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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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.)
62204 Commercial Street
P.O. Box 695
Roseland, Louisiana 70456 70456
(Address of Principal Executive Offices) (Zip Code)
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(504) 747-1111
(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, 1998,
were $8,219,646.
The issuer had 5,574,298 shares of common stock and 1,782,500
public warrants outstanding as of March 23, 1999.
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, 1999, was $2,433,703.
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1998 ANNUAL REPORT (S.E.C. FORM 10-KSB)
INDEX
Securities and Exchange Commission
Item Number and Description
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PART I
Item 1. Business........................................................................................3
Item 2. Properties.....................................................................................17
Item 3. Legal Proceedings..............................................................................17
Item 4. Submission of Matters to a Vote of Security Holders............................................18
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters..........................19
Item 6. Management's Discussion and Analysis or Plan of Operation......................................20
Item 7. Consolidated Financial Statements..............................................................27
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........27
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of The Exchange Act..............................................................28
Item 10. Executive Compensation.........................................................................30
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................34
Item 12. Certain Relationships and Related Transactions.................................................34
PART IV
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.........................................36
SIGNATURES, FINANCIAL STATEMENTS AND EXHIBIT INDEX
Signatures...................................................................................................... 40
Financial Statements........................................................................................... F-1
Exhibit Index
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PART I
Management believes that this Annual Report on Form 10-KSB for the year
ended December 31, 1998 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 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"), USA Industries, Inc., an Alabama
corporation ("USA"), Straight Line Manufacturing, Inc. ("Straight Line"), a
Michigan corporation, and KINT, L.L.C., a limited liability Louisiana
corporation ("KINT"), designs, manufactures and distributes recreational fun
karts ("Fun Karts"), also referred to as "go karts." Fun Karts are four-wheeled,
gas-powered vehicles typically equipped with engines of 5 to 13 horsepower and
purchased by consumers principally for off-road recreational use. The Company
shipped approximately 12,000 Fun Karts to dealers and mass merchandisers in
1998, which the Company believes represents approximately 9% of the total
domestic Fun Kart market. Consolidated revenues of the Company for the fiscal
year ended December 31, 1998 were approximately $8.3 million as compared with
combined revenues of approximately $7.6 million for the fiscal year ended
December 31, 1997. The Company operates manufacturing facilities in Roseland,
Louisiana, Prattville, Alabama and Milford, Michigan and maintains its executive
offices in Roseland, Louisiana.
The kart industry is comprised of three principal segments, Fun Karts,
racing and concession karts. Fun Karts, the largest segment, are karts sold to
consumers for general recreational use. Racing karts are specially designed for
use on established tracks in a controlled racing environment. Concession karts
are designed for use by amusement and entertainment centers which provide karts
and facilities for customers' use on a rental basis. Management estimates that
in 1998 approximately 156,000 karts were sold in the United States of which
approximately 135,000 were Fun Karts, 12,000 racing karts and 9,000 concession
karts. Historically, the Company, through its subsidiaries, has concentrated its
efforts in the Fun Karts market.
The Company offers a product line of approximately 35 Fun Kart models,
differentiated by frame size, drive train, seating capacity, tire size and tread
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
brush 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
Tecumseh Products Company, Briggs & Stratton and Honda engines. The end-users of
the Company's Fun Karts are primarily 7- to 17-year-old males, living with their
parents in suburban and rural markets. Typical Fun Kart purchasers are parents
who purchase Fun Karts for their children.
The Company relies on a broad and diversified national independent
dealer network, mass merchandisers and manufacturing representatives to sell its
products. In 1998, the Company sold 79% of its products through its over 700
dealers, primarily lawn and garden stores, motorcycle outlets, hardware stores
and specialty karts dealers, located in 40 states. The major markets for the
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Company's Fun Karts are in the Southeast and Southwest regions of the United
States. In 1998, the Company sold approximately 30% of its Fun Karts to
approximately 250 dealers located in Louisiana, Texas, Mississippi and Florida.
Although there are no formal dealer agreements, the Company, for the benefit of
certain of its higher volume dealers, will agree not to sell to other retailers
in a limited geographic area surrounding the high volume dealer. For eligible
dealers, the Company offers a dealer floor plan financing program through an
unaffiliated financial services company.
In 1997 the Company sold approximately 2,300 of its Fun Karts to two
retail chain merchandisers which accounted for approximately 15% of the
Company's 1997 revenues. During 1998, the Company sold approximately 1,400 units
to 10 mass merchandisers, which represented approximately 12% of its total
revenue.
In 1998, the Company entered into contracts with a number of
manufacturer representative organizations ("MRO") that were selected based on
the territories served, customer base and product lines being represented. The
relationship established with these organizations not only provided over
eighty-five additional salesmen promoting the Company's products, but also
provided access to a number of mass merchandisers.
During 1998, the Company also manufactured approximately 2,450 karts
for a competitor, which generated approximately $1.1 million of revenues
representing approximately 13% of the Company's total 1998 revenues. The Company
does not intend to produce any karts in 1999 for this competitor, but is
planning to manufacture concession karts for Daytona SuperKarts, Inc. d/b/a
Andretti SuperKarts ("Andretti") located in Daytona Beach, Florida. While, the
total number of karts that will be produced for Andretti is not expected to be
significant in 1999, the revenues are expected to be approximately the same as
the revenues generated by sales to a competitor of the Company in 1998. The
Company also has an option to acquire Andretti. See "Andretti Agreements" below.
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, and
through potential acquisitions of other manufacturers of karts and related
products.
On a selective basis, the Company continues to seek acquisitions that
will expand its existing product lines, market share and distribution channels.
However, other than an option to purchase 100% of the capital stock of Andretti,
the Company currently has no agreements or understandings with respect to any
such acquisitions and there can be no assurance that the Company will be able to
identify and acquire such businesses or obtain necessary financing on favorable
terms.
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, USA, Straight
Line and KINT. The Brister's and USA acquisitions in 1996 and the Straight Line
acquisition in 1998 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 was recorded as goodwill. At
December 31, 1998, due to the Company's operating history, management recognized
an impairment to the future recoverability of goodwill and charged all
unamortized goodwill at that date to operations. 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,
USA, Straight Line and KINT for the respective periods owned.
The address of the Company's principal executive office is 62204
Commercial Street, P.O. Box 695, Roseland, Louisiana 70456, and its telephone
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number is (504) 747-1111. The Company maintains manufacturing facilities at 202
Challenge Avenue, Prattville, Alabama 36067, Highway 51 South, Roseland,
Louisiana 70456 and 335 S. Houghton Street, Suite 2, Milford, Michigan 48381.
Recent Developments
Straight Line Acquisition. In October 1998, the Company acquired all of
the issued and outstanding capital stock of Straight Line, a Fun Kart
manufacturer located in Milford, Michigan. Management of the Company intends to
consolidate the operations, manufacturing, sales and marketing of Straight Line
products into the manufacturing and administrative facilities of the Company's
other operating subsidiaries. As consideration for the purchase of the Straight
Line shares of capital stock ("Straight Line Shares"), the Company issued and
delivered to Daniel D. Smock, the sole shareholder of Straight Line (the
"Shareholder"), 182,648 shares of the Company's Common Stock which had a market
value of $400,000, or $2.19 per share, based on the closing price per share of
the Company's Common Stock as reported on the Nasdaq SmallCap Market system on
September 15, 1998.
As further consideration for the purchase of the Straight Line Shares,
the Company and the Shareholder entered into a three-year Employment and
Noncompete Agreement at an annual salary of $80,000. The Shareholder was also
granted options to purchase 10,000 shares of the Company's Common Stock at $1.19
per share. As consideration for the covenants and other agreements of the
Shareholder in the Employment and Noncompete Agreement, the Company paid the
Shareholder $50,000 and issued and delivered to the Shareholder a Promissory
Note in the amount of $50,000 with interest at 6% per annum with the principal
and accrued interest payable to the Shareholder on March 31, 1999 ("Smock
Note").
Straight Line also issued to the Shareholder a $73,874.74 Promissory
Note with interest at 6% per annum to evidence the amount owed to the
Shareholder by Straight Line on the closing date of the transaction
("Shareholder Note"). A principal payment of approximately $15,000 has been paid
to the Shareholder. Payment of the remaining principal and accrued interest of
this Note is subject to the settlement of a pending lawsuit against Straight
Line or entry of a final non-appealable judgment. Any amount owed by Straight
Line as a result of the litigation will be offset against the remaining balance
of the principal and accrued interest of the Note. Any expenses, including
payment of any judgment or settlement, for the pending lawsuit that exceed the
principal balance and accrued interest of the Note will be paid by Straight
Line. The Company does not believe that the liability, if any, of Straight Line
in connection with the pending litigation will exceed the remaining principal
and accrued interest balance of the Note.
The payment of the Smock and Shareholder Notes is secured by a security
interest granted to Shareholder in the Straight Line Shares.
Andretti Agreements. Effective December 1, 1998, the Company acquired
from Andretti certain assets for $56,000. Andretti is a concession kart
manufacturer located in Daytona Beach, Florida. The shareholders of Andretti
(the "Andretti Shareholders") also granted the Company an option (the "Option")
to acquire the issued and outstanding shares of Andretti's common stock based on
a financial formula defined in the Option. The Option expires upon the
expiration of the 30-day period following Andretti's fiscal year ending December
31, 2000. The Company issued to the Andretti Shareholders an aggregate of 90,090
shares of Common Stock having a market value of approximately $100,000 as
payment for the Option. The Option also provides that Andretti can require the
Company to exercise the Option if Andretti achieves certain financial goals
during the Option term. The Company also has the right during the Option term,
subject to certain conditions, to acquire for $100.00 intellectual property
rights related to the business of Andretti.
The Company and Andretti also entered into a manufacturing agreement
(the "Manufacturing Agreement") which provides that the Company will
manufacture, on an exclusive basis, Andretti's concession karts at a
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predetermined per unit price. The Manufacturing Agreement will terminate on the
later of March 31, 2001 or the date that the Option is terminated or exercised.
The Company also purchased from an affiliate of Andretti a $375,000
note owed to such person by Andretti (the "Andretti Note"). The Company issued
337,838 shares of Common Stock to the affiliate as consideration for the
Andretti Note. Interest is due on December 1 of each year until the Andretti
Note is paid, with the principal balance and accrued interest due on the tenth
business following the expiration of the Option.
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. By standardizing the base
frame and components on each of the major lines of Fun Karts, the Company
expects to reduce volume purchase prices and decrease assembly costs. The
Company believes that modernization of its manufacturing facilities is essential
to improving the quality of the Company's products and promoting the price
competitiveness of its Fun Karts. The Company intends to expand and renovate, as
necessary, its manufacturing facilities, purchase new equipment and maintain
strict cost controls as a means to enhance the production of high quality Fun
Karts. In 1998, the Company made capital expenditures of approximately $750,000
for renovation of manufacturing facilities, leasehold improvements, equipment
purchases and expansion and relocation of the corporate offices to Roseland,
Louisiana.
Diversification of Domestic Distribution Channels. The historical
marketing strategy of the Company has been to build a broad and diverse
independent dealer base, primarily in Louisiana, Texas, Mississippi and Florida
by offering safe, high quality and reliable Fun Karts that are competitively
priced and timely delivered. In 1998, the Company entered into agreements with
several MROs that were selected based on the territories served, customer base
and product lines being represented. The relationship established with these
organizations not only provided over eighty-five additional salesmen promoting
the Company's products, but also provided access to a number of mass
merchandisers. The Company's future marketing efforts are designed to maintain
and expand its independent dealer network in the South and West regions of the
United States through direct communications with dealers, engaging additional
MROs and attendance at industry trade shows such as the International Lawn and
Garden Show. The Company also plans to assist dealers with their selling and
marketing efforts with Company-sponsored seminars, discount or rebate programs
and advertising, including product videos and brochures, leaflets, posters,
signs and other miscellaneous promotional items for use by dealers. The Company
will also seek to increase sales to mass merchandisers with direct communication
and the engagement of additional MROs. Although the Company believes that sales
to mass merchandisers offers a significant growth opportunity, the Company will
seek to obtain a reasonable balance between its dealer and mass merchandiser
distribution networks and will attempt to avoid a high concentration of sales to
any one or group of dealers or mass merchandisers.
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Growth Strategy
Increasing Product Recognition By Innovative Marketing to Target Users.
In 1998, the Fun Kart industry's sales were made to only approximately 0.7% of
the estimated 20 million 7- to 17-year-old males in the United States, the
Company's target users. The Company believes that if it is to further penetrate
its target market, the Company must advertise in media easily accessible by this
group and attractively and prominently display its Fun Karts in locations and at
events frequented by young males and their parents. The Company advertises its
products in national youth-oriented magazines and periodicals, on the Internet
and to a lesser extent, on billboards, radio and television. The Company
maintains a home page on the Internet (thunderkarts.com, sportskart.com and
usafunkarts.com) and has sponsored local events such as a Babe Ruth Baseball
Tournament, Arbor Day festival and parades.
Improve Product Design and Development. The Company believes that it is
a leader in the development of safety features for its Fun Karts, due primarily
to its emphasis on continuous research and development of safety related items.
The Company, primarily through the efforts of Charles Brister, the President and
Chief Executive Officer, has developed a number of technological advances,
including the automatic throttle override and automatic clutch lubrication
systems, which have significantly improved its products. Recently, Mr. Brister
has designed for the benefit of the Company and has applied for a patent for a
safety fuel tank and filler cap which is a new product to prevent a small
internal combustion engine from operating unless the fuel cap is firmly in place
on the tank. This apparatus will minimize the opportunity for a flash fire to
start and injure the operator of equipment which uses a small engine with an
integrated fuel tank such as a lawn mower, go kart or string trimmer. The
Company in 1998 employed additional engineering personnel primarily to continue
the development of innovative safety and technological features for the
Company's Fun Karts and to develop new products, including the Company's new
off-road 3-2 h.p. Fun Bike. The Company will continue to develop and distribute
optional Fun Kart parts and accessories to dealers for sales to Fun Kart
purchasers. The Company may also develop a line of helmets, jackets, boots and
other related items for its dealers and mass merchandisers to complement sales
of Fun Karts.
Expansion of Geographic Presence. The Company intends to expand its
geographic presence and increase its market share within and outside of its core
and contiguous markets by continued emphasis on the development and expansion of
its dealer and mass merchandiser networks, establishing relationships with
independent sales representatives to serve regions of the United States which
are currently underpenetrated by the Company and possible acquisition of kart
manufacturers and related businesses that offer synergistic growth opportunities
for the Company. During 1998, the Company had its first shipment of Fun Karts
into the Canadian market, and believes that international sales to countries
such as Canada offer a potential market for the Company's products.
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. Future acquisition candidates are anticipated to be (i) companies
having three or more years operating history and annual revenues up 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. Except for the Option to purchase
Andretti, the Company is not a party to any agreements, commitments, letters of
intent or understandings with any acquisition candidate.
Management believes that it will be necessary to obtain additional
financing prior to a major acquisition. The Company anticipates that the
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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.
Product Lines
The Company produces a full line of Fun Karts, currently consisting of
35 models which are variations on 15 different frames available in a variety of
colors which are sold at prices ranging from $500 to $4,000. The models are
differentiated by drive train (single wheel pull, live axle or torque
converter), engine size (5 h.p. to 13 h.p.), seating (single or double), tires
(turf, ATV, kleat), tires (4" to 8"), frame size and suspension (shock
absorbers). The Company markets its Fun Karts under the brand names of Thunder
Karts, USA Fun Karts and Sport Karts.
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 or
disc brakes, automatic throttle override system, rack and pinion steering, shock
absorbers, electric start, 5 to 13 horsepower engines, clutch lube system,
powder paint, high speed bearings, safety flag and full brush cages.
The Company believes that it is a leader in the development of safety
features for its Fun Karts, due primarily to its emphasis on continuous research
and development of safety related items. The Company has developed a number of
technological advances, including the automatic throttle override and automatic
clutch lubrication systems, which have significantly improved its products, and
the new safety fuel tank and filler cap which the Company anticipates will be
installed on its Fun Karts beginning in the third quarter of 1999.
The Company's 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 are enhancement of safety
for inexperienced drivers; stopping of simultaneous braking and throttling;
easier braking; and extended brake life.
Charles Brister, the Company's President and Chief Executive Officer,
has designed for the benefit of the Company and has applied for a patent for a
safety fuel tank and filler cap which is a new product to prevent a small
internal combustion engine from operating unless the fuel cap is firmly in place
on the tank. This apparatus will minimize the opportunity for a flash fire to
start and injure the operator of equipment which uses a small engine with an
integrated fuel tank such as a lawn mower, go kart or string trimmer.
The safety fuel tank and filler cap has been designed in several
different configurations to accommodate the variety of integrated fuel tanks now
being produced. It has been developed both as a product to be incorporated into
the design and manufacture of new fuel tanks and as a retrofit for engines
already in use. Utilizing either a magnetic, photoelectric or mechanical switch
that is interfaced between the fuel tank and filler cap, the device disables the
engine's ignition system when the filler cap is moved from its fully closed
position. Disabling the ignition system on a small internal combustion engine
immediately stops a running engine and then prevents it from restarting until
the fuel cap is replaced and the integrated switch sensors close the circuit.
The Company will be the exclusive licensee of this product for the
go-kart market and it is anticipated that the Company will issue sub-licenses to
several fuel tank, fuel cap or small engine manufacturers to facilitate
application of this technology to non go-kart related industries.
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Manufacturing Operations
The Company operates manufacturing facilities in Roseland, Louisiana,
Prattville, Alabama and Milford, Michigan. Fun Kart production levels at the
Company's manufacturing plants varies depending on the season. Between January
and May, the Company generally utilizes a ten-hour work day four days a week at
its plants. In June, the work week expands to five days and peaks in November at
six days. From June through December, daily output from all facilities is
approximately 100-125 Fun Karts. Management believes that with limited
renovation of its current facilities, the Company will be able to meet projected
increased customer demand for the Company's products for the foreseeable future.
Additional labor at reasonable costs is readily available in the vicinity of the
Company's manufacturing facilities.
The Fun Karts manufacturing process is primarily one of welding and
assembly at various work stations. The Company buys directly from mills both
pre-cut and uncut tubular steel used in the manufacturing of the frames. Since
the price differential between pre-cut and uncut tubular steel is relatively
small, it is more cost-effective, particularly for pieces that are certain not
to change, to purchase pre-cut tubular steel. The steel is cut and bent during
the manufacturing process to the frame specifications for the Company's various
Fun Kart models. Most of the other Fun Karts component parts, including engines,
wheels, tires, seats, steering wheels, steering tie rods and miscellaneous
parts, are purchased from various domestic vendors. The Company depends on
Tecumseh, Briggs & Stratton and Honda for its engines, and the loss of all of
these vendors may cause the Company to experience a temporary delay in the
production of the Company's Fun Karts. The Company believes other engine vendors
and suppliers of other component parts necessary for the production of Fun Karts
are readily available.
Quality Control, Warranties and Service
The Company adheres to strict quality standards and continuously
refines its production procedures to increase productivity and reduce warranty
claims. 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. The Company has not
historically incurred any significant warranty claims and have never had a
recall of any of its products.
Patents and Proprietary Technology
The Company does not own any patents, trademarks or service marks.
However, Charles Brister, President, Chief Executive Officer and 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.
In 1997, the Company and Mr. Brister entered into an agreement which
provided for an initial $10,000 license fee and a royalty payment 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 a royalty payment of
$1.00 for each Company Fun Kart on which the ATOS was installed or $20,000
annually whichever is greater. In 1998, the Company paid Mr. Brister $10,000 for
the initial license fee and owes Mr. Brister $20,000 for 1998 royalties under
the agreement.
The Company, in October 1998, entered into a license agreement with Mr.
Daniel Smock, former owner of Straight Line, for the exclusive right to
manufacture the "SportKarts" product line. The term of the licensing agreement
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is for the life of the patents applied for by Mr. Smock which are anticipated to
expire in the year 2013. Mr. Smock is to be paid a royalty of $10.00 for each
Fun Kart which is manufactured, after October 31, 1998, with the design and
processes developed by Mr. Smock.
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. The Company in 1998
sold approximately 30% of its Fun Karts to approximately 250 dealers 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 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. Credit terms are typically 2% net 10 days, net 30 days. For dealers who
meet certain credit requirements, the Company offers a dealer floor plan
financing program through an unaffiliated financial services company. The floor
plan agreement may be terminated at any time by the Company or the financial
services company with 30 days written notice to the other party and may be
terminated by the financial services company upon an event of default by the
Company, which includes failure by the Company to pay any amounts owed to the
lender when due, cessation of business or bankruptcy of the Company or a
material adverse change in the Company's financial condition. The Company, at
its option, will allow approved dealers up to 120 days of interest-free
financing under the floor plan agreement. The floor plan arrangements require
the Company to repurchase units in the event of dealer default. The Company does
not currently have any significant contingent liability under the repurchase
obligation of the floor plan agreement.
During 1998, the Company sold approximately 1,400 units to 10 mass
merchandisers, which represented approximately 12% of unit sales. Sales to
dealers, including lawn and garden stores, motorcycle shops, karts specialty
stores, automobile parts dealers and hardware stores, accounted for 79% of the
Company's 1998 unit sales. The Company estimates that sales of its products to
independent dealers and mass merchandisers will be approximately 60% and 40%,
respectively, in 1999. Although the Company believes that sales to mass
merchandisers offers a significant growth opportunity, the Company will seek to
obtain a reasonable balance between its dealer and mass merchandisers
distribution networks and will attempt to avoid a high concentration of sales to
any one or group of dealers or mass merchandisers.
In January 1998, the Company formed a Louisiana limited liability
corporation, KINT, L.L.C., as a wholly-owned subsidiary. KINT, doing business as
Bird Promotions, was activated during July 1998 for the purpose of organizing a
sales and marketing company, focusing on the sale of customized promotional Fun
Karts to various national companies. In March 1999, the Company ceased
operations within this subsidiary and consolidated the sales and marketing
efforts within other operating subsidiaries of the Company.
The Company has two main modes of delivery to its dealers. The Company
delivers directly to Louisiana, Alabama and Mississippi dealers, using
Company-owned trucks with trailers that can carry up to 27 Fun Karts. All
Louisiana, Alabama and Mississippi delivery routes are designed to be completed
-10-
<PAGE>
during a single day. All other dealers and mass merchandisers receive their Fun
Karts by common carrier, freight collect F.O.B. dealer. The Company is committed
to achieving a turnaround from order date to shipment of one to two days in the
off season, and three to seven days in peak season. Fun Karts are delivered
completely assembled, except for the installation of the accompanying safety
cages.
Marketing. The historical marketing strategy of the Company has been to
build a broad and diverse independent dealer base, primarily in the Southeast
and Southwest regions of the United States, the Company's core markets, by
offering safe, high-quality and reliable Fun Karts that are competitively priced
and timely delivered. In 1998 the Company added 38 new dealers, three
distributors, over 100 independent sales representatives and 10 mass
merchandisers to its existing distribution channels. The Company's future
marketing efforts are designed to maintain and expand its independent dealer
network in the South and West regions of the United States and in foreign
markets through direct communications with dealers and assisting them with their
selling and marketing efforts with Company-sponsored seminars, discounts or
rebate products and advertising, including product videos and brochures,
leaflets, posters, signs and other miscellaneous promotion and items for use by
dealers. The Company will also seek to increase sales to mass merchandisers with
direct communication, engaging additional independent sales representatives and
attendance by Company representatives at Fun Kart and industry related trade
shows. The Company believes that attendance at trade shows will allow it to
promote its products to a diversified group of dealers and mass merchandisers
currently targeted by the Company.
The Company's advertising and promotional materials emphasize the
safety-related features built into the Company's Fun Karts. The Company has
adopted this advertising strategy in order to promote the concept that it is fun
and safe for children to own and operate Fun Karts. The Company intends to
increase potential customers' awareness of its products by advertising in
youth-oriented magazines; motorcycle, lawn and garden, hardware and outdoor
power equipment trade magazines; displaying and promoting the Company's products
at NASCAR races and related events; and traditional print, billboard and, to a
lesser extent, on television and radio media. The Company believes that if it is
to further penetrate its target market, the Company must advertise in media
easily accessible by this group and attractively and prominently display its Fun
Karts in locations and at events frequented by young males and their parents.
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. Management
believes that if its business strategies are successful in 1999 and future
years, there will be some mitigation of the historically seasonal nature of the
Company's Fun Karts sales.
Customers
In 1998, approximately 79% of the Company's sales were to its
independent dealers and the Company projects that it will sell approximately 60%
of its Fun Karts to independent dealers in 1999. No customer accounted for 10%
or more of the Company's 1998 sales. The Company does not believe that any one
mass merchandiser or any dealer or group of affiliated dealers will account for
10% or more of the Company's 1999 revenues.
-11-
<PAGE>
Backlog
The Company typically fills and ships customer orders within 3 to 7
days of receipt of the order and, therefore, maintains no significant backlog.
Governmental Regulations
Consumer protection laws exist in many states in which the Company
markets its products. Any violation of such laws or regulations could have a
material adverse effect on the Company. The Company's manufacturing facilities
are inspected by the Occupational Safety and Health Administration. The Company
believes that it is generally in compliance in all material respects with all
currently applicable federal and state laws and regulations. Federal, state and
local environmental regulations are not expected to have a material effect on
the Company's operations. However, if the Company in the future acquires an
entity which is in violation of consumer or environmental laws and regulations,
such violations may have a material adverse effect on the Company's operations.
Management believes certain states, including California, have proposed
legislation involving emission or other safety standards for the type of
gas-powered type engines installed on the Company's Fun Karts. The Company is
currently unable to predict whether such legislation will be enacted in the
future and, if so, the ultimate impact on the Company and its operations.
Employees
As of March 15, 1999, the Company employed approximately 120 employees
which are employed on a full-time or part-time basis. Eighteen employees are
administration and sales personnel, eight 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.
Labor costs for the Company at its manufacturing facilities is
comparable to labor costs in its respective markets. The Company's employees are
not represented by a union or subject to a collectively bargaining agreement.
The Company has never experienced a strike or work stoppage and considers its
relations with its employees to be excellent.
Competition
The Fun Karts industry is highly competitive, and there is no assurance
that the Company will be able to 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.
-12
<PAGE>
Business Risk Factors
Uncertainty of Company's Ability to Continue As a Going Concern. The
Company's financial statements (contained elsewhere herein) were prepared
assuming that the Company will continue as a going concern. The Company's
independent auditor, in its report regarding the Company's financial statements,
expressed the fact that the Company has suffered recurring losses from
operations and experienced seasonality of product demand which is focused in the
last four months of the calendar year which impacts cash flow during the first
eight months of the year. These factors raise substantial doubt as to the
Company's ability to continue as a going concern. See "Management's Discussion
and Analysis or Plan of Operation" and Note B to the Consolidated Financial
Statements.
Operating Losses; Recent Senior Management Turnover. For the years
ended December 31, 1998, 1997 and 1996, the Company experienced net losses from
operations of approximately $3,930,000, $580,000 and $402,000, respectively, and
has utilized cash in operating activities of approximately $3,260,000, $220,000
and $110,000, respectively. Additionally, the Company has experienced senior
management turnover in both January 1998 and 1999. The Company's former
management was unable to operate the Company's facilities in a manner that would
allow the Company to meet demand for product production during the fourth
quarter of 1998 and, accordingly, incurred short-term financing from a
non-financial institution lender to provide liquidity. Further, former
management spent considerable time and financial resources in exploring possible
merger or acquisition candidates and the results of these efforts were for the
most part unsuccessful and diverted management time and resources from customer
demands for product during the Company's heaviest demand period. The Company's
continued existence is dependent upon its ability to generate sufficient cash
flows from operations to support its daily operations as well as provide
sufficient resources to retire existing liabilities on a timely basis.
