintain and expand its
independent dealer network in the South and West regions of the United States
and in foreign markets through direct communications with dealers and assisting
them with their selling and marketing efforts with Company-sponsored seminars,
discounts or rebate products and advertising, including product videos and
brochures, leaflets, posters, signs and other miscellaneous promotion and items
for use by dealers. The Company will also seek to increase sales to mass
merchandisers with direct communication, engaging independent sales
representatives and attendance by Company representatives at Fun Kart and
industry related trade shows. The Company believes that attendance at trade
shows will allow it to promote its products to a diversified group of dealers
and mass merchandisers currently targeted by the Company. The Company also
intends to implement a complete part and accessories sales program including
such items as helmets, jackets, boots and shirts, which will be sold to its
dealers and mass merchandisers. Parts and accessories may be ordered by
toll-free telephone contact with the Company's representatives and overnight
service is available if required.
The Company's advertising and promotional materials emphasize the
safety-related features built into the Company's Fun Karts. The Company has
adopted this advertising strategy in order to promote the concept that it is
fun and safe for children to own and operate Fun Karts. Additionally, the
Company intends to increase its penetration of its target market by enhancing
potential customers' awareness of its products by advertising in youth-oriented
magazines, motorcycle, lawn and garden, hardware and outdoor power equipment
trade magazines, establishment of a Company home page on the Internet,
displaying and promoting the Company's products at NASCAR races and related
events and traditional print, billboard and, to a lesser extent, television
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and radio media. The Company believes that if it is to further penetrate its
target market, the Company must advertise in media easily accessible by this
group and attractively and prominently display its Fun Karts in locations and
at events frequented by young males and their parents.
To enhance its marketing program, the Company, on January 21, 1997,
entered into a one-year promotional agreement with NASCAR driver, Bobby
Labonte. Under the terms of the agreement, Mr. Labonte will be the national
spokesperson for the Company's products and will appear at various
Company-sponsored and industry trade shows to promote the Company's Fun Karts.
The Company will also have the right to display a Company decal on Mr.
Labonte's #44 Busch Grand National racing car. Mr. Labonte will receive
approximately $104,000 for his services during 1997 plus reimbursement of
travel, food and lodging expenses. The Company has the option to renew the
agreement for 1998 on similar terms.
CUSTOMERS
In 1996, approximately 79% of the Company's sales were to its
independent dealers and the Company projects that it will sell approximately
80% of its Fun Karts to independent dealers in 1997. No one dealer or group of
affiliated dealers accounted for 10% or more of the Company's 1996 sales. In
1996, 12% and 9% of the Company's sales were made to Sam's Club and Wal-Mart,
respectively. The Company believes that Sam's Club and Wal-Mart will account
for approximately 6% and 5%, respectively, of the Company's 1997 revenues with
approximately 9% of 1997 revenues being attributable to other mass
merchandisers. The Company does not anticipate that sales to Sam's Club or
Wal-Mart will represent a significant portion of future revenues. The Company
does not believe that any one mass merchandiser or any dealer or group of
affiliated dealers will account for 10% or more of the Company's 1997 revenues.
The loss of any customer who accounts for 10% or more of the Company's revenues
would have a material adverse effect on the financial condition and results of
operations of the Company. See "Risk Factors -- Dependence on Independent
Dealers; Dependence on Major Customers."
BACKLOG
The Company typically fills and ships customer orders within 3 to 7
days of receipt of the order and, therefore, maintains no significant backlog.
FACILITIES
The following table sets forth information concerning the Company's
facilities:
<TABLE>
<CAPTION>
Date Leased Expiration of Approximate
Location or Acquired Description Lease Term Square Footage
--------------------------- ------------- --------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Covington, Louisiana 1996 Corporate Offices(1) 2001 3,400
Roseland Louisiana 1996 Manufacturing facility(2) 1998 48,000
Prattville, Alabama 1996 Manufacturing facility (3) 20,000
</TABLE>
- -----------------------
(1) The monthly lease payment is $4,058 with adjustments for Consumer Price
Index.
(2) The Company and Charles Brister, a director of the Company, have entered
into a Real Estate Option Right of First Refusal Agreement. This agreement
provides that the Company may, at its sole option, purchase the Roseland
facility for an aggregate purchase price of $550,000. The option can be
exercised after December 31, 1997 and expires on December 31, 2000. On
March 15, 1996, the Company and Mr. Brister entered into a lease agreement
for this facility which provides for a two-year primary term with a
two-year renewal option. The monthly lease payment is $6,025 with
adjustments for increases in the Consumer Price Index. The Company
believes these terms are comparable to existing market rates in the region.
Approximately 45,000 square feet is used for manufacturing and 3,000 square
feet is used for office space at the Roseland facility. See "Certain
Relationships and Related Transactions."
(3) The Prattville facility is situated on a two-acre tract of land owned by
the Company. This property is subject to a mortgage held by a financial
institution with a principal balance of approximately $230,000 at June 30,
1997 with interest at the financial institution's commercial base rate (10%
at June 30, 1997). The Company is obligated to make monthly payments of
principal and interest of $2,626 until 2010. The Prattville facility could
be expanded to 40,000 square feet on the existing land. The Company has
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an option to acquire two acres adjacent to its existing facilities for
future expansion. The Prattville facility is located in a planned
industrial park with adequate support utilities and freight services.
GOVERNMENTAL REGULATIONS
Consumer protection laws exist in many states in which the Company markets
its products. Any violation of such laws or regulations could have a material
adverse effect on the Company. The Company's manufacturing facilities are
inspected by the Occupational Safety and Health Administration. The Company
believes that it is generally in compliance in all material respects with all
currently applicable federal and state laws and regulations. Federal, state
and local environmental regulations are not expected to have a material effect
on the Company's operations. However, if the Company in the future acquires an
entity which is in violation of consumer or environmental laws and regulations,
such violations may have a material adverse effect on the Company's operations.
Management believes certain states, including California, have proposed
legislation involving emission or other safety standards for the type of
gas-powered type engines installed on the Company's Fun Karts. The Company is
currently unable to predict whether such legislation will be enacted in the
future and, if so, the ultimate impact on the Company and its operations.
EMPLOYEES
The Company employs approximately 96 employees of which 56 are employed on
a full-time basis. Eight employees are administration and sales personnel,
four are plant management and supervisory personnel and 84 hourly employees are
involved in manufacturing and shipping. In spite of the seasonal nature of
sales, the Company attempts to keep all personnel employed year-round and
increases the hours per work week to meet seasonal demand.
Cost of manufacturing labor for the Company is between $5.00 and $9.00 per
hour, which is comparable to labor costs in its respective markets. The
Company's employees are not represented by a union or subject to a collectively
bargaining agreement. The Company has never experienced a strike or work
stoppage and considers its relations with its employees to be excellent.
COMPETITION
The Fun Karts industry is highly competitive, and there is no assurance
that the Company will be able to continue to compete profitably in this
industry in the future. The Company expects that it will continue to face
intense competition as its business and acquisition strategies are implemented.
Such competition may result in reduced sales, reduced margins, or both. The
Company is and will be competing with larger, better capitalized companies
which may be better positioned to respond to shifts in consumer demand and
other market related changes. If other companies introduce new and modified
products before the Company achieves significant market expansion, the Company
may experience growth below projected levels which could have a material
adverse effect on the Company's operating results. However, the Company
believes that it will be able to compete effectively with its competitors by
diversifying its product line and expanding its market share through
implementation of its business and acquisition strategies.
The Company has identified three major competitors in the Fun Karts
industry, Manco Productions, a Fort Wayne, Indiana-based company, Carter
Brothers Manufacturing, a Brundidge, Alabama-based company, and Ken-Bar
Manufacturing, a Cornelia, Georgia-based company. Management estimates that
the Company, which had approximately 14% market share, plus its three primary
competitors accounted for over 60% of the Fun Karts sold in the United States
in 1996.
PRODUCT LIABILITY AND INSURANCE LIMITS
The nature of the products manufactured and marketed by the Company is such
that the products may fail due to material inadequacies or equipment failures.
Such a failure may subject the Company to the risk of product liability claims
and litigation arising from injuries allegedly caused by the improper
functioning or design of its products. As the Company expands its product
lines and distributes more products into the marketplace, the Company's
exposure to such potential liability will also increase. The Company currently
maintains $5
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million occurrence basis product liability insurance (with coverage being
provided in respect of accidents which occurred during the policy year,
regardless of when the related claim is made) with a $50,000 self-insured
retention and $5 million maximum per occurrence coverage. The Company has four
pending product liability claims. None of the current claims are expected to
exceed the existing policy limits. The Company has never had a claim that
resulted in an award or settlement in excess of insurance coverage. At
December 31, 1996, the Company had accrued $100,000 for the defense and
possible payment of pending claims. The Company believes that if it is
successful in the sale and distribution of a large number and variety of Fun
Karts and related products, product liability claims will be inevitable,
particularly given the current litigious nature of American consumers. There
is no assurance that such insurance coverage 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. 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.
LEGAL PROCEEDINGS
In addition to product liability claims, the Company, from time to time, is
involved in lawsuits in the ordinary course of business. Such lawsuits have
not resulted in any material losses to date, and, except as discussed below,
the Company does not believe that the outcome of any existing lawsuits would
have a material adverse effect on its business.
On February 4, 1997 a lawsuit was filed in a Mississippi state court
against the Company, Brister's and an unaffiliated insurance broker by the
Company's insurance underwriter to have insurance coverage declared as null and
void for an alleged material misrepresentation on the insurance application.
This action arose as a result of the payment in 1997 by the insurance
underwriter of $700,000 in settlement of a product liability lawsuit against
Brister's and other defendants. The Company intends to file a counterclaim
against the Company's insurance broker relating to possible misrepresentations
made by the insurance broker to the insurance underwriter regarding Brister's
prior product liability claims history. The Company intends to vigorously
defend this lawsuit. The Company is currently engaged in discovery and is
unable to predict the outcome of this litigation. If the Plaintiff is
successful in this litigation and is awarded a judgement for damages against
the Company and Brister's, such judgment could have a material adverse effect
on the Company's business, financial condition and results of operations.
Under the terms of the Brister's Acquisition, the Company may offset certain
product liability claims against certain shares of the Common Stock of the
Company issued to Mr. Charles Brister, a director and principal stockholder of
the Company, as partial consideration for the Brister's Acquisition. See "The
Company -- Acquisitions; Brister's Acquisition," "Management," "Certain
Relationships and Related Transactions" and "Principal Stockholders."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
V. Lynn Graybill(1)(2) 52 Chairman of the Board, President and Chief Executive Officer
John V. Callegari, Jr. 44 Vice President, Administration and Chief Financial Officer
Lawrence E. Schwall, III 36 Vice President, Sales and Marketing
Timothy P. Halter(1) 30 Vice President, Secretary and Director
Charles Brister(1) 45 Director
Joseph R. Mannes(2) 38 Director
Ronald C. Morgan 49 Director
Robert W. Bell(2) 59 Director
Gary C. Evans 40 Director
</TABLE>
- --------------------------------
(1) Members of the Company's Compensation Committee.
(2) Members of the Company's Audit Committee.
The Company may employ such additional management personnel as the
Board of Directors of the Company deems necessary. The Company has not
identified nor reached an agreement or understanding with any other individuals
to serve in such management positions, but does not anticipate any difficulty
in employing qualified individuals.
Directors of the Company are elected by the stockholders at each
annual meeting and serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Officers are elected to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed or their earlier resignation or removal from office.
Information regarding the directors and management of the Company is
set forth below.
V. Lynn Graybill is the Chairman of the Board, President and Chief
Executive Officer of the Company and has served in those capacities since March
1996. From September 1993 to March 1996, Mr. Graybill served as President of
Capacity of Texas, Inc., a specialty vehicle engineering and manufacturing
subsidiary of Collins Industries (Nasdaq: COLL), which sold products through an
international dealer organization. From 1988 to 1993, Mr. Graybill was
President and Chief Executive Officer of Peerless Chain Company, a 200 employee
$30 million sales consumer hardware company selling to hardware stores, farm
implement and supply stores, automotive parts stores, large mass merchandisers
and home centers in the United States. From 1985 to 1988, Mr. Graybill was
Division President of Harlan Tractor Corporation, a 90 employee $10 million
sales manufacturer of specialty vehicles, including ground support vehicles for
the airline industry. From 1980 to 1985, Mr. Graybill was Vice President of
Leland Truck Equipment Company, a 300 employee $30 million sales manufacturer
and retail distributor of truck parts and equipment. From 1972 to 1980, Mr.
Graybill worked in various supervisory, engineering, accounting, safety, union
contract administration and production control positions at Harnischfeger
Corporation, a Fortune 500 manufacturer of hydraulic truck and ground cranes.
Mr. Graybill received a B.S. degree in Industrial Management from Central
Missouri State University.
John V. Callegari, Jr., is the Vice President, Administration and
Chief Financial Officer of the Company and has served in these capacities since
November 1996. Mr. Callegari is responsible for all accounting matters,
Exchange Act reporting, cash management, risk management, audit and taxes,
human
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<PAGE> 47
resources and information systems for the Company. Prior to joining the
Company, Mr. Callegari served as Chief Financial Officer of Con Pac, Inc. from
May 1994 to May 1996. Con Pac, Inc. is a manufacturer of folding cartons, and
while with Con Pac, Inc., Mr. Callegari had responsibilities similar to those
which he has with the Company. From January 1992 to May 1994, Mr. Callegari
served as Executive Vice President and Chief Financial Officer of Sunport
Medical Corporation, a medical diagnostic imaging and rehabilitation company
with 12 clinics in the State of Texas, and was responsible for accounting
matters, Exchange Act reporting, investor relations and risk management. From
March 1982 to December 1991, Mr. Callegari served as Director of Finance of
Stewart Enterprises, a multi-divisional holding company with worldwide
interests in real estate, construction and insurance companies, and was
responsible for all accounting matters, including corporate acquisition
accounting. Mr. Callegari is a Certified Public Accountant and received his
B.S. degree in Accounting from Louisiana State University.
Lawrence E. Schwall, III, is the Vice President, Sales and Marketing
of the Company and has served in this capacity since January 1997. Mr.
Schwall's responsibilities include overseeing the development of the Company's
sales and marketing strategies, market forecasting, and the development and
presentation of product knowledge seminars for the Company's dealers and mass
merchandisers. From December 1995 to January 1997, Mr. Schwall served as
Territory Manager -- Commercial Lawn and Garden Dealers for Homelite, Inc., a
subsidiary of Deere & Co. Homelite, Inc. is a manufacturer of hand-held
products. While with Homelite, Inc., Mr. Schwall was responsible for producing
training seminars for the company's customers. From August 1987 to December
1995, Mr. Schwall was OEM Engine Sales Manager for Delta Power, Inc. and was
responsible for the sale and marketing of engines to existing customers and
prospective accounts throughout the southern region of the United States. Mr.
Schwall also served with the industrial division of Briggs & Stratton as
communications liaison for Delta Power, Inc.
Timothy P. Halter has been Vice President, Secretary and a director of
the Company since February 1996. Since May 1995, Mr. Halter has served as
President of Halter Financial Group, Inc., a Dallas, Texas based financial
consulting firm. From 1991 to 1995, Mr. Halter was President of Halter Capital
Corporation, a diversified holding company. Mr. Halter also serves on the
Board of Directors of Duncanville National Bank, located in Duncanville, Texas.
Charles Brister is a director of the Company and has served in this
capacity since March 1996. He served as President and Chief Executive Officer
of Brister's from 1986 to April 1996.
Joseph R. Mannes has been a director of the Company since July 1996,
and since February 1996 has been the Chief Financial Officer, Secretary and
Treasurer of Interactive Creations Incorporated ("ICI"), a corporation offering
real- time internet gaming services. From 1987 until joining ICI, Mr. Mannes
was First Vice President in the Corporate Finance Department of Rauscher Pierce
Refsnes, Inc., a Dallas, Texas stock brokerage company. From 1982 to 1987, Mr.
Mannes was in the commercial lending division of the First National Bank of
Boston, where he attained the position of Assistant Vice President. Mr. Mannes
worked in both the Special Industry Group and the High Technology Group at
First National Bank of Boston. Mr. Mannes graduated with an MBA in Accounting
and Finance from the Wharton School, Graduate Division, of the University of
Pennsylvania in 1982 and an A.B. from Dartmouth College in 1980. Mr. Mannes is
a Chartered Financial Analyst.
Ronald C. Morgan has been a director of the Company since July 1996.
Since June 1980, Mr. Morgan has served as Chief Operating Officer, Executive
Vice President and Director of The Leather Factory, Inc., an AMEX listed
company ("TLF"). Mr. Morgan was a co-founder of TLF. Mr. Morgan was employed
by the Tandy Leather Company for ten years prior to 1980, eventually attaining
the position of Vice-President -- Eastern Division. Mr. Morgan received a B.S.
degree from West Texas State University.
Robert W. Bell has been a director of the Company since July 1996. He
served as Chairman, President and Chief Executive Officer of NewCare Health
Corporation from 1987 to January 1997, when he retired. NewCare Health
Corporation is a Nasdaq SmallCap Market-listed nursing home company. From 1981
to 1987, Mr. Bell was President of R.W.B. Realty, a Louisiana corporation that
sponsored public and private limited partnerships that owned, built and
operated nursing homes and medical office buildings. From 1964 to 1981, Mr.
Bell was President and Chairman of Bell Realty and Land Company, a residential
land development and home construction business in Mississippi.
-46-
<PAGE> 48
Gary C. Evans has been a director of the Company since July 1996. Mr.
Evans has served as President, Chief Executive Officer and a director of Magnum
Hunter Resources, Inc. ("Magnum"), an American Stock Exchange oil and gas
exploration and development company, since December 1995. Mr. Evans previously
served as Chairman, President and Chief Executive Officer of Hunter Resources,
Inc. ("Hunter") from September 1992 until its merger with Magnum. From
December 1990 to September 1992, he served as President and Chief Operating
Officer of Hunter. From 1985 to 1990, he was the founder and President of
Sunbelt Energy, Inc., prior to its merger with Hunter. From 1981 to 1985, Mr.
Evans was associated with the Mercantile Bank of Canada where he held various
positions including Vice President and Manager of the Energy Division of the
southwestern United States. From 1977 to 1981, he served in various capacities
with National Bank of Commerce (currently BankTexas, N.A.) including Credit
Manager and Credit Officer. Mr. Evans serves on the Board of Directors of
Digital Communications Technology Corporation, an American Stock Exchange
listed company.
There are no family relationships among any of the Company's officers
and directors.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued for services,
including salary and bonus amounts, rendered in all capacities for the Company
to its Chief Executive Officer. No other executive officer of the Company
received remuneration in excess of $100,000 during the referenced periods. All
other compensation related tables required to be reported have been omitted as
there has been no applicable compensation awarded to, earned by or paid to any
of the Company's executive officers in any fiscal year to be covered by such
tables.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------- -----------------------------
Awards
-----------------------------
Securities
Other Annual Restricted Underlying
Name/Title Year Salary/Bonu Compensation Stock Awards Options/SARs
---------- ---- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
V. Lynn Graybill, Chairman of the 1996 $ 121,731 $15,000(1) -0- -0-
Board, Chief Executive Officer
and President
</TABLE>
- --------------------------
(1) Represents a signing bonus equal to 10% of Mr. Graybill's base salary,
which was paid by issuing Mr. Graybill 140,000 restricted shares of Common
Stock of the Company. See "-- Employment Agreements."
EMPLOYMENT AGREEMENTS
On March 15, 1996, the Company entered into a three-year Employment
Agreement (the "Employment Agreement") with V. Lynn Graybill, whereby Mr.
Graybill agreed to serve as Chairman of the Board, President and Chief
Executive Officer of the Company. The Employment Agreement is for a term of
three years and provides Mr. Graybill with an annual base salary of $150,000.
Upon execution of the Employment Agreement, Mr. Graybill received a signing
bonus of $15,000 (the "Bonus"). The Bonus was paid with the issuance by the
Company to Mr. Graybill of 140,000 shares of Common Stock (the "Graybill
Shares"), subject to a buy-back option of the Company. In year two of the
Employment Agreement, which ends on March 15, 1998, the Company may buy back up
to 70,000 Graybill Shares for $8,400 or $0.12 per share and in year three,
which ends on March 15, 1999, up to 35,000 Graybill Shares for $4,200 or $0.12
per share if Mr. Graybill is either terminated for cause or Mr. Graybill
terminates his employment voluntarily prior to the expiration of the Employment
Agreement. If the Employment Agreement is terminated for any reason other than
for cause or voluntarily by Mr. Graybill, the buy back option available to the
Company is terminated. Mr. Graybill may also receive performance based
incentive stock options to purchase shares of Common Stock at a price equal to
the market value of the Common Stock on the date of issuance, as determined by
the Board of Directors. Mr. Graybill receives benefits commensurate with his
title including medical insurance and other benefits offered to executive
management of the Company. Mr. Graybill is responsible for the day-to-day
operations of the Company and for the preparation of the Company's annual
budget, monthly operating financial statements, quarterly presentations
addressing qualitative and quantitative issues of the operations of the
Company, and any and all other matters requested by the Board of Directors.
-47-
<PAGE> 49
The Employment Agreement restricts the ability of Mr. Graybill to
compete with the Company (the "Covenant Not to Compete") by becoming involved
directly or indirectly with any business that designs, manufactures,
distributes or markets Fun Karts during the term of the Employment Agreement or
for a period of three years following the termination of the Employment
Agreement by either Mr. Graybill or the Company. The enforceability of the
Covenant Not to Compete is governed by the statutory and case law authority of
the State of Texas. Generally, a covenant not to compete is enforceable in the
State of Texas if the limitations contained therein are reasonable as to the
time, geographical area and scope of the activity which they cover.
Enforceability is generally determined on a case by case basis and hinges on
the showing that the limitations are reasonable and they are necessary to
protect the goodwill or other business interest of the entity seeking
enforcement. The Company believes the Covenant Not to Compete is enforceable
in light of the foregoing standards. However, if its enforceability is
challenged in a court of law, the Covenant Not to Compete may be substantially
altered to limit the scope of its application.
To provide for continuity of management, the Company may enter into
employment agreements with other members of its executive management staff.
STOCK OPTIONS
On July 23, 1996, the Board of Directors of the Company adopted a
stock option plan providing for the reservation of 66,667 shares of Common
Stock for options to be granted to employees of the Company at the discretion
of the Compensation Committee of the Board of Directors. In July 1996, the
Company issued to 30 employees, who were neither officers nor directors of the
Company, options to purchase an aggregate of 59,355 shares of Common Stock at
an exercise price of $5.63 per share which are currently exercisable and 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 66,667 shares of Common
Stock for options to be granted to employees of the Company. On January 30,
1997, the Company issued to each of John V. Callegari, Jr., the Vice President,
Administration and Chief Financial Officer of the Company, and Lawrence E.
Schwall, III, the Vice President, Sales and Marketing of the Company, options
to purchase 6,667 shares of Common Stock at an exercise of $4.875 per share
which are exercisable after January 30, 1998 and expire on January 30, 2002.
Also on January 30, 1997, the Company issued to 61 employees, who were neither
officers nor directors of the Company, options to purchase an aggregate of
52,670 shares of Common Stock at an exercise price of $4.875 per share which
are exercisable after January 30, 1998 and expire on January 30, 2002.
The exercise price per share of all options issued by the Company was
based on the closing bid price of the Company's Common Stock as quoted on the
Electronic Bulletin Board of NASD on the date of grant of such options. The
Company intends to adopt a qualified stock compensation plan after completion
of this Offering as it believes it is necessary to retain current management
and employ additional qualified personnel. Any stock option plan which is
adopted by the Company will have terms that are normally accepted in the
industry and for public entities.
COMPENSATION OF DIRECTORS
Each Director of the Company is entitled to receive annual
compensation of $6,000 for attendance of meetings of the Board of Directors of
the Company and for serving on any committees of the Board of Directors of the
Company. The Company will reimburse directors for out-of-pocket expenses of
attending meetings.
COMMITTEES
The Board of Directors of the Company has established a Compensation
Committee and Audit Committee. The Compensation Committee makes
recommendations to the Board of Directors regarding the compensation of
executive officers and administers the Company's employee benefit plans, if
any. The Audit Committee is comprised of a majority of independent directors
and its functions are to recommend to the Board of Directors the engagement of
the Company's independent public accountants, review with such accountants the
plans for and the results and scope of their auditing engagement and certain
other matters relating to their services as provided to the Company.
-48-
<PAGE> 50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From December 1989 until March 31, 1996, the Company had no
significant assets, liabilities or business operations. On December 15, 1995,
a former director of the Company and HFG, a financial consulting firm owned by
Timothy P. Halter, an officer and director of the Company, together acquired
31,634 shares of the Company's Common Stock from the then controlling
stockholders of the Company. Subsequently, on February 20, 1996, the Company
sold 50,000 restricted shares of its Common Stock to a former director of the
Company for $938 cash. On March 7, 1996, the Company sold an aggregate 967,545
restricted shares of Common Stock to HFG for $1,451 cash. See "The Company --
Historical," "Management," and "Principal Stockholders."
In connection with the Company's March 1996 Offering, the Company and
HFG have agreed to issue additional shares of Common Stock to participants in
the March 1996 Offering if on March 31, 1998 (the "Offering Valuation Date")
the average closing bid price of the Common Stock for the ten trading days
prior to and including the Offering Valuation Date (the "Stock Market Value")
does not equal or exceed $4.50 per share. If such an adjustment is required on
the Offering Valuation Date, each participant in the March 1996 Offering will
receive for no additional consideration an additional number of shares of
Common Stock necessary to increase the Stock Market Value per share of the
Common Stock acquired in the March 1996 Offering to $4.50 per share. HFG has
placed into escrow 233,333 shares of Common Stock (the "HFG Escrow Shares") to
be issued to participants in the March 1996 Offering if an adjustment is
required. The HFG Escrow Shares are subject to the terms and conditions of
that certain Escrow Agreement, dated March 31, 1996 (the "Escrow Agreement"),
by and between HFG, Securities Transfer Corporation, as escrow agent, and the
Company. If on the Offering Valuation Date the Stock Market Value of the
Common Stock is less than $2.25 per share, the Company will be obligated to
also issue the number of additional shares of Common Stock necessary to
increase the Stock Market Value per share of the Common Stock acquired in the
March 1996 Offering to $4.50 per share. If on the Offering Valuation Date, the
Stock Market Value is equal to or greater than $4.50 per share, the HFG Escrow
Agreement will terminate and the HFG Escrow Shares will be delivered to HFG.
Also, any remaining HFG Escrow Shares after any required distribution to the
original March 1996 Offering participants will be returned to HFG. The Company
is under no obligation to issue to HFG any additional shares of Common Stock as
reimbursement for any HFG Escrow Shares that may be distributed to participants
in the March 1996 Offering. The obligation of the Company and HFG to deliver
additional shares on the Offering Valuation Date applies only to original
participants in the March 1996 Offering who own shares purchased in the March
1996 Offering on the Offering Valuation Date. See "Risk Factors -- Potential
Additional Dilution to Public Investors," "The Company -- Recent Financings,"
"Dilution," "Principal Stockholders" and "Shares Eligible For Future Sale."
In January 1996, concurrent with the execution of the Brister's stock
purchase agreement, the Company entered into a consulting agreement with HFG
whereby HFG agreed to assist the Company with its corporate reorganization,
capital raising activities, employment of legal and accounting firms and the
Brister's Acquisition. For the benefit of the Company, HFG paid to Brister's a
deposit of $20,000 to cover Brister's legal and auditing expenses in the event
the Brister's Acquisition was not consummated. Additionally, HFG agreed to pay
all legal and other professional fees relating to the reorganization and
recapitalization of the Company, and the Brister's Acquisition, if the
Brister's Acquisition was not consummated. For such services and assumption of
contingent liabilities, the Company agreed to pay HFG a consulting fee of
$15,000 and reimbursement of expenses only if the Brister's Acquisition was
consummated. The $15,000 consulting fee was payable by the Company at the
Brister's closing in cash and/or a number of Brister's Escrow Shares (as
defined below) to be determined at the valuation date (as defined below). In
accordance with the terms of the HFG consulting agreement, if Mr. Brister
received 500,000 or more of the Brister's Escrow Shares, the Company would pay
the consulting fee with a cash payment of $10,000 and the delivery of the
remaining Brister's Escrow Shares, if any, to HFG. If Mr. Brister received
less than 500,000 of the Brister's Escrow Shares, the $15,000 consulting fee
would be satisfied by delivery to HFG of the remaining Brister's Escrow Shares.
In July 1996, HFG received 483,333 Brister's Escrow Shares as full payment of
the $15,000 consulting fee. Additionally, at the Brister's closing, HFG
received reimbursement of $36,400 from the Company for legal and other
professional fees paid by HFG relating to the Company's reorganization and
Brister's Acquisition. Brister's also returned to HFG the initial $20,000
deposit.
-49-
<PAGE> 51
The Company in March 1996 entered into a second consulting agreement
with HFG which provided for an annual payment of $10,000 to HFG for assisting
the Company with its financial public relations and stockholder communications.
The HFG consulting agreement expired in March 1997 and has been renewed for an
additional one-year period on similar terms. Timothy P. Halter, the President
and sole owner of HFG, is a principal stockholder of the Company and the Vice
President, Secretary and a director of the Company. See "Management" and
"Principal Stockholders."
At the closing of the Brister's Acquisition, effective at the close of
business on March 31, 1996, 1,000,000 shares of the Company's Common Stock (the
"Brister's Escrow Shares") were issued and delivered to an escrow agent to be
held until the valuation date for such shares. Under the terms of the
Brister's stock purchase agreement, Mr. Charles Brister, a director and
principal stockholder of the Company, was to receive, in addition to other
consideration, the number of Brister's Escrow Shares having a market value of
$3.1 million on the valuation date. The valuation date was defined in the
Brister's stock purchase agreement as the 30th day following the listing date
of the Company's Common Stock on the NASD Electronic Bulletin Board. On the
valuation date (July 29, 1996), the market value, as defined in the Brister's
stock purchase agreement, was the average of the closing bid and ask prices per
share of the Company's Common Stock as quoted on the NASD Electronic Bulletin
Board or $6.00 per share. The Company, in July 1996, delivered to Mr. Brister
516,667 of the Brister's Escrow Shares.
The Company also issued Mr. Brister a subordinated note in the
principal amount of $1,000,000 payable over a seven-year period (the
"Subordinated Note"), a $200,000 note with 10% interest, with interest and
principal payable quarterly beginning April 1, 1997 and with a maturity date of
April 1, 1998 or upon successful completion of an underwritten public offering
of the Company's securities (collectively, the "Brister Notes"). Interest on
the Subordinated Note accrues at the rate of 8% per annum in year one and
increases 1% per year thereafter to a maximum of 14% per annum in year seven.
Payments due under the Subordinated Note are to be made in quarterly
installments with interest only being due and payable for the first three years
of the Subordinated Note. The principal amount of the Subordinated Note is
payable in installments of $250,000 per year commencing in year four and ending
in year seven. The Subordinated Note is subordinated to the prior payment of
the principal of and interest on all other indebtedness of the Company then
outstanding, whether secured or unsecured. The Subordinated Note is secured
with securities having a market value of at least $1.0 million owned by Robert
W. Bell and Gary C. Evans, directors of the Company. The Brister Notes,
approximately $1.2 million, will be paid to Mr. Brister with a portion of the
proceeds of this Offering. See "The Company -- Acquisitions; Brister's
Acquisition," "Use of Proceeds," "Management" "Principal Stockholders."
Mr. Brister has deposited 83,334 shares of the Company's Common Stock
owned by him (the "Offset Shares") into an escrow account to offset any amounts
that may be owing at any time by Mr. Brister or Brister's to the Company or HFG
as a result of (i) a claim of products liability for Fun Karts manufactured
prior to the close of the Brister's Acquisition which results in either a
settlement or award of damages in excess of stated insurance policy limits or
(ii) any failure or breach of any representation, warranty, agreement or
covenant of Brister's or Mr. Brister under the terms of the Brister's stock
purchase agreement. If HFG or the Company determines that an offset is
appropriate, notice will be given to Mr. Brister at least 10 days prior to the
disposition of the Offset Shares. If conditions upon which the offset are
based are cured by Mr. Brister during that period, no offset will be
undertaken. However, upon an event of offset, both HFG and the Company have
sole discretion to sell or otherwise dispose of the number of Offset Shares
necessary to satisfy any outstanding liability or obligation imposed upon
either HFG or the Company. All remaining Offset Shares, upon the expiration of
the two-year offset period, will be returned to Mr. Brister. See "Business --
Legal Proceedings."
Concurrent with the Brister's Acquisition, the Company and Mr. Brister
entered into a Real Estate Option Right of First Refusal Agreement. Under the
terms of this agreement, the Company may, at its sole option, purchase the real
property and improvements upon which the Facilities are located for an
aggregate purchase price of $550,000. The option can be exercised commencing
on January 1, 1998 and expires on December 31, 2000. The Company and Mr.
Brister have also entered into a lease agreement for the Facilities which
provides for a two-year primary term with a two-year renewal option. The
monthly lease payment for the Facilities is $6,025 with adjustments for
increases in the Consumer Price Index. The Company believes these terms are
comparable to existing market rates in the region. See "Business --
Facilities."
-50-
<PAGE> 52
The Company, in March 1996, entered into a license agreement with
Charles Brister under which Mr. Brister has licensed to the Company for a
period of five years (at no cost to the Company during the first year) all of
the Intellectual Property (as hereinafter defined), which was owned by Mr.
Brister on March 15, 1996, and all Intellectual Property developed and/or owned
by Mr. Brister at any time subsequent to March 15, 1996. After the first year
of the license agreement, the Company and Mr. Brister agreed to enter into
subsequent agreements defining the license fee and royalty payments based on
terms at least as favorable as Mr. Brister has received, or could have
received, in arms'- length transactions with third parties. "Intellectual
Property" is defined as all domestic and foreign letters, 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 registration and applications and
copyright registration and applications owned or used by Brister's in the
operation of its business.
On March 15, 1997, the Company and Mr. Brister entered in an addendum
to the License Agreement and a related Royalty Agreement which provides for the
payment of a one-time license fee and future royalties, respectively, by the
Company to Mr. Brister for the use by the Company for a three-year period of
the automatic throttle override system ("ATOS") developed and patented by Mr.
Brister. The Company paid Mr. Brister an initial $10,000 license fee and
agreed during the first year of the three year extension to pay him a royalty
of $1.00 for each Company Fun Kart on which the ATOS was installed. During the
second and third year of the agreement, the Company agreed to pay during each
year a royalty of $1.00 for each Company Fun Kart on which the ATOS was
installed or $20,000 annually, whichever is greater.
Pursuant to the terms of the Brister's Acquisition, the Company
entered into a consulting agreement with Charles Brister which expired on
December 31, 1996. Under the consulting agreement, Mr. Brister provided
certain consulting services to the Company and its subsidiaries. In
consideration for these services, Mr. Brister received $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. During 1996, Mr. Brister received $10,070 from the
Company for consulting fees. The Company intends to employ Mr. Brister on a
project by project basis during 1997 under similar terms as the 1996 consulting
agreement to develop innovative safety and technological features for the
Company's Fun Karts and to assist management with the development and design of
new products.
In connection with the Brister's Acquisition, Charles Brister and the
Company entered into two Non-Competition Agreements. The first Non-Competition
Agreement (the "Texas Agreement") provides that Mr. Brister will not compete
with the Company (a) in any jurisdiction in which the Company or any of its
subsidiaries or affiliates is duly qualified to transact business, (b) within
any marketing area in which the Company is doing a substantial amount of
business or (c) by directly or indirectly owning, managing, operating,
controlling or being employed by any entity engaged in a business which is in
competition with that being conducted by the Company. Mr. Brister is subject
to the Texas Agreement until March 15, 2001. The Texas Agreement is governed
by the laws of the State of Texas and does not cover Mr. Brister's activities
in the State of Louisiana. The enforceability of the Texas Agreement is
governed by the statutory and case law authority of the State of Texas.
Generally, a covenant not to compete is enforceable in the State of Texas if
the limitations contained therein are reasonable as to the time, geographical
area and scope of the activity which they cover. Enforceability is generally
determined on a case by case basis and hinges on the showing that the
limitations are reasonable and they are necessary to protect the goodwill or
other business interest of the entity seeking enforcement. The Company
believes that the Texas Agreement is enforceable in light of the foregoing
standards.
The Company and Mr. Brister also entered into the Non-Competition
Agreement (Louisiana Only) (the "Louisiana Agreement") for the purpose of
defining Mr. Brister's covenant not to compete within the State of Louisiana.
Under the Louisiana Agreement, Mr. Brister is prohibited from engaging in the
same activities as enumerated in the Texas Agreement within the State of
Louisiana for a period of two years from March 15, 1996. The enforceability of
the Louisiana Agreement is governed by the statutory and case law authority of
the State of Louisiana. Generally, a covenant not to compete is enforceable in
the State of Louisiana if the parishes within Louisiana in which a party can
not compete are defined and the agreement is not for a term in excess of two
years. Enforceability is generally determined on a case by case basis. The
Company believes that the Louisiana Agreement is enforceable in light of the
foregoing standards.
-51-
<PAGE> 53
To finance the Brister's Acquisition, the Company issued a promissory
note in the principal amount of $2,000,000 (the "Schlinger "Note") payable to
The Schlinger Foundation, a California non-profit public benefit corporation
(the "Foundation"). The Schlinger Note bears interest at the rate of 14% per
annum and is due and payable on or before March 15, 2001. Interest on the Note
is payable monthly with the principal to be paid in annual installments of
$399,996 in 1998, $399,996 in 1999 and $1,200,008 and 2000. The Schlinger Note
is secured by a first lien and security interest in all of the Company's
equipment, accounts receivable and inventory. As further consideration for the
$2,000,000 loan, the Company paid the Foundation $21,000, consisting of $10,500
cash and issued the Foundation 70,000 restricted shares of Common Stock. In
July 1996, the Foundation purchased an additional 200,000 shares of Common
Stock from HFG for $600,000 or $3.00 per share. Evert I. Schlinger, the
trustee of the Foundation, also owns 219,048 shares of the Company's Common
Stock which he purchased in April 1996 from HFG for $115,000 or $0.52 per
share. On March 15, 1996, two trusts of which Mr. Schlinger is the trustee
purchased 49,445 shares of Common Stock from the Company for $111,250 or $2.25
per share. Timothy P. Halter, an officer, director and principal stockholder
of the Company, is the President and sole owner of HFG. The Company intends to
pay the Schlinger Note with a portion of the proceeds of this Offering. See
"The Company -- Recent Financings," "Use of Proceeds," "Management" and
"Principal Stockholders."
Mr. Jerry M. Allen, a Vice President and former shareholder of USA, a
subsidiary of the Company, received $62,500 cash and 41,667 shares of the
Company's Common Stock as a result of the USA Acquisition. See "The Company --
Acquisitions; USA Acquisition."
On November 15, 1996, Mr. Gary C. Evans, a director of the Company,
purchased a Unit from the Company for $25,000 in connection with the Company's
Bridge Financing. See "The Company -- Recent Financings." "Management,"
"Principal Stockholders," "Description of Securities -- Bridge Financing" and
"Shares Eligible for Future Sale -- Lock- up Agreements."
The Company believes that all the foregoing related-party transactions
were on terms no less favorable to the Company than could reasonably be
obtained from unaffiliated third parties. All future transactions with
affiliates will be approved by a majority of disinterested directors of the
Company and on terms no less favorable to the Company than those that are
generally available from unaffiliated third parties.
-52-
<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
ownership of the Company's shares of Common Stock as of July 31, 1997 by each
of its directors, executive officers and persons known by the Company to
beneficially own 5% or more of the outstanding shares of the Common Stock and
all executive officers and directors as a group.
<TABLE>
<CAPTION>
Shares Beneficially Percentage of Shares Percentage of Shares
Owned Prior to and Beneficially Owned Beneficially Owned
Name(1) After the Offering Prior to the Offering After the Offering(2)
---- ------------------ --------------------- ---------------------
<S> <C> <C> <C>
V. Lynn Graybill(3) . . . . . . . . . . . . . . . 140,000 5.2 3.3
John V. Callegari(4) . . . . . . . . . . . . . . 667 * *
Lawrence E. Schwall, III(5) . . . . . . . . . . . -0- -0- -0-
Charles Brister(6) . . . . . . . . . . . . . . . 516,667 19.0 12.2
Joseph R. Mannes(7) . . . . . . . . . . . . . . . 63,734 2.3 1.5
Ronald C. Morgan(7) . . . . . . . . . . . . . . . 3,334 * *
Robert W. Bell(7) . . . . . . . . . . . . . . . . 14,445 * *
Gary C. Evans(8) . . . . . . . . . . . . . . . . 38,613 1.4 *
Timothy P. Halter(9) . . . . . . . . . . . . . . 495,253 18.2 11.7
Halter Financial Group, Inc.(9) . . . . . . . . . 495,253 18.2 11.7
Schlinger Foundation(10) . . . . . . . . . . . . 489,048 18.0 11.6
Evert I. Schlinger(11) . . . . . . . . . . . . . 538,493 19.8 12.7
Blair L. Smith(12) . . . . . . . . . . . . . . . 179,134 6.6 4.2
Officers and directors as a group (9 persons) . . 1,272,713 46.4 30.0
--------- ------ ------
Total . . . . . . . . . . . . . . . . . 1,990,340 72.6% 46.9%
===== ====
</TABLE>
- -------------------------------
*Less than 1%.
(1) Unless otherwise indicated, each person named in the table has sole voting
and investment power with respect to the shares beneficially owned. Also,
unless otherwise indicated, the address of each beneficial owner identified
below is: c/o Karts International Incorporated, 109 Northpark Boulevard,
Suite 210, Covington, Louisiana 70433.
(2) Includes the issuance of 104,175 shares of Common Stock issuable upon the
conversion of the Convertible Preferred Stock.
(3) Mr. Graybill is a director and the Chairman of the Board, President and
Chief Executive Officer of the Company. See "Management -- Employment
Agreement."
(4) Mr. Callegari is Vice President, Administration and Chief Financial Officer
of the Company. See "Management."
(5) Mr. Schwall is Vice President, Sales and Marketing of the Company. See
"Management."
(6) Mr. Brister is a director of the Company. See "The Company --
Acquisitions; Brister's Acquisition," "Management" and "Certain
Relationships and Related Transactions."
(7) Messrs. Mannes, Morgan and Bell are directors of the Company. See
"Management."
(8) Mr. Evans is a director of the Company. Includes 4,167 shares of Common
Stock issuable upon conversion of one share of Convertible Preferred Stock
owned by Mr. Evans. Includes 6,667 shares of Common Stock and 13,334
shares of Common Stock underlying 1996 Warrants issued to Mr. Evans in
connection with the Bridge Financing and conversion of the Convertible
Preferred Stock. See "Management," "Certain Relationships and Related
Transactions," "Description of Securities -- 1996 Warrants and -- Bridge
Financing" and "Shares Eligible for Future Sale -- Lock-up Agreements."
(9) Mr. Halter, the Vice President, Secretary and director of the Company, is
the sole stockholder, director and president of HFG and is therefore deemed
to have beneficial ownership of the shares of Common Stock held by HFG.
Includes the 233,333 shares of Common Stock subject to the HFG Escrow
Agreement. HFG may be deemed a promoter of the Company. HFG and Mr.
Halter's address is 4851 LBJ Freeway, Suite 201, Dallas, Texas 75244. See
"Risk Factors -- Potential Additional Dilution to Public Investors," "The
Company -- Historical," "Management" and "Certain Relationships and Related
Transactions."
(10) The Schlinger Foundation ("Foundation") beneficially owns 270,000
shares of the Company's Common Stock. See "The Company -- Recent
Financings" and "Certain Relationships and Related Transactions." Mr.
Schlinger is the sole trustee of the Foundation and has sole voting
and dispositive power over the shares held by the Foundation.
However, Mr. Schlinger does not assert any ownership interest in any
of the shares of Common Stock of the Company owned by the Foundation.
Mr. Schlinger owns 219,048 of the shares of Common Stock of the
Company for his own account. See "Certain Relationships and Related
Transactions."
(11) Includes 270,000 shares of Common Stock owned by the Foundation,
219,048 shares of Common Stock owned by Mr. Schlinger for his own
account, 37,778 shares of Common Stock held by the Brian Schlinger
Trust and 11,667 shares of Common Stock held by the Evert I. Schlinger
Jr. Trust. Mr. Evert I. Schlinger is the sole trustee of the Brian
Schlinger and Evert I. Schlinger, Jr. Trusts and has sole voting and
dispositive power over the shares held by these trusts. However, Mr.
Evert I. Schlinger does not claim any ownership interest in any of the
shares of Common Stock owned by either the Brian Schlinger Trust or
the Evert I. Schlinger, Jr. Trust.
(12) Mr. Smith's address is 4900 Ridgeview, Parker, Texas 75002.
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<PAGE> 55
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000
shares of preferred stock, $0.001 par value, and 14,000,000 shares of Common
Stock, $0.001 par value per share. Upon completion of this Offering, there
will be approximately 4,221,633 million shares of Common Stock issued, which
includes the 104,175 shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock. Except for the 25 shares of Convertible Preferred
Stock previously issued, there are no other outstanding shares of preferred
stock.
