SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 000-23041
KARTS INTERNATIONAL INCORPORATED
(Name of Small Business Issuer as Specified in Its Charter)
Nevada 75-2639196
(State of Incorporation) (I.R.S. Employer Identification No.)
109 Northpark Boulevard, Suite 210 70433
Covington, Louisiana (Zip Code)
(Address of Principal Executive Offices)
(504) 875-7350
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Redeemable Common Stock Purchase Warrants
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's net revenues for the fiscal year ended December 31, 1997,
were $7,586,476.
The issuer had 4,854,133 shares of common stock and 1,782,500 public
warrants outstanding as of March 23, 1998.
The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the issuer, computed by reference to the average bid
and asked prices of such common stock as of March 23, 1998, was $11,824,988.
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1997 ANNUAL REPORT (S.E.C. FORM 10-KSB)
INDEX
Securities and Exchange Commission
Item Number and Description
PART I
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Item 1 Business............................................................................................... 3
Item 2 Properties............................................................................................ 12
Item 3 Legal Proceedings..................................................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders................................................... 13
PART II
Item 5 Market for the Company's Common Stock and Related Stockholder Matters................................. 14
Item 6 Management's Discussion and Analysis or Plan of Operation............................................. 15
Item 7 Consolidated Financial Statements..................................................................... 20
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 20
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a)
of the Exchange Act................................................................................... 21
Item 10 Executive Compensation................................................................................ 22
Item 11 Security Ownership of Certain Beneficial Owners and Management........................................ 25
Item 12 Certain Relationships and Related Transactions........................................................ 26
Item 13 Exhibits, Financial Statements and Reports on Form 8-K................................................ 28
SIGNATURES, FINANCIAL STATEMENTS AND EXHIBIT INDEX
Signatures...................................................................................................... 31
Financial Statements........................................................................................... F-1
Exhibit Index
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PART I
ITEM 1. BUSINESS
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General
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 five to
eight horsepower and purchased by consumers principally for off-road
recreational use. Consolidated net revenues of the Company for the fiscal year
ended December 31, 1997 were approximately $7,586,476 million as compared with
revenues of approximately $8,327,316 million for the fiscal year ended December
31, 1996. The Company operates manufacturing facilities in Roseland, Louisiana
and Prattville, Alabama, and currently maintains its executive offices in
Covington, Louisiana. It is anticipated that the Company's executive offices
will be moved to its Roseland manufacturing facility during the second quarter
of fiscal 1998.
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.
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 five horsepower engines. The end-users of the Company's Fun
Karts are primarily seven- 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 network of 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 1997, the
Company sold approximately 79% of its Fun Karts to dealers primarily 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 mass merchandisers. In 1996, sales to mass
merchandisers represented approximately 21% of the Company's revenues for such
fiscal year. In 1997, mass merchandisers accounted for approximately 17% of 1997
revenues. The Company does not believe that any mass merchandiser will account
for 10% or more of the Company's 1998 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.
On February 28, 1997, 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 Annual Report on Form 10-KSB
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.
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 in 1996 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, the consolidated results
of operations of the Company, Brister's and USA for the respective periods
owned.
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.
Recent Financings
1997 Public Offering. On September 16, 1997, the Company consummated a
public offering of securities (the "1997 Public Offering") whereby the Company
sold an aggregate of 1,550,000 shares of common stock, $.001 par value per share
(the "Common Stock"),at a price of $4.00 per share, and 1,550,000 Redeemable
Common Stock Purchase Warrants (the "Warrants") at $0.125 per Warrant. Each
Warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price of $4.00 per share during the four year period commencing on
September 9, 1998 (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 thirty (30) days written notice to the Warrant
holders, if the average closing price of the Common Stock equals or exceeds
$8.00 per share of Common Stock for the 20 consecutive trading days ending three
days prior to the date of the notice of redemption.
The Company received net proceeds of approximately $5,017,650 from the
sale of the securities offered in the 1997 Public Offering after payment of
offering expenses and underwriting discounts and commissions. Proceeds from the
1997 Public Offering were used as follows: (i) $2,250,000 for the repayment of
indebtedness, including payment of approximately $1,200,000 for two promissory
notes owed to Charles Brister, a director of the Company, for a portion of the
consideration for the acquisition of Brister's in 1996 (the "Brister's
Acquisition"); (ii) $625,000 for the redemption of the Company's convertible
preferred stock; (iii) $48,000 for a financial advising fee payable to J.P.
Turner Company, L.L.C., the representative of the underwriters of the 1997
Public Offering; (iv) $200,000 for product development; (v) $400,000 for
advertising and marketing expenses; and (vi) the remaining approximately
$1,700,000 for working capital purposes.
Under the terms of the 1997 Public Offering, the underwriters were
granted an over-allotment option to purchase 232,500 additional shares of Common
Stock and 232,500 additional Warrants. The over-allotment option
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was exercised and the transaction closed in October 1997, with the Company
selling to the underwriters an additional 232,500 shares of Common Stock for
$4.00 per share and 232,500 additional Warrants for $0.125 per Warrant for net
proceeds of approximately $834,385 after payment of offering expenses and
underwriting discounts and commissions. Net proceeds from the exercise of the
over-allotment option are being used for working capital purposes.
Bridge Financing. 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 (the "Convertible Preferred Stock") and 6,667
warrants (the "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, each holder of the Convertible Preferred Stock
agreed to the conversion of the Convertible Preferred Stock at the completion of
the Company's 1997 Public Offering at the conversion rate of one share of
Convertible Preferred Stock for $25,000, 4,167 shares of Common Stock and 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. At the closing of the 1997
Public Offering, the Company issued to the Convertible Preferred Stockholders
104,175 shares of Common Stock, 333,350 1996 Warrants and paid $625,000 upon
conversion of the outstanding shares of Convertible Preferred Stock.
Seasonality
Most Fun Karts are sold during the last quarter of the calendar 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.
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 1998 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.
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 seven- 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.
Continue to Improve Manufacturing Efficiency. Management believes that
greater productivity will reduce operating costs. The Company believes that
modernization of its manufacturing facilities is essential to
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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. 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.
Growth Strategy
Increasing Brand and Product Recognition By Innovative Marketing to
Target Users. The Company believes that if it is to further penetrate its target
market, the seven- to 17-year old male, 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 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, and through the use of
traditional print, billboard and to a lesser extent, television and radio media.
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. 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 current 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, its stockholders 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.
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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 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 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,
five 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'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."
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, with assistance and guidance from the Company's executive officers.
The Roseland facility is leased from Charles Brister, a director of the Company,
and the Company owns the Prattville facility which includes a two-acre tract of
land. See "Properties" 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. The Company is currently expanding its Roseland
facility to provide for approximately 2,400 square feet of additional executive
office space. The Company intends to move its executive offices to its Roseland
facility during the second quarter of fiscal 1998. See "Properties."
Fun Kart production levels at the Company's manufacturing plants vary
depending on the season. Between January and May, the Company generally utilizes
a 10-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. 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.
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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 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) 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
1997, the Company sold approximately 79% of its Fun Karts to dealers primarily
located in Louisiana, Texas, Mississippi and Florida.
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
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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 arrangement requires 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.
Typical domestic dealers include lawn and garden shops, hardware
stores, motorcycle shops, automobile parts stores and specialty 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.
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. The Company's future marketing efforts are designed to maintain and
expand its independent dealer network in the Southern and Western 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 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.
Backlog
The Company typically fills and ships customer orders within three to
seven days of receipt of the order and, therefore, maintains no significant
backlog.
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.
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Employees
The Company employs approximately 90 employees of which 45 are employed
on a full-time basis. Eight employees are administration and sales personnel, 10
are plant management and supervisory personnel and the remainder are hourly
employees 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. The Company's
employees are not represented by a union or subject to a collective 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 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.
Business Risk Factors
Risks Relating to Growth and Expansion. The ability of the Company to
execute its growth strategy will depend on certain 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 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.
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.
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<PAGE>
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. 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.
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 six 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
"Legal Proceedings."
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 and allows the Company to use brand names and utilize the ATOS on
its Fun Karts. The Company's success is dependent upon, among other things, its
continued ability to use these patented items and other proprietary materials.
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 "Certain Relationships and Related
Transactions."
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.
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. Although
the Company believes its relationship with its vendors to be excellent, the loss
of any vendor may cause the Company to experience a
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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.
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 1997, approximately 83% of
the Company's combined revenues were the result of sales to its independent
dealers. No one dealer or group of affiliated dealers accounted for 10% or more
of the Company's 1997 revenues. 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, the Company's financial
condition and results of operations would be adversely affected.
Forward-Looking Statements and Associated Risk. Management believes
that this Annual Report on Form 10-KSB for the year ended December 31, 1997
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 Annual Report
on Form 10-KSB will in fact transpire or prove to be accurate.
ITEM 2. PROPERTIES
----------
Facilities
The following table sets forth information concerning the Company's
facilities:
<TABLE>
<S> <C> <C> <C>
Date Leased Expiration of Approximate
Location or Acquired Description Lease Term Square Footage
- ------------------------------- ----------------- ----------------------------- ----------------- ----------------
Covington, Louisiana 1996 Corporate Offices(1) 2001 3,400
Roseland Louisiana 1996 Manufacturing facility(2) 2000 48,000
Prattville, Alabama 1996 Manufacturing facility (3) 20,000
(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 Company has exercised the 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. The Company is currently expanding
its Roseland manufacturing facility to provide for approximately 2,400
square feet of additional executive office space. The Company intends to
move its executive offices to the Roseland manufacturing facility during
the second quarter of 1998. 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 $224,295 at December
31, 1997 with interest at the financial institution's commercial base rate.
