SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
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, 1999
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 70456
P.O. Box 695 (Zip Code)
Roseland, Louisiana 70456
(Address of Principal
Executive Offices)
(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, 1999,
were $11,997,785.
The issuer had 5,799,320 shares of common stock and 1,832,500 public
warrants outstanding as of March 24, 2000.
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 24, 2000, was $3,084,849.
<PAGE>
1999 ANNUAL REPORT (SEC FORM 10-KSB)
INDEX
Securities and Exchange Commission
Item Number and Description
PART I
Item 1. Business.............................................................3
Item 2. Properties..........................................................16
Item 3. Legal Proceedings...................................................16
Item 4. Submission of Matters to a Vote of Security Holders.................17
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters.............................................17
Item 6. Management's Discussion and Analysis or Plan of Operation...........18
Item 7. Consolidated Financial Statements...................................24
Item 8. Changes in And Disagreements With Accountants on Accounting and
Financial Disclosure............................................24
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...............24
Item 10. Executive Compensation..............................................26
Item 11. Security Ownership of Certain Beneficial Owners and Management......32
Item 12. Certain Relationships and Related Transactions......................33
PART IV
Item 13. Exhibits, Financial Statements and Reports on Form 8...............34
SIGNATURES, FINANCIAL STATEMENTS AND EXHIBIT INDEX
Signatures....................................................................37
Financial Statements.........................................................F-1
Exhibit Index
<PAGE>
PART I
Management believes that this Annual Report on Form 10-KSB for the year
ended December 31, 1999 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 15,000 Fun Karts to dealers and mass merchandisers in
1999, which the Company believes represents approximately 11% of the total
domestic Fun Kart market. Consolidated revenues of the Company for the fiscal
year ended December 31, 1999 were approximately $12.0 million as compared with
combined revenues of approximately $8.3 million for the fiscal year ended
December 31, 1998. The Company operates manufacturing facilities in Roseland,
Louisiana and Prattville, Alabama 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 1999 approximately 159,000 karts were sold in the United States of which
approximately 140,000 were Fun Karts, 11,000 racing karts and 8,000 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 32 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 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 1999, the Company sold 48% 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
Company's Fun Karts are in the Southeast and Southwest regions of the United
States. In 1999, the Company sold approximately 26% 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.
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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.
The Company's efforts to increase its sales and production by expanding
its distribution through the mass merchandisers has been successful. In 1998,
the Company sold approximately 1,400 units to 10 mass merchandisers, which
represented approximately 12% of its total revenue. During 1999, the Company
expanded its relationship with the mass merchandisers and sold approximately 52%
or 7,800 units to 18 mass merchandisers which accounted for approximately 45% of
its total revenue. The Company plans to grow its mass merchandiser customer base
in order to continue increasing production volume and to capture a larger share
of the total kart market.
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 good will 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
number is (504) 747-1111. The Company maintains manufacturing facilities at 202
Challenge Avenue, Prattville, Alabama 36067 and Highway 51 South, Roseland,
Louisiana 70456.
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Recent Developments
During 1999, the Company began to market the concept of private label
manufacturing of go-karts to several perspective accounts. The targeted accounts
were companies that had a strong brand name recognition, an established dealer
base and did not manufacture or sell go-karts. At the end of 1999, the Company
was successful in reaching an agreement with Polaris Industries, Inc., the
world's largest maker of snowmobiles, to develop, manufacture and sell a line of
Polaris karts through the Polaris dealer network. In February 2000, the Company
announced that an exclusive, three year licensing agreement had been signed and
the new product line would be introduced in March, 2000. The Company expects
this relationship to significantly increase its dealer based volume during 2000.
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 and 1999, the Company made capital expenditures totaling
approximately $950,000 for manufacturing facilities and/or 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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<PAGE>
Growth Strategy
Increasing Product Recognition By Innovative Marketing to Target Users.
A 1998 survey estimated that 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. 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 3-1/2 h.p. Fun
Bike. During 1999, the Company began developing two new karts, an off road
mini-bike and several new design features that will be part of the new Polaris
go-kart line scheduled for introduction during the first quarter of 2000. 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 1999, the Company established a distributor in western
Canada and believes that the Canadian market offers significant sales growth
opportunity for the Company's products.
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<PAGE>
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
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.
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.
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Charles Brister, the Company's President and Chief Executive Officer,
has designed for the benefit of the Company 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.
Manufacturing Operations
The Company operates manufacturing facilities in Roseland, Louisiana
and Prattville, Alabama. 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 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.
