UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
- --------------------------------------------------------------------------------
(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---------- ACT OF 1934
For the quarterly period ended March 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
- --------------------------------------------------------------------------------
Commission File Number: 0-23041
KARTS INTERNATIONAL INCORPORATED
--------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 75-2639196
- ------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
109 Northpark Boulevard, Suite 210, Covington, LA 70433
-------------------------------------------------------
(Address of principal executive offices)
(504) 875-7350
---------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
May 14, 1998: Common Stock: 4,855,133 shares
Common Stock Warrants: 2,282,525
Transitional Small Business Disclosure Format (check one): YES NO X
<PAGE>
KARTS INTERNATIONAL INCORPORATED
Form 10-QSB for the Quarter ended March 31, 1998
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 22
Part II - Other Information
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
Part III - Information required by Rule 463 - Report of Offering
of Securities and Use of Proceeds Therefrom 24
2
<PAGE>
Part 1 - Item 1
Financial Statements
S. W. HATFIELD + ASSOCIATES
certified public accountants
Members: American Institute of Certified Public Accountants
SEC Practice Section
Information Technology Section
Texas Society of Certified Public Accountants
Independent Accountant's Report
-------------------------------
Board of Directors and Shareholders
Karts International Incorporated
We have reviewed the accompanying consolidated balance sheet as of March 31,
1998 of Karts International Incorporated (a Nevada corporation) and Subsidiaries
and the accompanying consolidated statement of operations for the three months
ended March 31, 1998 and 1997 and the consolidated statement of cash flows for
the three months ended March 31, 1998 and 1997. These financial statements are
the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression on an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
April 22, 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)
3
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(Unaudited) (Audited)
March 31 December 31,
1998 1997
----------------------------
<S> <C>
Assets
Current Assets
Cash on hand and in banks $ 2,286,101 $ 2,801,746
Accounts receivable
Trade, net of allowance for doubtful accounts
of $3,000 and $3,000, respectively 263,023 463,045
Recoverable income taxes 225,000 225,000
Inventory 870,572 909,214
Prepaid expenses 217,803 172,139
------------ ------------
Total current assets 3,862,499 4,571,144
------------ ------------
Property and equipment
Building and improvements 448,209 384,296
Equipment 671,583 670,705
Transportation equipment 125,640 77,820
Furniture and fixtures 130,747 129,951
------------ ------------
1,376,179 1,262,772
Accumulated depreciation (162,755) (137,746)
------------ ------------
1,376,179 1,125,026
Land 32,800 32,800
------------ ------------
Net property and equipment 1,246,224 1,157,826
------------ ------------
Other assets
Goodwill, net of accumulated amortization of
approximately $444,148 and $385,608, respectively 5,415,275 5,473,815
Organization costs, net of accumulated amortization
of approximately $44,453 and $38,990, respectively 64,802 70,265
Other 16,283 8,851
------------ ------------
Total other assets 5,496,360 5,552,931
------------ ------------
Total Assets $ 10,605,083 $ 11,281,901
============ ============
</TABLE>
- Continued -
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
4
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
March 31, 1998 and December 31, 1997
(Unaudited) (Audited)
March 31, December 31,
1998 1997
-----------------------------
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Current maturities of long-term debt $ 26,659 $ 18,357
Accounts payable - trade 124,562 292,083
Other accrued liabilities 137,022 60,574
Accrued income and franchise taxes payable 139,160 137,710
------------ ------------
Total current liabilities 427,403 508,724
------------ ------------
Long-term liabilities
Long-term debt, net of current maturities 257,317 230,841
------------ ------------
Total liabilities 684,720 739,565
------------ ------------
Commitments and contingencies
Shareholders' equity
Preferred stock - $0.001 par value
10,000,000 shares authorized
None issued and outstanding -- --
Common stock - $0.001 par value
14,000,000 shares authorized
4,854,133 shares issued and outstanding 4,854 4,854
Additional paid-in capital 13,040,090 13,040,090
Accumulated deficit (3,124,581) (2,502,608)
------------ ------------
Total shareholders' equity 9,920,363 10,542,336
------------ ------------
Total Liabilities and Shareholders' Equity $ 10,605,083 $ 11,281,901
============ ============
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
5
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended March 31, 1998 and 1997
Three months Three months
ended ended
March 31, March 31,
1998 1997
----------- -----------
Net Sales $ 509,205 $ 1,300,784
----------- -----------