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 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.
</TABLE>
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
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 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 six
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. 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.
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 Federal District Court in
New Orleans, Louisiana 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 has filed a
counterclaim against the Company's insurance broker relating to possible
negligence and 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 Charles Brister, a director and principal stockholder of
the Company, as partial consideration for the Brister's Acquisition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company had no matters requiring a vote of security holders during
the fourth quarter of fiscal 1997 nor the first quarter of fiscal 1998.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
-------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The Company's Common Stock and Warrants are traded on the Nasdaq
SmallCap Market system under the symbol "KINT" and "KINTW", respectively. The
following table sets forth the range of high and low closing bid prices for the
Common Stock and the Warrants 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>
<S> <C> <C> <C>
Common Stock Warrants
Bid Price(1) Bid Price
------------------------------- --------------------------------
Calendar Year 1998 Low High Low High
- ------------------ ------------------------------- --------------------------------
First Quarter (through March 23, 1998) $2.75 $3.75 $0.56 $1.19
Common Stock Warrants
Bid Price(1) Bid Price
------------------------------- --------------------------------
Calendar Year 1997 Low High Low High
- ------------------ ------------------------------- --------------------------------
First Quarter $4.13 $4.88 -- --
Second Quarter $4.00 $4.50 -- --
Third Quarter(2) $4.00 $5.38 $1.00 $1.50
Fourth Quarter $3.00 $4.75 $0.69 $1.25
Common Stock
Bid Price
-------------------------------
Calendar Year 1996 Low High
- ------------------ -------------- --------------
Second Quarter(3) $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 and Warrants began trading on the Nasdaq SmallCap Market
under the symbols "KINT" and "KINTW", respectively, on September 9, 1997.
(3) The Common Stock traded on the NASD Electronic Bulletin Board from June 27,
1996 to September 9, 1997.
On March 23, 1998, the closing bid and ask prices for the Common Stock
were $3.00 and $3.31, respectively, per share and the closing bid and ask prices
for the Warrants were $0.75 and $1.00, respectively, per Warrant. As of March
23, 1998, 4,854,133 shares of Common Stock were issued and outstanding and
1,782,500 Warrants were outstanding.
Holders. As of March 3, 1998, there were approximately 700 record and
beneficial holders of the Company's Common Stock and 300 record holders of the
Warrants.
Dividends. 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 the 1997 Public Offering, without the consent of the representative
of the underwriters, it shall not redeem or issue any of its securities or pay
any dividends, or make
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<PAGE>
any other cash distributions in respect of its securities, in excess of the
amount of the Company's current or retained earnings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
Overview
The Company had no significant business operations from 1989 through
March 1996. Prior to that time, the Company was engaged in the mining industry,
principally through joint ventures with related parties involving mining
properties located in Colorado. The Company is in the business of manufacturing
and marketing Fun Karts for the consumer market.
Effective at the close of business on March 31, 1996, the Company
purchased 100% of the issued and outstanding stock of Brister's, 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, issuance of $1.2 million of promissory notes (the "Brister Notes") and the
issuance to Mr. Brister of 516,667 shares of restricted shares of 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.
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 stockholders 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 stockholders 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.
On September 16, 1997, the Company consummated its 1997 Public Offering
whereby the Company sold an aggregate of 1,550,000 shares of Common Stock at a
price of $4.00 per share, and 1,550,000 Warrants at $0.125 per Warrant. Each
Warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price of $4.00 per share during the four year period commencing on
September 9, 1998 (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 thirty (30) days written notice to the Warrant
holders, if the average closing price of the Common Stock equals or exceeds
$8.00 per share of Common Stock for the 20 consecutive trading days ending three
days prior to the date of the notice of redemption.
The Company received net proceeds of approximately $5,017,650 from the
sale of the securities offered in the 1997 Public Offering after payment of
offering expenses and underwriting discounts and commissions. Proceeds from the
1997 Public Offering were used as follows: (i) $2,250,000 for the repayment of
indebtedness, including payment of the Brister Notes; (ii) $625,000 for the
redemption of the Company's Convertible Preferred Stock; (iii) $48,000 for a
financial advising fee payable to J.P. Turner Company, L.L.C., the
representative of the underwriters of the 1997 Public Offering; (iv) $200,000
for product development; (v) $400,000 for advertising and marketing expenses;
and (vi) the remaining approximately $1,700,000 for working capital purposes.
Under the terms of the 1997 Public Offering, the underwriters were
granted an over-allotment option to purchase 232,500 additional shares of Common
Stock and 232,500 additional Warrants. The over-allotment option was exercised
and the transaction closed in October 1997, with the Company selling to the
underwriters an additional 232,500 shares of Common Stock for $4.00 per share
and 232,500 additional Warrants for $0.125 per Warrant for net proceeds of
approximately $834,385 after payment of offering expenses and underwriting
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<PAGE>
discounts and commissions. Net proceeds from the exercise of the over-allotment
option are being used for working capital purposes.
The following discussion reflects historical consolidated financial
data for the periods ended December 31, 1997 and December 31, 1996.
Results of Operations
Year Ended December 31, 1997 as compared to Year Ended December 31,
1996. The financial information discussed herein is derived from the historical
consolidated financial statements of the Company for the respective years ended
December 31, 1997 and 1996 and the acquisition of USA on November 11, 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 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 and USA from their
respective acquisition dates and the consolidated results of the Company's
ownership of both Brister's and USA for the entire year presented for 1997.
The Company experienced revenues of approximately $7.6 million for the
year ended December 31, 1997 compared to $8.3 million for the year comparable
period of 1996. These results continue to reflect weak product demand during the
first half of each fiscal year 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
$2,149,000 for the year ended December 31, 1997 as compared to approximately
$2,571,000, including the one-time only non-cash charge of approximately
$1,008,000 to earnings for the "fair value" recognition on common stock sold or
issued to Halter Financial Group. The increase in comparable expenses between
1997 and 1996 was approximately $1,430,000. This increase was attributable to
increases in advertising and marketing costs, current year research and
development costs and general corporate overhead expenses related to the growth
and maturation of the Company's operations and amortization of goodwill incurred
at the respective acquisitions of Brister's and USA. Further, the 1997 financial
statements reflect the initial full year ownership of both Brister's and USA as
compared to only the respective operations of Brister's and USA from their
respective acquisition dates during 1996. Management has identified these costs
for constant monitoring and is taking steps to control expenditures at
anticipated constant or lower levels for future periods.
During 1997, the Company incurred approximately $34,000 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 Halter
Financial Group, Inc. ("HFG"), a company owned by Timothy P. Halter, Chairman of
the Board, Secretary and a director of the Company, for reorganization and
restructuring costs, at less than "fair value" as defined in the appropriate
accounting standards.
For the year ended December 31, 1997, the Company incurred a net loss
of approximately $1,051,000 as compared to a net loss of approximately $960,000,
including the one-time accounting charge discussed above, for the comparable
year ended December 31, 1996. Management attributes the increases in the net
loss for fiscal 1997 compared to fiscal 1996 to increased general corporate
overhead expenses and a decline in Fun Kart units sold from previous years.
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<PAGE>
Basic earnings (loss) per share were approximately $(0.32) for the year
ended December 31, 1997 and approximately $(0.51) for the year ended December
31, 1996. Excluding the one-time accounting charge, the year ended December 31,
1996 had a proforma earnings per share of approximately $0.25 per share.
Consolidated Fiscal Year Ended December 31, 1996 as compared to
Combined Fiscal Year Ended December 31, 1995. The Company, on a proforma
combined 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.
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.
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.
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 six product liability lawsuits
outstanding, none of which are expected to exceed existing product liability
insurance policy limits. The Company has never had a claim that resulted in an
award or settlement in excess of insurance coverage. There is no assurance that
the Company's insurance coverage of $5,000,000 per occurrence and $5,000,000
aggregate will be sufficient to fully protect the business and assets of the
Company from all claims, nor can any assurances be given that the Company will
be able to maintain the existing coverage or obtain additional coverage at
commercially reasonable rates. Management believes that it has process controls
on its product operations, product labeling, operator's manuals, and design
features which will assist in a successful defense of any present or future
product liability claim. To the extent product liability losses are beyond the
limits or scope of the Company's insurance coverage, the Company could
experience a material adverse effect upon its business, operations,
profitability and assets.
The Company sold certain securities to a former director of the Company
and to HFG (as hereinafter defined) during the Company's reorganization phase in
early 1996 prior to the Brister's Acquisition. Based on the
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"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 (as hereinafter defined), 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 "Certain Relationships
and Related Transactions" and "Notes to Consolidated Financial Statements."
Seasonality
The Company experiences significant seasonality in its sales pattern
with only approximately 40% of its sales recognized in the first half of the
year. Approximately 58% of total sales are realized after August of each year.
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 1998 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 paid the
$3.2 million of debt, including the Brister Notes, with a portion of the
proceeds of the 1997 Public Offering. See "Certain Relationships and Related
Transactions."
At December 31, 1997, the Company had positive working capital of
approximately $4.05 million. 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 $224,000 and $114,000 for calendar 1997
and 1996, respectively. This deficiency was principally caused by increases in
trade accounts receivable attributable to sales to mass merchandisers in 1996
and lower than expected sales volume in 1997. 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.