No Assurance of Funding for Additional Capital Requirements. The
Company will require additional financing to satisfy working capital and cash
flow requirements for its business operations. There can be no assurance that
additional financing will be available, or if available, that such financing
will be on favorable terms. Any such failure to secure additional financing or
otherwise maintain adequate liquidity could have a material adverse effect upon
the financial condition and results of operations of the Company.
Substantial Indebtedness; Debt Service Capability. The Company has a
substantial amount of long-term and short-term debt under its credit facilities
and accounts payable. There can be no assurance that the operations of the
Company will generate sufficient cash flows to service such debt. The Company's
leverage poses substantial risk in that it could limit the Company's ability to
respond to industry changes or economic downturns, as well as its ability to
satisfy its funding needs for operations or to raise debt or equity capital.
Consequences of Default under Credit Facilities. The Company has two
lines of credit with a non-financial institution lender for up to $2 million of
which approximately $1.5 million was outstanding at December 31, 1998. The lines
of credit are secured with the Company's accounts receivable and inventory and
are subject to standard affirmative and negative covenants, including
maintaining certain levels of working capital and minimum tangible net worth.
The credit lines were restructured in March 1999 to further provide that the
Company must obtain a minimum of $1.5 million of new equity capital by May 6,
1999. If a violation by the Company of any of the loan covenants occurs or any
other default by the Company on its obligations relating to the credit lines,
including failure to raise at least $1.5 million of additional equity capital,
the lender could declare the then outstanding indebtedness to be immediately due
and payable and could foreclose on a significant portion of the Company's
assets. Any default under its credit facilities would have a material adverse
effect upon the Company's financial condition and results of operation. See
"Management's Discussion and Analysis or Plan of Operation."
Dependence on Key Personnel. The Company's success will depend to a
large degree on its ability to retain the services of its existing management
-13-
<PAGE>
and to attract qualified personnel in the future. On January 19, 1999, Charles
Brister resumed the office of President and Chief Executive Officer of the
Company. The loss of the services of Mr. Brister or any key management personnel
or the inability to recruit and retain qualified personnel in the future could
have a material adverse effect on the Company's business and results of
operations. The Company may obtain key man life insurance policies on the lives
of key management personnel, with the proceeds of the policies to be payable to
the Company. While management of the Company believes that any such policy
proceeds would help the Company recruit and compensate replacements for such
individuals, there can be no assurance that any such proceeds would offset any
resulting financial impact of the death of any key management personnel.
Dependence on Product Development and Modification and Market
Acceptance. The Company's continued growth is dependent upon increased consumer
awareness and acceptance of the Company's existing and new products. No
assurances can be given that the Company will be able to successfully develop
new products, modify existing products or that any new or modified products will
meet with consumer acceptance in the marketplace or that the Company's current
products will receive continued or increased consumer acceptance. No assurance
can be given that the Company's existing products will continue to be sold at
acceptable margin levels or that the Company will be able to develop,
manufacture and distribute new products at acceptable margin levels.
Dependence on License Agreement with Executive Officer. Mr. Charles
Brister, President, Chief Executive, a director and principal stockholder of the
Company, owns certain patents, technology and trademarks which are licensed to
the Company, which allows the Company to use certain brand names and utilize the
automatic throttle override system on its Fun Karts. The Brister license
agreement expires March 15, 2000. The termination of the license agreement with
Mr. Brister prior to its term would have an adverse effect upon the Company's
ability to produce its current line of Fun Karts. Furthermore, there can be no
assurance that if the license agreement is terminated prior to its initial term
that the Company could find suitable substitutions for the licensed items and
technology or that its Fun Karts, produced without the licensed items and
technology, would receive the same market acceptance. Also, there is no
assurance that the technology licensed to the Company, or that the Company might
license in the future, will quickly become obsolete due to the development of
other, more advanced technology by competitors of the Company.
Dependence upon Company's Ability to Manage Growth and Expansion. The
Company's ability to manage its growth, if any, will require it to continue to
improve and expand its management, operational and financial systems and
controls. Any measurable growth in the Company's business will result in
additional demands on its management, administrative, operation, financial and
technical resources. There can be no assurance that the Company will be able to
successfully address these additional demands. There also can be no assurance
that the Company's operating and financial control systems will be adequate to
support its future operations and anticipated growth. Failure to manage the
Company's growth properly could have a material adverse effect upon the
Company's business, financial condition and results of operations. The Company
may also seek additional acquisitions of related businesses that could
complement or expand the Company's business. In the event the Company were to
identify an appropriate acquisition candidate, there is no assurance that the
Company would be able to successfully negotiate, finance or integrate such
acquired properties or businesses into current operations. Furthermore, such an
acquisition could cause a diversion of management's time and resources. There
can be no assurance that a given acquisition, when consummated, would not
materially adversely effect the Company's business and results of operations.
The Year 2000 Issue. The year 2000 issue is the result of computer
programs using two digits rather than four to define the applicable year.
Date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations,
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. The Company does not believe that the year 2000 issue will
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<PAGE>
have a material effect on its network, computer systems or operations; however,
it will continue to assess the potential impact of the year 2000 issue. Any
failure of the Company to become year 2000 compliant on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations, including, without limitation, a complete failure or
degradation of the performance of the Company's network or other systems. To the
extent that the Company relies on external vendors and network providers with
year 2000 exposure, any failure by such third-party providers to resolve any
year 2000 issues on a timely basis or in a manner that is compatible with the
Company's systems could have a material adverse effect on the Company. The
Company is evaluating such providers in relation to the year 2000 issue, and
furthermore, the Company has no control over whether its third-party providers
are, or will be, year 2000 compliant. Any failure on the part of such
third-party providers to become year 2000 compliant on a timely basis or in a
manner that is compatible with the Company's systems could have a material
adverse effect on the Company. In the event the Company encounters year 2000
problems, it would expect to take all necessary measures to address such
problems.
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.
Potential Product Liability and Insurance Limits. The nature of the
products manufactured and marketed by the Company is such that the products may
fail due to material inadequacies or equipment failures. Such a failure may
subject the Company to the risk of product liability claims and litigation
arising from injuries allegedly caused by the improper functioning or design of
its products. As the Company expands its product lines and distributes more
products into the marketplace, the Company's exposure to such potential
liability will also increase. The Company currently maintains $5 million
occurrence basis product liability insurance with a $25,000 self-insured
retention and $6 million maximum per occurrence coverage. The Company has 10
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
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.
Pending Litigation. In addition to product liability claims, the
Company, from time to time, is involved in lawsuits in the ordinary course of
business. On February 4, 1997 a lawsuit was filed in a Mississippi state court
against the Company, Brister's and an unaffiliated insurance broker by the
Company's insurance underwriter to have insurance coverage declared as null and
void for an alleged material misrepresentation on the insurance application.
This action arose as a result of the payment in 1997 by the insurance
underwriter of $700,000 in settlement of a product liability lawsuit against
Brister's and other defendants. A summary judgement was recently granted in
favor of the Company dismissing the insurance underwriter's claim. The insurance
underwriter has appealed the matter to the U.S. Fifth Circuit Court of Appeals
and if the appeal is successful and the insurance underwriter is awarded a
judgement for damages against the Company, such judgment could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Legal Proceedings."
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Possible Delisting of Securities from Nasdaq SmallCap Market and Risks
of Common Stock Trading Below $5.00 Per Share. On February 17, 1999, Nasdaq
advised the Company that its shares of Common Stock failed to maintain a closing
bid price per share of at least $1.00. To be eligible for continued listing on
the Nasdaq SmallCap Market, the Company's shares of Common Stock must maintain a
minimum price of $1.00 per share. The Company has until May 17, 1999 to regain
compliance with the minimum bid price requirement. If at any time during such
period the closing bid price of the Common Stock is at least $1.00 per share for
a minimum of ten consecutive trading days, the Company will have complied with
the minimum bid price requirement. However, if the Company is unable to
demonstrate compliance, with the minimum $1.00 per share bid price on or before
May 17, 1999, the Company's securities will be subject to delisting. To stay the
delisting, the Company may request a hearing by the close of business on May 17,
1999. At such hearing, the Company will be given an opportunity to present its
plans for achieving compliance with the minimum bid price requirement. Such plan
may include a reverse split of its Common Stock. The Company may be delisted
during such period for failure to maintain compliance with any other listing
requirement for which it is currently on notice or which occurs during the
period.
If the Company is unable in the future to satisfy the requirements for
continued quotation on Nasdaq SmallCap Market, trading in the Company's Common
Stock and Warrants would be conducted in the over-the-counter market in what are
commonly referred to as the "pink sheets" or on the NASD Electronic Bulletin
Board. As a result, an investor may find it more difficult to dispose of or
obtain accurate quotations as to the price of the Company's Common Stock and
Warrants. In addition, if the Common Stock and Warrants are suspended or
terminated from Nasdaq SmallCap Market and at such time the Common Stock has a
market price of less than $5.00 per share, then the sale of such securities
would become subject to certain regulations adopted by the Commission which
imposes sales practice requirements on broker-dealers. For example,
broker-dealers selling such securities must, prior to effecting the transaction,
provide their customers with a document which discloses the risks of investing
in the Company's Common Stock and Warrants. Furthermore, if the person
purchasing the securities is someone other than an accredited investor or an
established customer of the broker-dealer, the broker-dealer must also approve
the potential customer's account by obtaining information concerning the
customer's financial situation, investment experience and investment objectives.
The broker-dealer must also make a determination whether the transaction is
suitable for the customer and whether the customer has sufficient knowledge and
experience in financial matters to be reasonably expected to be capable of
evaluating the risk of transactions in the security. Accordingly, if the
Company's Common Stock and Warrants are suspended or terminated from Nasdaq
SmallCap Market and the Common Stock is trading for less than $5.00 per share,
the Commission's rules may limit the number of potential purchasers of the
securities.
ITEM 2. PROPERTIES
Facilities
The following table sets forth information concerning the Company's
facilities:
<TABLE>
Date Leased Expiration of Approximate
Location or Acquired Description Lease Term Square Footage
- ----------------------- -------------- ---------------------------- ---------------- ----------------
<S> <C> <C>
Roseland, Louisiana 1998 Corporate Offices(1) 2000 2,400
Roseland Louisiana 1996 Manufacturing facility(1) 2000 48,000
Prattville, Alabama 1996 Manufacturing facility (2) 20,000
Milford, Michigan (3) Manufacturing facility (3) 17,500
</TABLE>
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- -----------------
(1) The Company and Charles Brister, President, Chief Executive Officer and a
director of the Company, have entered into a Real Estate Option Right of
First Refusal Agreement which provides that the Company may, at its sole
option, purchase the Roseland facility from Mr. Brister for $550,000. The
option expires on December 31, 2000. The Company and Mr. Brister have
entered into a lease agreement, which expires in 2000, for this facility,
which includes the corporate offices. The monthly lease payment is $6,025
with certain adjustments. The Company believes these terms are comparable
to existing market rates in the region. The Company in 1998 spent
approximately $293,000 for leasehold improvements at the Roseland
manufacturing facility and added approximately 2,400 square feet of
additional executive office space at a cost of approximately $145,000. See
"Certain Relationships and Related Transactions."
(2) 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 $217,000 at December
31, 1998 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 Company in 1998 spent approximately $104,000 for
building improvements at the Prattville facility.
(3) The Milford facility is currently on a month-to-month basis at
approximately $5,600 per month.
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 a $25,000
self-insured retention and $6 million maximum per occurrence coverage. The
Company has 10 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 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. A summary judgment was recently
granted in favor of the Company dismissing the insurance underwriter's claim.
The insurance underwriter has appealed the matter to the U.S. Fifth Circuit
Court of Appeals. If the insurance underwriter is successful in this appeal, 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.
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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 1998 or the first quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND 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> <C>
Common Stock Warrants
Bid Price(1) Bid Price
------------ --------- ----------- -------
Calendar Year 1999 Low High Low High
- ------------------
First Quarter (through March 18, 1999) $0.44 $0.88 $0.16 $0.31
Common Stock Warrants
Bid Price(1) Bid Price
------------ --------- ----------- -------
Calendar Year 1998 Low High Low High
- ------------------
First Quarter $2.75 $3.75 $0.56 $1.19
Second Quarter $1.94 $3.63 $0.50 $0.88
Third Quarter $1.38 $3.38 $0.25 $0.69
Fourth Quarter $0.28 $1.88 $0.06 $0.25
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, 1999, the closing bid and ask prices for the Common Stock
were $.50 and $.63, respectively, per share and the closing bid and ask prices
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for the Warrants were each $.06 per Warrant. As of March 23, 1999, 5,574,298
shares of Common Stock were issued and outstanding and 1,782,500 Warrants were
outstanding.
Holders. As of March 23, 1999, there were approximately 550 record and
beneficial holders of the Company's Common Stock and approximately 300 record
and beneficial holders of the Warrants.
Dividends. The Company has not paid or declared any dividends with
respect to its Common 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, until
September 1999, without the consent of the representative of the underwriters of
its 1997 public offering of securities, it shall not redeem or issue any of its
securities or pay any dividends, or make any other cash distributions in respect
of its securities, in excess of the amount of the Company's current or retained
earnings. The Company may issue shares of preferred stock in the future which
may contain restrictions on the payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Caution Regarding Forward-Looking Information
This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
Overview
The Company is in the business of manufacturing and marketing Fun Karts
for the consumer market. In March 1996, the Company acquired Brister's, a Fun
Kart manufacturer, from Charles Brister, President, Chief Executive Officer,
director and principal stockholder of the Company, for $6.3 million. In November
1996, the Company acquired USA, a Fun Kart manufacturer located in Alabama, from
four USA stockholders for $1,000,000.
In September 1997, the Company consummated a 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 ("1997 Public
Offering"). Each Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $4.00 per share until September 9, 2002.
The Warrants are redeemable by the Company at a redemption price of $0.01 per
Warrant, at any time 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
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1997 Public Offering were used as follows: (i) $2,250,000 for the repayment of
indebtedness, including payment to Mr. Brister for a portion of the purchase
price for Brister's; (ii) $625,000 for the redemption of the Company's then
outstanding 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
discounts and commissions. Net proceeds from the exercise of the over-allotment
option was used for working capital purposes.
On October 27, 1998, the Company purchased 100.0% of the issued and
outstanding stock of Straight Line Manufacturing, Inc. (a Michigan corporation)
(Straight Line) for a total purchase price of approximately $400,000. The
acquisition was effective at the close of business on October 31, 1998. The
purchase price was paid with 182,648 shares of restricted, unregistered Common
Stock of the Company. Straight Line was incorporated as a Michigan corporation
on August 1, 1997 as the successor to a sole proprietorship. Straight Line is in
the business of manufacturing and marketing large, full suspension "fun karts"
for the consumer market.
The financial information discussed herein is derived from the
historical consolidated financial statements of the Company for the respective
years ended December 31, 1998 and 1997. The Company consummated the acquisition
of Straight Line effective as of the close of business on October 31, 1998.
Accordingly, the Company's consolidated results of operations for the year ended
December 31, 1998 includes the operating results of Straight Line from the
effective acquisition date through the end of the year.
The following discussion reflects historical consolidated financial
data for the periods as indicated below.
Results of Operations
Year Ended December 31, 1998 as compared to Year Ended December 31,
1997. The Company reported revenues of approximately $8.2 million for the year
ended December 31, 1998 compared to $7.6 million for year ended December 31,
1997, a 7.9% increase. These results continue to reflect weak product demand
during the first half of the each fiscal year due primarily to seasonality of
sales. The Company manufactured approximately 2,500 go-karts, mainly during the
second and third quarters, for a competitor in an attempt to mitigate some of
the seasonality of the Company's manufacturing operations. While the Company
does not anticipate manufacturing go-karts for competitor(s) in future periods,
other contract manufacturing is anticipated in future periods to attempt to
better utilize the Company's facilities and equipment during the first half of
the year. Additionally, the Company is continuing to expand its sales to mass
merchandisers whose demand is less seasonal in an effort to improve its sales
during traditional slow demand periods.
The Company incurred cost of sales of $8.8 million and $6.0 million in
1998 and 1997, respectively. This resulted in gross profit/(loss) of
approximately ($0.6 million) for the year ended December 31, 1998 and $1.6
million for the year ended December 31, 1997. Gross profit for the year ended
December 31, 1998 was adversely affected by underpricing the Company's new
product lines, extending additional pricing discount terms in order to establish
the Company's products with new mass merchandisers, inefficient purchasing of
materials and the write-off of obsolete inventory which was caused by design
changes to the Company's product lines. Cost of sales in 1998 was also
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negatively effected by unfavorable labor variances of approximately $650,000 due
to the labor inefficiencies associated with the introduction of several new
products at Brister's and USA Industries, employee turnover, ineffective
scheduling of the workforce and overtime payments. Other direct costs increased
approximately $1.0 million to $2.0 million for year ended December 31, 1998
compared to $1.0 million in 1997. Freight expense, one of the significant
components of other direct costs, increased approximately $200,000 in 1998
verses 1997. The increase was due to design changes in the product line that
reduced the number of units that comprised a truckload quantity and the
Company's inability to ship complete orders which were prepaid by customers.
These changes and operating inefficiencies caused the Company to incur
additional freight expense when units to complete a customer's order had to be
shipped separately. Other direct costs increased by approximately $135,000 due
to the inclusion of the operating results of Straight Line and KINT LLC.
Selling, general and administrative expenses totaled approximately $3.4
million for the year ended December 31, 1998 compared to approximately $2.1
million for the year ended December 31, 1997. Selling expenses accounted for
approximately $160,000 of the increase over the prior year largely due to the
additional commission expense paid to independent manufacturers representative
organizations which were added to the Company's sales force during 1998 and the
addition of a sales/marketing executive at the Company's USA subsidiary.
Professional fees and travel expenses increased approximately $120,000 and
$160,000, respectively, over the prior year as a result of increased acquisition
activity subsequently abandoned, increased travel resulting from expansion of
the Company's sales territory and the relocation and temporary living expenses
of several non-Louisiana based executives and management personnel. Salary
expense increased approximately $285,000 due to the Company's addition of
several administrative and operational professionals and the inclusion of
salaries at the Straight Line and KINT LLC subsidiaries. Included in the
Company's operating expenses for the year ended December 31, 1998 was a one-time
non-cash charge of approximately $413,000 related to the release of shares that
had been held in escrow to settle a contingency associated with the Company's
1996 private offering of securities.
Other income (expense) totaled approximately $(6.1 million) for the
year ended December 31, 1998, a $5.5 million change from the 1997 total of $(0.6
million). The increase in expense is largely attributable to a one-time charge
to operations of approximately $5.8 million to recognize the impairment of
future recoverability of goodwill. As a result of this action, the Company will
not incur any charges to operations for amortization of goodwill in future
periods. Additionally, the Company charged to operations approximately $289,000
to establish a reserve for an anticipated 1999 relocation of some of its
subsidiary operations and reorganizing its management team during the year ended
December 31, 1998. This increase in expenses was slightly offset by a decrease
in interest expense from approximately $508,000 for the year ended December 31,
1997 to approximately $92,000 for the same period in 1998. The reduction in
interest expense is due to the retirement of approximately $2.2 million of debt
in late 1997 using the proceeds from the Company's 1997 public stock offering.
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
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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, Inc. ("HFG"). Timothy P. Halter, an officer
and director of the Company, is the President and sole shareholder of HFG. 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.
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.
Additional Operations Information. The Company currently has 10 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 $6,000,000 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.
Seasonality
The Company experiences significant seasonality in its sales pattern
with only approximately 21% of its revenue recognized in the first half of the
year. Sales of Fun Karts are generally the lowest during the first quarter of
each calendar 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 its current on-going 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.
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Traditionally, many of the Company's dealers have sold Fun Karts only
during the Christmas holiday season. Recent market growth can be attributed to
some of these dealers beginning to sell Fun Karts on a year round basis and to
an increasing number of mass merchandisers who sell karts. Since mass
merchandisers are not typically constrained by the limited floor space that tend
to force the dealers into seasonal purchasing of karts, the Company intends to
increase mass merchandiser sales to mitigate the highly seasonal buying pattern
of its traditional dealer base. Additionally, the Company expects its contract
manufacturing of concession karts, typically ordered in the first and second
quarters, to further help utilize excess capacity in the first half of the year.
The Company also intends to offset the seasonal aspects of its current business
operations through acquisition of manufacturers or introduction of new product
lines that are compatible with the Company's business objectives and offer
product diversity which have either year round demand or that are
counter-seasonal to its existing product lines.
Liquidity and Capital Resources
At December 31, 1998, the Company had negative working capital of
approximately $(392,000) as compared to positive working capital of
approximately $4.06 million at December 31, 1997. The Company experienced
negative cash flow from operations of approximately $3,213,000 and $224,000 for
calendar 1998 and 1997, respectively. This deficiency during 1998 was
principally caused by significant increases in trade accounts receivable and
excess inventory purchases for anticipated sales to mass merchandisers. The
change in accounts receivable balances was attributable to a condition imposed
on the Company by its non-financial institution lender whereby all accounts
receivable were maintained by the Company as collateral on the related line of
credit instead of being liquidated by Company sponsored dealer floor plan
financing provided through Transamerica Business Finance Co. In prior periods,
approved dealers had purchases of Company products financed through Transamerica
with the Company participating in the related finance charges as a sales tool.
The use of Transamerica caused approved dealer floor plan purchases to be paid
within 15 business days of shipment by the Company. Further, the Transamerica
situation effectively transferred all credit risk from the Company to
Transamerica whereby the Company was only conditionally and contingently liable
for qualified sales to dealers in the event of default or late payment by the
dealer. Effective March 9, 1999, the Company's primary lender agreed to allow
the Company to utilize the Transamerica program for its qualified sales to
dealers in future periods.
During the year ended December 31, 1998, the Company expended cash of
approximately $747,000 on capital improvements consisting of renovation of
manufacturing facilities, leasehold improvements, equipment and the expansion
and relocation of its corporate offices to Roseland, Louisiana. Additional cash
expenditures, aggregating approximately $156,000, were made for (i) expenses
related to the acquisition of the Company's Straight Line subsidiary, (ii) the
initial payment on a covenant not to compete executed by the former sole
shareholder of Straight Line and (iii) to partially fund the acquisition of the
Option to acquire Andretti.
During the year ended December 31, 1997, the Company expended
approximately $477,000 for capital assets and/or improvements, including the
purchase of a powder paint system and tube bending machine for its manufacturing
facility in Prattville, Alabama.
Additionally, the Company used, in 1997, the net proceeds from the 1997
Public Offering to repay $2.2 million in long-term indebtedness, the $300,000
Brister's credit facility with a financial institution and to support the
Company's fixed asset programs and research and development efforts.
The 1998 cash consumption by operating and investing activities was
funded from available cash reserves carried forward from prior periods and the
infusion of approximately $1.5 million in cash from advances on the Company's
two lines of credit, aggregating $2 million in available credit, from KBK
Financial, Inc., a non-financial institution lender ("KBK"). In February 1999,
KBK notified the Company of certain defaults on the various covenants contained
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in the Company's loan agreement with KBK. On March 8, 1999, KBK granted the
Company a written waiver of the notified defaults. On March 9, 1999, the Company
and KBK executed an amendment to the Company's loan agreement, which provided
among other conditions, that the Company must obtain a minimum of $1.5 million
of new equity capital by May 6, 1999. If a violation by the Company of any of
the loan covenants occurs or any other default by the Company on its obligations
under these credit lines, including failure to raise the $1.5 million in new
equity capital, the lender could, at its sole discretion, declare the then
outstanding indebtedness to be immediately due and payable. The lender could
then foreclose on a significant portion of the Company's assets, which would
have a material adverse effect on the Company's financial condition and
operations.
The Company's continued existence is dependent upon its ability to
generate sufficient cash flows from operations to support its daily operations
as well as provide sufficient resources to retire existing liabilities and
obligations on a timely basis.
To mitigate the Company's negative cash flow from operations,
management has taken the following actions to stabilize the Company's financial
position for future periods: (i) initiated plans to consolidate the sales and
marketing operations of KINT, which focused on the sale of customized
promotional "fun karts" to various national companies, into existing functions
within the Company; (ii) initiated plans to relocate and/or consolidate Straight
Line manufacturing or sales activities within other existing facilities of the
Company; (iii) initiated cost control measures related to the use of direct
labor and material purchasing to maximize the utilization of overstocked
inventory positions that existed at December 31, 1998; (iv) terminated excess
management and supervisory personnel and reorganized Company management and
operational teams along consolidated Company lines rather than individual
operating subsidiary lines and (v) is reevaluating its product lines, costs of
manufacture, selling prices and customer relations to maximize unit sales and
gross profitability during the Company's slower sales seasons of the calendar
year. Management has also initiated plans to raise additional capital through
the sale of equity securities to provide additional working capital and to
improve liquidity.
Management believes that its efforts to raise additional capital
through the sale of equity securities and/or new debt financing will provide
additional cash flows. However, there can be no assurance that the Company will
be able to obtain additional funding or, that such funding, if available, will
be obtained on terms favorable to or affordable by the Company.
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.
The Company's acquisition strategy is subject to the availability of
financial resources. The Company is currently 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 year 2000 date change is believed to affect virtually all computers
and organizations. The Company has undertaken a comprehensive review of its
information systems including its main computer hardware and software, its
personal computers= hardware and software and associated peripheral devices and
general telecommunication systems. In addition, the Company has held discussions
with its software supplier with respect to the year 2000 date change. The
Company believes that it will not be required to modify or replace significant
portions of its software and any such modifications or replacements are, or will
be, readily available. The Company anticipates it will have all remedies in
place by the end of the third quarter of 1999.
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The Company does not expect the costs associated with the Year 2000
compliance to have a material effect on its financial position or its results of
operations. There can be no assurance until the year 2000, however, that all of
the Company's systems, and the systems of its suppliers, shippers and other
business partners will function adequately.
Other Matters
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (ASFAS
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 (AAPB 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 (ASFAS 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 (ASFAS
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 did not experience a
material impact to its consolidated financial statements presentation upon
adoption of this standard.
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 (ASFAS 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 did not experience a material impact to its
consolidated financial statements presentation upon adoption of this standard.
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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.
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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:
<TABLE>
Name Age Position
---- --- --------
<S> <C> <C> <C>
Timothy P. Halter 32 Chairman, Secretary and Director
Charles Brister(1)(2) 46 President, Chief Executive Officer and Director
Richard N. Jones 46 Vice President, Administration and Chief
Financial Officer
Lawrence E. Schwall, III 36 Vice President, Sales and Marketing
Joseph R. Mannes(2) 40 Director
Ronald C. Morgan(1)(2) 51 Director
Gary C. Evans(1) 42 Director
</TABLE>
- -----------------
(1) Members of the Company's Compensation Committee.
(2) Members of the Company's Audit Committee.
The Company may employ such additional management personnel as the
Board of Directors of the Company deems necessary. The Company has not
identified nor reached an agreement or understanding with any other individuals
to serve in such management positions, but does not anticipate any difficulty in
employing qualified individuals.
Directors of the Company are elected by the stockholders at each annual
meeting and serve until the next annual meeting of stockholders or until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed or their earlier resignation or removal from office.