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Quality Control, Warranties and Service
The Company adheres to strict quality standards and continuously
refines its production procedures to increase productivity and reduce warranty
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 a total of $40,000 for 1998 and
1999 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
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 1999
sold approximately 26% 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.
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During 1999, the Company sold approximately 7,800 units to 18 mass
merchandisers, which represented approximately 52% of unit sales. Sales to
dealers, including lawn and garden stores, motorcycle shops, karts specialty
stores, automobile parts dealers and hardware stores, accounted for 48% of the
Company's 1999 unit sales. With the addition of the Polaris dealer network, the
Company estimates that sales of its products to independent dealers and mass
merchandisers will be approximately 65% and 35%, respectively, in 2000. 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 was activated
during July 1998 for the purpose of organizing a sale and marketing company,
conducting business under the name Bird Promotions, 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 intends on using this entity to sell and market the new Polaris kart
line in 2000.
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
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. In 1999, the Company added
8 mass merchandisers and approximately 30 new dealers. 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.
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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, 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 with the continued expansion of it business with the mass
merchandisers and the adding of the Polaris dealer network, it will continue to
experience some mitigation of the historically seasonal nature of the Company's
Fun Karts sales.
Customers
In 1999, approximately 48% of the Company's sales were to its
independent dealers and the Company projects that it will sell approximately 65%
of its Fun Karts to independent dealers, including the Polaris dealers, in 2000.
The Company had only one customer accounted for more than 10% of the Company's
1999 sales. This customer purchased 11.2% of the units sold which resulted in
10.6% of the Company's total 1999 revenue. 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 2000 revenues.
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.
-11-
<PAGE>
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, 2000, the Company employed approximately 72 employees
which are employed on a full-time or part-time basis. Eighteen employees are
administration and sales personnel, nine 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.
Business Risk Factors
Liquidity Contingency. 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 liquidity
concerns as to the Company's ability to continue to finance its working capital
needs. 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, 1999, 1998 and 1997, the Company experienced net losses from
operations of approximately $2,163,000, $3,930,000 and $580,000, respectively,
and has utilized cash in operating activities of approximately $3,484,000,
$3,213,000 and $220,000, 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.
-12-
<PAGE>
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 $3.5 million
of which approximately $2.7 million was outstanding at December 31, 1999. The
lines of credit are secured with the Company's accounts receivable, inventory
and equipment 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 with the condition that
the Company must obtain a minimum of $1.5 million of new equity capital by May
6, 1999. An extension was granted to the Company and it successfully met this
condition as of June 30, 1999. These credit facilities came up for renewal on
March 1, 2000. The Company requested and was granted an extension until April
15, 2000 so it could better forecast the results of a private placement of the
Company's common stock dated February 7, 2000, the backlog resulting from the
introduction of the Polaris kart line and the Company's future cash needs. It is
expected that the Company and KBK will renew the credit facilities in April.
Failure to renew or any default under its credit facilities would have a
material adverse effect upon the Company's financial condition and results 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
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.
-13-
<PAGE>
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 and is expected to be renewed. The termination
of the license agreement with Mr. Brister could 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 not renewed 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 did not believe that the year 2000 issue would
have a material effect on its network, computer systems or operations; however,
it assessed the potential impact of the year 2000 issue. After minimal changes
and upgrades to some of its hardware and software, the Company considered its
information systems prepared for the year 2000. As of the date of this report,
the Company has not experienced any significant failure of the Company's
information systems and is not aware of any system failures on the part of its
external vendors, network providers or critical suppliers.
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.
-14-
<PAGE>
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 $6 million
occurrence basis product liability insurance with a $25,000 self-insured
retention and $5 million maximum per occurrence coverage. The Company has 7
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. In 1999, summary judgement was granted in favor
of the Company dismissing the insurance underwriter's claim. The insurance
underwriter appealed the matter to the U.S. Fifth Circuit Court of Appeals and
the appeal was denied. See "Legal Proceedings."
Delisting of Securities from Nasdaq SmallCap Market. On September 8,
1999, Nasdaq advised the Company that its shares of Common Stock and Warrants
were delisted from Nasdaq SmallCap Market for failing to maintain the
maintenance standards required for continued listing of the securities. As the
Company's Common Stock and Warrants were dropped off the SmallCap Market, they
began trading on the NASD Electronic Bulletin Board.
After the delisting, the sale of the Company's Common Stock and
Warrants became 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. While the Commission's
rules may limit the number of potential purchasers of the securities, trading
activity of the Company's Common Stock has increased since the delisting.