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, 1997 and 1996, respectively, the
Company expended approximately $477,000 and $72,000 for capital assets and/or
improvements, including the purchase in 1997 of a powder paint system and tube
bending machine for its manufacturing facility in Prattville, Alabama.
The Company used the net proceeds from the 1997 Public Offering to
repay $2.2 million in long-term indebtedness, the $300,000 Brister's credit line
and to support the Company's fixed asset programs and research and development
efforts. The combined effect of the repayment and conversion of the Company's
long-term debt
-18-
<PAGE>
will yield interest expense reductions of approximately $400,000 during the 12
month period after retirement of the debt.
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.
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. The Company has limited financial resources for future 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 a major 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.
Year 2000 Modifications
The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000. The Company does not
currently anticipate that it will incur material expenditures to complete any
such modifications.
Other Matters
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 requires companies with complex capital structures that have
publicly held common stock or common stock equivalents to present both basic and
diluted earnings per share ("EPS") on the face of the income statement. The
presentation of basic EPS replaces the presentation of primary EPS currently
required by Accounting Principles Board Opinion No. 15 ("APB No. 15"). Basic EPS
is calculated as income available to common stockholders divided by the weighted
average number of common shares outstanding during the period. Diluted EPS is
calculated using the "if converted" method for convertible securities and the
treasury stock method for options and warrants as prescribed by APB No. 15. This
statement is effective for financial statements issued for interim and annual
periods ending after December 15, 1997. The adoption of SFAS 128 did not have a
significant impact on the Company's reported EPS.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, Disclosures of Information
About Capital Structure ("SFAS 129") which establishes standards for disclosing
information about an entity's capital structure. The disclosures are not expect
to have a significant impact on the consolidated financial statements of the
Company. SFAS 129 is effective for financial statements ending after December
15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130") which established standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 is effective for
years beginning after December 15, 1997. The Company does not anticipate a
material impact to its consolidated financial statements upon adoption of this
standard.
-19-
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("SFAS 131") which establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes the related disclosures about
products and services, geographic areas and major customers. SFAS 131 replaces
the "industry segment" concept of Financial Accounting Standard No. 14 with a
"management approach" concept as the basis for identifying reportable segments.
SFAS 131 is effective for financial statements for annual periods beginning
after December 15, 1997. The Company does not anticipate a material impact to
its consolidated financial statements upon adoption of this standard.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
See Index to Financial Statements and Financial Statement Schedule beginning on
-------------------------------------------------------------------------------
Page F-2
--------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
There are not and have not been any disagreements between the Company
and its accountants on any matter of accounting principles or practices or
financial statement disclosure.
-20-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
Directors and Executive Officers
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Name Age Position
- ---- --- --------
Robert M. Aubrey 52 President, Chief Executive Officer and Director
Timothy P. Halter(1) 31 Chairman of the Board, Secretary and Director
Charles Brister(1) 45 Director
Gary C. Evans 40 Director
Joseph R. Mannes(2) 38 Director
Ronald C. Morgan 49 Director
- -------------------
(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.
Robert M. Aubrey is the President, Chief Executive Officer and a
director of the Company and has served in those capacities since January 30,
1998. From 1973 to 1997, Mr. Aubrey was the Chief Executive Officer of Aubrey,
Inc., a company that, along with its subsidiaries Air Care Industries and
National Industries, developed, manufactured and marketed residential air
ventilation fans, steel utility doors and portable electric heaters for the
residential, consumer and retail industries under private label and OEM
contracts. During that time, Mr. Aubrey was primarily responsible for the
increase of Aubrey, Inc.'s revenues from $4 million to annual revenues in excess
of $50 million. At the time of the sale of Aubrey, Inc., it marketed its
products under three different brand names, operated three manufacturing plants
and employed over 500 persons. Mr. Aubrey holds a Bachelors of Business
Administration from the University of Wisconsin.
Timothy P. Halter has been Secretary and a director of the Company
since February 1996. Mr. Halter was elected Chairman of the Board on February
16, 1998. 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.
-21-
<PAGE>
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.
Joseph R. Mannes has been a director of the Company since July 1996,
and since April 1997 has been Vice President and General Manager of iMagic
Online Corporation, a Texas company, offering real-time internet games.
Previously, he was the Chief Financial Officer, Secretary and Treasurer of
Interactive Creations Incorporated ("ICI"), a predecessor corporation. 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 1993, he has served as Chief Operating Officer, Executive Vice
President and Director of The Leather Factory, Inc., an AMEX listed company
("TLF"). As a co-founder of The Leather Factory, Mr. Morgan has served as Chief
Operating Officer, Executive Vice President and Director since its formation in
1980. Mr. Morgan was employed by the Tandy Corporation and Tandy Leather Company
10 years prior to 1980. During this 10 year period he was promoted through
various levels of management in such a manner that he progressed from
Manager-Trainee to Vice- President by 1977. Mr. Morgan was Vice President of
Tandy Leather Company from 1977 to 1980, directing operations for 350 retail
stores. From 1970 through 1976, Mr. Morgan served in several positions of
management for various companies of Tandy Corporation in New York, Pennsylvania,
California, Arizona, and Texas. Mr. Morgan attended college at Southern Colorado
State University and holds a Bachelor of Science degree from West Texas State
University.
There are no family relationships among any of the Company's officers
and directors.
Effective April 2, 1998, Robert W. Bell resigned as a director of the
Company. Mr. Bell's resignation was not the result of any disagreement with the
Company's management.
ITEM 10. 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.
-22-
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
<S> <C> <C> <C>
Annual Compensation Long-Term Compensation
------------------------------ -------------------------------
Awards
-------------------------------
Securities
Other Annual Restricted Underlying
Name/Title Year Salary/Bonus Compensation Stock Awards Options/SARs
- ---------- ---- ------------ ------------ ------------- ------------
V. Lynn Graybill, former Chairman of 1997 $131,250 $ -0- -0- -0-
the Board, Chief Executive Officer 1996 $121,731 $15,000(2) -0- -0-
and President(1)
(1) Effective January 15, 1998, V. Lynn Graybill resigned as Chairman of the Board, Chief Executive Officer and President of the
Company. See "-- Employment Agreements and Related Matters."
(2) 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.
</TABLE>
Employment Agreements and Related Matters
Effective January 30, 1998, the Company entered into an Employment
Agreement (the "Employment Agreement") with Robert M. Aubrey, whereby Mr. Aubrey
agreed to serve as President and Chief Executive Officer of the Company. The
Employment Agreement is for a term of three years and provides Mr. Aubrey with
an annual base salary of $150,000. Upon execution of the Employment Agreement,
Mr. Aubrey received options to purchase 200,000 shares of Common Stock at an
exercise price of $3.25 per share. The options vest as follows: (a) options to
purchase 100,000 shares vest on January 30, 1999; (b) options to purchase 50,000
shares vest on January 30, 2000; and (c) options to purchase the remaining
50,000 shares vest on January 30, 2001. All unvested options vest immediately
upon the termination of the Employment Agreement if such termination is for any
reason other than "for cause," and all unexercised options expire on January 30,
2003. Mr. Aubrey may also receive annual performance based stock options to
purchase up to 50,000 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, and an annual cash bonus not to exceed 15% of his base salary. Mr.
Aubrey is entitled to receive benefits commensurate with his title including
medical insurance and other benefits offered to executive management of the
Company. Mr. Aubrey 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.
The Employment Agreement restricts the ability of Mr. Aubrey 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
two years following the termination of the Employment Agreement by either Mr.
Aubrey 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.
In connection with the resignation of V. Lynn Graybill as Chairman of
the Board, Chief Executive Officer and President of the Company, the Company and
Mr. Graybill entered into a Mutual Release and Separation Agreement, dated
January 15, 1998 (the "Separation Agreement"), for the purpose of satisfying and
discharging all obligations of the Company to Mr. Graybill under the terms of
Mr. Graybill's Employment Agreement, dated March 15, 1996. Under the terms of
the Separation Agreement, the Company agreed to pay to Mr. Graybill a one time
payment of $208,100 (the "Severance Amount"). As additional consideration for
the Severance Amount, Mr. Graybill agreed to adhere to the non-competition and
non-solicitation covenants contained in his Employment Agreement, which
covenants expire on January 15, 2001.
-23-
<PAGE>
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 Brister's, 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. Mr.
Callegari's options expired as a result of the termination of his employment
with the Company in February 1998. 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.
In connection with the execution of his Employment Agreement, Mr.
Aubrey received options to purchase 200,000 shares of Common Stock at an
exercise price of $3.25 per share. The options vest as follows: (a) options to
purchase 100,000 shares vest on January 30, 1999; (b) options to purchase 50,000
shares vest on January 30, 2000; and (c) options to purchase the remaining
50,000 shares vest on January 30, 2001. All unvested options vest immediately
upon the termination of the Employment Agreement if such termination is for any
reason other than "for cause," and all unexpired options expire on January 30,
2003. Furthermore, in March 1998, the Company granted options to purchase an
aggregate of 20,000 shares of Common Stock at an exercise price of $3.50 per
share, to certain employees of the Company. The foregoing options vest on the
first anniversary date of their date of grant, and expire on the earlier of five
years from their respective date of grant or upon the termination of the option
holder as an employee of the Company.
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 either
the NASD Electronic Bulletin Board or the Nasdaq SmallCap Market system, as
applicable, on the date of grant of such options. The Company intends to submit
for approval a qualified stock compensation plan at its next annual meeting of
shareholders in May 1998. The Company believes it is necessary to have a stock
compensation plan available for management and employees 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
Chairman of the Board of the Company is also entitled to receive monthly
compensation of $5,000 for every month in which such individual serves in such
capacity. The Company will reimburse directors for out-of-pocket expenses
incurred for attending meetings.