Information regarding the directors and management of the Company is
set forth below.
Timothy P. Halter has been Secretary and a director of the Company
since February 1996, and Chairman since February 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 President and Chief Executive Officer of the Company
and has served in this capacity since January 1999. He previously served as
President and Chief Executive Officer of Brister's from 1986 to April 1996. He
has been a Director of the Company since March 1996.
Richard N. Jones is Vice President, Administration and the Chief
Financial Officer of the Company. Mr. Jones joined the Company in October 1998
and was elected to his current positions in March 1999. From January 1996 to
October 1998, Mr. Jones served as Vice President B Manufacturing and Treasurer
for Andretti, a manufacturer of concession go-karts. From June 1991 to January
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1996, Mr. Jones was the Chief Financial Officer for Apogee Plastic Technologies,
Inc., a vertically integrated plastic manufacturer that supplied computer and
communication enclosures for IBM, Motorola, Texas Instruments and other
customers. From February 1978 to April 1991, Mr. Jones worked for Hughes Supply,
Inc., a NYSE listed manufacturer and wholesale distributor of electrical,
plumbing and HVAC equipment and supplies. During his tenure as Corporate
Controller, he was involved in both a secondary public offering and a
convertible debenture offering, as well as numerous acquisitions. Mr. Jones
graduated with a BSBA from the University of Central Florida in 1978.
Lawrence E. Schwall, III, is the Vice President, Sales and Marketing of
the Company and has served in this capacity since January 1997. Mr. Schwall's
responsibilities include overseeing the development of the Company's sales and
marketing strategies, market forecasting, and the development and presentation
of product knowledge seminars for the Company's dealers and mass merchandisers.
From December 1995 to January 1997, Mr. Schwall served as Territory Manager C
Commercial Lawn and Garden Dealers for Homelite, Inc., a subsidiary of Deere &
Co. Homelite, Inc. is a manufacturer of hand-held products. While with Homelite,
Inc., Mr. Schwall was responsible for producing training seminars for the
company's customers. From August 1987 to December 1995, Mr. Schwall was OEM
Engine Sales Manager for Delta Power, Inc. and was responsible for the sale and
marketing of engines to existing customers and prospective accounts throughout
the southern region of the United States. Mr. Schwall also served with the
industrial division of Briggs & Stratton as communications liaison for Delta
Power, Inc.
Joseph R. Mannes has been a director of the Company since July 1996,
and since October 1998 has been Chief Financial Officer and Secretary of
Clearwire Technologies, Inc., a company offering broadband wireless Internet
connectivity. From February 1996 until October 1998 was the Chief Financial
Officer, Secretary and Treasurer of Interactive Creations Incorporated ("ICI"),
and subsequently was General Manager of I-Magic Online (its successor company) a
corporation offering real-time internet gaming services. From 1987 until joining
ICI, Mr. Mannes was First Vice President in the Corporate Finance Department of
Rauscher Pierce Refsnes, Inc., a Dallas, Texas stock brokerage company. From
1982 to 1987, Mr. Mannes was in the commercial lending division of the First
National Bank of Boston, where he attained the position of Assistant Vice
President. Mr. Mannes worked in both the Special Industry Group and the High
Technology Group at First National Bank of Boston. Mr. Mannes graduated with an
MBA in Accounting and Finance from the Wharton School, Graduate Division, of the
University of Pennsylvania in 1982 and an A.B. from Dartmouth College in 1980.
Mr. Mannes is a Chartered Financial Analyst.
Ronald C. Morgan has been a director of the Company since July 1996.
Since June 1980, Mr. Morgan has served as Chief Operating Officer, Executive
Vice President and Director of The Leather Factory, Inc., an AMEX listed company
("TLF"). Mr. Morgan was a co-founder of TLF. Mr. Morgan was employed by the
Tandy Leather Company for ten years prior to 1980, eventually attaining the
position of Vice-President C Eastern Division. Mr. Morgan received a B.S. degree
from West Texas State University.
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.
There are no family relationships among any of the Company's officers
and directors.
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<PAGE>
Section 16(a) Beneficial Ownership Report Compliance
The Company is not aware of any transactions in its outstanding
securities by or on behalf of any director, executive officer or 10% holder of
the Common Stock which would require the filing of any report pursuant to
Section 16(a) that was not filed by the Company.
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, by 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. Certain compensation related
tables required to be reported have been omitted since no applicable
compensation was awarded to, earned by or paid to any of the Company's executive
officers in any fiscal year to be covered by such tables.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------------------------- --------------------------------
Awards
--------
<S> <C> <C> <C> <C> <C>
Securities
Other Annual Restricted Underlying
Name/Title Year Salary/Bonus Compensation Stock Awards Options/SARs
- ---------- ---- ------------ ------------ ------------ ------------
Robert M. Aubrey, former President
and Chief Executive Officer(1) 1998 $140,625 $22,825(2) -0- 200,000
V. Lynn Graybill, former Chairman of
the Board, Chief Executive Officer 1997 $131,250 $ -0- -0- -0-
and President(3) 1996 $ 121,731 $15,000(4) -0- -0-
</TABLE>
- -----------------------
(1) Effective January 13, 1999, Robert M. Aubrey resigned as President, Chief
Executive Officer and a member of the Board of Directors of the Company.
See "C Employment Agreements and Related Matters."
(2) Principally housing and transportation allowance.
(3) Effective January 15, 1998, V. Lynn Graybill resigned as Chairman of the
Board, Chief Executive Officer and President of the Company. See "C
Employment Agreements and Related Matters."
(4) 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.
Employment Agreements and Related Matters
In January 1999, Charles Brister was elected President and Chief
Executive Officer of the Company. He will receive an annual salary of $150,000
to be paid at the end of the year in shares of the Company's Common Stock based
on a formula to be determined by the Board of Directors. Mr. Timothy P. Halter,
Chairman of the Board, has agreed to defer his $5,000 monthly compensation until
year end. He may accept payment of his compensation in shares of the Company's
Common Stock, subject to the approval of the Board of Directors.
Effective January 30, 1998, the Company entered into three-year
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 provided Mr. Aubrey with an annual base salary
of $150,000 and options to purchase 200,000 shares of Common Stock at an
exercise price of $3.25 per share. See "C Stock Options."
Effective January 13, 1999, Robert M. Aubrey resigned as President,
Chief Executive Officer and as a director of the Company. On January 20, 1999,
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<PAGE>
the Company and Mr. Aubrey entered into a Settlement Agreement and Full and
Final Release of All Claims (the "Aubrey Agreement") for the purpose of
satisfying and discharging all obligations of the Company to Mr. Aubrey under
the Employment Agreement. The Aubrey Agreement provides that the Company shall
forgive up to $19,000 of non-reimbursable expenses incurred by Mr. Aubrey and
pay to Mr. Aubrey one week of earned vacation. In consideration for the
foregoing, Mr. Aubrey agreed to adhere to the non-competition and
non-solicitation covenants set forth in the Employment Agreement until January
13, 2001. As part of his separation from the Company, the Company issued to Mr.
Aubrey options to purchase 15,000 shares of Common Stock at an option exercise
price of $1.06 per share which options were granted to replace the options to
purchase 200,000 shares of Common Stock that were canceled at separation. The
options are vested and expire on January 20, 2004.
In January 1998, V. Lynn Graybill resigned 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 AGraybill 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 Graybill Agreement, the Company paid 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 until January
15, 2001.
To provide for continuity of management, the Company may enter into
employment agreements with other members of its executive management staff.
Stock Options
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
options are currently exercisable and expire at various times during 2001.
In January 1997, the Company issued to an officer of the Company
options to purchase 6,667 shares of Common Stock at an exercise price of $4.875
per share, which options are exercisable and expire on January 30, 2002. The
Company also issued to 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 options are also exercisable and
expire on January 30, 2002.
During the fiscal year ended December 31, 1998, the Company granted to
certain of its employees options to purchase an aggregate of 265,000 shares of
Common Stock at exercise prices ranging from $1.06 to $3.50 per share, which
options expire periodically from January 31 to December 31, 2003. Of the total
number of options issued during fiscal 1998, options to purchase 200,000 shares
of Common Stock were issued to Robert M. Aubrey, which options were canceled
upon Mr. Aubrey's resignation as an officer and director of the Company in
January 1999, and an aggregate of 35,000 options were granted pursuant to the
Company's 1998 Stock Compensation Plan.
See "C 1998 Stock Compensation Plan."
<TABLE>
Option/Grants in Last Fiscal Year
<S> <C> <C> <C> <C>
- ------------------------------------ --------------------- ------------------------ -------------- ---------------
Number of Securities Percent of Total Options Exercise Price
Name/Title Underlying Options Granted to Employees in ($/sh) Expiration Date
Granted Fiscal 1998
Robert M. Aubrey, former
President and Chief Executive Officer... 200,000 75.5 $3.25 See footnote(1)
</TABLE>
- ---------------------
(1) The options to purchase 200,000 shares of Common Stock granted to Mr.
Aubrey were canceled immediately upon his resignation as an officer and
director of the Company in January 1999.
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<PAGE>
<TABLE>
<CAPTION>
Aggregate Fiscal Year-End Option Values
<S> <C> <C> <C>
Number of Securities Underlying
Unexercised Options at Fiscal Year-End Value of Unexercised No Market
Value Options at Fiscal Year End
- ------------------------------------ -------------------------------------- --------------------------------
Name/Title Exercisable Unexercisable Exercisable Unexercisable
Robert M. Aubrey, former President and
Chief Executive Officer................. -0- 200,000 -0- $212,000
</TABLE>
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.
1998 Compensation Plan
On May 27, 1998, the stockholders of the Company approved the 1998
Stock Compensation Plan of Karts International Incorporated (the "1998 Plan")
and reserved 1,000,000 shares of Common Stock for issuance under the plan. The
1998 Plan terminates on April 1, 2008 unless previously terminated by the Board
of Directors. The 1998 Plan is administered by the Compensation Committee (the
"Committee") or the entire Board of Directors as determined by the Board of
Directors.
Eligible participants in the 1998 Plan include full time employees,
directors and advisors of the Company and its subsidiaries. Options granted
under the 1998 Plan are intended to qualify as "incentive stock options"
pursuant to the provisions of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or options which do not constitute incentive stock
options ("nonqualified options") as determined by the Committee.
Under the 1998 Plan the Company may also grant "Restricted Stock"
awards. "Restricted Stock" represents shares of Common Stock issued to eligible
participants under the 1998 Plan subject to the satisfaction by the recipient of
certain conditions and enumerated in the specific Restricted Stock grant.
Conditions which may be imposed include, but are not limited to, specified
periods of employment, attainment of personal performance standards or the
overall performance of the Company. The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1998 Plan to promote
the development of the Company, and may be used by the Company as another means
of attracting and retaining qualified individuals to serve as employees of the
Company or its subsidiaries.
Incentive stock options may be granted only to employees of the Company
or a subsidiary who, in the judgment of the Committee, are responsible for the
management or success of the Company or a subsidiary and who, at the time of the
granting of the incentive stock option, are either an employee of the Company or
a subsidiary. No incentive stock option may be granted under the 1998 Plan to
any individual who would, immediately before the grant of such incentive stock
option, directly or indirectly, own more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company unless (i) such
incentive stock option is granted at an option price not less than one hundred
ten percent (110%) of the fair market value of the shares on the date the
incentive stock option is granted and (ii) such incentive stock option expires
on a date not later than five years from the date the incentive stock option is
granted.
The purchase price of the shares of the Common Stock offered under the
1998 Plan must be one hundred percent (100%) of the fair market value of the
Common Stock at the time the option is granted or such higher purchase price as
may be determined by the Committee at the time of grant; provided, however, if
an incentive stock option is granted to an individual who would, immediately
before the grant, directly or indirectly own more than ten percent (10%) of the
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<PAGE>
total combined voting power of all classes of stock of the Company, the purchase
price of the shares of the Common Stock covered by such incentive stock option
may not be less than one hundred ten percent (110%) of the fair market value of
such shares on the day the incentive stock option is granted. If the Common
Stock is listed upon an established stock exchange or exchanges, the fair market
value of the Common Stock shall be the highest closing price of the Common Stock
on the day the option is granted or, if no sale of the Common Stock is made on
an established stock exchange on such day, on the next preceding day on which
there was a sale of such stock. If there is no market price for the Common
Stock, then the Board of Directors and the Committee may, after taking all
relevant facts into consideration, determine the fair market value of the Common
Stock.
Options are exercisable in whole or in part as provided under the terms
of the grant, but in no event shall an option be exercisable after the
expiration of ten years from the date of grant. Except in case of disability or
death, no option shall be exercisable after an optionee ceases to be an employee
of the Company, provided that the Committee shall have the right to extend the
right to exercise for a period not longer than three months following the date
of termination of an optionee's employment. If an optionee's employment is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year following the date of termination of the
optionee's employment. If an optionee dies while in the employ of the Company
and shall not have fully exercised his options, the options may be exercised in
whole or in part at any time within one year after the optionee's death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.
Under the 1998 Plan, an individual may be granted one or more options,
provided that the aggregate fair market value (determined at the time the option
is granted) of the shares covered by incentive options which may be exercisable
for the first time during any calendar year shall not exceed $100,000. There
presently are outstanding options to purchase 35,000 shares of Common Stock at
prices ranging from $1.06 to $2.98 per share.
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.
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 three occasions during calendar 1998
and acted by unanimous consent in lieu of meeting on six 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 four occasions during calendar 1998. 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 1998.
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<PAGE>
<TABLE>
<CAPTION>
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 23, 1999 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.
- ---------------------------------------------------------- --------------------- ---------------------
Shares Beneficially Percentage of Shares
Name(1) Owned Beneficially Owned
<S> <C> <C>
Charles Brister(2).................................... 516,668 9.3
Richard N. Jones(3)................................... 9,459 *
Lawrence E. Schwall, III(4).......................... 6,667 0
Joseph R. Mannes(5)................................... 63,734 1.3
Ronald C. Morgan(5)................................... 3,334 *
Gary C. Evans(6)...................................... 51,114 *
Timothy P. Halter(7).................................. 574,630 10.3
Halter Financial Group, Inc.(7)....................... 574,630 10.3
Schlinger Foundation(8)............................... 520,000 9.3
Linda S. Neubauer(9).................................. 337,838 6.1
Officers and directors as a group (7 persons)(10)..... 1,225,607 22.0
</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, 62204 Commercial Street,
P.O. Box 695, Roseland, Louisiana 70456.
(2) Mr. Brister is the President, Chief Executive Officer and a director of the
Company. See "Certain Relationships and Related Transactions."
(3) Mr. Jones is the Vice President, Administration and Chief Financial Officer
of the Company.
(4) Includes options to purchase 6,667 shares of Common Stock at an exercise
price of $4.875 per share exercisable until January 30, 2002. Mr. Schwall
is Vice President, Sales and Marketing of the Company.
(5) Messrs. Mannes and Morgan are directors of the Company.
(6) Mr. Evans is a director of the Company. Includes 20,001 shares of Common
Stock underlying warrants owned by Mr. Evans.
(7) 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. HFG and Mr. Halter's
address is 14160 Dallas Parkway, Suite 950, Dallas, Texas 75240. See
"Certain Relationships and Related Transactions."
(8) The Schlinger Foundation's address is c/o Evert Schlinger, Trustee, 1944
Edison Street, Santa Ynez, California 93460.
(9) Ms. Neubauer's address is 487 John Anderson Drive, Ormond Beach, Florida
32174.
(10) Includes 20,001 shares of Common Stock underlying warrants owned by Mr.
Evans and options to purchase 6,667 shares of the Company's Common Stock
granted to Mr. Schwall.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1996, the Company in a private sale sold 233,333 shares of
Common Stock to 13 investors (the "Investors") for $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, Investors
received an aggregate of 95,624 HFG Escrow Shares. The remaining 137,709 HFG
Escrow Shares were released from escrow and delivered to HFG.
The Company and Charles Brister, the President and Chief Executive
Officer of the Company, have entered into a Real Estate Option Right of First
Refusal Agreement for the Roseland facility. Under the terms of this agreement,
the Company may, at its sole option, purchase the real property and improvements
for $550,000. The option expires on December 31, 2000. The Company and Mr.
Brister have also entered into a lease agreement for the Roseland manufacturing
facility, including the corporate offices, which expires in 2000. The monthly
lease payment for the Roseland facility is $6,025 with certain adjustments. The
Company believes these terms are comparable to existing market rates in the
region.
On March 17, 1999, the Company executed a promissory note in the
principal amount of $200,000 payable to Charles Brister, the Company's President
and Chief Executive Officer, to reflect a loan made to the Company by Mr.
Brister. Interest at 8% per annum is payable monthly with principal due at the
earlier of receipt by the Company of at least $1.5 million from the sale of
equity securities or June 17, 1999. Proceeds from the loan were used to reduce
Company indebtedness and to provide working capital.
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.
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<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(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.
4.8 Form of Stock Warrant issued on March 8, 1999 to KBK Financial,
Inc.
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.
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<PAGE>
Exhibit
Number Description of Exhibit
- ------------ -----------------------------------------------------------------
10.4* Royalty Agreement, dated March 15, 1997, by and between the
Company and Charles Brister.
10.5* $1,000,000 Subordinated Promissory Note, dated March 15, 1996,
payable to Charles Brister, executed by Brister's Thunder Karts,
Inc., as maker.
10.6* $200,000 Promissory Note, dated April 1, 1996, payable to Charles
Brister, executed by the Company, as maker.
10.7* Commercial Security Agreement, by and among Charles Brister, as
secured party, Brister's Thunder Karts, Inc., as borrower, and
Robert W. Bell and Gary C. Evans, as pledgors.
10.8* $2,000,000 Promissory Note, dated March 15, 1996, payable to The
Schlinger Foundation, executed by the Company, as maker, and by
Brister's Thunder Karts, Inc., as pledgor.
10.9* Commercial Security Agreement, by and among The Schlinger
Foundation, as secured party, the Company, as borrower, and
Brister's Thunder Karts, Inc., as pledgor.
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.
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<PAGE>
Exhibit
Number Description of Exhibit
- ------------ -----------------------------------------------------------------
10.23* $500,000 Loan Agreement, dated October 1, 1996, by and between
USA Industries, Inc., as debtor, and Deposit Guaranty National
Bank of Louisiana, as secured party, relating to the $500,000
Universal Note referenced as Exhibit 10.24.
10.24* $500,000 Universal Note, dated October 1, 1996, by and between
USA Industries, Inc., as borrower, and Deposit Guaranty National
Bank, as lender.
10.25* Security Agreement, dated October 1, 1996, by and between USA
Industries, Inc., as debtor, and Deposit Guaranty National Bank
of Louisiana, as secured party, relating to the $500,000
Universal Note referenced as Exhibit 10.24.
10.26* Financing Statement, by and between USA Industries, Inc., as
debtor, and Deposit Guaranty National Bank of Louisiana, as
secured party, relating to the Universal Note referenced as
Exhibit 10.24.
10.27* Guaranty, dated October 1, 1996, executed by Karts International
Incorporated, as guarantor, for the benefit of Deposit Guaranty
National Bank, as lender, and USA Industries, Inc., as borrower,
relating to the $500,000 Universal Note referenced as Exhibit
10.24.
10.28* Placement Agency Agreement, dated November 8, 1996, by and
between the Company and Argent Securities, Inc.
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.
10.39 Loan Agreement dated September 28, 1998 by and between the
Company and KBK Financial, Inc.
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<PAGE>
Exhibit
Number Description of Exhibit
- ------------ -----------------------------------------------------------------
10.40 First Amendment to Loan Agreement dated March 8, 1999 by and
between the Company, USA Industries, Inc., KINT, L.L.C.,
Brister's Thunder Karts, Inc. and KBK Financial, Inc.
10.41 Revolving Credit Promissory Note (Inventory) dated March 8, 1999
executed in favor of KBK Financial, Inc. by the Company.
10.42 Revolving Credit Promissory Note (Accounts Receivable) dated
March 8, 1999 executed in favor of KBK Financial, Inc. by the
Company.
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 by the Company
during the last quarter of 1998. On January 20, 1999, the Company filed
a current report on Form 8-K reporting the resignation of Robert M.
Aubrey as President, Chief Executive Officer and member of the Board of
Directors of the Company effective January 13, 1999.
-39-
<PAGE>
<TABLE>
<CAPTION>
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 March
26, 1999.
<S> <C> <C>
KARTS INTERNATIONAL INCORPORATED
(Registrant)
By: /s/ Charles Brister By: /s/ Richard N. Jones
------------------------------------------- -----------------------------------
Charles Brister, President, Chief Executive Richard N. Jones
Officer and Director Vice President, Administration
and Chief Financial 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:
Signature Title Date
--------- ----- ----
/s/ Charles Brister President, Chief Executive Officer and Director March 26, 1999
- ------------------------------------------
Charles Brister
/s/ Timothy P. Halter Chairman of the Board, Secretary and Director March 26, 1999
- ------------------------------------------
Timothy P. Halter
/s/ Richard N. Jones Vice President, Administration and Chief Financial March 26, 1999
- ------------------------------------------
Richard N. Jones Officer
/s/ Joseph R. Mannes Director March 26, 1999
- ------------------------------------------
Joseph R. Mannes
/s/ Ronald C. Morgan Director March 26, 1999
- ------------------------------------------
Ronald C. Morgan
/s/ Gary C. Evans Director March 26, 1999
- ------------------------------------------
Gary C. Evans
</TABLE>
-40-
<PAGE>
KARTS INTERNATIONAL
INCORPORATED
AND SUBSIDIARIES
Consolidated
Financial Statements
and
Auditor's Report
December 31, 1998 and 1997
S. W. HATFIELD, CPA
certified public accountants
Use our past to assist your future sm
F-1
<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, 1998 and 1997 F-4
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 31, 1998 and 1997 F-6
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997 F-7
Consolidated Statements of Cash Flows
for the years ended December 31, 1998 and 1997 F-9
Notes to Consolidated Financial Statements F-11
F-2
<PAGE>
S. W. HATFIELD, CPA
certified public accountant
Member: 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, 1998 and 1997 and the related consolidated statements of operations
and comprehensive income, 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, 1998 and 1997, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has experiences seasonality of product demand which is focused in the last
four (4) months of the calendar year which impacts cash flow during the first
eight (8) months of the calendar year. These factors raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note B. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
S. W. HATFIELD, CPA
(formerly S. W. HATFIELD + ASSOCIATES)
Dallas, Texas
March 18, 1999
Use our past to assist your future sm
P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor
Dallas, Texas 75382-0395 Dallas, Texas 75243-7212
214-342-9635 (voice) (fax) 214-342-9601
800-244-0639 [email protected]
F-3
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
------------ ------------
<S> <C> <C>
Current assets
Cash on hand and in bank $ 163,690 $ 2,801,746
Accounts receivable
Trade, net of allowance for doubtful accounts
of $90,500 and $3,000, respectively 2,310,707 463,045
Recoverable income taxes and other 40,395 225,000
Inventory 2,129,949 909,214
Prepaid expenses 214,231 172,139
------------ ------------
Total current assets 4,858,972 4,571,144
------------ ------------
Property and equipment - at cost 2,156,138 1,262,772
Accumulated depreciation (288,741) (137,746)
------------ ------------
1,867,397 1,125,026
Land 32,800 32,800
------------ ------------
Net property and equipment 1,900,197 1,157,826
------------ ------------
Other assets
Deposits and other 21,276 8,851
Note receivable 378,113 --
Option to acquire an unrelated entity 123,544 --
Covenant not to compete, net of accumulated
amortization of approximately $5,556 and $-0-,
respectively 94,444 --
Organization costs, net of accumulated
amortization of approximately $60,841 and
$38,990, respectively 48,414 70,265
Goodwill, net of accumulated amortization and
impairment of future recoverability of
approximately $6,414,452 and $385,608, respectively -- 5,473,815
------------ ------------
Total other assets 665,791 5,552,931
------------ ------------
TOTAL ASSETS $ 7,424,960 $ 11,281,901
============ ============
</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 SHEETS - CONTINUED
December 31, 1998 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
------------ ------------
<S> <C> <C>
Current liabilities
Cash overdraft $ 9,153 $ --
Notes payable to banks and others 1,564,715 --
Current maturities of long-term debt 35,289 18,357
Accounts payable - trade 2,963,279 292,083
Other accrued liabilities
Payroll and sales taxes payable 131,610 40,568
Accrued reorganization and relocation expenses 288,848 --
Other 257,912 20,006
Federal and State income taxes payable -- 137,710
------------ ------------
Total current liabilities 5,250,806 508,724
------------ ------------
Long-term liabilities
Notes payable, net of current maturities
Related parties 123,875 --
Banks and individuals 242,406 230,841
------------ ------------
Total liabilities 5,617,087 739,565
------------ ------------
Commitments and contingencies
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; 5,574,298 and 4,854,133
shares issued and outstanding, respectively 5,574 4,854
Additional paid-in capital 14,377,782 13,040,090
Accumulated deficit (12,575,483) (2,502,608)
------------ ------------
Total shareholders' equity 1,807,873 10,542,336
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,424,960 $ 11,281,901
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
Years ended December 31, 1998 and 1997
1998 1997
------------- ------------
<S> <C> <C>
Revenues
Kart sales - net $ 8,219,646 $ 7,586,476
------------ ------------
Cost of sales
Purchases 5,401,509 4,249,409
Direct labor 1,413,175 765,360
Other direct costs 2,030,320 1,005,202
------------ ------------
Total cost of sales 8,845,004 6,019,971
------------ ------------
Gross profit (625,358) 1,566,505
------------ ------------
Operating expenses
Research and development expenses 29,770 33,968
Selling expenses 393,555 231,132
General and administrative expenses
Salaries and related costs 977,397 691,857
Other operating expenses 1,224,194 832,491
Compensation expense related to common
stock issuances at less than "fair value"
for reorganization, restructuring and
consulting costs 413,412 --
Depreciation and amortization 321,309 359,321
------------ ------------
Total operating expenses 3,359,637 2,148,769
------------ ------------
Loss from operations (3,984,995) (582,264)
Other income (expense)
Interest expense (92,416) (507,696)
Employment termination settlement -- (208,100)
Relocation and reorganization expenses (288,848) --
Impairment of future recoverability of goodwill (5,793,184) --
Interest and other income 71,808 93,602
------------ ------------
Loss before income taxes (10,087,635) (1,204,458)
Income taxes 14,760 153,260
------------ ------------
Net loss (10,072,875) (1,051,198)
Other comprehensive income -- --
------------ ------------
Comprehensive income $(10,072,875) $ (1,051,198)
============ ============
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $(2.05) $(0.32)
==== ====
Weighted-average number of shares
of common stock outstanding - basic and fully diluted 4,920,702 3,319,620
============ ============
</TABLE>
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, 1998 and 1997
Convertible Additional
Preferred Stock Common Stock paid-in
Shares Amount Shares Amount capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 25 $ 625,000 2,717,458 $ 2,718 $ 6,190,192
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
Less costs and expenses of
raising capital -- -- -- -- (1,959,302)
Redemption of convertible
preferred stock and issuance
of common stock upon
conversion (25) (625,000) 104,175 104 458,265
Common stock issued upon
conversion of long-term debt -- -- 250,000 250 999,750
Net loss for the year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 -- -- 4,854,133 4,854 13,040,090
"Fair value" adjustment related to
sale of common stock to related
party for escrow agreement
related to March 1996 private
placement agreement -- -- -- -- 641,315
Less amounts related to costs
and expenses of raising capital -- -- -- -- (227,903)
Accumulated
deficit Total
------------ ------------
Balances at January 1, 1997 $ (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 -- 7,352,967
Less costs and expenses of
raising capital -- (1,959,302)
Redemption of convertible
preferred stock and issuance
of common stock upon
conversion -- 458,369
Common stock issued upon
conversion of long-term debt -- 1,000,000
Net loss for the year (1,051,198) (1,051,198)
------------ ------------
Balances at December 31, 1997 (2,502,608) 10,542,336
"Fair value" adjustment related to
sale of common stock to related
party for escrow agreement
related to March 1996 private
placement agreement -- 641,315
Less amounts related to costs
and expenses of raising capital -- (227,903)
</TABLE>
- Continued -
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, 1998 and 1997
Convertible Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------ ------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
October 1998 acquisition of
Straight Line Manufacturing, Inc. -- -- 182,648 183 399,817 -- 400,000
December 1998 payment of
consulting fees -- -- 109,589 109 49,891 -- 50,000
December 1998 acquisition of a
note receivable from Daytona
Superkarts, Inc. -- -- 337,838 338 374,662 -- 375,000
December 1998 acquisition of an
option to acquire 100.0% of the
issued and outstanding stock of
Daytona Superkarts, Inc. -- -- 90,090 90 99,910 -- 100,000
Net loss for the year -- -- -- -- -- (10,072,875) (10,072,875)
-- ---- ------------ ------- ------------ ------------ ------------
Balances at December 31, 1998 -- $ -- 5,574,298 $ 5,574 $ 14,377,782 $(12,575,483) $ 1,807,873
=== ==== ============ ======= ============ ============ ============
</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, 1998 and 1997
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net loss for the year $(10,072,875) $ (1,051,198)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 414,369 461,234
Reorganization and restructuring costs and related
effect of common stock issuances at less than "fair value" 413,412 --
Bad debt expense 87,500 --
Loss on abandonment of leasehold improvements 717 --
Impairment of future recoverability of goodwill 5,793,184 --
Payment of consulting fees with common stock 50,000 --
(Increase) Decrease in:
Accounts receivable-trade and other (1,937,205) 1,333,809
Recoverable income taxes 184,605 (225,000)
Inventory (1,080,102) 49,167
Prepaid expenses and other (54,268) (155,903)
Increase (Decrease) in:
Accounts payable 2,520,118 (474,750)
Other accrued liabilities 605,626 (29,898)
Income taxes payable (137,710) (131,507)
------------ ------------
Net cash used in operating activities (3,212,629) (224,046)
------------ ------------
Cash flows from investing activities
Cash received for sale of equipment -- 6,666
Cash paid for property and equipment (747,466) (477,294)
Cash acquired in acquisition of Straight Line Manufacturing, Inc. 746 --
Cash paid for acquisition of Straight Line Manufacturing, Inc. (82,280) --
Cash paid for covenant not to compete with former
owner of Straight Line Manufacturing, Inc. (50,000) --
Cash paid to acquire option to purchase Daytona Superkarts, Inc. (23,544) --
------------ ------------
Net cash used in investing activities (902,544) (470,628)
------------ ------------
Cash flows from financing activities
Increase in cash overdraft 9,153 --
Net activity on bank and other lines of credit 1,494,762 (140,020)
Principal payments on long-term debt (26,798) (2,220,622)
Cash received from sale of common stock and warrants -- 7,352,968
Cash paid for brokerage and placement fees related
to sale of common stock -- (1,500,934)
Cash paid for redemption of convertible preferred stock -- (625,000)
------------ ------------
Net cash provided by financing activities 1,477,117 2,866,392
------------ ------------
Increase (decrease) in cash (2,638,056) 2,171,718
Cash at beginning of year 2,801,746 630,028
------------ ------------
Cash at end of year $ 163,690 $ 2,801,746
============ ============
</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, 1998 and 1997
1998 1997
--------- ----------
<S> <C> <C>
Supplemental disclosure of interest
and income taxes paid
Interest paid for the year $ 87,881 $ 438,882
========= ==========
Income taxes paid (refunded) for the year - net $(199,365) $ 203,247
========= ==========
Supplemental disclosure of non-cash
investing and financing activities
Vehicles and equipment purchased with notes payable $ 55,295 $ --
========= ==========
Acquisition price of Straight Line Manufacturing, Inc.