The following description of certain matters relating to the Common
Stock, Preferred Stock, Convertible Preferred Stock, Redeemable Common Stock
Purchase Warrants, 1996 Warrants and Class A Warrants is a summary and is
qualified in its entirety by the provisions of the Company's Articles of
Incorporation and Bylaws.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the payment of preferential dividends with
respect to any preferred stock that from time to time may be outstanding. In
the event of the dissolution, liquidation or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of all liabilities of the Company and subject to the prior
distribution rights of the holders of any preferred stock that may be
outstanding at that time. The holders of Common Stock do not have cumulative
voting rights or preemptive or other rights to acquire or subscribe for
additional, unissued or treasury shares. Accordingly, the holders of more than
50% of the issued and outstanding Common Stock voting for the election of
directors can elect all of the directors if they choose to do so, and in such
event, the holders of the remaining shares of Common Stock voting for the
election of the directors will be unable to elect any person or persons to the
Board of Directors. All outstanding shares of Common Stock are, and when
issued, the shares of Common Stock offered hereby, will be fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue 10,000,000 shares of
preferred stock, $0.001 par value per share, in one or more series, and to fix
the rights, preferences, qualifications, privileges, limitations or
restrictions of each such series without any further vote or action by the
stockholders, including the dividend rights, dividend rate, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences, and the number of shares
constituting any series or the designations of such series. Except for the
Convertible Preferred Stock, no shares of preferred stock have been issued.
The Company does not currently have any plans, arrangements, commitments or
understandings to issue any additional shares of preferred stock.
CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock constitutes a single series of
preferred stock. The Company may in the future issue additional series of
preferred stock but may not reissue any initially issued shares of Convertible
Preferred Stock that have been redeemed or converted into Common Stock unless
such shares are included in a different series of preferred stock.
The following is a summary of the terms and provisions of the
Convertible Preferred Stock:
DIVIDENDS. Holders of shares of the Convertible Preferred Stock are
not entitled to receive cash dividends or cash equivalent value stock dividends
of Common Stock.
CONVERSION RIGHTS. Upon the occurrence of certain events, including,
the closing of this Offering, the Company has the option to require the holders
of the Convertible Preferred Stock to convert the Convertible
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<PAGE> 56
Preferred Stock into either (a) $25,000 and 4,167 shares of Common Stock
("Option One"), or (b) 8,334 shares of Common Stock ("Option Two"). If for any
reason the Company does not complete a public offering of the securities by
November 15, 1997, each share of Convertible Preferred Stock will be
automatically converted into 8,334 shares of Common Stock. The Company does
not currently have any plans, arrangements, commitments or understandings to
issue any additional shares of Convertible Preferred Stock. See "The Company
- -- Recent Financings," "Use of Proceeds," "-- Bridge Financing" and "Shares
Eligible for Future Sale -- Lock-up Agreements."
Holders of Convertible Preferred Stock converted into Common Stock
will be entitled to the same rights applicable at the time of conversion to
other holders of Common Stock. The holders of the shares of the Convertible
Preferred Stock have no preemptive rights with respect to any securities of the
Company.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Company, the holders of shares of the Convertible Preferred
Stock are entitled to receive out of assets of the Company available for
distribution to stockholders, before any distribution of assets is made to
holders of Common Stock or any other junior stock, liquidating distributions in
the amount of $25,000 per share. If upon any liquidation, dissolution or
winding up of the Company, the assets distributable to the holders of the
Convertible Preferred Stock to any such distribution on a parity with the
Convertible Preferred Stock are insufficient to fully pay the preferential
amount, the holders of the Convertible Preferred Stock and of such other
preferred stock will share ratably in such distribution of assets in proportion
to the full respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of shares of the Convertible Preferred Stock will not be
entitled to any further participation in any distribution of assets by the
Company. Neither a consolidation or merger of the Company with another
corporation nor a sale or transfer of all or part of the Company's assets for
cash or securities will be considered a liquidation, dissolution or winding up
of the Company.
The right of the Company, and the rights of its creditors and
stockholders (including holders of the Convertible Preferred Stock), to
participate in the distribution of the assets of any subsidiary of the Company
upon any liquidation or reorganization of such subsidiary, or otherwise, will
be subject to the prior claims of creditors of such subsidiary (except to the
extent the Company may itself be a creditor with recognized claims against such
subsidiary).
VOTING RIGHTS. The holders of shares of Convertible Preferred Stock
have no voting rights.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Each Warrant entitles the holder thereof to purchase one share of
Common Stock at the initial public offering price per share of Common Stock for
a period of four years commencing on the first anniversary of the Effective
Date of this Offering (the "First Exercise Date"). Each Warrant is redeemable
by the Company at a redemption price of $0.01 per Warrant at any time after the
First Exercise Date, upon 30 days' prior written notice to the holders thereof,
if the average closing bid price of the Common Stock, as reported on the
principal exchange upon which the Common Stock is traded, equals or exceeds
twice the initial public offering price per share of Common Stock for 20
consecutive trading days ending three days prior to the date of the notice of
redemption. Pursuant to applicable federal and state securities laws, and in
the event a current prospectus is not available, the Warrants may not be
exercised by the holders thereof and the Company will be precluded from
redeeming the Warrants. There can be no assurance that the Company will not be
prevented by financial or other considerations from maintaining a current
prospectus. Any Warrantholder who does not exercise prior to the redemption
date, as set forth in the Company's notice of redemption, will forfeit the
right to purchase the Common Stock underlying the Warrants, and after the
redemption date or upon conclusion of the exercise period, any outstanding
Warrants will become void and be of no further force or effect, unless extended
by the Board of Directors of the Company. See "Underwriting" for the terms of
the warrants issuable pursuant to the Underwriters' Warrants.
The number of shares of Common Stock that may be purchased is subject
to adjustment upon the occurrence of certain events including a dividend
distribution to the Company's stockholders, or a subdivision, combination or
reclassification of the outstanding shares of Common Stock. Further, the
Warrant exercise price
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<PAGE> 57
is subject to adjustment in the event the Company issues additional stock or
rights to acquire stock at a price per share that is less than the current
market price per share of Common Stock on the record date established for the
issuance of additional stock or rights to acquire stock. The term "current
market price" is defined as the average of the daily closing prices for the 20
consecutive trading days ending three days prior to the record date. However,
the Warrant exercise price will not be adjusted in the case of the issuance or
exercise of options pursuant to the Company's stock option plans, the issuance
or exercise of the Underwriters' Warrants (or the Warrants included therein),
or any other options or warrants outstanding as of the date of this Offering.
The Warrant exercise price is also subject to adjustment in the event of a
consolidation or merger where a distribution by the Company is made to a
stockholder of the Company's assets or evidences of indebtedness (other than
cash or stock dividends) or pursuant to certain subscription rights or other
rights to acquire Common Stock.
In order for a holder to exercise his Warrants, there must be a
current registration statement on file with the Commission and various state
securities commissions to cover registration of the shares of Common Stock
underlying the Warrants. The Company intends to maintain a current
registration statement while the Warrants are exercisable. The maintenance of
a currently effective registration statement could result in substantial
expense to the Company, and there is no assurance that the Company will be able
to maintain a current registration statement covering the shares issuable upon
exercise of the Warrants. The Company believes it will be to qualify the
shares of Common Stock underlying the Warrants for sale in those states where
the Securities are to be offered. The Warrantholders may be deprived of any
value for the Warrants if a current prospectus covering the shares issuable
upon the exercise thereof is not kept effective or if such underlying shares
are not qualified in the states in which the holders of the Warrants reside.
In addition, if the Company merges with a business which does not have and
cannot obtain audited financial statements, holders of the Warrants will be
unable to exercise their Warrants because the Company will be unable to provide
a current prospectus.
The Warrants may be exercisable on surrender of the applicable Warrant
certificate on or prior to expiration of the applicable Warrant exercise
period, with the form on the reverse side of the certificate executed as
indicated, and accompanied by payment of the full exercise price for the number
of Warrants being exercised. Subject to certain limitations, a commission is
payable to the Underwriters upon exercise of the Warrants. See "Underwriting."
1996 WARRANTS
Each of the 500,025 outstanding 1996 Warrants entitles the holder
thereof to purchase, up until May 15, 2000, one share of Common Stock at an
exercise price of $4.50 per share, subject to adjustment in certain
circumstances. The Company may redeem the 1996 Warrants for $.01 per warrant
at any time after November 15, 1997 and until such warrants expire on May 15,
2000, when the average of the daily closing bid price of the Common Stock
equals $9.00 or more per share on any 20 consecutive trading days ending within
15 days of the date on which notice of redemption is given. The Company will
provide holders of the 1996 Warrants with at least 30 days written notice of
the Company's intention to redeem the 1996 Warrants. See "The Company --
Recent Financings," "-- Bridge Financing" and "Shares Eligible for Future Sale
- -- Lock-up Agreements."
CLASS A WARRANTS
The Company has outstanding 63,334 Class A Warrants, with each Class A
Warrant entitling the holder thereof to purchase one share of Common Stock at
an exercise price of $5.25 on or before December 31, 1997. The Class A
Warrants were sold as part of an offering comprised of an aggregate of 3,333
shares of Common Stock and 66,667 Class A Warrants for an aggregate of $17,500
proceeds. On August 15, 1996, the holder of the Class A Warrants exercised
3,333 Class A Warrants and received 3,333 shares of Common Stock for $17,500.
See "The Company -- Recent Financings."
BRIDGE FINANCING
On November 15, 1996, the Company concluded the private sale of 25
Units (the "Units") for total proceeds of $625,000.00 (the "Bridge Financing").
Each Unit consisted of one share of Convertible Preferred Stock and 6,667 1996
Warrants. A total of 25 shares of Convertible Preferred Stock and 166,675 1996
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<PAGE> 58
Warrants were sold. Each 1996 Warrant entitles the holder thereof to purchase,
for a period of 42 months after November 15, 1996, one share of the Common
Stock at an exercise price of $4.50 per 1996 Warrant, subject to adjustment in
certain circumstances. Under the terms of the Bridge Financing, the Company
has the right to require the holders of the Convertible Preferred Stock to
convert their shares into either (a) $25,000 and 4,167 shares of the Common
Stock ("Option 1") or (b) 8,334 shares of Common Stock ("Option 2") if the
Company is able to complete a public offering of its securities prior to
November 15, 1997. Under either option, the investor will continue to hold the
1996 Warrants. If for any reason the Company does not complete a public
offering of its securities by November 15, 1997, each share of Convertible
Preferred Stock will be automatically converted into 8,334 shares of Common
Stock. On March 6 1997, the Company offered to each holder of the Convertible
Preferred Stock the option of either (i) receiving a refund of their cash
investment with interest at 12% per annum as consideration for assigning their
Convertible Preferred Stock and 1996 Warrants to the Company or (ii) agreeing
to the conversion of their Convertible Preferred Stock at the completion of
this Offering upon previously agreed terms along with the issuance of an
additional 13,334 1996 Warrants for each share of Convertible Preferred Stock
converted as further consideration for the agreement by the holders of
Convertible Stock to waive certain registration rights and agreeing to certain
lock-up provisions with respect to the Common Stock received on conversion of
the Convertible Preferred Stock and the 1996 Warrants. The Company has been
advised by all holders of the Convertible Preferred Stock that they will accept
the latter option. See "Shares Eligible for Future Sale -- Lock-up
Agreements."
Argent Securities, Inc. ("Argent") acted as placement agent with
regard to this private offering. As placement agent, Argent received a
commission of eight percent of the offering proceeds (or $50,000), four percent
of the offering proceeds (or $25,000) as additional compensation for investment
banking services and three percent of the offering proceeds (or $18,750) for
non-accountable expenses.
CERTAIN PROVISION OF THE ARTICLES OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Articles of Incorporation
("Articles") and Bylaws ("Bylaws") of the Company concern matters of corporate
governance and the rights of stockholders. The ability of the Board of
Directors to issue shares of preferred stock and to set the voting rights,
preferences and other terms thereof, may be deemed to have an anti-takeover
effect and may discourage takeover attempts not first approved by the Board of
Directors (including takeovers which certain stockholders may deem to be in
their best interests). To the extent takeover attempts are discouraged,
temporary fluctuations in the market price of the Common Stock, which may
result from actual or rumored takeover attempts, may be inhibited. These
provisions, together with the ability of the Board to issue preferred stock
without further stockholder action, also could delay or frustrate the removal
of incumbent directors or the assumption of control by stockholders, even if
such removal or assumption would be beneficial to stockholders of the Company.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy contest, even if they could be favorable to the interests of
stockholders, and could potentially depress the market price of the Common
Stock. The Board of Directors believes that these provisions are appropriate
to protect the interests of the Company and all of its stockholders.
MEETINGS OF STOCKHOLDERS. The Bylaws provide that a special meeting
of stockholders may be called by the President of the Company, the Board of
Directors or the holders of not less than 10% of the outstanding Common Stock
entitled to vote at such a meeting unless otherwise required by law. The
Company's Bylaws provide that only those matters set forth in the notice of the
special meeting may be considered or acted upon at the special meeting, unless
all stockholders entitled to vote are present and consent.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Company's Articles
provide that a director of the Company will not be personally liable to the
Company or its stockholders for monetary damages for any act or omission in
good faith. By its terms, and in accordance with applicable state law,
however, this provision does not eliminate or limit the liability of a director
of the Company for any breach of duty based upon an act or omission (i)
involving appropriation in violation of duty of any business opportunity of the
Company, (ii) involving acts or omissions that are not in good faith or which
involve intentional misconduct or a knowing violation of the law, or (iii)
involving unlawful distributions or transactions from which the director
derived an improper personal benefit. The Articles provide further that the
Company shall indemnify its directors, except in such matters as to which the
director shall be adjudged liable for his own negligence or intentional
misconduct
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<PAGE> 59
in the performance of his duty. A similar indemnification and limitation of
liability provision in the Company's Bylaws also extends such protection to
officers of the Company. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, or otherwise, the
Company is aware that, in the opinion of the Commission, such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
AMENDMENT OF BYLAWS. The Bylaws provide that the Bylaws may be
altered, amended or repealed by the Board of Directors. Such action by the
Board of Directors requires the affirmative vote of a majority of the directors
present at such meeting.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon the completion of this Offering and assuming conversion of the
Convertible Preferred Stock, the Company's authorized but unissued capital
stock will consist of approximately 9,778,172 million shares of Common Stock
and 10,000,000 shares of preferred stock. One of the effects of the
authorized, but unissued capital stock may be to enable the Board of Directors
to render more difficult or to discourage an attempt to obtain control of the
Company by means of a tender offer, proxy contest or otherwise, and thereby to
protect the continuity of the Company's management. If in the due exercise of
its fiduciary obligations, for example, the Board of Directors were to
determine that a takeover proposal was not in the Company's best interests,
such shares could be issued by the Board of Directors without stockholder
approval in one or more private or public offerings or other transactions that
might prevent or render more difficult or costly the completion of the proposed
takeover transaction by diluting the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group, by creating a
substantial voting block of institutional or other investors that might
undertake to support the position of the incumbent Board of Directors, by
effecting an acquisition that might complicate or preclude the takeover, or
otherwise. In this regard, the Company's Articles grants the Board of
Directors broad power to establish the rights and preferences of the
authorized, but unissued preferred stock, one or more series of which would be
issued entitling holders to vote separately as a class on any proposed merger
or consolidation, to convert preferred stock into a larger number of shares of
Common Stock or other securities, to demand redemption at a specified price
under prescribed circumstances related to a change in control, or to exercise
other rights designed to impede a takeover. The issuance of shares of
preferred stock pursuant to the Board's authority described above could
decrease the amount of earnings and assets available for distribution to
holders of Common Stock, and adversely affect the rights and powers, including
voting rights, of such holders and may have the effect of delaying, deferring
or preventing a change in control of the Company. The Board of Directors does
not currently intend to seek stockholder approval prior to any issuance of
authorized, but unissued stock, unless otherwise required by law.
TRANSFER AGENT
The transfer agent for the Company's Common Stock and Warrant Agent
for the Warrants is Securities Transfer Corporation, 16910 Dallas Parkway,
Suite 100, Dallas, Texas 75248.
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<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market
following the completion of the Offering could have an adverse effect on the
market price of the Common Stock. Upon completion of the Offering, there will
be approximately 4,221,633 (4,431,633 if the Underwriters' over-allotment
option is exercised in full) shares of Common Stock outstanding, which includes
the 104,175 shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock. The Securities offered hereby will be eligible for public
sale without restriction, except for shares purchased by affiliates of the
Company (those controlling or controlled by or under common control with the
Company and generally deemed to include officers and directors). Of the
4,221,633 shares of Common Stock to be outstanding after the Offering,
2,731,721 shares will be deemed "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act. Additionally,
there will be outstanding as of the closing of the Offering, options and
warrants to purchase an aggregate 2,228,718 shares of Common Stock (2,438,718
if the Underwriters' over- allotment option is exercised in full), including
(i) 1,400,000 shares of Common Stock issuable upon exercise of the Warrants
offered hereby, (ii) 140,000 shares issuable upon exercise of the Underwriters'
Warrants, (iii) 500,025 shares issuable upon exercise of the 1996 Warrants,
(iv) 63,334 shares issuable upon exercise of the Class A Warrants, and (v)
125,359 shares of Common Stock issuable upon exercise of options granted to
employees of the Company, which, when issued in connection with the terms of
such options and warrants, will be restricted shares under the Securities Act.
See "Management" and "Description of Securities."
Effective April 29, 1997, the Commission adopted amendments to Rule
144 to shorten the holding period for restricted securities, generally being
those securities purchased in unregistered private placements. As a result of
these amendments, and subject to satisfaction of certain other conditions, a
person, including an affiliate of the Company (or persons whose shares are
aggregated into such affiliate), who has owned restricted shares of Common
Stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of one
percent of the total number of outstanding shares of the same class or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the sale. Subject to the volume and holding period
limitations of Rule 144 and the lock-up agreements described below, 2,460,879
outstanding shares of Common Stock are eligible for sale under Rule 144 after
the completion of the Offering. Holders of approximately 1,376,221 shares of
Common Stock, including the holders of the Convertible Preferred Stock,
officers and directors of the Company, will agree to "lock-up" their shares of
Common Stock for periods ranging from 18 to 60 months after the completion of
the Offering. A person who has not been an affiliate of the Company for at
least the three months immediately preceding the sale and who has beneficially
owned shares of Common Stock for at least two years is entitled to sell such
shares under Rule 144(k) without regard to any of the limitations described
above. As of the commencement of the Offering, no restricted shares of Common
Stock would be eligible for sale under the provisions of Rule 144(k).
The possibility that substantial amounts of Common Stock may be sold
in the public market may adversely affect the prevailing market price for the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities.
REGISTRATION RIGHTS
The holders of the Underwriters' Warrants have been granted
registration rights to require the Company, at the Company's expense, to
register under the Securities Act the 140,000 Underwriters' Warrants and the
140,000 shares of Common Stock underlying the Underwriters' Warrants. See
"Underwriting." The holders of the Convertible Preferred Stock have certain
registration rights with respect to the 500,025 shares of Common Stock issuable
upon exercise of the 1996 Warrants. Any exercise of such registration rights
by the holders of these securities may hinder the Company's efforts to obtain
future financing and may have an adverse effect on the market price of the
Common Stock.
LOCK-UP AGREEMENTS
The holders of the Convertible Preferred Stock have agreed not to sell
or otherwise dispose, for a period of 18 months after the completion of this
Offering, any of the 104,175 shares of Common Stock to be issued upon
conversion of the Convertible Preferred Stock, the 1996 Warrants or 500,025
shares of Common Stock
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issuable upon exercise of the 1996 Warrants; provided the shares of Common
Stock issuable upon exercise of the 1996 Warrants are subject to demand
registration rights and may be subsequently sold by the holders thereof if the
Company calls for the redemption of the Warrants or 1996 Warrants within 18
months after the completion of this Offering. See "Description of Securities
- -- Bridge Financing."
All officers and directors of the Company who are existing
stockholders of the Company have agreed not to sell or dispose of any shares of
Common Stock held by them without the prior written consent of the
Representative until two years after the effective date of this Offering.
Furthermore, officers and directors whose total compensation is more than
$100,000 per year, or who own 5% or more of the Company's outstanding
securities, have agreed to enter into a compensation and lock-up agreement for
a period of five years to commence upon completion of this Offering. Officers
and directors of the Company who are subject to a five-year lock-up provision
shall have the right to have such restriction released at a rate of 20% per
annum for a period of five years based upon the Company's achievement of
certain goals with respect to the following: (i) annual revenue growth of 20%
or more, (ii) annual earnings per share growth of 20% or more, and (iii) annual
price of stock growth of 20% or more. With regard to V. Lynn Graybill, the
Chairman of the Board and Chief Executive Officer of the Company, the
afore-referenced lock-up provisions, to which Mr. Graybill would be subject,
will be terminated after the termination of Mr. Graybill's Employment
Agreement, unless such Agreement is otherwise extended. See "Management --
Employment Agreements."
UNDERWRITING
The underwriters named below (the "Underwriters") for whom J.P. Turner
& Company, L.L.C. is acting as Representative (the "Representative"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement between the Company and the Representative (the "Underwriting
Agreement"), to purchase from the Company, and the Company has agreed to sell
to the Underwriter, the aggregate number of shares of Common Stock and Warrants
set forth opposite their names below:
<TABLE>
<CAPTION>
Number of Number of
<S> <C> <C>
Underwriters Shares Warrants
------------ ------ --------
J.P. Turner & Company, L.L.C. . . .
-------------------- --------------------
Total . . . . . . . . . .
==================== ====================
</TABLE>
The Underwriters are committed to purchase and pay for all of the
shares of Common Stock and Warrants offered hereby if any shares of Common
Stock and Warrants are purchased. The shares of Common Stock and Warrants
subject to this Offering are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel and to various other
conditions.
The Underwriters have advised the Company that the Underwriters
propose to offer the shares of Common Stock and Warrants subject to this
Offering to the public at the public offering price set forth on the cover page
of this Prospectus. The Underwriters may allow to certain dealers who are
members of the NASD a concession not in excess of $.___ per share of Common
Stock and at $.___ per Warrant and such dealers may reallow a concession of not
in excess $.___ per share of Common Stock and $.___ per Warrant to certain
other dealers who are members of the NASD.
The Company has granted to the Representative an option, exercisable
for 45 days from the date of this Prospectus, to purchase up to 210,000
additional shares of Common Stock and 210,000 additional Warrants at the public
offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Representative may exercise this
option on one occasion, in whole or in part, solely for the purpose of covering
over- allotments, if any, made in connection with the sale of the shares of
Common Stock and Warrants offered hereby.
In connection with this Offering, certain Underwriters and selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common
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Stock and Warrants. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
persons may bid for or purchase Common Stock or Warrants for the purpose of
stabilizing their respective market prices. The Underwriters also may create a
short position for the account of the Underwriters by selling more shares of
Common Stock or Warrants in connection with the Offering than they are
committed to purchase from the Company, and in such case may purchase shares of
Common Stock or Warrants in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters
may also cover all or a portion of such short position by exercising the
over-allotment option. In addition, the Representative, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of other Underwriters, the
selling concession with respect to shares of Common Stock and Warrants that are
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock and
Warrants at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
The Company has agreed with the Representative that the Company will
pay to the Underwriters a warrant solicitation fee (the "Warrant Solicitation
Fee") equal to 5% of the exercise price of the Warrants which are exercised
pursuant to a solicitation of exercise of the Warrants or in connection with a
redemption and to the extent not inconsistent with the guidelines of the NASD
and the rules and regulations of the Commission (including NASD Notice to
Members 81-38). Such Warrant Solicitation Fee will be paid to the Underwriters
if (a) the market price of the Common Stock on the date that any Warrant is
exercised is greater than the exercise price of the Warrant; (b) the exercise
of such Warrant was solicited by the Underwriters; (c) prior specific written
approval for exercise is received from the customer if the Warrant is held in a
discretionary account; (d) disclosure of this compensation agreement is made
prior to or upon the exercise of such Warrant; (e) solicitation of the exercise
is not in violation of Regulation M of the Exchange Act; (f) the Underwriters
provided bona fide services in exchange for the Warrant Solicitation Fee; and
(g) the Underwriters have been specifically designated in writing by the
holders of the Warrants as the broker. Unless granted an exemption by the
Commission from Regulation M under the Exchange Act, the Underwriters will be
prohibited from engaging in any market making activities or solicited brokerage
activities with respect to the Securities for the period from five business
days prior to any solicitation by the Underwriters of the Exercise of any
Warrant until the termination of such solicitation activity by the
Underwriters. The foregoing five-day restriction period is reduced by one day
where the security has an average daily trading volume of $100,000 and the
public float for the issuer's equity securities is at least $25 million; and
there is no restrictive period where the average daily trading volume of the
security is $1 million and the public float for the issuer's equity securities
is at least $150 million. As a result, the Underwriters may be unable to
continue to provide a market for the Securities during certain periods while
the Warrants are exercisable.
The Representative has informed the Company that the Underwriters do
not intend to confirm sales of shares of Common Stock or Warrants offered
hereby to any accounts over which they exercise discretionary authority.
Prior to this Offering, the Company's Common Stock has been traded on
the NASD Electronic Bulletin Board. As a result, the public offering price of
the Common Stock offered hereby has been determined by negotiations among the
Company and the Representatives based on the prior trading history of the
Company's Common Stock.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance of three percent of the gross proceeds of this Offering, none
of which has been paid to date. The Company also has agreed to pay all
expenses in connection with registering or qualifying the shares of Common
Stock and Warrants offered hereby for sale under the laws of the states in
which the Securities are sold by the Underwriters (including expenses of
counsel retained for such purpose by the Underwriters) and the expense of all
pre- and post-closing advertisements relating to this Offering.
The Company has agreed to sell to the Representative for an aggregate
purchase price of $140 ($.001 per warrant), warrants entitling the
Representative to purchase from the Company 140,000 shares of Common
-61-
<PAGE> 63
Stock and 140,000 Warrants (10 percent of the securities sold in the Offering)
at an exercise price of 145% of the price per share of Common Stock offered
hereby and 145% of the price per Warrant offered hereby. The Underwriters'
Warrants may not be transferred or exercised for one year from the date of this
Prospectus, except to officers and partners of the Underwriters or members of
the underwriting or selling group, if any, and are exercisable during the
year-year period commencing one year from the date of this Prospectus (the
"Warrant Exercise Term").
During the Warrant Exercise Term, the holders of the Underwriters'
Warrants are given, at nominal cost, the opportunity to profit from a rise in
the market price of the Company's Common Stock. To the extent that the
Underwriters' Warrants are exercised, dilution to the percentage ownership of
the Company's stockholders will occur. Further, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected since the holders of the Underwriters' Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain additional equity capital on terms more favorable to the company than
those provided in the Underwriters' Warrants. Any profit realized by the
Representative on sale of the Underwriters' Warrants or the underlying
securities may be deemed additional underwriting compensation. The Company has
further agreed to place an indeterminable number of shares of Common Stock,
underlying the exercise of the Underwriters' Warrants, including additional
shares of Common Stock issuable in the event any of the anti-dilution
provisions set forth in the instruments evidencing such Underwriters' Warrants
are triggered. Subject to certain limitations and exclusions, the Company has
agreed, at the request of the holders of a majority of the Underwriters'
Warrants, to register the Underwriters' Warrants, and the underlying shares of
Common Stock, under the Securities Act on two occasions during the Warrant
Exercise Term; one such occasion shall be at the Company's expense. The
Company has also agreed to include such Underwriters' Warrants and underlying
shares of Common Stock in any appropriate registration statement filed by the
Company for five years from the date of this Prospectus. See "Shares Eligible
for Future Sale."
All officers and directors, as of the Effective Date, have agreed with
the Representative in writing not to sell, assign or transfer any of their
shares of the Company's securities without the Representative's prior written
consent for periods ranging from 18 to 60 months from the Effective Date,
subject to certain conditions. Also, the holders of the Company's Convertible
Preferred Stock have agreed to certain lock-up provisions for the securities
received upon redemption of the Convertible Preferred Stock for 18 months,
subject to certain conditions. See "Shares Eligible for Future Sale -- Lock-up
Agreement."
The Company has agreed to enter into a financial advisory agreement
with the Representative for them to offer financial consulting services to the
Company for a period of two years commencing on the closing date of the
Offering for an aggregate of $48,000, which amount shall be prepaid in full at
the closing of the Offering. Such consulting services are to include
evaluating the Company's capital requirements for future growth and expansion,
advising the Company as to alternative methods and sources of financing and
advising management of the Company regarding potential business opportunities.
If the Representative originates a financing or a merger, acquisition, joint
venture or other transaction to which the Company is a party, the
Representative will be entitled to receive a finder's fee in consideration for
origination of such transaction. Such finder's fee shall be calculated as a
percentage of the value of the applicable transaction in accordance with the
following schedule: 5% on the first $1,000,000; 4% on the amount from
$1,000,001 to $2,000,000; 3% on the amount from $2,000,001 to $3,000,000; 2% on
the amount from $3,000,001 to $4,000,000; 1% on the amount from $4,000,001 to
$5,000,000; and 1% on the amount above $5,000,000.
The Representative will have the right, for a period of five years
following the completion of this Offering or until the Underwriters' Warrants
have been exercised in full, whichever comes first, to each designate a nominee
for election to the Board or, in lieu thereof, to have a representative attend
all Board meetings of the Company. Any such nominee may be a director,
officer, partner, employee or affiliate of the Representative. The Company
(and its current directors and officers) have agreed to support any such
nominee designated by the Representative. The Representative has advised the
Company that they have not presently identified any designees to nominate for
election to the Board.
The Company has agreed that, for a period of two years from the
closing of the Offering, without the consent of the Representative, it shall
not redeem or issue any of its securities or pay any dividends, or make
-62-
<PAGE> 64
any other cash distributions in respect of its securities, in excess of the
amount of the Company's current or retained earnings recognized from and after
the closing date. See "Dividend Policy."
For a period of four years following the completion of this Offering,
the officers and directors of the Company have agreed to effect any permitted
sales of their shares of Common Stock through the Representative provided that
the price and terms of executed offered by the Representative are at least as
favorable as those that may be obtained from other brokerage firms.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The foregoing includes a summary of the principal terms of the
Underwriting Agreement and does not purport to be complete. Reference is made
to the copy of the form of Underwriting Agreement filed as an exhibit to the
Company's Registration Statement of which this Prospectus forms a part.
LEGAL MATTERS
Certain legal matters in connection with the validity of the
Securities offered hereby are being passed upon for the Company by Looper,
Reed, Mark & McGraw Incorporated, Dallas, Texas. Certain legal matters in
connection with this Offering will be passed upon for the Underwriters by
Johnson & Montgomery, Atlanta, Georgia. Richard B. Goodner, a member of
Looper, Reed, Mark & McGraw Incorporated, owns 12,000 shares of Common Stock of
the Company.
EXPERTS
The consolidated financial statements for fiscal years ended December
31, 1996, 1995 and 1994 for the Company, to the extent of and for the periods
indicated in the reports, have been audited by S. W. Hatfield + Associates,
independent certified public accountants, and are included in this Prospectus
in reliance upon the authority of said firm as experts in accounting and
auditing in giving said reports.
-63-
<PAGE> 65
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEX TO FINANCIAL STATEMENTS F-1
KARTS INTERNATIONAL INCORPORATED
Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996 F-2
Consolidated Statement of Operations
for the six months ended June 30, 1997 and 1996 F-4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-7
Report of Independent Certified Public Accountants F-9
Consolidated Balance Sheets
as of December 31, 1996 and 1995 F-10
Consolidated Statements of Operations
for the years ended December 31, 1996 and 1995 F-12
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1996 and 1995 F-13
Consolidated Statements of Cash Flows
for the years ended December 31, 1996 and 1995 F-16
Notes to Consolidated Financial Statements F-18
Introduction to Proforma Consolidated Financial Information F-35
Proforma Consolidated Statement of Income
for the year ended December 31, 1996 F-36
Proforma Consolidated Statement of Income
for the year ended December 31, 1995 F-37
Proforma Consolidated Statement of Income
for the year ended December 31, 1994 F-38
Notes to Proforma Consolidated Financial Information F-39
BRISTER'S THUNDER KARTS, INC.
Balance Sheet as of March 31, 1996 F-40
Statement of Income and Changes in Retained Earnings
for the three months ended March 31, 1996 F-41
Statement of Cash Flows
for the three months ended March 31, 1996 F-42
Notes to Financial Statements F-43
Report of Independent Certified Public Accountants F-47
Balance Sheets as of December 31, 1995 and 1994 F-48
Statements of Income
for the years ended December 31, 1995 and 1994 F-49
Statement of Changes in Shareholder's Equity
for the years ended December 31, 1995 and 1994 F-50
Statements of Cash Flows
for the years ended December 31, 1995 and 1994 F-51
Notes to Financial Statements F-53
</TABLE>
F-1
<PAGE> 66
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
ASSETS
(Unaudited) (Audited)
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash on hand and in bank $ 474,241 $ 630,028
Accounts receivable
Trade, net of allowance for doubtful
accounts of approximately $2,515
and $5,000, respectively 312,787 1,795,802
Other -- 1,052
Inventory 943,971 958,381
Prepaid expenses 250,808 6,027
----------- ------------
TOTAL CURRENT ASSETS 1,981,807 3,391,290
----------- ------------
PROPERTY AND EQUIPMENT - AT COST
Buildings and related improvements 572,197 331,360
Equipment 463,623 317,665
Furniture and fixtures 69,471 65,299
Vehicles 77,820 57,050
----------- ------------
1,183,111 771,374
Less accumulated depreciation (88,108) (34,598)
----------- ------------
1,095,003 736,776
Land 32,800 32,800
----------- ------------
NET PROPERTY AND EQUIPMENT 1,127,803 769,576
----------- ------------
OTHER ASSETS
Deposits and other 83,165 19,060
Organization costs, net of accumulated
amortization of $28,065 and $17,139
respectively 81,190 92,116
Loan costs, net of accumulated amortization
of $68,560 and $20,120, respectively 53,473 101,913
Goodwill, net of accumulated amortization
of $268,474 and $151,286, respectively 5,590,949 5,708,137
----------- ------------
TOTAL OTHER ASSETS 5,808,777 5,921,226
----------- ------------
TOTAL ASSETS $ 8,918,387 $ 10,082,092
=========== ============
</TABLE>
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-2
<PAGE> 67
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30, 1997 and December 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable to a bank $ 417,690 $ 140,020
Current portion of long-term debt 111,196 116,390
Accounts payable - trade 469,117 766,833
Accrued liabilities 43,642 90,472
Accrued income taxes payable 85,042 269,217
----------- ------------
TOTAL CURRENT LIABILITIES 1,126,687 1,382,932
----------- ------------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities
Related parties 3,200,000 3,200,000
Banks and individuals 148,782 132,660
----------- ------------
TOTAL LIABILITIES 4,475,469 4,715,592
----------- ------------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE PREFERRED STOCK
$0.001 par value. 25 shares allocated, issued and
outstanding 625,000 625,000
----------- ------------
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. 2,717,458 issued and outstanding, respectively 2,718 2,718
Additional paid-in capital 6,190,192 6,190,192
Accumulated deficit (2,374,992) (1,451,410)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 3,817,918 4,741,500
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,918,387 $ 10,082,092
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-3
<PAGE> 68
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six and three months ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Kart sales $ 2,515,232 $ 1,150,153 $ 1,214,448 $ 1,150,153
----------- ----------- ----------- -----------
COST OF SALES
Purchases and direct expenses 2,151,651 707,284 1,018,704 707,284
Depreciation 45,568 11,293 24,085 11,293
----------- ----------- ----------- -----------
TOTAL COST OF SALES 2,197,219 718,577 1,042,789 718,577
----------- ----------- ----------- -----------
GROSS PROFIT 318,013 431,576 171,659 431,576
----------- ----------- ----------- -----------
OPERATING EXPENSES
Research and development
expenses 21,857 -- 21,857 --
Selling, general and
administrative expenses 834,801 292,264 353,273 289,492
Compensation expense related
to common stock issuances
at less than "fair value" for
reorganization, restructuring
and consulting costs -- 1,430,287 -- --
Depreciation and amortization 176,816 52,946 97,163 52,507
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,033,474 1,775,497 472,293 341,999
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (715,461) (1,343,921) (300,634) 89,577
OTHER INCOME (EXPENSES)
Interest and other miscellaneous 60,822 (4,639) 9,536 (4,639)
Interest expense (268,943) (136,174) (113,595) (121,459)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (923,582) (1,484,734) (404,693) (36,521)
INCOME TAX (EXPENSE) BENEFIT -- 4,305 -- 4,305
----------- ----------- ----------- -----------
NET LOSS $ (923,582) $(1,480,429) $ (404,693) $ (32,216)
=========== =========== =========== ===========
Loss per share of common
stock outstanding $ (0.37) $ (1.04) $ (0.16) $ (0.01)
=========== =========== =========== ===========
Weighted-average number
of shares outstanding 2,509,415 1,418,602 2,509,415 2,312,143
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-4
<PAGE> 69
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Six months Six months
ended ended
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (923,582) $(1,480,429)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 240,296 64,239
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 1,484,067 63,404
Inventory 14,410 (226,210)
Prepaid expenses and other (308,886) (3,939)
Increase (decrease) in
Accounts payable and other accrued liabilities (528,721) 162,764
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES (22,416) 25,116
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition of Brister's Thunder Karts, Inc. -- (2,256,065)
Cash acquired in acquisition of Brister's Thunder Karts, Inc. -- 488,047
Cash paid for reorganization expenses -- (52,690)
Proceeds from sale of fixed assets 6,666 --
Purchases of property and equipment (428,635) (31,280)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (421,969) (1,851,988)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from sale of common stock -- 527,389
Cash paid for brokerage and placement fees
related to sale of common stock -- (163,100)
Proceeds from long-term borrowings -- 2,000,000
Payments on long-term borrowings -- (84,365)
Proceeds from bank line of credit 288,598 --
Cash paid for loan costs -- (16,783)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES 288,598 2,263,141
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (155,787) 436,269
Cash and cash equivalents at beginning of period 630,028 --
----------- -----------
Cash and cash equivalents at end of period $ 474,241 $ 436,269
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-5
<PAGE> 70
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Six months ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Six months Six months
ended ended
June 30, June 30,
1997 1996
-------------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF INTEREST AND INCOME TAXES PAID
Interest paid during the period $ 284,130 $ 135,735
============== ==========
Income taxes paid (refunded) $ 184,175 $ 8,059
============== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Acquisition price of Brister's Thunder Karts, Inc.
settled with common stock and notes payable $ -- $4,100,000
============== ==========
Loan origination fees settled with common stock $ -- $ 10,500
============== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-6
<PAGE> 71
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
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.
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. 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.
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.
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 audited financial statements as of and for the year ended December 31,
1996 presented elsewhere in this section. 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 elsewhere in this section
when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements are
unaudited, prepared in accordance with the instructions for Form 10-QSB 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.
F-7
<PAGE> 72
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - BASIS OF PRESENTATION - CONTINUED
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, as appropriate based upon their
respective acquisition date(s). All significant intercompany transactions have
been eliminated. The consolidated entities are collectively referred to as
Company.
NOTE 2 - LITIGATION
The Company's subsidiaries continue as named defendant in several product
liability lawsuits related to its "fun karts". The Company and its subsidiaries
continue to have commercial liability coverage to cover these exposures with a
$50,000 per claim self-insurance clause. 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.
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 continues to be 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 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.
NOTE 3 - CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
As of As of
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Weighted-average shares outstanding 2,717,458 1,567,320
Exclusion of contingent shares issued in escrow transaction (233,333) (148,718)
Net effect of dilutive stock options and warrants based on
the treasury stock method using average market price 25,460 --
----------- -----------
Total weighted-average shares outstanding 2,509,585 1,418,602
=========== ===========
Net loss $ (923,582) $(1,480,429)
=========== ===========
Per share amount $ (0.37) $ (1.04)
=========== ===========
</TABLE>
The convertible preferred stock is considered anti-dilutive for the six months
ended June 30, 1997 and 1996, respectively.
F-8
<PAGE> 73
[S. W. HATFIELD + ASSOCIATES LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Karts International Incorporated
(formerly Sarah Acquisition Corporation)
We have audited the accompanying consolidated balance sheets of Karts
International Incorporated (a Nevada corporation) (formerly Sarah Acquisition
Corporation, a Florida corporation) and Subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Karts International
Incorporated (formerly Sarah Acquisition Corporation) and Subsidiaries as of
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the years then ended in conformity with generally
accepted accounting principles.
/s/ S. W. HATFIELD + ASSOCIATES
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
February 28, 1997 (except for
Note I as to which the date
is March 6, 1997)
F-9
<PAGE> 74
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED BALANCE SHEET
December 31, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash on hand and in bank $ 630,028 $ --
Accounts receivable
Trade, net of allowance for doubtful accounts
of $5,000 and $-0-, respectively 1,795,802 --
Other 1,052 --
Inventory 958,381 --
Prepaid expenses 6,027 --
------------ --------------
TOTAL CURRENT ASSETS 3,391,290 --
------------ --------------
PROPERTY AND EQUIPMENT - AT COST 771,374 --
Accumulated depreciation (34,598) --
------------ --------------
736,776 --
Land 32,800 --
------------ --------------
NET PROPERTY AND EQUIPMENT 769,576 --
------------ --------------
OTHER ASSETS
Deposits and other 19,060 --
Loan costs, net of accumulated
amortization of approximately $20,120 and $-0-, respectively 101,913 --
Organization costs, net of accumulated
amortization of approximately $17,139 and $-0-, respectively 92,116 --
Goodwill, net of accumulated
amortization of approximately $151,286 and $-0-, respectively 5,708,137 --
------------ --------------
TOTAL OTHER ASSETS 5,921,226 --
------------ --------------
TOTAL ASSETS $ 10,082,092 $ --
============ ==============
</TABLE>
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 75
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED BALANCE SHEET - CONTINUED
December 31, 1996 and 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
------------ ---------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to banks $ 140,020 $ --
Current maturities of notes payable 116,390 --
Accounts payable - trade 766,833 4,010
Other accrued liabilities
Payroll and sales taxes payable 55,944 --
Interest payable 33,099 --
Other 1,429 --
Federal and State income taxes payable 269,217 --
------------ ---------
TOTAL CURRENT LIABILITIES 1,382,932 4,010
------------ ---------
LONG-TERM LIABILITIES
Notes payable, net of current maturities
Related parties 3,200,000 --
Banks and individuals 132,660 --
------------ ---------
TOTAL LIABILITIES 4,715,592 4,010
------------ ---------
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, 25 shares allocated; -0- and
-0- shares issued and outstanding, respectively -- --
Common stock - $0.001 par value 14,000,000
shares authorized; 2,717,458 and 83,441 shares
issued and outstanding, respectively 2,718 83
Additional paid-in capital 6,190,192 487,751
Accumulated deficit (1,451,410) (491,844)
------------ ---------
TOTAL SHAREHOLDERS' EQUITY 4,741,500 (4,010)
------------ ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 10,082,092 $ --
============ =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 76
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
REVENUES
Kart sales $ 8,327,316 $ --
----------- ---------
COST OF SALES
Purchases 4,910,692 --
Direct labor 570,842 --
Other direct costs 360,998 --
----------- ---------
TOTAL COST OF SALES 5,842,532 --
----------- ---------
GROSS PROFIT 2,484,784 --
----------- ---------
OPERATING EXPENSES
Salaries and related costs 427,025 --
Insurance 353,944 --
Other operating expenses 472,481 630
Compensation expense related
to common stock issuances
at less than "fair value" for
reorganization, restructuring
and consulting costs 1,430,287 --
Depreciation and amortization 203,022 --
----------- ---------
TOTAL OPERATING EXPENSES 2,886,759 630
----------- ---------
INCOME (LOSS) FROM OPERATIONS (401,975) (630)
OTHER INCOME (EXPENSE)
Interest expense (396,589) --
Interest and other income 32,573 --
----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (765,991) (630)
INCOME TAXES (193,575) --
----------- ---------
NET INCOME (LOSS) $ (959,566) $ (630)
=========== =========
Net income (loss) per weighted-average
share of common stock outstanding
Primary $ (0.51) nil
Weighted-average number of shares
of common stock outstanding
Primary 1,892,563 124,616
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 77
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995,
AS REPORTED -- $ -- 31,254,621 $ 1,563
Retirement of treasury stock -- -- (102,600) --
Effect of 1 for 250 reverse stock
split, post treasury stock retirement,
including rounding, as of February 23,
1996 -- -- (31,027,405) (1,438)
Effect of 2 for 3 reverse stock split,
including rounding, as of March 24,
1997 -- -- (41,370) (42)
---- ----- ---------- -------
BALANCES AT JANUARY 1, 1995,
AS RESTATED -- -- 83,246 83
Net loss for the year -- -- -- --
---- ----- ---------- -------
BALANCES AT DECEMBER 31, 1995 -- -- 83,246 83
Sale of common stock
to current and former directors in
February 1996, including "fair
value" adjustment -- -- 784,212 785
<CAPTION>
Additional
paid-in Accumulated Treasury
capital deficit Stock Total
------- ------- ----- -----
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995,
AS REPORTED $ 492,940 $(491,214) $(6,669) $ (3,380)
Retirement of treasury stock (6,669) -- 6,669 --
Effect of 1 for 250 reverse stock
split, post treasury stock retirement,
including rounding, as of February 23,
1996 1,438 -- -- --
Effect of 2 for 3 reverse stock split,
including rounding, as of March 24,
1997 42 -- -- --
--------- --------- ------- ---------
BALANCES AT JANUARY 1, 1995,
AS RESTATED 487,751 (491,214) -- (3,380)
Net loss for the year -- (630) -- (630)
--------- --------- ------- ---------
BALANCES AT DECEMBER 31, 1995 487,751 (491,844) -- (4,010)
Sale of common stock
to current and former directors in
February 1996, including "fair
value" adjustment 885,375 -- -- 886,160
</TABLE>
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 78
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sale of common stock
to related party for escrow
agreement related to March
1996 private placement
agreement -- $ -- 233,333 $233
under private placement
memorandum in March 1996 -- -- 233,333 233
less cost of raising capital -- -- -- --
under private sale document in July 1996 -- -- 6,667 7
Sale of convertible preferred
stock under private placement
memorandum in November 1996 25 625,000 -- --
Issuance of common stock for
payment of January 1996 professional
services for corporate reorganization
and restructuring, including "fair value"
adjustment -- -- 483,333 483
settlement of January 1996 negotiated
employment contract signing bonus -- -- 140,000 140
payment of March 1996 loan
origination fees -- -- 70,000 70
July 1996 settlement of the acquisition
of Brister's Thunder Karts, Inc. -- -- 516,667 517
November 1996 acquisition of
USA Industries, Inc. -- -- 166,667 167
<CAPTION>
Additional
paid-in Accumulated Treasury
capital deficit Stock Total
------- ------- ----- -----
<S> <C> <C> <C> <C>
Sale of common stock
to related party for escrow
agreement related to March
1996 private placement
agreement $ 117 $-- $ -- $ 350
under private placement
memorandum in March 1996 524,767 -- -- 525,000
less cost of raising capital (163,100) -- -- (163,100)
under private sale document in July 1996 34,993 -- -- 35,000
Sale of convertible preferred
stock under private placement
memorandum in November 1996 -- -- -- --
Issuance of common stock for
payment of January 1996 professional
services for corporate reorganization
and restructuring, including "fair value"
adjustment 545,683 -- -- 546,166
settlement of January 1996 negotiated
employment contract signing bonus 14,860 -- -- 15,000
payment of March 1996 loan
origination fees 10,430 -- -- 10,500
July 1996 settlement of the acquisition
of Brister's Thunder Karts, Inc. 3,099,483 -- -- 3,100,000
November 1996 acquisition of
USA Industries, Inc. 749,833 -- -- 750,000
</TABLE>
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE> 79
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income for the year -- -- -- --
---- -------- --------- ------
BALANCES AT DECEMBER 31, 1996 25 $625,000 2,717,458 $2,718
==== ======== ========= ======
<CAPTION>
Additional
paid-in Accumulated Treasury
capital deficit Stock Total
------- ------- ----- -----
<S> <C> <C> <C> <C>
Net income for the year -- (959,566) -- (959,566)
BALANCES AT DECEMBER 31, 1996 $6,190,192 $(1,451,410) $ -- $ 4,741,500
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE> 80
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the year $ (959,566) $(630)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 223,142 --
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-trade and other (770,825) --
Inventory 154,485 --
Prepaid expenses and other 82,517 --
Increase (Decrease) in:
Accounts payable (458,548) 630
Other accrued liabilities 3,944 --
Income taxes payable 165,675 --
----------- -----
NET CASH USED IN OPERATING ACTIVITIES (113,889) --
----------- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (71,734) --
Cash paid for reorganization costs (109,255) --
Cash acquired in acquisition of Brister's
Thunder Karts, Inc. and USA Industries, Inc. 535,425 --
Cash paid for acquisition of Brister's
Thunder Karts, Inc. and USA Industries, Inc. (2,533,642) --
----------- -----
NET CASH USED IN INVESTING ACTIVITIES (2,179,206) --
----------- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from bank line of credit 100,000 --
Cash proceeds from long-term note payable 2,000,000 --
Cash paid for long-term note origination fees (16,783) --
Principal payments on long-term debt (89,633) --
Cash received from sale of convertible preferred stock 625,000 --
Cash paid for brokerage and placement fees
related to sale of convertible preferred stock (94,750) --
Cash received from sale of common stock 657,139 --
Cash paid for brokerage and placement fees
related to sale of common stock (257,850) --
----------- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,923,123 --
----------- -----
INCREASE IN CASH 630,028 --
Cash at beginning of year -- --
----------- -----
CASH AT END OF YEAR $ 630,028 $ --
=========== =====
</TABLE>
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 81
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF INTEREST
AND INCOME TAXES PAID
Interest paid for the year $ 348,730 $ --
========== ======
Income taxes paid for the year $ 28,000 $ --
========== ======
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 $ --
========== ======
Acquisition price of USA Industries, Inc. settled
with common stock $ 750,000 $ --
========== ======
Loan origination fees settled with common stock $ 10,500 $ --
========== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE> 82
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
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 to 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.