-24-
<PAGE>
Meetings and Committees of the Board of Directors
The business of the Company is managed under the direction of the Board
of Directors. The Board of Directors met on four occasions during calendar 1997
and acted by unanimous consent in lieu of meeting on three occasions during such
period.
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 Compensation
Committee met on three occasions during calendar 1997. 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. The Audit Committee met on two
occasions during calendar 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
The following table sets forth certain information with respect to the
ownership of the Company's shares of Common Stock as of March 3, 1998 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>
Shares Beneficially Percentage of Shares
Name(1) Owned Beneficially Owned
------------------------------------------------------- ------------------- --------------------
<S> <C>
Robert M. Aubrey(2).................................... -0- -0-
Charles Brister(3)..................................... 516,668 10.6
Joseph R. Mannes(4).................................... 63,734 1.3
Ronald C. Morgan(4).................................... 3,334 *
Gary C. Evans(5)....................................... 51,114 1.1
Timothy P. Halter(6)................................... 470,254 9.7
Halter Financial Group, Inc.(6)........................ 470,254 9.7
Schlinger Foundation(7)................................ 730,288 15.0
Evert I. Schlinger(8).................................. 768,066 15.8
Officers and directors as a group (6 persons)(9)....... 1,105,104 22.7
</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) Mr. Aubrey is the President, Chief Executive Officer and a director of the
Company.
(3) Mr. Brister is a director of the Company. See "Certain Relationships
and Related Transactions."
(4) Messrs. Mannes and Morgan are directors of the Company.
(5) Mr. Evans is a director of the Company. Includes 20,001 s hares of Common
Stock underlying 1996 Warrants issued to Mr. Evans in connection with the
Bridge Financing and conversion of the Convertible Preferred Stock. See
"Certain Relationships and Related Transactions."
(6) Mr. Halter, the Chairman of the Board, Secretary and director of the
Company, is the sole stockholder, director and president of Halter
Financial Group, Inc. ("HFG") and is therefore deemed to have beneficial
ownership of the shares of Common Stock held by HFG. Includes the 210,288
shares of Common Stock subject to the HFG Escrow Agreement (as hereinafter
defined). HFG and Mr. Halter's address is 4851 LBJ Freeway, Suite 201,
Dallas, Texas 75244. See "Certain Relationships and Related Transactions."
(7) The Schlinger Foundation ("Foundation") beneficially owns 520,000 shares of
the Company's Common Stock, See "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 210,288 of the shares of Common Stock of the Company for his
own account. See "Certain Relationships and Related Transactions."
(8) Includes 520,000 shares of Common Stock owned by the Foundation, 210,288
shares of Common Stock owned by Mr. Schlinger for his own account, and
37,778 shares of Common Stock held by the Brian Schlinger Trust. Mr. Evert
I. Schlinger
-25-
<PAGE>
is the sole trustee of the Brian Schlinger Trust and has sole voting and
dispositive power over the shares held by this trust. However, Mr. Evert
I. Schlinger does not claim any ownership interest in any of the shares of
Common Stock owned by the Brian Schlinger Trust.
(9) Includes 20,001 shares of Common Stock underlying 20,001 1996 Warrants held
by Mr. Evans.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
On March 31, 1996, the Company concluded the private sale of 233,333
shares of Common Stock to 13 investors (the "Investors") for aggregate proceeds
of $525,000 (the "March 1996 Offering"). In connection with the March 1996
Offering, the Company and HFG agreed to issue additional shares of Common Stock
to the Investors if on March 31, 1998 (the "Offering Valuation Date") the
average closing bid price of the Common Stock for the 10 trading days prior to
and including the Offering Valuation Date (the "Stock Market Value") did not
equal or exceed $4.50 per share, such that each Investor would 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 to $4.50 per share. HFG placed into escrow 233,333 shares of Common
Stock (the "HFG Escrow Shares") to be issued to Investors if an adjustment was
required. Based upon the Stock Market Value of the Company Stock on the Offering
Valuation Date, HFG is obligated to issue to the Investors an aggregate of
76,499 HFG Escrow Shares. All remaining HFG Escrow Shares will be returned to
HFG. The Company is under no obligation to issue to HFG any additional shares of
Common Stock as reimbursement for the HFG Escrow Shares distributed to
participants in the March 1996 Offering.
As partial consideration for the Brister's Acquisition, the Company
issued to Charles Brister, a director of the Company, a subordinated note in the
principal amount of $1,000,000 and a $200,000 note (collectively, the "Brister
Notes"). In September 1997, the Company paid Mr. Brister approximately $1.2
million as payment of the Brister Notes plus accrued interest.
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.
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 Roseland manufacturing facility which
provides for a two-year primary term with a two-year renewal option. The monthly
lease payment for the Roseland facility 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.
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.
-26-
<PAGE>
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 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.
During 1997 the Company paid Mr. Brister a total of $17,283 under the License
Agreement.
The Company employed Mr. Brister as a consultant on a project by
project basis during 1997 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. During 1997, Mr. Brister received
approximately $30,000 for consulting fees.
To partially 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"). 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. On August 28,
1997, the Foundation agreed that upon the closing of the 1997 Public Offering it
would convert $1 million of the principal amount of the Schlinger Note into
250,000 shares of Common Stock. In October 1997, the Company paid the Foundation
approximately $1.0 million as payment of the remaining balance of the Schlinger
Note plus accrued interest.
The Foundation has agreed not to sell or dispose of the 250,000 shares
of Common Stock issued upon conversion of $1 million principal amount of the
Schlinger Note until after September 9, 1998. The Foundation has also agreed not
to sell or dispose of the remaining 270,000 shares it owns until after September
9, 1998, provided the Foundation may sell such shares in the public market at a
price equal to or greater than $7.00 per share without regard to the provisions
of the lock-up agreement.
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. At the closing of the 1997 Public Offering, Mr. Evans, and the
other Convertible Preferred Stockholders, converted the outstanding Convertible
Preferred Stock into shares of Common Stock and 1996 Warrants. In September
1997, the Company paid Mr. Evans $25,000 and issued to him 4,167 shares of
Common Stock and 13,334 1996 Warrants upon conversion of one share of
Convertible Preferred Stock owned by Mr. Evans.
The holders of the Convertible Preferred Stock have agreed not to sell
or otherwise dispose of, for a period of 18 months following the completion of
the 1997 Public Offering, any of the 104,175 shares of Common Stock, the 1996
Warrants or 500,025 shares of Common Stock issuable upon exercise of the 1996
Warrants which were issued to them upon conversion of the Convertible Preferred
Stock in September 1997. Certain officers and directors of the Company have
agreed not to sell or dispose of any of the shares of Common Stock held by them
without the prior written consent of the representative of the underwriters of
the Company's 1997 Public Offering until after September 9, 1999.
The Company has granted to the holders of the underwriters' warrants
(the "Underwriters' Warrants") issued to the underwriters in connection with the
Company's 1997 Public Offering registration rights to require the Company, at
the Company's expense, to register under the Securities Act of 1933, as amended,
the 155,000 Underwriters' Warrants and 155,000 shares under the Underwriters'
Warrants. The Company has also granted to the holders of the 1996 Warrants
certain registration rights with respect to the 500,025 shares of Common Stock
issuable upon exercise of the 1996 Warrants.
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.
-27-
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-KSB
--------------------------------------------------------
(a)(1) Financial Statements: See Index to Consolidated Financial Statements on
page F-2.
(a)(2) Exhibits:
Exhibit
Number Description of Exhibit
- ------- ----------------------------------------------------------------------
2.1* Agreement and Plan of Merger, dated April 16, 1996, by and between
Sarah Acquisition Corporation and the Company.
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.
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.
-28-
<PAGE>
Exhibit
Number Description of Exhibit
------ -------------------------------------------------------------------
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.
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.
-29-
<PAGE>
Exhibit
Number Description of Exhibit
- ------ -----------------------------------------------------------------------
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.
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.
10.37* Letter Agreement between The Schlinger Foundation and the
Company, dated August 28, 1997, regarding the conversion of $1
million of the principal amount of the Schlinger Note into
250,000 shares of Common Stock.
10.38**Employment Agreement, dated January 30, 1998, by and between the
Company and Robert M. Aubrey.
21.1* Subsidiaries of the Company.
27.1** Financial Data Schedule.
- ----------------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (SEC File No. 333-24145) and incorporated by reference herein.
** Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997, as filed with the U.S.
Securities and Exchange Commission on March 30, 1998.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the last
quarter of fiscal 1997.
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on April
16, 1998.