Cost of sales
Purchases, direct labor and
related costs 694,442 1,132,947
Depreciation 16,358 21,483
----------- -----------
Total cost of sales 710,800 1,154,430
----------- -----------
Gross profit (201,595) 146,354
----------- -----------
Operating expenses
Research and development expenses 2,096 --
Selling expenses 17,327 44,530
General and administrative expenses 332,307 436,998
Depreciation and amortization 76,807 74,401
----------- -----------
Total operating expenses 428,537 555,929
----------- -----------
Income (loss) from operations (630,132) (409,575)
Other income (expense)
Interest expense (20,369) (131,138)
Other 28,528 51,286
----------- -----------
Income before income taxes (621,973) (489,427)
Provision for income taxes -- --
----------- -----------
Net income (loss) $ (621,973) $ (489,427)
=========== ===========
Income (loss) per weighted-
average share of common
stock outstanding- basic $ (0.13) $ (0.18)
=========== ===========
Weighted-average number
of shares of common
stock outstanding 4,854,133 2,717,288
=========== ===========
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1998 and 1997
Three months Three months
ended ended
March 31, March 31,
1998 1997
------------ ------------
<S> <C>
Cash flows from operating activities
Net income (loss) for the period $ (621,973) $ (489,427)
Adjustments to reconcile net income
(loss) to net cash used in operating activities
Depreciation and amortization 93,165 95,884
(Increase) Decrease in:
Accounts receivable 200,022 1,284,240
Income taxes recoverable -- --
Inventory 38,642 44,779
Prepaid expenses (45,664) (213,956)
Other (7,432) --
Increase (Decrease) in:
Accounts payable and other accrued liabilities (91,073) (672,310)
Accrued income taxes payable 1,450 --
----------- -----------
Cash flows used in operating activities (432,863) 49,210
----------- -----------
Cash flows from investing activities
Cash paid for reorganization expenses -- (27,497)
Proceeds from sale of property and equipment -- 6,666
Cash paid for property and equipment (76,265) (36,185)
----------- -----------
Cash flows used in investing activities (76,265) (173 198
----------- -----------
Cash flows from financing activities
Net activity on bank line of credit -- 200,000
Principal payments on long-term note payable (6,517) (28,303)
----------- -----------
Cash flows provided by financing activities (6,517) 171,697
----------- -----------
Increase in cash (515,645) 47,709
Cash at beginning of period 2,801,746 630,028
----------- -----------
Cash at end of period $ 2,286,101 $ 677,737
=========== ===========
</TABLE>
- Continued -
The financial information included herein has been prepared by management
without audit by independent certified public accountants. See accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Three months ended March 31, 1998 and 1997
Three months Three months
ended ended
March 31, March 31,
1998 1997
------------- ------------
<S> <C>
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $20,369 $134,237
======= ========
Income taxes paid (refunded) for the period $ -- $184,175
======= ========
Supplemental disclosure of non-cash
investing and financing activities
Transportation equipment purchased with notes payable $41,295 $ --
======= ========
</TABLE>
8
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Karts International Incorporated (formerly Sarah Acquisition Corporation)
(Company) was originally incorporated on February 28, 1984 as Rapholz Silver
Hunt, Inc. under the laws of the State of Florida. In June 1984, April 1986, and
November 1987, respectively, the Company changed its corporate name to Great
Colorado Silver, Inc., Great Colorado Silver Valley Development Company and J.
R. Gold Mines, Inc. In January 1996, the Company changed its corporate name to
Sarah Acquisition Corporation. In December 1995, the Company experienced a
change in control due to the transfer of a controlling position in issued and
outstanding shares of common stock of the Company between unrelated third
parties. It was the intent of the new controlling shareholders and management to
seek a suitable situation for merger or acquisition.
On February 23, 1996, the Company was reincorporated in the State of Nevada by
means of a merger with and into Karts International Incorporated, a Nevada
corporation incorporated on February 21, 1996. The Company was the surviving
entity and changed its corporate name to Karts International Incorporated.
In March 1996, the Company acquired 100.0% of the issued and outstanding stock
of Brister's Thunder Karts, Inc. (a Louisiana corporation), a "fun kart"
manufacturer located in Roseland, Louisiana.
In November 1996, the Company acquired 100.0% of the issued and outstanding
stock of USA Industries, Inc. (an Alabama corporation), a "fun kart"
manufacturer located in Prattville, Alabama.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company has a concentration of key raw material suppliers for kart engines.
In the event of any disruption in engine availability, if any, the Company may
experience a negative economic impact. The Company does not anticipate any
foreseeable interruption in engine availability and believes that alternate
suppliers are available.