settled with issuance of common stock $ 400,000 $ --
========= ==========
Acquisition of a note receivable from Daytona
Superkarts, Inc. with issuance of common stock $ 375,000 $ --
========= ==========
Acquisition of an option to acquire 100.0% of the
issued and outstanding stock of Daytona Superkarts,
Inc. with issuance of common stock $ 100,000 $ --
========= ==========
Long-term note payable converted to common stock $ -- $1,000,000
========= ==========
Vehicle acquired with long-term bank note $ -- $ 20,770
========= ==========
</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 (Company) was originally incorporated on
February 28, 1984 as Rapholz Silver Hunt, Inc. under the laws of the State of
Florida. 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.
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 reverse split had occurred as of the
beginning of the first period presented in the accompanying consolidated
financial statements.
The Company's two principal wholly-owned subsidiaries are Brister's Thunder
Karts, Inc. (a Louisiana corporation), located in Roseland, Louisiana and USA
Industries, Inc. (an Alabama corporation), located in Prattville, Alabama. These
two entities manufacture and sell "fun karts" through dealers, distributors and
mass merchandisers.
On January 5, 1998, the Company formed a new limited liability corporation,
KINT, L.L.C. (KINT) as a wholly-owned subsidiary. This entity was activated
during July 1998 for the purpose of creating a sales and marketing company
focusing on the sale of customized promotional "fun karts" to various national
companies. This subsidiary conducted business operations under the trade name of
"Bird Promotions". In March 1999, Company management ceased all operations
within this subsidiary and consolidated these sales and marketing efforts within
other operating subsidiaries of the Company.
On October 27, 1998, effective at the close of business on October 31, 1998, the
Company acquired 100.0% of the issued and outstanding stock of Straight Line
Manufacturing, Inc. (a Michigan corporation) (Straight Line), a manufacturer of
large, full suspension "fun karts" located in Milford, Michigan, for total
consideration of approximately $400,000. This acquisition was accounted for as a
purchase. In addition to the purchase transaction, the Company entered into a
covenant not to compete with the former owner of Straight Line Manufacturing,
Inc. for a period of at least three (3) years for total consideration of
$100,000, consisting of $50,000 cash and a note payable for $50,000.
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.
F-11
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS - Continued
The accompanying consolidated financial statements contain the accounts of Karts
International Incorporated and its wholly-owned subsidiaries, Brister's Thunder
Karts, Inc., USA Industries, Inc., KINT, LLC and Straight Line Manufacturing,
Inc. All significant intercompany transactions have been eliminated. The
consolidated entities are collectively referred to as Company.
For segment reporting purposes, the Company operates in only one industry
segment and makes all operating decisions and allocates resources based on the
best benefit to the Company as a whole.
NOTE B - GOING CONCERN
For the years ended December 31, 1998, 1997, and 1996, the Company experienced
net losses from operations of approximately $3,930,000, $580,000, and $402,000,
respectively and has utilized cash in operating activities of approximately
$3,260,000, $220,000 and $110,000, respectively. Additionally, the Company has
experienced senior management team turnover in both January 1997 and 1998. The
Company's former management was unable to operate the Company's facilities in a
manner that would allow the Company meet its order demand for product production
during the fourth quarter of 1998 and, accordingly, incurred short-term
financing from a non-financial institution lender to provide liquidity. Further,
former management spent considerable time and financial resources in exploring
possible merger or acquisition candidates and the results of these efforts were
for the most part unsuccessful and diverted management time and resources from
customer demands for product during the Company's heaviest demand period.
The Company's continued existence is dependent upon its ability to generate
sufficient cash flows from operations to support its daily operations as well as
provide sufficient resources to retire existing liabilities and obligations on a
timely basis.
Management has taken the following actions to stabilize the Company's financial
position for future periods: 1) initiated plans to dissolve its separate sales
and marketing company subsidiary which focused on the sale of customized
promotional "fun karts" to various national companies and consolidated this
sales effort into existing functions within the Company; 2) initiated plans to
consider the relocation and/or consolidation of manufacturing or sales
activities within other existing facilities of the Company; 3) initiated cost
control measures related to the use of direct labor and material purchasing to
maximize the utilization of overstocked positions that existed at December 31,
1998; 4) terminated excess management and supervisory personnel hired by former
management and reorganized Company management and operational teams along
consolidated Company lines rather than individual operating subsidiary lines as
implemented by former management and 5) is reevaluating its product lines, costs
of manufacture, selling prices and customer relations to maximize unit sales and
gross profitability during the Company's slower sales seasons of the calendar
year. Management has also initiated plans to raise additional capital through
the sale of equity securities to provide additional working capital and improve
liquidity.
Management believes that its efforts to raise additional capital through the
sale of equity securities and/or new debt financing will provide additional cash
flows. However, there can be no assurance that the Company will be able to
obtain additional funding or, that such funding, if available, will be obtained
on terms favorable to or affordable by the Company.
F-12
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - ACQUISITION OF SUBSIDIARIES
On October 27, 1998, the Company purchased 100.0% of the issued and outstanding
stock of Straight Line Manufacturing, Inc. (a Michigan corporation) (Straight
Line) for a total purchase price of approximately $400,000. The acquisition was
effective at the close of business on October 31, 1998. The purchase price was
paid with 182,648 shares of restricted, unregistered common stock of the
Company. Straight Line was incorporated as the successor to a Michigan sole
proprietorship on August 1, 1997 under the laws of the State of Michigan and in
the business of manufacturing and marketing large, full suspension "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 $400,000
Costs incurred to complete the acquisition 34,506
Assets acquired (234,328)
Liabilities assumed 354,851
--------
Goodwill related to Straight Line $555,029
========
Management of the Company intends to consolidate the operations, manufacturing,
sales and marketing of Straight Line's products into the manufacturing and
administrative facilities of the Company's other operating subsidiaries.
Accordingly, the Company charged all goodwill incurred in the acquisition of
Straight Line to operations at the closing date of the acquisition.
Additionally, the Company has accrued, and charged to operations as of December
31, 1998, approximately $160,000 in anticipated costs and expenses related to
the closure of this facility and relocation of its manufacturing lines to other
production facilities of the Company.
Pro forma unaudited results of operations relating to the acquisition of
Straight Line, as though the acquisition had occurred as of the beginning of the
first period presented, is as follows:
1998 1997
------------ -----------
Revenues $ 8,379,695 $ 7,672,265
============ ===========
Net income (loss) $(10,280,600) $(1,065,736)
============ ===========
Earnings per share - basic $(2.09) $(0.32)
==== ====
NOTE D - 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.
F-13
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - 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 throughout the United
States and are principally concentrated in the southeastern quadrant of the
country. 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.
The Company had no significant international sales during 1998 and 1997.
The Company anticipates continuing international sales in future periods
and is continuing to develop credit policies related to this revenue
source.
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,
1998 and 1997, inventory consisted of the following components:
1998 1997
---------- --------
Raw materials $1,909,822 $765,674
Work in process 92,330 127,780
Finished goods 127,797 15,760
---------- --------
$2,129,949 $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. Covenant not to compete
-----------------------
In conjunction with the acquisition of Straight Line Manufacturing, Inc.,
the Company paid $100,000 to the former sole shareholder of Straight Line
for a covenant not to compete for a period of at least three (3) years. The
consideration given was $50,000 cash and a note payable for $50,000. The
covenant is being amortized to operations over a period of three years
using the straight line method.
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 using the
straight-line method.
F-14
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - 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 year
ended December 31, 1997, no charges to operations were made for impairments
in the recoverability of goodwill. Subsequent to December 31, 1998, current
management, upon realization that 1998 operational objectives were not met,
recorded an impairment of future recoverability of goodwill equivalent to
100.0% of the unamortized goodwill incurred at the acquisition of Brister's
Thunder Karts, Inc., USA Industries, Inc. and Straight Line Manufacturing,
Inc.
8. Income taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. At December 31, 1998 and 1997, the deferred tax asset and
deferred tax liability accounts, as recorded when material, are entirely
the result of temporary differences. Temporary differences represent
differences in the recognition of assets and liabilities for tax and
financial reporting purposes, primarily accumulated depreciation and
amortization. No valuation allowance was provided against deferred tax
assets, where applicable. As of December 31, 1998 and 1997, the deferred
tax asset related to the Company's net operating loss carryforward was
fully reserved.
9. Advertising
-----------
The Company does not conduct any direct response advertising activities.
For non-direct response advertising, the Company charges the costs of these
efforts to operations at the first time the related advertising is
published. For various sales publications, catalogs and other sales related
items, the Company capitalizes the development and direct production costs
and amortizes these costs over the estimated useful life of the related
materials, not to exceed an eighteen (18) month period from initial
publication of the materials.
10. 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, 1998 and 1997, the
outstanding warrants and options are deemed to be anti-dilutive due to the
Company's net operating loss position.
F-15
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - 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, 1998 and 1997, the
Company and its subsidiaries had credit risk exposures in excess of the FDIC
coverage as follows:
<TABLE>
Highest Lowest Number of
Entity exposure exposure days with exposure
----------------- -------- -------- ------------------
<S> <C> <C> <C>
Year ended December 31, 1998
Karts International Incorporated $823,842 $1,806 135
Brister's Thunder Karts, Inc. $464,252 $601 163
USA Industries, Inc. $157,606 $236 198
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>
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 1998 and
1998, the Company had unsecured amounts invested in reverse repurchase
agreements on a daily basis from February 1997 through December 31, 1998. As of
December 31, 1998 and 1997, the Company had an unsecured outstanding reverse
repurchase agreement of approximately $83,000 and $2,395,000, respectively. The
Company incurred no losses during 1998 and 1997 as a result of any of these
unsecured situations.
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components:
Estimated
1998 1997 useful life
---------- ---------- -------------
Building and improvements $ 925,713 $ 384,296 5 to 25 years
Equipment 947,015 670,705 5 to 10 years
Transportation equipment 130,740 77,820 3 to 5 years
Furniture and fixtures 152,670 129,951 5 years
--------- ---------
2,156,138 1,262,772
Accumulated depreciation (288,741) (137,746)
--------- ---------
1,867,397 1,125,026
Land 32,800 32,800
--------- ----------
Net property and equipment $1,900,197 $1,157,826
========= ==========
Total depreciation expense charged to operations for the years ended December
31, 1998 and 1997 was approximately $151,303 and $103,148, respectively.
F-16
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - NOTE RECEIVABLE
In December 1998, the Company acquired a $375,000 note receivable from an
unrelated individual payable by an unrelated corporation in exchange for 337,838
shares of unregistered, restricted common stock. The note receivable bears
interest at 10.0% and is due and payable 10 days after the expiration of an
option which the Company executed to acquire 100.0% of the issued and
outstanding stock of the unrelated corporation making the note. This note is
unsecured.
NOTE H - OPTION TO ACQUIRE AN UNRELATED ENTITY
Effective December 1, 1998, the Company acquired from an unrelated entity
certain assets for cash of $56,000. The unrelated entity is a concession kart
manufacturer located in Daytona Beach, Florida. The shareholders of the
unrelated entity ( Shareholders) also granted the Company an option (Option) to
acquire 100.0% of the issued and outstanding shares of the unrelated entity's
common stock based on a financial formula defined in the Option.
The Option expires upon the expiration of the 30-day period following the
unrelated entity's fiscal year ending December 31, 2000. The Company issued to
the Shareholders an aggregate of 90,090 shares of Common Stock having a market
value of approximately $100,000 as payment for the Option. The Option also
provides that unrelated entity can require the Company to exercise the Option if
unrelated entity achieves certain financial goals during the Option term. The
Company also has the right during the Option term, subject to certain
conditions, to acquire for $100 certain intellectual property rights related to
the business of the unrelated entity.
The Company and unrelated entity also entered into a manufacturing agreement
(Manufacturing Agreement) which provides that the Company will manufacture, on
an exclusive basis, the unrelated entity's concession karts at a predetermined
per unit price. The Manufacturing Agreement will terminate on the later of March
31, 2001 or the date that the Option is terminated or exercised.
NOTE I - NOTES PAYABLE TO BANKS AND OTHERS
The Company has two lines of credit with an aggregate face value of $2,000,000.
One line of credit note is tied to the Company's aggregate trade accounts
receivable balances, not to exceed $1,000,000 (A/R LOC). The second line of
credit is tied to the Company's aggregate inventory balances, not to exceed
$1,000,000 (Inventory LOC). The total amounts which may be outstanding at any
one time, and the corresponding note principal advances, are tied to the
respective "Borrowing Base" calculations contained in the Loan Agreement
(Agreement). As of December 31, 1998, an aggregate of approximately $1,550,924
is outstanding on these lines of credit. The notes require the interest and fees
on the notes to be paid monthly and all of the Company's trade accounts
receivable collections are deposited to the lender's benefit to a lockbox
controlled by the lender. The notes mature in September 1999.
The notes bear interest at an initial Contract Rate of 10.25%. In the event that
the Company achieves and maintains a annual audited Net Profit, as defined in
the Agreement, of at least $200,000, the Company may apply for a reduction in
the note's interest rate to the Lender's Base Rate plus 1.5% (9.75% at December
31, 1998). In the event that the lower interest rate is granted and the $200,000
Net Profit or the Company's audited financial statements are not delivered
within 120 days of the Company's year end, the interest rate will immediately
revert to the initial Contract Rate. Further, the Agreement requires the payment
of a one-time 1.0% commitment fee and the payment of a 1/12% servicing fee per
month on the face amount of each line of credit during the term of each
respective line of credit.
F-17
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - NOTES PAYABLE TO BANKS AND OTHERS - Continued
The Inventory LOC contains a clause that this line of credit must be paid in
full and held at a $-0- balance between January 1, 1999 and February 28, 1999
for a period of at least 30 consecutive days. Additionally, the Agreement
contains certain restrictive covenants related to the Company's business
operations and financial ratios. As of December 31, 1998, the Company was not in
compliance with all covenants in the Agreement. The lender notified the Company
on February 22, 1999 of certain defaults on the Agreement and the lender granted
a waiver of the notified defaults on March 8, 1999.
On March 9, 1999, the Company and the lender executed an amendment to the
Company's loan agreement with the lender whereby the Company must obtain a
minimum of $1.5 million of new equity capital by May 6, 1999. If a violation by
the Company of any of the loan covenants occurs or any other default by the
Company on its obligations under these credit lines, including failure to raise
the $1.5 million in new equity capital, the lender could, at its sole
discretion, could declare the then outstanding indebtedness to be immediately
due and payable. The lender could then foreclose on a significant portion of the
Company's assets, which could have a material adverse effect on the Company's
financial condition and operations.
The Company's Straight Line subsidiary has two separate term lines of credit:
A $60,000 corporate line of credit payable to a bank with an
outstanding balance of approximately $56,732 at December 31, 1998. This
line of credit bears interest at the Bank's base rate plus 1.0% (9.0%
at December 31, 1998). This line of credit requires monthly payments of
approximately 2.0% of the outstanding principal plus all accrued, but
unpaid, interest and fees. This line of credit is secured by a first
mortgage on residential property owned by the former sole shareholder
of Straight Line and the personal guaranty of the former sole
shareholder and matures in November 1999.
A $10,000 personal line of credit payable to a bank with an outstanding
balance of approximately $9,495 at December 31, 1998. This line of
credit bears at the Bank's base rate plus 3.0% (11.00% at December 31,
1998). This line of credit requires monthly payments of 1.8% of the
outstanding principal balance plus all accrued, but unpaid, interest
and fees. This line of credit is subject to the collateralization
discussed above and this line of credit matures in November 1999.
A recap of notes payable consist of the following:
1998 1997
----------- ---------
Inventory line of credit $ 800,000 $ -
Accounts receivable line of credit 698,486 -
$60,000 corporate line of credit 56,734 -
$10,000 personal line of credit 9,495 -
----------- -----
Total notes payable $ 1,564,715 -
=========== =====
F-18
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - LONG-TERM DEBT TO RELATED PARTIES
Long-term debt consists of the following:
1998 1997
--------- ---------
<S> <C> <C>
$50,000 note payable to the former sole shareholder
of Straight Line. Interest at 6.0%. Principal and
all accrued, but unpaid, interest is due at maturity
in March 1999. Secured by the Company's
interest in the issued and outstanding stock
of Straight Line Manufacturing, Inc. Management
anticipates restructuring this note on or before
its scheduled maturity date. $50,000 $ -
$73,875 note payable to the former sole shareholder
of Straight Line. Interest at 6.0%. Principal only
payment of $15,000 payable by January 31, 1999.
Remaining principal and all accrued, but unpaid,
interest is payable subject to the settlement of
a product liability lawsuit against Straight Line
Manufacturing, Inc. incurred prior to the Company's
acquisition of Straight Line. If the lawsuit is settled
prior to March 31, 1999; 50.0% of the principal and
all accrued, but unpaid, interest will be due on
October 1, 1999 and the balance will be due and payable
on March 31, 2000. If the lawsuit is settled between
March 31, 1999 and March 31, 2000, all principal
and accrued, but unpaid, interest will be due and
payable 210 days after the lawsuit settlement date
or March 31, 2000, which ever is earlier. If the
lawsuit is settled after March 31, 2000, all principal
and accrued, but unpaid, interest is due and payable
30 days after the lawsuit settlement date. 73,875 -
------- ---------
Total related party long-term debt $123,875 $ -
======= =========
NOTE K - LONG TERM DEBT TO BANKS AND OTHERS
Long-term debt payable to banks and others consist of the following at December
31, 1998 and 1997:
1998 1997
--------- ----------
$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 owned by Brister's Thunder Karts, Inc. 15,075 18,781
F-19
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - LONG-TERM DEBT TO BANKS AND OTHERS - Continued
1998 1997
--------- ---------
$23,122 installment note payable to a bank. Interest
at 8.25%. Payable in monthly installments of
approximately $726, including accrued interest.
Final maturity in March 2001. Collateralized by
a vehicle owned by Brister's Thunder Karts, Inc. 17,849 -
$240,020 mortgage note payable to a bank. Interest
at the Bank's Commercial Base Rate (9.25% at
December 31, 1998). Payable in monthly installments
of approximately $2,626, including accrued interest.
Final maturity in August 2010. Collateralized by
land and a building owned by USA Industries, Inc. 217,371 224,295
$9,348 installment note payable to a bank. Interest
at 10.0%. Payable in monthly installments of
approximately $303, including accrued interest.
Final maturity in April 1999. Collateralized by
transportation equipment owned by USA
Industries, Inc. 1,411 4,208
$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
transportation equipment owned by USA
Industries, Inc. 14,042 -
$14,000 installment note payable to an equipment
finance company. Payable in monthly installments
of approximately $345, including accrued interest.
Final maturity in May 2002. Collateralized by
equipment owned by USA Industries, Inc. 11,947 -
------- ---------
Total long-term debt to banks and individuals 277,695 249,198
Less current maturities (35,289) (18,357)
-------- ---------
Long-term portion $242,406 $ 230,841
=======- =========
</TABLE>
F-20
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - LONG-TERM DEBT TO BANKS AND OTHERS - Continued
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ --------------
1999 $ 35,289
2000 35,456
2001 26,661
2002 19,493
2003 17,249
2004 - 2008 114,603
2009 - 2013 28,944
----------
Totals $ 277,695
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 L - INCOME TAXES
The components of income tax (benefit) expense for the years ended December 31,
1998 and 1997, respectively, are as follows:
1998 1997
--------- ----------
Federal:
Current $ (3,388) $(156,403)
Deferred - -
--------- ----------
(3,388) (156,403)
State:
Current (11,372) 3,143
Deferred - -
--------- ----------
(11,372) 3,143
--------- ----------
Total $(14,760) $(153,260)
========= ==========
As of December 31, 1998, the Company has a net operating loss carryforward of
approximately $3,000,000 to offset future taxable income. Subject to current
regulations, this carryforward will begin to expire in 2012.
The Company's income tax expense for the years ended December 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 $(3,412,796) $(409,516)
Increase (decrease) in income taxes resulting from:
State income taxes (11,372) 3,143
Non-deductiability of adjustment for common
stock issued at less than "fair value" 140,560 -
Difference caused by use of statutory amortization
periods for deduction of goodwill 1,969,683 79,669
Other, including reserve for deferred tax asset 1,310,537 173,444
--------- ---------
Income tax expense $ (3,388) $(153,260)
=========== =========
</TABLE>
F-21
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - RELATED PARTY TRANSACTIONS
The Company leases its manufacturing facilities under an operating lease with
the former owner of Brister's, who is also the Company's President and Chief
Operating Officer, in addition to being 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 for each of the years ended December 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.
NOTE N - 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 required 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.
F-22
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - CONVERTIBLE PREFERRED STOCK - Continued
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.
NOTE O - COMMON STOCK TRANSACTIONS
On February 28, 1997, to be effective on March 24, 1997, the Company's Board of
Directors approved a two (2) for three (3) reverse stock split and a
corresponding reduction of the authorized shares of common stock in anticipation
of a proposed underwritten public offering of the Company's common stock during
1997. This reverse stock split reduced the authorized shares of common stock
from 20,000,000 to 14,000,000. The issued and outstanding shares of common stock
shown in the accompanying financial statements reflect the ultimate effect of
the reverse stock split as if this reverse split had occurred as of the
beginning of the first period presented in the accompanying consolidated
financial statements.
The terms of a March 31, 1996 private placement memorandum required 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.
F-23
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - COMMON STOCK TRANSACTIONS - Continued
At the close of business on March 31, 1998, the Company's common stock, as
quoted on the NASDAQ Small-Cap Market, closed below the required strike price of
$4.50 per share. Accordingly, during the second quarter of 1998, effective April
1, 1998, the entity owned by an officer and director of the Company released
approximately 95,624 of the 233,333 shares being held in escrow for the
settlement of the contingency related to the March 31, 1996 private placement
memorandum. The remaining approximate 137,709 shares were released from the
escrow agreement and returned to the entity owned by an officer and director of
the Company.
The April 1, 1998 transactions were recorded by the Company based on the imputed
"fair value" of the securities released from escrow upon the ultimate settlement
of the March 31, 1996 contingent issuance as required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The
imputed "fair value" of the 95,624 shares was calculated as approximately
$227,904 based upon the Company's closing stock price on March 31, 1998. This
imputed charge was offset against the imputed additional paid-in capital
generated as a result of this accounting transaction as a cost of raising the
initial capital in the original March 31, 1996 transaction. The imputed "fair
value" of the residual 137,709 shares was calculated as approximately $413,412,
net of the initial cash paid of $350, based upon the Company's closing stock
price on March 31, 1998. This difference between the imputed fair value and the
actual cash paid was recorded as a component of compensation expense related to
common stock issuances at less than "fair value" for reorganization,
restructuring and consulting expenses in the accompanying statement of
operations.
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.
In December 1998, the Company issued an aggregate 90,090 shares of unregistered,
restricted common stock, valued at approximately $100,000, to acquire an option
to acquire 100.0% of the issued and outstanding stock of an unrelated entity
engaged in the manufacture of concession karts.
In December 1998, the Company issued 337,838 shares of unregistered, restricted
common stock valued at approximately $375,000 to acquire a note receivable from
the unrelated entity discussed above with a face amount of $375,000 from an
unrelated individual.