KARTS INTERNATIONAL INCORPORATED
(Registrant)
By: /s/ Robert M. Aubrey By: /s/ Timothy P. Halter
-------------------------------------------- ---------------------
Robert M. Aubrey, President, Chief Executive Timothy P. Halter
Officer and Director (Principal Accounting
(Principal Executive Officer) Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
<TABLE>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ Robert M. Aubrey President, Chief Executive Officer and Director April 16, 1998
- -------------------------------------------
Robert M. Aubrey (Principal Executive Officer)
/s/ Timothy P. Halter Chairman of the Board, Secretary and Director April 16, 1998
- -------------------------------------------
Timothy P. Halter (Principal Accounting Officer)
/s/ Charles Brister Director April 16, 1998
- -------------------------------------------
Charles Brister
/s/ Joseph R. Mannes Director April 16, 1998
- -------------------------------------------
Joseph R. Mannes
/s/ Ronald C. Morgan Director April 16, 1998
- -------------------------------------------
Ronald C. Morgan
/s/ Gary C. Evans Director April 16, 1998
- -------------------------------------------
Gary C. Evans
</TABLE>
-31-
<PAGE>
KARTS INTERNATIONAL
INCORPORATED
AND SUBSIDIARIES
Consolidated
Financial Statements
and
Auditor's Report
December 31, 1997 and 1996
S. W. HATFIELD + ASSOCIATES
certified public accountants
Use our past to assist your future sm
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONTENTS
Page
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 1997 and 1996 F-4
Consolidated Statements of Operations
for the years ended December 31, 1997 and 1996 F-6
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1997 and 1996 F-7
Consolidated Statements of Cash Flows
for the years ended December 31, 1997 and 1996 F-9
Notes to Consolidated Financial Statements F-11
<PAGE>
S. W. HATFIELD + ASSOCIATES
certified public accountants
Members: American Institute of Certified Public Accountants
SEC Practice Section
Information Technology Section
Texas Society of Certified Public Accountants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
Karts International Incorporated
We have audited the accompanying consolidated balance sheets of Karts
International Incorporated (a Nevada corporation) and Subsidiaries as of
December 31, 1997 and 1996 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 and Subsidiaries as of December 31, 1997 and 1996, 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. W. HATFIELD + ASSOCIATES
Dallas, Texas
March 20, 1998
Use our past to assist your future sm
P. O. Box 820392 o Dallas, Texas 75382-0392 o 214-342-9635
9236 Church Road, Suite 1040 o Dallas, Texas 75231 o 800-244-0639
214-342-9601 (fax) o [email protected] (e-mail)
F-3
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997 and 1996
ASSETS
1997 1996
------------ ------------
<S> <C> <C>
Current assets
Cash on hand and in bank $ 2,801,746 $ 630,028
Accounts receivable
Trade, net of allowance for doubtful accounts
of $3,000 and $5,000, respectively 463,045 1,795,802
Recoverable income taxes 225,000 --
Other -- 1,052
Inventory 909,214 958,381
Prepaid expenses 172,139 6,027
------------ ------------
Total current assets 4,571,144 3,391,290
------------ ------------
Property and equipment - at cost 1,262,772 771,374
Accumulated depreciation (137,746) (34,598)
------------ ------------
1,157,826 736,776
Land 32,800 32,800
------------ ------------
Net property and equipment 1,157,826 769,576
------------ ------------
Other assets
Deposits and other 8,851 19,060
Loan costs, net of accumulated amortization
of approximately $122,033 and $20,120, respectively -- 101,913
Organization costs, net of accumulated
amortization of approximately $38,990 and
$17,139, respectively 70,265 92,116
Goodwill, net of accumulated amortization
of approximately $385,608 and $151,286, respectively 5,473,815 5,708,137
------------ ------------
Total other assets 5,552,931 5,921,226
------------ ------------
TOTAL ASSETS $ 11,281,901 $ 10,082,092
============ ============
</TABLE>
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
December 31, 1997 and 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
------------ ------------
<S> <C>
Current liabilities
Notes payable to banks $ -- $ 140,020
Current maturities of notes payable 18,357 116,390
Accounts payable - trade 292,083 766,833
Other accrued liabilities
Payroll and sales taxes payable 40,568 55,944
Interest payable -- 33,099
Other 20,006 1,429
Federal and State income taxes payable 137,710 269,217
------------ ------------
Total current liabilities 508,724 1,382,932
------------ ------------
Long-term liabilities
Notes payable, net of current maturities
Related parties -- 3,200,000
Banks and individuals 230,841 132,660
------------ ------------
Total liabilities 739,565 4,715,592
------------ ------------
Commitments and contingencies
Convertible Preferred Stock
$0.001 par value. 25 shares allocated,
issued and outstanding -- 625,000
------------ ------------
Shareholders' Equity
Preferred stock - $0.001 par value 10,000,000
shares authorized, 25 shares allocated; -0- and
-0- shares issued and outstanding, respectively -- --
Common stock - $0.001 par value 14,000,000
shares authorized; 4,854,133 and 2,717,458
shares issued and outstanding, respectively 4,854 2,718
Additional paid-in capital 13,040,090 6,190,192
Accumulated deficit (2,502,608) (1,451,410)
------------ ------------
Total shareholders' equity 10,542,336 4,741,500
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 11,281,901 $ 10,082,092
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
Revenues
Kart sales - net $ 7,586,476 $ 8,327,316
----------- -----------
Cost of sales
Purchases 4,249,409 4,910,692
Direct labor 765,360 570,842
Other direct costs 1,005,202 676,604
----------- -----------
Total cost of sales 6,019,971 6,158,138
----------- -----------
Gross profit 1,566,505 2,169,178
----------- -----------
Operating expenses
Research and development expenses 33,968 --
Selling expenses 231,132 30,195
General and administrative expenses
Salaries and related costs 691,857 445,624
Other operating expenses 832,491 462,025
Compensation expense related to common
stock issuances at less than "fair value"
for reorganization, restructuring and
consulting costs -- 1,430,287
Depreciation and amortization 359,321 203,022
----------- -----------
Total operating expenses 2,148,769 2,571,153
----------- -----------
Loss from operations (582,264) (401,975)
Other income (expense)
Interest expense (507,696) (396,589)
Employment termination settlement (208,100) --
Interest and other income 93,602 32,573
----------- -----------
Loss before income taxes (1,204,458) (765,991)
Income taxes 153,260 (193,575)
----------- -----------
Net loss $(1,051,198) $ (959,566)
=========== ===========
Net loss per weighted-average share
of common stock outstanding - Basic $ (0.32) $ (0.51)
=========== ===========
Weighted-average number of shares
of common stock outstanding - Basic 3,319,620 1,892,563
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
Convertible Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------ -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 -- -- 83,246 $ 83 $ 487,751 $(491,844) (4,010)
Sale of common stock
to current and former directors in
February 1996, including "fair
value" adjustment -- -- 784,212 785 885,375 -- 886,160
Sale of common stock
to related party for escrow
agreement related to March
1996 private placement
agreement -- -- 233,333 233 117 -- 350
under private placement
memorandum in March 1996 -- -- 233,333 233 524,767 -- 525,000
less cost of raising capital -- -- -- -- (163,100) -- (163,100)
under private sale document in July 1996 -- -- 6,667 7 34,993 -- 35,000
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 -- -- 483,333 483 545,683 -- 546,166
settlement of January 1996 negotiated
employment contract signing bonus -- -- 140,000 140 14,860 -- 15,000
payment of March 1996 loan
origination fees -- -- 70,000 70 10,430 -- 10,500
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1997 and 1996
Convertible Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
-------- -------- ---------- -------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
July 1996 settlement of the acquisition
of Brister's Thunder Karts, Inc. -- -- 516,667 517 3,099,483 -- 3,100,000
November 1996 acquisition of
USA Industries, Inc. -- -- 166,667 167 749,833 -- 750,000
Net loss for the year -- -- -- -- -- (959,566) (959,566)
--------- --------- ---------- -------- ---------- ------------ -----------
Balances at December 31, 1996 25 625,000 2,717,458 2,718 6,190,192 (1,451,410) 4,741,500
Sale of common stock and warrants
under Form SB-2 Registration
Statement, including over-allotment
and Underwriter's warrants -- -- 1,782,500 1,782 7,351,185 -- 7,352,967
Less costs and expenses of
raising capital -- -- -- -- (1,959,302) -- (1,959,302)
Redemption of convertible
preferred stock and issuance
of common stock upon
conversion (25) (625,000) 104,175 104 458,265 -- 458,369
Common stock issued upon
conversion of long-term debt -- -- 250,000 250 999,750 -- 1,000,000
Net loss for the year -- -- -- -- -- (1,051,198) (1,051,198)
--------- --------- ---------- -------- ---------- ------------ -----------
Balances at December 31, 1997 -- $ -- 4,854,133 $ 4,854 $13,040,090 $ (2,502,608) $10,542,336
========= ========= ========== ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
<S> <C>
Cash flows from operating activities
Net loss for the year $(1,051,198) $ (959,566)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 461,234 223,142
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 1,333,809 (770,825)
Recoverable income taxes (225,000) --
Inventory 49,167 154,485
Prepaid expenses and other (155,903) 82,517
Increase (Decrease) in:
Accounts payable (474,750) (458,548)
Other accrued liabilities (29,898) 3,944
Income taxes payable (131,507) 165,675
----------- -----------
Net cash used in operating activities (224,046) (113,889)
----------- -----------
Cash flows from investing activities
Cash received for sale of equipment 6,666 --
Cash paid for property and equipment (477,294) (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 (470,628) (2,179,206)
----------- -----------
Cash flows from financing activities
Net activity on bank line of credit (140,020) 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 (2,220,622) (89,633)
Cash received from sale of convertible preferred stock -- 625,000
Cash paid for redemption 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 and warrants 7,352,968 657,139
Cash paid for brokerage and placement fees
related to sale of common stock (1,500,934) (257,850)
----------- -----------
Net cash provided by financing activities 2,866,392 2,923,123
----------- -----------
Increase in cash 2,171,718 630,028
Cash at beginning of year 630,028 --
----------- -----------
Cash at end of year $ 2,801,746 $ 630,028
=========== ===========
</TABLE>
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
Years ended December 31, 1997 and 1996
1997 1996
--------------- ----------
<S> <C>
Supplemental disclosure of interest
and income taxes paid
Interest paid for the year $ 438,882 $ 348,730
=============== ==========
Income taxes paid for the year $ 203,247 $ 28,000
=============== ==========
Supplemental disclosure of non-cash
investing and financing activities
Long-term note payable converted to common stock $ 1,000,000 $ --
=============== ==========
Vehicle acquired with long-term bank note $ 20,770 $ --
=============== ==========
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-10
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Karts International Incorporated (formerly Sarah Acquisition Corporation)
(Company) was originally incorporated on February 28, 1984 as Rapholz Silver
Hunt, Inc. under the laws of the State of Florida. In June 1984, April 1986, and
November 1987, respectively, the Company changed its corporate name to Great
Colorado Silver, Inc., Great Colorado Silver Valley Development Company and J.