The accompanying consolidated financial statements contain the accounts of Karts
International Incorporated and its wholly-owned subsidiaries, Brister's Thunder
Karts, Inc. and USA Industries, Inc. All significant intercompany transactions
have been eliminated. The consolidated entities are collectively referred to as
Company.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
-------------------------
The Company considers all cash on hand and in banks, certificates of
deposit and other highly-liquid investments with maturities of three months
or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
9
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2. Accounts and advances receivable
--------------------------------
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located in the Southeastern United
States, principally Texas, Louisiana, Mississippi, Alabama, Georgia and
Florida. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts
receivable shown on the balance sheet at the date of non-performance.
3. Inventory
---------
Inventory consists of steel, engines and other related raw materials used
in the manufacture of "fun karts". These items are carried at the lower of
cost or market using the first-in, first-out method. As of March 31, 1998
and December 31, 1997, inventory consisted of the following components:
March 31, December 31,
1998 1997
----------- -----------
Raw materials $772,722 $765,674
Work in process 49,035 127,780
Finished goods 48,815 15,760
-------- --------
$870,572 $909,214
======= =======
4. Property, plant and equipment
-----------------------------
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
Total depreciation expense charged to operations for the quarters ended
March 31, 1998 and 1997 was approximately $29,162 and $26,846,
respectively.
5. Organization costs
------------------
Costs related to the restructuring and reorganization of the Company have
been capitalized and are being amortized over a five year period,
commencing March 15, 1996, using the straight-line method.
10
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Goodwill
--------
Goodwill represents the excess of the purchase price of acquired
subsidiaries over the fair value of net assets acquired and is amortized
over 25 years using the straight-line method.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", the Company follows the policy of evaluating all
qualifying assets as of the end of each reporting quarter. For the periods
ended March 31, 1998 and 1997, no charges to operations were made for
impairments in the recoverability of goodwill.
7. Income taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. At March 31, 1998 and December 31, 1997, the deferred tax
asset and deferred tax liability accounts, as recorded when material, are
entirely the result of temporary differences. Temporary differences
represent differences in the recognition of assets and liabilities for tax
and financial reporting purposes, primarily accumulated depreciation and
amortization. No valuation allowance was provided against deferred tax
assets, where applicable.
8. Income (Loss) per share
-----------------------
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and common
stock equivalents (primarily outstanding options and warrants). Common
stock equivalents represent the dilutive effect of the assumed exercise of
the outstanding stock options and warrants, using the treasury stock
method. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of
issuance, whichever is later. As of March 31, 1998 and December 31, 1997,
the outstanding warrants and options are deemed to be anti-dilutive due to
the Company's net operating loss position.
9. Reclassifications
-----------------
Certain amounts within the accompanying financial statements for the
quarter ended March 31, 1997 have been reclassified to conform to the
presentation for the quarter ended March 31, 1998.
10. Accounting standards to be adopted
----------------------------------
Upon the adoption of a formal stock compensation plan, the Company
anticipates using the "fair value based method" of accounting for
compensation based stock options pursuant to Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Under the fair value based method, compensation cost will be measured at
the grant date of the respective option based on the value of the award and
will be recognized as a charge to operations over the service period, which
will usually be the respective vesting period of the granted option(s).
11
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Accounting standards to be adopted - continued
----------------------------------
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", (SFAS130) which established standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS130 is effective for years beginning after December 15,
1997. The Company has no components of comprehensive income that do not
appear in the accompanying consolidated statements of operations and did
experience any impact from this change in presentation of its consolidated
financial statements upon adoption of this standard.
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information", (SFAS131) which establishes revised
standards for the method in which public business enterprises are to report
information about operating segments in their annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
This statement also revises the related disclosures about products and
services, geographic areas and major customers. SFAS131 replaces the
"industry segment" concept established in Statement of Financial Accounting
Standard No. 14 with a "management approach" concept as the basis for
identifying reportable segments. SFAS131 is effective for financial
statements for years beginning after December 31, 1997 and for interim
periods presented after December 31, 1998. The Company does not anticipate
a material impact from this change in disclosure presentation in its
consolidated financial statements upon adoption of this standard.