-15-
<PAGE>
<TABLE>
<CAPTION>
ITEM 2. PROPERTIES
----------
Facilities
The following table sets forth information concerning the Company's
facilities:
Date Leased Expiration of Approximate
Location or Acquired Description Lease Term Square Footage
- ------------------- ----------- ------------------------- -------------- --------------
<S> <C> <C> <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) 25,000
</TABLE>
- --------------------
(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 $206,000 at December
31, 1999 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 1999, spent approximately $58,000 for
building improvements at the Prattville facility.
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 $6 million occurrence basis product liability insurance with a $25,000
self-insured retention and $5 million maximum per occurrence coverage. The
Company has 7 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.
-16-
<PAGE>
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. In 1999, a summary judgment was
granted in favor of the Company dismissing the insurance underwriter's claim.
The insurance underwriter appealed the matter to the U.S. Fifth Circuit Court of
Appeals and the appeal was denied.
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 1999 or the first quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Until September 8, 1999, the Company's Common Stock and Warrants were
traded on the Nasdaq SmallCap Market system under the symbol "KINT" and "KINTW",
respectively. On September 8, 1999, the Company's Common Stock and Warrants
began trading on the NASD Electronic Bulletin Board. 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.
Common Stock Warrants
Bid Price(1) Bid Price
Calendar Year 1999 Low High Low High
------------------ ----- ----- ----- -----
First Quarter $0.44 $1.00 $0.03 $0.31
Second Quarter $0.31 $0.56 $0.03 $0.19
Third Quarter $0.31 $0.81 $0.03 $0.16
Fourth Quarter $0.21 $0.38 $0.00 $1.06
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
-17-
<PAGE>
(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 traded on the Nasdaq SmallCap Market under
the symbols "KINT" and"KINTW", respectively, on September 9, 1997 to September
8, 1999.
(3) The Common Stock traded on the NASD Electronic Bulletin Board from June 27,
1996 to September 9, 1997. The Common Stock and Warrants resumed trading on
September 8, 1999.
On March 24, 2000, the closing bid and ask prices for the Common Stock
were $.75 and $.75, respectively, per share and the closing bid and ask prices
for the Warrants were $0.03 and $0.10 per Warrant. As of March 24, 2000,
5,799,320 shares of Common Stock were issued and outstanding and 1,832,500
Warrants were outstanding.
Holders. As of March 24, 2000, the Company estimates that there were
approximately 570 record and beneficial holders of the Company's Common Stock,
including those whose share are held in broker accounts, 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 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.
-18-
<PAGE>
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 during the four year period
commencing on September 9, 1998 (the "First Exercise Date"). The Warrants are
redeemable by the Company at a redemption price of $0.01 per Warrant, at any
time after the First Exercise Date, upon thirty (30) days written notice to the
Warrant holders, if the average closing price of the Common Stock equals or
exceeds $8.00 per share of Common Stock for the 20 consecutive trading days
ending three days prior to the date of the notice of redemption.
The Company received net proceeds of approximately $5,017,650 from the
sale of the securities offered in the 1997 Public Offering after payment of
offering expenses and underwriting discounts and commissions. Proceeds from the
1997 Public Offering were used as follows: (i) $2,250,000 for the repayment of
indebtedness, including payment to Mr. Brister for a portion of the purchase
price for Brister's; (ii) $625,000 for the redemption of the Company's
Convertible Preferred Stock; (iii) $48,000 for a financial advising fee payable
to J.P. Turner & Company, L.L.C., the representative of the underwriters of the
1997 Public Offering; (iv) $200,000 for product development; (v) $400,000 for
advertising and marketing expenses; and (vi) the remaining approximately
$1,700,000 for working capital purposes.
Under the terms of the 1997 Public Offering, the underwriters were
granted an over-allotment option to purchase 232,500 additional shares of Common
Stock and 232,500 additional Warrants. The over-allotment option was exercised
and the transaction closed in October 1997, with the Company selling to the
underwriters an additional 232,500 shares of Common Stock for $4.00 per share
and 232,500 additional Warrants for $0.125 per Warrant for net proceeds of
approximately $834,385 after payment of offering expenses and underwriting
discounts and commissions. Net proceeds from the exercise of the over-allotment
option was being 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 the successor to a
Michigan sole proprietorship on August 1, 1997 under the laws of the State of
Michigan and is in the business of manufacturing and marketing large, full
suspension "fun karts" for the consumer market.
On June 3, 1999, the Company issued $1,500,000 of convertible,
subordinated debentures resulting in net proceeds of approximately $1,466,900.