R. Gold Mines, Inc. In January 1996, the Company changed its corporate name to
Sarah Acquisition Corporation.
The Company has had no significant business operations from 1989 through 1996.
Prior to that time, the Company was involved in the mining industry, principally
through joint ventures with related parties involving mining properties located
in Colorado.
In December 1995, the Company experienced a change in control due to the
transfer of a controlling position in issued and outstanding shares of common
stock of the Company between unrelated third parties. It was the intent of the
new controlling shareholders and management to seek a suitable situation for
merger or acquisition.
On February 23, 1996, the Company was reincorporated in the State of Nevada by
means of a merger with and into Karts International Incorporated, a Nevada
corporation incorporated on February 21, 1996. The Company was the surviving
entity and changed its corporate name to Karts International Incorporated. The
reincorporation merger had the effect of a one for 250 reverse split of the
Company's issued and outstanding common stock.
The reincorporation merger also modified the Company's capital structure to
authorize the issuance of up to 20,000,000 shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par value
Preferred Stock. The effect of this transaction has been reflected in the
accompanying financial statements as of the beginning of the first period
presented.
On February 28, 1997, to be effective on March 24, 1997, the Company's Board of
Directors approved a two (2) for three (3) reverse stock split and a
corresponding reduction of the authorized shares of common stock in anticipation
of a proposed underwritten public offering of the Company's common stock during
1997. The issued and outstanding shares of common stock shown in the
accompanying financial statements reflect the ultimate effect of the March 24,
1997 reverse stock split as if this second reverse split had occurred as of the
beginning of the first period presented in the accompanying consolidated
financial statements.
During February and March 1996, the Company sold or issued an aggregate
1,634,650 post-March 24, 1997 reverse split shares of restricted, unregistered
common stock to a former director and a company controlled by a current officer
and director during the Company's reorganization phase. The differential between
the aggregate cash proceeds of approximately $2,039 and the "fair value" of the
shares issued created a one-time accounting charge to operations for
compensation expense related to reorganization, restructuring and consulting
expenses of approximately $1,430,000. These transactions are more fully
discussed in Note J - Common Stock Transactions.
On March 15, 1996, effective at the close of business on March 31, 1996, the
Company acquired 100.0% of the issued and outstanding stock of Brister's Thunder
Karts, Inc. (a Louisiana corporation), a "fun kart" manufacturer located in
Roseland, Louisiana for total consideration of approximately $6,100,000. This
acquisition was accounted for as a purchase.
F-11
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS - Continued
On November 20, 1996, effective at the close of business on November 21, 1996,
the Company acquired 100.0% of the issued and outstanding stock of USA
Industries, Inc. (an Alabama corporation), a "fun kart" manufacturer located in
Prattville, Alabama for total consideration of approximately $1,000,000. This
acquisition was accounted for as a purchase.
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.
Purchase price $6,100,000
Assets acquired (2,017,394)
Liabilities assumed 781,367
----------
Goodwill related to Brister's $4,863,973
==========
F-12
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
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.
Purchase price $1,000,000
Assets acquired (1,496,970)
Liabilities assumed 1,492,420
Goodwill related to USA $ 995,450
==========
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:
1996
Revenues $10,698,824
Net income (loss) $(214,984)
Earnings per share - basic $(0.07)
==========
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-13
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
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,
1997 and 1996, inventory consisted of the following components:
1997 1996
-------- --------
Raw materials $765,674 $875,450
Work in process 127,780 37,661
Finished goods 15,760 45,270
-------- --------
$909,214 $958,381
======== ========
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-14
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
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 follows the policy of evaluating all
qualifying assets as of the end of each reporting quarter. For the years
ended December 31, 1997 and 1996, no charges to operations were made for
impairments in the recoverability of goodwill.
8. Income taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. At December 31, 1997 and 1996, the deferred tax asset and
deferred tax liability accounts, as recorded when material, are entirely
the result of temporary differences. Temporary differences represent
differences in the recognition of assets and liabilities for tax and
financial reporting purposes, primarily accumulated depreciation and
amortization. No valuation allowance was provided against deferred tax
assets, where applicable.
9. Income (Loss) per share
-----------------------
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and common
stock equivalents (primarily outstanding options and warrants). Common
stock equivalents represent the dilutive effect of the assumed exercise of
the outstanding stock options and warrants, using the treasury stock
method. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of
issuance, whichever is later. As of December 31, 1997 and 1996, the
outstanding warrants and options are deemed to be anti-dilutive due to the
Company's net operating loss position.
10. Reclassifications
-----------------
Certain amounts within the accompanying financial statements for the year
ended December 31, 1996 have been reclassified to conform to the
presentation for the year ended December 31,1997.
11. 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-15
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Accounting standards to be adopted - continued
----------------------------------
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", (SFAS130) which established standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS130 is effective for years beginning after December 15,
1997. The Company does not anticipate a material impact from this change in
presentation of its consolidated financial statements upon adoption of this
standard.
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information", (SFAS131) which establishes revised
standards for the method in which public business enterprises are to report
information about operating segments in their annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
This statement also revises the related disclosures about products and
services, geographic areas and major customers. SFAS131 replaces the
"industry segment" concept established in Statement of Financial Accounting
Standard No. 14 with a "management approach" concept as the basis for
identifying reportable segments. SFAS131 is effective for financial
statements for years beginning after December 31, 1997 and for interim
periods presented after December 31, 1998. The Company does not anticipate
a material impact from this change in disclosure presentation in its
consolidated financial statements upon adoption of this standard.
NOTE D - CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash accounts in financial institutions subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the Company and its subsidiaries are entitled to aggregate
coverage of $100,000 per account type per separate legal entity per individual
financial institution. During the year ended December 31, 1997, the Company and
its subsidiaries had credit risk exposures in excess of the FDIC coverage as
follows:
<TABLE>
Highest Low Number of
Entity exposure exposure days with exposure
-------------------------- ---------- -------- ------------------
<S> <C>
Karts International Incorporated $1,624,288 $566 146
Brister's Thunder Karts, Inc. $830,848 $450 300
USA Industries, Inc. $447,918 $75 110
</TABLE>
F-16
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - CONCENTRATIONS OF CREDIT RISK - Continued
Additionally, the Company utilizes a lockbox system for the collection and
deposit of receipts on trade accounts receivable for each operating subsidiary
and a corporate cash concentration sweep account whereby all excess cash funds
are concentrated into one primary depository account with a financial
institution. The Company and the financial institution then participate in
uncollateralized reverse-repurchase agreements which are settled on a "next-
business day" basis for the investment of surplus cash funds. During 1997, the
Company had unsecured amounts invested in reverse repurchase agreements on a
daily basis from February 1997 through December 31, 1997. As of December 31,
1997, the Company had an unsecured outstanding reverse repurchase agreement of
approximately $2,395,000. The Company incurred no losses during 1997 as a result
of any of these unsecured situations.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components:
Estimated
1997 1996 useful life
----------- -------- -------------
Building and improvements $ 384,296 $331,360 5 to 25 years
Equipment 670,705 317,665 5 to 10 years
Transportation equipment 77,820 57,050 3 to 5 years
Furniture and fixtures 129,951 65,299 5 years
----------- --------
1,262,772 771,374
Accumulated depreciation (137,746) (34,598)
----------- --------
1,125,026 736,776
Land 32,800 32,800
----------- --------
Net property and equipment $ 1,157,826 $769,576
=========== ========
Total depreciation expense charged to operations for the years ended December
31, 1997 and 1996 was approximately $103,148 and $34,598, respectively.
NOTE F - NOTES PAYABLE
Notes payable consist of the following:
1997 1996
---------- ---------
$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
========== ========
F-17
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996
----------- -----------
<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
$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
----------- ---------
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - LONG-TERM DEBT - Continued
1997 1996
---------- -----------
<S> <C> <C>
Banks and individuals
- ---------------------
$20,770 installment note payable to a bank. Interest
at 7.75%. Payable in monthly installments of
approximately $419, including accrued interest.
Final maturity in May 2002. Collateralized by
a vehicle 18,781 -
$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. 224,295 235,089
$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. 4,208 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. 1,914 6,408
------- ----------
Total long-term debt to banks and individuals 249,198 249,050
------- ----------
Total long-term debt 249,198 3,449,050
Less current maturities (18,357) (116,390)
-------- ----------
Long-term portion $230,841 $3,332,660
======== ==========
</TABLE>
F-19
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - LONG-TERM DEBT - Continued
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ ----------
1998 $ 18,357
1999 15,253
2000 15,731
2001 17,335
2002 16,063
2003-2007 95,171
2008-2010 71,288
Totals $249,198
In September 1997, the Company issued 250,000 shares of restricted, unregistered
common stock in payment of $1,000,000 in principal on the long-term debt payable
to a Foundation.