F-18
<PAGE> 83
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
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.
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 - ACQUISITION OF SUBSIDIARIES
On March 15, 1996, the Company purchased 100.0% of the issued and outstanding
stock of Brister's Thunder Karts, Inc. (a Louisiana corporation) for a total
purchase price of approximately $6,100,000. The acquisition was effective at
the close of business on March 31, 1996. The purchase price was paid with
$2,000,000 cash, a note payable for $1,000,000 and 775,000 shares (516,667
post-March 24, 1997 reverse split shares) of restricted, unregistered common
stock of the Company. Brister's Thunder Karts, Inc. (Brister's) was formed on
August 2, 1976 under the laws of the State of Louisiana. Brister's is in the
business of manufacturing and marketing motorized "fun karts" for the consumer
market. Results of operations of Brister's are included in the consolidated
financial statements beginning on the effective date of the acquisition.
This acquisition was accounted for using the purchase method of accounting for
business combinations. The Company allocates 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 is recorded as goodwill.
<TABLE>
<S> <C>
Purchase price $ 6,100,000
Assets acquired (2,017,394)
Liabilities assumed 781,367
-----------
Goodwill related to Brister's $ 4,863,973
===========
</TABLE>
F-19
<PAGE> 84
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITION OF SUBSIDIARIES - CONTINUED
On November 20, 1996, the Company purchased 100.0% of the issued and
outstanding stock of USA Industries, Inc. (an Alabama corporation) for a total
purchase price of approximately $1,000,000. The acquisition was effective at
the close of business on November 21, 1996. The purchase price was paid with
$250,000 cash and 250,000 shares (166,667 post-March 24, 1997 reverse split
shares) of restricted, unregistered common stock of the Company. USA
Industries, Inc. (USA) was formed on January 2, 1992 under the laws of the
State of Alabama. USA is in the business of manufacturing and marketing
motorized "fun karts" for the consumer market. Results of operations of USA are
included in the consolidated financial statements beginning on the effective
date of the acquisition.
This acquisition was accounted for using the purchase method of accounting for
business combinations. The Company allocates 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 is recorded as goodwill.
<TABLE>
<S> <C>
Purchase price $ 1,000,000
Assets acquired (1,496,970)
Liabilities assumed 1,492,420
-----------
Goodwill related to USA $ 995,450
===========
</TABLE>
Pro forma unaudited results of operations relating to the acquisition of
Brister's and USA, as though the acquisition had occurred as of the beginning
of the first period presented, is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Revenues $10,698,824 $8,514,460
=========== ==========
Net income (loss) $ (214,984) $ 121,324
=========== ==========
Earnings per share $ (0.07) $ 0.04
=========== ==========
</TABLE>
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
The Company considers all cash on hand and in banks, certificates of
deposit and other highly-liquid investments with maturities of three
months or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the
Company's cash management policies.
2. Accounts and advances receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located 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.
F-20
<PAGE> 85
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
2. Accounts and advances receivable - continued
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. As of December 31,
1996, inventory consisted of the following components:
<TABLE>
<S> <C>
Raw materials $875,450
Work in process 37,661
Finished goods 45,270
--------
$958,381
========
</TABLE>
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.
F-21
<PAGE> 86
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - 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 December 31, 1996 and 1995, 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).
F-22
<PAGE> 87
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components:
<TABLE>
<CAPTION>
Estimated
1996 1995 useful life
--------- ------- --------------
<S> <C> <C> <C>
Building and improvements $ 331,360 $ -- 5 to 25 years
Equipment 317,665 -- 5 to 10 years
Transportation equipment 57,050 -- 3 to 5 years
Furniture and fixtures 65,299 -- 5 years
--------- -------
771,374 --
Accumulated depreciation (34,598) --
--------- -------
736,776 --
Land 32,800 --
--------- -------
Net property and equipment $ 769,576 $ --
========= =======
</TABLE>
Total depreciation expense charged to operations for the years ended December
31, 1996 and 1995 was approximately $34,598 and $-0-, respectively.
NOTE E - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
$300,000 line of credit payable to a bank
Interest at 8.25%. Principal and accrued
interest payable at maturity. Maturity in
August 1997. Secured solely by accounts
receivable due from a specific customer and
guaranteed by the Company $100,000 $ --
$40,020 term note payable to a bank. Interest
at 10.5%. Principal and accrued interest
payable at maturity. Secured by accounts
receivable, inventory and equipment of USA
Industries, Inc. Paid in full in January 1997 40,020 --
-------- ------
Total notes payable $140,020 $ --
======== ======
</TABLE>
Additionally, USA has a line of credit with a bank, bearing interest at the
bank's prime interest rate and matures on September 30, 1997. Advances on this
line are made at the rate of 40% per qualifying purchase order received by USA
(as defined in the line of credit agreement) and an additional 45% of each
eligible receivable (as defined in the line of credit agreement). The total
available credit available is $500,000 and no amounts are outstanding at
December 31, 1996. The USA line of credit is collateralized by specific
accounts receivable from a single significant customer of USA and is also
guaranteed by the Company.
F-23
<PAGE> 88
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - NOTES PAYABLE - CONTINUED
The lines of credit are maintained at the same bank and the USA line of credit
contains certain restrictive covenants related to the maintenance of certain
current ratios and minimum net worth. The Company was in compliance with all
covenants as of December 31, 1996.
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Related parties
$2,000,000 note payable to a Foundation
Interest at 14.0%. Interest payable on the
15th day of each month beginning on
March 15, 1996. All accrued but unpaid
interest due on March 14, 2001. Principal
payable as follows: $399,996 on March 14,
1999; $399,996 on March 14, 2000; $1,200,008
on March 14, 2001. Secured by accounts
receivable, inventory, property and equipment
owned or acquired by the Company $2,000,000 $ --
$1,000,000 payable to the former shareholder
of Brister's Thunder Karts, Inc. Interest
payable at 8.0% in the first loan year and
escalating 1.0% per year to a maximum of
14.0% in the seventh loan year. Interest
only payable quarterly, starting June 30,
1996. All unpaid but accrued interest is due
at maturity. Principal payable in annual
installments of $250,000 starting on March 31,
2000. Collateralized by certain assets valued
at $1 million owned by certain members of
the Company's Board of Directors 1,000,000 --
</TABLE>
F-24
<PAGE> 89
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - LONG-TERM DEBT - CONTINUED
<TABLE>
<CAPTION>
1996 1995
----------- ------
<S> <C> <C>
Related parties - continued
$200,000 note payable to the former shareholder
of Brister's Thunder Karts, Inc. Interest payable
at 10.0%. Payable in quarterly installments,
including interest, of $20,000, $55,000,
$53.750, $52,500 and $51,250, respectively,
commencing on April 1, 1997. Final maturity
in April 1998 or immediately upon successful
completion of an underwritten public offering
of the Company's securities. Collateralized by
certain assets valued at $1 million owned by
certain members of the Company's Board of
Directors 200,000 --
----------- ------
Total related party long-term debt 3,200,000 --
----------- ------
Banks and individuals
$240,020 mortgage note payable to a bank. Interest
at the Bank's Commercial Base Rate (9.75% at
December 31, 1996). 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. 235,089 --
$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. 7,553 --
$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 6,408 --
----------- ------
Total long-term debt to banks and individuals 249,050 --
----------- ------
Total long-term debt 3,449,050 --
Less current maturities (116,390) --
----------- ------
Long-term portion $ 3,332,660 $ --
=========== ======
</TABLE>
F-25
<PAGE> 90
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - LONG-TERM DEBT - CONTINUED
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ ----------
<S> <C>
1997 $ 116,390
1998 115,030
1999 411,958
2000 661,809
2001 1,463,085
2002-2006 588,270
2007-2010 92,508
----------
Totals $3,449,050
==========
</TABLE>
NOTE G - INCOME TAXES
The components of income tax expense for the years ended December 31, 1996 and
1995, respectively, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
Federal:
Current $156,675 $ --
Deferred -- --
-------- ------
156,675 --
-------- ------
State:
Current 36,900 --
Deferred -- --
-------- ------
36,900 --
-------- ------
Total $193,575 $ --
======== ======
</TABLE>
The Company's income tax expense for the years ended December 31, 1996 and
1995, respectively, differed from the statutory federal rate of 34 percent as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ------
<S> <C> <C>
Statutory rate applied to earnings (loss) before income taxes $(260,437) $ --
Increase (decrease) in income taxes resulting from:
State income taxes 36,900 --
Non-deductability of adjustment for common
stock issued at less than "fair value" 485,490 --
Difference caused by use of statutory amortization
periods for deduction of goodwill (37,724) --
Utilization of pre-acquisition net operating loss
of USA Industries, Inc. (38,173) --
Other 7,519 --
--------- ------
Income tax expense $ 193,575 $ --
========= ======
</TABLE>
F-26
<PAGE> 91
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - 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.
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.
In January 1996, concurrent with the execution of a letter of intent related to
a Stock Purchase Agreement whereby the Company acquired 100.0% of the issued
and outstanding stock of Brister's, the Company entered into a consulting
contract with a company owned by an officer and director of the Company whereby
the consulting company would provide all necessary legal, capital and other
related professional services, exclusive of accounting and auditing services,
related to the reorganization, recapitalization and consummation of the
acquisition of Brister's for a fee of $15,000. The payment of the fee was
contingent upon the successful consummation of the Brister's acquisition. The
fee was ultimately settled with the differential between 1,500,000 pre-reverse
stock split unregistered, restricted common stock (1,000,000 post-reverse split
shares) escrowed to close the acquisition of Brister's and the actual number of
shares to be issued to the then owners of Brister's, pursuant to the applicable
settlement terms of the Stock Purchase Agreement and the consulting contract.
Upon final settlement, the $15,000 fee was paid through the issuance of
approximately 725,000 pre- reverse stock split shares (483,333 post-reverse
stock split shares) to the consulting company.
NOTE I - 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.
F-27
<PAGE> 92
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - CONVERTIBLE PREFERRED STOCK - CONTINUED
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. 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.
NOTE J - 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.
F-28
<PAGE> 93
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - 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 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.
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.
F-29
<PAGE> 94
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - COMMON STOCK TRANSACTIONS - CONTINUED
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.
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.
F-30
<PAGE> 95
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - COMMON STOCK TRANSACTIONS - CONTINUED
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.
NOTE K - 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.
<TABLE>
<CAPTION>
Warrants Warrants Warrants
granted exercised outstanding Exercise price
------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Class A Warrants 66,667 3,334 63,333 $5.25 per share
1996 Warrants 166,668 -- 166,668 $4.50 per share
------- ----- ------- ---------------
Totals 233,335 3,334 230,001
======= ===== =======
</TABLE>
F-31
<PAGE> 96
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - 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.
<TABLE>
<CAPTION>
Options Options Options
granted exercised outstanding Exercise price
------- --------- ----------- --------------
<S> <C> <C> <C> <C>
1996 options 59,355 -- 59,355 $5.63 per share
====== ===== ======
Shares allocated 125,377
=======
</TABLE>
NOTE M - 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 December 31, 1996, approximately $100,000 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.
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.
F-32
<PAGE> 97
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - COMMITMENTS AND CONTINGENCIES - CONTINUED
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.
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.
Employment agreement
In March 1996, pursuant to a January 1996 letter agreement, the Company entered
into a long-term employment contract (Agreement) with an individual to serve as
the Company's Chairman of the Board, President and Chief Executive Officer. The
Agreement is for a term of three (3) years and provides for an annual base
salary of $150,000. Upon execution of the Agreement, the individual earned a
signing bonus of 10%, or $15,000, paid with the issuance of 210,000 restricted,
unregistered post-reorganization shares (140,000 post-March 24, 1997 reverse
split shares) of common stock. Under the terms of the Agreement, the Company
may buy-back 140,000 shares in Year 1 of the Agreement at an aggregate price of
$16,800 if the individual is terminated for cause or the individual voluntarily
terminates his employment prior to March 15, 1997; 70,000 shares in Year 2 of
the Agreement at an aggregate price of $8,400 if the individual is terminated
for cause or the individual voluntarily terminates his employment between March
15, 1997 and March 15, 1998; and 35,000 shares in Year 3 of the Agreement at an
aggregate price of $4,200 if the individual is terminated for cause or the
individual voluntarily terminates his employment between March 15, 1998 and
March 15, 1999. If the Agreement is terminated for any reason than for cause or
voluntary termination by the individual, the buy-back option is terminated.
F-33
<PAGE> 98
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - COMMITMENTS AND CONTINGENCIES - CONTINUED
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, 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. 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 N - SIGNIFICANT CUSTOMERS
During the year ended December 31, 1996, the Company had two related customers
responsible for net sales in excess of 10.0% of total net sales.
<TABLE>
<S> <C> <C>
Total net sales $8,327,316 100.00%
========== ======
Company A $1,316,880 15.81%
Company B 369,460 4.44%
---------- ------
Total significant customers $1,686,340 20.25%
========== ======
</TABLE>
NOTE O - EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Primary
Weighted-average shares outstanding 2,079,728 124,616
Exclusion of contingent shares issued in escrow transaction (190,893) --
Net effect of dilutive stock options and warrants
based on the treasury stock method using
average market price 3,728 --
----------- ---------
Total weighted-average shares outstanding 1,892,563 124,616
=========== =========
Net income $ (959,566) $ (630)
=========== =========
Per share amount $ (0.51) nil
=========== =========
</TABLE>
The convertible preferred stock is considered anti-dilutive for the years ended
December 31, 1996 and 1995, respectively.
F-34
<PAGE> 99
KARTS INTERNATIONAL INCORPORATED
INTRODUCTION TO PROFORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
Karts International Incorporated (Karts) acquired 100.0% of the issued and
outstanding stock of Brister's Thunder Karts, Inc. (a Louisiana corporation)
(Brister's) at the close of business on March 31, 1996 and 100.0% of the issued
and outstanding stock of USA Industries, Inc. (an Alabama corporation) (USA) as
of the close of business on November 21, 1996.
The purchase price of Brister's was approximately $6,300,000 with approximately
$2,000,000 paid in cash, notes payable to the seller aggregating $1,200,000 and
775,000 shares (516,667 post-March 24, 1997 reverse stock split shares) of
Karts unregistered, restricted common stock.
The purchase price of USA was $1,000,000 with approximately $250,000 paid in
cash at closing and the balance paid in 250,000 shares (166,667 post-March 24,
1997 reverse stock split shares) of Karts unregistered, restricted common stock
equaling $750,000 based upon the closing price of the Company's common stock on
the settlement date.
Both acquisition transactions were accounted for using the purchase method of
accounting for business combinations. Karts allocated the total purchase price
to the assets acquired based upon their respective relative fair value. Any
excess purchase price over the fair value of the assets acquired was recorded
as goodwill.
<TABLE>
<CAPTION>
Brister's USA
Thunder Industries,
Karts, Inc. Inc.
----------- -----------
<S> <C> <C>
Purchase price $ 6,300,000 $ 1,000,000
Assets acquired (2,017,394) (1,496,970)
Liabilities assumed 981,367 1,492,420
----------- -----------
Goodwill $ 4,863,973 $ 995,450
=========== ===========
</TABLE>
The Proforma Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994 present the consolidated results of continuing operations
of Karts International Incorporated and Subsidiaries and USA Industries, Inc.
as if the acquisitions occurred as of January 1, 1994, as adjusted for the pro
forma effect of the amortization of goodwill.
These proforma statements include all material adjustments necessary to present
proforma historical results of the above described transactions. The proforma
information does not purport to be indicative of the financial position or the
results of operations which would have actually been obtained if the
acquisition transactions had actually been consummated on the dates indicated.
In addition, the proforma financial information does not purport to be
indicative of the financial position or results of operations that may be
obtained in the future.
The proforma information has been prepared by Karts and all calculations have
been made based on assumptions deemed appropriate in the circumstances by
Karts. Certain of these assumptions are set forth under the Notes to Proforma
Consolidated Financial Information.
The proforma financial information should be read in conjunction with the
historical Financial Statements and Notes thereto of Karts International
Incorporated and its wholly-owned subsidiaries, Brister's Thunder Karts, Inc.
and USA Industries, Inc.
F-35
<PAGE> 100
KARTS INTERNATIONAL INCORPORATED
COMBINED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Brister's USA
Thunder Industries, Pro Forma
Karts Karts, Inc. Inc. effect of
International 1/1/96 to 1/1/96 to amortization Pro Forma
Incorporated 3/31/96 11/21/96 of goodwill Combined
------------ ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Kart sales $ 8,327,316 $ 916,845 $ 1,454,663 $ -- $ 10,698,824
COST OF GOODS SOLD 5,842,532 353,734 1,417,106 -- 7,613,372
----------- --------- ----------- -------- ------------
GROSS PROFIT 2,484,784 563,111 37,557 -- 3,085,452
OPERATING EXPENSES
General and administrative 1,253,450 277,666 223,947 -- 1,755,063
Compensation expense
related to common stock
issuances at less than
"fair value" for reorgan-
ization, restructuring
and consulting costs 1,430,287 -- -- -- 1,430,287
Depreciation and
amortization 203,022 14,687 40,849 83,091 341,649
----------- --------- ----------- -------- ------------
Total operating expenses 2,886,759 292,353 264,796 83,091 3,526,999
----------- --------- ----------- -------- ------------
INCOME FROM OPERATIONS (401,975) 270,758 (227,239) (83,091) (441,547)
OTHER INCOME (EXPENSE)
Litigation settlements -- (17,379) -- -- (17,379)
Interest and other (364,016) 448 -- -- (363,568)
----------- --------- ----------- -------- ------------
INCOME BEFORE INCOME TAXES (765,991) 253,827 (227,239) (83,091) (822,494)
PROVISION FOR INCOME TAXES (193,575) (89,675) -- -- (283,250)
----------- --------- ----------- -------- ------------
NET INCOME (LOSS) $ (959,566) $ 164,152 $ (227,239) $(83,091) $ (1,105,744)
=========== ========= =========== ======== ============
Pro Forma earnings per
weighted-average share
of common stock $ (0.58)
============
Pro Forma number of
weighted-average shares
of common stock outstanding 1,892,563
============
</TABLE>
F-36
<PAGE> 101
KARTS INTERNATIONAL INCORPORATED
COMBINED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Pro Forma
Karts Brister's USA effect of
International Thunder Industries, amortization Pro Forma
Incorporated Karts, Inc. Inc. of goodwill Combined
------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Kart sales $ -- $ 7,320,417 $1,194,043 $ -- $ 8,514,460
COST OF GOODS SOLD -- 5,131,735 1,052,605 -- 6,184,340
----------- ----------- ---------- --------- -----------
GROSS PROFIT -- 2,188,682 141,438 -- 2,330,120
OPERATING EXPENSES
General and
administrative 630 1,443,155 94,822 -- 1,538,607
Depreciation and
amortization -- 68,815 32,161 234,377 335,353
----------- ----------- ---------- --------- -----------
Total operating expenses 630 1,511,970 126,983 234,377 1,873,960
----------- ----------- ---------- --------- -----------
INCOME FROM OPERATIONS (630) 676,712 14,455 (234,377) 456,160
OTHER INCOME (EXPENSE)
Litigation settlements -- (130,000) -- -- (130,000)
Interest and other -- 13,263 587 -- 13,850
----------- ----------- ---------- --------- -----------
INCOME BEFORE INCOME TAXES (630) 559,975 15,042 (234,377) 340,010
PROVISION FOR INCOME TAXES -- (218,686) -- -- (218,686)
----------- ----------- ---------- --------- -----------
NET INCOME (LOSS) $ (630) $ 341,289 $ 15,042 $(234,377) $ 121,324
=========== =========== ========== ========= ===========
Pro Forma earnings per
weighted-average share
of common stock $ 0.06
===========
Pro Forma number of
weighted-average shares
of common stock outstanding 1,892,563
===========
</TABLE>
F-37
<PAGE> 102
KARTS INTERNATIONAL INCORPORATED
COMBINED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Pro Forma
Karts Brister's USA effect of
International Thunder Industries, amortization Pro Forma
Incorporated Karts, Inc. Inc. of goodwill Combined
------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Kart sales $ -- $ 6,203,293 $ 866,207 $ -- $ 7,069,500
COST OF GOODS SOLD -- 4,421,274 764,971 -- 5,186,245
----------- ----------- --------- --------- -----------
GROSS PROFIT -- 1,782,019 101,236 -- 1,883,255
OPERATING EXPENSES
General and administrative 630 1,235,694 77,453 -- 1,313,777
Depreciation and
amortization -- 81,179 28,977 234,377 344,533
----------- ----------- --------- --------- -----------
Total operating expenses 630 1,316,873 106,430 234,377 1,658,310
----------- ----------- --------- --------- -----------
INCOME FROM OPERATIONS (630) 465,146 (5,194) (234,377) 224,945
OTHER INCOME (EXPENSE)
Interest and other -- 97,414 372 -- 97,786
----------- ----------- --------- --------- -----------
INCOME BEFORE INCOME TAXES (630) 562,560 (4,822) (234,377) 322,731
PROVISION FOR INCOME TAXES -- (216,072) -- -- (216,072)
----------- ----------- --------- --------- -----------
NET INCOME (LOSS) $ (630) $ 346,488 $ (4,822) $(234,377) $ 106,659
=========== =========== ========= ========= ===========
Pro Forma earnings per
weighted-average share
of common stock $ 0.06
===========
Pro Forma number of
weighted-average shares
of common stock outstanding 1,892,563
===========
</TABLE>
F-38
<PAGE> 103
KARTS INTERNATIONAL INCORPORATED
NOTES TO PROFORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The Proforma Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994 are derived from the historical Statements of Income of
Karts International Incorporated, Brister's Thunder Karts, Inc. and USA
Industries, Inc.
The proforma information reflects the adjustments to record the acquisition of
Brister's Thunder Karts, Inc. by Karts International Incorporated on April 1,
1996 as if the acquisition occurred on January 1, 1994. This transaction was
recorded pursuant to the requirements of Accounting Principles Board Opinion
#16, "Business Combinations", and is accounted for as a purchase.
Additionally, the proforma information reflects the adjustments to record the
acquisition of USA Industries, Inc. by Karts International Incorporated on
November 21, 1996 as if the acquisition occurred on January 1, 1994. This
transaction was recorded pursuant to the requirements of Accounting Principles
Board Opinion #16, "Business Combinations", and is accounted for as a purchase.
The proforma financial information should be read in conjunction with the
historical Financial Statements and Notes thereto of Karts International
Incorporated and its wholly-owned subsidiaries, Brister's Thunder Karts, Inc.
and USA Industries, Inc.
The proforma information does not purport to be indicative of the financial
position or the results of operations which would have actually been obtained
if the acquisition transactions had actually been consummated on the dates
indicated. In addition, the proforma financial information does not purport to
be indicative of the financial position or results of operations that may be
obtained in the future.
The respective pro forma adjustments to the historical financial statements
depicted on the Proforma Consolidated Statements of Income are described below:
(1) Adjustment to amortize approximately $5.86 million in cumulative goodwill
acquired in the respective acquisitions as if both acquisitions had
occurred on January 1, 1994. Goodwill is amortized using a 25 year life
and the straight-line method.
F-39
<PAGE> 104
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
BALANCE SHEET
March 31, 1996
UNAUDITED
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS
Cash on hand and in bank $ 488,047
Accounts and notes receivable
Trade 239,864
Other 424
Inventory 852,631
Prepaid expenses 101,050
-----------
TOTAL CURRENT ASSETS 1,682,016
-----------
PROPERTY AND EQUIPMENT - AT COST 496,425
Less accumulated depreciation (171,528)
-----------
NET PROPERTY AND EQUIPMENT 324,897
-----------
OTHER ASSETS
Deposits 4,059
-----------
TOTAL ASSETS $ 2,010,972
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 83,235
Current maturities of long-term debt 4,190
Accounts payable and other accrued liabilities 97,394
Federal and State income taxes payable 103,542
-----------
TOTAL CURRENT LIABILITIES 288,361
-----------
LONG-TERM LIABILITIES
Notes payable 5,364
Deferred income tax liability 17,438
-----------
TOTAL LIABILITIES 311,163
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - no par value
1,000 shares authorized, issued
and outstanding 1,000
Retained earnings 1,698,809
-----------
TOTAL SHAREHOLDERS' EQUITY 1,699,809
-----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,010,972
===========
</TABLE>
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 105
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
STATEMENTS OF INCOME AND CHANGES IN RETAINED EARNINGS
Three months ended March 31, 1996
<TABLE>
UNAUDITED
<S> <C>
REVENUES $ 916,845
COST OF SALES 399,334
-----------
GROSS PROFIT 517,511
OPERATING EXPENSES 299,527
-----------
INCOME FROM OPERATIONS 217,984
OTHER INCOME (EXPENSE) (13,647)
-----------
INCOME BEFORE INCOME TAXES 204,337
INCOME TAX (EXPENSE) (89,675)
-----------
NET INCOME 114,662
RETAINED EARNINGS
At beginning of period 1,584,147
-----------
At end of period $ 1,698,809
===========
</TABLE>
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 106
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
STATEMENTS OF CASH FLOWS
Three months ended March 31, 1996
UNAUDITED
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the period $ 114,662
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 20,273
(Increase) Decrease in:
Accounts receivable (86,167)
Inventory (280,632)
Prepaid expenses 50,525
Deposits (4,059)
Increase (Decrease) in:
Accounts payable and other
accrued liabilities (416,388)
Federal income taxes payable 63,054
-----------
NET CASH USED IN OPERATING ACTIVITIES (538,732)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (46,343)
Cash received (advanced) on
other accounts receivable (424)
-----------
NET CASH USED IN INVESTING ACTIVITIES (46,767)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable (26,988)
Principal payments on long-term debt (1,045)
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (28,033)
-----------
DECREASE IN CASH (613,532)
Cash at beginning of period 1,101,579
-----------
Cash at end of period $ 5,338
===========
SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID
Interest paid during the period $ 14,639
===========
Income taxes paid during the period $ 26,621
===========
</TABLE>
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 107
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Brister's Thunder Karts, Inc. (Company) was formed on August 2, 1976 under the
laws of the State of Louisiana. The Company is in the business of manufacturing
and marketing motorized "fun" karts for the consumer market. Effective at the
close of business on March 31, 1996, the Company's sole shareholder sold 100.0%
of the Company's issued and outstanding stock to Karts International
Incorporated (KII). The Company became a wholly-owned subsidiary of KII at that
date.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the instructions for interim financial statements,
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.
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.
2. Accounts and advances receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout 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.
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 March 31, 1996,
inventory consisted of the following components:
<TABLE>
<S> <C>
Raw materials $506,022
Work in process 211,825
Finished goods 134,784
--------
$852,631
========
</TABLE>
F-43
<PAGE> 108
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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. Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes. At March 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.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components:
<TABLE>
<CAPTION>
Estimated
useful life
-----------
<S> <C> <C>
Equipment $ 360,368 10 years
Transportation equipment 85,788 3 years
Furniture and fixtures 45,822 7 years
Leasehold improvements 4,447 10 years
---------
496,425
Accumulated depreciation (171,528)
---------
Net property and equipment $ 324,897
=========
</TABLE>
NOTE D - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<S> <C>
$137,025 note payable to a finance
company. Interest at 9.20%.
Payable in monthly installments
of approximately $14,290, including
interest. Secured by insurance coverage. $83,235
=======
</TABLE>
F-44
<PAGE> 109
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
$27,677 note payable to the Company's
former shareholder. Interest at 7.0%
Payable in semi-monthly installments
of approximately $200, including interest
Secured by equipment $ 9,554
Less current portion (4,190)
-------
Long-term portion $ 5,364
=======
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ ------
<S> <C> <C>
1996 $4,190
1997 4,494
1998 870
------
$9,554
======
</TABLE>
NOTE F - INCOME TAXES
The deferred current tax asset and non-current deferred tax liability on the
March 31, 1996 balance sheet consists of the following:
<TABLE>
<S> <C>
Current deferred tax asset $ --
Current deferred tax liability --
Valuation allowance for current deferred tax asset --
-------
Net current deferred tax asset $ --
=======
Non-current deferred tax asset $ --
Non-current deferred tax liability 17,438
Valuation allowance for non-current deferred tax asset --
-------
Net non-current deferred tax asset $17,438
=======
</TABLE>
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
F-45
<PAGE> 110
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - CONTINUED
The components of income tax expense for the three months ended March 31, 1996
is as follows:
<TABLE>
<S> <C>
Federal:
Current $78,502
Deferred --
-------
78,502
-------
State:
Current 11,173
Deferred --
-------
11,173
-------
Total $89,675
=======
</TABLE>
The Company's income tax expense for the three months ended March 31, 1996
differed from the statutory federal rate of 34 percent as follows:
<TABLE>
<S> <C>
Statutory rate applied to
earnings before income taxes $69,475
Increase (decrease) in income taxes
resulting from:
State income taxes 11,173
Effect of book/tax differences
in depreciation and other tax
basis adjustments 9,027
-------
Income tax expense $89,675
=======
</TABLE>
NOTE G - RELATED PARTY TRANSACTIONS
The Company leases its manufacturing facilities and corporate offices under an
operating lease with its sole shareholder. The lease requires payments of
approximately $6,025 per month and the lease expires in December 1996. The
lease contains an extension option for the year beginning January 1997. Total
lease expense for the three months ended March 31, 1996 was approximately
$18,075.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is named as defendant in several lawsuits related to its "fun"
karts. The Company has commercial liability coverage to cover these exposures
with a $25,000 per claim self-insurance clause. 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 March 31, 1996, approximately $50,000 has been accrued and
charged to operations for anticipated future 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.
F-46
<PAGE> 111
[S. W. HATFIELD + ASSOCIATES LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholder
Brister's Thunder Karts, Inc.
We have audited the accompanying balance sheets of Brister's Thunder Karts,
Inc. (a Louisiana corporation) as of December 31, 1995 and 1994 and the related
statements of income, changes in shareholder's equity and cash flows for each
of the two years ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Brister's Thunder Karts, Inc.
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the two years ended December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ S. W. HATFIELD + ASSOCIATES
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
March 9, 1996
F-47
<PAGE> 112
BRISTER'S THUNDER KARTS, INC.
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash on hand and in bank $ 1,101,579 $ 521,432
Accounts receivable
Trade 153,697 179,576
Other -- 24,000
Inventory 571,999 381,743
Prepaid expenses 151,575 109,745
----------- -----------
TOTAL CURRENT ASSETS 1,978,850 1,216,496
----------- -----------
PROPERTY AND EQUIPMENT 450,082 349,050
Accumulated depreciation (151,255) (98,444)
----------- -----------
NET PROPERTY AND EQUIPMENT 298,827 250,606
----------- -----------
TOTAL ASSETS $ 2,277,677 $ 1,467,102
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Notes payable $ 110,223 $ 76,881
Current maturities of long-term debt 4,190 3,908
Accounts payable and other accrued expenses 513,782 98,783
Federal and state income taxes payable 40,488 1,271
----------- -----------
TOTAL CURRENT LIABILITIES 668,683 180,843
----------- -----------
LONG-TERM LIABILITIES
Notes payable, net of current maturities 6,409 10,599
Deferred tax liability 17,438 31,802
----------- -----------
TOTAL LIABILITIES 692,530 223,244
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock - no par value
1,000 shares authorized, issued
and outstanding, respectively 1,000 1,000
Retained earnings 1,584,147 1,242,858
----------- -----------
TOTAL SHAREHOLDER'S EQUITY (DEFICIT) 1,585,147 1,243,858
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $ 2,277,677 $ 1,467,102
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 113
BRISTER'S THUNDER KARTS, INC.
STATEMENTS OF INCOME
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
REVENUES
Kart sales $ 7,320,417 $ 6,203,293
----------- -----------
COST OF SALES
Materials 4,350,123 3,805,191
Direct labor 447,654 328,524
Freight 72,687 76,289
Other 261,271 211,270
----------- -----------
TOTAL COST OF SALES 5,131,735 4,421,274
----------- -----------
GROSS PROFIT 2,188,682 1,782,019
----------- -----------
OPERATING EXPENSES
Salaries, wages and related costs 872,502 777,662
Insurance 174,166 180,032
Other general and administrative costs 396,487 278,000
Depreciation and amortization 68,815 81,179
----------- -----------
TOTAL OPERATING EXPENSE 1,511,970 1,316,873
----------- -----------
INCOME FROM OPERATIONS 676,712 465,146
OTHER INCOME (EXPENSES)
Interest and other income 9,043 20,763
Litigation settlements and reserves (130,000) --
Gain on sale of fixed assets 4,220 76,651
----------- -----------
INCOME BEFORE INCOME TAXES 559,975 562,560
INCOME TAXES (218,686) (216,072)
----------- -----------
NET INCOME $ 341,289 $ 346,488
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 114
BRISTER'S THUNDER KARTS, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock
-------------------- Retained
# shares Amount earnings Totals
-------- ------ ------------ -----------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1994 1,000 $1,000 $ 1,069,472 $ 1,070,472
Property dividend to shareholder -- -- (173,102) (173,102)
Net income for the year -- -- 346,488 346,488
----- ------ ----------- -----------
BALANCES AT DECEMBER 31, 1994 1,000 1,000 1,242,858 1,243,858
Net income for the year -- -- 341,289 341,289
----- ------ ----------- -----------
BALANCES AT DECEMBER 31, 1995 1,000 $1,000 $ 1,584,147 $ 1,585,147
===== ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 115
BRISTER'S THUNDER KARTS, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the year $ 341,289 $ 346,488
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 68,815 81,179
Gain on sale of fixed assets (4,220) (76,651)
(Increase) Decrease in:
Accounts receivable 25,879 (55,961)
Inventory (190,256) (289,293)
Prepaid expenses (151,575) --
Increase (Decrease) in:
Accounts payable and
other accrued liabilities 525,222 (28,260)
Income taxes payable 148,962 (192,178)
Deferred tax liability (14,364) 21,277
----------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 749,752 (193,399)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash collected from miscellaneous advances 24,000 35,000
Cash advanced on miscellaneous advances -- (24,000)
Purchase of property and equipment (112,816) (84,822)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (88,816) (73,822)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from shareholder - net (40,381) 40,381
Principal payments on note payable (36,500) --
Principal payments on long-term debt (3,908) (3,645)
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES (80,789) 36,736
----------- ---------
INCREASE (DECREASE) IN CASH 580,147 (230,485)
Cash at beginning of period 521,432 751,917
----------- ---------
CASH AT END OF PERIOD $ 1,101,579 $ 521,432
=========== =========
</TABLE>
- CONTINUED -
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 116
BRISTER'S THUNDER KARTS, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
INTEREST AND INCOME TAXES PAID
Interest paid for the period $ 34,773 $ 7,170
======== ========
Income taxes paid for the period $ 84,088 $386,973
======== ========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of insurance through
short-term note payable $137,025 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 117
BRISTER'S THUNDER KARTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Brister's Thunder Karts, Inc. (Company) was formed on August 2, 1976 under the
laws of the State of Louisiana. The Company is in the business of manufacturing
and marketing motorized "fun" karts for the consumer market.
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.
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.
2. Accounts and advances receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the
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.
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 December 31,
1995 and 1994, inventory consisted of the following components:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Raw materials $522,849 $223,490
Work in process 49,150 147,360
Finished goods -- 10,893
-------- --------
$571,999 $381,743
======== ========
</TABLE>
F-53
<PAGE> 118
BRISTER'S THUNDER KARTS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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. Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes. At December 31, 1995 and 1994, 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.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components as of December 31,
1995 and 1994, respectively:
<TABLE>
<CAPTION>
Estimated
1995 1994 useful life
--------- --------- -----------
<S> <C> <C> <C>
Equipment $ 314,339 $ 198,688 10 years
Transportation equipment 85,788 98,865 3 years
Furniture and fixtures 45,608 47,150 7 years
Leasehold improvements 4,347 4,347 10 years
--------- ---------
450,082 349,050
Accumulated depreciation (151,255) (98,444)
--------- ---------
Net property and equipment $ 298,827 $ 250,606
========= =========
</TABLE>
NOTE D - NOTES PAYABLE
Notes payable consists of the following at December 31, 1995 and 1994,
respectively,
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
$137,025 note payable to a finance company
Interest at 9.20%. Payable in monthly
installments of approximately $14,290,
including interest. Secured by insurance coverage $110,223 $ --
Note payable to shareholder. Interest at 12.0%
Final payment due December 1995 -- 76,881
-------- -------
$110,223 $76,881
======== =======
</TABLE>
F-54
<PAGE> 119
BRISTER'S THUNDER KARTS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1994,
respectively,
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
$27,677 note payable to the Company's
former shareholder. Interest at 7.0%
Payable in semi-monthly installments
of approximately $200, including interest
Secured by equipment $ 10,599 $ 14,507
Less current portion (4,191) (3,908)
-------- --------
Long-term portion $ 6,408 $ 10,599
======== ========
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ ------
<S> <C>
1996 $ 4,191
1997 4,494
1998 1,914
-------
$10,599
=======
</TABLE>
NOTE F - INCOME TAXES
The deferred current tax asset and non-current deferred tax liability on the
December 31, 1995 and 1994, respectively, balance sheet consists of the
following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Current deferred tax asset $ -- $ --
Current deferred tax liability -- --
Valuation allowance for current deferred tax asset -- --
------- -------
Net current deferred tax asset $ -- $ --
======= =======
Non-current deferred tax asset $ -- $ --
Non-current deferred tax liability 17,438 31,802
Valuation allowance for non-current deferred tax asset -- --
------- -------
Net non-current deferred tax asset $17,438 $31,802
======= =======
</TABLE>
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
F-55
<PAGE> 120
BRISTER'S THUNDER KARTS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - CONTINUED
The components of income tax expense (benefit) for the years ended December 31,
1995 and 1994, respectively, are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Federal:
Current $ 204,000 $171,317
Deferred (14,364) 21,277
--------- --------
189,636 192,594
--------- --------
State:
Current 29,050 23,478
Deferred -- --
--------- --------
29,050 23,478
--------- --------
Total $ 218,686 $216,072
========= ========
</TABLE>
The Company's income tax expense (benefit) for the years ended December 31,
1995 and 1994, respectively, differed from the statutory federal rate of 34
percent as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Statutory rate applied to
earnings before income taxes $ 190,392 $ 191,270
Increase (decrease) in income taxes
resulting from:
State income taxes 29,050 23,478
Deferred income taxes (14,364) 21,277
Effect of incremental tax brackets 13,608 (19,953)
--------- ---------
Income tax expense $ 218,686 $ 216,072
========= =========
</TABLE>
NOTE G - RELATED PARTY TRANSACTIONS
The Company leases its manufacturing facilities and corporate offices under an
operating lease with its sole shareholder. The lease requires payments of
approximately $6,025 per month and the lease expires in December 1996. The
lease contains an extension option for the year beginning January 1997. Total
lease expense for the years ended December 31, 1995 and 1994, respectively,
were approximately $70,400 and $60,887.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is named as defendant in several lawsuits related to its "fun"
karts. The Company has commercial liability coverage to cover these exposures
with a $25,000 per claim self-insurance clause. 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 naming the Company as a
defendant. As of December 31, 1996, approximately $100,000 has been accrued and
charged to operations for anticipated future 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.
F-56
<PAGE> 121
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 4
Risk Factors................................ 8
The Company................................. 18
Common Stock Price Ranges and Dividends..... 21
Dividend Policy............................. 21
Use of Proceeds............................. 22
Dilution.................................... 24
Capitalization.............................. 25
Selected Historical Consolidated and
Combined Financial Information............ 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 27
Business.................................... 33
Management.................................. 45
Certain Relationships and Related
Transactions.............................. 49
Principal Stockholders...................... 53
Description of Securities................... 54
Shares Eligible for Future Sale............. 59
Underwriting................................ 60
Legal Matters............................... 63
Experts..................................... 63
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
---------------------
UNTIL ( DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
KARTS INTERNATIONAL
INCORPORATED
1,400,000 SHARES OF COMMON STOCK
AND 1,400,000 REDEEMABLE
COMMON STOCK PURCHASE
WARRANTS
-------------------------
PROSPECTUS
-------------------------
[KARTS INTERNATIONAL INCORPORATED LOGO]
, 1997
======================================================
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation relieve its directors from
liability for monetary damages to the full extent permitted by Nevada law.
Sections 78.751 and 78.752 of the General Corporation Law of the State of
Nevada authorize a corporation to indemnify, among others, any officer or
director against certain liabilities under specified circumstances, and to
purchase and maintain insurance on behalf of its officers and directors. The
Underwriting Agreement between the Company and the Underwriters in connection
with the Offering provides for reciprocal indemnification by each party of the
other and its officers, directors and controlling persons under specified
circumstances.
Article Seventh and Article Eighth of the Company's Articles of
Incorporation, included in Exhibit 3.1 hereto, which provide for certain
limitations on the liability of directors and indemnification of directors and
officers, respectively, are hereby incorporated by reference. The Company's
Articles of Incorporation provide, in general, that no director of the Company
shall be personally liable for monetary damages for breach of the director's
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) an act or
omission not in good faith that constitutes a breach of duty of the director to
the Company or an act or omission that involves intentional misconduct or a
knowing violation of other laws; (iii) a transaction from which the director
received an improper personal benefit, whether or not the benefit resulted from
an action taken within the scope of the director's office; or (iv) any act or
omission for which the liability of a director is expressly provided by an
applicable statute.
Article VII, Section 7 of the Company's Bylaws, included in Exhibit
3.2 hereto, provides, in general, that the Company shall indemnify its
directors and officers under the circumstances defined in Section 78.751 of the
General Corporation Law of the State of Nevada and gives authority to the
Company to purchase insurance with respect to such indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will bear the following estimated expenses incurred in
connection with this Offering:
<TABLE>
<CAPTION>
Item Amount
- ---- ------
<S> <C>
SEC registration fee . . . . . . . . . . . . . . . . . $5,531.46
NASD filing fee . . . . . . . . . . . . . . . . . . . . 2,307.37
Nasdaq application and listing fee . . . . . . . . . . 10,000.00
Underwriters' non-accountable expense allowance . . . . 173,250.00*
Blue sky filing fees and expenses . . . . . . . . . . . 40,000.00
Transfer agent and registrar fees . . . . . . . . . . . 5,000.00
Printing and engraving expenses . . . . . . . . . . . . 60,000.00
Legal fees and expenses . . . . . . . . . . . . . . . . 135,000.00
Accounting fees and expenses . . . . . . . . . . . . . 25,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 3,911.17
----------
TOTAL $470,000.00*
</TABLE>
- ------------------------------
*$199,238 and $485,988, respectively, if the Underwriters' over-allotment
option is fully exercised.