On June 30, 1999, the Company also received net proceeds of approximately
$1,235,140 from a private placement of 1,550,000 shares of 9% cumulative,
convertible preferred stock. Proceeds from these transactions were used to
reduce the Company's trade accounts payable and provide additional working
capital.
In August 1999, the Company moved the manufacturing of the Straight Line
product line to its Prattville, Alabama facility and closed its Michigan
facility. The closing of the Michigan facility was part of an overall plan to
increase capacity utilization while reducing overhead expenses through the
consolidation of its operations.
-19-
<PAGE>
The financial information discussed herein is derived from the
historical consolidated financial statements of the Company for the respective
years ended December 31, 1999 and 1998. The following discussion reflects
historical consolidated financial data for the periods as indicated below.
Results of Operations
Year Ended December 31, 1999 as compared to Year Ended December 31,
1998. The Company reported revenues of approximately $12.0 million for the year
ended December 31, 1999, compared to $8.2 million for year ended December 31,
1998, a 46% increase. These results reflect significant improvement in both the
volume and average selling price of the Company's products. The Company's sales
continue to show a high degree of seasonality, however efforts to mitigate the
historical pattern by expanding its sales to mass merchandisers whose demand is
less seasonal have been effective. The Company intends to continue identifying
opportunities to establish new customers whose demand for the Company's products
would be during the first half of the year.
The Company incurred cost of sales of $11.3 million and $8.8 million in
1999 and 1998, respectively. This resulted in gross profit/(loss) of
approximately $0.7 million for the year ended December 31, 1999 and ($0.6
million) for the year ended December 31, 1998. Gross profit for the year ended
December 31, 1999 was favorably effected by increased volume and improved
selling margins. Both unit sales increases and consolidation of the Company's
manufacturing activities allowed the Company to improve utilization of its labor
force and manufacturing capacity thereby reducing the per unit burden. The
Company increased its selling prices in 1999, especially on those units that it
identified as being underpriced during their introductory period during 1998.
Other direct costs were controlled and remained approximately the same as costs
incurred during 1998 while unit volume increased by approximately 25%.
Selling, general and administrative expenses totaled approximately $2.8
million for the year ended December 31, 1999 compared to approximately $3.4
million for the year ended December 31, 1998. The Company was successful in
reducing these expenses by approximately 18% through the cost reduction efforts
which began during the second quarter of 1999. The Company reduced its
management and support staff and implemented new cost controls to bring its
expenses back into line with its current volume. The Company will continue to
monitor its staffing and allow future increases only to the extent necessary to
support increased sales and manufacturing activity.
Other income (expense) totaled approximately $(0.2 million) for the year
ended December 31, 1999 compared to $(6.1 million) for the year ended December
31, 1998. The decrease in expense is largely attributable to the one-time charge
to operations of approximately $5.8 million to recognize the impairment of
future recoverability of goodwill recorded in 1998. Additionally in 1998, the
Company charged to operations approximately $289,000 for reorganization
expenses. Interest expense increased to approximately $396,000 for the year
ended December 31, 1999 from approximately $92,000 for the year ended December
31, 1998. This was due to a higher level of borrowing on the Company's working
capital lines of credit and the $1,500,000 in new debt.
Net loss for the year ended December 31, 1999 was reduced to
approximately $2,366,000 from a net loss of approximately $10,073,000 incurred
for the year ended December 31, 1998. Basic loss per share was $0.42 and $2.05
for the years ended December 31, 1999 and 1998, respectively.
-20-
<PAGE>
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 effected 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
negatively effected by unfavorable labor variances resulting from employee
turnover, ineffective scheduling of the workforce and overtime premium paid.
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 component 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 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 additional 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 1996 private
offering of securities.
-21-
<PAGE>
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. These increase in expenses were 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.
Additional Operations Information. The Company currently has 7 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 $6,000,000 per
occurrence and $5,000,000 aggregate will be sufficient to fully protect the
business and assets of the Company from all claims, nor can any assurances be
given that the Company will be able to maintain the existing coverage or obtain
additional coverage at commercially reasonable rates. Management believes that
it has process controls on its product operations, product labeling, operator's
manuals, and design features which will assist in a successful defense of any
present or future product liability claim. To the extent product liability
losses are beyond the limits or scope of the Company's insurance coverage, the
Company could experience a material adverse effect upon its business,
operations, profitability and assets.
Seasonality
The Company experiences significant seasonality in its sales pattern
with only approximately 25% 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.