NOTE H - INCOME TAXES
The components of income tax (benefit) expense for the years ended December 31,
1997 and 1996, respectively, are as follows:
1997 1996
---------- --------
Federal:
Current $(156,403) $156,675
Deferred - -
--------- --------
(156,403) 156,675
--------- ---------
State:
Current 3,143 36,900
Deferred - -
--------- ---------
3,143 36,900
--------- ---------
Total $(153,260) $ 193,575
========= =========
F-20
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES - Continued
The Company's income tax expense for the years ended December 31, 1997 and 1996,
respectively, differed from the statutory federal rate of 34 percent as follows:
<TABLE>
<S> <C>
1997 1996
--------- ---------
Statutory rate applied to earnings (loss) before income taxes $(409,516) $(260,437)
Increase (decrease) in income taxes resulting from:
State income taxes 3,143 36,900
Non-deductiability 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 79,669 (37,724)
Utilization of pre-acquisition net operating loss
of USA Industries, Inc. - (38,173)
Other 173,444 7,519
--------- ---------
Income tax expense $(153,260) $ 193,575
========= =========
</TABLE>
NOTE I - RELATED PARTY TRANSACTIONS
The Company leases its manufacturing facilities under an operating lease with
the former owner of Brister's, who is also a Company shareholder and director.
Concurrent with the closing of the acquisition of Brister's, the Company and the
former owner executed a new lease agreement for a primary two-year term expiring
in 1998 and an additional two-year renewal option. The monthly lease payment
will remain at $6,025 per month with annual adjustments for increases based upon
the Consumer Price Index. Total payments under this agreement were approximately
$72,300 and $54,225 for the years ended December 31, 1997 and 1996,
respectively.
Concurrent with the acquisition of Brister's, the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal Agreement.
This agreement provides that the Company may, at its sole option, purchase the
real property and improvements in Roseland, Louisiana currently utilized by the
Company or its subsidiary for an aggregate purchase price of $550,000. The
option may be exercised commencing on
January 1, 1998 and expires on December 31, 2000.
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.
F-21
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - CONVERTIBLE PREFERRED STOCK
The Company has 10,000,000 shares of Preferred Stock (Preferred Shares)
authorized for issuance.
In October 1996, the Company's Board of Directors allocated 25 shares of the
authorized number to facilitate the private placement of said shares as a
component of an Equity Unit (Unit) to be sold through a Private Placement
Memorandum (PPM). The PPM was fully subscribed and closed in November 1996. Each
$25,000 Unit consisted of one (1) share of convertible preferred stock and
10,000 redeemable common stock purchase warrants. The PPM raised total gross
proceeds of approximately $625,000 and net proceeds of approximately $530,250 to
the Company.
The Preferred Shares require mandatory conversion upon either the effectiveness
of a public offering of the Company's common stock pursuant to a Registration
Statement or upon the first anniversary date of the PPM closing date. In the
event that the conversion is triggered by a public offering, each Preferred
Share will be converted, at the holder's option, into either $25,000 cash and
the issuance of 6,250 shares of restricted, unregistered common stock or 12,500
shares of restricted, unregistered common stock. In either situation, the holder
retains piggyback registration rights for the shares of common stock issued in
the conversion. In the event that the conversion is triggered by the first
anniversary date of the PPM closing, each Preferred Share will be converted to
12,500 shares of restricted, unregistered common stock, subject to identical
piggyback registration rights.
In January 1997, the Company began undertaking a secondary public offering of
common stock pursuant to a Form SB-2 Registration Statement (secondary
offering). In accordance with guidance and instructions from the National
Association of Securities Dealers (NASD) related to the Company's application
for listing on the "NASDAQ Small-Cap Market", the NASD requested certain
modifications to the terms and conditions underlying the sale and issuance of
the Preferred Shares and their conversion terms.
On March 6, 1997, the Company offered to each holder of the Convertible
Preferred Stock the option of either (i) receiving a refund of $25,000 (the
initial Unit price) plus simple interest at 12.0% per annum as consideration for
assigning their Convertible Preferred Stock and 1996 Warrants to the Company or
(ii) agreeing to the conversion of the Convertible Preferred Stock at the
completion of a pending secondary offering upon the previously agreed terms
along with the issuance of an additional 13,334 1996 Warrants for each share of
Convertible Preferred Stock held as additional consideration for waiving certain
registration rights and agreeing to certain lock-up provisions with respect to
the Common Stock issuable upon conversion of the Convertible Preferred Stock and
the 1996 Warrants. 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.
On September 19, 1997, concurrent with a successful sale of common stock and
warrants pursuant to a Registration Statement on Form SB-2, the Company paid
$625,000 to redeem the outstanding convertible preferred stock and issued an
aggregate 104,175 shares of restricted, unregistered common stock and an
aggregate 333,350 1996 Warrants to the holders of the convertible preferred
stock as a component of the redemption.
F-22
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - COMMON STOCK TRANSACTIONS
On February 23, 1996, the Company was reincorporated in the State of Nevada by
means of a merger with and into Karts International Incorporated, a Nevada
corporation incorporated on February 21, 1996. The Company was the surviving
entity and changed its corporate name to Karts International Incorporated. The
reincorporation merger had the effect of a one for 250 reverse split of the
Company's issued and outstanding common stock.
The reincorporation merger also modified the Company's capital structure to
authorize the issuance of up to 20,000,000 shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par value
Preferred Stock. The effect of this transaction has been reflected in the
accompanying financial statements as of the beginning of the first period
presented.
On February 28, 1997, to be effective on March 24, 1997, the Company's Board of
Directors approved a two (2) for three (3) reverse stock split and a
corresponding reduction of the authorized shares of common stock in anticipation
of a proposed underwritten public offering of the Company's common stock during
1997. This reverse stock split reduced the authorized shares of common stock
from 20,000,000 to 14,000,000. The issued and outstanding shares of common stock
shown in the accompanying financial statements reflect the ultimate effect of
the March 24, 1997 reverse stock split as if this second reverse split had
occurred as of the beginning of the first period presented in the accompanying
consolidated financial statements.
On February 20, 1996, the Company sold 18,750,000 restricted, unregistered
pre-reorganization shares of common stock (75,000 equivalent post-reorganization
shares) (50,000 post-March 24, 1997 reverse split shares) to a former Company
director for cash of approximately $938. The transaction was recorded by the
Company based on the imputed "fair value" of the securities issued as required
by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The imputed fair value of this transaction was
calculated at a "fair value" of approximately $1.13 per share or approximately
$56,500. The differential between the imputed fair value and the actual cash
paid was recorded as a component of compensation expense related to common stock
issuances at less than "fair value" for reorganization, restructuring and
consulting expenses in the accompanying consolidated statement of operations.
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.
F-23
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - COMMON STOCK TRANSACTIONS - Continued
On March 31, 1996, the Company sold 350,000 restricted, unregistered
post-reorganization shares (233,333 post- March 24, 1997 reverse split shares)
of common stock under a Private Placement Memorandum at a price of $1.50 per
share. The total gross proceeds of the offering were $525,000. Certain placement
costs and commissions related to the sale of the Private Placement stock,
totaling approximately $163,100, were deducted from the gross proceeds and
charged against additional paid-in capital.
The terms of the March 31, 1996 private placement memorandum require the Company
and/or a company owned by a current officer and director to issue additional
shares to the original investors in the private placement memorandum in the
event that the Company's securities, as listed on a published exchange or
electronic bulletin board, does not equal $3.00 per share ($4.50 per share, as
adjusted by the March 24, 1997 reverse stock split) on March 31, 1996 (the
second anniversary date of the closing of the private placement memorandum
offering). The issuance of additional shares, if any is required, to the
original investors will be done without additional compensation to the Company.
To facilitate this contingency, the Company sold 350,000 restricted,
unregistered post-reorganization shares (233,333 post-March 24, 1997 reverse
split shares) of common stock to an entity owned by an officer and director of
the Company for cash of approximately $350. These shares were placed into an
escrow account for the benefit of the original investors. In the event that no
additional shares are required to be issued to the original investors, the
shares held in escrow will be returned to the company owned by a current officer
and director of the Company.
On March 15, 1996, the Company issued 105,000 restricted, unregistered
post-reorganization shares (70,000 post- March 24, 1997 reverse split shares) of
common stock to a Foundation as a component of the loan origination costs to
secure the $2,000,000 note payable. The proceeds of this note payable were used
to satisfy the cash component of the Brister's acquisition cost.
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.
F-24
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - COMMON STOCK TRANSACTIONS - Continued
On March 15, 1996, in accordance with a January 1996 letter of intent, the
Company issued 210,000 restricted, unregistered post-reorganization shares
(140,000 post-March 24, 1997 reverse split shares) of common stock to the
Company's chief executive officer, valued at $15,000, as additional
consideration for the execution of an employment agreement.
In July 1996, pursuant to Rule 504 of The Securities Act of 1933, the Company
sold 5,000 Units, consisting of 5,000 post-reorganization shares of common stock
(3,334 post-March 24, 1997 reverse split shares) and 100,000 Class A common
stock warrants (66,667 post-March 24, 1996 reverse stock split warrants) for
approximately $17,500 to an unaffiliated investor. The Class A common stock
warrants may be exercised to purchase one (1) post-reorganization share of the
Company's common stock at a price of $3.50 per share ($5.25 per share, post-
March 24, 1997 reverse stock split). The Class A common stock warrants were
assigned no value in the accompanying consolidated financial statements. In
August 1996, 5,000 warrants (3,334 post-March 24, 1997 reverse split warrants)
were exercised for total proceeds of $17,500. The total effect of this
transaction was the sale of 10,000 post-reorganization shares (6,667 post-March
24, 1997 reverse split shares) for a total price of $35,000.