NOTE C - CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash accounts in financial institutions subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the Company and its subsidiaries are entitled to aggregate
coverage of $100,000 per account type per separate legal entity per individual
financial institution. During the quarter ended March 31, 1998 and 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>
Quarter ended March 31, 1998
Karts International Incorporated $ 21,278 $21,278 1
Brister's Thunder Karts, Inc. $162,063 $12,115 33
USA Industries, Inc. $ 73,714 $ 3,953 73
Year ended December 31, 1997
Karts International Incorporated $1,624,288 $566 146
Brister's Thunder Karts, Inc. $ 830,848 $450 300
USA Industries, Inc. $ 447,918 $ 75 110
</TABLE>
12
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - 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. The Company had
unsecured amounts invested in reverse repurchase agreements on a daily basis
from February 1997 through March 31, 1998. As of March 31, 1998 and December 31,
1997, the Company had unsecured outstanding reverse repurchase agreements of
approximately $2,215,000 and $2,395,000, respectively. The Company incurred no
losses during 1997 or 1998 as a result of any of these unsecured situations.
<TABLE>
<CAPTION>
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
1998 1997
--------- ------------
<S> <C>
$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. $220,703 $224,295
$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 17,876 18,781
$23,122 installment note payable to a bank. Interest
at 8.25%. Payable in monthly installments of
approximately $726, including accrued interest.
Final maturity in March 2001. Collateralized by
a vehicle. 23,097 -
$18,198 installment note payable to a bank. Interest
at 8.25%. Payable in monthly installments of
approximately $572, including accrued interest.
Final maturity in March 2001. Collateralized by
a vehicle 18,173 -
13
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG-TERM DEBT - Continued
March 31, December 31,
1998 1997
--------- ------------
$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. 3,387 4,208
$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. 740 1,914
---------- ---------
Total long-term debt 283,976 249,198
Less current maturities (26,659) (18,357)
---------- ---------
Long-term portion $257,317 $230,841
======= =======
</TABLE>
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ ----------
1998 $ 26,659
1999 27,846
2000 30,346
2001 21,099
2002 15,159
2003-2007 95,172
2008-2010 67,695
Totals $283,976
NOTE H - INCOME TAXES
The components of income tax (benefit) expense for the quarters ended March 31,
1998 and 1997, respectively, are as follows:
1998 1997
-------- --------
Federal $ - $ -
State - -
-------- --------
Total $ - $ -
======== ========
14
<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 quarters ended March 31, 1998 and 1997,
respectively, differed from the statutory federal rate of 34 percent as follows:
<TABLE>
1998 1997
---------- ----------
<S> <C> <C>
Statutory rate applied to earnings (loss) before income taxes $(211,471) $(166,405)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Utilization of pre-acquisition net operating loss
of USA Industries, Inc. - 38,173
Utilization of net operating loss 211,471 128,232
------- -------
Income tax expense $ - $ -
======= =======
</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
$18,075 and $18,075 for the quarters ended March 31, 1998 and 1997,
respectively.
Concurrent with the acquisition of Brister's, the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal Agreement.
This agreement provides that the Company may, at its sole option, purchase the
real property and improvements in Roseland, Louisiana currently utilized by the
Company or its subsidiary for an aggregate purchase price of $550,000. The
option may be exercised commencing on
January 1, 1998 and expires on December 31, 2000.
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 1,000,000 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 483,333 shares to the
consulting company.
15
<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.
16
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - COMMON STOCK TRANSACTIONS
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. These
warrants originally were to expire on December 31, 1997 and the exercise period
was extended by the Company through December 31, 1998.
In November 1996, the Company privately sold 25 units which included 250,000
Redeemable Common Stock Purchase Warrants (1996 Warrants) (166,668 post-March
24, 1997 reverse stock split warrants), as discussed in previous footnotes).
Each warrant entitles the holder to purchase one (1) share of common stock at
$3.00 per share ($4.50 post-March 24, 1997 reverse split), subject to adjustment
in certain circumstances, for a period of 42 months from the closing date of the
offering. The 1996 Warrants are redeemable by the Company at a price of $0.01
per Warrant at any time after one (1) year from the offering closing date when
the average of the daily closing bid price of the Company's common stock equals
$6.00 or more per share on any 20 consecutive trading days ending within 15 days
of the date on which notice of redemption is given to the holders. The Company
will provide holders of the 1996 Warrants with at least 30 days written notice
of the Company's intent to redeem the Warrants.
In September 1996, concurrent with the redemption of the issued and outstanding
convertible preferred stock, the Company issued an additional aggregate 333,350
1996 Warrants to the holders of the convertible preferred stock. This
transaction was valued at the equivalent selling price of $0.125 per warrant, or
$41,669, and was charged as a component of cost of capital related to the sale
of an aggregate 1,782,500 shares of common stock and deducted from the
additional paid-in capital related to the gross proceeds of the offering.
In September 1997, the Company sold 155,000 Underwriter's Warrants for an
aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2.