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. 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, 1999, the Company had negative working capital of
approximately $(218,000) as compared to negative working capital of
approximately $(518,000) at December 31, 1998. The Company experienced negative
cash flow from operations of approximately $3,484,000 and $3,213,000 for
calendar 1999 and 1998, respectively.
During the year ended December 31, 1999, the Company expended cash of
approximately $222,000 on capital improvements; consisting of expansion of its
manufacturing facilities, leasehold improvements and equipment Additional cash
expenditures of approximately $14,000 were made for legal fees associated with
the acquisition of the Option to acquire Andretti.
-22-
<PAGE>
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 1) expenses
related to the acquisition of the Company's Straight Line subsidiary, 2) the
initial payment on a covenant not to compete executed by the former sole
shareholder of Straight Line and 3) 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 1999 cash consumption by operating and investing activities was
funded from the net proceeds from the sale of 1,550,000 shares of 9% preferred
stock and from the issuance of $1,500,000 of subordinated debentures. In
addition, the Company increased its line of credit from KBK Financial, Inc., a
non-financial institution lender (KBK) secured by its accounts receivables to
$2.5 million.
While the Company has made significant progress in reducing its
operational losses, continued increases in volume and strict control of expenses
will be necessary for the Company to return to profitability. 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: 1) initiated plans to raise additional equity through a
private placement of common stock; 2) initiated plans to relocate its USA
Industries operation to Roseland, Louisiana, and 3) entered into an exclusive
three licensing agreement with Polaris Industries, Inc. to produce a line of
karts for sale through their existing dealer network.
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.
In the event that the Company identifies a compatible business
acquisition or expansion candidate in future periods, if any are specifically
identified or undertaken; the Company has limited financial resources for the
completion of these efforts. The Company will be dependent upon the proceeds
from additional financings, including receiving proceeds from the future
exercise of the Warrants of which there can be no assurance, to facilitate a
major acquisition. The Company may also need additional financing to achieve
full implementation of its long-term growth strategy and for working capital.
There can be no assurance that additional financing will be available, or if
available, that such financing will be on favorable terms.
-23-
<PAGE>
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 did not have to modify or replace significant portions of its software.
The Company completed its modifications prior to December 31, 1999 and through
the date of this report has not experienced any significant difficulties with
its information systems or that of any of its suppliers, shippers or business
partners.
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
Directors and Executive Officers
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Name Age Position
---- --- --------
Timothy P. Halter(1) 33 Chairman, Secretary and Director
Charles Brister(1)(2) 47 President, Chief Executive Officer
and Director
Richard N. Jones 47 Vice President, Administration and
Chief Financial Officer
Lawrence E. Schwall, III 37 Vice President, Sales and Marketing
Joseph R. Mannes(2) 41 Director
Ronald C. Morgan(2) 52 Director
Gary C. Evans(1) 43 Director
- -------------------
(1) Members of the Company's Compensation Committee.
(2) Members of the Company's Audit Committee.
-24-
<PAGE>
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.
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 - Manufacturing and Treasurer
for Andretti, a manufacturer of concession go-karts. From June 1991 to January
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--
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.
-25-
<PAGE>
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-- 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.
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.
-26-
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation
Compensation Awards
------------ ------------
Securities
Other Annual Restricted Underlying
Name/Title Year Salary/Bonus Compensation Stock Awards Options/SARs
---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles Brister, President and 1999 $137,500 $ -0- -0- 450,000
Chief Executive Office
Robert M. Aubrey, former President 1998 $140,625 $22,825(2) -0- 200,000
and Chief Executive Officer(1)
V. Lynn Graybill, former Chairman 1997 $131,250 $ -0- -0- -0-
of the Board, Chief Executive 1996 $121,731 $15,000(4) -0- -0-
Officer and President(3)
</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 "--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
"--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 after 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. Effective
February, 2000, Mr. Brister will receive his annual salary in cash. On October
19, 1999, the Company's Board of Directors ratified an Employment Agreement
dated August 1, 1999 with Charles Brister to serve as the Company's President
and Chief Executive Officer for a period of three years beginning February 1,
1999, with an automatic one year extension unless either the Company of the
President provides a thirty (30) day written notice not to continue the
Agreement. This Agreement provides the President with an annual salary of
$150,000 per year, payable in either common stock of the Company or cash.
Further, the President was granted 450,000 options to purchase shares of the
Company's common stock at 100% of the closing bid price of the Company's common
stock on the date of ratification and the options vest as follows: 100,000 at
the ratification date of this Agreement, 150,000 on the second anniversary date
of this Agreement; and 200,000 on the third anniversary date of this Agreement.