On November 20, 1996, Company acquired 100% of the issued and outstanding stock
of USA Industries, Inc. an Alabama corporation, in exchange for $250,000 in cash
and 250,000 restricted, unregistered post-reorganization shares (166,667
post-March 24, 1997 reverse split shares) of restricted, unregistered common
stock of the Company having an aggregate market value of $750,000.
On September 16, 1997, the Company issued 250,000 shares of restricted,
unregistered common stock to a Foundation as settlement of $1,000,000 in then
outstanding long-term debt.
On September 16, 1997 and November 24, 1997, the Company sold an aggregate
1,550,000 and 232,500 shares of common stock and warrants pursuant to a
Registration Statement filed on Form SB-2. This transaction generated gross
proceeds to the Company of approximately $7,352,813.
NOTE L - 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.
F-25
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMON STOCK WARRANTS
In September 1996, concurrent with the redemption of the issued and outstanding
convertible preferred stock, the Company issued an additional aggregate 333,350
1996 Warrants to the holders of the convertible preferred stock. This
transaction was valued at the equivalent selling price of $0.125 per warrant, or
$41,669, and was charged as a component of cost of capital related to the sale
of an aggregate 1,782,500 shares of common stock and deducted from the
additional paid-in capital related to the gross proceeds of the offering.
In September 1997, the Company sold 155,000 Underwriter's Warrants for an
aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2.
Each warrant allows the Underwriter to purchase one share of the Company's
common stock at $6.00 per share and one (1) 1997 Warrant at a price of $0.1875
per share. The 1997 warrants are described in detail in the next paragraph.
These warrants expire on September 9, 2002 if not exercised by the Underwriter.
In September and November 1997, the Company sold, pursuant to a Registration
Statement on Form SB-2, an aggregate 1,782,500 warrants (1997 Warrants) at
$0.125 each for gross proceeds of $222,813. Each warrant entitles the holder to
purchase one (1) share of the Company's common stock at a price of $4.00 per
share during the four year period commencing on September 9, 1998. These
warrants are redeemable by the Company at a redemption price of $0.01 per
warrant, at any time after September 9, 1998 upon thirty (30) days written
notice to the respective warrant holders if the average closing price of the
Company's common stock equals or exceeds $8.00 per share for the 20 consecutive
trading days ending three (3) days prior to the notice of redemption.
<TABLE>
Warrants Warrants Warrants
granted exercised outstanding Exercise price
--------- --------- ----------- ---------------
<S> <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 at December 31, 1996 233,335 - 230,001
========= ======== ---------
1996 Warrants 333,350 - 333,350 $4.50 per share
Underwriter's Warrants 155,000 - 155,000 $4.00 per share
1997 Warrants 1,782,500 - 1,782,500 $4.00 per share
--------- -------- ---------
Totals at December 31, 1997 2,270,850 - 2,500,851
========= ======== =========
</TABLE>
NOTE M - 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.
F-26
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - STOCK OPTIONS - Continued
On January 30, 1997, the Board of Directors of the Company adopted a stock
option plan providing for the reservation of an additional 66,667 post-reverse
split shares of common stock for options to be granted to employees of the
Company. Concurrent with this action, the Company granted options to purchase
6,667 shares of the Company's common stock at a price of $4.875 per shares to
the Company's then Chief Financial Officer and the Company's Vice President of
Marketing (VP Options). These options are exercisable after January 30, 1998 and
expire on January 30, 2002. The options granted to the Company's former Chief
Financial Officer expired concurrent with his termination in the first quarter
of 1998.
Further, on January 30, 1997, the Company granted options to purchase an
aggregate 52,670 shares of the Company's common stock to employees of the
Company and its operating subsidiaries at an exercise price of $4.875 per
post-split share. These options are exercisable after January 30, 1998 and
expire on January 30, 2002.
<TABLE>
Options Options Options Options
granted exercised terminated outstanding Exercise price
------- --------- ---------- ----------- ----------------
<S> <C> <C>
1996 options 59,355 - - 59,355 $5.63 per share
1997 VP options 13,334 - 6,667 6,667 $4.875 per share
1997 options 52,670 - - 52,670 $4.875 per share
------- ----- -------- -------
Totals 125,359 - 6,667 118,692
======= ===== ======== =======
Shares allocated 125,377
=======
</TABLE>
NOTE N - 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, 1997. The Company is vigorously contesting each lawsuit and
has accrued management's estimation of the Company's exposure in each situation.
Additionally, the Company maintains a reserve for future litigation equal to the
"per claim" self-insurance amount times the four-year rolling average of
lawsuits filed naming the Company as a defendant. As of December 31, 1997,
approximately $150,000 has been accrued and charged to operations for
anticipated future litigation.
On February 4, 1997, litigation was filed against the Company and Brister's in
an action to have Brister's product liability insurance coverage (discussed in
the preceding paragraph) declared null and void as a result of a payment by
Brister's insurance underwriter in settlement of a product liability lawsuit.
Legal counsel is of the opinion that this action has questionable merit and the
determination of an outcome, if any, is unpredictable at this time. The Company
is vigorously defending the action. Additionally, the Company is pursuing a
counteraction against the underwriter's agent for potential misrepresentations
made by the agent to the underwriter regarding Brister's during the acquisition
of the aforementioned commercial liability insurance coverage. The Company is
currently engaged in discovery and is unable to predict the ultimate outcome of
this litigation.
F-27
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
Litigation - continued
- ----------
The Company anticipates no material impact to either the results of operations,
its financial condition or liquidity based on the uncertainty of outcome, if
any, of existing litigation, either collectively and/or individually, at this
time.
Consulting and Patent Licensing
- -------------------------------
Pursuant to the acquisition of Brister's, the Company entered into a Consulting
Agreement with the former owner of Brister's. The former owner will provide
certain consulting services to the Company or any subsidiary thereof, which
services will not exceed 8 eight-hour work days per month. As consideration for
such services, the former owner will receive $400 per day for consulting
services provided at the Company's principal place of business and $800 per day
for consulting services provided while traveling in connection with Company
business. The former owner is required to maintain the confidentiality of all
Company information. The Company paid the former owner approximately $30,000
under the terms of this agreement during the year ended December 31, 1997.
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.
On March 15, 1997, the Company and the former owner amended this Licensing
Agreement and executed a related Royalty Agreement, for a three (3) year term,
which provides for the payment of a one-time license fee and a "per unit"
royalty fee. Upon execution, the Company paid an initial license fee of $10,000
and agreed to pay a royalty of $1.00 per unit on which the existing intellectual
property is installed. For the second and third years of the Agreement, the
Company will pay the greater of $20,000 per year or $1.00 per unit on which the
existing intellectual property is installed. During the year ended December 31,
1997, the Company paid or accrued approximately $21,000 under this Agreement.
F-28
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
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.
Concurrent with the resignation of this individual as the Company's Chairman of
the Board, President and Chief Executive Officer, effective January 15, 1998,
this Agreement was terminated and was settled with a one-time cash payment by
the Company of approximately $208,100. In anticipation of this event, due to
ongoing negotiation, this settlement was charged to operations as a component of
"Other expense" in the accompanying consolidated financial statements.
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.
F-29
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - SIGNIFICANT CUSTOMERS
During the year ended December 31, 1997 and 1996, the Company had two related
customers responsible for net sales in excess of 10.0% of total net sales.
<TABLE>
1997 1996
------------------------ -------------------------
Percent of Percent of
Amount sales Amount sales
---------- ---------- ----------- ----------
<S> <C>
Company A $ 713,664 9.41% $1,316,880 15.81%
Company B 566,480 7.47% 369,460 4.44%
---------- ------ ---------- ------
$1,280,144 16.88% $1,686,340 20.25%
========== ===== ========== ======
Total net sales $7,586,476 100.00% $8,327,316 100.00%
========== ====== ========== ======
</TABLE>
NOTE P - SUBSEQUENT EVENTS
Effective January 30, 1998, the Company entered into an Employment Agreement
(Agreement) with an individual to serve as the Company's President and Chief
Executive Officer (President). The Agreement is for a term of three (3) years
and provides the President with an annual base salary of $150,000. Upon
execution of the Agreement, the President received options to purchase up to
200,000 shares of the Company's common stock at an exercise price of $3.25 per
share. The options vest as follows: 100,000 shares as of January 30, 1999;
50,000 shares as of January 31, 2000; 50,000 shares as of January 31, 2001. All
unvested options vest immediately upon the termination of the Agreement if
termination is for reason other than "for cause", and all unexercised options
expire on January 31, 2003. The President may also receive annual performance
based stock options to purchase up to 50,000 shares of the Company's common
stock at a price equal to the market value of the Company's common stock on the
date of issuance, as determined by the Company's Board of Directors, and an
annual cash bonus not to exceed 15.0% of the annual base salary.
In March 1998, the Company granted options to purchase an aggregate 20,000
shares of the Company's common stock to employees of the Company and its
operating subsidiaries at an exercise price of $3.50. These options vest on the
first anniversary date of their grant and expire on the earlier of five years
from the date of their grant or upon termination of the option holder as an
employee of the Company.
F-30