<PAGE> 123
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
a. PRIVATE OFFERING COMPLETED ON NOVEMBER 15, 1996.
On November 15, 1996, the Company concluded the private sale of 25
Units (the "Units") for total proceeds of $625,000. Each Unit consisted of one
share of convertible preferred stock, $0.001 par value per share (the
"Convertible Preferred Stock") and 6,667 Redeemable Common Stock Purchase
Warrants (the "1996 Warrants"). A total of 25 shares of Convertible Preferred
Stock and 166,675 1996 Warrants were sold. Each 1996 Warrant entitles the
holder thereof to purchase, for a period of 42 months after November 15, 1996,
one share of the Company's Common Stock at an exercise price of $4.50 per 1996
Warrant, subject to adjustment in certain circumstances. Upon completion of
this Offering, the Company has the option to require the holders of the
Convertible Preferred Stock to convert each share of the Convertible Preferred
Stock into either (a) $25,000 and 4,167 shares of Common Stock or (b) 8,334
shares of Common Stock. Under either option, the investor will continue to
hold the 1996 Warrants. If for any reason the Company does not complete a
public offering of its securities by November 15, 1997, each share of
Convertible Preferred Stock will be automatically converted into 8,334 shares
of Common Stock.
Information concerning the sale of the Units is as follows:
<TABLE>
<CAPTION>
No. of
Units Date of Sale Purchaser Consideration
- ----- ------------ --------- -------------
<S> <C> <C> <C>
1 November 15, 1996 Ervin L. Betts $25,000
2 November 15, 1996 The Bisio Living Trust 50,000
2 November 15, 1996 Central Scale Profit Sharing Plan 50,000
1 November 15, 1996 Dean L. Duncan 25,000
1 November 15, 1996 Gary C. Evans 25,000
2 November 15, 1996 Mathew W. Geisser, Jr.
and Barbara E. Geisser 50,000
2 November 15, 1996 Fred M. Harris 50,000
1 November 15, 1996 Roy Henrichs 25,000
1 November 15, 1996 Craig S. Jennings 25,000
1 November 15, 1996 Edward M. Kalinowski, Sr. 25,000
1 November 15, 1996 Harrison J. Kornfield 25,000
1 November 15, 1996 Chris Murray 25,000
2 November 15, 1996 A. L. Park 50,000
2 November 15, 1996 Putich Sales, Inc., DBPP 50,000
1 November 15, 1996 Alex Theriot, Jr. 25,000
1 November 15, 1996 Eva Dell W. Turner Trust 25,000
3 November 15, 1996 Ralph L. Zaun 75,000
--- --------
25 $ 625,000
== ========
</TABLE>
On March 6, 1997, the Company offered to each subscriber to the
offering the option of either receiving a refund of their investment, with
interest applied thereon at a rate of 12% per annum, or retaining the
investment and receiving an additional 13,334 1996 Warrants for each Unit
subscribed for as 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. The Company believes that none of the subscribers will seek a refund
of their initial investment in the Company. Gary C. Evans is a director of the
Company.
Argent Securities, Inc. ("Argent") acted as placement agent with
regard to this private offering. As placement agent, Argent received a
commission of eight percent of the aggregate amount of the offering, four
percent of the offering proceeds (or $25,000) as additional compensation for
investment banking services and three percent of the offering proceeds (or
$18,750) for non-accountable expenses.
II-2
<PAGE> 124
The Company, after determining the availability of the exemption from
registration provided under Rule 506 of Regulation D ("Regulation D")
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), relied upon such exemption in connection with the issuance of the shares
of Convertible Preferred Stock and 1996 Warrants. The purchasers had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. In connection with the Company's reliance upon the
exemption from registration provided in Rule 506, the Company determined that
each investor (i) was an accredited investor as that term is defined in Rule
501(a) of Regulation D, (ii) had such knowledge and experience in financial and
business matters that he was capable of evaluating the merits and risks of an
investment in the Company and had the financial ability to assume the monetary
risks associated therewith, (iii) was able to bear the complete loss of his
investment in the Company, (iv) had received such other documents and
information as he requested and had an opportunity to ask questions of and
receive answers from representatives of the Company, and (v) was acquiring the
shares of Convertible Preferred Stock and 1996 Warrants of the Company for his
own account, for investment purposes and not with a view to a further
distribution thereof. Each purchaser signed a Subscription Agreement, which
included certain investment representations made by each purchaser. The
Company has impressed the certificates representing the shares of Convertible
Preferred Stock and 1996 Warrants with a restrictive legend.
b. PRIVATE OFFERING COMPLETED ON MARCH 31, 1996.
On March 31, 1996, the Company concluded the private sale of 233,333
shares of Common Stock at a purchase price of $2.25 per share for total gross
proceeds of $525,000 (the "March 1996 Offering"). In connection with the
Company's March 1996 Offering, the Company and HFG have agreed to issue
additional shares of Common Stock to participants in the March 1996 Offering if
on March 31, 1998 (the "Offering Valuation Date") the average closing bid price
of the Common Stock for the ten trading days prior to and including the
Offering Valuation Date (the "Stock Market Value") does not equal or exceed
$4.50 per share. If such an adjustment is required on the Offering Valuation
Date, each participant in the March 1996 Offering will receive for no
additional consideration an additional number of shares of Common Stock
necessary to increase the Stock Market Value per share of the Common Stock
acquired in the March 1996 Offering to $4.50 per share. HFG has placed into
escrow 233,333 shares of Common Stock (the "HFG Escrow Shares") to be issued to
participants in the March 1996 Offering if an adjustment is required. The HFG
Escrow Shares are subject to the terms and conditions of that certain Escrow
Agreement, dated March 31, 1996 (the "Escrow Agreement"), by and between HFG,
Securities Transfer Corporation, as escrow agent, and the Company. If on the
Offering Valuation Date the Stock Market Value of the Common Stock is less than
$2.25 per share, the Company will be obligated to also issue the number of
additional shares of Common Stock necessary to increase the Stock Market Value
per share of the Common Stock acquired in the March 1996 Offering to $4.50 per
share. If on the Offering Valuation Date, the Stock Market Value is equal to
or greater than $4.50 per share, the HFG Escrow Agreement will terminate and
the HFG Escrow Shares will be delivered to HFG. The Company is under no
obligation to issue to HFG any additional shares of Common Stock as
reimbursement for any HFG Escrow Shares that may be distributed to participants
in the March 1996 Offering. The obligation of the Company and HFG to deliver
additional shares on the Offering Valuation Date applies only to original
participants in the March 1996 Offering who own shares purchased in the March
1996 Offering on the Offering Valuation Date.
Information concerning the sale of such securities is as follows:
<TABLE>
<CAPTION>
No. of
Shares Date of Sale Purchaser Consideration
------ ------------ --------- -------------
<S> <C> <C> <C>
37,778 March 31, 1996 The Brian Schlinger Trust $85,000
11,667 March 31, 1996 The Evert I. Schlinger, Jr. Trust 26,250
23,333 March 31, 1996 Warren G. Schlinger 52,500
</TABLE>
II-3
<PAGE> 125
<TABLE>
<S> <C> <C> <C>
11,667 March 31, 1996 James C. Hays, M.D. $ 26,250
23,333 March 31, 1996 Stephen F. Chadwick 52,500
11,667 March 31, 1996 Dexter H. Housley 26,250
23,333 March 31, 1996 Forrest Johnson 52,500
11,667 March 31, 1996 Mark Mazanski 26,250
23,333 March 31, 1996 Christopher C. Jones 52,500
11,667 March 31, 1996 Larry W. Gonser 26,250
23,333 March 31, 1996 Kenneth A. Owen 52,500
11,667 March 31, 1996 Robert G. Farris 26,250
8,888 March 31, 1996 Franklin Gornick 20,000
------- --------
233,333 $525,000
======= ========
</TABLE>
The Company, after determining the availability of the exemption from
registration provided under Rule 506 of Regulation D promulgated under the
Securities Act, relied upon such exemption in connection with the issuance of
233,333 shares of its Common Stock to 13 investors, nine of whom the Company
determined were accredited investors as that term is defined in Rule 501(a) of
Regulation D. Messrs. Housley, Mazanski, Gonser and Gornick were determined by
the Company to be sophisticated investors. In connection with the Company's
reliance upon the exemption from registration provided in Rule 506 of
Regulation D, the Company determined that each investor (i) had such knowledge
and experience in financial and business matters that he was capable of
evaluating the merits and risks of an investment in the Company and had the
financial ability to assume the monetary risks associated therewith, (ii) was
able to bear the complete loss of his investment in the Company, (iii) had
received such other documents and information as he requested and had an
opportunity to ask questions of and receive answers from representatives of the
Company, and (iv) was acquiring the shares of Common Stock of the Company for
his own account, for investment purposes and not with a view to a further
distribution thereof. The Company determined that the Brian Schlinger Trust,
the Evert I. Schlinger, Jr. Trust, Warren G. Schlinger, James C. Hayes, M.D.,
Stephen F. Chadwick, Forrest Johnson, Christopher C. Jones, Kenneth A. Owen and
Robert G. Farris were accredited investors as that term is defined in Rule
501(a) of Regulation D. Each purchaser signed a Subscription Agreement, which
included certain investment representations made by each purchaser. The
Company has impressed the stock certificates representing the 233,333 shares
with a restrictive legend. No underwriter participated in any of the sales
discussed above, nor did the Company pay any commissions with respect to these
issuances. No purchaser was affiliated with the Company. Mr. Evert I.
Schlinger owns 219,048 shares of the Company's Common Stock and is the sole
trustee of the Brian Schlinger and Evert I. Schlinger, Jr. Trusts and has
voting and dispositive powers over the shares of Common Stock owned by the
Trusts but disclaims any beneficial ownership of such shares. Warren G.
Schlinger is the brother of Evert I. Schlinger.
c. PRIVATE OFFERING COMPLETED ON JULY 2, 1996.
On July 2, 1996, the Company concluded the private sale of 3,333
shares of Common Stock and 66,667 Class A Warrants Units for a total of $17,500
cash. Each Class A Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $5.25 per share, as adjusted, until December 31,
1997.
II-4
<PAGE> 126
Information concerning the sale of such securities is as follows:
<TABLE>
<CAPTION>
No. of No. of
Shares Class A Warrants Date of Sale Purchaser Consideration
- ------ ---------------- ------------ --------- -------------
<S> <C> <C> <C> <C>
3,333 66,667 July 2, 1996 Art Beroff $17,500
</TABLE>
No underwriter participated in the sale discussed above, nor did the
Company pay any commissions or fees with respect to said issuance. With regard
to such sale, the Company relied upon Rule 504 of Regulation D promulgated
under the Securities Act for an exemption from the registration requirements of
the Securities Act. The purchaser signed a subscription agreement, which
included certain representations made by such purchaser. The purchaser was not
affiliated with the Company. The proceeds from this offering were utilized by
the Company for working capital purposes.
d. ACQUISITION OF BRISTER'S THUNDER KARTS, INC..
The Company, as partial consideration for the acquisition of all of
the issued and outstanding capital stock of Brister's Thunder Karts, Inc.
("Brister's"), which was effective at the close of business on March 31, 1996,
delivered, in July 1996, to Charles Brister, Brister's sole shareholder and a
current director and principal stockholder of the Company, 516,667 shares of
the Company's Common Stock valued at $3.1 million in accordance with the
provisions of the related stock purchase agreement.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the issuance of 516,667 shares of its Common Stock
to Mr. Brister. No underwriter participated in the transaction, nor did the
Company pay any commission with respect to the issuance of such shares. Mr.
Brister had access to information concerning the Company, its financial
condition, assets, management and proposed activities. Mr. Brister was the
chief executive officer, sole director and shareholder of Brister's prior to
the acquisition and was elected as a director of the Company after the
acquisition. In connection with the Company's reliance upon the exemption from
registration provided in Section 4(2) of the Securities Act, the Company
determined that Mr. Brister (i) had such knowledge and experience in financial
and business matters that he was capable of evaluating the merits and risks of
an investment in the Company and had the financial ability to assume the
monetary risks associated therewith, (ii) was able to bear the complete loss of
his investment in the Company, (iii) had received such other documents and
information as he has requested and had an opportunity to ask questions of and
receive answers from representatives of the Company, (iv) was acquiring the
shares of Common Stock of the Company for his own account, for investment
purposes and not with a view to a further distribution thereof, and (v) was a
sophisticated investor. The Company has impressed the stock certificates
representing the 516,667 shares with a restrictive legend.
e. ACQUISITION OF USA INDUSTRIES, INC..
Effective at the close of business on November 21, 1996, the Company,
as consideration for the acquisition of all of the issued and outstanding
capital stock of USA Industries, Inc. ("USA"), paid an aggregate of $1.0
million payable $250,000 in cash and issued an aggregate of 166,667 shares of
Common Stock to the four shareholders of USA. Pursuant to the stock purchase
agreement between the Company, USA and its shareholders, the Common Stock was
valued at $4.50 per share or an aggregate consideration of $750,000 for 166,667
shares. Each USA shareholder, Jerry Michael Allen, Angela T. Allen, Johnny C.
Tucker and Carol Y. Tucker (the "USA Shareholders"), received $62,500 cash and
41,667 restricted shares of the Company's Common Stock.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the issuance of 166,667 shares of its Common Stock
to the USA Shareholders. No underwriter participated in the transaction, nor
did the Company pay any commissions with respect to the issuance of such
shares. The Company and USA were engaged in similar business activities, the
manufacturing of Fun Karts. The USA Shareholders had access to information
concerning the Company, its financial condition, assets, management and
proposed activities. The USA shareholders represented that they were acquiring
the Company's shares of Common Stock for investment and not with a view to
resale or
II-5
<PAGE> 127
for further distribution of all or any part thereof in any transaction which
would constitute a "distribution" within the meaning of the Securities Act.
Each USA Shareholder acknowledged to the Company that the shares of the
Company's Common Stock received by each shareholder were "restricted
securities" and had not been registered under the Securities Act and that the
Company was not under any obligation to file a registration statement with the
Securities and Exchange Commission or any state securities agency with respect
to the shares of the Company's Common Stock acquired by them. In connection
with the Company's reliance upon the exemption from registration provided in
Section 4(2) of the Securities Act, the Company determined that each USA
Shareholder (i) had such knowledge and experience in financial and business
matters that they were capable of evaluating the merits and risks of their
investment in the Company's shares of Common Stock and had the financial
ability to assume the monetary risks associated therewith, (ii) was able to
bear the complete loss of their investment in the shares of Common Stock of the
Company, (iii) was not relying upon any statements or instruments made or
issued by any person other than the Company and its officers in making their
decision to invest in the Company's Common Stock, and (iv) was a sophisticated
investor. The Company has impressed the stock certificates representing the
shares with a restrictive legend. Mr. Jerry M. Allen, a former USA
shareholder, is currently the Vice President of USA.
f. ISSUANCES TO THE SCHLINGER FOUNDATION.
On March 15, 1996, as partial consideration for the $2,000,000 loan
(the "Schlinger Note") from The Schlinger Foundation (the "Foundation") to the
Company, the Company paid to the Foundation $21,000, consisting of $10,500 cash
and the issuance of 70,000 restricted shares of Common Stock to the Foundation.
Mr. Evert I. Schlinger who owns 219,048 shares of Common Stock of the Company
is the President and Trustee of the Foundation and has voting and dispositive
powers over the shares of Common Stock owned by the Foundation, although Mr.
Schlinger disclaims any beneficial ownership of such shares. The Company
determined that Mr. Schlinger had a history of providing financing to small
private emerging growth businesses through equity purchases and debt financing
similar to the financing provided to the Company.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuances of the Schlinger
Note and shares of its Common Stock to the Foundation. No underwriter
participated in the issuances, nor did the Company pay any commissions with
respect to these transactions. The Foundation and Mr. Schlinger had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. In connection with the Company's reliance upon the
exemption from registration provided in Section 4(2) of the Securities Act, the
Company determined that (i) the Company's securities were acquired by the
Foundation for its own account, for investment purposes only and not with a
view towards distribution thereof, (ii) the Foundation had the ability to bear
economically a total loss of its investment in the Company, (iii) the
Foundation and Mr. Schlinger had such knowledge and experience in financial and
business matters that they were capable of evaluating the merits and risks of
an investment in the Company. The Company has impressed the stock certificates
representing the referenced shares of Common Stock with a restrictive legend.
g. ISSUANCES TO FORMER DIRECTOR AND HFG.
On February 20, 1996, the Company sold 50,000 restricted shares of its
Common Stock to Glenn A. Little, a former director of the Company, for $938
cash. Subsequently, on March 7, 1996, the Company sold an aggregate of 967,545
restricted shares of Common Stock to HFG for an aggregate of $1,451 cash. Of
the shares acquired by HFG, 233,333 shares represent the HFG Escrow Shares
placed into escrow under the terms of the March 1996 Offering. Timothy P.
Halter, the President and sole owner of HFG, is a principal stockholder of the
Company and the Vice President, Secretary and a director of the Company.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuances of shares to Mr.
Little and HFG. No underwriter participated in the transactions, nor did the
Company pay any commissions with respect to these transactions. Mr. Little and
HFG had access to information concerning the Company, its financial condition,
assets, management and proposed activities. The shares of Common Stock were
issued to Mr. Little and HFG based on certain investment representations by
them, including representations that the Company's securities were being
acquired by Mr. Little and HFG for their own account, for investment purposes
only and not with a view towards distribution thereof. In connection with the
Company's reliance upon the exemption from registration provided in Section
4(2) of the Securities Act, the Company determined that Mr. Little and HFG (i)
had such knowledge and experience in financial and business matters that they
were capable of evaluating the merits and risks
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<PAGE> 128
of their investment in the Company's Common Stock and had the financial ability
to assume the monetary risks associated therewith, (ii) are able to bear the
complete loss of their investment in the shares of Common Stock of the Company,
and (iii) were sophisticated investors. The Company has impressed the stock
certificates representing the shares of Common Stock issued to Mr. Little and
HFG with a restrictive legend.
h. ISSUANCE OF 483,333 SHARES OF COMMON STOCK TO HFG.
In January 1996, concurrent with the execution of the Brister's stock
purchase agreement, the Company entered into a consulting agreement with HFG
whereby HFG agreed to assist the Company with its corporate reorganization,
recapitalization and the Brister's Acquisition for a fee of $15,000. The
consulting fee was payable at the closing of the Brister's Acquisition in
shares of Common Stock of the Company or $10,000 cash and shares of Common
Stock of the Company, as determined in accordance with the terms of the
consulting agreement and the Brister's stock purchase agreement. The payment
of the consulting fee was contingent upon the successful consummation of the
Brister's Acquisition. The $15,000 consulting fee was subsequently paid by the
Company upon the closing of the Brister's Acquisition with the delivery, in
July 1996, to HFG of 483,333 restricted shares of the Company's Common Stock.
Timothy P. Halter, the President and sole owner of HFG, is a principal
stockholder of the Company and the Vice President, Secretary and a director of
the Company.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuance of securities to
HFG. No underwriter participated in the transaction, nor did the Company pay
any commissions with respect to this transaction. HFG had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. The shares of Common Stock were issued to HFG based
on certain investment representations by HFG, including representations that
the Company's securities were acquired by HFG for its own account, for
investment purposes only and not with a view towards distribution thereof. In
connection with the Company's reliance upon the exemption from registration
provided in Section 4(2) of the Securities Act, the Company determined that HFG
(i) had such knowledge and experience in financial and business matters that it
was capable of evaluating the merits and risks of its investment in the
Company's Common Stock and had the financial ability to assume the monetary
risks associated therewith, (ii) is able to bear the complete loss of its
investment in the shares of Common Stock of the Company, and (iii) was a
sophisticated investor. The Company impressed the stock certificates
representing the shares of Common Stock issued to HFG with a restrictive
legend.
i. ISSUANCE OF 140,000 SHARES OF COMMON STOCK TO V. LYNN
GRAYBILL.
On March 15, 1996, the Company entered into a three-year employment
agreement (the "Employment Agreement") with V. Lynn Graybill whereby Mr.
Graybill agreed to serve as Chairman of the Board, President and Chief
Executive Officer of the Company. The Employment Agreement is for a term of
three years and provides Mr. Graybill with an annual base salary of $150,000.
Upon execution of the Employment Agreement, Mr. Graybill received a signing
bonus of $15,000 (the "Bonus"). The Bonus was paid with the issuance by the
Company to Mr. Graybill of 140,000 shares of Common Stock (the "Graybill
Shares"), subject to a buy-back option of the Company. In year two of the
Employment Agreement, which ends on March 15, 1998, the Company may buy back up
to 70,000 Graybill Shares for $8,400 or $0.12 per share and in year three,
which ends on March 15, 1998, up to 35,000 Graybill Shares for $4,200 or $0.12
per share if Mr. Graybill is either terminated for cause or Mr. Graybill
terminates his employment voluntarily prior to the expiration of the Employment
Agreement. If the Employment Agreement is terminated for any reason other than
for cause or voluntarily by Mr. Graybill, the buy-back option available to the
Company is terminated. Mr. Graybill currently serves as the Company's Chairman
of the Board, President and Chief Executive Officer.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuance of securities to Mr.
Graybill. No underwriter participated in the transaction, nor did the Company
pay any commissions with respect to this transaction. Mr. Graybill had access
to information concerning the Company, its financial condition, assets,
management and proposed activities. The shares of Common Stock were issued to
Mr. Graybill based on certain investment representations by Mr. Graybill,
including representations that the Company's securities were acquired by Mr.
Graybill for his own account, for investment purposes only and not with a view
towards distribution thereof. In connection with the Company's reliance upon
the exemption from registration provided in Section 4(2) of the Securities Act,
the Company determined that Mr. Graybill (i) had such knowledge and experience
in financial and business matters that he was capable of evaluating the merits
and risks of his investment in the Company's Common Stock and had the financial
ability to assume the monetary risks associated therewith, (ii) is able to bear
the complete loss of this investment in the shares of Common Stock of the
Company, and
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<PAGE> 129
(iii) was a sophisticated investor. The Company has impressed the stock
certificates representing the shares of Common Stock issued to Mr. Graybill
with a restrictive legend.
j. ISSUANCES OF OPTIONS.
On July 23, 1996, the Board of Directors of the Company adopted a
stock option plan, the terms and conditions of which are set forth in the
minutes of the Board of Directors meeting of July 23, 1996, providing for the
reservation of 66,667 shares of Common Stock for options to be granted to
employees of the Company. In July 1996, the Company, pursuant to the terms of
the plan adopted by the Board of Directors of the Company and the terms of a
written option agreement between the Company and the respective option holders,
issued to 30 employees, who were neither officers nor directors of the Company,
options to purchase an aggregate of 59,355 shares of Common Stock at an
exercise price of $5.63 per share which are currently exercisable and expire at
various times during 2001.
On January 30, 1997, the Board of Directors of the Company adopted a
stock option plan, the terms and conditions of which are set forth in the
minutes of the Board of Directors meeting of January 30, 1997, providing for
the reservation of 66,667 shares of Common Stock for options to be granted to
employees of the Company. On January 30, 1997, the Company issued to each of
John V. Callegari, Jr., the Vice President, Administration and Chief Financial
Officer of the Company, and Lawrence E. Schwall, III, the Vice President, Sales
and Marketing of the Company, options to purchase 6,667 shares of Common Stock
at an exercise of $4.875 per share which are exercisable after January 30, 1998
and expire on January 30, 2002. Also on January 30, 1997, the Company issued
to 61 employees, who were neither officers nor directors of the Company,
options to purchase an aggregate of 52,670 shares of Common Stock at an
exercise price of $4.875 per share which are exercisable after January 30, 1998
and expire on January 30, 2002.
Each of the foregoing options were granted pursuant to the terms of
the respective plans adopted by the Board of Directors of the Company and a
written option agreement between the Company and the respective option holders.
With regard to the issuances of the options discussed above, the Company relied
upon Rule 701 under the Securities Act for an exemption from the registration
requirements of the Securities Act, since at the time the options were granted
the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement in connection with the Offering.
1.2* Form of Underwriters' Warrant.
1.3* Form of Financial Advisory Agreement between the Company and
J.P. Turner & Company, L.L.C.
1.4* Form of Lock-Up Agreement among the Company, J.P. Turner &
Company, L.L.C. and the holders of the Convertible Preferred
Stock.
1.5* Form of Lock-Up Agreement among the Company, J.P. Turner &
Company, L.L.C. and V. Lynn Graybill, Chairman of the Board,
Chief Executive Officer and President of the Company.
1.6* Form of Lock-Up Agreement among the Company, J.P. Turner &
Company, L.L.C. and certain officers and directors of the
Company.
1.7* Form of Selected Dealers Agreement.
2.1** Agreement and Plan of Merger, dated April 16, 1996, by and
between Sarah Acquisition Corporation and the Company.
</TABLE>
II-8
<PAGE> 130
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------
<S> <C>
2.2** Stock Purchase Agreement, dated January 16, 1996, by and
among Halter Financial Group, Inc. on behalf of the Company,
Brister's Thunder Karts, Inc., and Charles Brister (Schedules
have been omitted, but will be furnished to the Commission upon
request).
2.3** Amendment to Stock Purchase Agreement, dated March 15, 1996, by
and among Halter Financial Group, Inc. on behalf of the
Company, Brister's Thunder Karts, Inc., and Charles Brister
(Schedules have been omitted, but will be furnished to the
Commission upon request).
2.4** Stock Purchase Agreement, dated October 4, 1996, by and among
the Company, USA Industries, Inc., Jerry Michael Allen, Angela
T. Allen, Johnny C. Tucker, and Carol Y. Tucker (Schedules have
been omitted, but will be furnished to the Commission upon
request).
2.5** Consulting Agreement, dated January 16, 1996, by and between
Halter Financial Group, Inc. and Sarah Acquisition Corporation.
3.1** Articles of Incorporation of the Company.
3.2** Bylaws of the Company.
3.3** Certificate to Decrease Authorized Shares of Common Stock,
dated March 12, 1997.
4.1** Specimen of Common Stock Certificate.
4.2* Form of Warrant Agreement covering the Warrants.
4.3** Form of Redeemable Common Stock Purchase Warrants issued in
connection with the sale of the Warrants.
4.4** Form of Redeemable Common Stock Purchase Warrant issued in the
Company's private offering of Units, completed November 15,
1996 (the "1996 Warrants").
4.5** Form of Common Stock Purchase Warrant issued in the Company's
offering of Units pursuant to Rule 504, completed July 2, 1996
(the "Class A Warrants").
4.6** Certificate of Designation Establishing Series of Preferred
Stock, filed with the Secretary of State of Nevada on November
15, 1996.
4.7** Specimen of Convertible Preferred Stock Certificate.
5.1* Opinion of Looper, Reed, Mark & McGraw Incorporated regarding
legality of the securities being registered.
10.1** Lease Agreement, dated March 18, 1996, by and between Northpark
Properties, L.L.C. and the Company.
10.2** License Agreement, dated March 15, 1996, by and between the
Company and Charles Brister.
10.3** Addendum "A" to License Agreement, dated March 15, 1997, by
and between the Company and Charles Brister.
10.4** Royalty Agreement, dated March 15, 1997, by and between the
Company and Charles Brister.
10.5** $1,000,000 Subordinated Promissory Note, dated March 15, 1996,
payable to Charles Brister, executed by Brister's Thunder Karts,
Inc., as maker.
10.6** $200,000 Promissory Note, dated April 1, 1996, payable to
Charles Brister, executed by the Company, as maker.
10.7** Commercial Security Agreement, by and among Charles Brister, as
secured party, Brister's Thunder Karts, Inc., as borrower, and
Robert W. Bell and Gary C. Evans, as pledgors.
10.8** $2,000,000 Promissory Note, dated March 15, 1996, payable to
The Schlinger Foundation, executed by the Company, as maker,
and by Brister's Thunder Karts, Inc., as pledgor.
10.9** Commercial Security Agreement, by and among The Schlinger
Foundation, as secured party, the Company, as borrower, and
Brister's Thunder Karts, Inc., as pledgor.
</TABLE>
II-9
<PAGE> 131
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------------------------------------
<S> <C>
10.10** Vendor Agreement, dated June 5, 1996, by and between
Wal-Mart Stores, Inc. and Brister's Thunder Karts, Inc.
10.11** Vendor Agreement, dated September 30, 1996, by and between
Wal-Mart Stores, Inc. and USA Industries, Inc.
10.12** Floor Plan Agreement, dated September 9, 1996, by and among
Deutsche Financial Services Corporation, the Company, and
Brister's Thunder Karts, Inc.
10.13** Guaranty of Vendor, dated September 9, 1996, executed by the
Company and Brister's Thunder Karts, Inc. in favor of Deutsche
Financial Services Corporation.
10.14** Employment Agreement, as amended, dated March 15, 1996, by and
between the Company and V. Lynn Graybill.
10.15** Consulting Engagement Letter, dated February 19, 1997, by and
between Charles Brister, as consultant, and the Company.
10.16** Letter Agreement, dated January 21, 1997, by and between Bobby
Labonte, as national spokesman for the Company, and the Company.
10.17** Consulting Agreement, dated March 16, 1997, by and between the
Company and Halter Financial Group, Inc.
10.18** Form of Private Placement Subscription Participation Option
Notice, dated March 6, 1997, relating to the Company's November
1996 private offering.
10.19** $300,000 Universal Note, dated August 13, 1996, payable to
Deposit Guaranty National Bank, executed by Brister's Thunder
Karts, Inc., as borrower.
10.20** Security Agreement, dated August 13, 1996, by and between
Brister's Thunder Karts, Inc., as debtor, and Deposit Guaranty
National Bank, as secured party, relating to the $300,000
Universal Note referenced as Exhibit 10.19.
10.21** Collateral Pledge Agreement, dated August 13, 1996, by Brister's
Thunder Karts, Inc., as pledgor, relating to the $300,000
Universal Note referenced as Exhibit 10.19.
10.22** Guaranty, dated August 13, 1996, executed by the Company, as
guarantor, for the benefit of Deposit Guaranty National Bank,
as lender, and Brister's Thunder Karts, Inc., as borrower,
relating to the $300,000 Universal Note referenced as Exhibit
10.19.
10.23** $500,000 Loan Agreement, dated October 1, 1996, by and between
USA Industries, Inc., as debtor, and Deposit Guaranty National
Bank of Louisiana, as secured party, relating to the $500,000
Universal Note referenced as Exhibit 10.24.
10.24** $500,000 Universal Note, dated October 1, 1996, by and between
USA Industries, Inc., as borrower, and Deposit Guaranty National
Bank, as lender.
10.25** Security Agreement, dated October 1, 1996, by and between USA Industries, Inc., as debtor,
and Deposit Guaranty National Bank of Louisiana, as secured party, relating to the $500,000
Universal Note referenced as Exhibit 10.24.
10.26** Financing Statement, by and between USA Industries, Inc.,
as debtor, and Deposit Guaranty National Bank of Louisiana,
as secured party, relating to the Universal Note referenced as
Exhibit 10.24.
10.27** Guaranty, dated October 1, 1996, executed by Karts International Incorporated, as guarantor,
for the benefit of Deposit Guaranty National Bank, as lender, and USA Industries, Inc., as
borrower, relating to the $500,000 Universal Note referenced as Exhibit 10.24.
10.28** Placement Agency Agreement, dated November 8, 1996, by and
between the Company and Argent Securities, Inc.
</TABLE>
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<PAGE> 132
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ -----------------------------------------------------------------
<S> <C>
10.29** Option Agreement, dated March 15, 1996, by and between Charles
Brister, as seller, and Brister's Thunder Karts, Inc., as
Purchaser.
10.30** Lease of Commercial Property, dated September 27, 1995, by and
between Charles Brister, as lessor, and Brister's Thunder Karts,
Inc., as lessee, as amended by that certain Amended Lease of
Commercial Property, dated November 30, 1995, as amended by that
certain First Amendment to Lease of Commercial Property, dated
March 15, 1996.
10.31** Non-Competition Agreement, dated March 15, 1996, by and between
Charles Brister and the Company.
10.32** Non-Competition Agreement (Louisiana), dated March 15, 1996, by
and between Charles Brister
and the Company.
10.33** Form of Non-Qualified Stock Option Agreement between the
Company and the participants in the July 1996 Stock Option Plan.
10.34** Form of Non-Qualified Stock Option Agreement between the
Company and the participants in the January 1997 Stock Option
Plan.
10.35** Escrow Agreement, dated March 31, 1996, between Halter Financial
Group, Inc., Securities Transfer Corporation and the Company.
10.36* Letter Agreement between Brister's Thunder Karts, Inc. and
Deposit Guaranty National Bank extending the maturity date of
the $300,000 Universal Note referenced in Exhibit 10.19.
21.1** Subsidiaries of the Company.
23.1* Consent of S. W. Hatfield & Associates.
23.2* Consent of Looper, Reed, Mark & McGraw Incorporated (included
in its opinion filed as Exhibit 5.1).
24.1** Power of attorney.
27.1* Financial Data Schedule.
</TABLE>
- -----------------------
*Filed herewith.
**Previously filed.
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(a) To include any prospectus required in Section
10(a)(3) of the Act;
(b) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
(c) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
II-11
<PAGE> 133
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company pursuant to the provisions
described under Item 24 above, or otherwise, the Company has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that for purposes of
determining any liability under the Securities Act, (i) the information omitted
from the Prospectus filed as part of this Registration Statement, as permitted
by Rule 430A of the Securities Act and to be contained in the form of
Prospectus to be filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act, shall be deemed to be incorporated by
reference into this Registration Statement at the time it is declared
effective, and (ii) each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-12
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment
No. 3 to its registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Covington, State of
Louisiana, on the 18th day of August, 1997.
KARTS INTERNATIONAL INCORPORATED
(Company)
By: /s/ V. Lynn Graybill
------------------------------------
V. Lynn Graybill, President
and Chief Executive Officer
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement on Form SB-2 has been signed by the following
persons on behalf of the Company and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ V. Lynn Graybill President, Chief Executive Officer, August 18, 1997
------------------------------------------------------ Chairman of the Board of Directors
V. Lynn Graybill
/s/ Timothy P. Halter* Vice President, Secretary and August 18, 1997
------------------------------------------------------ Director
Timothy P. Halter
/s/ John V. Callegari, Jr.* Vice President, Administration and August 18, 1997
------------------------------------------------------ Chief Financial Officer
John V. Callegari, Jr.
/s/ Charles Brister* Director August 18, 1997
------------------------------------------------------
Charles Brister
/s/ Joseph R. Mannes* Director August 18, 1997
------------------------------------------------------
Joseph R. Mannes
/s/ Ronald C. Morgan* Director August 18, 1997
------------------------------------------------------
Ronald C. Morgan
/s/ Robert W. Bell* Director August 18, 1997
------------------------------------------------------
Robert W. Bell
/s/ Gary C. Evans* Director August 18, 1997
------------------------------------------------------
Gary C. Evans
*By: /s/ V. Lynn Graybill
--------------------------------------------------
V. Lynn Graybill, Attorney-in-fact
</TABLE>
II-13
<PAGE> 135
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement in connection with the Offering.
1.2* Form of Underwriters' Warrant.
1.3* Form of Financial Advisory Agreement between the Company and
J.P. Turner & Company, L.L.C.
1.4* Form of Lock-Up Agreement among the Company, J.P. Turner &
Company, L.L.C. and the holders of the Convertible Preferred
Stock.
1.5* Form of Lock-Up Agreement among the Company, J.P. Turner &
Company, L.L.C. and V. Lynn Graybill, Chairman of the Board,
Chief Executive Officer and President of the Company.
1.6* Form of Lock-Up Agreement among the Company, J.P. Turner &
Company, L.L.C. and certain officers and directors of the
Company.
1.7* Form of Selected Dealers Agreement.
2.1** Agreement and Plan of Merger, dated April 16, 1996, by and
between Sarah Acquisition Corporation and the Company.
</TABLE>
<PAGE> 136
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------
<S> <C>
2.2** Stock Purchase Agreement, dated January 16, 1996, by and
among Halter Financial Group, Inc. on behalf of the Company,
Brister's Thunder Karts, Inc., and Charles Brister (Schedules
have been omitted, but will be furnished to the Commission upon
request).
2.3** Amendment to Stock Purchase Agreement, dated March 15, 1996, by
and among Halter Financial Group, Inc. on behalf of the
Company, Brister's Thunder Karts, Inc., and Charles Brister
(Schedules have been omitted, but will be furnished to the
Commission upon request).
2.4** Stock Purchase Agreement, dated October 4, 1996, by and among
the Company, USA Industries, Inc., Jerry Michael Allen, Angela
T. Allen, Johnny C. Tucker, and Carol Y. Tucker (Schedules have
been omitted, but will be furnished to the Commission upon
request).
2.5** Consulting Agreement, dated January 16, 1996, by and between
Halter Financial Group, Inc. and Sarah Acquisition Corporation.
3.1** Articles of Incorporation of the Company.
3.2** Bylaws of the Company.
3.3** Certificate to Decrease Authorized Shares of Common Stock,
dated March 12, 1997.
4.1** Specimen of Common Stock Certificate.
4.2* Form of Warrant Agreement covering the Warrants.
4.3** Form of Redeemable Common Stock Purchase Warrants issued in
connection with the sale of the Warrants.
4.4** Form of Redeemable Common Stock Purchase Warrant issued in the
Company's private offering of Units, completed November 15,
1996 (the "1996 Warrants").
4.5** Form of Common Stock Purchase Warrant issued in the Company's
offering of Units pursuant to Rule 504, completed July 2, 1996
(the "Class A Warrants").
4.6** Certificate of Designation Establishing Series of Preferred
Stock, filed with the Secretary of State of Nevada on November
15, 1996.
4.7** Specimen of Convertible Preferred Stock Certificate.
5.1* Opinion of Looper, Reed, Mark & McGraw Incorporated regarding
legality of the securities being registered.
10.1** Lease Agreement, dated March 18, 1996, by and between Northpark
Properties, L.L.C. and the Company.
10.2** License Agreement, dated March 15, 1996, by and between the
Company and Charles Brister.
10.3** Addendum "A" to License Agreement, dated March 15, 1997, by
and between the Company and Charles Brister.
10.4** Royalty Agreement, dated March 15, 1997, by and between the
Company and Charles Brister.
10.5** $1,000,000 Subordinated Promissory Note, dated March 15, 1996,
payable to Charles Brister, executed by Brister's Thunder Karts,
Inc., as maker.
10.6** $200,000 Promissory Note, dated April 1, 1996, payable to
Charles Brister, executed by the Company, as maker.
10.7** Commercial Security Agreement, by and among Charles Brister, as
secured party, Brister's Thunder Karts, Inc., as borrower, and
Robert W. Bell and Gary C. Evans, as pledgors.
10.8** $2,000,000 Promissory Note, dated March 15, 1996, payable to
The Schlinger Foundation, executed by the Company, as maker,
and by Brister's Thunder Karts, Inc., as pledgor.
10.9** Commercial Security Agreement, by and among The Schlinger
Foundation, as secured party, the Company, as borrower, and
Brister's Thunder Karts, Inc., as pledgor.
</TABLE>
<PAGE> 137
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ -----------------------------------------------------------------
<S> <C>
10.10** Vendor Agreement, dated June 5, 1996, by and between
Wal-Mart Stores, Inc. and Brister's Thunder Karts, Inc.
10.11** Vendor Agreement, dated September 30, 1996, by and between
Wal-Mart Stores, Inc. and USA Industries, Inc.
10.12** Floor Plan Agreement, dated September 9, 1996, by and among
Deutsche Financial Services Corporation, the Company, and
Brister's Thunder Karts, Inc.
10.13** Guaranty of Vendor, dated September 9, 1996, executed by the
Company and Brister's Thunder Karts, Inc. in favor of Deutsche
Financial Services Corporation.
10.14** Employment Agreement, as amended, dated March 15, 1996, by and
between the Company and V. Lynn Graybill.
10.15** Consulting Engagement Letter, dated February 19, 1997, by and
between Charles Brister, as consultant, and the Company.
10.16** Letter Agreement, dated January 21, 1997, by and between Bobby
Labonte, as national spokesman for the Company, and the Company.
10.17** Consulting Agreement, dated March 16, 1997, by and between the
Company and Halter Financial Group, Inc.
10.18** Form of Private Placement Subscription Participation Option
Notice, dated March 6, 1997, relating to the Company's November
1996 private offering.
10.19** $300,000 Universal Note, dated August 13, 1996, payable to
Deposit Guaranty National Bank, executed by Brister's Thunder
Karts, Inc., as borrower.
10.20** Security Agreement, dated August 13, 1996, by and between
Brister's Thunder Karts, Inc., as debtor, and Deposit Guaranty
National Bank, as secured party, relating to the $300,000
Universal Note referenced as Exhibit 10.19.
10.21** Collateral Pledge Agreement, dated August 13, 1996, by Brister's
Thunder Karts, Inc., as pledgor, relating to the $300,000
Universal Note referenced as Exhibit 10.19.
10.22** Guaranty, dated August 13, 1996, executed by the Company, as
guarantor, for the benefit of Deposit Guaranty National Bank,
as lender, and Brister's Thunder Karts, Inc., as borrower,
relating to the $300,000 Universal Note referenced as Exhibit
10.19.
10.23** $500,000 Loan Agreement, dated October 1, 1996, by and between
USA Industries, Inc., as debtor, and Deposit Guaranty National
Bank of Louisiana, as secured party, relating to the $500,000
Universal Note referenced as Exhibit 10.24.
10.24** $500,000 Universal Note, dated October 1, 1996, by and between
USA Industries, Inc., as borrower, and Deposit Guaranty National
Bank, as lender.
10.25** Security Agreement, dated October 1, 1996, by and between USA
Industries, Inc., as debtor, and Deposit Guaranty National Bank
of Louisiana, as secured party, relating to the $500,000
Universal Note referenced as Exhibit 10.24.
10.26** Financing Statement, by and between USA Industries, Inc.,
as debtor, and Deposit Guaranty National Bank of Louisiana,
as secured party, relating to the Universal Note referenced as
Exhibit 10.24.
10.27** Guaranty, dated October 1, 1996, executed by Karts
International Incorporated, as guarantor, for the benefit of
Deposit Guaranty National Bank, as lender, and USA Industries,
Inc., as borrower, relating to the $500,000 Universal Note
referenced as Exhibit 10.24.
10.28** Placement Agency Agreement, dated November 8, 1996, by and
between the Company and Argent Securities, Inc.
</TABLE>
<PAGE> 138
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ -----------------------------------------------------------------
<S> <C>
10.29** Option Agreement, dated March 15, 1996, by and between Charles
Brister, as seller, and Brister's Thunder Karts, Inc., as
Purchaser.
10.30** Lease of Commercial Property, dated September 27, 1995, by and
between Charles Brister, as lessor, and Brister's Thunder Karts,
Inc., as lessee, as amended by that certain Amended Lease of
Commercial Property, dated November 30, 1995, as amended by that
certain First Amendment to Lease of Commercial Property, dated
March 15, 1996.
10.31** Non-Competition Agreement, dated March 15, 1996, by and between
Charles Brister and the Company.
10.32** Non-Competition Agreement (Louisiana), dated March 15, 1996, by
and between Charles Brister
and the Company.
10.33** Form of Non-Qualified Stock Option Agreement between the
Company and the participants in the July 1996 Stock Option Plan.
10.34** Form of Non-Qualified Stock Option Agreement between the
Company and the participants in the January 1997 Stock Option
Plan.
10.35** Escrow Agreement, dated March 31, 1996, between Halter Financial
Group, Inc., Securities Transfer Corporation and the Company.
10.36* Letter Agreement between Brister's Thunder Karts, Inc. and
Deposit Guaranty National Bank extending the maturity date of
the $300,000 Universal Note referenced in Exhibit 10.19.
21.1** Subsidiaries of the Company.
23.1* Consent of S. W. Hatfield & Associates.
23.2* Consent of Looper, Reed, Mark & McGraw Incorporated (included
in its opinion filed as Exhibit 5.1).
24.1** Power of attorney.
27.1* Financial Data Schedule.
</TABLE>
- -----------------------
* Filed herewith.
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
1,400,000 Shares of Common Stock
and
1,400,000 Redeemable Common Stock Purchase Warrants
of
KARTS INTERNATIONAL INCORPORATED
UNDERWRITING AGREEMENT
Atlanta, Georgia
August ___, 1997
J.P. Turner & Company, L.L.C.
3340 Peachtree Road, N.E.
Suite 450
Atlanta, Georgia 30326
Gentlemen:
Karts International Incorporated, a Nevada corporation (the
"Company"), confirms its agreement with J.P. Turner & Company, L.L.C.
("J.P. Turner"), and each of the other underwriters named in Schedule I
hereto (collectively, the "Underwriters," which term shall also include any
underwriter substituted as hereinafter provided in Section 11), for whom
J.P. Turner is acting as representative (in such capacity, J.P. Turner
shall hereinafter be referred to as the "Representative"), with respect to
the sale by the Company, and the purchase by the Underwriters, acting
severally and not jointly, of One Million Four Hundred Thousand
(1,400,000) shares (the "Shares") of the Company's common stock, par value
$.001 per share (the "Common Stock"), and One Million Four Hundred Thousand
(1,400,000) Redeemable Common Stock Purchase Warrants (the "Redeemable
Warrants") ("Firm Securities"), each of the Redeemable Warrants entitles
the holder thereof to purchase one share of Common Stock at an exercise
price of $______ per share pursuant to a warrant agreement (the "Warrant
Agreement") between the Company and the warrant agent, set forth in
Schedule II, and with respect to the grant by the Company to the
Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of 210,000 additional
Shares and 210,000 Redeemable Warrants (the "Additional Securities") for
the purpose of covering over-allotments, if any. The aforesaid Firm
Securities together with all or any part of the Additional Securities are
hereinafter collectively referred to as the "Securities." The Company also
proposes to issue and sell to the Underwriters for an approximate price of
$140 ($0.001 per warrant), non-callable warrants entitling the
Underwriters' to purchase from the Company an
Page 1
<PAGE> 2
Underwriters' Warrant (the "Underwriters' Warrant") for the purchase of an
aggregate of 140,000 Shares (the "Underwriters' Shares") and 140,000
Redeemable Common Stock Purchase Warrants (the "Underwriters' Warrants").