Each warrant allows the Underwriter to purchase one share of the Company's
common stock at $6.00 per share and one (1) 1997 Warrant at a price of $0.1875
per share. The 1997 warrants are described in detail in the next paragraph.
These warrants expire on September 9, 2002 if not exercised by the Underwriter.
In September and November 1997, the Company sold, pursuant to a Registration
Statement on Form SB-2, an aggregate 1,782,500 warrants (1997 Warrants) at
$0.125 each for gross proceeds of $222,813. Each warrant entitles the holder to
purchase one (1) share of the Company's common stock at a price of $4.00 per
share during the four year period commencing on September 9, 1998. These
warrants are redeemable by the Company at a redemption price of $0.01 per
warrant, at any time after September 9, 1998 upon thirty (30) days written
notice to the respective warrant holders if the average closing price of the
Company's common stock equals or exceeds $8.00 per share for the 20 consecutive
trading days ending three (3) days prior to the notice of redemption.
17
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMON STOCK WARRANTS - Continued
As of March 31, 1998, the Company's warrants are as follows:
Warrants Warrants Warrants
granted exercised outstanding Exercise price
---------- --------- ----------- --------------
<S> <C> <C>
1996 issuances
Class A Warrants 66,667 3,334 63,333 $5.25 per share
1996 Warrants 166,668 - 166,668 $4.50 per share
---------- -------- -------
233,335 - 230,001
========== ======== -------
1997 issuances
1996 Warrants 333,350 - 333,350 $4.50 per share
Underwriter's Warrants 155,000 - 155,000 $4.00 per share
1997 Warrants 1,782,500 - 1,782,500 $4.00 per share
--------- -------- ---------
2,270,850 - 2,500,851
========= ======== =========
</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.
On January 30, 1997, the Board of Directors of the Company adopted a stock
option plan providing for the reservation of an additional 66,667 post-reverse
split shares of common stock for options to be granted to employees of the
Company. Concurrent with this action, the Company granted options to purchase
6,667 shares of the Company's common stock at a price of $4.875 per shares to
the Company's then Chief Financial Officer and the Company's then Corporate Vice
President of Marketing, who is now solely the Vice President of Sales and
Marketing for the Brister's Thunder Karts, Inc. subsidiary (VP Options). These
options are exercisable after January 30, 1998 and expire on January 30, 2002.
The options granted to the Company's former Chief Financial Officer expired
concurrent with his termination in the first quarter of 1998.
Further, on January 30, 1997, the Company granted options to purchase an
aggregate 52,670 shares of the Company's common stock to employees of the
Company and its operating subsidiaries at an exercise price of $4.875 per
post-split share. These options are exercisable after January 30, 1998 and
expire on January 30, 2002.
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.
18
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - STOCK OPTIONS - Continued
The outstanding options as of March 31, 1998 and December 31, 1997 are as
follows:
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
------- ----- ----- ------
December 31, 1997 totals 125,359 - 6,667 118,692
1998 options 20,000 - - 20,000 $3.50 per share
-------- ----- -------- -------
March 31, 1998 totals 145,359 - 6,667 138,692
======= ===== ===== =======
</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 March 31, 1998 and December 31, 1997. The Company is vigorously contesting
each lawsuit and has accrued management's estimation of the Company's exposure
in each situation. Additionally, the Company maintains a reserve for future
litigation equal to the "per claim" self-insurance amount times the four-year
rolling average of lawsuits filed naming the Company as a defendant. As of March
31, 1998 and December 31, 1997, approximately $120,000 and $160,000 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.
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.
19
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
.
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
Consulting and Patent Licensing
Pursuant to the acquisition of Brister's, the Company entered into a Consulting
Agreement with the former owner of Brister's. The former owner will provide
certain consulting services to the Company or any subsidiary thereof, which
services will not exceed 8 eight-hour work days per month. As consideration for
such services, the former owner will receive $400 per day for consulting
services provided at the Company's principal place of business and $800 per day
for consulting services provided while traveling in connection with Company
business. The former owner is required to maintain the confidentiality of all
Company information. The Company paid the former owner approximately $19,940 and
$30,000 under the terms of this agreement during the quarter ended March 31,
1998 and the year ended December 31, 1997, respectively.
Pursuant to the acquisition of Brister's, the Company and the former owner of
Brister's entered into a Non- Competition Agreement. The former owner has agreed
not to compete with the Company or any of its subsidiaries for a period of five
years in any jurisdiction in which the Company or any subsidiary is duly
qualified to conduct business or within any marketing area in which the Company
is doing a substantial amount of business or is engaged in a business similar to
that currently operated by the Company. Additionally, the former owner agreed
that during the same five-year period not to interfere with the employment
relationship between the Company and any of its other employees by soliciting
any of such individuals to participate in individual business ventures.