On December 14, 1998, the Company issued 109,589 shares of unregistered,
restricted common stock valued at approximately $50,000 in settlement of a
contract for consulting services of equal value related to various business
acquisition activities. The $50,000 has been charged to operations in the
accompanying financial statements.
NOTE P - COMMON STOCK WARRANTS
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.
F-24
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - COMMON STOCK WARRANTS - Continued
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 outstanding outstanding
originally at December 31, Warrants at December 31,
issued 1997 expired 1998 Exercise price
------------ --------------- ----------- ------------- ---------------
<S> <C> <C>
Class A Warrants 66,667 63,333 (63,333) - $5.25 per share
1996 Warrants 500,018 500,018 - 500,018 $4.50 per share
Underwriter's Warrants 155,000 155,000 - 155,000 $4.00 per share
1997 Warrants 1,782,500 1,782,500 - 1,782,500 $4.00 per share
--------- --------- ---------- ---------
Totals at December 31, 1998 2,504,185 2,500,851 (63,333) 2,437,518
========= ========= ========== =========
</TABLE>
On March 9, 1999, the Company, as compensation for waiving certain events of
default and the amendment to the Company's loan agreement with a non-financial
institution lender, granted the lender a stock warrant to purchase 100,000
shares of the Company's restricted, unregistered common stock at a price of
$0.54 per share. If the Company fully repays the outstanding indebtedness to the
lender within ninety (90) days of the warrant date, the number of shares subject
to the warrant reduces to 50,000. If and only if there is no total retirement of
the indebtedness to the lender, the number of shares subject to the warrant
reduces based upon the Company's net income achieved during Calendar 1999. The
number of shares subject to the warrant based upon the Company's net income in
the event of a non-retirement of the indebtedness is as follows:
Net income # of shares
---------- -----------
$975,000 50,000
$877,500 60,000
$780,000 75,000
This warrant is exercisable at any time after its issuance and expires four (4)
years from its issuance.
F-25
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - 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 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.
During 1998, the Company granted an aggregate 265,000 options to purchase an
equivalent number of shares of restricted, unregistered common stock to officers
and employees in conjunction with the employment of such officers and employees.
These options are exercisable at prices ranging from $1.06 per share to $3.50
per share. Concurrent with the termination of a Company officer, 210,000 of the
granted 1998 options terminated. The remaining options are exercisable between
March 1999 and December 1999 and expire between March 2003 and December 2003.
There were no exercise of any options during the years ended December 31, 1998
and 1997. The following table summarizes all options granted from 1996 to
December 31, 1998.
<TABLE>
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
-------- --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1996 options 59,355 - - 59,355 $5.63
1997 VP options 13,334 - 6,667 6,667 $4.875
1997 options 52,670 - - 52,670 $4.875
1998 options 265,000 - 210,000 55,000 $1.06 - $3.50
------- ---- ------- ------
Totals 390,359 - 216,667 118,692
======= ==== ======= =======
</TABLE>
1998 Compensation Plan
On May 27, 1998, the stockholders of the Company approved the 1998 Stock
Compensation Plan of Karts International Incorporated (1998 Plan) and reserved
1,000,000 shares of Common Stock for issuance under the plan. The 1998 Plan
terminates on April 1, 2008 unless previously terminated by the Board of
Directors. The 1998 Plan is administered by the Compensation Committee
(Committee) or the entire Board of Directors as determined by the Board of
Directors.
F-26
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - STOCK OPTIONS - Continued
Eligible participants in the 1998 Plan include full time employees, directors
and advisors of the Company and its subsidiaries. Options granted under the 1998
Plan are intended to qualify as "incentive stock options" pursuant to the
provisions of Section 422 of the Internal Revenue Code of 1986, as amended
(Code), or options which do not constitute incentive stock options (nonqualified
options) as determined by the Committee.
Under the 1998 Plan the Company may also grant "Restricted Stock" awards.
"Restricted Stock" represents shares of Common Stock issued to eligible
participants under the 1998 Plan subject to the satisfaction by the recipient of
certain conditions and enumerated in the specific Restricted Stock grant.
Conditions which may be imposed include, but are not limited to, specified
periods of employment, attainment of personal performance standards or the
overall performance of the Company. The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1998 Plan to promote
the development of the Company, and may be used by the Company as another means
of attracting and retaining qualified individuals to serve as employees of the
Company or its subsidiaries.
Incentive stock options may be granted only to employees of the Company or a
subsidiary who, in the judgment of the Committee, are responsible for the
management or success of the Company or a subsidiary and who, at the time of the
granting of the incentive stock option, are either an employee of the Company or
a subsidiary. No incentive stock option may be granted under the 1998 Plan to
any individual who would, immediately before the grant of such incentive stock
option, directly or indirectly, own more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company unless (i) such
incentive stock option is granted at an option price not less than one hundred
ten percent (110%) of the fair market value of the shares on the date the
incentive stock option is granted and (ii) such incentive stock option expires
on a date not later than five years from the date the incentive stock option is
granted.
The purchase price of the shares of the Common Stock offered under the 1998 Plan
must be one hundred percent (100%) of the fair market value of the Common Stock
at the time the option is granted or such higher purchase price as may be
determined by the Committee at the time of grant; provided, however, if an
incentive stock option is granted to an individual who would, immediately before
the grant, directly or indirectly own more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company, the purchase price
of the shares of the Common Stock covered by such incentive stock option may not
be less than one hundred ten percent (110%) of the fair market value of such
shares on the day the incentive stock option is granted. If the Common Stock is
listed upon an established stock exchange or exchanges, the fair market value of
the Common Stock shall be the highest closing price of the Common Stock on the
day the option is granted or, if no sale of the Common Stock is made on an
established stock exchange on such day, on the next preceding day on which there
was a sale of such stock. If there is no market price for the Common Stock, then
the Board of Directors and the Committee may, after taking all relevant facts
into consideration, determine the fair market value of the Common Stock.
F-27
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - STOCK OPTIONS - Continued
Options are exercisable in whole or in part as provided under the terms of the
grant, but in no event shall an option be exercisable after the expiration of
ten years from the date of grant. Except in case of disability or death, no
option shall be exercisable after an optionee ceases to be an employee of the
Company, provided that the Committee shall have the right to extend the right to
exercise for a period not longer than three months following the date of
termination of an optionee's employment. If an optionee's employment is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year following the date of termination of the
optionee's employment. If an optionee dies while in the employ of the Company
and shall not have fully exercised his options, the options may be exercised in
whole or in part at any time within one year after the optionee's death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.
Under the 1998 Plan, an individual may be granted one or more options, provided
that the aggregate fair market value (determined at the time the option is
granted) of the shares covered by incentive options which may be exercisable for
the first time during any calendar year shall not exceed $100,000. There
presently are outstanding options to purchase 35,000 shares of Common Stock at
prices ranging from $1.06 to $2.98 per share.
NOTE R - 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 $25,000 per claim self-insurance clause
as of December 31, 1998. 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, 1998 and
1997, respectively, approximately $176,000 and $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. During 1998, a
summary judgment was granted in favor of Brister's dismissing the claim. The
plaintiff has appealed the summary judgment decision and the Company and
Brister's are of the opinion that the initial decision of the Court will be
upheld.
The Company anticipates no material impact to either the results of operations,
its financial condition or liquidity based on the uncertainty of outcome, if
any, of existing litigation, either collectively and/or individually, at this
time.
F-28
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - 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, who became the Company's President
during January 1999. 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 $40,000 and $30,000 under the terms
of this agreement during the years ended December 31, 1998 and 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 was obligated to pay 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 years
ended December 31, 1998 and 1997, respectively, the Company paid or accrued
approximately $20,000 and $21,000 under this Agreement.
F-29
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - COMMITMENTS AND CONTINGENCIES - Continued
Employment agreement
- --------------------
Effective January 30, 1998, the Company entered into an Employment Agreement
(Agreement) with an individual to serve as the Company's President and Chief
Executive Officer (President). The Agreement is for a term of three (3) years
and provides the President with an annual base salary of $150,000. Upon
execution of the Agreement, the President received options to purchase up to
200,000 shares of the Company's common stock at an exercise price of $3.25 per
share. The options vest as follows: 100,000 shares as of January 30, 1999;
50,000 shares as of January 31, 2000; 50,000 shares as of January 31, 2001. All
unvested options vest immediately upon the termination of the Agreement if
termination is for reason other than "for cause", and all unexercised options
expire on January 31, 2003. The President may also receive annual performance
based stock options to purchase up to 50,000 shares of the Company's common
stock at a price equal to the market value of the Company's common stock on the
date of issuance, as determined by the Company's Board of Directors, and an
annual cash bonus not to exceed 15.0% of the annual base salary.
In January 1999, this individual resigned as President, Chief Executive Officer
and as a director of the Company and the Company and the individual entered into
a Settlement Agreement and Full and Final Release of All Claims (Agreement) for
the purpose of satisfying and discharging all obligations of the Company to the
individual under the Agreement. The Agreement provides that the Company shall
forgive up to $19,000 of non-reimbursable expenses incurred by the individual
and pay to for one week of earned vacation. In consideration for the foregoing,
the former President agreed to adhere to the non-competition and
non-solicitation covenants set forth in the Employment Agreement until January
13, 2001. As part of his separation from the Company, the Company issued to the
individual options to purchase 15,000 shares of Common Stock at an option
exercise price of $1.06 per share which were granted to replace the options to
purchase 200,000 shares of common stock which were effectively canceled at
separation. These options are vested and expire on January 20, 2004.
On October 27, 1998, the Company entered into an Employment Agreement
(Agreement) with the former sole shareholder of Straight Line for the individual
to serve as the President of the Straight Line subsidiary (Straight Line
President). The Agreement is for a term of three (3) years with an automatic one
year extension unless either the Company or the Straight Line President provides
a thirty (30) day written notice not to continue the Agreement. This Agreement
provides the Straight Line President with an annual base salary of $80,000. Upon
execution of this Agreement, the Straight Line President received options to
purchase up to 10,000 shares of the Company's common stock at an exercise price
equal to the closing bid price of the Company's common stock as quoted on the
NASDAQ SmallCap market.
The Straight Line President may also receive, at the discretion of the Company's
Board of Directors, annual performance based stock options to purchase up to
10,000 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.
F-30
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE S - SIGNIFICANT CUSTOMERS
During the year ended December 31, 1998, the Company was an OEM manufacturer of
"fun karts" for one of its competitors. Total sales to this entity totaled
approximately $864,000, or approximately 10.51% of total net sales. During 1998,
the Company had no other single or related groups of customers that aggregated
more than 10.0% of total net sales.
During 1997, the Company had two related customers responsible for net sales in
excess of 10.0% of total net sales. The sales to these two related customers are
summarized below:
1997
---------------------------
Percent of
Amount sales
---------- ---------
Company A $ 713,664 9.41%
Company B 566,480 7.47%
---------- ------
$1,280,144 16.88%
========== ======
Total net sales $7,586,476 100.00%
========= ======
NOTE T - SUBSEQUENT EVENT
On March 17, 1999, the Company executed a promissory note with its President and
Chief Executive Officer. The note bears interest at 8.0% and accrued interest is
payable monthly. All principal and accrued, but unpaid, interest is due at the
earlier of the receipt of proceeds from an anticipated equity offering or three
months from the date of the note. The loan is unsecured.
F-31
STOCK WARRANT
This Stock Warrant ("Warrant") is issued this 8th day of March, 1999, by KARTS
INTERNATIONAL INCORPORATED, a Nevada corporation (the "Company"), to KBK
FINANCIAL, INC., a Delaware corporation (KBK FINANCIAL, INC and any subsequent
assignee or transferee hereof are hereinafter referred to collectively as
"Holder").
AGREEMENT:
1. Issuance of Warrant. For and in consideration of (i) KBK Financial, Inc.
("KBK") waiving various events of default under that certain Loan Agreement
dated September 28, 1998 (the "Loan Agreement") between KBK Financial, Inc.
and the Company (as such Loan Agreement is amended from time to time), (ii)
KBK continuing to finance the Company under the Loan Agreement (such
financing being more fully evidenced by the Notes, as defined in the Loan
Agreement), and (iii) other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company hereby grants
to Holder the right to purchase 100,000 shares of the Company's $.001 par
value common stock (the "Common Stock"), which the Company represents
equals 1.8% of the issued and outstanding capital stock of the Company on
the date hereof, calculated on a fully diluted basis after full exercise of
this Warrant (the "Base Amount"); provided, however, the Base Amount shall
be reduced to 50,000 shares of the Common Stock if on or before the
ninetieth (90th) day from the date hereof all indebtedness owing under the
Notes is fully repaid to KBK and there are no further obligations on KBK to
provide loans or advances to Borrower under the Loan Agreement (the "Pay
Off Reduction"). If and only if there is no Pay Off Reduction of the Base
Amount, the Base Amount of the shares subject to this Warrant will be as
follows if the Borrower achieves the Net Income targets set forth below for
the Company's 1999 fiscal year:
Net Income Base Amount
---------- -----------
$975,000 50,000
$877,500 60,000
$780,000 75,000
As used herein, "Net Income" shall mean net income before taxes, as
determined by generally accepted accounting principals, as reflected on the
Borrower's audited financial statements for the Company's 1999 fiscal year.
The shares of Common Stock issuable on exercise of this Warrant are
hereafter referred to as the "Shares". This Warrant shall be exercisable at
any time and from time to time for four (4) years from the date issued. For
purposes of this Warrant, the term "fully diluted basis" shall be
determined in accordance with generally accepted accounting principles as
of the date hereof
2. Exercise Price. The per share exercise price (the "Exercise Price") for
which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be $0.54.
3. Exercise. This Warrant may be exercised by the Holder hereof (but only on
the conditions hereinafter set forth) as to all or a portion of such
Shares, upon delivery of written notice of intent to exercise to the
Company at the following address: 62204 Commercial Street, Roseland,
Louisiana 70456, or such other address as the Company shall designate by
written notice to the Holder hereof, together with this Warrant and payment
to the Company of the aggregate Exercise Price of the Shares so purchased.
The Exercise Price shall be payable, at the option of the Holder, (i) by
certified or cashier's check, or (ii) by the surrender of the Note or
portion thereof having an outstanding principal balance equal to the
aggregate Exercise Price. Upon exercise of this Warrant as aforesaid, the
Company shall as promptly as practicable, and in any event within fifteen
(15) days thereafter, execute and deliver to the Holder of this Warrant a
certificate or certificates for the total number of whole Shares for which
this Warrant is being exercised in such names and denominations as are
requested by such Holder. If this Warrant shall be exercised with respect
to less than all of the Shares, the Holder shall be entitled to receive a
new Warrant covering the number of Shares in respect of which new Warrant
shall not have been exercised, which new Warrant shall in all other
respects be identical to this Warrant. The Company covenants and agrees
that it will pay when due any and all state and federal issue taxes which
may be payable in respect of the issuance of this Warrant or the issuance
of any Shares upon exercise of this Warrant.
4. Representations, Covenants and Conditions. The above provisions are subject
to the following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended ("Securities Act") or any state
securities laws ("Blue Sky Laws"). This Warrant has been acquired for
investment purposes and not with a view to distribution or resale and
may not be pledged, hypothecated sold, made subject to a security
interest, or otherwise transferred without (i) an effective
registration statement for such Warrant under the Securities Act and
such applicable Blue Sky Laws, or (ii) an opinion of counsel which
opinion and counsel shall be reasonably satisfactory to the Company
and its counsel that registration is not required under the Securities
Act or under any applicable Blue Sky Laws (the Company hereby
acknowledges that Louke, Liddell & Sapp, LLP is acceptable counsel).
Transfer of the Shares issued upon the exercise of this Warrant shall
be restricted in the same manner and to the same extent as this
Warrant and the certificates representing such Shares shall bear
substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"),
OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERED UNTIL
(i) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(11) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION
UNDER SUCH SECURITIES ACTS OR SUCH APPLICABLE STATE SECURITIES LAWS IS
NOT REQUIRED IN CONNECTION WITH I SUCH PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other
documents and instruments as counsel for the Company reasonably deems
necessary to effect the compliance of the issuance of this Warrant and
any shares of Common Stock issued upon exercise hereof with applicable
federal and state securities laws.
(b) The Company covenants and agrees that all Shares which may be issued
upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid
and
<PAGE>
nonassessable, free from all taxes, liens, charges and preemptive
rights, if any, with respect thereto or to the issuance thereof. The
Company shall at all times reserve and keep available for issuance
upon the exercise of this Warrant such number of authorized but
unissued shares of Common Stock as will be sufficient to permit the
exercise in full of this Warrant.
(c) The Company represents and warrants to Holder the following:
(1) As of tile date hereof, the authorized capital stock of the
Company consists solely of 14,000,000 shares of Common
Stock, of which 5,457,560 shares are issued and outstanding
and 100,000 shares of which shall be reserved for issuance
upon exercise of this Warrant; provided, however, that the
number of shares reserved for issuance upon exercise of this
Warrant may be increased from time to time in accordance
with the terms of this Warrant;
(ii) As of the date hereof, the Company shall not have
outstanding any stock or securities convertible or
exchangeable for any shares of its Common Stock or
containing any profit participation features, nor shall it
have outstanding any rights or options to subscribe for or
to purchase its Common Stock or any stock or securities
convertible into or exchangeable for its Common Stock or any
stock appreciation rights or phantom stock plans, except as
set forth on Schedule A and for this Warrant.
(iii)Schedule A accurately sets forth the following with respect
to all outstanding options and rights to acquire Common
Stock from Borrower: (i) the total number of shares issuable
upon exercise of all outstanding options, (ii) the range of
exercise prices for all such outstanding options, (iii) the
number of shares issuable, the exercise price, for each such
outstanding option and (iv) with respect to all outstanding
options, warrants and rights to acquire the Company's
capital stock other than this Warrant, the number of shares
covered, the exercise price;
(iv) As of the date hereof, the Company shall not be subject to
any obligation (contingent or otherwise) to repurchase,
redeem, retire or otherwise acquire any shares of its
capital stock or any warrants, options or other rights to
acquire its capital stock, except as set forth in this
Warrant or on Schedule A attached hereto;
(v) As of the date hereof, all of the outstanding shares or the
Company's capital stock shall be validly issued. fully paid
and nonassessable. There are not statutory or contractual
preemptive rights, rights of first refusal, anti-dilution
rights or any similar rights, held by stockholders or option
holders of the Company, with respect to the issuance of this
Warrant or the issuance of the Common Stock upon exercise of
this Warrant.
5. Transfer of Warrant. Subject to the provisions of Section 4 hereof, this
Warrant may be transferred, in whole or in part, to any person or entity, by
presentation of this Warrant to the Company with written instructions for such
transfer. Upon such presentation for transfer, the Company shall promptly
execute and deliver a new Warrant or Warrants in the form hereof in the name of
the assignee or assignees and in the denominations specified in such
instructions. The Company shall pay all expenses incurred by it in connection
with the preparation, issuance and delivery of Warrants under this Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights;
Preference Rights. Except as otherwise provided herein, this Warrant does
not confer upon the Holder, as such, any right whatsoever as a shareholder
of the Company. Notwithstanding the foregoing, if the Company should offer
to all of the Company's shareholders the right to purchase any securities
of the Company, then all shares of Common Stock that are subject to this
Warrant shall be deemed to be outstanding and owned by the Holder and the
Holder shall be entitled to participate in such rights offering. The
Company shall not grant any preemptive rights with respect to any of its
capital stock without the prior written consent of the Holder.
7. Adjustment Upon Changes in Stock.
(a) If all or any portion of this Warrant shall be exercised subsequent to
any stock split, stock dividend, recapitalization, combination of
shares of the Company, or other similar event, occurring after the
date hereof, then the Holder exercising this Warrant shall receive,
for the aggregate price paid upon such exercise, the aggregate number
and class of shares which such Holder would have received if this
Warrant had been exercised immediately prior to such stock split,
stock dividend, recapitalization, combination of shares, or other
similar event. If any adjustment under this Subsection would create a
fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded and
tile number of shares subject to this Warrant shall be the next higher
number of shares, rounding all fractions upward. Whenever there shall
be an adjustment pursuant to this Subsection, the Company shall
forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
(b) If all or any portion of this Warrant shall be exercised subsequent to
any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event,
occurring after the date hereof, as a result of which shares of Common
Stock shall be changed into the same or a different number of shares
of the same or another class or classes of securities of the Company
or another entity, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the
aggregate number and class of shares which such Holder would have
received if this Warrant had been exercised immediately prior to such
merger, consolidation, exchange of shares, separation, reorganization
or liquidation, or other similar event. If any adjustment under this
Subsection would create a fractional share of
<PAGE>
Common Stock or a right to acquire a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares
subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be an adjustment
pursuant to this Subsection, the Company shall forthwith notify the
Holder or Holders of this Warrant of such adjustment, setting forth in
reasonable detail the event requiring the adjustment and the method by
which such adjustment was calculated.
8. Registration.
(a) The Company and the holders of the Shares agree that if at any time
the Company shall propose to file a registration statement with
respect to any of its Common Stock on a form suitable for a secondary
offering, it will give notice in writing to such effect to the
registered holder(s) of the Shares at least thirty (30) days prior to
such filing, and, at the written request of any such registered
holder, made within ten (10) days after the receipt of such notice,
will include therein at the Company's cost and expense (excluding
underwriting discounts, and commissions and filing fees attributable
to the Shares included therein) such of the Shares as such holder(s)
shall request; provided, however, that if the offering being
registered by the Company is underwritten and if the representative of
the underwriters certifies in writing that the inclusion therein of
the Shares would materially and adversely affect the sale of the
securities to be sold by the Company thereunder, then the Company
shall be required to include in the offering, only that number of
securities, including the Shares, which the underwriters determine in
their sole discretion will not jeopardize the success of the offering
(the securities so included to be apportioned pro rata among all
selling shareholders according to the total amount of securities
entitled to be included therein owned by each selling shareholder).
(b) Whenever the Company in its sole discretion undertakes to effect the
registration of any of the Shares, the Company shall, as expeditiously
as reasonably possible:
(i) Prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement covering such Shares and
use its reasonable to cause such registration statement to be
declared effective by the Commission as expeditiously as possible
and to keep such registration effective until the earlier of (A)
the date when all Shares covered by the registration statement
have been sold or (B) one hundred eighty (180) days from the
effective date of the registration statement; provided, however,
that nothing in this Section 8 shall be construed to prohibit or
limit the Company's authority to abandon the registration
statement at any time if it determines, in its sole discretion,
that to do so would be in the Company's best interest.
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may
be necessary to keep such registration statement effective during
the period referred to in Subsection 8(b)(i) and to comply with
the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration
statement, and cause the prospectus to be supplemented by any
required prospectus supplement, and as so supplemented to be
filed with the Commission pursuant to Rule 424 under the
Securities Act.
(iii)Furnish to the selling holder(s) such numbers of copies of such
registration statement, each amendment thereto, the prospectus
included in such registration statement (including each
preliminary prospectus), each supplement thereto and such other
documents as they may reasonably request in order to facilitate
the disposition of the Shares owned by them.
(iv) Provide a transfer agent and registrar for all such Shares not
later than the effective date of such registration statement.
(v) In the event an underwriter is engaged by the Company, enter into
such customary agreements (including underwriting agreements in
customary form for a primary offering) and take all such other
actions as the underwriters, if any, reasonably request in order
to expedite or facilitate the disposition of such Shares
(including, without limitations effecting a stock split or a
combination of shares).
(vi) Make available for inspection by any selling holder or any
underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other
agent retained by any such selling holder or underwriter, all
financial and other records, pertinent corporate documents and
properties of the Company which is information that is available
to the public, and cause the officers, directors, employees and
independent accountants of the Company to supply all publicly
available information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with
such registration statement.
(vii)Promptly notify the selling holder(s) and the underwriters, if
any, of the following events and (it' requested by any such
person) confirm such notification in writing: (A) the filing of
the prospectus or any prospectus supplement and the registration
statement and any amendment or post-effective supplement thereto
and, with respect to the registration statement or any
post-effective amendment thereto, the declaration of the
effectiveness of such documents; (B) any requests by the
Commission for amendments or supplements to the registration
statement or the prospectus or for additional information; (C)
the issuance or threat of issuance by the Commission of any stop
order suspending the effectiveness of the registration statement
or the initiation of any proceedings for that purpose; and (D)
the receipt by the Company of any notification with respect to
the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threat of initiation of any
proceeding for such purposes.
(viii) Make every reasonable effort to prevent the entry of any order
suspending the effectiveness of the registration statement and
obtain at the earliest possible moment the withdrawal of any such
order, if entered,
(ix) Cooperate with the selling holder(s) and the underwriters, if
any, to facilitate the timely preparation and delivery of
certificates representing the Shares to be sold and not bearing
any restrictive
<PAGE>
11. Severability. If any provision(s) of this Warrant or the application
thereof to any person or circumstances shall be invalid or unenforceable to
any extent, the remainder of this Warrant and the application of such
provisions to other persons or circumstances shall not be affected thereby
and shall be enforced to the greatest extent permitted by law.
12. Counterparts. This Warrant may be executed in any number of counterparts
and by different parties to this Warrant in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same Warrant.
13. WAIVER OF JURY TRIAL. THE COMPANY AND HOLDER EACH HEREBY IRREVOCABLY
WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY
TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS WARRANT OR ANY
TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date first
above written.
KARTS INTERNATIONAL INCORPORATED,
a Nevada corporation
By: /s/ Charles Brister
------------------------------
Name: Charles Brister
Title:
President & C.E.O.
KBK FINANCIAL, INC., a Delaware corporation
By:
--------------------------------
Name: Jeff Kassing
Title: Senior Vice President & General Counsel
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made as of this 28th day of September,
1998 by and between KARTS INTERNATIONAL INCORPORATED, a Nevada corporation
("Borrower") And KBK FINANCIAL, INC., a Delaware Corporation ("KBK") in
connection with the mutual covenants and agreements contained herein, the
parties hereto-agrees as follows:
1. Definitions. All, terms and phrases used herein which are defined in the
Uniform Commercial Code in the State of Louisiana, as amended from time to
time (the "UCC") shall have the meanings given them in the UCC unless
otherwise defined herein. The following definitions shall apply throughout
this Agreement:
"Affiliate" means with respect to any Person in question, any other Person
owned or controlled by, or which owns or controls or is under common
control or is otherwise affiliated with such Person in question. A Person
shall be deemed to control another Person if such Person possesses,
directly or indirectly, the power to direct or cause the direction or the
management and policies of such other Person, whether through the ownership
of voting securities, by contract or otherwise.
"A/R Borrowing Base" shall mean an amount equal to 65% of Eligible Accounts
until the end of the Clean Up Period and 80% of Eligible Accounts
thereafter.
"A/R Line of Credit" has the meaning given it in Section 2.
"A/R Line of Credit Amount" has the meaning given to it in Section 2.
"BTK" means Broster's Thunder Markets, Inc.
"Business Day" means any day other than Saturday, Sunday or any other day
on which KBK's office in New Orleans, Louisiana is closed.
"Clean Up Period" has the meaning given it in Section 2.
"Collateral" has the meaning given it in Section 4.
"Credit Facilities" has the meaning given it in Section 2.
"Debit Account: means Account No. 5002120582 that Borrower has with Deposit
Guaranty National Bank over which KBK has express written authority to
debit pursuant to this Agreement.