The shares of Common Stock issuable upon exercise of the Redeemable
Warrants and the Underwriters' Warrants are hereinafter sometimes referred
to as the "Warrant Shares." The Shares, the Redeemable Warrants, the
Common Stock and Underwriters' Shares, Underwriters' Warrants, and the
Warrant Shares are more fully described in the Registration Statement (as
defined in Subsection 1(a) hereof) and the Prospectus (as defined in
Subsection 1(a) hereof) referred to below. Unless the context otherwise
requires, all references to the "Company" shall include all subsidiaries
(as defined in Subsection 2(c) hereof) referred to below and identified in
the Prospectus, as if separately stated herein. All representations,
warranties and opinions of counsel shall cover such subsidiaries.
1. Representations and Warranties of the Company. The
Company represents and warrants to and agrees with each of the Underwriters
as of the date hereof, and as of the Closing Date and any Option Closing
Date, (as defined in Subsection 2 (c) hereof), if any, as follows:
(a) The Company has prepared and filed with the
Securities and Exchange Commission (the "Commission") in accordance with
the provisions of the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder (collectively, the "Act"), a
registration statement, and an amendment or amendments thereto, on Form
SB-2 (File No. 333-24145) under the Act (the "Registration Statement"),
including a prospectus subject to completion relating to the Shares and
Redeemable Warrants which registration statement and any amendment or
amendments have been prepared by the Company in material compliance with
the requirements of the Act and the rules and regulations of the Commission
under the Act. The term "Registration Statement" as used in this Agreement
means the registration statement (including all financial schedules and
exhibits), as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this
Agreement. If it is contemplated, at the time this Agreement is executed,
that a post-effective amendment to the registration statement will be filed
and must be declared effective before the offering of the Shares may
commence, the term "Registration Statement" as used in this Agreement means
the registration statement as amended by said post-effective amendment. If
an abbreviated registration statement is prepared and filed with the
Commission in accordance with Rule 462(b) under the Act (an "Abbreviated
Registration Statement"), the term "Registration Statement" as used in this
Agreement includes the Abbreviated Registration Statement. The term
"Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement, or, if the prospectus included in
the Registration Statement omits information in reliance on Rule 430A under
the Act and such information is included in a prospectus filed with the
Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as
used in this Agreement means the prospectus in the form included in the
Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant
to Rule 424(b). The term "Preliminary Prospectus" as used in this
Agreement means the prospectus subject to completion in the form included
in the registration
Page 2
<PAGE> 3
statement at the time of the initial filing of the registration statement
with the Commission, and as such prospectus shall have been amended from
time to time prior to the date of the Prospectus.
(b) Neither the Commission nor any state regulatory
authority has issued any order preventing or suspending the use of any
Preliminary Prospectus, the Registration Statement or Prospectus or any
part thereof and no proceedings for a stop order have been instituted or
are pending or, to the best knowledge of the Company, threatened. Each of
the Preliminary Prospectus, the Registration Statement and Prospectus at
the time of filing thereof conformed in all material respects with the
requirements of the Act and the Rules and Regulations, and neither the
Preliminary Prospectus, the Registration Statement or Prospectus at the
time of filing thereof contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein and
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that this representation
and warranty does not apply to statements made or statements omitted in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriters by or on behalf of the
Underwriters expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus.
(c) When the Registration Statement becomes effective
and at all times subsequent thereto up to the Closing Date and each Option
Closing Date and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Underwriters or a
dealer, the Registration Statement and the Prospectus will contain all
material statements which are required to be stated therein in material
compliance with the Act and the Rules and Regulations, and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations; neither the Registration Statement, nor any amendment thereto,
at the time the Registration Statement or such amendment is declared
effective under the Act, will contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Prospectus
at the time the Registration Statement becomes effective, at the Closing
Date and at any Option Closing Date, will not contain an untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that this representation
and warranty does not apply to statements made or statements omitted in
reliance upon and in conformity with information supplied to the Company in
writing by or on behalf of the Underwriters expressly for use in the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto.
(d) The Company has been duly organized and is now,
and at the Closing Date and any Option Closing Date will be, validly
existing as a corporation in good standing under the laws of the State of
Nevada. Other than the Company's Subsidiaries (as defined in Section (e)),
the Company does not own, directly or indirectly, an interest in any
corporation, partnership, trust, joint venture or other business entity;
provided, that the foregoing shall not be applicable to the investment of
the net proceeds from the sale of the Securities in short-term, low-risk
investments as set forth under "Use of Proceeds" in the Prospectus. The
Company is duly qualified and licensed and in good
Page 3
<PAGE> 4
standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of its properties or the character of its operations
require such qualification or licensing, except where the failure to so
register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results
of operations of the Company and the subsidiaries taken as a whole (a
"Material Adverse Effect"). The Company has all requisite power and
authority (corporate and other), and has obtained any and all necessary
material applications, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials
and bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and has
been doing business in compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all material
federal, state, local and foreign laws, rules and regulations; and the
Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the
aggregate, would have a Material Adverse Effect. The disclosures in the
Registration Statement concerning the effects of federal, state, local, and
foreign laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and do
not omit to state a material fact necessary to make the statements
contained therein not misleading in light of the circumstances in which
they were made.
(e) The Company's subsidiaries (collectively, the
"Subsidiaries") include Brister's Thunder Karts, Inc. and USA Industries,
Inc. Each Subsidiary is a corporation duly organized, validly existing and
in good standing in the jurisdiction of its incorporation, with full
corporate power and authority to own, lease and operate its properties and
to conduct its business, and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place where
the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify does not, singly or in the aggregate, have a Material Adverse
Effect; all of the outstanding shares of capital stock of each of the
Subsidiaries, have been duly authorized and validly issued, are fully paid
and nonassessable, and are owned by the Company directly, or indirectly
through one of the other Subsidiaries, free and clear of any lien, adverse
claim, security interest, equity or other encumbrance.
(f) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus under
"Capitalization" and will have the adjusted capitalization set forth
therein on the Closing Date and the Option Closing Date, if any, based upon
the assumptions set forth therein, and the Company is not a party to or
bound by any instrument, agreement or other arrangement providing for the
Company to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as otherwise described in the
Prospectus. The Securities, the Additional Securities, Underwriters
Shares, the Underwriter's Warrants, and the Warrant Shares and all other
securities issued or issuable by the Company conform or, when issued and
paid for, will conform in all material respects to all statements with
respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been duly
Page 4
<PAGE> 5
authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no rights of rescission with respect thereto, and are
not subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of any
holders of any security of the Company, or similar contractual rights
granted by the Company. The Securities, the Additional Securities, the
Underwriters' Shares, and the Underwriter's Warrants to be issued and sold
by the Company hereunder, and the Warrant Shares issuable upon exercise of
the Redeemable Warrants and the Underwriter's Warrants and payment
therefor, are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof and
thereof, will be validly issued, fully paid and non-assessable and will
conform in all material respects to the descriptions thereof contained in
the Prospectus; the holders thereof will not be subject to any liability
solely as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities, the Additional Securities,
the Underwriters' Shares, and the Underwriter's Warrants, and the Warrant
Shares has been duly and validly taken; and the certificates representing
the Securities, the Underwriter's Warrants, and the Warrant Shares will be
in due and proper form. Upon the issuance and delivery pursuant to the
terms hereof of the Securities to be sold by the Company hereunder, the
Underwriters will acquire good and marketable title to such Securities free
and clear of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever.
(g) The financial statements of the Company, together
with the related notes and schedules thereto, included in the Registration
Statement, the Preliminary Prospectus and the Prospectus fairly present the
financial position and the results of operations of the Company at the
respective dates and for the respective periods to which they apply; and
such financial statements have been prepared in conformity with generally
accepted accounting principles, consistently applied throughout the periods
involved. There has been no material adverse change or development
involving a prospective change in the condition, financial or otherwise, or
in the earnings, business affairs, position, prospects, value, operation,
properties, business, or results of operation of the Company, whether or
not arising in the ordinary course of business, since the dates of the
financial statements included in the Registration Statement and the
Prospectus and the outstanding debt, the property, both tangible and
intangible, and the business of the Company, conforms in all material
respects to the descriptions thereof contained in the Registration
Statement and in the Prospectus.
(h) S. W. Hatfield + Associates, whose report is filed
with the Commission as a part of the Registration Statement, is an
independent certified public accountant as required by the Act.
(i) The Company (i) has paid all federal, state,
local, and foreign taxes for which it is liable, including, but not limited
to, withholding taxes and taxes payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986 (the "Code"), (ii) has furnished all tax and
information returns it is required to furnish pursuant to the Code, and has
established adequate reserves for such taxes which are not due and payable,
and (iii) does not have knowledge of any tax
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<PAGE> 6
deficiency or claims outstanding, proposed or assessed against it (other
than certain state or local tax returns, as to which the failure to file,
singly or in the aggregate, would not have a Material Adverse Effect.)
(j) The Company maintains insurance, which is in full
force and effect, of the types and in the amounts which it reasonably
believes to be necessary for its business, including, but not limited to,
personal and product liability insurance covering all personal and real
property owned or leased by the Company against fire, theft, damage and all
risks customarily insured against.
(k) There is no action, suit, proceeding, inquiry,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending (to the knowledge of the Company) or
threatened against (or circumstances known to the Company that may give
rise to the same), or involving the properties or business of the Company
which: (i) is required to be disclosed in the Registration Statement which
is not so disclosed (and such proceedings as are summarized in the
Registration Statement are accurately summarized in all respects); or (ii)
singly or in the aggregate would have a Material Adverse Effect.
(l) The Company has full legal right, power and
authority to enter into this Agreement, the Underwriters' Warrant and the
Warrant Agreement and to consummate the transactions provided for in such
agreements; and this Agreement, the Underwriters' Warrant and the Warrant
Agreement have each been duly and properly authorized, executed and
delivered by the Company. Each of this Agreement, the Underwriters'
Warrant and the Warrant Agreement, constitutes a legal, valid and binding
agreement of the Company, subject to due authorization, execution and
delivery by the Representative and/or the Underwriters, enforceable against
the Company in accordance with its terms (except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting enforcement
of creditors' rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law). Neither the Company's
execution or delivery of this Agreement, the Underwriters' Warrant, and the
Warrant Agreement, its performance hereunder and thereunder, its
consummation of the transactions contemplated herein and therein, nor the
conduct of its business as described in the Registration Statement, the
Prospectus, and any amendments or supplements thereto, conflicts with or
will conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest defect or other restriction
or equity of any kind whatsoever upon any property or assets (tangible or
intangible) of the Company pursuant to the terms of: (i) the Articles of
Incorporation or By-Laws of the Company; (ii) any material license,
contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by which the
Company is bound or to which any of its properties or assets (tangible or
intangible) is or may be subject, other than conflicts that, singly or in
the aggregate, will not have a Material
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Adverse Effect; or (iii) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Company or any of its activities or properties.
(m) No consent, approval, authorization or order of,
and no filing with, any court, regulatory body, government agency or other
body, domestic or foreign, is required for the issuance of the Securities
pursuant to the Prospectus and the Registration Statement, the performance
of this Agreement and the transactions contemplated hereby, except such as
have been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with (i) the Underwriters'
purchase and distribution of the Securities to be sold by the Company
hereunder; or (ii) the issuance and delivery of the Underwriters' Warrant,
the Underwriters' Shares, the Underwriter's Warrants, the Redeemable
Warrants or the Warrant Shares.
(n) All executed agreements or copies of executed
agreements filed as exhibits to the Registration Statement to which the
Company is a party or by which the Company may be bound or to which any of
its assets, properties or businesses may be subject have been duly and
validly authorized, executed and delivered by the Company, and constitute
the legal, valid and binding agreements of the Company, enforceable against
it in accordance with its respective terms. The descriptions contained in
the Registration Statement of contracts and other documents are accurate in
all material respects and fairly present the information required to be
shown with respect thereto by the Act and the Rules and Regulations and
there are no material contracts or other documents which are required by
the Act or the Rules and Regulations to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be
copies.
(o) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus, and
except as may otherwise be indicated or contemplated herein or therein, the
Company has not: (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money in any material
amount; (ii) entered into any transaction other than in the ordinary course
of business; (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock; or (iv) made any
changes in capital stock, material changes in debt (long or short term) or
liabilities other than in the ordinary course of business, material changes
in or affecting the general affairs, management, financial operations,
stockholders equity or results of operations of the Company.
(p) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus, and
except as may otherwise be indicated or contemplated herein or therein, no
default exists in the due performance and observance of any material term,
covenant or condition of any license, contract, indenture, mortgage,
installment sales agreement,
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lease, deed of trust, voting trust agreement, stockholders agreement, note,
loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other agreement or instrument to
which the Company is a party or by which the Company may be bound or to
which any of the property or assets (tangible or intangible) of the Company
is subject or affected.
(q) To the best knowledge of the Company, the Company
has generally enjoyed a satisfactory employer-employee relationship with
its employees and is in compliance in all material respects with all
federal, state, local, and foreign laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours.
(r) To the best knowledge of the Company, since its
inception, the Company has not incurred any liability arising under or as a
result of the application of the provisions of the Act.
(s) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus, and
except as may otherwise be indicated or contemplated herein or therein, the
Company does not presently maintain, sponsor or contribute to, and never
has maintained, sponsored or contributed to, any program or arrangement
that is an "employee pension benefit plan," an "employee welfare benefit
plan" or a "multi-employer plan" as such terms are defined in Sections
3(2), 3(l) and 3(37) respectively of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company
does not maintain or contribute, now or at any time previously, to a
defined benefit plan, as defined in Section 3(35) of ERISA.
(t) The Company is not in violation in any material
respect of any domestic or foreign laws, ordinances or governmental rules
or regulations to which it is subject, except to the extent that any such
violation would not, singly or in the aggregate, have a Material Adverse
Effect.
(u) No holders of any securities of the Company or of
any options, warrants or other convertible or exchangeable securities of
the Company exercisable for or convertible or exchangeable for securities
of the Company have the right to include any securities issued by the
Company in the Registration Statement or any registration statement to be
filed by the Company within twelve (12) months of the date hereof or to
require the Company to file a registration statement under the Act during
such twelve (12) month period, except such registration rights as have been
waived or disclosed in the Prospectus.
(v) Neither the Company, nor, to the Company's best
knowledge, any of its employees, directors, principal stockholders or
affiliates (within the meaning of the Rules and Regulations) has taken,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result in, under the
Exchange Act, or otherwise, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the
Securities or otherwise.
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<PAGE> 9
(w) Except as described in the Prospectus, to the best
of the Company's knowledge, none of the patents, patent applications,
trademarks, service marks, trade names and copyrights, or licenses and
rights to the foregoing presently owned or held by the Company is in
dispute or are in any conflict with the right of any other person or entity
within the Company's current area of operations nor has the Company
received notice of any of the foregoing. To the best of the Company's
knowledge, the Company: (i) owns or has the right to use, free and clear of
all liens, charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind whatsoever, all
patents, trademarks, service marks, trade names and copyrights, technology
and licenses and rights with respect to the foregoing, used in the conduct
of its business as now conducted or proposed to be conducted without
infringing upon or otherwise acting adversely to the right or claimed right
of any person, corporation or other entity under or with respect to any of
the foregoing; and (ii) except as set forth in the Prospectus, is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant
to, any patent, trademark, service mark, trade name, copyright, know-how,
technology or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(x) Except as described in the Prospectus, to the best
of the Company's knowledge, the Company owns and has the unrestricted right
to use all material trade secrets, trademarks, trade names, know-how
(including all other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), inventions, designs,
processes, works of authorship, computer programs and technical data and
information (collectively herein "Intellectual Property") required for or
incident to the development, manufacture, operation and sale of all
products and services sold or proposed to be sold by the Company, free and
clear of and without violating any right, lien, or claim of others,
including without limitation, former employers of its employees; provided,
however, that the possibility exists that other persons or entities,
completely independently of the Company, or employees or agents, could have
developed trade secrets or items of technical information similar or
identical to those of the Company.
(y) The Company has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and personal
property owned or leased by it free and clear of all liens, charges,
claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred
to in the Prospectus and liens for taxes or assessments not yet due and
payable.
(z) The Company has obtained such duly executed
legally binding and enforceable agreements as required by the
Representative pursuant to which the Company's President and certain
Directors and affiliates described in the Prospectus, have agreed not to,
directly or indirectly, offer to sell, sell, grant any option for the sale
of, assign, transfer, pledge, hypothecate or otherwise encumber any of
their shares of Common Stock or other securities of the Company (either
pursuant to Rule 144 of the Rules and Regulations or otherwise) or dispose
of any beneficial interest
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therein for certain periods of up to __ months subject to earlier release
upon the Company's achievement of certain performance thresholds, following
the effective date of the Registration Statement without the prior written
consent of the Representative. The Company will cause the Transfer Agent,
as defined below, to mark an appropriate legend on the face of stock
certificates representing all of such shares of Common Stock and other
securities of the Company.
(aa) Except as disclosed in the Prospectus, the Company
has not incurred any liability and there are no arrangements or
understandings for services in the nature of a finder's or origination fee
with respect to the sale of the Securities or any other arrangements,
agreements, understandings, payments or issuances with respect to the
Company or any of its officers, directors, employees or affiliates that may
adversely affect the Underwriters' compensation, as determined by the NASD.
(bb) The Securities have been approved for quotation on
the Nasdaq SmallCap Market of the Nasdaq Stock Market, Inc., subject to
official notice of issuance.
(cc) Neither the Company nor to the Company's best
knowledge any of its respective officers, employees, agents or any other
person acting on behalf of the Company, has, directly or indirectly, given
or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or
official or employee of any governmental agency (domestic or foreign) or
instrumentality of any government (domestic or foreign) or any political
party or candidate for office (domestic or foreign) or other person who
was, is, or may be in a position to help or hinder the business of the
Company (or assist the Company in connection with any actual or proposed
transaction) which: (a) might subject the Company, or any other such person
to any damage or penalty in any civil, criminal or governmental litigation
or proceeding (domestic or foreign); (b) if not given in the past, might
have had a materially adverse effect on the assets, business or operations
of the Company; or (c) if not continued in the future, might adversely
affect the assets, business, operations or prospects of the Company. The
Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act 1977, as amended.
(dd) Except as set forth in the Prospectus, and to the
best knowledge of the Company, no officer, director or principal
stockholder of the Company, or any "affiliate" or "associate" (as these
terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any such person or entity or the Company, has or has had, either
directly or indirectly, (i) an interest in any person or entity which (A)
furnishes or sells services or products which are furnished or sold or are
proposed to be furnished or sold by the Company, or (B) purchases from or
sells or furnishes to the Company any goods or services, except with
respect to the beneficial ownership of not more than 1% of the outstanding
shares of capital stock of any publicly-held entity; or (ii) a beneficial
interest in any contract or agreement to which the Company is a party or by
which it may be bound or affected. Except as set forth in the Prospectus
under "Certain Relationships and Related Transactions," there are no
existing agreements, arrangements, understandings or transactions, or
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proposed agreements, arrangements, understandings or transactions, between
or among the Company, and any officer, director, or principal stockholder
of the Company, or any affiliate or associate of any such person or entity,
which is required to be disclosed pursuant to Rule 404 of Regulation S-B.
(ee) Any certificate signed by any officer of the
Company and delivered to the Underwriters or to the Underwriters' Counsel
shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(ff) The Company has entered into an employment
agreement with V. Lynn Graybill as described in the Prospectus. Unless
waived by the Representative, the Company shall use its reasonable efforts
at reasonable cost to obtain a key-man life insurance policy in the amount
of not less than $1,000,000 on the life of Mr. Graybill, which policy
shall be owned by the Company and shall name the Company as the sole
beneficiary thereunder.
(gg) No securities of the Company have been sold by the
Company since its date of incorporation, except as disclosed in Part II of
the Registration Statement.
(hh) The minute books of the Company have been made
available to Underwriter's Counsel and contain a complete summary of all
meetings and actions of the Board of Directors and Shareholders of the
Company since the date of its incorporation.
2. Purchase, Sale and Delivery of the Securities, Additional
Securities and Agreement to Issue Underwriters' Warrant.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to each
Underwriter, and each Underwriter, severally and not jointly, agree to
purchase from the Company at the price per share and the price per warrant
set forth below, that proportion of the number of Common Stock and
Redeemable Warrants set forth in Schedule I opposite the name of such
Underwriter that such number of Common Stock and Redeemable Warrants bears
to the total number of shares of Common Stock and Redeemable Warrants,
respectively, subject to such adjustment as the Underwriters in their
discretion shall make to eliminate any sales or purchases of fractional
Securities, plus any additional numbers of Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but subject to the
terms and conditions herein set forth, the Company hereby grants an option
to the Underwriters, severally and not jointly, to purchase up to an
additional 210,000 Shares from the Company and 210,000 Redeemable Warrants
at the prices set forth below. The option granted hereby will expire 45
days after the date of this Agreement, and may be exercised in whole or in
part from time to time only for the purpose of covering over-allotments
which may
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be made in connection with the offering and distribution of the Additional
Securities upon notice by the Representative to the Company setting forth
the number of Additional Securities as to which the Underwriters are then
exercising the option and the time and date of payment and delivery for
such Additional Securities. Any such time and date of delivery shall be
determined by the Underwriters, but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to
the Closing Date, as defined in paragraph (c) below, unless otherwise
agreed to between the Representative and the Company. In the event such
option is exercised, each of the Underwriters, acting severally and not
jointly, shall purchase such number of Option Securities then being
purchased which shall have been allocated to such Underwriter by the
Representative, and which such Underwriter shall have agreed to purchase,
subject in each case to such adjustments as the Underwriters in their
discretion shall make to eliminate any sales or purchases of fractional
Securities. Nothing herein contained shall obligate the Underwriters to
make any over-allotments. No Additional Securities shall be delivered
unless the Firm Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Securities shall be made at the offices of
counsel to the Representative in Atlanta, Georgia, or at such other place
as shall be agreed upon by the Underwriters and the Company. Such delivery
and payment shall be made at 10:00 a.m. (New York City time) on
___________, 1997 or at such other time and date as shall be designated by
the Representative but not less than three (3) nor more than five (5)
business days after the effective date of the Registration Statement (such
time and date of payment and delivery being hereafter called "Closing
Date"). In addition, in the event that any or all of the Additional
Securities are purchased by the Underwriters, payment of the purchase price
for, and delivery of certificates for such Additional Securities shall be
made at the above-mentioned office or at such other place and at such time
(such time and date of payment and delivery being hereinafter called
"Option Closing Date") as shall be agreed upon by the Representative and
the Company on each Option Closing Date as specified in the notice from the
Representative to the Company. Delivery of the certificates for the
Additional Securities and the Additional Securities, if any, shall be made
to the Underwriters against payment by the Underwriters of the purchase
price for the Securities and the Option Securities, if any, to the order of
the Company as the case may be by certified check in New York Clearing
House funds or, at the election of the Representative, all or a portion of
the funds may be paid by Bank wire transfer of funds or by Representative's
commercial check. Certificates for the Firm Securities and the Additional
Securities, if any, shall be in definitive, fully registered form, shall
bear no restrictive legends and shall be in such denominations and
registered in such names as the Underwriters may request in writing at
least two (2) business days prior to Closing Date or the relevant Option
Closing Date, as the case may be. The certificates or the Depository Trust
Corporation electronic notifications, as the case may be, for the
Securities and the Additional Securities, if any, shall be made available
to the Underwriters at the above-mentioned office or such other place as
the Underwriters may designate for inspection, checking and packaging no
later than 9:30 a.m. on the last business day prior to Closing Date or the
relevant Option Closing Date, as the case may be.
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The purchase price of the Common Stock and
Redeemable Warrants to be paid by each of the Underwriters, severally and
not jointly, to the Company for the Securities purchased under Clauses (a)
and (b) above will be $______ per Share and $______ per Redeemable Warrant
(which price is net of the Underwriters' discount and commissions). The
Company shall not be obligated to sell any Securities hereunder unless all
Securities to be sold by the Company are purchased hereunder. The Company
agrees to issue and sell 1,400,000 shares of the Common Stock and the
Company agrees to issue and sell 1,400,000 Redeemable Warrants to the
Underwriters in accordance herewith.
(d) On the Closing Date, the Company shall issue and
sell to the Underwriters the Underwriters' Warrant at a purchase price of
$140.00, which purchase option shall entitle the holders thereof to
purchase an aggregate of 140,000 Shares and 140,000 Warrants. The
Underwriters' Purchase Option shall be exercisable for a period of four
(4) years commencing one (1) year from the closing date of the Registration
Statement at an initial exercise price equal to one hundred twenty percent
(145%) of the initial public offering price of the Shares and Redeemable
Warrants. The Underwriter's Purchase Option Agreement and form of Purchase
Option Certificate shall be substantially in the form filed as an Exhibit
to the Registration Statement. Payment for the Underwriters' Warrant shall
be made on Closing Date. The Company has reserved and shall continue to
reserve a sufficient number of Shares for issuance upon exercise of the
Underwriters' Warrant.
3. Public Offering of the Securities. As soon after the
Registration Statement becomes effective and as the Representative deems
advisable, but in no event more than three (3) business days after such
effective date, the Underwriters shall make a public offering of the
securities (other than to residents of or in any jurisdiction in which
qualification of the Securities is required and has not become effective)
at the price and upon the other terms set forth in the Prospectus. The
Underwriters may allow such concessions and discounts upon sales to other
dealers as set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause
the Registration Statement and any amendments thereto to become effective
as promptly as practicable and will not at any time, whether before or
after the effective date of the Registration Statement, file any amendment
to the Registration Statement or supplement to the Prospectus or file any
document under the Exchange Act (i) before termination of the offering of
the Securities by the Underwriters, which the Underwriters shall not
previously have been advised and furnished with a copy, or (ii) to which
the Underwriters shall have objected or (iii) which is not in compliance
with the Act, the Exchange Act or the Rules and Regulations.
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<PAGE> 14
(b) As soon as the Company is advised or obtains
knowledge thereof, the Company will advise the Underwriters and confirm by
notice in writing: (i) when the Registration Statement, as amended, becomes
effective, if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said
Rule 430A and when any post-effective amendment to the Registration
Statement becomes effective; (ii) of the issuance by the commission of any
stop order or of the initiation, or the threatening of any proceeding,
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution or
proceeding for that purpose; (iii) of the issuance by any state securities
commission of any proceedings for the suspension of the qualification of
the Securities for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose; (iv) of
the receipt of any comments from the Commission; and (v) of any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission or regulatory
authority shall enter a stop order or suspend such qualification at any
time, the Company will make every effort to obtain promptly the lifting of
such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Underwriters) or transmit the Prospectus by a
means reasonably calculated to result in filing with the Commission
pursuant to Rule 424(b)(1) (or, if applicable and if consented to by the
Underwriters pursuant to Rule 424(b)(4)) not later than the Commission's
close of business on the earlier of (i) the second business day following
the execution and delivery of this Agreement and (ii) the fifth business
day after the effective date of the Registration Statement.
(d) The Company will give the Underwriters notice of
its intention to file or prepare any amendment to the Registration
Statement (including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus which the
Company proposes for use by the Underwriters in connection with the
offering of the Securities which differs from the corresponding prospectus
on file at the Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to be filed
pursuant to Rule 424(b) of the Rules and Regulations), will furnish the
Underwriters with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may be,
and will not file any such prospectus to which the Underwriters or Johnson
& Montgomery ("Underwriters' Counsel") shall reasonably object.
(e) The Company shall cooperate in good faith with the
Underwriters, and Underwriters' Counsel, at or prior to the time the
Registration Statement becomes effective, in endeavoring to qualify the
Securities for offering and sale under the securities laws of such
jurisdictions as the Underwriters may reasonably designate, and shall
cooperate with the Underwriters and Underwriters' Counsel in the making of
such applications, and filing such documents and shall furnish such
information as may be required for such purpose; provided, however, the
Company shall not be required to: (i) qualify as a foreign corporation or
file a general
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consent to service of process in any such jurisdiction; or (ii) qualify or
"blue sky" in any state which requires a lock-up of inside securities for a
period greater than five (5) years (or such earlier date if the
Representative has exercised the Underwriters' Warrant). In each
jurisdiction where such qualification shall be effected, the Company will,
unless the Underwriters agree that such action is not at the time necessary
or advisable, use all reasonable efforts to file and make such statements
or reports at such times as are or may reasonably be required by the laws
of such jurisdiction to continue such qualification.
(f) During the time when the Prospectus is required to
be delivered under the Act, the Company shall use all reasonable efforts to
comply with all requirements imposed upon it by the Act and the Exchange
Act, as now and hereafter amended and by the Rules and Regulations, as from
time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Securities in accordance with the provisions
hereof and the Prospectus, or any amendments or supplements thereto. If at
any time when the Prospectus relating to the Securities is required to be
delivered under the Act, any event shall have occurred as a result of
which, in the opinion of counsel for the Company or Underwriters' Counsel,
the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or
if it is necessary at any time to amend the Prospectus to comply with the
Act, the Company will notify the Underwriters promptly and prepare and file
with the Commission an appropriate amendment or supplement in accordance
with Section 10 of the Act, each such amendment or supplement to be
reasonably satisfactory to Underwriters' Counsel, and the Company will
furnish to the Underwriters a reasonable number of copies of such amendment
or supplement.
(g) As soon as practicable, but in any event not later
than 45 days after the end of the 12-month period commencing on the day
after the end of the fiscal quarter of the Company during which the
effective date of the Registration Statement occurs (90 days in the event
that the end of such fiscal quarter is the end of the Company's fiscal
year), the Company shall make generally available to its security holders,
in the manner specified in Rule 158(b) of the Rules and Regulations, and to
the Underwriters, an earnings statement which will be in such form and
detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations,
which statement need not be audited unless required by the Act, covering a
period of at least 12 consecutive months after the effective date of the
Registration Statement.
(h) During a period of five (5) years after the date
hereof and provided that the Company is required to file reports with the
Commission under Section 12 of the Exchange Act, the Company will provide
the Representative's director Designee or Attendee, as defined herein,
copies of the below described documents prior to release where applicable
and will furnish to its stockholders and to the Underwriter as soon as
practicable, annual reports (including financial statements audited by
independent public accountants):
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(i) as soon as they are available, copies of
all reports (financial or other) mailed to stockholders;
(ii) as soon as they are available, copies of
all reports and financial statements furnished to or filed with the
Commission, the NASD or any securities exchange;
(iii) every press release and every material
news item or article of interest to the financial community in respect of
the Company and any future subsidiaries or their affairs which was released
or prepared by the Company;
(iv) any additional information of a public
nature concerning the Company and any future subsidiaries or their
respective businesses which the Underwriters may reasonably request;
(v) a copy of any Schedule 13D, 13G, 14D-1,
13E-3 or 13E-4 received or filed by the Company from time to time;
(vi) such other information as may be
requested with reference to the property, business, stockholders and
affairs of the Company and its subsidiaries.
During such five-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries
are consolidated, and will be accompanied by similar financial statements
for any significant subsidiary which is not so consolidated.
(i) For as long as the Company is required to file
reports with the Commission under Section 12 of the Exchange Act, the
Company will maintain a Transfer Agent and a Warrant Agent, which may be
the same entity, and, if necessary under the jurisdiction of incorporation
of the Company, a Registrar (which may be the same entity as the Transfer
and Warrant Agent) for its Common Stock and Redeemable Warrants.
(j) The Company will furnish to the Underwriters or
pursuant to the Underwriters' direction, without charge, at such place as
the Underwriters may designate, copies of each Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which copies will be signed and will include all financial
statements and exhibits), the Prospectus, and all amendments and
supplements thereto, including any prospectus prepared after the effective
date of the Registration Statement, in each case as soon as available and
in such quantities as the Underwriters may reasonably request.
(k) Neither the Company, nor its officers or
directors, nor affiliates of any of them (within the meaning of the Rules
and Regulations) will take, directly or indirectly, any action
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designed to, or which might in the future reasonably be expected to cause
or result in, stabilization or manipulation of the price of any securities
of the Company.
(1) The Company shall apply the net proceeds from the
sale of the Securities in substantially the manner, and subject to the
provisions, set forth under "Use of Proceeds" in the Prospectus. Except
for the redemption of the Company's outstanding Convertible Preferred Stock
as disclosed in the Prospectus, no portion of the net proceeds will be used
directly or indirectly to acquire any securities issued by the Company.
(m) The Company shall timely file all such reports,
forms or other documents as may be required (including but not limited to a
Form SR as may be required pursuant to Rule 463 under the Act) from time to
time, under the Act, the Exchange Act, and the Rules and Regulations, and
all such reports, forms and documents filed will comply as to form and
substance with the applicable requirements under the Act, the Exchange Act,
and the Rules and Regulations.
(n) The Company shall furnish to the Underwriters as
early as practicable prior to each of the date hereof, the Closing Date and
each Option Closing Date, if any, but no later than two (2) full business
days prior thereto, a copy of the latest available unaudited interim
financial statements of the Company (which in no event shall be as of a
date more than forty-five (45) days prior to the date of the Registration
Statement) which have been read by the Company's independent public
accountants, as stated in their letters to be furnished pursuant to Section
6(k) hereof.
(o) For a period of five (5) years from the Closing
Date (or such earlier date if the Representative has exercised the
Underwriters' Purchase Option Agreement), the Company shall furnish to the
Underwriters at the Company's sole expense, (i) daily consolidated transfer
sheets relating to the Securities upon the Representative's reasonable
request; (ii) a list of holders of Securities upon the Representative's
reasonable request; (iii) a list of, if any, the securities positions of
participants in the Depository Trust Company upon the Representative's
reasonable request.
(p) For a period of five (5) years after the effective
date of the Registration Statement (or such earlier date if the
Representative has exercised the Underwriting Purchase Option Agreement),
the Company shall use its best efforts to cause two (2) individuals (the
"Designees") selected by the Representative to be elected to the Board of
Directors of the Company (the "Board"), if requested by the Representative.
Alternatively, the Representative shall be entitled to appoint an
individual who shall be permitted to attend all meetings of the Board (the
"Advisor") and to receive all notices and other correspondence and
communications sent by the Company to members of the Board. Upon election
to the Board, the Designees shall be entitled to call special meetings of
the Board and to serve on the Audit and Compensation Committees. The
Designees may be removed by the Board only for "justifiable cause" as that
term is defined in the Employment Contract between the Company and V. Lynn
Graybill. The Company shall reimburse the Representative's Designees or
Advisor for his or her out-of-pocket expenses reasonably incurred and
authorized in advance by the Company in connection with his or her
attendance of the Board meetings and a fee equal to the
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amount paid to the other outside directors of the Company. The Designee or
Advisor shall also be entitled to participate in any Stock Option Plans of
the Company for non-employees. To the extent permitted by law, the Company
agrees to indemnify and hold the Designee (as a director or Advisor) and
the Representative harmless against any and all claims, actions, awards and
judgements arising out of his or her service as a director or Advisor and
in the event the Company maintains a liability insurance policy affording
coverage for the action of its officer and directors, to include such
Designee and the Representative as an insured under such policy.
(q) For a period equal to the lesser of (i) five (5)
years from the date hereof, or (ii) the sale to the public of the Warrant
Shares, the Company will use its best efforts not to take any action or
actions which may prevent or disqualify the Company's use of Forms S-1 or,
if applicable, S-2 and S-3 (or other appropriate form) for the registration
under the Act of the Warrant Shares.
(r) For a period of five (5) years from the date
hereof, the Company shall use its best efforts at its cost and expense to
maintain the listing of the Securities on the Nasdaq SmallCap Market or
NASDAQ National Market System if the Company meets all of the requirements
and qualifications promulgated by the NASD.
(s) On or before the effective date of the
Registration Statement, the Company shall retain or make arrangements to
retain a financial public relations firm and a publicist reasonably
satisfactory to the Representative which shall be continuously engaged from
such engagement date to a date 24 months from the effective date of the
Registration Statement. Upon the expiration of such two (2) year period,
such engagement shall continue until the expiration of any lock-up period
provided for in the Lock-Up Agreement(s) with certain officers and
directors of the Company subject to the Company's right to terminate any
such firm with the consent of the Underwriter's director Designees.
Further, the Company shall engage for a period of two years at least three
firms (one of which shall be the Representative and one of which shall be
Standard & Poor's Stock Reports Professional Edition) which are reasonably
acceptable to the Representative to provide industry research and advice to
the Company. Upon the expiration of such two-year period, such engagement
shall continue until the expiration of any lock-up period provided
hereunder, subject to the Company's right to terminate any such firm with
the consent of the Underwriters' director designee.
(t) The Company shall (i) file a Form 8-A with the
Commission providing for the registration under the Exchange Act of the
Securities and (ii) promptly take all necessary and appropriate actions to
be included in Standard and Poor's Corporation Descriptions and/or Moody's
OTC Manual and to continue such inclusion for a period of not less than
five (5) years, as soon as practicable, but in no event more than five (5)
business days' after the effective date of the Registration Statement.
(u) Following the Effective Date of the Registration
Statement and for a period of five (5) years thereafter (or such earlier
date if the Representative has exercised the Underwriters'
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Warrant), the Company shall, at its sole cost and expense, prepare and file
such blue sky trading applications with such jurisdictions as the
Representative may reasonably request after consultation with the Company,
and on the Representative's request, furnish the Underwriters with a
secondary trading survey prepared by securities counsel to the Company.
(v) The Company shall not amend or alter any term of
any written employment agreement nor Lock-Up Agreement between the Company
and any executive officer, director or affiliate, during the term thereof,
in a manner more favorable to such employee or entity, without the express
written consent of the Representative until such time as the Underwriter's
Purchase Option has been exercised in full.
(w) Until the completion of the distribution of the
Securities, the Company shall not, without the prior written consent of the
Representative and Underwriters' Counsel, which consent shall not be
unreasonably withheld, issue, directly or indirectly, any press release or
other communication or hold any press conference with respect to the
Company or its activities or the offering contemplated hereby, other than
trade releases issued in the ordinary course of the Company's business
consistent with past practices with respect to the Company's operations.
(x) Commencing one (1) year from the date hereof, upon
the exercise of any Warrant, the exercise of which was solicited by the
Underwriters in accordance with the applicable rules and regulations of the
NASD prevailing at the time of such solicitation, the Company shall pay to
the soliciting Underwriter a fee of 5% of the aggregate exercise price of
such Warrant (the "Warrant Solicitation Fee") within five (5) business days
of such exercise, so long as the Underwriters provided bona fide services
in exchange for the Warrant Solicitation Fee and the Underwriters have been
specifically designated in writing by the holders of the Warrants as the
broker. The Company further agrees that it will not solicit the exercise
of any Warrant other than through the Underwriters, unless either: (i) the
Underwriters cannot legally solicit the exercise of the Warrants at the
time of such solicitation; (ii) the Representative declines, in writing, to
solicit the exercise of the Warrants within five (5) business days of such
a written request by the Company; or (iii) the Representative consents to
the solicitation of the exercise of the Warrants by the Company or another
entity.
(y) The Company will use its best efforts to maintain
its registration under the Exchange Act in effect for a period of five (5)
years from the Closing Date.
(z) For a period of twenty-four (24) months commencing
on the Effective Date (or such earlier date if the Representative has
exercised the Underwriters' Warrant), except with the written consent of
the Underwriters, which consent shall not be unreasonably withheld, the
Company will not issue or sell, directly or indirectly, any shares of its
capital stock, or sell or grant options, or warrants or rights to purchase
any shares of its capital stock, except pursuant to (i) this Agreement,
(ii) the Underwriters' Warrants, (iii) warrants and options of the Company
heretofore issued and described in the Prospectus, and (iv) the grant of
options and the issuance of shares issued upon
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exercise of options issued or to be issued under a stock option plan to be
adopted in the future by the Company with terms that are reasonable for a
public entity the size of the Company which is described in the Prospectus;
except that, during such period, the Company may issue up to ______ shares
pursuant to certain employee stock options as is described in the
Prospectus, and issue securities in connection with an acquisition, merger
or similar transaction, provided that such securities are not publicly
registered or issued pursuant to Regulation S of the Act, and the acquirer
of the securities is not granted registration rights with respect thereto
which are effective prior to 24 months after the Effective Date and until
the Underwriter's Purchase Option is exercised, the Underwriter grants its
consent. Notwithstanding anything to the contrary set forth in the prior
sentence, the Company may not issue any class or series of Preferred Stock
for a period of 24 months from the Effective Date without the unanimous
vote or consent of all members of the Board of Directors of the Company.
Prior to the Effective Date, the Company will not issue any options or
warrants without the prior written consent of the Underwriters.
(aa) The Company will not file any registration
statement relating to the offer or sale of any of the Company's securities,
including any registration statement on Form S-8, during the 12 months
following the Closing Date without the Underwriters' prior written consent.
(bb) Subsequent to the dates as of which information is
given in the Registration Statement and Prospectus and prior to the Closing
Dates, except as disclosed in or contemplated by the Registration Statement
and Prospectus, (i) the Company will not have incurred any liabilities or
obligations, direct or contingent, or entered into any material
transactions other than in the ordinary course of business; (ii) there
shall not have been any change in the capital stock, funded debt (other
than regular repayments of principal and interest on existing indebtedness)
or other securities of the Company, any adverse change in the condition
(financial or other), business, operations, income, net worth or
properties, including any loss or damage to the properties of the Company
(whether or not such loss is insured against), which could adversely affect
the condition (financial or other), business, operations, income, net worth
or properties of the Company; and (iii) the Company shall not pay or
declare any dividend or other distribution on its Common Stock or its other
securities or redeem or repurchase any of its Common Stock or other
securities.
(cc) The Company, for a period of twenty-four (24)
months following the Effective Date (or such earlier date if the
Representative has exercised the Underwriters' Warrant), shall not redeem
any of its securities, and shall not pay any dividends or make any other
cash distribution in respect of its securities in excess of the amount of
the Company's current or retained earnings derived after the Effective Date
without obtaining the Underwriters' prior written consent, which consent
shall not be unreasonably withheld. The Underwriters shall either approve
or disapprove such contemplated redemption of securities or dividend
payment or distribution within five (5) business days from the date the
Underwriters receive written notice of the Company's proposal with respect
thereto; a failure of the Underwriters to respond within the five (5)
business day period shall be deemed approval of the transaction.
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(dd) The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that: (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary in order to permit preparation of financial
statements in accordance with generally accepted accounting principles and
to maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences, and (v) all quarterly reports filed on Form 10-Q shall
be reviewed by the Company's accountant in accordance with SAS 71.
(ee) The Company, for a period of twenty-four (24)
months following the Effective Date (or such earlier date if the
Representative has exercised the Underwriters' Warrant), shall implement
the following procedures:
(i) Thirty days prior to fiscal year end, the
President will present to the Board of Directors a business plan to be
adopted by the Board of Directors at fiscal year end. The business plan
will include the following:
a) quarterly projections - including
balance sheet, profit/loss statement and cash flow
statements with underlying assumptions
b) upon board approval, this
document becomes the annual budget
(ii) No later than the 20th day of each month,
the Company will provide the Board with comparative financial statements
for the previous month showing actual balance sheet, profit/loss and cash
flow vs. budget with written explanations for deviation in excess of
$50,000 or 10% of line item presented.
(iii) Monthly Board meetings (which may be by
telephone) by the 25th of each month to include discussion of the Monthly
Report and approval of any changes to the business plan based on change of
circumstances.
(iv) Implementation of a compensation
committee, which will be headed by an outside director and include one of
the Underwriters' Designee Directors, to make recommendations to the Board
for compensation for all outside consultants, officers and outside
directors.
(v) Implementation of an audit committee
which will have as its members one of the Underwriters Designee Directors
and one outside Director.
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If the Company fails to comply with or breaches any
provisions of this Section 4 of this Agreement, the Underwriters may cause
the Company to retain one or more consultants, accountants or other
professionals to assist the Company in curing the breach or failure and the
Company will reimburse such third party directly for costs and expenses
incurred.
(ff) Financial Advisory Agreement. On the Closing
Date, the Company shall execute a Financial Advisory Agreement with you for
services, which shall include without limitation (i) advising the Company
in connection with possible acquisitions (ii) facilitating shareholder
communications and relations, including the preparation of the Company's
annual report and (iii) advising and assisting the Company with long-term
financial planning, corporate reorganization, expansion and capital
structure and other financial matters. Such agreement shall have a term of
two years and provide for compensation of $2,000 per month which amount
shall be prepaid in full on the Closing Date. The Financial Advisory
Agreement shall further provide that during the term of such agreement, in
the event that you (i) introduce, negotiate or arrange on the Company's
behalf a non-public equity financing or (ii) arrange on the Company's
behalf a non-public debt financing or (iii) arrange for the purchase or
sale of assets, or for a merger acquisition or joint venture for the
Company, then the Company will compensate you (based on the Transaction
Value, as defined below) for such services in an amount equal to:
5% on the first $1,000,000 of the Transaction Value;
4% on the amount from $1,000,001 to $2,000,000;
3% on the amount from $2,000,001 to $3,000,000;
2% on the amount from $3,000,001 to $4,000,000;
1% on the amount from $4,000,001 to $5,000,000;
1% on the amount in excess of $5,000,000.