At the closing of the Brister's acquisition, the Company entered into a
Licensing Agreement with the former owner of Brister's. This agreement provides
that the former owner will (1) license to the Company all of the Intellectual
Property (as defined) currently owned by the former owner and being used by the
Company or any subsidiary at terms at least as favorable as the former owner has
received or could have received in arms-length transactions with third parties
and (2) for a period of five years from the execution of the Licensing Agreement
will license to the Company, at the Company's sole option, all Intellectual
Property developed or owned by the former owner at any time subsequent to the
Closing Date. The license referenced in section (2) above shall be exclusive to
the Company and free of charge for the first year from the date of invention and
thereafter at terms at least as favorable as the former owner has received or
could have received in arms-length transactions with third parties. Intellectual
Property is defined in the Stock Purchase Agreement as all domestic and foreign
letters patent, patents, patent applications, patent licenses, software licenses
and know-how licenses, trade names, trademarks, copyrights, unpatented
inventions, service marks, trademark registrations and applications, service
mark registrations and applications and copyright registrations and applications
owned or used by the Company or any subsidiary in the operation of its business.
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 quarter ended March 31,
1998 and the year ended December 31, 1997, the Company paid or accrued
approximately $640 and $21,000, respectively, under this Agreement.
20
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
Contingent stock issuances
- --------------------------
The terms of the March 31, 1996 private placement memorandum require the Company
and/or a company owned by a current officer and director to issue additional
shares to the original investors in the private placement memorandum in the
event that the Company's securities, as listed on a published exchange or
electronic bulletin board, does not equal $3.00 per share ($4.50 per share, as
adjusted by the March 24, 1997 reverse stock split) on March 31, 1998 (the
second anniversary date of the closing of the private placement memorandum
offering). The issuance of additional shares, if any is required, to the
original investors will be done without additional compensation to the Company.
To facilitate this contingency, the Company sold 350,000 restricted,
unregistered post-reorganization shares (233,333 post-March 24, 1997 reverse
split shares) of common stock to an entity owned by an officer and director of
the Company for cash of approximately $350. These shares were placed into an
escrow account for the benefit of the original investors. In the event that no
additional shares are required to be issued to the original investors, the
shares held in escrow will be returned to the company owned by a current officer
and director of the Company. The Company is unable to predict the fair value of
these shares placed into escrow or the impact, if any, that such valuation will
have on the Company's Statement of Income for the period ending March 31, 1998.
Employment Agreement
- --------------------
Effective January 30, 1998, the Company entered into an Employment Agreement
(Agreement) with an individual to serve as the Company's President and Chief
Executive Officer (President). The Agreement is for a term of three (3) years
and provides the President with an annual base salary of $150,000. Upon
execution of the Agreement, the President received options to purchase up to
200,000 shares of the Company's common stock at an exercise price of $3.25 per
share. The options vest as follows: 100,000 shares as of January 30, 1999;
50,000 shares as of January 31, 2000; 50,000 shares as of January 31, 2001. All
unvested options vest immediately upon the termination of the Agreement if
termination is for reason other than "for cause", and all unexercised options
expire on January 31, 2003. The President may also receive annual performance
based stock options to purchase up to 50,000 shares of the Company's common
stock at a price equal to the market value of the Company's common stock on the
date of issuance, as determined by the Company's Board of Directors, and an
annual cash bonus not to exceed 15.0% of the annual base salary.
21
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three months ended March 31, 1998 as compared to the three months ended
March 31, 1997
The Company experienced net revenues of approximately $509,000 for the three
months ended March 31, 1998 compared to approximately $1.3 million for the
comparable period of 1997. These sales results continue to reflect weak product
demand during the first quarter of the Company's operating year due primarily to
seasonality of product demand at the consumer level. Additionally, sales to mass
merchandisers ceased during the second quarter of 1997 and these mass
merchandiser sales mitigated some the seasonality effects during the first
quarter of 1997. Current Company management has instituted various sales and
marketing strategies, including the pursuit of additional distribution channels,
including potential mass merchandiser or buying group customers, and geographic
areas which management believes are under served, to improve its sales during
the Company's traditional slow demand periods.