Additionally, the President may be eligible to receive an annual bonus which
shall be in the form of (a) options to purchase up to 50,000 shares of the
Company's common stock, which shall vest immediately upon grant and expire five
years from the grant date and (b) cash, not to exceed 15% of the President's
base salary.
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 "-- 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,
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.
-27-
<PAGE>
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 "Graybill 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 "-- 1998 Stock Compensation Plan."
During the fiscal year ended December 31, 1999, the Company granted to
certain of its employees options to purchase an aggregate of 120,000 shares of
Common Stock at exercise prices ranging from $0.375 to $0.31 per share, which
options expire periodically from October 19, 2004 to December 31, 2004. In
addition, the Company granted Mr. Aubrey an option to purchase 15,000 shares of
Common Stock at an exercise price of $1.06 per share which expire on January 20,
2004 as part of his resignation settlement; to Charles Brister, President and
CEO of the Company, options to purchase 450,000 shares of Common Stock at an
exercise price of $0.375 per share, which options expire periodically from
October 19, 2004 through October 19, 2006, and to Richard Jones, Chief Financial
Officer of the Company, options to purchase 225,000 shares of Common Stock at an
exercise price of $0.375 per share, which options expire periodically from
October 19, 2004 through October 19, 2006.
-28-
<PAGE>
<TABLE>
<CAPTION>
Option/Grants in Last Fiscal Year
Name/Title Number of Securities Percent of Total Options Exercise Price Expiration Date
Underlying Options Granted to Employees in ($/sh)
Granted Fiscal 1998
- --------------------------- -------------------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Charles Brister, President 450,000 55.6 $ 0.375 See footnote (1)
and Chief Executive Officer
- -----------------------
(1) The options to purchase the listed shares expire periodically from October
19, 2004 through October 19, 2006.
Aggregate Fiscal Year-End Option Values
Number of Value of
Securities Unexercised No
Underlying Market Value
Unexercised Options at
Options at Fiscal Year End
Fiscal Year-End
Name/Title Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ----------- ------------- ----------- -------------
Charles Brister, President 100,000 350,000 $37,500 $131,250
and Chief Executive Officer
</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.
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<PAGE>
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.
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 855,000 shares of Common Stock at
prices ranging from $0.31 to $2.98 per share.
-30-
<PAGE>
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 five occasions during calendar 1999
and acted by unanimous consent in lieu of meeting on one 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 two occasions during calendar 1999. 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 one
occasions during calendar 1999.
-31-
<PAGE>
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 24, 2000 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.
Percentage of
Shares Shares
Name(1) Beneficially Beneficially
------ Owned Owned
------------ -------------
Charles Brister(2)................................... 674,007 11.4
Richard N. Jones(3).................................. 67,924 1.2
Lawrence E. Schwall, III(4)......................... 30,297 *
Joseph R. Mannes(5).................................. 67,364 1.2
Ronald C. Morgan(5).................................. 6,964 *
Gary C. Evans(6)..................................... 54,744 *
Timothy P. Halter(7)................................. 578,260 10.0
Halter Financial Group, Inc.(7)...................... 578,260 10.0
Schlinger Foundation(8).............................. 592,581 10.2
Linda S. Neubauer(9)................................. 337,838 5.8
Officers and directors as a group (7 persons)(10).... 1,479,560 24.6
- ------------------
*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) Includes options to purchase 100,000 shares of Common Stock at an exercise
price of $0.375 per share exercisable until October 19, 2004. Mr. Brister
is the President, Chief Executive Officer and a director of the Company.
See "Certain Relationships and Related Transactions."
(3) Includes options to purchase 60,000 shares of Common Stock at an exercise
price of $1.50 to $0.375 per share exercisable until October 1, 2003 or
October 19, 2004. Mr. Jones is the Vice President, Administration and Chief
Financial Officer of the Company.
(4) Includes options to purchase 26,667 shares of Common Stock at an exercise
price of $4.875 to $0.31 per share exercisable until January 30, 2002 or
December 31, 2004. 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, options to purchase 26,667 shares of the Company's Common Stock
granted to Mr. Schwall., options to purchase 60,000 shares of the Company's
Common Stock granted to Mr. Jones and options to purchase 100,000 shares of
the Company's Common Stock granted to Mr. Brister.
-32-
<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 Mr. Brister 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 to Charles Brister, the Company's President and
Chief Executive Officer. 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 or June 17, 1999. Mr. Brister converted the amount owed
on this note and subsequent loans into shares of the 9% Convertible Preferred
Stock sold through the Private Placement dated March 31, 1999.