"Transaction Value" shall mean the aggregate value of all cash,
securities and other property (i) paid to the Company, its affiliates or
their shareholders in connection with any transaction referred to above
involving any investment in or acquisition of the Company or any
affiliates (or the assets of either), (ii) paid by the Company or any
affiliate in any such transaction involving an investment in or
acquisition of another party or its equity holdings by the Company or any
affiliate, or (iii) paid or contributed by the Company or any affiliate
and by the other party or parties in the event of any such transaction
involving a merger, consolidation, joint venture or similar joint
enterprise or undertaking. The value of any such securities (whether debt
or equity) or other property shall be the fair market value thereof as
determined by mutual agreement of the Company and the Underwriters or by
an independent appraiser jointly selected by the Company and the
Underwriters.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the
Closing Date and the Option Closing Date (to the extent not paid at the
Closing Date) all expenses and fees (other than
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fees of Underwriters' Counsel, except as provided in (iv) below) incident
to the performance of the obligations of the Company under this Agreement,
including, without limitation: (i) the fees and expenses of accountants and
counsel for the Company; (ii) all costs and expenses incurred in connection
with the preparation, duplication, printing, filing, delivery and mailing
(including the payment of postage with respect thereto) of the Registration
Statement and the Prospectus and any amendments and supplements thereto and
the printing, mailing and delivery of this Agreement, the Selected Dealer
Agreements, the Agreement Among Underwriters, Underwriters Questionnaires,
Powers of Attorney and related documents, including the cost of all copies
thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters in
quantities as hereinabove stated; (iii) the printing, engraving, issuance
and delivery of the Securities including any transfer or other taxes
payable thereon; (iv) disbursements and fees of Underwriters' Counsel in
connection with the qualification of the Securities under state or foreign
securities or "Blue Sky" laws and determination of the status of such
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, which Underwriters'
Counsel blue sky fees (exclusive of filing fees and disbursements) shall be
$1,000 for each state in which application for registration or
qualification is made up to an aggregate of $35,000 for all states
combined; (v) fees and expenses of the transfer agent; (vi) the fees
payable to the NASD; (vii) the fees and expenses incurred in connection
with the listing of the Securities on the Nasdaq SmallCap Market and any
other fees for application and admission to a registered Stock Exchange for
which the Underwriter requires the Company to register its Securities;
(viii) fees and expenses for any tombstone advertisements reasonably
requested by the Representative; (ix) Closing Binders; and (x) Lucite cubes
containing a miniature definite Prospectus. All fees and expenses payable
to the Underwriters shall be payable at the Closing Date or Option Closing
Date, as applicable.
(b) If this Agreement is terminated by the
Underwriters in accordance with the provisions of Section 6, Section 10(a)
or Section 12, the Company shall reimburse and indemnify the Underwriters
for all of their out-of-pocket expenses reasonably incurred in connection
with the transactions contemplated hereby.
(c) The Company further agrees that, in addition to
the expenses payable pursuant to subsection (a) of this Section 5, it will
pay to the Underwriters a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of
the Securities, $__________ of which has been paid to date to the
Underwriters. The Company will pay the remainder of the non-accountable
expense allowance on the Closing Date by direct payment to third parties
for fees and expenses including, but not limited to, fees and expenses of
Underwriter's Counsel and the balance by deduction from the proceeds of the
offering contemplated herein. In the event the Underwriters elect to
exercise the over-allotment option described in Section 2(b) hereof, the
Company further agrees to pay to the Underwriters on the Option Closing
Date (by deduction from the proceeds of the offering) a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds
received by the Company from the sale of the Option Securities.
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6. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters hereunder shall be subject to the
continuing accuracy of the representations and warranties of the Company
herein as of the Closing Date and each Option Closing Date, if any, as if
they had been made on and as of the Closing Date or each Option Closing
Date, as the case may be; the accuracy on and as of the Closing Date or
Option Closing Date, if any, of the statements of officers of the Company
made pursuant to the provisions hereof; and the performance by the Company
on and as of the Closing Date and each Option Closing Date, if any, of each
of its covenants and obligations hereunder and to the following further
conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 P.M., New York City time, on the date of this
Agreement or such later date and time as shall be consented to in writing
by the Underwriters, and, at Closing Date and each Option Closing Date, if
any, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been instituted or shall be pending or contemplated by the Commission
and any request on the part of the Commission for additional information
shall have been complied with to the reasonable satisfaction of Underwriter
and Underwriters' Counsel. If the Company has elected to rely upon Rule
430A of the Rules and Regulations, the price of the Securities and any
price-related information previously omitted from the effective
Registration Statement pursuant to such Rule 430A shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) of the
Rules and Regulations within the prescribed time period, and prior to the
Closing Date the Company shall have provided evidence satisfactory to the
Underwriters of such timely filing, or a post-effective amendment providing
such information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) The Underwriters shall not have advised the
Company that the Registration Statement, or any amendment thereto, contains
an untrue statement of fact which, in the Underwriters' opinion, is
material or omits to state a fact which, in the Underwriters' opinion, is
material and is required to be stated therein or is necessary to make the
statements therein not misleading, or that the Prospectus, or any
supplement thereto, contains an untrue statement of fact which, in the
Underwriters' reasonable opinion, is material, or omits to state a fact
which, in the Underwriters' reasonable opinion, is material and is required
to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date and each Option
Closing Date, as the case may be, the Underwriters shall have received from
Underwriters' Counsel, such opinion or opinions with respect to the
organization of the Company the validity of the Securities, the
Registration Statement, the Prospectus and other related matters as the
Underwriters reasonably may request and such counsel shall have received
such papers and information as they request to enable them to pass upon
such matters.
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(d) At the Closing Date and the Option Closing Date
the Underwriters shall have received an opinion of Looper, Reed, Mark &
McGraw, counsel to the Company, dated the Closing Date, or Option Closing
Date, as the case may be, addressed to the Underwriter and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company: (A) has been duly organized
and is validly existing as a corporation in good standing under the laws of
the State of Nevada with full corporate power and authority to own and
operate its properties and to carry on its business as set forth in the
Registration Statement and Prospectus; (B) to the best knowledge of such
counsel, the Company is duly registered or qualified as a foreign
corporation in all jurisdictions in which by reason of maintaining an
office in such jurisdiction or by owning or leasing real property in such
jurisdiction it is required to be so registered or qualified except where
failure to register or qualify does not have, singly or in the aggregate, a
Material Adverse Effect; and (C) to the best knowledge of such counsel, the
Company has not received any notice of proceedings relating to the
revocation or modification of any such registration or qualification.
(ii) The Registration Statement, each
Preliminary Prospectus that has been circulated and the Prospectus and any
post-effective amendments or supplements thereto (other than the financial
statements, schedules and other financial and statistical data included
therein, as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and Regulations and the
conditions for use of a registration statement on Form SB-2 have been
satisfied by the Company. Such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants for the
Company and representatives of the Underwriters at which the contents of
the Registration Statement, the Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and Prospectus, on the
basis of the foregoing, no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or any
amendment thereto at the time such Registration Statement or amendment
became effective or the Prospectus as of the date thereof contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or to make the statements therein in light of
the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and schedules and other financial and statistical data
included in the Registration Statement or Prospectus or with respect to
statements or omissions made therein in reliance upon information furnished
in writing to the Company on behalf of any Underwriter expressly for use in
the Registration Statement or the Prospectus).
(iii) To the best of such counsel's knowledge,
the Company has a duly authorized, issued and outstanding capitalization as
set forth in the Prospectus as of the date indicated therein, under
"Capitalization." The Shares, Redeemable Warrants, the Purchase Option,
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the Underwriters' Warrants, and the Warrant Shares conform in all material
respects to all statements with respect thereto contained in the
Registration Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly issued and
are fully paid and non-assessable; the holders thereof, to counsel's best
knowledge, are not subject to personal liability by reason of being such
holders, and none of such securities were issued in violation of the
preemptive rights of any holder of any security of the Company.
(iv) The issuance of the Shares, Redeemable
Warrants and the Warrant Shares have been duly authorized and when issued
and paid for in accordance with this Agreement and the Warrant Agreement,
respectively, will be validly issued, fully paid and non-assessable
securities of the Company. The holders of the Securities when issued and
paid for, will not be subject to personal liability by reason of being such
holders. To the best of such counsel's knowledge, the Securities are not
and will not be subject to the preemptive or similar contractual rights of
any shareholder of the Company. All corporate action required to be taken
for the authorization, issuance and sale of the Securities has been duly
and validly taken. The certificates representing the Shares and Redeemable
Warrants are in due and proper form.
(v) Based solely on telephonic, verbal
confirmation provided to such counsel by the staff of the Commission, the
Registration Statement and all post-effective amendments, if any, have
become effective under the Act, and, if applicable, filing of all pricing
information has been timely made in the appropriate form under Rule 430A,
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and to the best
of such counsel's knowledge, no proceedings for that purpose have been
instituted or are pending or threatened or contemplated under the Act; and
any required filing of the Prospectus pursuant to Rule 424(b) has been
made.
(vi) To the best of such counsel's knowledge,
(A) there are no material contracts or other documents required to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement and the Prospectus and filed as exhibits thereto,
and (B) the descriptions in the Registration Statement and the Prospectus
and any supplement or amendment thereto regarding such material contracts
or other documents to which the Company is a party or by which it is bound,
are accurate in all material respects and fairly represent the information
required to be shown by Form SB-2 and the Rules and Regulations.
(vii) This Agreement, the Underwriters Purchase
Option Agreement, the Warrant Agreement, and the Financial Consulting
Agreement have each been duly and validly authorized, executed and
delivered by the Company, and assuming that it is a valid and binding
agreement of the Underwriters, so as the case may be, constitutes a legal,
valid and binding agreement of the Company enforceable as against the
Company in accordance with its respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting enforcement
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of creditors rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law or pursuant to public
policy).
(viii) Neither the execution or delivery by the
Company of this Agreement, the Underwriter's Purchase Option Agreement, and
the Warrant Agreement, nor its performance hereunder or thereunder, nor its
consummation of the transactions contemplated herein or therein, nor the
conduct of its business as described in the Registration Statement, the
Prospectus, and any amendments or supplements thereto, nor the issuance of
the securities conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a material default under, or result in the
creation or imposition of any material lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any
kind whatsoever upon any property or assets (tangible or intangible) of the
Company pursuant to the terms of (A) the Articles of Incorporation of the
Company, or (B) to the best knowledge of such counsel, and except to the
extent it would not have a Material Adverse Effect on the Company, any
statute, judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or administrative agency
or other governmental agency or body, having jurisdiction over the Company
or any of its respective activities or properties.
(ix) No consent, approval, authorization or
order, and no filing with, any court, regulatory body, government agency or
other body, (other than such as may be required under state securities
laws, as to which no opinion need be rendered) is required in connection
with the issuance by the Company of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this
Agreement, the Underwriters' Warrant, the Financial Consulting Agreement
and the Warrant Agreement by the Company, and the taking of any action by
the Company contemplated hereby or thereby, which has not been obtained.
(x) To the best of such counsel's knowledge,
except as described in the Prospectus, no person, corporation, trust,
partnership, association or other entity holding securities of the Company
has the contractual right to include and/or register any securities of the
Company in the Registration Statement, require the Company to file any
registration statement or, if filed, to include any security in such
registration statement for twelve months from the date hereof.
(xi) After the public offering, the Securities
will be eligible for listing on the Nasdaq SmallCap Market.
In rendering such opinion such counsel may rely, (A) as to
matters involving the application of laws other than the laws of the United
States, the corporate laws of Nevada and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, if at all, upon an opinion or opinions (in form
and in substance reasonably satisfactory to Underwriters' Counsel) of other
counsel reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws, and (B) as to matters of fact, to the extent they deem
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proper, on certificates and written statements of responsible officers of
the Company and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting
the corporate existence or good standing of the Company; provided, that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel if requested. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and, in their opinion, the Underwriters and
they are justified in relying thereon.
(e) At each Option Closing Date, if any, the
Underwriters shall have received the an opinion of counsel to the Company,
each dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel confirming as of
Option Closing Date the statements made by such firm, in their opinion,
delivered on the Closing Date.
(f) On or prior to each of the Closing Date and the
Option Closing Date, Underwriters' Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this Section 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.
(g) Prior to the Closing Date and each Option Closing
Date, if any: (i) there shall have been no material adverse change nor
development involving a prospective change in the condition, financial or
otherwise, prospects or the business activities of the Company, whether or
not in the ordinary course of business, from the latest dates as of which
such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company, from the latest date as of which the
financial condition of the Company is set forth in the Registration
Statement and Prospectus which is materially adverse to the Company; (iii)
the Company shall not be in material default under any provision of any
instrument relating to any outstanding indebtedness; (iv) no material
amount of the assets of the Company shall have been pledged or mortgaged,
except as set forth in the Registration Statement and Prospectus; (v) no
action, suit or proceeding, at law or in equity, shall have been pending or
to its knowledge threatened against the Company, or affecting any of its
properties or businesses before or by any court or federal, state or
foreign commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may materially adversely affect the
business, operations, prospects or financial condition or income of the
Company, except as set forth in the Registration Statement and Prospectus;
and (vi) no stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated, threatened or contemplated
by the Commission.
(h) At the Closing Date and each Option Closing Date,
if any, the Underwriters shall have received a certificate of the Company
signed by the principal executive officer and by the
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chief financial or chief accounting officer of the Company, dated the
Closing Date or Option Closing Date, as the case may be, to the effect
that:
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if made on and as of the
Closing Date or the Option Closing Date, as the case may be, and the
Company has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be performed or
satisfied at or prior to such Closing Date or Option Closing Date, as the
case may be;
(ii) No stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceedings for that purpose have been instituted or are pending or, to the
best of each of such person's knowledge, are contemplated or threatened
under the Act;
(iii) The Registration Statement and the
Prospectus and, if any, each amendment and each supplement thereto, contain
all statements and information required to be included therein, and none of
the Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading and neither the Preliminary Prospectus nor any
supplement thereto includes any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading; and
(iv) Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus
and except as otherwise contemplated therein: (A) the Company has not
incurred up to and including the Closing Date or the Option Closing Date as
the case may be, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent; (B) the Company
has not paid or declared any dividends or other distributions on its
capital stock; (C) the Company has not entered into any transactions not in
the ordinary course of business; (D) there has not been any change in the
capital stock or any increase in long-term debt or any increase in the
short-term borrowings (other than any increase in the short term borrowings
in the ordinary course of business) of the Company; (E) the Company has not
sustained any material loss or damage to its property or assets, whether or
not insured; (F) there is no litigation which is pending or threatened
against the Company which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth;
(v) Neither the Company nor any of its
officers or affiliates shall have taken, and the Company, its officers and
affiliates will not take, directly or indirectly, any action designed to,
or which might reasonably be expected to, cause or result in the
stabilization or manipulation of the price of the Company's securities to
facilitate the sale or resale of the Shares.
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References to the Registration Statement and the
Prospectus in this subsection (i) are to such documents as amended and
supplemented at the date of such certificate.
(i) By the Closing Date, the Underwriters shall have
received clearance from NASD as to the amount of compensation allowable or
payable to the Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the
Representative shall have received a letter, dated such date, addressed to
the Representative in form and substance satisfactory in all respects
(including the non-material nature of the changes or decreases, if any,
referred to in clause (iii) below) to the Underwriters, from S. W. Hatfield
+ Associates:
(i) confirming that they are independent
public accountants with respect to the Company within the meaning of the
Act and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the
condensed financial statements and supporting schedules of the Company
included in the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the
Rules and Regulations thereunder and that the Underwriters may rely upon
the opinion of S.W. Hatfield + Associates with respect to the financial
statements and supporting schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited
review which included a reading of the latest available unaudited interim
condensed financial statements of the Company (with an indication of the
date of the latest available unaudited interim condensed financial
statements), a reading of the latest available minutes of the stockholders
and board of directors and the various committees of the boards of
directors of the Company, consultations with officers and other employees
of the Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (A) the unaudited condensed financial
statements of the Company included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
condensed financial statements of the Company included in the Registration
Statement, or (B) at a specified date not more than five (5) days prior to
the effective date of the Registration Statement, there has been any change
in the capital stock, or any increase in total borrowings of the Company,
or any decrease in the stockholders' equity or working capital of the
Company as compared with amounts shown in the financial statements included
in the Registration Statement, other than as set forth in or contemplated
by the Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease, and (C) during the
period from ____________ to a specified date not more than five (5) days
prior to the effective date of the Registration Statement, there was any
decrease in revenue, net earnings or increase in net income
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or earnings per common share of the Company, in each case as compared with
the corresponding period of the prior year other than as set forth in or
contemplated by the Registration Statement, or, if there was any such
decrease, setting forth the amount of such decrease;
(iv) stating that they have compared specific
dollar amounts, numbers of Securities, percentages of revenue and earnings,
statements and other financial information pertaining to the Company set
forth in the Prospectus in each case to the extent that such amounts,
numbers, percentages, statements and information may be derived from the
general accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal counsel, with
the results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures did not constitute an
examination in accordance with generally accepted auditing standards) set
forth in the letter and found them to be in agreement; and
(v) statements as to such other matters
incident to the transaction contemplated hereby as the Underwriters may
reasonably request.
(k) At the Closing Date and each Option Closing Date,
the Underwriters shall have received from S. W. Hatfield + Associates, a
letter, dated as of the Closing Date, or Option Closing Date, as the case
may be, to the effect that they reaffirm that statements made in the letter
furnished pursuant to Subsection (j) of this Section, except that the
specified date referred to shall be a date not more than five days prior to
the Closing Date and, if the Company has elected to rely on Rule 430A of
the Rules and Regulations, to the further effect that they have carried out
procedures as specified in clause (iii) of subsection (j) of this Section
with respect to certain amounts, percentages and financial information as
specified by the Underwriters and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages
and financial information to be in agreement with the records specified in
such clause (iii).
(l) On each of the Closing Date and the Option Closing
Date, if any, there shall have been duly tendered to the Underwriters for
the several Underwriters' accounts the appropriate number of Securities.
(m) No order suspending the sale of the Securities in
any jurisdiction designated by the Underwriters pursuant to subsection (e)
of Section 4 hereof shall have been issued on either the Closing Date or
the Option Closing Date, if any, and no proceedings for that purpose shall
have been instituted or to its knowledge or that of the Company shall be
contemplated.
If any condition to the Underwriters' obligations
hereunder to be fulfilled prior to or at the Closing Date or the relevant
Option Closing Date, as the case may be, is not so fulfilled, the
Underwriters may terminate this Agreement or, if the Underwriters so elect,
it may waive any such conditions which have not been fulfilled or extend
the time for their fulfillment.
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7. Indemnification.
(a) The Company agrees to indemnify and hold harmless
each of the Underwriters, including specifically each person who may be
substituted for an Underwriter as provided in Section 11 hereof and each
person, if any, who controls any Underwriter ("controlling person") within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any and all losses, claims, damages, expenses or liabilities, joint
or several (and actions in respect thereof), whatsoever (including but not
limited to any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever), as such are incurred, to which such
Underwriter or such controlling person may become subject under the Act,
the Exchange Act or any other federal or state statutory laws or
regulations at common law or otherwise or under the laws of foreign
countries arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained (i) in any Preliminary
Prospectus (except that the indemnification contained in this paragraph
with respect to any preliminary prospectus shall not inure to the benefit
of the Underwriter or to the benefit of any person controlling the
Underwriter on account of any loss, claim, damage, liability or expense
arising from the sale of the Securities by the Underwriter to any person if
a copy of the Prospectus, as amended or supplemented, shall not have been
delivered or sent to such person within the time required by the Act, and
the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus, as amended and supplemented, and such
correction would have eliminated the loss, claim, damage, liability or
expense), the Registration Statement or the Prospectus (as from time to
time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is
included securities of the Company issued or issuable upon exercise of the
Underwriters' Warrant; or (iii) in any application or other document or
written communication (in this Section 8 collectively called "application")
executed by the Company or based upon written information furnished by the
Company in any jurisdiction in order to qualify the Securities under the
securities laws thereof or filed with the Commission, any state securities
commission or agency, Nasdaq Stock Market, Inc. or any other securities
exchange; or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein
not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), unless such statement or
omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or
on behalf of such Underwriter expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any amendment
thereof or supplement thereto, in any post-effective amendment, new
registration statement or prospectus or in any application, as the case may
be, or (iv) any failure of the Company to comply with any provision of this
Underwriting Agreement resulting in a claim or loss to the Underwriters.
The indemnity agreement in this subsection (a) shall be in
addition to any liability which the Company may have at common law or
otherwise.
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(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the Registration Statement, and each
other person, if any, who controls the Company within the meaning of
Section 20 of the Act or Section 20 of the Exchange Act to the same extent
as the foregoing indemnity from the Company to the Underwriters but only
with respect to statements or omissions, if any, made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment
thereof or supplement thereto in any post-effective amendment, new
registration statement or prospectus, or in any blue sky application or any
other such application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment
thereof or supplement thereto or in any post-effective amendment, new
registration statement or prospectus, or in any such application, provided
that such written information or omissions only pertain to disclosures in
the Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto, in any post-effective amendment,
new registration statement or prospectus or in any such application,
provided, further, that the liability of each Underwriter to the Company
shall be limited to the amount of the net proceeds of the Offering received
by the Company. The Company acknowledges that the statements with respect
to the public offering of the Securities set forth under the heading
"Underwriting" and the stabilization legend and the last paragraph of the
cover page in the Prospectus have been furnished by the Underwriters
expressly for use therein and any information furnished by or on behalf of
the Underwriter filed in any jurisdiction in order to qualify the
Securities under State Securities laws or filed with the Commission, the
NASD or any securities exchange constitute the only information furnished
in writing by or on behalf of the Underwriters for inclusion in the
Prospectus and the Underwriters hereby confirm that such statements and
information are true and correct.
(c) Promptly after receipt by an indemnified party
under this Section 7 of notice of the commencement of any action, suit or
proceeding, such indemnified party shall, if a claim in respect thereof is
to be made against one or more indemnifying parties under this Section 7,
notify each party against whom indemnification is to be sought in writing
of the commencement thereof (but the failure so to notify an indemnifying
party shall not relieve it from any liability which it may have under this
Section 7 except to the extent that it has been prejudiced in any material
respect by such failure or from any liability which it may have otherwise
avoided). In case any such action is brought against any indemnified party,
and it notifies an indemnifying party or parties of the commencement
thereof, the indemnifying party or parties will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing the
indemnified party or parties shall have the right to employ its or their
own counsel in any such case but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying
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parties in connection with the defense of such action at the expense of the
indemnifying party, (ii) the indemnifying parties shall not have employed
counsel reasonably satisfactory to such indemnified party to have charge of
the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnifying party or parties
shall have reasonably concluded that there may be defenses available to it
or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties
shall not have the right to direct the defense of such action on behalf of
the indemnified party or parties), in any of which events such fees and
expenses of one additional counsel shall be borne by the indemnifying
parties. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection
with any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action
effected without its written consent; provided however, that such consent
was not unreasonably withheld.
(d) In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes claim for
indemnification pursuant to this Section 7, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Section 7
provide for indemnification in such case, or (ii) contribution under the
Act may be required on the part of any indemnified party, then each
indemnifying party in lieu of indemnifying such indemnified party shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, expenses or liabilities (or actions
in respect thereof) (A) in such proportion as is appropriate to reflect the
relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand from the offering
of the Securities or (B) if the allocation provided by clause (A) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (A) above but
also the relative fault of each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable
considerations. In any case where the Company is the contributing party
and the Underwriters are the indemnified party the relative benefits
received by the Company on the one hand, and the Underwriters, on the
other, shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Securities (before deducting expenses)
bear to the total underwriting discounts and commissions received by the
Underwriters hereunder, in each case as set forth in the table on the Cover
Page of the Prospectus. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Underwriters and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
amount paid or payable by an indemnified party as a result of the losses,
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<PAGE> 35
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subdivision (d), the Underwriters
shall not be required to contribute any amount in excess of the amount of
the net proceeds of the Offering received by the Company. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this Section 7, each
person, if any, who controls the Company within the meaning of the Act,
each officer of the Company who has signed the Registration Statement, and
each director of the Company shall have the same rights to contribution as
the Company, subject in each case to this subparagraph (d). Any party
entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in
respect to which a claim for contribution may be made against another party
or parties under this subparagraph (d), notify such party or parties from
whom contribution may be sought, but the omission so to notify such party
or parties shall not relieve the party or parties from whom contribution
may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to the extent that such
party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or
otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant
hereto, shall be deemed to be representations, warranties and agreements at
the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the indemnity
agreements contained in Section 7 hereof, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf
of any Underwriter, the Company, or any controlling person, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters.
9. Effective Date.
This Agreement shall become effective: (i) upon the execution and
delivery hereof by the parties hereto; or (ii) if, at any time this
Agreement is executed and delivered, it is necessary for the Registration
Statement or a post-effective amendment thereto to be declared effective
before the offering of the Shares may commence, when notification on
_________________ of the effectiveness of the Registration Statement or
such post-effective amendment has been released by the Commission. Until
such time as this Agreement shall have become effective, it may be
terminated by the Company, by notifying you, or by you, as Representatives
of the several Underwriters, by notifying the Company.
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10. Termination.
(a) The Underwriters shall have the right to terminate
this Agreement (i) if any calamitous domestic or international event or act
or occurrence has materially disrupted, or in the Underwriters' opinion
will in the immediate future materially disrupt general securities markets
in the United States; or (ii) if trading on the New York Stock Exchange,
the American Stock Exchange, the Nasdaq National Market, or in the
over-the-counter market shall have been suspended or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required on the over-the-counter market by the
NASD or by order of the Commission or any other government authority having
jurisdiction; or (iii) if the United States shall have become involved in a
war or major hostilities; or (iv) if a banking moratorium has been declared
by a New York State or federal authority; or (v) if a moratorium in foreign
exchange trading has been declared; or (vi) if the Company shall have
sustained a material adverse loss, whether or not insured, by reason of
fire, flood, accident or other calamity that materially impairs the
investment quality of the Securities; or (vii) if there shall have been
such material adverse change in the conditions or prospects of the Company,
involving a change not contemplated by the Registration Statement.
(b) Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 9 and 10
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 shall not be in any way affected by such election
or termination or failure to carry out the terms of this Agreement or any
part hereof.
11. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify
the termination of this Agreement under the provisions of Section 6,
Section 10 or Section 12 hereof) to purchase the Securities which it or
they are obligated to purchase on such date under this Agreement (the
"Defaulted Securities), the Underwriters shall have the right, within 24
hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other Underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Underwriters shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not
exceed 10% of the total number of Firm Securities to be purchased on such
date, the non-defaulting Underwriters shall be obligated to purchase the
full amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
nondefaulting Underwriters; or
(b) if the number of Defaulted Securities exceeds 10%
of the total number of Firm Securities, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriters.
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No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in
a termination of this Agreement, the Underwriters shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or
in any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the
Closing Date or any Option Closing Date, as applicable, to sell and deliver
the number of Securities which it is obligated to sell hereunder on such
date, then this Agreement shall terminate (or, if such default shall occur
with respect to any Option Securities to be purchased on an Option Closing
Date, the Underwriters may at the Underwriters option, by notice from the
Underwriters to the Company, terminate the Underwriters' several
obligations to purchase Securities from the Company on such date) without
any liability on the part of any non-defaulting party other than pursuant
to Section 5 and Section 7 hereof. No action taken pursuant to this
Section shall relieve the Company from liability, if any, in respect of
such default.
13. Notices. All notices and communications hereunder, except
as herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Underwriters shall be directed
to the Representative at J.P. Turner & Company, L.L.C., 3340 Peachtree
Road, Suite 450, Atlanta, GA 30326, with a copy to Johnson & Montgomery,
One Buckhead Plaza, 3060 Peachtree Road, N.W., Suite 400, Atlanta, Georgia
30305, Attention: Robert E. Altenbach, Esq. Notices to the Company shall
be directed to the Company.
14. Parties. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Underwriters, the Company and the
controlling persons, directors and officers referred to in Section 7
hereof, and their respective successors, legal representatives and assigns,
and their respective heirs and legal representatives and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Agreement or any
provisions herein contained. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such
purchase.
15. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Georgia
without giving effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original,
and all of which taken together shall be deemed to be one and the same
instrument.
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<PAGE> 38
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
KARTS INTERNATIONAL INCORPORATED
By:
-----------------------------------
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN
ON BEHALF OF THEMSELVES AND THE OTHER SEVERAL UNDERWRITERS
NAMED IN SCHEDULE I HERETO:
J.P. Turner & Company, L.L.C., as
Representative of the Several Underwriters
By:
--------------------------------------------------------------
Name:
-----------------------
Title: Chairman
Page 38
<PAGE> 39
SCHEDULE I
<TABLE>
<CAPTION>
Underwriter Number of Securities
----------- --------------------
<S> <C>
J.P. Turner & Company, L.L.C. 1,400,000 Shares of Common Stock
1,400,000 Redeemable Common Stock
Purchase Warrants
</TABLE>
Page 39
<PAGE> 40
SCHEDULE II
Warrant Agent - Securities Transfer Corporation
Page 40
<PAGE> 1
EXHIBIT 1.2
THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH
OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS
MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933, AS
AMENDED, FORMING A PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE
AMENDMENT THERETO, WHICH IS EFFECTIVE UNDER SAID ACT, OR UNLESS IN THE OPINION
OF COUNSEL TO THE CORPORATION, SUCH OFFER AND SALE IS EXEMPT FROM THE
APPLICABLE PROVISIONS OF SECTION 5 OF SAID ACT.
WARRANT
For the Purchase of
_____ Share(s) of Common Stock, Par Value $.001 Per Share
and
_____ Redeemable Common Stock Purchase Warrant(s)
of
KARTS INTERNATIONAL INCORPORATED
Incorporated Under the Laws of the
State of Nevada
Void After 5 P.M. New York, New York, time
on _____________, ________
No. ______________ Warrant to Purchase _____ Shares
THIS IS TO CERTIFY, that, for value received, J.P. Turner & Company,
L.L.C., a Georgia limited liability company (the "Underwriter"), or registered
assigns, is entitled, subject to the terms and conditions hereinafter set forth
on or after ________, 1997, and at any time prior to 5 P.M., New York, New
York, time on ___________, ______, but not thereafter, to purchase _____ shares
of Common Stock, par value $.001 per share ("Common Stock"), and ______
Warrants to purchase ____ share(s) of Common Stock each (the "Warrants"), of
KARTS INTERNATIONAL INCORPORATED, a Nevada corporation (the "Corporation"),
from the Corporation upon payment to the Corporation of $_____ per share of
Common Stock and $_____ per Warrant (the "Purchase Price"), if and to the
extent this Warrant is exercised, in whole or in part, during the period this
Warrant remains in force, subject in all cases to adjustment as provided in
Article II hereof, and to receive certificates representing the Common Stock
and Warrants so purchased, upon presentation and surrender to the Corporation
of this Warrant, with the form of subscription attached hereto duly executed,
and accompanied by payment of the Purchase Price of each Share purchased as
provided herein; provided, however, that the exercise price of each Warrant
shall be $______ per share of Common Stock purchasable upon exercise of a
Warrant, subject to adjustment, but shall contain all other terms and
conditions of a warrant. This Warrant may not be transferred prior to
________________, ______.
<PAGE> 2
ARTICLE I - TERMS OF THE WARRANT
Section 1.01 Subject to the provisions of Sections 1.05 and 3.01
hereof, this Warrant may be exercised at any time and from time to time after
9:00 A.M., New York, New York, time, on __________________, 199__ (the
"Exercise Commencement Date"), but no later than 5:00 P.M., New York, New York,
time on ______________, 19___ (the "Expiration Time"). If _______________,
199__, is a day on which banking institutions are authorized by law to close,
then the date on which this Warrant shall expire shall be the next succeeding
day which shall not be such a day. If this Warrant is not exercised on or
before the Expiration Time it shall become void, and all rights hereunder shall
thereupon cease.
Section 1.02 (1) The holder of this Warrant (the "Holder") may
exercise this Warrant, in whole or in part, upon surrender of this Warrant with
the form of subscription attached hereto duly executed, to the Corporation at
its corporate office located at 109 Northpark Boulevard, Suite 210 Covington,
LA 70433 together with the full Purchase Price for the Securities to be
purchased in lawful money of the United States, or by check, bank draft or
postal or express money order payable in United States dollars to the order of
the Corporation, and upon compliance with and subject to the conditions set
forth herein.
(2) Upon receipt of this Warrant with the form of subscription
duly executed and accompanied by payment of the aggregate Purchase Price for
the Securities for which this Warrant is then being exercised, together with
all taxes applicable upon such exercise, the Corporation shall cause to be
issued certificates for the total number of whole shares of Common Stock and
Warrants for which this Warrant is being exercised in such denominations as are
required for delivery to the Holder, and the Corporation shall thereupon
deliver such certificates to the Holder or its nominee.
(3) In case the Holder shall exercise this Warrant with respect to
less than all of the Securities that may be purchased under this Warrant, the
Corporation shall execute a new Warrant for the balance of the Shares that may
be purchased upon exercise of this Warrant and deliver such new Warrant to the
Holder.
(4) The Corporation covenants and agrees that it will pay when due
and payable any and all taxes that may be payable in respect of the issue of
this Warrant, or the issue of any shares of Common Stock or Warrants upon the
exercise of this Warrant. The Corporation shall not, however, be required to
pay any tax that may be payable in respect of any transfer involved in the
issuance or delivery of this Warrant or of the shares of Common Stock or
Warrants in a name other than that of the Holder at the time of surrender, and
until the payment of such tax the Corporation shall not be required to issue
such shares of Common Stock or Warrants.
Section 1.03 This Warrant may be split-up, combined or exchanged
for another Warrant or Warrants of like tenor to purchase a like aggregate
number of Securities. If the Holder desires to split-up, combine, or exchange
this Warrant, he shall make such request in writing delivered to the
Corporation at its corporate office and shall surrender this Warrant and any
other Warrants to be so
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<PAGE> 3
split-up, combined or exchanged at such office. Upon any such surrender for a
split-up, combination or exchange, the Corporation shall execute and deliver to
the person entitled thereto a Warrant or Warrants, as the case may be, as so
requested. The Corporation shall not be required to effect any split-up,
combination or exchange that will result in the issuance of a Warrant entitling
the Holder to purchase upon exercise a fraction of the Shares. The Corporation
may require the holder to pay a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any split-up, combination or
exchange of Warrants.
Section 1.04 Prior to due presentment for registration or transfer
of this Warrant, the Corporation may deem and treat the Holder, as registered
on the books of the Corporation maintained for that purpose, as the absolute
owner of this Warrant (notwithstanding any endorsement or notation of ownership
or other writing hereon) for the purpose of any exercise hereof and for all
other purposes and the Corporation shall not be affected by any notice to the
contrary.
Section 1.05 Prior to _______, 199__, this Warrant may not be
sold, hypothecated, exercised, assigned, or transferred, except to any member
of the National Association of Securities Dealers, Inc. participating in the
offering contemplated in Section 3.01 hereof and to individuals who are the
bona fide officers or partners of the Underwriter or such members, or any
successor to their respective businesses or pursuant to the laws of descent and
distribution, and thereafter and until its expiration shall be assignable and
transferable in accordance with and subject to the provisions of the Securities
Act of 1933, as amended (the "Act"), if this Warrant is exercised immediately
upon assignment or transfer. If this Warrant is not exercised immediately upon
assignment or transfer, this Warrant shall lapse.
Section 1.06 Any assignment permitted hereunder shall be made by
surrender of this Warrant to the Corporation at its principal office with the
Form of assignment attached hereto duly executed and funds sufficient to pay
any transfer tax. In such event, the Corporation shall, without charge,
execute and deliver a new Warrant in the name of the assignee named in such
instrument of assignment and this Warrant shall promptly be canceled. This
Warrant may be divided or combined with other Warrants that carry the same
rights upon presentation thereof at the corporate office of the Corporation
together with a written notice signed by the Holder, specifying the names and
denominations in which such new Warrants are to be issued.
Section 1.07 Nothing contained in this Warrant shall be construed
as conferring upon the Holder the right to vote or to consent or to receive
notice as a stockholder in respect of any meetings of stockholders for the
election of directors or any other matter, or as having any rights whatsoever
as a stockholder of the Corporation. If, however, at any time prior to the
expiration of this Warrant and prior to its exercise, any of the following
shall occur:
a. the Corporation shall declare any dividend payable in
stock to the holders of its Common Stock or make any other distribution in
property other than cash to the holders of its Common Stock; or
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<PAGE> 4
b. the Corporation shall offer to the holders of its
Common Stock rights to subscribe for or purchase any shares of any class of
stock or any other purchase any shares of any class of stock or any other
rights or options or securities exchangeable for or convertible into shares of
any class of stock; or
c. the Corporation shall effect any reclassification of
its Common Stock (other than a reclassification involving merely the
subdivision or combination of outstanding shares of Common Stock) or any
capital reorganization, or any consolidation or merger (other than a merger in
which no distribution of securities or other property is made to holders of
Common Stock), or any sale, transfer or other disposition of its property,
assets and business substantially as an entirety, or the liquidation,
dissolution or winding up of the Corporation; or
d. the Corporation shall issue any shares of Common
Stock in exchange for shares of preferred stock or indebtedness of the
Corporation, other than upon conversion of such shares of preferred stock or
indebtedness; then, in each such case, the Corporation shall cause notice of
such proposed action to be mailed to the Holder. Such notice shall specify (i)
the date on which the books of the Corporation shall close, or a record be
taken, for determining holders of Common Stock entitled to receive such stock
dividend or other distribution or such rights or options, or the date on which
such reclassification, reorganization, consolidation, merger, sale, transfer,
other disposition, liquidation, dissolution, winding up or exchange shall take
place or commence, as the case may be, (ii) the date as of which it is expected
that holders of record of Common Stock shall be entitled to receive securities
or other property deliverable upon such action, if any such date has been fixed
(on such date in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the right to exercise this
Warrant shall terminate), and (iii) such facts as shall indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Purchase Price and the kind and amount of the Commons Stock and other
securities and property deliverable upon exercise of this Warrant. Such notice
shall be mailed in the case of any action covered by Subsection 1.07(a) and
1.07(b) above, at least ten (10) days prior to the record date of determining
holders of the Common Stock for purposes of receiving such payment or offer,
and in the case of any action covered by Subsection 1.07(c) or 1.07(d) above,
at least ten (10) days prior to the earlier of the date upon which such action
is to take place or any record date to determine holders of Common Stock
entitled to receive such securities or other property.
Without limiting the obligation of the Corporation to provide notice
to the Holder of actions hereunder, it is agreed that failure of the
Corporation to give notice shall not invalidate such action of the Corporation.
Section 1.08 If this Warrant is lost, stolen, mutilated or
destroyed, the Corporation shall, on such reasonable terms as to indemnity or
otherwise as it may impose (which shall, in the case of a mutilated Warrant,
include the surrender thereof), issue a new Warrant of like denomination and
tenor as, and in substitution for, this Warrant, which shall thereupon become
void. Any such new Warrant shall constitute an independent contractual
obligation of the Corporation, whether or not the Warrant so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.
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<PAGE> 5
Section 1.09 (1) The Corporation covenants and agrees that at
all times it shall reserve and kept available for the exercise of this Warrant
such number of authorized shares of Common Stock and Warrants (and shares of
Common Stock underlying such Warrants) as are sufficient to permit the
exercise in full of this Warrant.
(2) Prior to this issuance of any shares of Common Stock upon
exercise of this Warrant or the Warrants, the Corporation shall secure the
listing of such shares upon any securities exchange upon which the shares of
the Corporation's Common Stock may at the time be listed for trading, if any.
(3) The Corporation covenants that all shares of Common Stock when
issued upon the exercise of this Warrant or the Warrants will be validly
issued, fully paid, nonassessable and free of preemptive rights.
ARTICLE II -- ADJUSTMENT OF PURCHASE PRICE
AND NUMBER OF SHARES OF COMMON STOCK
PURCHASABLE UPON EXERCISE
Section 2.01 Subject to the provisions of this Article II, the
Purchase Price in effect from time to time shall be subject to adjustment as
follows:
(a) In the case the Corporation shall (i) declare a dividend or make
a distribution on the outstanding shares of its Common Stock in shares
of its Common Stock, (ii) subdivide the outstanding shares of its
Common Stock into a greater number of shares, (iii) combine the
outstanding shares of its Common Stock into a smaller number of
shares, (iv) issue any shares of its Common Stock shares, (iv) issue
any shares of its Common Stock by reclassification of the Common
Stock, then in each case the Purchase Price in effect immediately
after the record date for such dividend or distribution or the
effective date of such subdivision, combination or reclassification
shall be adjusted so that it shall equal the price determined by
multiplying the Purchase Price in effect immediately prior thereto by
a fraction, of which the numerator shall be the number of shares of
Common Stock outstanding immediately before such dividend,
distribution, subdivision, combination or reclassification, and of
which the denominator shall be the number of shares of Common Stock
outstanding immediately after such dividend, distribution,
subdivision, combination or reclassification. Any shares of Common
Stock of the Corporation issuable in payment of a dividend shall be
deemed to have been issued immediately prior to the record date for
such dividend.
(b) All calculations under this Section 2.01 shall be made to the
nearest whole cent.
Section 2.02 No adjustment in the Purchase Price in accordance
with the provisions of Subsection 2.01(a) hereof need be made if such
adjustment would amount to a change of less than 1% in such Purchase Price;
provided that the amount by which any adjustment is not
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<PAGE> 6
made by reason of the provisions of this Section 2.02 shall be carried forward
and taken into account at the time of any subsequent adjustment in the Purchase
Price.
Section 2.03 Upon each adjustment of the Purchase Price pursuant
to Subsection 2.01(a) each Warrant shall thereupon evidence the right to
purchase Shares comprised of the same number of Warrants and that number of
shares of Common Stock (calculated to the nearest whole share) obtained by
multiplying the number of shares of Common Stock purchasable immediately prior
to such adjustment and dividing the product so obtained by the Purchase Price
in effect immediately after such adjustment.
Section 2.04 In case of any capital reorganization, other than in
the cases referred to in Section 2.01 hereof, or the consolidation or merger of
the Corporation with or into another corporation (other than a merger or
consolidation in which the Corporation is the merger or consolidation in which
the Corporation is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock or the conversion of
the outstanding shares of Common Stock into shares of other stock or other
securities or property), or the sale of the property of the Corporation as an
entirety or substantially as an entirety, or the conversion, however effected,
of the Corporation into another form of entity (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of any Warrant (as to the shares of Common Stock
subject thereto and in lieu of the number of shares of Common Stock theretofore
deliverable) the number of shares of stock or other securities or property to
which a holder of the number of shares of Common Stock that would otherwise
have been deliverable upon the exercise of such Warrant would have been
entitled upon such Reorganization if such Warrant had been exercised in full
immediately prior to such Reorganization. In case of any Reorganization,
appropriate adjustment, as determined in good faith by the Board of Directors
of the Corporation, shall be made in the application of the provisions herein
set forth with respect to the rights and interests of Warrant holders so that
the provisions set forth herein shall thereafter be applicable, as nearly as
possible, in relation to any shares or other property thereafter deliverable
upon exercise of Warrants. The Corporation shall not effect any such
Reorganization, unless upon or prior to the consummation thereof the successor
entity, or if the Corporation shall be the surviving entity in any such
Reorganization and is not the issuer of the shares of stock or other securities
or property to be delivered to holders of shares of the Common Stock
outstanding at the effective time thereof, then such issuer shall assume by
written instrument the obligation to deliver to the Holder such shares of
stock, securities, cash or other property as the Holder shall be entitled to
purchase in accordance with the foregoing provisions. In the event of a sale
or conveyance or other transfer of all or substantially all of the assets of
the Corporation as a part of a plan for liquidation of the Corporation, all
rights to exercise any Warrant shall terminate on the date such sale or
conveyance or other transfer is to be consummated.
Section 2.05 The Corporation may select a firm of independent
certified public accountants acceptable to the Holder hereof, which selection
may be changed from time to
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<PAGE> 7
time, to verify the computations made in accordance with this Article II. The
certificate, report or other written statement of any such firm shall be
conclusive evidence of the correctness of any computation made under this
Article II.
Section 2.06 Irrespective of any adjustments pursuant to this
Article II, Warrants theretofore or thereafter issued need not be amended or
replaced, but certificates thereafter issued shall bear an appropriate legend
or other notice of any adjustments.
Section 2.07 The Corporation shall not be required upon the
exercise of any Warrant to issue fractional shares of Common Stock that may
result from adjustments in accordance with this Article II to the Purchase
Price or number of shares of Common Stock purchasable under each Warrant. If
more than one Warrant is exercised at one time by the same Holder, the number
of full shares of Common Stock and Warrants that shall be deliverable shall be
computed based on the number of shares of Common Stock and Warrants
deliverable in exchange for the aggregate number of Warrants exercised. With
respect to any final fraction of a share called for upon the exercise of any
Warrant or Warrants, the Corporation shall pay a cash adjustment in respect of
such final fraction in an amount equal to the same fraction of the market value
of a share of Common Stock on the business day next preceding the date of such
exercise. The Holder, by his acceptance of the Warrant, shall expressly waive
any right to receive any fractional share of Common Stock upon exercise of the
Warrants. For the purposes of this Section 2.07, the market price per share of
Common Stock at any date shall mean the last reported sale price regular way
or, in case no such reported sale takes place on such date, the average of the
last reported bid and asked prices regular way, in either case on the principal
national securities exchange on which the Common Stock is admitted to trading
or listed if that is the principal market for the Common Stock or if not listed
or admitted to trading on any national securities exchange or if such national
security exchange is not the principal market for the Common Stock, the closing
bid price (or closing sales price, if reported) as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System or its
successor, if any. If the price of the Common Stock is not so reported, then
such market price shall mean the last known price paid per share by a purchaser
of such stock in an arms' length transaction. All calculations under this
Section 2.07 shall be made to the nearest 1/100th of a share.
Section 2.08 In no event shall the Purchase Price be adjusted
below the par value per share of the Common Stock.
ARTICLE III
REGISTRATION UNDER THE SECURITIES ACT OF 1933
Section 3.01 The sale of this Warrant and the shares of Common
Stock and the Warrants issuable upon exercise of this Warrant have been
registered under the Act on Form SB-2, SEC File No. 333-24145 (the
"Registration Statement").