"Eligible Accounts" means, at the time of determination thereof, all
accounts of Obligors except the following: (i) commencing January 1, 1998,
any account which by its terms is payable more than thirty (30) days from
the invoice date; (ii) any account which has been outstanding for more than
ninety (90) days from the invoice date; (iii) to the extent that the
aggregate outstanding amount owed by any single account debtor exceeds the
Debtor Limit (which is $15,000.00 per account debtor unless otherwise
approved by KBK), any amount in excess of the Debtor Limit owed by such
account debtor; (iv) any account that is owed by an account debtor which is
an Affiliate of any Obligor or an officer or employee of any Obligor; (v)
any account that arises out of a sale made, goods shipped or services
performed outside or the United States or that is owed by an account debtor
located outside the United States unless such account debtor is subject to
the jurisdiction of the courts in the United States with respect to such
account; (iv) any account that is owed by an account debtor which is a
creditor or supplier of any Obligor; (vii) any account that is owed by an
account debtor which has asserted any defense or offset or which has
contested any liability with respect to such account; (viii) any account
owed by an account debtor if more than 20% (in dollar amount) of such
account debtor's accounts are outstanding for more than ninety (90) days
from the due date of the invoice; (ix) any account the account debtor of
which is the United States or any department, agency or instrumentality
thereof, unless the right to payment under such account is assigned to KBK
in full compliance with the Assignment of Claims Act of 1940, as amended
(31 U.S.C. 3727); (x) any account the account debtor of which is any state
or any department, agency or subdivision thereof unless the right to
payment under Such account is assigned to KBK in full compliance with such
state's laws pertaining to the assignment of claims, if any; (xi) any
account with respect to which any Obligor has furnished a payment and/or
performance bond and that portion of any account representing retainage;
(xii) any account owing by an account debtor for which there has been
instituted a proceeding in bankruptcy or a reorganization under the United
States Bankruptcy Code or other law, whether state or federal, now or
hereafter existing for the relief of debtors; (xiii) any account with
respect to which goods are placed on consignment or other terms by reason
of which payment by the account debtor may be conditioned; and (xiv) any
account (or portion of an account) which, KBK may designate from time to
time, in its sole and absolute discretion, for exclusion from Eligible
Accounts. The gross face amount payable pursuant to the invoice related to
an account shall be used for purposes of determining the amount of an
account.
"Eligible Inventory" means as of any date, the aggregate value of all
inventory of raw materials and finished goods (excluding work in progress
and packaging materials, supplies and any advertising costs capitalized
into inventory) then owned by USA or BTK and held for sale, lease or other
disposition in the ordinary course of its business, in which KBK has a
first priority lien, excluding (i) inventory which is damaged, defective,
obsolete or otherwise unsalable in the ordinary course of the business of
USA of BTK, (ii) inventory which has been returned or rejected, (iii)
inventory subject to any consignment arrangement between USA or BTK and any
other person or entity, (iv) Inventory which is in transit, (v) inventory
located outside the United States, (vi) all inventory of USA until all of
USA's inventory is tracked by a Tested Perpetual Inventory System, and
(vii) inventory which KBK in KBK's sole and absolute descretion deems
ineligible. For purposes of this definition, Eligible Inventory shall be
valued at the lower of cost (excluding the cost of labor) or market value.
Environmental Laws" means an and all federal, state and local laws,
regulations, rules, orders, licenses, agreements or other governmental
restrictions relating to the protection of human health or the environment
or to emissions, discharges or releases of pollutants or industrial, toxic
or hazardous substances into the environment, or otherwise relating to the
manufacture, processing, treatment, transport or handling of pollutants or
industrial, toxic or hazardous substances
1
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations
promulgated with respect thereto.
"ERISA Affiliate" means with respect to any Person in question, any Person
that would be treated as a single employer with Borrower.
"ERISA Plan" means any pension benefit plan subject to Title IV of ERISA
maintained by Borrower or any ERISA Affiliate thereof with respect to which
Borrower or any ERISA Affiliate has a fixed or contingent liability.
"Event of Default: has the meaning given it in Section 13.
"GAAP" means those generally accepted accounting principles and practices
which arc recognized as such by the financial Accounting Standards Board
(or any generally recognized successor), consistently applied throughout
the period involved.
"Guarantors" means USA, BTK and Kint, L.L.C. (whether one or more).
"Indemnified Claims" means any and all claims, demands, actions, causes of
action, judgments, suits, liabilities, obligations, losses, damages and
consequential damages, penalties, fines, costs, fees, expenses and
disbursements (including without limitation, fees and expenses of attorneys
and other professional consultants and experts in connection with any
investigation or defense) of every kind or nature, known or unknown,
existing or hereafter arising, foreseeable or unforeseeable, which may be
imposed upon, threatened or asserted against or incurred or paid by any
Indemnified Person at any time and from time to time, because of or
resulting from, in connection with or in any way relating to or arising out
of any of the Credit Facilities, the Collateral or any other transaction,
act, omission, event or circumstance in any way connected with or
contemplatcd by this Agreement or the other Loan Documents or any action
taken or omitted by any such indemnified Person under or in connection with
any of the foregoing (including but not limited to any investigation,
litigation, proceeding, enforcement of KBK's rights or defense of KBK's
actions related to or arising out of this Agreement or the other Loan
Documents), whether or not any Indemnified Person is a party hereto.
"Indemnified Person" shall collectively mean KBK and its officers,
directors, shareholders, employees, attorneys, representatives, agents,
Affiliates, successors and assigns.
"INV Borrowing Base" means an amount equal to 50% of all Eligible Inventory
(subject to the provisions of the Inventory Maintenance Certificate and
Inventory Reports attached hereto); provided, however, any Eligible
Inventory which constitutes raw materials and is tracked by a Tested
Perpetual Inventory Systems will have a borrowing base equal to 65%.
"INV Line of Credit" has the meaning given it in Section 2.
"INV Line of Credit Amount" has the meaning given it in Section 2.
"Lien" means any mortgage, lien, pledge, assignment, adverse claim, charge,
security interest or other encumbrance,
"Loan Documents" means this Agreement, the Notes and all other documents,
agreements and instruments now or hereafter required by KBK to be executed
and delivered in connection herewith (including, without limitation, all
documents, agreements and instruments evidencing, securing, governing,
guaranteeing and/or pertaining to the Notes and the Credit Facilities).
"Net Profit" means net income after taxes (including extraordinary losses
and excluding extraordinary gains) as of the end of time period being
measured.
"Notes" has the meaning given it in Section 3.
"Obligors" means Borrower and Guarantors.
"Person" means a corporation, association, partnership, limited liability
company, organization, business, individual, governmental or political
subdivision thereof or governmental agency.
"Remittance Address" means the Borrower's current lockbox address until KBK
notifies Borrower of a new Remittance Address.
"Subordinated Debt" means indebtedness owing by Borrower to a creditor
other than KBK which has been subordinated and subject in right of payment
to the prior payment of all indebtedness and obligations now or hereafter
owing by Borrower to KBK, such subordination to be evidenced by a written
agreement between KBK and the subordinated creditor which is in form and
substance satisfactory to KBK.
"Tangible Net Worth" means, as of any date, the amount by which Borrower's
total assets exceeds its total liabilities, plus Subordinated Debt, less
any intangible assets (as defined by GAAP), less deferred charges.
"Termination Event" means (a) the occurrence with respect to any ERISA Plan
of (i) a reportable event described in Sections 4043(b)(5) of ERISA or (ii)
any other reportable event described in Section 4043 of ERISA other than a
reportable event not subject to the provision for 30-day notice to the
Pension Benefit Guaranty Corporation pursuant to a waiver by such
corporation under Section 4043(a) of ERISA, (b) the withdrawal of Borrower
or any Affiliate of Borrower from any ERISA Plan during a plan year in
which it was a "substantial employer" as defined in Section4001 (a)(2) of
ERISA, or (c) any event or condition which might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any ERISA Plan.
"Tested Perpetual Inventory System" means a perpetual inventory system
which has been adequately tested to ensure that it works properly to the
satisfaction of KBK, in KBK's sole discretion.
2
<PAGE>
"USA" MEANS USA Industries, Inc.
2. Credit Facilities, Subject to the terms and conditions set forth in this
Agreement and the other Loan Documents, KBK hereby agrees to provide to
Borrower the following Credit Facility or Facilities (whether one or more,
the "Credit Facilities"):
(A) A/R Line of Credit. Subject to the terms and conditions set forth
herein, KBK agrees to provide to Borrower - a revolving line of credit
(the "A/R Line of Credit") during the period commencing on the date
hereof and continuing through the maturity date of the Note evidencing
the A/R Line of Credit from time to time. Borrower or may request
advances under the A/R Line of Credit from time to time; provided,
however, the total principal amount outstanding at any time under the
A/R Line of Credit shall not exceed the lesser of (i) an amount equal
to the A/R Borrowing Base, or (ii) $1,000,000.00 (the "A/R Line of
Credit Amount"). If at any time the aggregate principal amount
outstanding under the A/R Line of Credit shall exceed an amount equal
to the A/R Borrowing Base, Borrower agrees to immediately repay to KBK
such excess amount, plus all accrued but unpaid interest thereon.
Subject to the terms and conditions set forth in this Agreement and in
the Note evidencing the A/R Line of Credit from time to time, Borrower
may borrow, repay and reborrow under the A/R Line of Credit. The sums
advanced under the A/R Line of Credit shall be used for working
capital purposes.
(b) INV Line of Credit. Subject to the terms and conditions set forth
herein, KBK agrees to provide to Borrower a revolving line of credit
(the "INV Line of Credit") during the period commencing on the date
hereof and continuing through the 10th day prior to the maturity
date of the Note evidencing the INV Line ine of Credit from time to
time. Borrower may request advances under the INV Line of Credit from
time to time, provided, however, the total principal amount
outstanding at any time under the INV Line of Credit shall not exceed
the lesser of (i) an amount equal to the INV Borrowing Base, or (ii)
$1,000,000.00 (the "INV Line of Credit Amount"). If at any time the
aggregate principal amount outstanding under the INV Line of Credit
shall exceed an amount equal to the INV Borrowing Base, Borrower
agrees to immediately repay to KBK such excess amount, plus all
accrued but unpaid interest thereon. Borrower understands and agrees
that for a period of at least 30 consecutive days (the "Clean Up
Period") during the period between January 1 and February 28 each
year, Borrower must repay all amounts outstanding under tire INV Line
of Credit. Borrower may request advances under the INV Line of Credit
no more often than once each calendar day. Subject to the terms and
conditions set forth in this Agreement and in the Note evidencing the
INV Line of Credit from time to time, Borrower may borrow, repay and
reborrow under the INV Line of Credit. The sums advanced under the INV
Line of Credit shall be used for working capital purposes.
3. Promissory Notes.
(a) Notes. Borrower agrees to execute, Contemporaneously herewith, a
promissory note payable to the order of KBK, in form and substance
acceptable to KBK in KBK's sole and absolute discretion, for each
Credit Facility provided hereunder to evidence the indebtedness owing
by Borrower to KBK under each such facility (whether one or more,
together with any renewals, extensions and increases thereof, the
"Notes").
(b) Rate and Payments. The principal of and interest on the Notes shall be
due and payable and may be prepaid in accordance with the terms and
conditions set forth in the Notes and in this Agreement. Interest on
the Notes shall accrue at the rate set forth therein; provided,
however, in the event Obligors, on a consolidated basis, achieve a Net
Profit of at least $200,000.00 as of the end of any fiscal year based
upon Obligor's annual audited financial statements, the Contract Rate
(as defined in the Notes) shall be reduced to the Base Rate plus one
and one-half percent (1.5%). Any such interest rate reduction will
become effective on the first day of the calendar month following (i)
delivery to KBK or Obligor's annual audited financial statements which
demonstrate the requisite Net Profit, and (ii) a notice letter from
Borrower requesting that the Contract Rate be adjusted. In the event
the Contract Rate in the Notes is ever decreased per this subsection,
to maintain such lower interest rate, Obligors MUST maintain a Net
Profit of at least $200,000.00 annually thereafter per their annual
audited financial statements. In the event a Net Profit of at least
$200,000.00 is not maintained or Borrower does not timely deliver the
annual audited financial statements to KBK in accordance with
Subsection 12(a), the Contract Rate of the Notes Shall be immediately
increased to the original Contract Rate.
4. Collateral. As security for the indebtedness evidenced by the Notes and any
and all other indebtedness or obligations owing from time to time by
Borrower to KBK under this Agreement, KBK shall receive a Lien in and to
the collateral described in the other Loan Documents (the "'Collateral").
5. Guarantors. As a condition precedent to KBK's obligation to provide the
Credit Facilities to Borrower, Borrower agrees to cause the Guarantors to
each execute and deliver to KBK contemporaneously herewith a guaranty
agreement, in form and substance acceptable to KBK in KBK's sole and
absolute discretion.
6. Fees.
(a) Commitment Fee. Borrower shall pay to KBK, concurrently with the
execution hereof, a commitment fee in the amount of one percent (1.0%)
of the A/R Line of Credit Amount, and one percent (1.0%) of the INV
Line of Credit Amount. Borrower hereby authorizes KBK, in KBK's sole
discretion, to collect any such commitment fees (i) by deducting such
fees from the first advance under the subject Credit Facilities, (ii)
by debiting the Debit Account, (iii) by applying that portion of any
up-front deposit delivered to KBK by Borrower which is in excess of
KBK's costs and expenses (including, without limitation, attorneys'
fees), or (iv) by using any combination of the foregoing. This
authorization does not affect Borrower's obligation to pay such sums
to KBK. Borrower and KBK acknowledge and agree that the commitment
fees are reasonable compensation to KBK for making the subject Credit
Facilities available to Borrower and for no other purpose and are
fully earned and non-refundable under any and all circumstances.
(b) Servicing Fee. Borrower agrees to pay KBK a servicing fee on the first
day of each calendar month during the term of the A/R Line of Credit
equal to l/12% of the A/R Line of Credit Amount. Borrower agrees to
pay KBK a servicing fee on the first day of each calendar month during
the term of the INV Line of Credit equal to 1/12% of the INV Line of
Credit Amount. If the first calendar month covers less than a full
month, the
3
<PAGE>
servicing fees shall be prorated for such month. Borrower hereby
authorizes KBK, in KBK's sole discretion, to collect such servicing
fees (i) by deducting such fee from the first advance, if any, under
the subject Credit Facility after such fee is due, (ii) by debiting
the Debit Account, or (iii) by using any combination of the foregoing.
This authorization does not affect Borrower's obligation to pay such
sums to KBK when due. Borrower and KBK acknowledge and agree that such
fees are reasonable compensation to KBK for making the Credit
Facilities available to Borrower and for no other purpose,
7. Representations and Warranties. Borrower hereby represents and warrants,
and upon each request for an advance under the Credit Facilities further
represents and warrants, to KBK as follows:
(a) Existence: Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the state of its
incorporation and is duly licensed, qualified to do business and
is in good standing in all other states in which such licensing,
qualification and good standing are necessary. Borrower has all
requisite power and authority (i) to own and operate its
properties, (ii) to carry on its business as now conducted and as
proposed to be conducted, and (iii) to execute and deliver this
Agreement and the other Loan Documents to which Borrower is a
party.
(b) Binding Obligations. The execution, delivery, and performance of
this Agreement and all of the other Loan Documents by Borrower
have been duly authorized by all necessary action by Borrower,
have been duly executed and delivered by Borrower and constitute
legal, valid and binding obligations of Borrower, enforceable in
accordance with their respective terms, except as limited by
bankruptcy, insolvency or similar laws of general application
relating to the enforcement of creditors' rights and except to
the extent specific remedies may generally be limited by
equitable principles.
(c) No Consent. The execution, delivery and performance of this
Agreement and the other Loan Documents, and the consummation of
the transactions contemplated hereby and thereby, do not (i)
conflict with, result in a violation of, or constitute a default
under (A) any provision of Borrower's articles or certificate of
incorporation or bylaws, (B) any law, governmental regulation,
court decree or order applicable to Borrower, or (C) any other
document or agreement to which Borrower is a party, or (ii)
require the consent, approval or authorization of any third
party.
(d) Financial Condition. Each financial statement of Borrower
supplied to KBK is true, correct and complete in all material
respects and fairly presents Borrower's financial condition in
all material respects as of the date of each such statement.
There has been no material adverse change in such financial
condition or results of operations of Borrower subsequent to the
date of the most recent financial statement supplied to KBK.
(e) Litigation. There are no actions, suits or proceedings, pending
or, to the knowledge of Borrower, threatened against or affecting
Borrower or the properties of Borrower, before any court or
governmental department, commission or board, which, if
determined adversely to Borrower, would have a material adverse
effect on the business, financial condition, properties,
operations or prospects of Borrower.
(f) Taxes, Governmental Charges. Borrower has filed all federal,
state and local tax reports and returns required by any law or
regulation to be filed by it and has either duly paid all taxes,
duties and charges indicated due on the basis of such returns and
reports, or made adequate provision for the payment thereof, and
the assessment of any material amount of additional taxes in
excess of those paid and reported is not reasonably expected.
There is no tax Lien notice against Borrower or its properties
presently on file.
(g) ERISA Compliance. Borrower is in compliance with ERISA concerning
Borrower's ELSA Plan, if any, or is not required to contribute to
any "Multi-employer plan" as defined in Section 401 Of ELSA.
(h) Compliance with Laws. Borrower is conducting its business in
material compliance with all statutes, rules, regulations and/or
ordinances imposed by any governmental unit upon Borrower or upon
its businesses, operations and property (including, without
limitation, all Environmental Laws). Borrower has all permits and
licenses necessary for the operations of its business as
presently conducted and as proposed to be conducted.
(i) Tradenames. Borrower and Guarantors conduct business under no
trade or assumed name except Kim L.L.C. conducts business under
the tradename Bird Promotions.
8. Conditions Precedent to Advances. KBK's obligation to make any advance
under this Agreement and the other Loan Documents shall be subject to the
conditions precedent that, as of the date of such advance and after giving
effect thereto (i) all representations and warranties made to KBK in this
Agreement and the other Loan Documents shall be true and correct, as or and
as if made on such date, (ii) no material adverse change in the financial
condition of Borrower or its business since the effective date of the most
recent financial statements furnished to KBK by Borrower shall have
occurred, (iii) no Event of Default shall have occurred and no event has
occurred and is continuing, or would result from the requested advance,
which with notice or lapse of time, or both, would constitute an Event of
Default (as hereinafter defined), (iv) KBK shall have received all Loan
Documents appropriately executed by Borrower and all other proper parties
and all such Loan Cocuments are in full force and effect, and (v) KBK shall
have received all fees and expenses owing to KBK under this Agreement and
the other Loan Documents.
9. Affirmative Covenants. Until (i) the Notes and all other obligations and
liabilities of Borrower under this Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) KBK has no further commitment to
lend hereunder, Borrower agrees and covenants that it will, unless KBK
shall otherwise consent in writing (which consent may be withheld by KBK in
KBK's sole and absolute discretion):
(a) Accounts and Records. Maintain its books and records in accordance
with GAAP.
(b) Right of Inspection. Permit KBK to visit its properties and
installations and to examine, audit and make and take away copies or
reproductions of Borrower's books and records, at all reasonable
times. Borrower agrees to pay all costs associated with any such
audits, at a rate equal to $500.00 per day, per person, plus
out-of-pocket expenses; provided, however, as long as no Event of
Default has occurred, Borrower's obligation for KBK's audits shall not
exceed $15,000.00 per calendar year.
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(c) Right to Additional Information. Furnish KBK with such additional
information and statements, lists of assets and liabilities, tax
returns, and other reports with respect to Borrower's financial
condition and business operations as KBK may request from time to
time.
(d) Compliance with Laws. Conduct its business in an orderly and efficient
manner consistent with good business practices, and perform and comply
with all statutes, rules, regulations and/or ordinances imposed by any
governmental unit upon Borrower, its businesses, operations and
properties (including without limitation, all Environmental Laws).
(e) Taxes. Pay and discharge when due all assessments, taxes, governmental
charges and levies, of every kind and nature , imposed upon Borrower
or its properties, income or profits, prior to the date on which
penalties would attach, and all lawful claims that, if unpaid, might
become a Lien upon any of Borrower's property, income or profits,
provided, however, Borrower will not be required to pay and discharge
any such assessment, tax, charge, levy or claim so long as (i) same
shall be contested in good faith by appropriate judicial,
administrative or other legal proceedings timely instituted, (ii)
Borrower shall have established adequate reserves with respect to such
contested assessment, tax, charge, levy or claim in accordance with
GAAP, and (iii) the perfection and priority of KBK's security interest
in the Collateral, or the value of the Collateral, is not impaired.
(f) Insurance. Maintain, with Financially sound and reputable insurers,
such insurance as deemed necessary or otherwise required by KBK,
including but not limited to, fire insurance, comprehensive property
damage, public liability, worker's compensation and business
interruption insurance.
(g) Notice of Material Change/Litigation. Borrower shall promptly notify
KBK in writing (i) of any material adverse change in Borrower's
financial condition or its businesses, and (ii) of any litigation or
claims against Borrower which could materially affect Borrower or its
business operations, financial condition or prospects.
(h) Corporate Existence. Maintain its corporate existence and good
standing in the state of its incorporation and its qualification and
good standing in all other states where required by applicable law.
(i) ERISA. Borrower shall promptly notify KBK in writing of the adoption
or amendment of any plan that results in the representations in
Subsection 7(g) no longer being true and correct.
(j) Additional Documentation. Execute and deliver, or cause to be executed
and delivered, any and all other agreements, instruments or documents
which KBK may reasonably request in order to give effect to the
transactions contemplated under this Agreement and the other Loan
Documents.
(k) Remittance Address, Application of Account Proceeds. The invoices
related to all of Borrower's accounts shall set forth the Remittance
Address as its sole address for payment, KBK shall have exclusive and
unrestricted access to the Remittance Address. KBK is irrevocably
authorized and empowered to apply any and all proceeds of collection
of accounts received by KBK (at KBK's option, without obligation to do
so) to the outstanding principal amount of, interest on, and other
amounts owing in connection with the Note evidencing the A/R Line of
Credit, this Agreement and the other Loan Documents (in any order
selected by KBK) within 3 Business Days after KBK receives and
deposits such proceeds. Borrower acknowledges and agrees (a) that all
proceeds of collection of Borrower's accounts by KBK will not be
segregated by KBK and may be commingled with KBK's other funds, and
(b) that KBK shall have no duty (fiduciary or otherwise) with respect
to the proceeds of collection of Borrower's accounts except as
specifically provided for in this Agreement and the other Loan
Documents. If KBK either elects not to apply the proceeds of such
collections to the amounts owing to KBK within such 3 Business Day
period or there are no amounts owing to KBK under or in connection
with the A/R Line of Credit, KBK shall retain possession of such
collections as additional Collateral; provided, however, that if no
Event of Default has occurred, KBK shall release such collections to
Borrower at the written request of Borrower after such 3 Business Day
period has elapsed.
(i) Perpetual Inventory System. USA and BTU must have a tested Perpetual
Inventory System in place covering all of their inventory on or before
January 3 1, 1999.
10. Negative Covenants, Until (i) the Notes and all other obligations and
liabilities of Borrower under this Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) KBK has no further commitment to
lend hereunder, Borrower will not and Will cause Guarantors to not, without
the prior written consent of KBK (which consent may withhold in KBK's sole
and absolute discretion):
(a) Nature of Business. Make any material change in the nature of its
business as carried on as of the date hereof.
(b) Liquidations; Mergers; Consolidations; Acquisitions; Name Change
Liquidate, merge or consolidate with or into any other Person, convert
from one type of legal entity to another type of legal entity, form or
acquire any new subsidiary or acquire by purchase or otherwise all or
substantially all of the assets of any other Person, or change its
name or operate under any new trade or assumed names.
(c) Transactions with Affiliates. Enter into any transaction, including,
without limitation, the purchase, sale or exchange of property or the
rendering of any service, with any Affiliate of any Obligor, except in
the reasonable terms no less favorable to Obligor than would be
obtained in a comparable arm's-length transaction with a person or
entity not an Affiliate of any Obligor and in accordance with the
terms and provisions of the Loan Documents.
(d) Sale of Assets. Sell, lease, transfer or otherwise dispose of all or
substantially all of its assets or properties, other than inventory
sold in the ordinary course of business and as necessary to replace
obsolete equipment.
(e) Liens. Create or incur any Lien on any of its assets, other than (i)
Liens securing indebtedness owing to KBK, (ii) pledges or deposits to
secure the payment of obligations under any worker's compensation laws
or
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similar laws, (iii) deposits to secure the payment of public or
statutory obligations, (iv) mechanic's, carriers', workman's,
repairman's or other Liens arising by operation of law in the ordinary
course of business which secure obligations that are not overdue or
arc being contested in good faith and for which such entity has
established adequate reserves in accordance with generally accepted
accounting principles, (and for which KBK's security interest in the
Collateral is not impaired) and (v) Liens existing as of the date
hereof which have been disclosed to and approved by KBK in writing.
(f) Change in Management. Permit a change in the senior management.
(g) Loans. Make any loans to any person or entity.
11. Financial Covenants. Until (i) the Notes and all other obligations and
liabilities of Borrower under this Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) KBK has no further commitment to
lend hereunder, Obligors, on a consolidated basis, will maintain the
following financial covenants;
(a) Current Ratio. At the end of each fiscal month, a ratio of (i) current
assets (excluding prepaid expenses), to (ii) current liabilities of
not less than 1.5 to 1.0.
(b) Debt/Tangible Net Worth Ratio. At the end of each fiscal month, a
ratio of total liabilities to Tangible Net Worth of less than 2.5 to
1.0.
(c) Tangible Net Worth. At the end of each fiscal month, its Tangible Net
Worth of not loss than $2,500,000.00.
Unless otherwise specified, all accounting and financial terms and
covenants set forth above are to be determined according to GAAP.
12. Reporting Requirements. Until (i) the Notes and all other obligations and
liabilities of Borrower under this Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) KBK has no-further commitment to
lend hereunder, Borrower will and will cause the Guarantors, unless KBK
shall otherwise consent in writing, furnish to KBK:
(a) Financial Statements. The following financial statements: (i) within
120 days after the last day of each fiscal year of Borrower a
consolidated statement of income and a consolidated statement of cash
flows of Obligors for such fiscal year, and a consolidated balance
sheet of Obligors as of the last day of such fiscal year in each case
audited by an independent certified public accounting firm acceptable
to KBK, together with a copy of any report to management delivered to
Borrower by such accountants in connection therewith; and (ii) within
30 days after the last day of each fiscal month of Borrower, an
unaudited consolidated statement of income and statement of cash flows
of Obligors for such fiscal month, and an unaudited consolidated
balance sheet of Obligors as of the last day of such fiscal month.
Borrower represents and warrants that each such statement of income
and statement of cash flows will fairly present, in all material
respects, the results of operations and cash flows of Borrower for the
period set forth therein, and that each such balance sheet will fairly
present, in all material respects, the financial condition of Borrower
as of the date set forth therein, all in accordance with GAAP, (or,
with respect to unaudited financial statements, in the notes thereto
and subject to year-end review adjustments).
(b) Borrowing-Base Report. An A/R Borrowing Base Report, in the form
attached hereto as Schedule A, contemporaneously with each advance
requested under the A/R Line of Credit and within ten (10) Business
Days after the end of each month
(c) A/R Aging. An accounts receivable aging report in form and detail
satisfactory to KBK within ten (10) Business Days after each month.