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.
-33-
<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.
-34-
<PAGE>
10.3* Addendum "A" to License Agreement, dated March 15, 1997, by and
between the Company and Charles Brister.
10.4* Royalty Agreement, dated March 15, 1997, by and between the Company
and Charles Brister.
10.5* $1,000,000 Subordinated Promissory Note, dated March 15, 1996, payable
to Charles Brister, executed by Brister's Thunder Karts, Inc., as
maker.
10.6* $200,000 Promissory Note, dated April 1, 1996, payable to Charles
Brister, executed by the Company, as maker.
10.7* Commercial Security Agreement, by and among Charles Brister, as
secured party, Brister's Thunder Karts, Inc., as borrower, and Robert
W. Bell and Gary C. Evans, as pledgors.
10.8* $2,000,000 Promissory Note, dated March 15, 1996, payable to The
Schlinger Foundation, executed by the Company, as maker, and by
Brister's Thunder Karts, Inc., as pledgor.
10.9* Commercial Security Agreement, by and among The Schlinger Foundation,
as secured party, the Company, as borrower, and Brister's Thunder
Karts, Inc., as pledgor.
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.
-35-
<PAGE>
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.
-36-
<PAGE>
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.
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 1999.
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
30, 2000.
KARTS INTERNATIONAL INCORPORATED
(Registrant)
By: /s/ Charles Brister By: /s/ Richard N. Jones
--------------------------------- ------------------------------------
Charles Brister, President, Chief Richard N. Jones
Executive 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 March 30, 2000
- --------------------- and Director
Charles Brister
/s/ Timothy P. Halter Chairman of the Board, Secretary March 30, 2000
- --------------------- and Director
Timothy P. Halter
/s/ Richard N. Jones Vice President, Administration and March 30, 2000
- --------------------- Chief Financial Officer
Richard N. Jones
/s/ Joseph R. Mannes Director March 30, 2000
- ---------------------
Joseph R. Mannes
/s/ Ronald C. Morgan Director March 30, 2000
- ---------------------
Ronald C. Morgan
/s/ Gary C. Evans Director March 30, 2000
- ---------------------
Gary C. Evans
-37-
<PAGE>
KARTS INTERNATIONAL
INCORPORATED
AND SUBSIDIARIES
Financial Statements
and
Auditor's Report
December 31, 1999 and 1998
S. W. HATFIELD, CPA
certified public accountants
Use our past to assist your future sm
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONTENTS
Page
----
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 1999 and 1998 F-4
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 31, 1999 and 1998 F-6
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1999 and 1998 F-7
Consolidated Statements of Cash Flows
for the years ended December 31, 1999 and 1998 F-8
Notes to Consolidated Financial Statements F-10
F-2
<PAGE>
S. W. HATFIELD, CPA
certified public accountants
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, 1999 and 1998 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the years
then ended in conformity with generally accepted accounting principles.
S. W. HATFIELD, CPA
Dallas, Texas
March 24, 2000 (except for Note B
as to which the date is March 31, 2000)
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, 1999 and 1998
ASSETS
------
1999 1998
----------- -----------
<S> <C> <C>
Current assets
Cash on hand and in bank $ 399,639 $ 163,690
Accounts receivable
Trade, net of allowance for doubtful accounts
of $198,065 and $90,500, respectively 2,485,561 2,310,707
Other 16,473 40,395
Inventory 2,214,678 2,129,949
Prepaid expenses 350,606 214,231
----------- -----------
Total current assets 5,466,957 4,858,972
----------- -----------
Property and equipment - at cost 2,458,695 2,156,138
Accumulated depreciation (522,023) (288,741)
----------- -----------
1,936,672 1,867,397
Land 32,800 32,800
----------- -----------
Net property and equipment 1,969,472 1,900,197
----------- -----------
Other assets
Deposits and other 50,785 21,276
Note receivable 415,685 378,113
Option to acquire an unrelated entity 138,001 123,544
Covenant not to compete, net of accumulated
amortization of approximately $38,889 and
$5,556, respectively 61,111 94,444
Organization costs, net of accumulated amortization
of approximately $82,691 and $60,841, respectively 26,564 48,414
----------- -----------
Total other assets 692,146 665,791
----------- -----------
TOTAL ASSETS $ 8,128,575 $ 7,424,960
=========== ===========
</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, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current liabilities
Cash overdraft $ -- $ 9,153
Notes payable to banks and others 2,724,005 1,564,715
Notes payable to affiliates 229,395 123,875
Current maturities of long-term debt 57,482 35,289