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<PAGE> 8
Upon exercise, in part or in whole, of this Warrant, the certificates
representing in the Warrants shall bear the legend specified thereby and the
certificates representing the shares of Common Stock upon such exercise and the
shares issuable upon exercise of the Warrants shall bear the following legend:
"The shares represented by this certificate have been registered under
the Securities Act of 1933, as amended, solely for sale to the holder of a
warrant to purchase, which holder may be deemed to be an underwriter of such
shares within the provisions and for purposes only of the Securities Act of
1933, as amended. The issuer of these shares will agree to a transfer hereof
only if (1) an amended or supplemented prospectus setting forth the terms of
the offer has been filed as part of a post-effective amendment to the
Registration Statement under which these shares are registered or as part of a
new registration statement, if then required, and such post-effective amendment
or new registration statement has become effective under the Securities Act of
1933, as amended, or (2) counsel to the issuer is satisfied that no such
post-effective amendment or new registration statement is required."
The Corporation agrees that it shall be satisfied that no
post-effective amendment or new registration statement is required for the
public sale of the shares of Common Stock if it shall be presented with a
letter from the Staff of the Securities and Exchange Commission (the
"Commission") stating in effect that, based upon stated facts that the
Corporation shall have no reason to believe are not true in any material
respect, the Staff of the Commission will not recommend any action to the
Commission if such shares are offered and sold without delivery of a
prospectus, and that, therefore, no post-effective amendment to the
Registration Statement under which the sale of such shares is registered or new
registration statement is required to be filed.
Section 3.02 The Corporation agrees and undertakes that, upon written
request of the then holder(s) of not less than 50% of the total Warrants that
were originally issued to the Underwriter, made at any time within the period
commencing one year after ________________, 19___, and ending five (5) years
after the effective date of the Registration Statement, the Corporation will
file not more than once a registration statement or offering statement under
the Act, registering or qualifying, as the case may be, the sale of the Common
Stock underlying the Warrants and the Warrants (which are deliverable upon
exercise of the Warrants). The Corporation must file a registration statement
or offering statement if the Common Stock underlying the Warrants and such
Warrants cannot be sold under Regulation A because of the limited exemption.
The Corporation agrees to use its best efforts to cause the above filing to
become effective. All expenses of such registration or qualification,
including but not limited to, legal, accounting and printing fees, will be paid
by the Corporation.
In addition to the above, the Corporation understands and agrees that
if at any time during the period referred to above it should file a
registration statement or offering
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<PAGE> 9
statement pursuant to the Act for a public offering of securities, the
Corporation, at its own expense, will offer to the Holder the opportunity to
register or qualify the offering and sale of the Shares underlying the Warrants
and the Warrants (which are deliverable upon exercise of the Warrants)
(limited, in the case of a Regulation A offering, to the amount of the
available exemption remaining after all shares of Common Stock to be offered by
the Company have been accommodated). This paragraph is not applicable to a
registration statement filed with the Commission on Form S-4 or S-8, or any
successor Forms, and shall apply only if at least 25% of the underlying shares
of Common Stock of this Warrant and such Warrants are so presented for sale.
Section 3.03 In connection with any registration under Section 3.02
hereof, the Corporation covenants and agrees as follows:
(a) The Corporation shall use its best efforts to
have any post-effective amendment or new registration statement declared
effective at the earliest possible time, and shall furnish such number of
prospectuses as shall reasonably be requested by the Holder selling Shares.
(b) The Corporation shall pay all costs, fees, and
expenses in connection with all post-effective amendments or new registration
statements under Section 3.02 hereof including, without limitation, the
Corporation's legal and accounting fees, printing expenses, blue sky fees and
expenses, except that the Corporation shall not pay any of the following costs,
fees or expenses: (i) underwriting discounts and commissions allocable to the
Shares, (ii) state transfer taxes, (iii) brokerage commissions and (iv) fees
and expenses of counsel and accountants for the holders of the Warrants,
Warrants, and/or shares of Common Stock.
(c) The Corporation will take all necessary action
to qualify or register the securities included in a post-effective amendment or
new registration statement for offering and sale under the securities or blue
sky laws of such states as are requested by the holders of such securities,
provided that the Corporation shall not be obligated to execute or file any
general consent to service of process or to qualify as a foreign corporation to
do business under the law of any such jurisdiction.
(d) The Holder shall be entitled to pay the
Purchase Price for the Securities and the exercise price of the underlying
Warrants purchasable upon the exercise of this Warrant out of the proceeds of
any sale of the securities purchasable upon their exercise, provided such
exercise and sale occur simultaneously.
Section 3.04 (a) The Corporation shall indemnify and hold harmless
each person registering the sale of securities pursuant to this Article III
(the "Seller") and each underwriter, within the meaning of the Act, who may
purchase from or sell for any Seller any of the Shares from and against any and
all losses, claims, damages and liabilities caused by any
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<PAGE> 10
untrue statement or alleged untrue statement of a material fact contained in
any post-effective amendment or new registration statement or any supplemented
prospectus under the Act included therein required to be filed or furnished by
reason of Section 3.02, or caused by any omission or alleged omission to state
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished or required to be furnished in writing to the
Corporation by such Seller or underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such Seller
or underwriter within the meaning of the Act; provided, however, that the
indemnity agreement by the Corporation set forth in this Section 3.04 with
respect to any prospectus that shall be subsequently amended or supplemented
prior to the written confirmation of the sale of any securities shall not inure
to the benefit of any Seller or underwriter from whom the person asserting such
securities that are the subject thereof (or to the benefit of any person
controlling such Seller or underwriter), if such Seller or underwriter failed
to send or give a copy of the prospectus as amended or supplemented to such
person at or prior to written confirmation of the sale of such securities to
such person and if such amended or supplemented prospectus did not contain any
untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such cause, claim, damage or liability.
(b) Each Seller that avails itself of the procedures
under Article III shall indemnify, and secure the agreement of any underwriter
which the Seller employs to indemnify, the Corporation, its directors, each
officer signing the related post-effective amendment or registration statement
and each person, if any, who controls the Corporation within the meaning of the
Act from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact
contained in any post-effective amendment or registration statement or any
prospectus required to be filed or furnished by reason of Section 3.02, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, insofar as such losses, claims, damages or liabilities are caused
by any untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished in writing to the Corporation by any
such Seller or underwriter expressly for use therein.
Section 3.05 The agreements in this Article III shall continue in
effect regardless of the exercise and surrender of this Warrant.
ARTICLE IV -- OTHER MATTERS
Section 4.01 The Corporation will from time to time promptly pay,
subject to the provisions of paragraph (4) of Section 1.02 hereof, all taxes
and charges that may be imposed upon the Corporation in respect of the issuance
or delivery of this Warrant or the shares of Common Stock and Warrants
purchasable upon the exercise of this Warrant.
-10-
<PAGE> 11
Section 4.02 All the covenants and provisions of this Warrant by
or for the benefit of the Corporation shall bind and inure to the benefit of it
successors and assigns hereunder.
Section 4.03 Notices or demands pursuant to this Warrant to be
given or made by the Holder to or on the Corporation shall be sufficiently
given or made if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed, until another address is designated
in writing by the Corporation, as follows:
Karts International Incorporated
109 Northpark Boulevard, Suite 210
Covington, LA 70433
Attention: President
Notices to the Holder provided for in this Warrant shall be deemed given or
made by the Corporation if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Corporation.
Section 4.04 The validity, interpretation and performance of this
Warrant shall be governed by the substantive laws of the State of ____________.
Section 4.05 Nothing in this Warrant expressed and nothing that may be
implied from any of the provisions hereof is intended, or shall be construed,
to confer upon, or give to, any person or corporation other than the
Corporation and the Holder any right, remedy or claim under promise or
agreement hereof, and all covenants, conditions, stipulations, promises and
agreements contained in this Warrant shall be for the sole and exclusive
benefit of the Corporation and its successors and of the Holder, its successors
and, if permitted, its assignees.
Section 4.06 The headings herein are for convenience only and are not
part of this Warrant and shall not affect the interpretation thereof.
IN WITNESS WHEREOF, this, Warrant has been duly executed by the Corporation
under its corporate seal as of the ____ day of __________, 1997.
KARTS INTERNATIONAL INCORPORATED
---------------------------------------
[CORPORATE SEAL] Name:
------------------------------
Title:
-----------------------------
Attest:
- ------------------------------
Secretary
-11-
<PAGE> 12
KARTS INTERNATIONAL INCORPORATED
Subscription Form
(To be executed by the registered holder to exercise the right to purchase
Common Stock and Warrants evidenced by the foregoing warrant)
Karts International Incorporated
109 Northpark Boulevard, Suite 210
Covington, LA 70433
The undersigned hereby irrevocably subscribes for the purchase of
_____ shares of your Common Stock and ____ Warrants to purchase ___ shares of
your Common Stock pursuant to and in accordance with the terms and conditions
of this Warrant, and herewith makes payment, covering the purchase of such
Securities. Certificates for the shares of Common Stock and the Warrants
should be delivered to the undersigned at the address stated below. If such
number of Securities shall not be all of the Securities purchasable hereunder,
please deliver a new Warrant of like tenor for the balance of the remaining
Securities purchasable hereunder to the undersigned at the address stated
below.
The undersigned agrees that: (1) the undersigned will not offer,
sell, transfer or otherwise dispose of any such shares of Common Stock being
purchased hereunder or the shares of Common Stock underlying the Warrants
being purchased hereunder unless either (a) a registration statement, or
post-effective amendment thereto, covering the sale of such shares of Common
Stock has been filed with the Securities and Exchange Commission pursuant to
the Securities Act of 1933, as amended (the "Act"), and such sale, transfer or
other disposition is accompanied by a prospectus meeting the requirements of
Section 10 of the Act forming a part of such registration statement, or
post-effective amendment thereto, which is in effect under the Act covering the
sale of the shares of Common Stock to be sold, transferred or otherwise
disposed of, or (b) counsel acceptable to Karts International Incorporated and
satisfactory to the undersigned has rendered an opinion acceptable to the
Company in writing and addressed to the Company that such proposed offer, sale,
transfer or other disposition of the shares of Common Stock is exempt from the
provisions of Section 5 of the Act in view of the circumstances of such
proposed offer, sale, transfer or other disposition; (2) the Company may notify
the transfer agent for its Common Stock that the certificates for the Common
Stock acquired by the undersigned pursuant hereto are not to be transferred
unless the transfer agent receives advance from the Company that one or both of
the conditions referred to in (1)(a) and (1)(b) above have been satisfied; and
(3) the Company may affix the legend set forth in Section 3.01 of this Warrant
to the certificates for shares of Common Stock hereby subscribed for and
purchasable upon exercise of the Warrants, if such legend is applicable.
Dated: Signed:
----------------- ----------------------------
Signature guaranteed: Address
---------------------------
---------------------------
<PAGE> 13
KARTS INTERNATIONAL INCORPORATED
Assignment Form
(To be executed by the registered holder to effect assignment of the foregoing
warrant)
FOR VALUE RECEIVED _________________________________ hereby sells, assigns and
transfers unto _________________________________ the right to purchase _____
shares of Common Stock, par value $.001 per share and ____ Warrants, to
purchase _____ shares of such Common Stock of the Corporation purchasable
pursuant to the within Warrant, on the terms and conditions set forth therein,
and does hereby irrevocably constitute and appoint____________________ and/or
its transfer agent Attorney, to transfer on the books of the Corporation
Warrants representing such rights, with full power of substitution.
Dated:
------------------
Signed:
------------------------------
Signature guaranteed:
- ------------------------------
<PAGE> 1
EXHIBIT 1.3
FINANCIAL ADVISORY AGREEMENT
THIS AGREEMENT (the "Agreement") is made effective ____________, 1997
between J.P. Turner & Company, L.L.C. ("Consultant") and Karts International
Incorporation (hereinafter the "Company").
RECITALS
A. Company desires to be assured of the association and services of
Consultants in order to avail itself of Consultant's experience, skills and
abilities, and background and knowledge, to facilitate long range planning, and
to execute the Company's business and investment banking needs in an orderly
and efficient manner, and is therefore willing to engage Consultant upon the
terms and conditions herein contained.
B. Consultant agrees to be engaged and retained by the Company and
upon said terms and conditions.
NOW, THEREFORE, in consideration of the recitals, promises and
conditions in this Agreement, the Consultant and Company agree as follows:
1. Consulting Services. Company hereby retains Consultant to become
the investment banking consultant to the Company and to render such advice,
consultation and information to the Board of Directors and the officers of the
Company regarding general financial matters, including, but not limited to,
long-term financial planning, expansions, changes in capital structure,
shareholder relations, the raising of capital from public and private sources,
and investment banking transactions and services, as shall be requested in
writing by the President of the Company from time to time. Consultant agrees,
upon request, to make itself available to render such services as reasonably
requested by the President of the Company and within the scope of this
Agreement.
2. Term. Except as otherwise provided in Section 3(b) of this
Agreement, the term of this Agreement shall be for a period of two (2) years
commencing ___________, 1997.
3. Compensation of Consultants.
a. Advisory Fee. In exchange for the services provided
hereunder, the Company hereby agrees to pay Consultant an advisory fee equal to
$24,000 per year during the term of this Agreement. The Company shall pay
$48,000 (representing prepayment in full of the fees for the two-year term of
this Agreement) to Consultant on the closing date of the Company's public
offering of 1,400,000 shares of the Company's common stock, par value $.001 per
share ("Common Stock") and 1,400,000 redeemable warrants to purchase Common
Stock, underwritten by Consultant.
<PAGE> 2
b. Finder's Fees. In addition to the compensation and
expenses paid or payable to Consultant pursuant to Sections 3(a) and 4 hereof,
the Company agrees that, if a consultant, directly or indirectly, introduces
the Company, during the term of this Agreement, to any person or entity that
during the term hereof or within 18 months following the term hereof, provides
any investment capital, loan or any other equity or debt financing to the
Company or any affiliate thereof, or becomes a party to a merger, acquisition,
joint venture, private placement or other similar transaction with the Company
or any affiliate thereof, then the Company shall pay Consultant a cash finder's
fee. Each cash finder's fee payable to Consultant under this Agreement shall be
calculated as a percentage of the Transaction Value (as defined herein) in
accordance with the following scale:
5% on the first $1,000,000 of the Transaction Value;
4% on the amount from $1,000,001 to $2,000,000;
3% on the amount from $2,000,001 to $3,000,000;
2% on the amount from $3,000,001 to $4,000,000;
1% on the amount from $4,000,001 to $5,000,000;
1% on the amount in excess of $5,000,000.
"Transaction Value" shall mean the aggregate value of all
cash, securities and other property (i) paid to the Company, its affiliates or
their shareholders in connection with any transaction referred to above
involving any investment in or acquisition of the Company or any affiliates (or
the assets of either), (ii) paid by the Company or any affiliate in any such
transaction involving an investment in or acquisition of another party or its
equity holdings by the Company or any affiliate, or (iii) paid or contributed
by the Company or any affiliate and by the other party or parties in the event
of any such transaction involving a merger, consolidation, joint venture or
similar joint enterprise or undertaking. The value of any such securities
(whether debt or equity) or other property shall be the fair market value
thereof as determined by mutual agreement of the Company and the Consultants or
by an independent appraiser jointly selected by the Company and the Consultant.
4. Expenses. Company agrees to pay all reasonable business expenses
authorized in advance by Company in writing and incurred by Consultant in
furtherance of the business of Company, including travel, food, lodging and
entertainment expenses, upon presentation by Consultant of receipt in form
reasonably satisfactory to Company.
5. Relationship of Parties. This Agreement shall not constitute an
employer-employee relationship. It is the intention of each party that each
Consultant shall be an independent contractor and not an employee of the
Company. Consultant shall not have the authority to act as the agent of the
Company except when such authority as specifically delegated to Consultant by
the Company. Subject to the express provisions herein, the manner and means
utilized by Consultant in the performance of Consultant's services hereunder
shall be under the sole control of the Consultant.
-2-
<PAGE> 3
6. Liability of Consultant. The Company acknowledges that all opinions
and advice, whether oral or written, given by Consultant to the Company in
connection with this Agreement are intended solely for the benefit and use of
the Company in considering the transaction to which they relate, and the
Company agrees that no person or entity other than the Company shall be
entitled to make use of or rely upon the advice of Consultants to be given
hereunder, and no such opinion or advice shall be used by the Company for any
other purpose or reproduced, disseminated, quoted or referred to by the Company
in communications with third parties at any time, in any manner or for any
purpose, nor may the Company make any public reference to Consultant or use
Consultant's name in any annual report or any other report or release of the
Company without Consultant's prior written consent, except that the Company
may, without Consultant's further consent, disclose this Agreement (but not the
information provided to the Company by Consultant) in the Company's filings
with the Securities and Exchange Commission, if such disclosure is required by
law.
7. Notices. Any notice, request, demand or other communication
required or permitted hereunder shall be deemed to be properly given when
personally served in writing or when deposited in the United States mail,
postage prepaid, addressed to the other party at the address appearing at the
end of this Agreement. Either party may change its address by written notice
make in accordance with this Section.
8. Benefit of Agreement. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective legal
representatives, administrators, executors, successors, subsidiaries and
affiliates.
9. Governing Law. This Agreement is made and shall be governed and
construed in accordance with the laws of the State of Georgia.
10. Assignment. Any attempt by either party to assign any rights,
duties or obligations which arise under this Agreement without the prior
written consent of the other party shall be void, and shall constitute a breach
of the terms of this Agreement.
11. Entire Agreement, Modifications. This Agreement constitutes the
entire agreement between the Company and the Consultant. No promises,
guarantees, inducements or agreements, oral or written, expressed or implied,
have been made other than as contained in this Agreement. This Agreement can
only be modified or changed in writing signed by the party or parties to be
charged.
12. Termination. This Agreement shall automatically terminate after
the initial two (2) year term. If terminated by the Company, such action shall
not alter Company's obligation to pay Consultant the agreed upon full
compensation described in this Agreement.
13. Litigation Expenses. If any action is brought by either party to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and disbursements in addition to
any other relief to which it may be entitled.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date indicated at the beginning of this Agreement.
J.P. Turner & Company, L.L.C.
3340 Peachtree Road, NE, Suite 450
Atlanta, Georgia 30326
Dated:
---------------------- ---------------------------------------
Name:
---------------------------------
Title:
--------------------------------
Karts International Incorporated
109 Northpark Boulevard, Suite 210
Covington, Louisiana 70433
Dated:
---------------------- ---------------------------------------
Name:
---------------------------------
Title:
--------------------------------
-4-
<PAGE> 1
EXHIBIT 1.4
August ___, 1997
J. P. Turner & Company, L.L.C.
3340 Peachtree Road, Suite 450
Atlanta, Georgia 30326
RE: KARTS INTERNATIONAL INCORPORATED - LOCK-UP AGREEMENT
CONVERTIBLE PREFERRED STOCKHOLDERS
Gentlemen:
The undersigned understands that Karts International Incorporated (the
"Company") has filed a Registration Statement on Form SB-2 (the "Registration
Statement") with the Securities and Exchange Commission in connection with a
proposed public offering (the "Offering") underwritten by Argent Securities,
Inc. (the "Underwriter") of 1,400,000 shares of common stock, par value $.001
per share (the "Common Stock") and 1,400,000 warrants (the "Warrants") to
purchase shares of Common Stock. In addition, the Underwriter has been granted
an option to purchase from the Company up to an additional aggregate of 210,000
shares of Common Stock and 210,000 Warrants for the sole purpose of covering
over-allotments, if any.
In connection with the Offering, the undersigned agrees that, except
as hereinafter provided, such undersigned will not, without the Underwriter's
prior written consent, sell, contract to sell or otherwise dispose of any
shares of Common Stock issued upon conversion of the Preferred Shares, 1996
Warrants, common stock issued upon exercise of the 1996 Warrants, options,
convertible securities, or other equity securities of the Company (including
any other securities of the Company issuable upon exercise or conversion of any
warrants, options or convertible securities), now owned or hereinafter
acquired, whether directly or indirectly or beneficially (as defined in Section
13 of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder) by such undersigned (all such securities
referred to collectively herein as the "Securities") for a period of eighteen
months from the effective date ("Effective Date") of the Registration
Statement.
Notwithstanding the foregoing, the undersigned reserves the right to
sell or otherwise dispose of the Securities owned by such undersigned in a
privately negotiated transaction, provided that (i) the purchaser agrees in
advance in writing with the Underwriters to the restrictions on transfer of the
Securities set forth herein and (ii) the disposition is otherwise in accordance
with the federal securities and other laws.
<PAGE> 2
Argent Securities, Inc.
August ___, 1997
Page 2
Further, during the four year period following the Effective Date of
the Registration Statement, the undersigned grants to the Underwriters the
right of first refusal to sell any and all securities owned by the undersigned
which the undersigned may desire to sell, provided that the price and terms of
execution offered by the Underwriters are at least favorable as may be obtained
by the undersigned from other brokerage firms.
The undersigned will permit an appropriate restrictive legend to be
applied to all certificates evidencing the Securities and will cause the
transfer agent for the Company to note such restriction on the transfer books
and records of the Company.
This agreement shall be binding upon any pledgee or any transferee of
the undersigned and shall be binding on the heirs, legal representatives,
transferees and assigns of the undersigned. Any attempted sale, transfer or
other disposition in violation of the agreement shall be null and void. The
undersigned acknowledges that this agreement was a material inducement to the
Underwriters to act as the Company's underwriters and agrees that the
Underwriter's remedies at law may be inadequate in the event of a violation of
this agreement and, in such event, agrees to pay the Underwriter's costs and
expenses, including attorney's fees, of enforcing this agreement, which may
include costs of an action seeking to enjoin such violation.
The undersigned hereby represents and warrants that, as of the
Effective Date, the undersigned owns (or will own) the amount and type of
securities set forth below:
---------------------------------------------
---------------------------------------------
---------------------------------------------
-----------------------------------
Signature
-----------------------------------
Print Name
-----------------------------------
Print Address
-----------------------------------
<PAGE> 1
EXHIBIT 1.5
LOCK-UP LETTER AGREEMENT
August __, 1997
J.P. Turner & Company, L.L.C.
3340 Peachtree Road, N.E.
Suite 450
Atlanta, Georgia 30326
Gentlemen:
I am the owner of ________ shares of Common Stock par value of $.01
per share (the "Common Stock") of Karts International Incorporation, a Nevada
corporation (the "Company").
The Company intends to conduct an initial public offering of its
Common Stock ("IPO") which shall be underwritten by, among others, J.P. Turner
& Company, L.L.C. ("J.P. Turner") as expressed in a letter of intent between
the Company and J.P. Turner (the "Letter of Intent") dated January 29, 1997.
The undersigned recognizes the benefits which the Company will derive from the
IPO. For and in consideration of J.P. Turner entering into the Letter of Intent
and its willingness to conduct the IPO contemplated thereby on mutually
acceptable terms, I hereby agree to the following lock-up arrangement
restricting the sale of its Company Common Stock.
A. THE LOCK-UP
1. During the period commencing on the date hereof and ending on the
date which is 60 months from the closing of the IPO (such period herein
referred to as the "Lock-Up Period"), I will not sell, pledge, hypothecate,
grant an option for sale or otherwise dispose of, or transfer or grant any
rights with respect thereto in any manner (either privately or publicly
pursuant to Rule 144 of the General Rules and Regulations under the Securities
Act of 1933, as amended, or otherwise) any of the shares of Common Stock
(directly or indirectly owned or controlled by me on the date hereof) (the
"Securities"), without J.P. Turner's prior written consent; provided, however,
that Securities may be sold or otherwise transferred in a private transaction
during the Lock-Up Period so long as the acquiror of the Securities, by written
agreement with J.P. Turner entered into at the time of acquisition and
delivered to J.P. Turner prior to the consummation of such acquisition, agrees
to be bound by the terms of this Paragraph A.1. for the balance of the Lock-Up
Period, and by the terms of Paragraph A.2. below; and, provided further, that
the Securities, or any portion thereof, may be transferred (I) by any such
transferee to a trust for the benefit of, or as gifts to, either individually
or collectively in any number, such transferee, or his or her spouse and
children, (a "Permitted Transferee") and in such event the trustee of such
trust or donor shall execute this Lock-Up Letter Agreement and agree to be
bound thereby; or (ii) by court order or pursuant to the laws of descent and
distribution.
2. In the event I desire to sell any of the Securities at any time
during the term of the Lock-Up Period or within 12 months after termination of
the Lock-Up Period as described below, publicly under Rule 144 or otherwise, I
will sell such securities through J.P. Turner, so long as the
<PAGE> 2
price and terms of execution offered by J.P. Turner are at least as favorable
as may be obtained from other brokerage firms.
3. Notwithstanding the provision of Paragraph 4 below, on __________,
1999, 2000, and 2001, _______ Shares shall be released from the restrictions
set forth in Paragraph A(i) and may be sold in accordance with the provisions
of Paragraph A(2) above, provided, however, that the price of the Shares must
be equal to or in excess of the price of the Shares sold in the IPO, except for
any sale made before the second anniversary of the Closing Date where the price
of the Shares must be equal to or in excess of $_____ per Share.
4. The Securities shall be released from the restrictions set forth in
paragraph A(1) in the increments indicated below upon the Company's achievement
of three targets for applicable years as set forth in the following table and
the footnotes thereunder (the "Chart").
<TABLE>
<CAPTION>
==========================================================================================
RELEASE PERCENTAGE OF EARNINGS PER SHARE OF
SHARES (A) SHARES (B) STOCK
FYE --------------------------------------------------------- PRICE OF ANNUAL
1/31 Current Cumulative Current Cumulative SHARES(C) REVENUE
- --------- ------------ ---------------- -------------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 0 0 $ $ $ --
1998 0 0 $ $ $ $
1999 $ $ $ $
2000 $ $ $ $
2001 $ $ $ $
2002 $ $ $ $
========= ============ ================ ============== ============ ============= =======
</TABLE>
(a) For the year in which the Company attains (i) the earnings per share (EPS)
on a cumulative basis, (ii) the target stock price for Shares or (iii)
Annual Revenue on a cumulative basis after ______, any Shares not
previously released shall be released in addition to the Shares released
for the applicable year. In addition, for any fiscal year in which the
Company attains earnings per share, target stock price or cumulated Annual
Revenue targets applicable to a subsequent fiscal year, any shares
eligible for release in such subsequent fiscal year shall also be
released. Regardless of whether the EPS target, Target Stock Price or
Annual Revenue is achieved, all of the shares shall be released on
_________.
(b) Earnings per share is defined as net income per share of the Company as
reported in its audited financial statements for the applicable fiscal
year.
- 2 -
<PAGE> 3
(c) The stock price of shares shall be defined as the average of the closing
bid sales price of the Common Stock of the last 20 trading days prior to
the end of the fiscal year.
5. Notwithstanding anything herein to the contrary, all of the
Securities shall be released from the restrictions set forth in paragraph A(1),
to the extent not previously released, on _________________.
B. PROVISIONS APPLICABLE TO SHARES
The Company and the undersigned hereby acknowledge and represent that:
(a) A copy of this Lock-up Agreement will be available from
the Company or its transfer agent upon request and without charge and a copy of
this Lock-Up Agreement may be filed with the Securities Commissions of various
states, including, without limitation, any state securities commission
requiring its availability.
(b) A typed legend will be placed on the reverse side of each
stock certificate representing the Common Stock covered by the Lock-up
Agreement which states that the sale or transfer of the shares evidenced by the
certificate is subject to certain restrictions pursuant to an agreement between
the shareholder (whether beneficial or of record) and J.P. Turner, which
agreement is on file with the Company and the Company's stock transfer agent
from whom a copy is available, upon request and without charge.
(c) The terms and conditions of this Lock-up Agreement can
only be modified (including premature termination thereof), upon the written
consent of J.P. Turner and the prior approval of any state securities
commission which requires such consent.
(d) Stop transfer instructions will be placed with the
transfer agent against all shares of the Company's Common Stock subject to the
restrictions contained in paragraph A(1) of this Lock-up Agreement.
Notwithstanding the foregoing, shares subject to this Lock-Up Agreement may be
transferred by the transfer agent when shares are accompanied by an opinion of
company counsel certifying that such transfer is a permitted transfer.
(e) This Lock-Up Letter Agreement shall terminate and be of
no force and effect if it, or any of J.P. Turner's rights and obligations
hereunder, are assigned to any third party by J.P.
Turner.
(f) With regard to V. Lynn Graybill, the Chairman of the
Board and Chief Executive Officer of the Company, the afore-referenced lock-up
provisions, to which Mr. Graybill would be subject, will be terminated after
the termination of Mr. Graybill's Employment Agreement, unless such Agreement
is otherwise extended.
- 3 -
<PAGE> 4
If this agreement is acceptable to J.P. Turner, please sign the form
of acceptance below and deliver one of the counterparts hereof to me. This will
become a binding agreement between us upon execution by each of the parties
hereto.
Very truly yours,
---------------------------------------
V. Lynn Graybill
---------------------------------------
(Number of Shares Beneficially Owned)
AGREED to and ACCEPTED
this ____ day of August, 1997.
J.P. Turner & Company, L.L.C.
By
-------------------------------
Authorized Signature
- 4 -
<PAGE> 1
EXHIBIT 1.6
LOCK-UP LETTER AGREEMENT
August __, 1997
J.P. Turner & Company, L.L.C.
3340 Peachtree Road, N.E.
Suite 450
Atlanta, Georgia 30326
Gentlemen:
I am the owner of ________ shares of Common Stock par value of $.01
per share (the "Common Stock") of Karts International Incorporation, a Nevada
corporation (the "Company").
The Company intends to conduct an initial public offering of its
Common Stock ("IPO") which shall be underwritten by, among others, J.P. Turner
& Company, L.L.C. ("J.P. Turner") as expressed in a letter of intent between
the Company and J.P. Turner (the "Letter of Intent") dated January 29, 1997.
The undersigned recognizes the benefits which the Company will derive from the
IPO. For and in consideration of J.P. Turner entering into the Letter of Intent
and its willingness to conduct the IPO contemplated thereby on mutually
acceptable terms, I hereby agree to the following lock-up arrangement
restricting the sale of its Company Common Stock.
A. THE LOCK-UP
1. During the period commencing on the date hereof and ending on the
date which is 60 months from the closing of the IPO (such period herein
referred to as the "Lock-Up Period"), I will not sell, pledge, hypothecate,
grant an option for sale or otherwise dispose of, or transfer or grant any
rights with respect thereto in any manner (either privately or publicly
pursuant to Rule 144 of the General Rules and Regulations under the Securities
Act of 1933, as amended, or otherwise) any of the shares of Common Stock
(directly or indirectly owned or controlled by me on the date hereof) (the
"Securities"), without J.P. Turner's prior written consent; provided, however,
that Securities may be sold or otherwise transferred in a private transaction
during the Lock-Up Period so long as the acquiror of the Securities, by written
agreement with J.P. Turner entered into at the time of acquisition and
delivered to J.P. Turner prior to the consummation of such acquisition, agrees
to be bound by the terms of this Paragraph A.1. for the balance of the Lock-Up
Period, and by the terms of Paragraph A.2. below; and, provided further, that
the Securities, or any portion thereof, may be transferred (I) by any such
transferee to a trust for the benefit of, or as gifts to, either individually
or collectively in any number, such transferee, or his or her spouse and
children, (a "Permitted Transferee") and in such event the trustee of such
trust or donor shall execute this Lock-Up Letter Agreement and agree to be
bound thereby; or (ii) by court order or pursuant to the laws of descent and
distribution.
2. In the event I desire to sell any of the Securities at any time
during the term of the Lock-Up Period or within 12 months after termination of
the Lock-Up Period as described below, publicly under Rule 144 or otherwise, I
will sell such securities through J.P. Turner, so long as the
<PAGE> 2
price and terms of execution offered by J.P. Turner are at least as favorable
as may be obtained from other brokerage firms.
3. Notwithstanding the provision of Paragraph 4 below, on __________,
1999, 2000, and 2001, _______ Shares shall be released from the restrictions
set forth in Paragraph A(i) and may be sold in accordance with the provisions
of Paragraph A(2) above, provided, however, that the price of the Shares must
be equal to or in excess of the price of the Shares sold in the IPO, except for
any sale made before the second anniversary of the Closing Date where the price
of the Shares must be equal to or in excess of $_____ per Share.
4. The Securities shall be released from the restrictions set forth in
paragraph A(1) in the increments indicated below upon the Company's achievement
of three targets for applicable years as set forth in the following table and
the footnotes thereunder (the "Chart").
<TABLE>
<CAPTION>
================================================================================================
RELEASE PERCENTAGE OF EARNINGS PER SHARE OF
SHARES (A) SHARES (B) STOCK
FYE ----------------------------- ------------------------------ PRICE OF ANNUAL
1/31 Current Cumulative Current Cumulative SHARES(C) REVENUE
- --------- ----------- ----------------- ------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 0 0 $ $ $ --
1998 0 0 $ $ $ $
1999 $ $ $ $
2000 $ $ $ $
2001 $ $ $ $
2002 $ $ $ $
========= ============ ================ ============== =============== ============= ===========
</TABLE>
(a) For the year in which the Company attains (i) the earnings per share (EPS)
on a cumulative basis, (ii) the target stock price for Shares or (iii)
Annual Revenue on a cumulative basis after ______, any Shares not
previously released shall be released in addition to the Shares released
for the applicable year. In addition, for any fiscal year in which the
Company attains earnings per share, target stock price or cumulated Annual
Revenue targets applicable to a subsequent fiscal year, any shares
eligible for release in such subsequent fiscal year shall also be
released. Regardless of whether the EPS target, Target Stock Price or
Annual Revenue is achieved, all of the shares shall be released on
_________.
(b) Earnings per share is defined as net income per share of the Company as
reported in its audited financial statements for the applicable fiscal
year.
- 2 -
<PAGE> 3
(c) The stock price of shares shall be defined as the average of the closing
bid sales price of the Common Stock of the last 20 trading days prior to
the end of the fiscal year.
5. Notwithstanding anything herein to the contrary, all of the
Securities shall be released from the restrictions set forth in paragraph A(1),
to the extent not previously released, on ________________.
B. PROVISIONS APPLICABLE TO SHARES
The Company and the undersigned hereby acknowledge and represent that:
(a) A copy of this Lock-up Agreement will be available from
the Company or its transfer agent upon request and without charge and a copy of
this Lock-Up Agreement may be filed with the Securities Commissions of various
states, including, without limitation, any state securities commission
requiring its availability.
(b) A typed legend will be placed on the reverse side of each
stock certificate representing the Common Stock covered by the Lock-up
Agreement which states that the sale or transfer of the shares evidenced by the
certificate is subject to certain restrictions pursuant to an agreement between
the shareholder (whether beneficial or of record) and J.P. Turner, which
agreement is on file with the Company and the Company's stock transfer agent
from whom a copy is available, upon request and without charge.
(c) The terms and conditions of this Lock-up Agreement can
only be modified (including premature termination thereof), upon the written
consent of J.P. Turner and the prior approval of any state securities
commission which requires such consent.
(d) Stop transfer instructions will be placed with the
transfer agent against all shares of the Company's Common Stock subject to the
restrictions contained in paragraph A(1) of this Lock-up Agreement.
Notwithstanding the foregoing, shares subject to this Lock-Up Agreement may be
transferred by the transfer agent when shares are accompanied by an opinion of
company counsel certifying that such transfer is a permitted transfer.
(e) This Lock-Up Letter Agreement shall terminate and be of
no force and effect if it, or any of J.P. Turner's rights and obligations
hereunder, are assigned to any third party by J.P.
Turner.
- 3 -
<PAGE> 4
If this agreement is acceptable to J.P. Turner, please sign the form
of acceptance below and deliver one of the counterparts hereof to me. This will
become a binding agreement between us upon execution by each of the parties
hereto.
Very truly yours,
---------------------------------------
---------------------------------------
(Number of Shares Beneficially Owned)
AGREED to and ACCEPTED
this ____ day of August, 1997.
J.P. Turner & Company, L.L.C.
By
--------------------------------
Authorized Signature
- 4 -
<PAGE> 1
EXHIBIT 1.7
_______ Shares of Common Stock
and
______ Redeemable Common Stock Purchase Warrants
KARTS INTERNATIONAL INCORPORATED
SELECTED DEALER AGREEMENT
August ___, 1997
Gentlemen:
We have agreed as the underwriter (the "UNDERWRITER") named in the
enclosed prospectus (the "PROSPECTUS"), subject to the terms and conditions of
an Underwriting Agreement dated May __, 1997 (the "UNDERWRITING AGREEMENT"), to
purchase from Karts International Incorporated., a Nevada corporation (the
"Company") ____ shares of Common Stock, par value $.001 per share (the "PUBLIC
SHARES") and ____ Redeemable Common Stock Purchase Warrants (the "PUBLIC
WARRANTS"). We may also purchase as many as ________ additional shares of
Common Stock and ____ Redeemable Common Stock Purchase Warrants (the "OPTION
SECURITIES") from the Company pursuant to Section 2 (1)) of the Underwriting
Agreement. The Securities are more particularly described in the Prospectus,
additional copies of which will be supplied in reasonable quantities upon
request.
We are offering a portion of the Public Shares and Warrants for sale
to selected dealers (the "SELECTED DEALERS"), among whom we are pleased to
include you, at the public offering price, less a concession in the amount set
forth in the Prospectus under "UNDERWRITING." This offering is made subject to
delivery of the Public Shares and Warrants and their acceptance by the
Underwriter, to the approval of all legal matters by our counsel, and to the
terms and conditions herein set forth, and may be made on the basis of the
reservation of the Public Shares and Warrants or an allotment against
subscription.
We will advise you by telegram of the method and terms of the
offering. Acceptances should be sent to J.P. Turner & Company, L.L.C., 3340
Peachtree Road, N.E., Suite 450, Atlanta, Georgia 30326, Attention: William L.
Mello. Subscription books may be closed by us at any time without notice, and
we reserve the right to reject any subscription in whole or in part, but
notification of allotments against and rejections of subscriptions will be made
as promptly as practicable.
<PAGE> 2
Any of the Public Shares and Warrants purchased by you hereunder are
to be promptly offered by you to the public at the public offering price, as
set forth in the Prospectus, except as herein otherwise provided and except
that a reallowance from any such public offering price not in excess of the
amount set forth in the Prospectus under "UNDERWRITING" may be allowed to
dealers who are members in good standing of the National Association of
Securities Dealers, Inc. (the "NASD"), or foreign dealers or institutions not
eligible for membership in said association who agree to abide by the
conditions with respect to foreign dealers and institutions set forth in your
confirmation below. We may buy Public Shares and Warrants from, or sell Public
Shares and Warrants to, any Selected Dealer, and any Selected Dealer may buy
Public Shares and Warrants from, or sell Public Shares and Warrants to, any
other Selected Dealer at the public offering price less all or any part of the
concession set forth in the Prospectus; after the Public Shares and Warrants
are released for sale to the public, we are authorized to vary the offering
price of the Public Shares and Warrants and other selling terms.
If, prior to the termination of this Agreement, we purchase or
contract to purchase any Public Shares and Warrants which were purchased by you
from us or any Selected Dealer at a concession from the public offering price
(or any Public Shares and Warrants which we believe have been substituted
therefor) you hereby agree that we may: (i) require you to pay us on demand an
amount equal to the concession on such Public Shares and Warrants; (ii) sell
for your account the Public Shares and Warrants so purchased and debit or
credit your account with the loss or profit resulting from such sale; or (iii)
require you to purchase such Public Shares and Warrants at a price equal to the
total cost of such purchase including commissions and transfer taxes (if any)
on redelivery.
Public Shares and Warrants accepted or allotted hereunder shall be
paid for in full at the public offering price, at the office of J.P. Turner &
Company, L.L.C., 3340 Peachtree Road, N.E., Suite 450, Atlanta, Georgia 30326
(or such other place as you may be instructed) prior to 8:30 a.m., New York
City time, on such day after the public offering date as we may advise three
(3) days after the effective date, by certified or official bank check payable
in New York Clearing House funds to the order of J.P. Turner & Company, L.L.C.
against delivery of certificates. If Public Shares and Warrants are purchased
and paid for by you hereunder at the public offering price, the concession will
be paid to you after the termination of this Agreement.
We have been advised by the Company that a registration statement
(Registration No. 333-24145) (the "REGISTRATION STATEMENT") for the Public
Shares and Warrants, filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the benefit of the Company) you will
comply with the applicable requirements of the Act and of the Securities
Exchange Act of 1934, as amended, and the terms and conditions set forth in the
Prospectus. No person is authorized by the Company or the Underwriter to give
or rely on any information or to make any representations not contained in the
Prospectus in connection with the sale of Public Shares and Warrants. You are
not authorized to act as agent for the Company or the Underwriter in offering
the Public Shares and Warrants to the public or otherwise. Nothing contained
herein shall constitute or be construed to make the Selected Dealers partners
with the Underwriter or with one another.
-2-
<PAGE> 3
We shall not be under any liability (except for our own want of good
faith) for or in respect of the validity or value of, or title to, any Public
Shares and Warrants; the form or completeness of, or the statements contained
in, or the validity of, the Registration Statement, any preliminary prospectus,
the Prospectus, or any amendment or supplement thereto or any other letters or
instruments executed by or on behalf of the Company or others; the form or
validity of the agreement for the purchase of the Public Shares and Warrants or
this Agreement; the delivery of the Public Shares and Warrants; the performance
by the Company or others of any agreement on its or their part; or any matter
in connection with any of the foregoing; provided, however, that nothing in
this paragraph shall be deemed to relieve the Underwriter from any liability
under the Act.
You, by your confirmation below, represent that: (i) you are a member
in good standing of the NASD or are a foreign bank or dealer not eligible for
membership in the NASD which agrees to make no offers or sales of Public Shares
and Warrants within the United States, its territories or its possessions, or
to persons who are citizens thereof or residents therein, (ii) neither you nor
any of your directors, officers, partners or "PERSONS ASSOCIATED WITH" you (as
defined in the By-Laws of the NASD) nor, to your knowledge, any "RELATED
PERSON" (as defined by the NASD in its Interpretation of Article III, Section I
of its Rules of Fair Practice, as amended) or any other broker-dealer, have
participated or intend to participate in any transaction or dealing as to which
documents or information are required to be filed with the NASD pursuant to
such Interpretation, and as to which such documents or information have not
been so filed as required.
You agree not to, at any time prior to the termination of this
Agreement, bid for, purchase, sell or attempt to induce others to purchase or
sell, directly or indirectly, any Public Shares and Warrants other than (a) as
provided for in this Agreement or the Underwriting Agreement relating to the
Public Shares and Warrants, or (1)) purchases or sales as broker on unsolicited
orders for the account of others. In making the sales of Public Shares and
Warrants, if you are a member of the NASD, you will comply with all applicable
rules of the NASD, including, without limitation, the NASD's Interpretation of
Article II, Section I of its Rules of Fair Practice with respect to Free-Riding
and Withholding and Section 24 of Article III of the NASD's Rules of Fair
Practice, or if you are a foreign bank or dealer, you agree to comply with such
Interpretation of Sections 8, 24 and 36 of such Article as though you were such
a member and Section 25 of such Article as it applies to a nonmember broker or
dealer in a foreign country. Further, pursuant to Securities Act Release No.
4968, you will distribute a Preliminary Prospectus to all persons reasonably
expected to be purchasers of shares from you at least 48 hours prior to the
time you expect to mail confirmation.
Upon written application to us, we will inform you as to the advice we
have received from counsel concerning the jurisdictions in which the Public
Shares and Warrants have been qualified for sale or are exempt under the
respective securities or blue sky laws of such jurisdictions, but we have not
assumed and will not assume any obligation or responsibility as to the right of
any Selected Dealer to sell the Public Shares and Warrants in any jurisdiction.
-3-
<PAGE> 4
As Underwriter, we shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the offering or
arising thereunder. We shall not be under any obligation to you except for
obligations expressly assumed by us in this Agreement.
You agree, upon our request, at any time or times prior to the
termination of this Agreement, to report to us the number of Public Shares and
Warrants purchased by you pursuant to the provisions hereof which then remain
unsold.
Selected Dealers will be governed by the conditions herein set forth
until this Agreement is terminated. This Agreement will terminate at the close
of business on the 30th business day after the public offering of the Public
Shares and Warrants, but, in our discretion, may be extended by us for a
further period or periods not exceeding 30 business days in the aggregate and
in our discretion, whether or not extended, may be terminated at any earlier
time. Notwithstanding the termination of this Agreement, you shall remain
liable for your proportionate amount of any claim, demand or liability which
may be asserted against you alone, or against you together with other dealers
purchasing Public Shares and Warrants upon the terms hereof, or against us,
based upon the claim that the Selected Dealers, or any of them, constitute an
association, an unincorporated business or other entity.
This Agreement shall be construed in accordance with the laws of the
State of Georgia without giving effect to conflict of laws principles.
In the event that you agree to purchase Public Shares and Warrants in
accordance with the terms hereof, and of the aforementioned telegram, kindly
confirm such agreement by competing and signing the form provided for that
purpose on the enclosed duplicate hereof and returning it to us promptly.
All communications from you should be addressed to J.P. Turner &
Company, L.L.C., 3340 Peachtree Road, N.E., Suite 450, Atlanta, Georgia 30326,
Attention: William L. Mello. Any notice from us to you shall be deemed to have
been duly given if mailed or telegraphed to you at this address to which this
letter is mailed.
Very truly yours,
J.P. Turner & Company, L.L.C.
By:
------------------------------------
Name:
-----------------------------
Title:
----------------------------
-4-
<PAGE> 5
August ___, 1997
J.P. Turner & Company, L.L.C.