(d) Inventory Maintenance Certificate. With each advance request under the
INV Line of Credit, with each advance request under the A/R Line of
Credit and within ten (10) Business Days after the end of each month,
(i) Borrower shall provide to KBK an Inventory Maintenace
Certificate, in the form attached hereto as Schedule 3, (ii) until
such time all of the inventory, of BTK is covered by a Tested
Perpetual inventory System, BTK shall provide to KBK an Inventory
Report in the form attached hereto as Schedule C, (iii) after all of
the inventory of BTK is covered by a Tested Perpetual Inventory
System, BTK shall provide to KBK an Inventory Report in the form
attached hereto as Schedule D, and (iv) after all of the inventory of
USA is covered by a Tested Perpetual Inventory System, USA shall
provide to KBK an Inventory Report in the form, attached hereto as
Schedule E.
(c) Inventory Listing. A list of inventory for USA and BTK by location and
type (to include the following: raw materials, work in Process and
finished goods) within ten (10) Business Days after the end of each
month, in form and detail satisfactory to KBK.
13. Events of Default Each of the following shall constitute an "Event of
Default" under this Agreement and the other Loan Documents:
(a) Failure to Pay Indebtednes. Borrower shall fail to pay as and when due
any part of the principal of, or interest on, the Notes or any other
indebtedness or Obligations now or hereafter owing to KBK by Borrower,
(b) Non-performance of Covenants. Any of the Obligors shall breach any
covenant or agreement made herein, any of tile other Loan Documents or
in any other agreement now or hereafter entered into between any of
the Obligors and KBK.
(c) False Representation. Any warranty or representationmade herein, or in
any of the other Loan Documents shall be false or misleading in any
material respect when made.
(d) Default Under Other Loan Documents. The occurrence of an event of
default under any of the other Loan Documents or any other agreement
now or hereafter entered into between any of the Obligors and KBK.
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(c) Untrue Financial Report. Any report certificate, schedule, financial
statement, profit and loss statement or other statement furbished by
any Obligor, or by any other person on behalf of any Obligor, to KBK
is not true and correct in any material respect.
(f) Default to Third Party. The occurrence of any event which permits the
acceleration of the maturity of any indebtedness owing by any of the
Obligors to any third party under any agreement or undertaking.
(g) Bankruptcy. The filing of a voluntary or involuntary case by or
against any, of the Obligors under the United States Bankrupcy Code or
other present or future federal or state insolvency, bankruptcy or
similar laws, or the appointment of a receiver, trustee, conservator
or custodian for a substantial portion of the assets of any of the
Obligors.
(h) Insolvency. Any of the Obligors shall become insolvent make a transfer
in fraud of creditors or make an assignment for the benefit of
creditors.
(i) Involuntary Lien. The filing or commencement of any involuntary Lien,
garnishment, attachment or the like shall be issued against or with
respect to the Collateral.
(j) Material Adverse Change. A material adverse change shall have occurred
in the financial condition, business prospects or operations of any of
the Obligors.
(k) Tax Lien. Any of the Obligors shall have a federal or state tax Lien
filed against any of its properties.
(l) Execution on Collateral. The Collateral or any portion thereof is
taken on execution or other process of law.
(m) ERISA Plan. Either (i) any "accumulated funding deficiency" (as
defined in Section 412(a) of the Internal Revenue Code of 1986, as
amended) in excess of $25,000 exists with respect to any ERISA Plan of
Borrower or its ERISA Affiliate, or (ii) any Termination Event occurs
with respect to any ERISA Plan of Borrower or its ERISA Affiliate and
the then current value of such ERISA Plan's benefit liabilities
exceeds the then current value of such ERISA Plan's assets available
for the payment of such benefit liabilities by more than $25.000.
(n) Guarantor's Obligations. If any of the obligations of any Guarantor is
limited or terminated by operation of law or by such Guarantor, or any
such Guarantor becomes the subject of an insolvency proceeding.
(o) Judgment. The entry against any of the Obligors of a final and
nonappicalable judgment for the payment of money in excess of $25,000
(not covered by insurance satisfactory to KBK in KBK's sole:
discretion).
Nothing contained in this Loan Agreement shall be construed to limit the
events of default enumerated in any of the other Loan Documents and all
such events of default shall be cumulative.
14. Remedies. Upon the occurrence of any one or more of the foregoing Events of
Default, (a) the entire unpaid balance of principal of the Notes, together
with all accrued but unpaid interest thereon, and all other indebtedness
owing to KBK by Borrower at such time shall, at the option of KBK, become
immediately due and payable without further notice, demand, presentation,
notice of dishonor, notice of intent to accelerate, notice of acceleration,
protest or notice of protest of any kind, all of which are expressly waived
by Borrower, and (b) KBK may, at its option, cease further advances under
the Credit Facilities or under any of the Loan Documents, Provided however,
concurrently and automatically with the occurrence of an Event of Default
under Suhsections (g) or (h) in the Section entitled "Event of Default" (i)
further advances under the Credit Facilities and under lite Loan Documents
shall cease, and (ii) the Notes and all other indebtedness owing to KBK by
Borrower at such time shall, without any action by KBK, become immediately
due and payable, without further notice, demand, presentation, notice of
dishonor, notice of acceleration, notice of intent to accelerate, protest
or notice of protest of any kind, all of which are expressly waived by
Borrower. All rights and remedies of KBK set forth in this Agreement and in
any of the other Loan Documents are cumulative and may also be exercised by
KBK, at its option and in its sole discretion, upon the occurrence of an
Event of Default.
15. Indemnification. Borrower hereby indemnifies and agrees to hold harmless
and defend all Indemnified Persons from and against any and all Indemnified
Claims. THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH
INDEMNIFIED CLAIMS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN
PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN
WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY INDEMNIFIED
PERSON, but shall exclude any of the foregoing resulting from such
Indemnified Person's gross negligence or willful misconduct. If Borrower or
any third party ever alleges any gross negligence or willful misconduct by
any Indemnified Person, the indemnification provided for in this Section
shall nonetheless be paid upon demand, subject to later adjustment or
reimbursement, until such time as a court of competent jurisdiction enters
a final judgment as to the extent and affect of the alleged gross
negligence or willful misconduct. Upon notification and demand, Borrower
agrees to provide defense of any Indemnified Claim and to pay all costs and
expenses of Counsel selected by any Indemnified Person in respect thereof.
Any Indemnified Person against whom any Indemnified Claim may be asserted
reserves the right to settle or compromise any such Indemnified Claim as
such Indemnified Person may determine in its sole discretion, and the
obligations of such Indemnified Person, if any, pursuant to any such
settlement or compromise shall be deemed included within the Indemnified
Claims. Except as specifically provided in this Section, Borrower waives
all notices from any Indemnified Person. The Provisions of this Section
shall Survive the termination of this Agreement.
16. Rights Cumulative. All rights of KBK under the terms of this Agreement
shall be cumulative of, and in addition to, rights of KBK under any and all
other agreements between Borrower and KBK (including, but not limited to,
the other Loan Documents), and not in substitution or diminution of any
rights now or hereafter held by KBK under the terms of any other agreement.
17. Waiver and Agreement. Neither the failure nor any delay on the part of KBK
to exercise any right, power or privilege herein or under any of the other
Loan Documents shall operate as a waiver thereof, nor shall any single or
partial exercise of such right, power or privilege preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege. No waiver of any provision in this Loan Agreement or in any of
the other Loan Documents and no departure by Borrower therefrom shall be
effective unless the same shall be in writing and signed
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by KBK, and then shall be effective only in the specific instance and for
the purpose for which given and to the extent specified in such writing. No
modification or amendment to this Loan Agreement or to any of the other
Loan Documents shall be valid or effective unless the same is signed by the
party against whom it is sought to be enforced.
18. Benefits. This Agreement shall be binding upon and inure to the benefit of
KBK and Borrower, and their respective successors and assigns; provided,
however, that Borrower may not, without the prior written consent of KBK,
assign any rights powers, duties or obligations under this Agreement or any
of the other Loan Documents.
19. Notices. All notices, requests, demands or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and
given by (i) personal delivery, (ii) expedited delivery service with proof
of delivery, (iii) United States mail, postage prepaid, registered or
certified mail, return receipt requested, or (iv) telecopy (with receipt
thereof confirmed by telecopier) sent to the intended addressee at the
address set forth on the signature page hereof and shall be deemed to have
been received either, in the case of personal delivery, as of the time of
personal delivery, in the case of expedited delivery service, as of the
date of first attempted delivery at the address and in the manner provided
herein, in the case of mail, upon deposit in a depository receptacle under
the care and custody of the United States Postal Service, or in the case of
telecopy, upon receipt. Either party shall have the right to change its
address for notice hereunder to any other location within the continental
United States by notice to the other party of such new address at least
thirty (30) days prior to the effective date of such new address.
20. Governing Law; Venue; Submission to Jurisdiction. THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF LOUISIANA WITHOUT GIVING EFFECT TO THE PRINCIPLES
OF CONFLICTS OF LAWS THEREOF, EXCEPT TO THE EXTENT PERFECTION AND THE
EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST GRANTED
HEREUNDER OR THEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE
GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF LOUISIANA.
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS ARE PERFORMABLE BY THE PARTIES
IN ORLEANS PARISH, LOUISIANA. BORROWER AND KBK EACH AGREE THAT ORLEANS
PARISH, LOUISIANA, SHALL BE THE EXCLUSIVE VENUE FOR LITIGATION OF ANY
DISPUTE OR CLAIM ARISING UNDER OR RELATING TO THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS, AND THAT SUCH PARISH IS A CONVENIENT FORUM IN WHICH To
DECIDE ANY SUCH DISPUTE OR CLAIM. BORROWER AND KBK EACH CONSENT TO THE
PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN ORLEANS
PARISH, LOUISIANA FOR THE LITIGATION OF ANY SUCH DISPUTE OR CLAIM. BORROWER
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION
WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH
PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
21. Waiver of Jury Trial. BORROWER AND KBK EACH HEREBY IRREVOCABLY WAIVES, TO
THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME
ARISING OUT OF UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH.
22. Invalid Provisions. If any provision of this Agreement or any of the other
Loan Documents is held to be illegal, invalid or unenforceable under
present or future laws, such provision shall be fully severable and the
remaining provisions of this Agreement or any of the other Loan Documents
shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance.
23. Expenses. Borrower shall pay all costs and expenses (including, without
limitation, reasonable attorneys' fees) in connection with (i) the
preparation of the Loan Documents, (ii) any action required in the course
of administration of the indebtedness and obligations evidenced by the Loan
Documents, and (iii) any action in the enforcement of KBK's rights upon the
occurrence of Event of Default.
24. Participation of the Credit Facilities. Borrower agrees that KBK may, at
its option, sell interests in any of the Credit Facilities and its rights
under (his Agreement and the other Loan Documents and, in connection with
each such sale, KBK may disclose any, financial and other information
available to KBK concerning Borrower to each prospective purchaser and
assignee.
25. Conflicts. In the event any term or provision hereof is inconsistent with
or conflicts with any provision of the other Loan Documents, the terms and
provisions contained in this Agreement shall be controlling.
26. Counterparts. This Agreement may be separately executed in any number of
counterparts, each of which shall be an original, but all of which, taken
together, shall be deemed to constitute one and the same instrument.
Delivery of an executed counterpart of this Agreement by telecopy shall be
equally as effective as delivery of a manually executed counterpart of this
Agreement. Any Party delivering an executed counterpart of this Agreement
by telecopy also shall deliver a manually executed counterpart of this
Agreement but the failure to deliver a manually executed counterpart shall
not affect the validity, enforceability, and binding effect of this
Agreement.
27. ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO
THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE
TRANSACTIONS CONTEMPLATED HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS AGREEMENT ALSO
AMENDS AND SUPERSEDES ANY OF THE TERMS OF ANY PRIOR WRITTEN AGREEMENTS WITH
RESPECT TO THE MATTERS SET FORTH IN THIS AGREEMENT.
EXECUTED as of the date first above written.
BORROWER: KBK FINANCIAL, INC.
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KARTS INTERNATIONAL INCORPORATED By: ______________________________
By: /s/ Robert M. Aubrey Name: Jeff Kassing
-----------------------------
Robert M. Aubrey
Title: C.E.O Title: Vice President & General Counsel
Borrower's Address: KBK's Address:
P.O. Box 695 201 St. Charles Avenue
62204 Commercial Street Suite 4208
Roseland, Louisiana New Orleans, Louisiana 70170
70456 Attn: Legal Department
telecopy No. (504) 747-2700 Telecopy No. (504) 569-8114
9
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered
into by and between KARTS INTERNATIONAL INCORPORATED, a Nevada corporation
("Borrower"), USA Industries, Inc., Kint, L.L.C. and Brister's Thunder Karts,
Inc. (collectively the "Guarantors") and KBK FINANCIAL, INC. ("KBK").
WHEREAS, Borrower and KBK entered into that certain Loan Agreement
dated as of September 28, 1998, as amended from time to time (collectively, the
"Loan Agreement"); and
WHEREAS, the Loan Agreement currently governs (i) a revolving accounts
receivable line of credit in the maximum amount of $1,000,000.00 provided by KBK
to Borrower, as currently evidenced by that certain Revolving Credit Promissory
Note (Accounts Receivable) dated September 28, 1998 payable by Borrower to the
order of KBK in the stated principal amount of $1,000,000.00 (the "A/R Note");
and (ii) a revolving inventory line of credit in the maximum amount of
$1,000,000.00 provided by KBK to Borrower, as currently evidenced by that
certain Revolving Credit Promissory Note (Inventory) dated September 28, 1998
payable by Borrower to the order of KBK in the stated principal amount of
$1,000,000.00 (the "INV Note"); and
WHEREAS, the Loan Agreement, the A/R Note, the INV Note and all other
documents evidencing, securing, governing, guaranteeing and/or pertaining to the
A/R Note and the INV Note are hereinafter referred to collectively as the "Loan
Documents"; and
WHEREAS, the parties hereto now desire to modify the Loan Agreement as
hereinafter provided;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties, and agreements contained herein, and for other
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.01 The terms used in this Amendment to the extent not otherwise
defined herein shall have the same meanings as in the Loan Agreement.
ARTICLE 11
Amendments
Section 2.01 Effective as of the date hereof, the following definitions as
defined in Section 1 of the Loan Agreement are hereby amended in their entirety
to read as follows:
" 'A/R/ Borrowing Base' shall mean an amount equal to 70% of Eligible
Accounts
"Guarantors" means USA, BTK, Kint and Straight Line (whether one or
more).
"INV Borrowing Base" means an amount equal to 50% of all Eligible
Inventory (subject to the provisions of the Inventory Maintenance
Certificate and Inventory Reports attached hereto).
"Straight Line" means Straight Line Manufacturing, Inc."
Section 2.02 Effective as of the date hereof, the term "Obligors", as used in
the definition of "Eligible Accounts" set forth in Section 1 of the Loan
Agreement, shall not include Straight Line.
Section 2.03 Effective as of the date hereof, the 30 day Clean Up Period
required in Subsection 2(b) of the Loan Agreement is hereby deleted.
Subsection 2.04 Effective as of the date hereof, Subsection 3(b) of the Loan
Agreement is hereby amended in its entirety to read as follows:
"(b) Rate and Payments. The principal of and interest on the Notes
shall be due and payable and may be prepaid in accordance with the
terms and conditions set forth in the Notes and in this Agreement.
Interest on the Notes shall accrue at the rate set forth therein;
provided, however, in the event Borrower raises a minimum of
$1,500,000.00 of new equity between March 1, 1999 and May 6, 1999,
the Contract Rate (as defined in the Notes) shall be reduced to the
Base Rate, plus three percent (3%)."
Section 2.05 Effective as of the date hereof, the first two sentences of
Subsection 6(b) of the Loan Agreement are hereby amended in their entirety to
read as follows:
"Borrower agrees to pay KBK a servicing fee on the first day of each
calendar month during the term of the A/R Line of Credit equal to
1/6% of the A/R Line of Credit Amount. Borrower agrees to pay KBK a
servicing fee on the first day of each calendar month during the term
of the INV Line of Credit equal to 1/6% of the INV Line of Credit
Amount."
Section 2.06 Effective as of the date hereof, Subsection 9(b) of the Loan
Agreement is hereby amended in its entirety to read as follows:
"(b) Right of Inspection. Permit KBK to visit its properties and
installations and to examine, audit and make and take away copies or
reproductions of Borrower's books and records, at all reasonable
times. Borrower agrees to pay all costs associated with any such
audits, at a rate equal to $500.00 per day, per person, plus
out-of-pocket expenses."
Section 2.07 effective as of the date hereof, Subsection 9(1) of the Loan
Agreement is hereby amended in its entirety to read as follows:
1
<PAGE>
"(1) Perpetual Inventory System. USA must have a tested Perpetual
Inventory System in place covering all of their inventory on or
before June 30, 1999."
Section 2.08 Effective as of the date hereof, Subsection 12(d) of the Loan
Agreement is hereby amended to require the Inventory Maintenance Certificate and
Inventory Reports required therein to be delivered to KBK within three (3)
Business Days after each week.
Section 2.09 Effective as of the date hereof, Subsection 12(e) of the Loan
Agreement is hereby amended in its entirety to follows:
"(e) Inventory Listing. A list of inventory for USA and BTK by
location and type (to include the following: raw materials, work in
process and finished goods) within three (3) Business Days after the
end of each week, in form and detail satisfactory to KBK; provided,
however, until USA has a tested Perpetual Inventory Systems in place
covering all of USA's inventory, USA is required to deliver its
inventory listing within three (3) Business Days after each month."
Section 2. 10 Effective as of the date hereof, Schedule A to the Loan Agreement
is hereby amended in its entirety to read as on Schedule A attached hereto.
Section 2.11 Effective as of the date hereof, Schedule D to the Loan Agreement
is hereby amended in its entirety to read as on Schedule D attached hereto.
Section 2.12 Effective as of the date hereof, Schedule E to the Loan Agreement
is hereby amended in its entirety to read, as on Schedule E attached hereto.
ARTICLE III
Note
Section 3.01 Contemporaneously with the execution hereof, Borrower agrees to
execute and deliver to KBK a promissory note (the "Modified A/R Note") in the
stated principal amount of $1,000,000.00, in form and substance satisfactory to
KBK, in amendment and modification of the A/R Note. All Collateral currently
securing the A/R Note will continue to secure the Modified A/R Note.
Contemporaneously with the execution hereof, Borrower agrees to execute and
deliver to KBK a promissory note (the "Modified INV Note") in the stated
principal amount of $1,000,000.00, in form and substance satisfactory to KBK, in
amendment and modification of the INV Note. All Collateral currently securing
the INV Note will continue to secure the Modified INV Note.
ARTICLE IV
Representations, Warranties, Ratification and Reaffirmation
Section 4.01 Borrower hereby represents and warrants that: (i) the
representations and warranties contained in the Loan Agreement are true and
correct on and as of the date hereof as though made on and as of the date
hereof, (ii) no event has occurred and is continuing that constitutes an Event
of Default or would constitute an Event of Default but for the requirement of
notice or lapse of time or both, and (iii) there are no claims or offsets
against, or defenses or counterclaims to, the Loan Documents, the indebtedness
evidenced thereby or the liens securing same (including without limitation, any
defenses or offsets resulting from or arising out of breach of contract or duty,
the amount of interest charged, collected or received on the Loan Documents
heretofore, or breach of any commitments or promises of any type).
Section 4.02 The terms and provisions set forth in this Amendment shall modify
and supersede all inconsistent terms and provisions set forth in the Loan
Agreement, but except as expressly modified and superseded by this Amendment,
the terms and provisions of the Loan Agreement are ratified and confirmed and
shall continue in full force and effect, Borrower hereby agreeing that the Loan
Agreement and the other Loan Documents are and shall continue to be outstanding,
validly existing and enforceable in accordance with their respective terms.
Section 4.03 Guarantors previously executed those three certain guaranty
agreements (collectively the "Guaranty Agreements") each dated September 28,
1998, for the benefit of KBK to unconditionally guarantee the payment and
performance by Borrower of certain indebtedness owing to KBK described therein,
including without limitation, the indebtedness evidenced by the A/R Note and the
INV Note. Guarantors, by executing this Amendment, hereby consent to this
Amendment and agree that, notwithstanding the execution of this Amendment, the
Modified A/R Note and the Modified INV Note, the Guaranty Agreements remain in
full force and effect and the obligations thereunder remain valid and binding
against Guarantors with respect to the A/R Note and the INV Note, as amended and
modified by the Modified A/R Note, the Modified INV Note and all other
indebtedness guaranteed thereunder. Guarantors acknowledge and agree that there
are no claims or offsets against, or defenses or counterclaims to, the terms and
provisions of the Guaranty Agreements or the obligations created or evidenced
thereby.
ARTICLE V
Miscellaneous
Section 5.01 Each of the Loan Documents is hereby amended so that any reference
in the Loan Documents to the Loan Agreement shall mean a reference to the Loan
Agreement as amended hereby.
Section 5.02 This Amendment may be executed simultaneously in one or more
counterparts, each of shall be deemed an original, but all of which together
shall constitute one and the same instrument. Delivery of an executed
counterpart of this Amendment by telecopy shall be equally as effective as
delivery of a manually executed counterpart of this Amendment. Any party
delivering an executed counterpart of this Amendment by telecopy also shall
deliver a manually executed counterpart of this Amendment but the failure to
deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Amendment.
Section 5.03 The agreeemnt and this Amendment have been entered into in Orleans
Parish, Louisiana and shall be performable for all purposes in Orleans Parish,
Louisiana. THE AGREEEMNT, AS AMENDED HEREBY, SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA. Courts within the State
of
2
<PAGE>
Louisiana shall have jurisdiction over any and all disputes arising under or
pertaining to the Agreement, as amended hereby, and venue in any such dispute
shall be the courts located in Orleans Parish, Louisiana.
Section 5.04 This Amendment shall not become effective until executed by KBK.
EXECUTED as of March 8, 1999.
BORROWER:
KARTS INTERNATIONAL INCORPORATED
By: /s/ Charles Brister
----------------------
Name: Charles Brister
Title: President & C.E.O.
GUARANTORS:
USA INDUSTRIES, INC.
By: /s/ Charles Brister
----------------------
Name: Charles Brister
Title: President & C.E.O.
BRISTER'S THUNDER KARTS, INC.
By: /s/ Charles Brister
----------------------
Name: Charles Brister
Title: President & C.E.O.
KINT, L.L.C.
By: /s/ Charles Brister
----------------------
Name: Charles Brister
Title: President & C.E.O.
KBK:
KBK FINANCIAL, INC.
By:
Name: Jeff Kassing
Title: Senior Vice President &
General Counsel
3
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
TO LOAN AGREEMENT
Dated September 28, 1998
BY AND BETWEEN
KBK FINANCIAL, INC.
AND
KARTS INTERNATIONAL INCORPORATED
ACCOUNTS RECEIVABLE BORROWING BASE REPORT
<S> <C> <C>
Borrower Date
KARTS INTERNATIONAL INCORPORATED
Activity Amount
1. Gross Accounts as of last report
2. Add: Gross Sales since last report (Per attached Sales Journal) (+)
3. Deduct: Collections since last report (Per attached Collection Journal) (-)
4. Debit Memos (-)
5. Dilutive Credit Memos (-)
6. Credit Adjustments (-)
7. Gross Accounts as of this report (=)
8. Deduct: Ineligible Accounts (Per Attached) (-)
9. Eligible Accounts as of this report (=)
10. Lesser of (i) A/R Borrowing Base (line 9 x 70%), or (ii) $1,000,000.00
11. Beginning Principal Balance (Ending Principal Balance as of last report)
12. Deduct: Collections since last report (same as line 3) (-)
13. Principal Balance before any advance under this report (=)
14. Availability (line 10 less line 13)
15. Deduct Advance: Advance Requested (-)
16. Advance for Fees, Interest and Expenses (-)
17. Remaining Availability (=)
18. Ending Principal Balance (sum of lines 13, 15 and 16)
</TABLE>
The undersigned, as an authorized officer of Karts International Incorporated
("Borrower"), USA Industries, Inc., Brister's Thunder Karts, Inc., KINT, L.L.C.,
and Straight Line Manufacturing, Inc. (collectively, the "Guarantors") presents
this Report to K.BK Financial, Inc. ("KBK") in accordance with the terms of that
certain Loan Agreement dated September 28, 1998 between Borrower and KBK (the
"Loan Agreement") and represents and warrants to KBK that, with respect to the
Eligible Accounts (as such term is defined in the Loan Agreement) identified on
this Report such accounts (i) arise from the bona fide sales of products or
billings for services of an Obligor (as defined in the Loan Agreement) and are
obligations of an Obligor's customers, payable at full value, (ii) all goods and
materials have been received by each of such customers or all services completed
to each of customer's satisfaction, (iii) the goods or services meet the
requirements of such customers (as to quality, quantity, delivery timeliness,
etc.), (iv) are not subject to any known offsets, disputes or counterclaims,
except as disclosed to KBK in writing, (v) are not with respect to which goods
are placed on consignment or other terms by reason of which payment by the
account debtor may be conditioned, and (vi) remain unpaid as of the date hereof.
Borrower also represents and warrants to KBK that no Event of Default has
occurred under the Loan Agreement or any other Loan Documents (as such term is
defined in the Loan Agreement) and all representations and warranties contained
in the Loan Agreement and all other Loan Documents are true and correct as of
the date hereof.
BORROWER:
KARTS INTERNATIONAL INCORPORATED
By: ______________________________
Name: Charles Brister
Title: President & C.E.O.
GUARANTORS:
USA INDUSTRIES, INC. BRISTER'S THUNDER KARTS, INC.
By: By:
Name: Name:
Title: Title:
KINT, L.L.C.
By: Name:
Title:
4
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE D
TO LOAN AGREEMENT
Dated September 28,1998
BY AND BETWEEN
KBK FINANCIAL, INC.
AND
KART INTERNATIONAL INCORPORATED
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INVENTORY REPORT
OF BRISTER'S THUNDER KARTS, INC.
Financial Statement
Report#_________________ Date:
1. INVENTORY
a. Raw Materials
b. Work in Process
C. Finished Goods
- ------------------------------------------------------------------------------------------
2. TOTAL GROSS INVENTORY Per This Certificate (Sum of all lines in Section 1 above)
- -------------------------------------------------------------------------------------------
3. INELIGIBLE INVENTORY
- ------------------------------------------------------------------------------------------
a. Raw Materials
b. Work In Process
C. Finished Goods
- ------------------------------------------------------------------------------------------
4. TOTAL ELIGIBLE RAW MATERIAL INVENTORY Per This Certificate (Line la less Line 3a)
- ------------------------------------------------------------------------------------------
5. ADVANCE RATE FOR ELIGIBLE RAW MATERIALS INVENTORY 50%
- ------------------------------------------------------------------------------------------------------
6. AVAILABILITY PER RAW MATERIALS INVENTORY (Line 4 multiplied by Line 5)
- ------------------------------------------------------------------------------------------------------
7. TOTAL ELIGIBLE FINISHED GOODS INVENTORY (Line 1c less Line 3c)
- ------------------------------------------------------------------------------------------------------
8. ADVANCE RATE FOR ELIGIBLE FINISHED GOODS INVENTORY 50%
- ------------------------------------------------------------------------------------------------------
9. AVAILABILITY PER FINISHED GOODS INVENTORY (Line 7 multiplied by Line 8)
- ------------------------------------------------------------------------------------------------------
10. TOTAL AVAILABILITY (Sum of Lines 6 and 9)
- ------------------------------------------------------------------------------------------------------
</TABLE>
The undersigned, _______________________ does hereby certify that he/she has
made a thorough inquiry into all matters certified herein and based upon such
inquiry does hereby certify to KBK Financial, Inc. ("KBK") as follows:
1. He/She is duly elected, qualified and acting ________________ of
______________. of
2. This Certificate is being submitted to KBK pursuant to that certain
Loan Agreement dated September 28, 1998 between Karts International
Incorporated and KBK (as from time to time as supplemented or amended,
the "Loan Agreement"). Terms used or not otherwise defined herein
shall have the meanings assigned to them in the Loan Agreement.