Due to the decline in unit sales to mass merchandisers and related effect on net
sales dollars, the Company was unable to completely absorb its fixed
manufacturing overhead expenses. Accordingly, the Company experienced a decline
in gross profit from approximately $146,000 for the first quarter of 1997 to
approximately $(202,000) for the comparable period of 1998.
Selling, general and administrative expenses, including depreciation and
amortization, were approximately $428,000 during the three months ended March
31, 1998 as compared to approximately $556,000 for the three months ended March
31, 1997. The Company continues to experience a maturation and stabilization of
the Company's operations and the results of management oversight of corporate
overhead expenses during 1998. Management anticipates that current expenditure
levels will remain relatively constant during future periods.
For the three month period ended March 31, 1998, the Company incurred a net loss
of approximately $622,000 as compared to a net loss of approximately $489,000
for the comparable three month period ended March 31, 1997. Management
attributes the increase in the net loss for the first three months of 1998
compared to the comparable period of 1997 to decreased unit sales volume levels
which did not allow for the complete absorption of all fixed manufacturing
overhead costs during the quarter.
Primary earnings (loss) per share were approximately $(0.13) per share for the
three months ended March 31, 1998 and approximately $(0.18) per share for the
three months ended March 31, 1997.
Additional Operations information.
The Company currently has approximately six product liability lawsuits
outstanding, none of which are expected to exceed existing product liability
insurance policy limits. The Company has never had a claim that resulted in an
award or settlement in excess of insurance coverage.
There is no assurance that the Company's insurance coverage of $5,000,000 per
occurrence and $5,000,000 aggregate will be sufficient to fully protect the
business and assets of the Company from all claims, nor can any assurances be
given that the Company will be able to maintain the existing coverage or obtain
additional coverage at commercially reasonable rates. Management believes that
it has process controls on its product operations, product labeling, operator's
manuals, and design features which will assist in a successful defense of any
present or future product liability claim. To the extent product liability
losses are beyond the limits or scope of the Company's insurance coverage, the
Company could experience a material adverse effect upon its business,
operations, profitability and assets.
22
<PAGE>
Liquidity and Financial Condition
With respect to the comparative balance sheet, consolidated assets of $l0.6
million at March 31, 1998 were approximately $700,000 lower than the $11.3
million at December 31, 1997. This decrease is principally attributable to an
decrease in current assets related to the collection of accounts receivable and
the utilization of cash resources for fixed asset additions (approximately
$76,000) and the use of cash in operating activities of approximately $433
thousand. Consolidated liabilities of $684,000 at March 31, 1998 were comparable
to the year end balance of approximately $740,000. The decrease was primarily
due to a reduction in trade accounts payable and offsetting increases in
long-term debt arising from the purchase of transportation equipment during the
first quarter of 1998.
Although Karts International Incorporated is a seasonal business with 50% or
more of its sales being historically recorded in the fourth calendar quarter,
management believes its cash reserves and inventory levels are sufficient to
insure adequate manufacturing and shipment of finished goods. Additionally,
management is of the opinion that the 1997 plant additions will insure that the
Company will have sufficient capacity to meet peak product demands. Further, the
Company, during the first quarter of 1998, began construction on an
administrative office addition adjacent to the Roseland, Louisiana manufacturing
facility. As of March 31, 1998, approximately $63,000 had been expended on this
addition. Management is of the opinion that the occupation of this facility
during the second quarter of 1998 will contribute to future corporate overhead
expense savings and allow for better corporate management oversight of the daily
operations at the Company's Roseland Louisiana facility.
Capital Requirements
During the first three months of 1998, the Company has expended approximately
$76,000 for new property and equipment, including approximately $63,000 for the
construction of an administrative office addition adjacent to the Roseland,
Louisiana manufacturing facility. Further, the Company incurred long-term
installment debt of approximately $41,000 for transportation equipment which was
financed through the Company's primary financial institution. The long-term debt
is collateralized by the related transportation equipment, is for a term of
three years and bears interest at 8.25%.
The Company has identified no further significant capital requirements for the
current operating year. Liquidity requirements mandated by future business
expansions or acquisitions, if any are specifically identified or undertaken,
are not readily determinable at this time as no substantive plans have been
formulated by management.
Part II - Other Information
Item 1 - Legal Proceedings
See accompanying notes to the consolidated financial statements
Item 2 - Changes in Securities
None
Item 3 - Defaults on Senior Securities
None
23
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
j) Exhibits
None
k) Reports on Form 8-K
January 27, 1998 - Reporting of Resignation of V. Lynn Graybill,
Chairman, President and CEO.