3340 Peachtree Road, N.E.
Suite 450
Atlanta, Georgia 30326
Attention: William L. Mello
Gentlemen:
We hereby confirm our agreement to purchase ____ shares of Public
Shares and _____ Warrants (as such term is defined in the Selected Dealer
Agreement), of Karts International Incorporated, subject to the terms and
conditions of the foregoing Agreement and your telegram to us referred to
herein. We hereby acknowledge receipt of the definitive Prospectus relating to
the Public Shares and Warrants, and we confirm that in purchasing Public Shares
and Warrants we have relied upon no statements whatsoever, written or oral,
other than the statements in such Prospectus. We have made a record of our
distribution of preliminary prospectuses and, when furnished with copies of any
revised preliminary prospectus, we have, upon your request, promptly forwarded
copies thereof to each person to whom we had theretofore distributed
preliminary prospectuses. We confirm that we have complied and will comply with
all of the requirements of Rule 15c2-8 of the Securities Exchange Act of 1934.
We hereby represent that we are a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") or, if we are not
such a member, we are a foreign dealer or institution not eligible for
membership in said Association which agrees to make no sales within the United
States, its territories or its possessions or to persons who are citizens
thereof or residents therein. If we are a member of the NASD, we agree to
comply with all applicable rules of the NASD, including, without limitation,
the provisions of Section 24 of Article III of the Rules of Fair Practice of
the NASD, or, if we are such a foreign dealer or institution, we agree to
comply with all applicable rules of the NASD, including, without limitation,
the NASD's Interpretation with Respect to Free-Riding and Withholding and
Sections 8, 24 and 36 of such article as if we were such a member, and Section
25 of such Article as it applies to a non-member broker or dealer in a foreign
country.
<PAGE> 6
Pursuant to your telegram, we hereby subscribe for an allotment of
____ shares of Common Stock and ____ Redeemable Common Stock Purchase Warrants,
and acknowledge a concession of $._____ from the $______ public offering price
of the Public Shares and Warrants.
- ---------------------------------- -------------------------------
Corporate or Firm Name of (Signature of Authorized
Selected Dealer Official or Partner)
- ---------------------------------- -------------------------------
Address Date Accepted
- ---------------------------------- -------------------------------
Telephone Tax I.D.#
-2-
<PAGE> 1
EXHIBIT 4.2
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of ____________, 1997 between Karts
International Incorporated, a Nevada corporation, having its principal place of
business at 109 Northpark Boulevard, Suite 210, Covington, Louisiana 70433,
(the "Company") and Securities Transfer Corporation, a Texas corporation,
having its principal place of business at 16910 Dallas Parkway,
Suite 100, Dallas, Texas 75248 (the "Warrant Agent").
W I T N E S S E T H :
WHEREAS, the Company proposes to issue and sell to the public in a
secondary public offering (the "Secondary Offering") 1,400,000 shares of the
Company's Common Stock, par value $.001 per share ("Shares"), and 1,400,000
Redeemable Common Stock Purchase Warrants (the "Public Warrants") (plus an
additional 210,000 shares and 210,000 Warrants to cover overallotments);
WHEREAS, the Company also proposes to issue and sell to J.P. Turner &
Company, L.L.C. (the "Underwriter") in the Secondary Offering an option to
purchase 140,000 Shares and 140,000 Warrants (the "Underwriter Warrants" and
together with the Public Warrants sometimes hereinafter referred to as the
"Warrants");
WHEREAS, the Warrants shall be evidenced by certificates substantially
in the form of Exhibit A annexed hereto (the "Warrant Certificate"), each
Warrant entitling the holder thereof to purchase one share of Common Stock;
WHEREAS, the Warrants will have an exercise price of $_______ per
share of Common Stock, subject to certain adjustments (the "Warrant Price"),
will be exercisable commencing on the first anniversary of the effective date
of the Secondary Offering ("First Exercise Date") until a date which is the
fifth anniversary of the effective date of the Secondary Offering ("Last
Exercise Date"), unless extended by the Company, and, except for the
Underwriter's Warrants, will be exercisable during any period of time fixed for
that Warrant's redemption in a Redemption Notice (hereinafter defined in
Section 2.03), which period of time will terminate on a stated Redemption
Date (hereinafter defined in Section 2.03);
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act in connection with the
issuance, registration, transfer, exchange and replacement of the Warrant
Certificates and exercise of the Warrants; and
WHEREAS, the Company and the Warrant Agent desire to set forth in this
Agreement the terms and conditions upon which the Warrant Certificates shall be
issued, transferred, exchanged and placed and the Warrants exercised, and to
provide for the rights of the holders of the Warrants;
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and the respective undertakings herein below set forth, the
Company and the Warrant Agent agree as follows:
ARTICLE I
ISSUANCE AND EXECUTION OF WARRANTS
SECTION 1.01. The Company hereby appoints the Warrant Agent to act on
behalf of the Company in accordance with the terms and conditions herein set
forth, and the Warrant Agent hereby accepts such appointment and agrees to
perform the same in accordance with such provisions.
SECTION 1.02. The Warrant Certificates for the Warrants shall be
issued in registered form only. The text of the Warrant Certificate, including
the form of assignment and subscription printed on the reverse side thereof,
shall be substantially in the form of Exhibit A annexed hereto, which text is
hereby incorporated in this Agreement by reference as though fully set forth
herein and to whose terms and conditions the Company and the Warrant Agent
hereby agree. Each Warrant Certificate shall evidence the right, subject to the
provisions of this Agreement and of such Warrant Certificate, to purchase the
number of validly issued, fully paid and non-assessable shares of Common Stock,
as that term is defined in Section 1.05 of this Agreement, stated therein, free
of preemptive rights, subject to adjustment as provided in Article III of
this Agreement.
SECTION 1.03. Upon the written order of the Company, signed by the
President or any Vice President, and the Secretary, Treasurer, Assistant
Secretary or Assistant Treasurer of the Company, the Warrant Agent shall issue
and register Warrants in the names and denominations specified in that order,
and will countersign and deliver Warrant Certificates evidencing the same in
accordance with that order. Each Warrant Certificate shall be dated the date of
its countersignature. Each Warrant Certificate shall be executed on behalf of
the Company by the manual or facsimile signature of the President of the
Company, under its corporate seal, affixed or facsimile, attested by the manual
or facsimile signature of the Secretary of the Company and shall be
countersigned manually by the Warrant Agent. The Warrant Certificates shall not
be valid for any purpose unless so countersigned. In case any officer whose
facsimile signature has been placed upon any Warrant Certificate shall have
ceased to be such before such Warrant Certificate is issued, it may be issued
with the same effect as if such officer had not ceased to be such on the date
of issuance.
SECTION 1.04. Except as otherwise expressly stated herein, all terms
used in the Warrant Certificate have the meanings provided in this Agreement.
SECTION 1.05. As used herein, the term "Common Stock" shall mean the
aggregate number of shares that the Company, by its Certificate of
Incorporation, as from time to time amended, is authorized to issue, which are
not limited by its Certificate of Incorporation to a fixed
-2-
<PAGE> 3
sum or percentage of the book value in respect of the rights of the holders
thereof to participate in dividends or in distribution of assets upon the
voluntary or involuntary liquidation, dissolution, or winding up the Company.
SECTION 1.06. The Warrant Agent understands and agrees that the Public
Warrants and shares of Common Stock are being sold separately in the Secondary
Offering and that the Shares and the Public Warrants will be traded separately
immediately upon the closing of the Secondary Offering.
ARTICLE II
WARRANT PRICE, DURATION AND EXERCISE OF WARRANTS, CALL OF
WARRANTS AND TRADING OF WARRANTS
SECTION 2.01.
(a) Each Warrant shall entitle the person in whose name at
the time the Warrant shall be registered upon the books to be maintained by the
Warrant Agent for that purpose (the "Warrant Holder"), subject to the
provisions of the Warrant Certificates and of this Agreement, to purchase from
the Company any time on or after the First Exercise Date but at or before the
Last Exercise Date, up to the number of shares of Common Stock stated therein,
as adjusted, at the Warrant Price in effect at such date, payable in full at
the time of purchase in the manner provided in Section 2.02 of this Agreement.
(b) Each Warrant shall be exercisable in accordance with the
terms herein and in the Warrant Certificate which, among other things, contains
certain terms as to the Warrant Price.
SECTION 2.02.
(a) The Warrant Holder may exercise a Warrant, in whole or in
part, by surrender of the Warrant Certificate, with the form of subscription
thereon duly executed by the Warrant Agent at its corporate office, together
with the Warrant Price for each share of Common Stock to be purchased in lawful
money of the United States, or by certified check, bank draft, or postal or
express money order payable in United States Dollars to the order of the
Company.
(b) Upon receipt of a Warrant Certificate with the form of
election to purchase thereon duly executed and accompanied by payment of the
aggregate Warrant Price for the shares of Common Stock for which the Warrant is
then being exercised, the Warrant Agent shall requisition from the transfer
agent certificates for the total number of the shares of Common Stock for which
the Warrant is being exercised in such names and denominations as are required
for delivery to the Warrant Holder, and the Warrant Agent shall thereupon
deliver such certificates to or in accordance with the instructions of the
Warrant Holder. The Company covenants and agrees that it has duly
-3-
<PAGE> 4
authorized and directed its transfer agent (and will authorize and direct all
its future transfer agents) to comply with all such requests of the Warrant
Agent.
(c) In case any Warrant Holder shall exercise his Warrant
with respect to less than all of the shares of Common Stock that may be
purchased under the Warrant, a new Warrant Certificate for the balance shall be
countersigned and delivered to or upon the order of the Warrant Holder.
(d) The Company covenants and agrees that it will pay when
due and payable any and all taxes which may be payable in respect to the
issuance of Warrants, or the issuance of any shares of Common Stock upon the
exercise of Warrants. However, neither the Company nor the Warrant Agent shall
be required to issue or deliver any Warrant Certificate or shares of Common
Stock in a name other than that of the Warrant Holder at the time of surrender
if any tax is payable in respect of such transfer until the person requesting
the same has paid to the Company the amount of such tax or has established to
the Company's satisfaction that such tax has been paid or shall not be due and
payable. In the event that any transfer tax is due and payable, the Warrant
Agent shall be under no obligation to issue or deliver any Warrant Certificate
or shares of Common Stock in a name other than that of the Warrant Holder until
the Company has notified the Warrant Agent that the transfer tax, if any, has
been paid, or in the alternative, that no transfer tax is due and payable by
reason of an exemption.
(e) The Warrant Agent shall account promptly to the Company
with respect to Warrants exercised and concurrently account to the Company for
all moneys received by the Warrant Agent for the purchase of shares of Common
Stock upon the exercise of Warrants.
(f) The Warrant Agent covenants and agrees that upon the
exercise of any of the Warrants, the Warrant Agent shall provide written notice
to the Company at 109 Northpark Boulevard, Suite 210, Covington, Louisiana
70433 and to the Underwriter at its office at 3340 Peachtree Street, NE, Suite
450, Atlanta, Georgia 30326, the expense of which notice shall be borne by the
Company. Each notice shall contain the name of the exercising Warrant Holder,
the number of shares of Common Stock that the Warrant Holder has elected to
purchase, the purchase price paid on a per share basis and the cumulative
number of Warrants exercised by all of the Warrant Holders as of the date of
the transaction which is the subject of the aforesaid notice. Such notice shall
be made on the date of the exercise of the Warrant. Nothing contained herein
shall be construed so as to prevent the Warrant Agent from providing the
information required in this Section 2.02 (f) in a consolidated or tabular
form, provided that all other provisions of this Section are complied with.
(g) The Warrant Agent covenants and agrees that it shall
provide a list of each and every holder of the Warrants to the Company and the
Underwriter at such time or from time to time as shall be required by the
Company or the Underwriter, but in no event shall such a list be provided less
frequently than once per annum at a date as shall be determined by the Company.
-4-
<PAGE> 5
SECTION 2.03. (a) Commencing on the first anniversary of the effective
date of the Secondary Offering, the Company may, subject to the conditions set
forth herein, redeem all, but not less than all, the Warrants then outstanding
at a redemption price of $.001 per Warrant upon not less than thirty (30) days
prior written notice (the "Redemption Notice") to the holders thereof provided
that the average closing price of the Common Stock for the 20 consecutive
trading days ending three (3) days prior to the date of the Redemption Notice
is at least $_____, subject to adjustment for stock dividends, stock splits and
other anti-dilution provisions as provided for under Article III herein. For
purposes of this Section 2.03, "closing price" at any date shall be deemed to
be: (i) the last sale price regular way as reported on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or (ii) if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked prices
regular way for the Common Stock as reported by the Nasdaq National Market or
Nasdaq Small Cap Market of the Nasdaq Stock Market, Inc. ("NASDAQ") or (iii) if
the Common Stock is not listed or admitted for trading on any national
securities exchange, and is not reported by NASDAQ, the average of the closing
bid and asked prices in the over-the-counter market as furnished by the
National Quotation Bureau, Inc. or if no such quotation is available, the fair
market value of the Common Stock as determined in good faith by the Board of
Directors of the Company. The Redemption Notice shall be deemed effective upon
mailing and the time of mailing is the "Effective Date of the Notice". The
Redemption Notice shall state a redemption date not less than thirty (30) days
from the Effective Date of the Notice (the "Redemption Date") . No Redemption
Notice shall be mailed unless all funds necessary to pay for redemption of all
Warrants then outstanding shall have first been set aside by the Company in
trust with the Warrant Agent for the benefit of all Warrant Holders so as to be
and continue to be available therefor. The redemption price to be paid to the
Warrant Holders will be $____ for each share of the Common Stock of the Company
to which the Warrant Holder would then be entitled upon exercise of the Warrant
being redeemed, as adjusted from time to time as provided herein (the
"Redemption Price"). In the event the number of shares of Common Stock issuable
upon exercise of the Warrant being redeemed are adjusted pursuant to Article
III hereof, then upon each such adjustment the Redemption Price will be
adjusted by multiplying the Redemption Price in effect immediately prior to
such adjustment by a fraction, the numerator of which is the number of shares
of Common Stock issuable upon exercise of the Warrant being redeemed
immediately prior to such adjustment and the denominator of which is the number
of shares of Common Stock issuable upon exercise of such Warrant being redeemed
immediately after such adjustment. The Warrants may only be redeemed if the
Company has in effect a current Registration Statement or post-effective
amendment covering the shares underlying the Warrants. The Warrant Holders may
exercise their Warrants between the Effective Date of the Notice and the
Redemption Date, such exercise being effective if done in accordance with
Section 2.02 (a), and if the Warrant Certificate, with form of election to
purchase duly executed and the Warrant Price, as applicable for such Warrant
subject to redemption for each share of Common Stock to be purchased is
actually received by the Warrant Agent at its office located at 16910 Dallas
Parkway, Suite 100, Dallas, TX 75248, no later than 5:00 P.M. New York time on
the Redemption Date.
(b) If any Warrant Holder does not wish to exercise any
Warrant being redeemed, the Warrant Holder should mail such Warrant to the
Warrant Agent at its office located at 16910
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<PAGE> 6
Dallas Parkway, Suite 100, Dallas, TX 75248, after receiving the Redemption
Notice required by this Section. If such Redemption Notice shall have been so
mailed, and if on or before the Effective Date of the Notice all funds
necessary to pay for redemption of all Warrants then outstanding shall have
been set aside by the Company in trust with the Warrant Agent for the benefit
of all Warrant Holders so as to be and continue to be available therefor, then,
on and after said Redemption Date, notwithstanding that any Warrant subject to
redemption shall not have been surrendered for redemption, the obligation
evidenced by all Warrants not surrendered for redemption or effectively
exercised shall be deemed no longer outstanding, and all rights with respect
thereto shall forthwith cease and terminate, except only the right of the
holder of each Warrant subject to redemption to receive the Redemption Price
for each share of Common Stock to which he would be entitled if he exercised
the Warrant upon receiving the Redemption Notice of the Warrant subject to
redemption held by the Holder hereof.
(c) Notwithstanding anything contained in this Article II,
the Underwriter's Warrants shall not be eligible for redemption by the Company.
ARTICLE III
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF WARRANT PRICE
SECTION 3.01. In case the Company shall at any time after the date of
this Agreement (i) declare a dividend on the outstanding Common Stock in shares
of its capital stock, (ii) subdivide the outstanding Common Stock, (iii)
combine the outstanding Common Stock into a smaller number of shares, or (iv)
issue any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, in each case,
the Warrant Price, and the number and kind of shares of Common Stock receivable
upon exercise, in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination, or reclassification shall
be proportionately adjusted so that the holder of any Warrant exercised after
such time shall be entitled to receive the aggregate number and kind of shares
which if such Warrant had been exercised immediately prior to such time, he
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
SECTION 3.02. In case the Company after the date hereof shall issue
rights, options, or warrants to all holders of Common Stock entitling them to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion
price per share, if a security convertible into or exchangeable for Common
Stock) less than the "current market price" (as defined in Section 3.04 hereof)
per share of Common Stock on the record date established for the issuance of
such rights, options or warrants, then, in such case, the Warrant Price shall
be adjusted by multiplying the Warrant Price in effect on the record date of
such issuance by a fraction, of which the numerator shall be the number of
shares of Common
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<PAGE> 7
Stock outstanding on the record date for such issuance plus the number of
shares of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so to be issued (or the aggregate initial conversion
price of the convertible securities to be issued or sold) would purchase at
such "current market price" and of which the denominator shall be the number of
shares of Common Stock outstanding on the record date for such issuance plus
the number of additional shares of Common Stock to be issued (or into which the
convertible or exchangeable securities to be issued or sold are initially
convertible or exchangeable). Such adjustment shall become effective at the
close of business on such record date; provided, however, that, to the extent
the shares of Common Stock (or securities convertible to or exchangeable for
shares of Common Stock) are not delivered, the Warrant Price shall be
readjusted after the expiration of such rights, options, or warrants (but only
with respect to Warrants exercised after such expiration), to the Warrant Price
which would then be in effect had the adjustments made upon the issuance of
such rights or warrants been made upon the basis of delivery of only the number
of shares of Common Stock or securities convertible into or exchangeable for
shares of Common Stock actually issued. In case any subscription price may be
paid in a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be as determined in good faith by
the board of directors of the Company, whose determination shall be conclusive
absent manifest error. Shares of Common Stock owned by or held for the account
of the Company or any majority-owned subsidiary shall not be deemed outstanding
for the purpose of any such computation.
Notwithstanding the foregoing, no adjustment in the Warrant
Price or the number of shares of Common Stock issuable upon exercise of the
Warrants shall be made upon (i) the issuance of options (or upon exercise
thereof) by the Company pursuant to its Stock Option Plans, (ii) the issuance
of the Underwriter's Warrants, or (iii) any other options and warrants
outstanding as of the date hereof.
SECTION 3.03. In case the Company shall distribute to all holders of
Common Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company is
the continuing corporation) evidences of its indebtedness or assets (other than
cash dividends distributions and dividends payable in shares of Common Stock),
subscription rights, options, or warrants or convertible or exchangeable
securities containing the right to subscribe for or purchase shares of Common
Stock (excluding those referred to in Section 3.02 hereof), then, in each case,
the Warrant price shall be adjusted by multiplying the Warrant Price in effect
immediately prior to the record date for the determination of stockholders
entitled to receive such distribution by a fraction of which the numerator
shall be the "current market price" per share of Common Stock on such record
date, less the fair market value (as determined in good faith by the board of
directors of the Company, whose determination shall be conclusive absent
manifest error) of the portion of the evidences of indebtedness or assets so to
be distributed, or of such subscription rights, options, or warrants,
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock, applicable to the share, and of which the
denominator shall be such "current market price" per share of Common Stock.
Such adjustment shall be made whenever any such distribution is made, and shall
become effective on the date of such
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<PAGE> 8
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
SECTION 3.04. For the purpose of any computation under sections 3.02
and 3.03 hereof, the "current market price" per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices for the 20
consecutive trading days ending three (3) days prior to such date. The closing
price for each day shall be the last reported sales price regular way or, in
case no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if the Common Stock
is not listed or admitted to trading on any national securities exchange, the
highest reported bid price as furnished by NASDAQ. If on any such date the
Common Stock is not quoted on NASDAQ or any such organization, the closing
price shall be deemed to be the average of the closing bid and asked prices in
the over-the-counter market as reported by the National Quotation Bureau or if
no such quotation is available, the fair value of the Common Stock on such
date, as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error.
SECTION 3.05. No adjustment in the Warrant Price shall be required if
such adjustment is less than $____; provided, however, that any adjustments
which by reason of this Section 3.05 are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Article III shall be made to the nearest cent or to the
nearest one-thousandth of a share, as the case may be.
SECTION 3.06. In any case in which this Article III shall require that
an adjustment in the Warrant Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the holder of any Warrant exercised after such record date,
the shares, if any, issuable upon such exercise over and above the shares, if
any, issuable upon such exercise on the basis of the Warrant Price in effect
prior to such adjustment; provided, however, that the Company shall deliver to
such holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares upon the occurrence of the event
requiring such adjustment.
SECTION 3.07. Upon each adjustment of the Warrant Price as a result of
the calculations made in Section 3.01, 3.02, or 3.03 hereof, each Warrant
outstanding prior to the making of the adjustment in the Warrant Price shall
thereafter evidence the right to purchase, at the adjusted Warrant Price, that
number of shares (calculated to the nearest thousandth) obtained by dividing
(A) the product obtained by multiplying the number of shares purchasable upon
exercise of a Warrant prior to adjustment of the number of shares by the
Warrant Price in effect prior to adjustment of the Warrant Price by (B) the
Warrant Price in effect after such adjustment of the Warrant Price.
SECTION 3.08. In case of any capital reorganization of the Company, or
of any reclassification of the Common Stock (other than a reclassification of
the Common Stock referred to in Section 3.01 hereof), or in the case of the
consolidation of the Company with or the merger of
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<PAGE> 9
the Company into any other corporation or of the sale, transfer, or lease of
the properties and assets of the Company as, or substantially as, an entirety
to any other corporation or other entity, each Warrant shall after such capital
reorganization, reclassification of Common Stock, consolidation, merger, sale,
transfer, or lease, be exercisable, on the same terms and conditions specified
in this Agreement, for the number of shares of stock or other securities,
assets, or cash to which a holder of the number of shares purchasable (at the
time of such capital reorganization, reclassification of Common Stock,
consolidation, merger, sale, transfer, or lease) upon exercise of such Warrant
would have been entitled upon such capital reorganization, reclassification of
Common Stock, consolidation, merger, sale, transfer, or lease; and in any such
case, if necessary, the provisions set forth in this Article III with respect
to the rights and interests thereafter of the holders of the Warrants shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock, other securities, assets, or cash thereafter
deliverable on the exercise of the Warrants. The subdivision or combination of
shares of Common Stock at any time outstanding into a greater or lesser number
of shares shall not be deemed to be a reclassification of the Common Stock for
the purposes of this subsection. The Company shall not effect any such
consolidation, merger, transfer, or lease, unless prior to or simultaneously
with the consummation thereof, the successor corporation (if other than the
Company) resulting from such consolidation or merger or the Corporation
purchasing, receiving, or leasing such assets or other appropriate corporation
or entity shall expressly assume, by written instrument in form satisfactory to
the Underwriter, the obligation to deliver to the holder of each Warrant such
shares of stock, securities, or assets as, in accordance with the foregoing
provisions, such holders may be entitled to purchase and to perform the other
obligations of the Company under this Agreement.
SECTION 3.09. The Company may make such reductions in the Warrant
Price, in addition to those required by this Article III, as it shall, in it
sole discretion, determine to be advisable.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF
WARRANT HOLDERS
SECTION 4.01. No Warrant Holder, as such, shall be entitled to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purposes, nor shall anything contained in any Warrant Certificate be construed
to confer upon any Warrant Holder, as such, any of the rights of a shareholder
of the Company or any right to vote, give or withhold consent to any action by
the Company, whether upon any recapitalization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise,
receive dividends or subscription rights, or otherwise, until in connection
with the exercise of any Warrant, such Warrant shall have been surrendered and
the purchase price or the shares of Common Stock for which such Warrant is
being exercised shall have been received by the Warrant Agent; provided,
however, that any such surrender and payment on any date when the stock
transfer books of the Company shall be closed shall constitute the person or
persons in whose name or names the certificate or certificates for those shares
of Common Stock are
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<PAGE> 10
to be issued as the record holder or holders thereof for all purposes at the
opening of business on the next succeeding day on which such stock transfer
books are open and the Warrant surrendered shall not be deemed to have been
exercised, in whole or in part, as the case maybe, until such next succeeding
day on which stock transfer books are open.
SECTION 4.02. The Company covenants and agrees that it shall
contemporaneously provide to all Warrant Holders of record any publication,
mailing or notice of an event which it shall provide to all of its shareholders
of record and which event shall result in the adjustment to the Warrant Price
as provided in Article III hereof. For purposes of this Section 4.02, the
Warrant Holders of record shall be those Warrant Holders who are of record on a
date even with the date chosen by the Company for the purpose of determining
the shareholders of record who shall be entitled to receive such publication,
mailing or notice.
SECTION 4.03. If any Warrant Certificate is lost, stolen, mutilated or
destroyed, the Company and the Warrant Agent may, on such terms as to indemnity
or otherwise as they may in their discretion reasonably impose, which shall, in
the case of a mutilated Warrant Certificate, include the surrender thereof,
issue a new Warrant Certificate of like denomination and tenor as, and in
substitution for, the Warrant Certificate so lost, stolen mutilated or
destroyed.
SECTION 4.04.
(a) The Company covenants and agrees that at all times it
shall reserve and keep available for the exercise of outstanding Warrants such
number of authorized shares of Common Stock and the aggregate number and kind
of any other securities which the Warrants are exercisable for, pursuant to the
provisions of Article III hereof, as are sufficient to permit the exercise in
full of such Warrants and that it will make available to the Warrant Agent from
time to time a number of duly executed certificates representing shares of
Common Stock and other securities, sufficient therefor.
(b) The Company shall use its best efforts to secure the
listing, upon official notice of issuance, of the shares of Common Stock
issuable upon exercise of Warrants upon any securities exchange upon which the
Common Stock becomes listed.
(c) The Company covenants that all shares of Common Stock
issued on exercise of Warrants shall be validly issued, fully paid,
non-assessable and free of preemptive rights.
(d) The Company has filed a Registration Statement on Form
SB-2 (Registration No. 333-24145) for the registration of, among other things,
the sale of the Warrants and the shares of Common Stock issuable upon exercise
thereof under the Securities Act of 1933, as amended (the "Act"). The Company
shall use its best efforts to secure the effectiveness of the Registration
Statement under the Act, and to register or qualify such Warrants and shares of
Common Stock under the laws of any states in which the sale of the Warrants and
shares of Common Stock was registered or qualified at the time of the Secondary
Offering and shall use its reasonable good faith
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<PAGE> 11
efforts to register and qualify such Warrants and shares of Common Stock in
such additional states and jurisdictions as may be appropriate. The Company
further agrees to use its best efforts to maintain the effectiveness of such
Registration Statement and such state qualifications, as aforesaid, by the
filing of any and all amendments to the Registration Statement and such state
qualifications as may be required from time to time under the Act or the laws
of the various states until the expiration or termination of all the Warrants
in accordance herewith.
(e) The Company will furnish to the Warrant Agent, upon
request, an opinion of counsel satisfactory to the Warrant Agent to the effect
that (i) a Registration Statement under the Act is then in effect with respect
to the Warrants and shares of Common Stock issuable upon the exercise of the
Warrants and that the prospectus included therein complies as to form in all
material respects, (except as to financial statements, including schedules, and
other accounting and financial data, as to which such counsel need express no
opinion), with the requirements of the Act and the rules and regulations of the
Commission thereunder; or a Registration Statement under the Act with respect
to said shares of Common Stock is not required. In the event that said opinion
states that such a Registration Statement is in effect, the Company will from
time to time furnish the Warrant Agent with current prospectuses meeting the
requirements of the Act and such rules and regulations in sufficient quantity
to permit the Warrant Agent to deliver a prospectus ("Prospectus") to each
Warrant Holder upon exercise thereof. The Company further agrees to pay all
fees, costs and expenses in connection with the preparation and delivery to the
Warrant Agent of the foregoing opinions and Prospectuses and the above
mentioned registrations and other actions, and to immediately notify the
Warrant Agent in the event that (i) the Commission shall have issued or
threatened to issue any order preventing or suspending the use of any
Prospectus; (ii) at any time any Prospectus shall contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; or (iii)
for any reason it shall be necessary to amend or supplement any Prospectus in
order to comply with the Act.
SECTION 4.05. If the number of shares purchasable upon the exercise of
each Warrant is adjusted pursuant to Section 3.07 hereof, the Company shall not
be required to issue fractions of shares upon exercise of the Warrants or to
distribute share certificates which evidence fractional shares. In lieu of
fractional shares, the Company, in its sole discretion, may pay to the
registered holders of Warrant Certificates at the time such Warrants are
exercised as herein provided an amount in cash equal to the same fraction of
the current market value of a share. For purposes of this Section 4.05, the
current market value of a share issuable upon the exercise of a Warrant shall
be the closing price of a share of Common Stock, as determined pursuant to the
second and third sentences of Section 3.04, for the trading day immediately
prior to the date of such exercise.
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<PAGE> 12
ARTICLE V
TREATMENT OF WARRANT HOLDERS
SECTION 5.01. Prior to due presentment for registration of transfer of
any Warrant, the Company and the Warrant Agent may deem and treat the Warrant
Holder as the absolute owner of such warrant, notwithstanding any notation of
ownership or other writing thereon, for the purpose of any exercise thereof and
for all other purposes, and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.
ARTICLE VI
CONCERNING THE WARRANT AGENT
AND OTHER MATTERS
SECTION 6.01. The Company will from time to time promptly pay, subject
to the provisions of Section 2.02 (d) of this Agreement, all taxes and charges
that may be imposed upon the Company or the Warrant Agent in respect of the
issuance or delivery of shares of Common Stock upon the exercise of Warrants.
SECTION 6.02.
(a) The Warrant Agent may resign and be discharged from its
duties under this Agreement upon sixty (60) days notice in writing, mailed to
the Company by registered or certified mail, and to each Warrant Holder. The
Company may remove the Warrant Agent or any successor warrant agent upon sixty
(60) days notice in writing, mailed to the Warrant Agent or successor Warrant
Agent, as the case may be, by registered or certified mail, and to each Warrant
Holder; provided, however, the Company shall appoint a new Warrant Agent as
hereinafter provided and such removal shall not become effective until a
successor Warrant Agent has been appointed and has accepted such appointment.
If the Warrant Agent shall resign or shall otherwise become capable of acting,
the Company shall appoint a successor to the Warrant Agent. If the Company
shall fail to make such appointment within a period of sixty (60) days after it
has been notified in writing of such resignation or incapability by the Warrant
Agent by a Warrant Holder, who shall, with such notice, submit his Warrant
Certificate for inspection by the Company, then any Warrant Holder may apply to
any court of competent jurisdiction or the appointment of a successor to the
Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or
by such a court shall be a registered transfer agent, bank or trust company,
subject to the terms and conditions of this Section 6.02, in good standing and
incorporated under the laws of any State of the United States, having its
principal office in the United States of America. After appointment, the
successor Warrant Agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally named as Warrant Agent
without further act or deed. The former Warrant Agent shall deliver and
transfer to the successor Warrant Agent any property at the time held by it
hereunder and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose. Failure to give any notice provided for in this
Section, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Warrant Agent or the appointment
of the successor Warrant Agent, as the case may be.
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<PAGE> 13
(b) Any corporation into which the Warrant Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Warrant Agent shall be a party, or any
corporation succeeding to the corporate trust business of the Warrant Agent,
shall be the successor to the Warrant Agent hereunder without the execution or
filing of any paper or any further act on the part of any of the parties
hereto. In case at the time such successor to the Warrant Agent shall succeed
to the agency created by this Agreement, any of the Warrant Certificates shall
have been countersigned but not delivered, any such successor to the Warrant
Agent may adopt the countersignature of the original Warrant Agent and deliver
such Warrant Certificates so countersigned, and in case at that time any of the
Warrant Certificates shall not have been countersigned, any successor to the
Warrant Agent may countersign such Warrant Certificate in its own name or in
the name of the successor Warrant Agent; and in all such cases such Warrant
Certificates shall have the full force provided in the Warrant Certificates and
this Agreement.
In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrant Certificates shall have been
countersigned but not delivered, the Warrant Agent may adopt the
countersignature under this prior name and deliver Warrant Certificates so
countersigned; and in case at that time any of the Warrant Certificates shall
not have been countersigned, the Warrant Agent may countersign such Warrant
Certificates either in its prior name or in its changed name; and in all such
cases such Warrant Certificates shall have the full force provided in the
Warrant Certificates and in this Agreement.
SECTION 6.03. The Company agrees to pay the Warrant Agent a reasonable
fee for all services rendered by it hereunder. The Company also agrees to
indemnify the Warrant Agent for, and to hold it harmless against, any loss,
liability or expense, incurred without gross negligence, willful misconduct or
bad faith on the part of the Warrant Agent, arising out of or in connection
with the acceptance and administration of this Agreement, including the costs
and expenses of defending against any claim of liability in the premises.
SECTION 6.04. The Company covenants and agrees that it shall, at the
Company's expense, provide to the Warrant Agent copies of its current
prospectus, if any, in such quantity as to enable the Warrant Agent to deliver
one copy of such current prospectus to such Warrant Holder who shall exercise
his rights under a Warrant. Notwithstanding anything else contained in this
Section 6.04, the Company shall not be obligated to provide copies of its
current prospectus for the purpose of allowing the Warrant Agent to deliver
such copies to any Warrant Holder who delivers all of his redeemable warrants
for redemption pursuant to Section 2.03 or who shall notice the Company of his
intent to permit redemption of all of his Warrants pursuant to Section 2.03
herein or to any person who shall hold any Warrant subject to the terms of this
Agreement after the earlier of the Redemption Date or the Last Exercise Date of
the Warrants.
SECTION 6.05. The Warrant Agent undertakes the duties and obligations
imposed by this Agreement upon the following terms and conditions, by all of
which the Company and the holders of Warrant certificates, by their acceptance
thereof, shall be bound:
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<PAGE> 14
(a) Whenever in the performance of its duties under this
Agreement the Warrant Agent shall deem it necessary or desirable that any fact
or matter be proved or established by the Company prior to taking or suffering
any action hereunder, that fact or matter, unless other evidence in respect
thereof be herein specifically prescribed, may be deemed to be conclusively
proved and established by a certificate signed by the President or the
Secretary of the Company and delivered to the Warrant Agent. That certificate
shall be full authorization to the Warrant Agent for any action taken or
suffered in good faith by it under the provisions of this Agreement in reliance
upon that certificate.
(b) The Warrant Agent shall be liable hereunder only for its
own gross negligence, willful misconduct or bad faith.
(c) The Warrant Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Warrant Certificates, except its countersignature thereof, or be required to
verify the same, but all such statements and recitals are and shall be deemed
to have been made by the Company only.
(d) The Warrant Agent shall not be under any responsibility
in respect of the validity of this Agreement or the execution and delivery
hereof, except the due execution hereof by the Warrant Agent, or in respect of
the validity or execution of any Warrant Certificate, except its
countersignature thereof; nor shall it be responsible for any Warrant
Certificate; nor shall it be responsible for the adjustment of the Warrant
Price or the making of any change in the number of shares of Common Stock
required under the provisions of Article III of this Agreement or responsible
for the manner, method or amount of any such change or the ascertaining of the
existence of facts that would require any such adjustment or change except with
respect to the exercise of Warrant Certificates after actual notice of any
adjustment of the Warrant Price; nor shall it by any act under this Agreement
be deemed to make any representation or warranty as to the authorization or
reservation of any shares of Common Stock to be issued pursuant to this
Agreement or any Warrant Certificate or as to whether any share of Common Stock
will when issued be validly issued, fully paid, non-assessable and free of
preemptive rights.
(e) The Warrant Agent and any shareholder, director, officer
or employee of the Warrant Agent may buy, sell or deal in any of the Warrant
Certificates or other securities of the Company to retain a pecuniary interest
in any transaction in which the Company may be interested or contract with or
lend money to or otherwise act as fully and freely as though it was not the
Warrant Agent or subject to this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any
other legal entity.
(f) The Warrant Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder
from any officer or assistant officer of the Company, and to apply to any such
officer or assistant officer for advice or instructions in connection
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<PAGE> 15
with its duties, and shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions of any such officer
or assistant officer.
(g) The Warrant Agent may consult with its counsel or other
counsel satisfactory to it, including counsel for the Company, and the opinion
of such counsel shall be full and complete authorization and protection in
respect of any action taken, offered, or omitted by it hereunder in good faith
and in accordance with the opinion of such counsel.
(h) The Warrant Agent shall incur no liability to the Company
or to any holder of any Warrant for any action taken by it in reliance upon any
Warrant Certificate or certificate for Common Stock, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed, and where necessary, certified
or acknowledged, by the proper person or persons.
SECTION 6.06. The Warrant Agent may, without the consent or
concurrence of the Warrant Holders, by supplemental agreement or otherwise,
concur with the Company in making any changes or corrections in this Agreement
that (i) it shall have been advised by counsel, who may be counsel for the
Company, are required to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest error herein
contained, or (ii) as provided in Section 3.09, the Company deems necessary of
advisable and which shall not be inconsistent with the provisions of the
Warrant Certificates, provided such changes or corrections do not adversely
affect the privileges or immunities of the Warrant Holders.
SECTION 6.07. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
SECTION 6.08. Forthwith upon the appointment after the date thereof of
any transfer agent for the Common Stock, or of any subsequent transfer agent
for the Common Stock, the Company will file with the Warrant Agent a statement
setting forth the name and address of such transfer agent.
SECTION 6.09. Notice or demand pursuant to this Agreement to be given
or made by the Warrant Agent or by any Warrant Holder to or on the Company
shall be sufficiently given or made and effective on the third business day
after posting thereof, unless otherwise provided in this Agreement, if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
Karts International Incorporated
109 Northpark Boulevard, suite 210
Covington, Louisiana 70433
Attn: V. Lynn Graybill, President
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<PAGE> 16
notice or demand pursuant to this Agreement to be given or made by the Company
or any Warrant Holder to or on the Warrant Agent shall be sufficiently given or
made and effective on the third business day after posting thereof, unless
otherwise provided in this Agreement, if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing by the Warrant
Agent with the Company) as follows:
Securities Transfer Corporation
16910 Dallas Parkway, Suite 100
Dallas TX 75248
Attn: Compliance Department
notice or demand pursuant to this Agreement to be given or made by the Company
or the Warrant Agent to or on the Underwriter shall be sufficiently given or
made and effective on the third business day after posting thereof, unless
otherwise provided in this Agreement, if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing by the
Underwriter with the Company) as follows:
J.P. Turner & Company, L.L.C.
3340 Peachtree Street, Suite 450
Atlanta, Georgia 30326
Attn: William L. Mello
notice or demand pursuant to this Agreement to be given or made by the Company
or the Warrant Agent to or on any Warrant Holder shall be sufficiently given or
made and effective on the third business day after posting thereof, unless
otherwise provided in this Agreement, if sent by first-class mail, postage
prepaid, addressed to such Warrant Holder at his last known address as it shall
appear in the records of the Company, if such notice shall be given by the
Company, or, if such notice shall be given by the Warrant Agent, as it shall
appear on the register maintained by the Warrant Agent.
A copy of any Notice or demand given or made pursuant to this
Agreement on the Warrant Agent, Company or Underwriter shall be promptly
forwarded by the recipient thereof to each of the Company, Warrant Agent or
Underwriter who shall not have received or made such demand or Notice.
SECTION 6.10. The validity, interpretation and performance of this
Agreement and the Warrants shall be governed by the law of the State of Nevada.
SECTION 6.11. Nothing in this Agreement shall be construed to give to
any person or corporation other than the parties hereto and the Warrant Holders
any right, remedy or claim under promise or agreement hereof. All covenants,
conditions, stipulations, promises and agreements contained in this Agreement
shall be for the sole and exclusive benefit of the Company and the Warrant
Agent and their successors and of the Warrant Holders, and their heirs,
representatives, successors, assigns and transferees.
-16-
<PAGE> 17
SECTION 6.12. A copy of this Agreement shall be available for
inspection by any Warrant Holder during the regular business hours and at the
corporate office of the Warrant Agent in Dallas, Texas, at which time the
Warrant Agent may require any Warrant Holder to submit his Warrant Certificate
for inspection by it.
SECTION 6.13. This Agreement shall terminate on the Last Exercise
Date, or such earlier date upon which all Warrants have been exercised or
redeemed, except that the Warrant Agent shall account to the Company pursuant
to Section 2.02 (e) of this Agreement for all cash held by it. The provisions
of Section 6.03 and 6.04 of this Agreement shall survive such termination.
SECTION 6.14. The Article headings in this Agreement are for
convenience only and are not part of this Agreement and shall not affect the
interpretation thereof.
SECTION 6.15. This Agreement may be executed in any number
counterparts, each of which is so executed shall be deemed to be an original,
and all such counterparts shall together constitute but one and the same
agreement.
ATTEST: KARTS INTERNATIONAL INCORPORATED
By:
-----------------------------------
V. Lynn Graybill, President
and Chief Executive Officer
ATTEST: SECURITIES TRANSFER CORPORATION
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
-17-
<PAGE> 1
EXHIBIT 5.1
[LOOPER, REED, MARK & MCGRAW INCORPORATED LETTERHEAD]
August 19, 1997
Karts International Incorporated
109 Northpark Boulevard, Suite 220
Covington, Louisiana 70433
Re: Registration Statement on Form SB-2 (SEC File No. 333-24145)
Initially Filed with the Securities and Exchange Commission
(the "Commission") on March 28, 1997; Amendment No. 3 to
Registration Statement Filed with the Commission on August 19,
1997
---------------------------------------------------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 and Amendment No. 3 thereto, SEC File No. 333-24145, (the Registration
Statement and Amendment No. 3 thereto being referred to hereinafter as the
"Registration Statement"), in connection with the registration of 3,360,000
shares of common stock, $.001 par value (the "Common Stock"), and 1,610,000
Redeemable Common Stock Purchase Warrants (the "Warrants") (with the number of
shares of Common Stock registered in the Registration Statement including
1,400,000 shares of Common Stock offered thereby, 1,4000,000 shares of Common
Stock issuable upon exercise of the Warrants, 210,000 shares of Common Stock
subject to the Underwriter's over-allotment option, 210,000 shares of Common
Stock issuable upon exercise of 210,000 Warrants subject to the Underwriter's
over-allotment option, and 140,000 shares of Common Stock issuable upon
exercise of 140,000 warrants subject to the Underwriter's Warrants). The
Common Stock and the Warrants will be issued and sold in the manner described
in the Registration Statement and in the exhibits thereto.
We have examined the proceedings heretofore taken and are familiar
with the procedures proposed to be taken by the Company in connection with the
authorization, issuance and sale of the Common Stock and the Warrants. It is
our opinion that the Common Stock and the Warrants to be sold by the Company
pursuant to the Registration Statement will be, when sold and paid for pursuant
to the terms of the Registration Statement, and the exhibits thereto, legally
issued, fully paid and non-assessable securities of the Company. Further, it
is our opinion that when the Warrants are exercised pursuant to the Warrant
Agreement, the shares of Common Stock issuable
<PAGE> 2
Karts International Incorporated
August 19, 1997
Page 2
upon exercise of the Warrants will be, when issued and paid for pursuant to the
respective terms of the Warrant Agreement, and the Registration Statement and
the exhibits thereto, legally issued, fully paid and non-assessable shares of
the Company.
We consent to the use of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
caption "Legal Matters" in the Registration Statement and in the Prospectus
which forms a part thereof.
Very truly yours,
Looper, Reed, Mark & McGraw Incorporated
By: /s/ Richard B. Goodner
------------------------------------
Richard B. Goodner
RBG:mdp
<PAGE> 1
EXHIBIT 10.36
[DEPOSIT GUARANTY NATIONAL BANK LETTERHEAD]
August 1, 1997
Mr. V. Lynn Graybill
President
Karts International
109 Northpark Blvd., Suite 210
Covington, LA 70433
Dear Mr. Graybill:
This letter is to confirm that our Bank will extend for sixty days your
current credit facility in the amount of $300,000.00 to Karts International for
Bristers Thunder Karts. We value your relationship.
Please contact me if you have any questions.
Sincerely yours,
/s/ PHIL K. LIVINGSTON
Phil K. Livingston
President Hammond
PKL/jwn
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in Amendment No. 3 to Form SB-2 Registration Statement
under The Securities Act of 1933 of Karts International Incorporated (a Nevada
corporation) of our report dated February 28, 1997 (except for Note I as to
which the date is March 6, 1997) on the consolidated financial statements of
Karts International Incorporated as of December 31, 1996 and 1995 and for each
of the years then ended, accompanying the financial statements contained in
such Amendment No. 3 to Form SB-2 Registration Statement Under the Securities
Act of 1933, and to the use of our name and the statements with respect to us
as appearing under the heading "Experts".
/s/ S. W. HATFIELD + ASSOCIATES
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
August 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED (A) QUARTERLY FINANCIAL
STATEMENTS FOR THE PERIOD ENDED 6-30-97 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL INFORMATION IN FORM SB-2, AMENDMENT #3.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 474,241
<SECURITIES> 0
<RECEIVABLES> 315,302
<ALLOWANCES> 2,515
<INVENTORY> 943,971
<CURRENT-ASSETS> 1,981,807
<PP&E> 1,215,911
<DEPRECIATION> 88,108
<TOTAL-ASSETS> 8,918,387
<CURRENT-LIABILITIES> 1,126,687
<BONDS> 0
625,000
0
<COMMON> 2,718
<OTHER-SE> 3,815,200
<TOTAL-LIABILITY-AND-EQUITY> 3,817,918
<SALES> 2,515,232
<TOTAL-REVENUES> 2,515,232
<CGS> 2,197,219
<TOTAL-COSTS> 1,033,474
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,943
<INCOME-PRETAX> (923,582)
<INCOME-TAX> 0
<INCOME-CONTINUING> (923,582)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (923,582)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> 0
</TABLE>