3. All information contained in this Certificate is true, correct and
completed.
IN WITNESS HEREOF, this instrument is executed by the undersigned as
of 19______.
BRISTER'S THUNDER KARTS, INC.
By:
Name:
Title:
5
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE E
TO LOAN AGREEMENT
Dated September 28,1998
BY AND BETWEEN
KBK FINANCIAL, INC.
AND
KART INTERNATIONAL INCORPORATED
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INVENTORY REPORT
OF BRISTER'S THUNDER KARTS, INC.
Financial Statement
Report#_________________ Date:
1. INVENTORY
a. Raw Materials
b. Work in Process
C. Finished Goods
- ------------------------------------------------------------------------------------------
2. TOTAL GROSS INVENTORY Per This Certificate (Sum of all lines in Section 1 above)
- -------------------------------------------------------------------------------------------
3. INELIGIBLE INVENTORY
- ------------------------------------------------------------------------------------------
a. Raw Materials
b. Work In Process
C. Finished Goods
- ------------------------------------------------------------------------------------------
4. TOTAL ELIGIBLE RAW MATERIAL INVENTORY Per This Certificate (Line la less Line 3a)
- ------------------------------------------------------------------------------------------
5. ADVANCE RATE FOR ELIGIBLE RAW MATERIALS INVENTORY 50%
- ------------------------------------------------------------------------------------------------------
6. AVAILABILITY PER RAW MATERIALS INVENTORY (Line 4 multiplied by Line 5)
- ------------------------------------------------------------------------------------------------------
7. TOTAL ELIGIBLE FINISHED GOODS INVENTORY (Line 1c less Line 3c)
- ------------------------------------------------------------------------------------------------------
8. ADVANCE RATE FOR ELIGIBLE FINISHED GOODS INVENTORY 50%
- ------------------------------------------------------------------------------------------------------
9. AVAILABILITY PER FINISHED GOODS INVENTORY (Line 7 multiplied by Line 8)
- ------------------------------------------------------------------------------------------------------
10. TOTAL AVAILABILITY (Sum of Lines 6 and 9)
- ------------------------------------------------------------------------------------------------------
</TABLE>
The undersigned, _______________________ does hereby certify that he/she has
made a thorough inquiry into all matters certified herein and based upon such
inquiry does hereby certify to KBK Financial, Inc. ("KBK") as follows:
1. He/She is duly elected, qualified and acting ________________ of
______________. of
2. This Certificate is being submitted to KBK pursuant to that certain
Loan Agreement dated September 28, 1998 between Karts International
Incorporated and KBK (as from time to time as supplemented or amended,
the "Loan Agreement"). Terms used or not otherwise defined herein
shall have the meanings assigned to them in the Loan Agreement.
3. All information contained in this Certificate is true, correct and
completed.
IN WITNESS HEREOF, this instrument is executed by the undersigned as
of 19______.
BRISTER'S THUNDER KARTS, INC.
By:
Name:
Title:
6
REVOLVING CREDIT PROMISSORY NOTE
(Inventory)
$1,000,000.00 March 8, 1999
FOR VALUE RECEIVED, on or before February 28, 2000 ("Maturity Date"), the
undersigned and if more than one, each of them, jointly and severally
(hereinafter referred to as "Borrower"), promises to pay to the order of KBK
FINANCIAL, INC. ("KBK") at its offices in Orleans Parish, Louisiana at 201 St.
Charles Avenue, Suite 4208, New Orleans, Louisiana 70170, the principal amount
of ONE MILLION AND 00/100 DOLLARS ($1,000,000.00) ("Total Principal Amount"), or
such amount less than the Total Principal Amount which is outstanding from time
to time if the total amount outstanding under this Revolving Credit Promissory
Note ("Note") is less than the Total Principal Amount, together with interest at
the rate set forth below on such portion of the Total Principal Amount which has
been advanced to Borrower from the date advanced until paid.
Interest Rate. The unpaid principal amount of this Note shall bear interest at a
fluctuating rate per annum which shall from day to day be equal to a rate
("Contract Rate"), calculated on the basis of the actual days elapsed but
computed as if each year consisted of 360 days, equal to the sum of (a) the Base
Rate of interest ("Base Rate") as established from time to time by KBK (which
may not be the lowest, best or most favorable rate of interest which KBK may
charge on loans to its customers) plus (b) seven and no hundredths percent
(7.00%), each change in the rate to be charged on this Note to become effective
without notice to Borrower on the effective date of each change in the Base
Rate; provided, however, in no event shall the Contract Rate be less than seven
percent (7.00%) per annum; provided, further that the Contract Rate shall not
exceed the maximum rate allowed by applicable law.
Repayment Terms. The principal of and all accrued but unpaid interest on this
Note shall be due and payable as follows:
(a) interest shall be due and payable monthly as it accrues,
commencing on the 15th day of March, 1999 and continuing on the
15th day of each successive month thereafter during the term of
this Note; and
(b) the outstanding principal balance of this Note, together with
all accrued but unpaid interest, shall be due and payable on
the Maturity Date.
Borrower authorizes KBK to effect all payments due under this Note and to
collect all sums due hereunder (whether by acceleration or otherwise) by
debiting Borrower's account number [# omitted] at DEPOSIT GUARANTY NATIONAL BANK
(the "Debit Account") through the Automated Clearing House system ("ACH"). Such
authorization shall not affect the obligations of Borrower to make all payments
when due hereunder. If on any payment date there are insufficient funds in the
Debit Account to make such payments in full, Borrower agrees to pay KBK on
demand a $100.00 manual processing fee. All payments of principal or interest on
this Note shall be made in lawful money of the United States of America in
immediately available funds, and, if such payments are not made via ACH, shall
be made at KBK's address indicated above, or such other place as the holder of
this Note shall designate in writing to Borrower. If any payment of principal of
or interest on this Note shall become due on a day which is not a Business Day
(as hereinafter defined), such payment shall be made on the next succeeding
Business Day and any such extension of time shall be included in computing
interest in connection with such payment. As used herein, the term "Business
Day" shall mean any day other than a Saturday, Sunday or any other day on which
KBK's office in New Orleans, Louisiana is closed. All regularly scheduled
payments of the indebtedness evidenced by this Note shall be applied first to
any accrued but unpaid interest then due and payable hereunder and then to the
principal amount then due and payable. The books and records of KBK shall be
prima facie evidence of all outstanding principal of and accrued and unpaid
interest on this Note. To the extent that any interest is not paid on or before
the fifth day after it becomes due and payable, KBK may, at its option, add such
accrued interest to the principal of this Note. Notwithstanding anything herein
to the contrary, upon an Event of Default (as hereinafter defined) or at
maturity, whether by acceleration or otherwise, all principal of this Note
shall, at the option of KBK, bear interest at a fixed rate equal to 18% per
annum until paid.
Prepayment Penalty. Borrower may from time to time prepay all or any portion of
the outstanding principal balance of this Note without premium or penalty;
provided, however, if (a) the outstanding principal balance hereof is prepaid in
full, and (b) Borrower notifies KBK of Borrower's intention to terminate
financing under this Note prior to the Maturity Date, then, in addition to such
principal prepayment, there shall be due and owing by Borrower at such time a
prepayment penalty equal to 2.00% of the Total Principal Amount.
Loan Documents. This Note is subject to the terms and conditions set forth in
that certain Loan Agreement dated September 28, 1998 by and between Borrower and
KBK, as may be amended from time to time (the "Loan Agreement). This Note, the
Loan Agreement and all other documents evidencing, securing, governing,
guaranteeing and/or pertaining to this Note are hereinafter collectively
referred to as the "Loan Documents". The holder of this Note is entitled to the
benefits and security provided in the Loan Documents.
Advances. Subject to the terms of the Loan Agreement, Borrower may request
advances and make payments hereunder from time to time, provided that it is
understood and agreed that the aggregate principal amount outstanding from time
to time hereunder shall not at any time exceed the Total Principal Amount. The
unpaid balance of this Note shall increase and decrease with each new advance or
payment hereunder, as the case may be. This Note shall not be deemed terminated
or canceled prior to the Maturity Date, although the entire principal balance
hereof may from time to time be paid in full. Subject to the terms of this Note
and the other Loan Documents, Borrower may borrow, repay and reborrow hereunder.
Purpose. Borrower agrees that no advances under this Note shall be used for
personal, family or household purposes, and that all advances hereunder shall be
used solely for business, commercial, investment or other similar purposes.
Borrower agrees that this Note and the indebtedness thereby shall be subject to
Louisiana R.S. 9:3509, et seq.
Event of Default. Borrower agrees that upon the occurrence of any one or more of
the following events of default ("Event of Default"):
(a) failure of Borrower to pay when due any installment of principal
of or interest on this Note or on any other indebtedness now or
hereafter owing by Borrower to KBK; or
(b) the occurrence of any event of default specified in any of the
other Loan Documents or
(c) the bankruptcy or insolvency of, the assignment for the benefit
of creditors by, or the appointment of a receiver for any of the
property of, or the liquidation, termination, dissolution or
death or legal incapacity of Borrower;
the holder of this Note may, at its option, without further notice or demand,
(i) declare the outstanding principal balance of and accrued but unpaid interest
on this Note at once due and payable, (ii) refuse to advance any additional
amounts under the Note, (iii) foreclose all liens securing payment hereof, (iv)
pursue any and all other rights, remedies and recourses available to the holder
hereof, including but not limited to any such rights, remedies or recourses
under the other Loan Documents, at law or in equity, or (v) pursue any
combination of the foregoing. The failure to exercise the option to accelerate
the maturity of this Note or any other right remedy or recourse available
<PAGE>
to the holder hereof upon the occurrence of an Event of Default hereunder shall
not constitute a waiver of the right of the holder of this Note to exercise the
same at that time or at any subsequent time with respect to such Event of
Default or any other Event of Default. The rights, remedies and recourses of the
holder hereof, as provided in this Note and in any of the other Loan Documents,
shall be cumulative and concurrent and may be pursued separately, successively
or together as often as occasion therefore shall arise, at the sole discretion
of the holder hereof. The acceptance by the holder hereof of any payment under
this Note which is less than the payment in full of all amounts due and payable
at the time of such payment shall not (i) constitute a waiver of or impair,
reduce, release or extinguish any right, remedy or recourse of the holder
hereof, or nullify any prior exercise of any such right, remedy or recourse, or
(ii) impair, reduce, release or extinguish the obligations of any party liable
under any of the other Loan Documents as originally provided herein or therein.
Compliance With Usury Laws. This Note and the other Loan Documents are intended
to be performed in accordance with, and only to the extent permitted by, the
applicable usury laws, if any. Accordingly, notwithstanding any provision to the
contrary in this Note or any of the other Loan Documents, in no event whatsoever
shall this Note or any of the other Loan Documents require the payment or permit
the payment, taking, reserving, receiving, collection or charging of any sums
constituting interest under applicable laws which exceed the maximum amount
permitted by such laws. If any such excess interest is called for, contracted
for, charged, taken, reserved, or received in connection with this Note or any
of the other Loan Documents, or in any communication by KBK or any other person
to Borrower or any other person, or in the event all or part of the principal or
interest shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of interest
contracted for, charged, taken, reserved, or received on the amount of principal
actually outstanding from time to time under this Note or any of the other Loan
Documents shall exceed the maximum amount of interest permitted by applicable
usury laws, then in any such event it is agreed as follows: (i) the provisions
of this Section shall govern and control; (ii) neither Borrower nor any other
person or entity now or hereafter liable for payments under this Note or any of
the other Loan Documents shall be obligated to pay the amount of such interest
to the extent such interest is in excess of the maximum amount of interest
permitted by applicable usury laws; (iii) any such excess which is or has been
received notwithstanding this Section shall be credited against the then unpaid
principal balance of this Note and the other Loan Documents or, if this Note or
any of the other Loan Documents has been or would be paid in full by such
credit, refunded to Borrower, and (iv) the provisions of this Note or any of the
other Loan Documents, and any communication to Borrower, shall immediately be
deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the maximum lawful rate allowed under
applicable laws as now or hereafter construed by courts having jurisdiction
hereof or thereof. Without limiting the foregoing, all calculations of the rate
of interest contracted for, charged, taken, reserved, or received in connection
herewith which are made for the purpose of determining whether such rate exceeds
the maximum lawful rate shall be made to the extent permitted by applicable laws
by amortizing, prorating, allocating and spreading during the period of the full
term of this Note or any of the other Loan Documents, including all prior and
subsequent renewals and extensions, all interest at any time contracted for,
charged, taken, reserved, or received. The terms of this Section shall be deemed
to be incorporated into every other Loan Document.
Costs of Collection: Waivers. If this Note is placed in the hands of an attorney
for collection, or is collected in whole or in part by suit or through probate,
bankruptcy or other legal proceedings of any kind, Borrower agrees to pay, in
addition to all other sums payable hereunder, all costs and expenses of
collection, including but not limited to reasonable attorneys' fees. Borrower
and any and all endorsers and guarantors of this Note severally waive
presentment for payment, notice of nonpayment, protest, demand, notice of
protest, notice of intent to accelerate, notice of acceleration and dishonor,
diligence in enforcement and indulgences of every kind and without further
notice hereby agree to renewals, extensions, exchanges or releases of
collateral, taking of additional collateral indulgences or partial payments,
either before or after maturity.
Renewal and Extension. This Note is given in modification, renewal and
extension, but not extinguishment, of all amounts left owing and unpaid under
that certain promissory note dated September 28, 1998 executed and delivered by
Borrower and payable to the order of KBK in the stated principal amount of $
1,000,000.
Governing Law, Venue-, Submission to Jurisdiction. THIS NOTE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA WITHOUT
GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.. THIS NOTE IS
PERFORMABLE IN ORLEANS PARISH, LOUISIANA. BORROWER AGREES THAT ORLEANS PARISH,
LOUISIANA SHALL BE THE EXCLUSIVE VENUE FOR LITIGATION OF ANY DISPUTE OR CLAIM
ARISING UNDER OR RELATING TO THIS NOTE, AND THAT SUCH PARISH IS A CONVENIENT
FORUM IN WHICH TO DECIDE ANY SUCH DISPUTE OR CLAIM. BORROWER CONSENTS TO THE
PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN ORLEANS PARISH
LOUISIANA FOR THE LITIGATION OF ANY SUCH DISPUTE OR CLAIM. BORROWER IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.
Waiver of Jury Trial. BORROWER HEREBY IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT
PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED
HEREWITH.
FINAL AGREEMENT. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN KBK AND BORROWER WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED
HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
BORROWER:
KARTS INTERNATIONAL INCORPORATED
By: /s/ Charles Brister
---------------------------
Name: Charles Brister
Title: President & C.E.O.
REVOLVING CREDIT PROMISSORY NOTE
(Accounts Receivable)
$1,000,000.00 March 8, 1999
FOR VALUE RECEIVED, on or before February 28, 2000 ("Maturity Date"), the
undersigned and if more than one, each of them, jointly and severally
(hereinafter referred to as "Borrower"), promises to pay to the order of KBK
FINANCIAL, INC. ("KBK") at its offices in Orleans Parish, Louisiana, at 201 St.
Charles Avenue, Suite 4208, New Orleans, Louisiana 70170, the principal amount
of ONE MILLION AND 00/100 DOLLARS ($1,000,000.00) ("Total Principal Amount"), or
such amount less than the Total Principal Amount which is outstanding from time
to time if the total amount outstanding under this Revolving Credit Promissory
Note ("Note") is less than the Total Principal Amount, together with interest at
the rate set forth below on such portion of the Total Principal Amount which has
been advanced to Borrower from the date advanced until paid.
Interest Rate. The unpaid principal amount of this Note shall bear interest at a
fluctuating rate per annum which shall from day to day be equal to a rate
("Contract Rate"), calculated on the basis of the actual days elapsed but
computed as if each year consisted of 360 days, equal to the sum of (a) the Base
Rate of interest ("Base Rate") as established from time to time by KBK (which
may not be the lowest, best or most favorable rate of interest which KBK may
charge on loans to its customers) plus (b) seven and no hundredths percent
(7.00%), each change in the rate to be charged on this Note to become effective
without notice to Borrower on the effective date of each change in the Base
Rate; provided, however, in no event shall the Contract Rate be less than seven
percent (7.00%) per annum; provided, further that the Contract Rate shall not
exceed the maximum rate allowed by applicable law.
Repayment Terms. The principal of and all accrued but unpaid interest on this
Note shall be due and payable as follows:
(a) interest shall be due and payable monthly as it accrues,
commencing on the 15th day of March, 1999 and continuing on the
15th day of each successive month thereafter during the term of
this Note; and
(b) the outstanding principal balance of this Note, together with
all accrued but unpaid interest, shall be due and payable on
the Maturity Date.
Borrower authorizes KBK to effect all payments due under this Note and to
collect all sums due hereunder (whether by acceleration or otherwise) (i) by
debiting Borrower's account number [# omitted] at DEPOSIT GUARANTY NATIONAL BANK
(the "Debit Account") through the Automated Clearing House system ("ACH"), (ii)
by applying amounts collected in accordance with the terms of the Loan
Agreement, and (iii) in the case of interest payments due hereunder, by making
an advance under this Note. Such authorization shall not affect the obligations
of Borrower to make all payments when due hereunder. If on any payment date
there are insufficient funds in the Debit Account to make such payments in full,
Borrower agrees to pay KBK on demand a $100.00 manual processing fee. All
payments of principal or interest on this Note shall be made in lawful money of
the United States of America in immediately available funds, and, if such
payments are not made via ACH, shall be made at KBK's address indicated above,
or such other place as the holder of this Note shall designate in writing to
Borrower. If any payment of principal of or interest on this Note shall become
due on a day which is not a Business Day (as hereinafter defined), such payment
shall be made on the next succeeding Business Day and any such extension of time
shall be included in computing interest in connection with such payment. As used
herein, the term "Business Day" shall mean any day other than a Saturday, Sunday
or any other day on which KBK's office in New Orleans, Louisiana is closed. All
regularly scheduled payments of the indebtedness evidenced by this Note shall be
applied first to any accrued but unpaid interest then due and payable hereunder
and then to the principal amount then due and payable. The books and records of
KBK shall be prima facie evidence of all outstanding principal of and accrued
and unpaid interest on this Note. To the extent that any interest is not paid on
or before the fifth day after it becomes due and payable, KBK may, at its
option, add such accrued interest to the principal of this Note. Notwithstanding
anything herein to the contrary, upon an Event of Default (as hereinafter
defined) Or at maturity, whether by acceleration or otherwise, all principal of
this Note shall, at the option of KBK, bear interest at a fixed rate equal to
18% per annum until paid.
Prepayment Penalty. Borrower may from time to time prepay all or any portion of
the outstanding principal balance of this Note without premium or penalty;
provided, however, if (a) the outstanding principal balance hereof is prepaid in
full, and (b) Borrower notifies KBK of Borrower's intention to terminate
financing under this Note prior to the Maturity Date, then, in addition to such
principal prepayment, there shall be due and owing by Borrower at such time a
prepayment penalty equal to 2.00% of the Total Principal Amount.
Loan Documents. This Note is subject to the terms and conditions set forth in
that certain Loan Agreement dated September 28, 1998 by and between Borrower and
KBK, as may be amended from time to time (the "Loan Agreement"). This Note, the
Loan Agreement and all other documents evidencing, securing, governing,
guaranteeing and/or pertaining to this Note are hereinafter collectively
referred to as the "Loan Documents". The holder of this Note is entitled to the
benefits and security provided in the Loan Documents.
Advances. Subject to the terms of the Loan Agreement, Borrower may request
advances and make payments hereunder from time to time, provided that it is
understood and agreed that the aggregate principal amount outstanding from time
to time hereunder shall not at any time exceed the Total Principal Amount. The
unpaid balance of this Note shall increase and decrease with each new advance or
payment hereunder, as the case may be. This Note shall not be deemed terminated
or canceled prior to the Maturity Date, although the entire principal balance
hereof may from time to time be paid in full. Subject to the terms of this Note
and the other Loan Documents, Borrower may borrow, repay and reborrow hereunder.
Purpose. Borrower agrees that no advances under this Note shall be used for
personal, family or household purposes, and that all advances hereunder shall be
used solely for business, commercial, investment or other similar purposes.
Borrower agrees that this Note and the indebtedness evidenced thereby shall be
subject to Louisiana R.S. 9:3509, et seq.
Event of Default. Borrower agrees that upon the occurrence of any one or more of
the following events of default ("Event of Default"):
(a) failure of Borrower to pay when due any installment of principal
of or interest on this Note or on any other indebtedness now or
hereafter owing by Borrower to KBK; or
(b) the occurrence of any event of default specified in any of the
other Loan Documents; or
(c) the bankruptcy or insolvency of, the assignment for the benefit
of creditors by, or the appointment of a receiver for any of the
property of, or the liquidation, termination, dissolution or
death or legal incapacity of Borrower;
the holder of this Note may, at its option, without further notice or demand,
(i) declare the outstanding principal balance of and accrued but unpaid interest
on this Note at once due and payable, (ii) refuse to advance any additional
amounts under the Note, (iii) foreclose all
<PAGE>
liens securing payment hereof, (iv) pursue any and all other rights, remedies
and recourses available to the holder hereof, including but not limited to any
such rights, remedies or recourses under the other Loan Documents, at law or in
equity, or (v) pursue any combination of the foregoing. The failure to exercise
the option to accelerate the maturity of this Note or any other right remedy or
recourse available to the holder hereof upon the occurrence of an Event of
Default hereunder shall not constitute a waiver of the right of the holder of
this Note to exercise the same at that time or at any subsequent time with
respect to such Event of Default or any other Event of Default. The rights,
remedies and recourses of the holder hereof, as provided in this Note and in any
of the other Loan Documents, shall be cumulative and concurrent and may be
pursued separately, successively or together as often as occasion therefore
shall arise, at the sole discretion of the holder hereof. The acceptance by the
holder hereof of any payment under this Note which is less than the payment in
full of all amounts due and payable at the time of such payment shall not (i)
constitute a waiver of or impair, reduce, release or extinguish any right,
remedy or recourse of the holder hereof, or nullify any prior exercise of any
such right, remedy or recourse, or (ii) impair, reduce, release or extinguish
the obligations of any party liable under any of the other Loan Documents as
originally provided herein or therein.
Compliance With Usury Laws. This Note and the other Loan Documents are intended
to be performed in accordance with, and only to the extent permitted by, the
applicable usury laws, if any. Accordingly, notwithstanding any provision to the
contrary in this Note or any of the other Loan Documents, in no event whatsoever
shall this Note or any of the other Loan Documents require the payment or permit
the payment, taking, reserving, receiving, collection or charging of any sums
constituting interest under applicable laws which exceed the maximum amount
permitted by such laws. If any such excess interest is called for, contracted
for, charged, taken, reserved, or received in connection with this Note or any
of the other Loan Documents, or in any communication by KBK or any other person
to Borrower or any other person, or in the event all or part of the principal or
interest shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of interest
contracted for, charged, taken, reserved, or received on the amount of principal
actually outstanding from time to time under this Note or any of the other Loan
Documents shall exceed the maximum amount of interest permitted by applicable
usury laws, then in any such event it is agreed as follows: (i) the provisions
of this Section shall govern and control; (it) neither Borrower nor any other
person or entity now or hereafter liable for payments under this Note or any of
the other Loan Documents shall be obligated to pay the amount of such interest
to the extent such interest is in excess of the maximum amount of interest
permitted by applicable usury laws; (iii) any such excess which is or has been
received notwithstanding this Section shall be credited against the then unpaid
principal balance of this Note and the other Loan Documents or, if this Note or
any of the other Loan Documents has been or would be paid in full by such
credit, refunded to Borrower, and (iv) the provisions of this Note or any of the
other Loan Documents, and any communication to Borrower, shall immediately be
deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the maximum lawful rate allowed under
applicable laws as now or hereafter construed by courts having jurisdiction
hereof or thereof. Without limiting the foregoing, all calculations of the rate
of interest contracted for, charged, taken, reserved, or received in connection
herewith which are made for the purpose of determining whether such rate exceeds
the maximum lawful rate shall be made to the extent permitted by applicable laws
by amortizing, prorating, allocating and spreading during the period of the full
term of this Note or any of the other Loan Documents, including all prior and
subsequent renewals and extensions, all interest at any time contracted for,
charged, taken, reserved, or received. The terms of this Section shall be deemed
to be incorporated into every other Loan Document.
Costs of Collection, Waivers. If this Note is placed in the hands of an attorney
for collection, or is collected in whole or in part by suit or through probate,
bankruptcy or other legal proceedings of any kind, Borrower agrees to pay, in
addition to all other sums payable hereunder, all costs and expenses of
collection, including but not limited to reasonable attorneys' fees. Borrower
and any and all endorsers and guarantors of this Note severally waive
presentment for payment, notice of nonpayment, protest, demand, notice of
protest, notice of intent to accelerate, notice of acceleration and dishonor,
diligence in enforcement and indulgences of every kind and without further
notice hereby agree to renewals, extensions, exchanges or releases of
collateral, taking of additional collateral indulgences or partial payments,
either before or after maturity.
Renewal and Extension. This Note is given in modification, renewal and
extension, but not extinguishment, of all amounts left owing and unpaid under
that certain promissory note dated September 28, 1998 executed and delivered by
Borrower and payable to the order of KBK in the stated principal amount of
$1,000,000.00.
Governing Law, Venue, Submission to Jurisdiction. THIS NOTE SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA WITHOUT
GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. THIS NOTE IS
PERFORMABLE IN ORLEANS PARISH, LOUISIANA. BORROWER AGREES THAT ORLEANS PARISH,
LOUISIANA SHALL BE THE EXCLUSIVE VENUE FOR LITIGATION OF ANY DISPUTE OR CLAIM
ARISING UNDER OR RELATING TO THIS NOTE, AND THAT SUCH PARISH IS A CONVENIENT
FORUM IN WHICH TO DECIDE ANY SUCH DISPUTE OR CLAIM. BORROWER CONSENTS TO THE
PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN ORLEANS PARISH,
LOUISIANA FOR THE LITIGATION OF ANY SUCH DISPUTE OR CLAIM. BORROWER IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER RAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.
Waiver of Jury Trial. BORROWER HEREBY IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT
PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED
HEREWITH.
FINAL AGREEMENT. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN KBK AND BORROWER WITH RESPECT TO THE TRANSACTIONS
CONTEMPLATED HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
BORROWER:
KARTS INTERNATIONAL INCORPORATED
By: /s/ Charles Brister
---------------------------
Name: Charles Brister
Title: President & C.E.O.
SUBSIDIARIES OF THE COMPANY
1) Brister's Thunder Karts, Inc., a Louisiana corporation
2) USA Industries, Inc., an Alabama corporation
3) Straight Line Manufacturing, Inc., a Michigan corporation
4) KINT, L.L.C., a Louisana limited liability company
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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<CIK> 1010077
<NAME> Karts International Incorporated
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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