<TABLE>
<CAPTION>
Part III - Information required by Rule 463
Report of Offering of Securities and Use of Proceeds Therefrom
<S> <C>
1a. Effective date of Registration Statement filed on Form SB-2 September 9, 1997
1b. SEC file number assigned to Registration Statement: 333-24143
1c. CUSIP number assigned 485766-20-8
12. Has the offering commenced? If yes, date commenced. Yes, on September 9, 1997
13. Did the offering terminate before any securities were sold? No
14. Did the offering terminate prior to the sale of all securities registered? No.
15. Name of managing underwriter J. P. Turner & Company, LLC
6a. Title and code of each class of securities registered Common Stock - EQ
Redeemable Common Stock
Warrants - OT
6b. Describe the class of securities categorized as "other" Each warrant is transferrable
immediately upon issuance
and entitles the holder to
purchase one share of
Common Stock at a price of
$4.00 per share during the four
year period following the first
anniversary date of the
offering.
</TABLE>
24
<PAGE>
16. Indicate the amount and aggregate offering price of securities registered
and sold to date for the account of the issuer and for the account of any
selling security holder(s)
<TABLE>
Aggregate price Aggregate
Title of Amount of offering Amount offering price
security registered amount registered sold of amount sold
-------- ---------- ----------------- ----------------- --------------
<S> <C> <C>
FOR THE ACCOUNT OF THE ISSUER
Common stock 1,782,500 shares $7,130,000 1,782,500 shares $7,130,000
Common stock
Warrants 1,782,500 warrants $222,812 1,782,500 warrants $222,812
Underwriter's
Warrants 155,000 warrants $155 155,000 warrants $155
FOR THE ACCOUNT OF ANY SELLING SECURITY HOLDER(S) - None
17. State the amount of expenses incurred for the issuer's account
in connection with the issuance and distribution of the securities
registered for each category listed below: Direct or indirect payments to others
Underwriting discounts and commissions $ 955,865
Expenses paid to or for Underwriters 48,000
Other expenses 497,068
----------
Total expenses $1,500,933
==========
9. Indicate net offering proceeds to the issuer after expenses in Item 8. $5,852,034
10. State the amount of net offering proceeds to the issuer used for each of
of the purposes listed below:
Repayment of indebtedness $2,550,000
Redemption of convertible preferred stock 625,000
Financial advisory fee 48,000
Product development 200,000
Advertising and marketing 400,000
11. Do the use of proceeds in Item 10 represent a material change in the use(s)
of proceeds described in the prospectus? No
12. Report of Sales of Securities and Use of Proceeds Therefrom
Gross proceeds from
Sale of common stock $7,130,000
Sale of common stock warrants 222,967
----------
7,352,967
----------
25
<PAGE>
Expenditures from gross proceeds
Underwriter's commissions and discounts 955,865
Payment of financial advisory fee 48,000
Retirement of Schlinger Note payable and accrued interest 1,005,833
Retirement of Brister Notes payable and accrued interest 1,155,958
Retirement of Bank lines of credit and accrued interest 410,587
Redemption of convertible preferred stock 625,000
Legal and accounting fees 515,801
Printing expenses 135,000
Acquisition of equipment 400,000
Transfer to working capital 2,100,923
---------
Total expenditures through March 31, 1998 7,352,967
---------
Remaining proceeds as of March 31, 1998 $ -
=========
</TABLE>
26
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KARTS INTERNATIONAL INCORPORATED
May 14 , 1998 /s/ Robert M. Aubrey
------ -----------------------------
Robert M. Aubrey
President, Chief Executive
Officer and Director
May 14 , 1998 /s/ Timothy P. Halter
------ -----------------------------
Timothy P. Halter
Chief Accounting Officer and
Director
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 1010077
<NAME> Karts International Incorporated
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 2286101
<SECURITIES> 0
<RECEIVABLES> 266023
<ALLOWANCES> 3000
<INVENTORY> 870572
<CURRENT-ASSETS> 3862499
<PP&E> 1408979
<DEPRECIATION> 162755
<TOTAL-ASSETS> 10605083
<CURRENT-LIABILITIES> 427403
<BONDS> 0
0
0
<COMMON> 4854
<OTHER-SE> 9915509
<TOTAL-LIABILITY-AND-EQUITY> 10605083
<SALES> 509205
<TOTAL-REVENUES> 509205
<CGS> 710800
<TOTAL-COSTS> 428537
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20369
<INCOME-PRETAX> (621973)
<INCOME-TAX> 0
<INCOME-CONTINUING> (621973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (621973)
<EPS-PRIMARY> (0.13)
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