Accounts payable - trade 2,068,404 2,963,279
Other accrued liabilities
Accrued payroll, payroll taxes and sales taxes payable 306,735 131,610
Accrued reorganization and relocation expenses -- 288,848
Other 299,290 257,912
Federal and State income taxes payable -- --
------------ ------------
Total current liabilities 5,685,311 5,374,681
------------ ------------
Long-term liabilities
Notes payable, net of current maturities
Long-term debt, net of current maturities 266,100 242,406
Banks and individuals 1,500,000 --
------------ ------------
Total liabilities 7,451,411 5,617,087
------------ ------------
Commitments and contingencies
Shareholders' Equity Preferred stock - $0.001 par value
10,000,000 shares authorized;
1,550,000 and -0- issued and
outstanding, respectively 1,550 --
Common stock - $0.001 par value
14,000,000 shares authorized;
5,574,298 and 5,574,298 shares
issued and outstanding, respectively 5,574 5,574
Additional paid-in capital 15,611,373 14,377,782
Accumulated deficit (14,941,333) (12,575,483)
------------ ------------
Total shareholders' equity 677,164 1,807,873
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,128,575 $ 7,424,960
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
December 31, 1999 and 1998
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Kart sales - net $ 11,997,785 $ 8,219,646
------------ ------------
Cost of sales
Purchases 7,979,959 5,401,509
Direct labor 1,314,202 1,372,935
Other direct costs 2,036,030 1,925,806
------------ ------------
Total cost of sales 11,330,191 8,700,250
------------ ------------
Gross profit 667,594 (480,604)
------------ ------------
Operating expenses
Research and development expenses 7,775 29,770
Selling expenses 459,253 538,309
General and administrative expenses
Salaries and related costs 1,194,002 977,397
Other operating expenses 974,389 1,224,194
Compensation expense related to common
stock issuances at less than "fair value"
for reorganization, restructuring and
consulting costs -- 413,412
Depreciation and amortization 139,976 321,309
------------ ------------
Total operating expenses 2,775,395 3,504,391
------------ ------------
Loss from operations (2,107,801) (3,984,995)
------------ ------------
Other income (expense)
Interest expense (396,219) (92,416)
Relocation and reorganization expenses -- (288,848)
Impairment of future recoverability of goodwill -- (5,793,184)
Interest and other income 155,314 71,808
------------ ------------
Loss before income taxes (2,348,706) (10,087,635)
Provision for income taxes (17,144) 14,760
------------ ------------
Net loss (2,365,850) (10,072,875)
Other comprehensive income -- --
------------ ------------
Comprehensive income $ (2,365,850) $(10,072,875)
============ ============
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $ (0.42) $ (2.05)
============ ============
Weighted-average number of shares
of common stock outstanding - basic and fully diluted 5,574,298 4,920,702
============ ============
</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, 1999 and 1998
Convertible Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
--------- --------- --------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1998 - $ - 4,854,133 $ 4,854 $13,040,090 $ (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 - 641,315
Less amounts related to costs
and expenses of raising capital - - - - (227,903) - (227,903)
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
Proceeds from sale of
Convertible Preferred Stock 1,550,000 1,550 - - 1,548,450 - 1,550,000
Less amounts related to costs
and expenses of raising capital - - - - (314,859) - (314,859)
Net loss for the year - - - - - (2,365,850) (2,365,850)
--------- --------- --------- --------- ----------- ------------ -----------
Balances at December 31, 1999 1,550,000 $ 1,550 5,574,298 $ 5,574 $15,611,373 $(14,941,333) $ 677,164
========= ========= ========= ========= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1999 and 1998
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss for the year $ (2,365,850) $(10,072,875)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 299,699 414,369
Bad debt expense 135,027 87,500
Interest income accrued on note receivable (37,572) --
Reorganization and restructuring costs and related
effect of common stock issuances at less than "fair value" -- 413,412
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 (285,960) (1,937,205)
Recoverable income taxes -- 184,605
Inventory (84,729) (1,080,102)
Prepaid expenses and other (177,116) (54,268)
Increase (Decrease) in:
Accounts payable (379,899) 2,520,118
Other accrued liabilities (587,321) 605,626
Income taxes payable -- (137,710)
------------ ------------
Net cash used in operating activities (3,483,721) (3,212,629)
------------ ------------
Cash flows from investing activities
Cash paid for property and equipment (222,078) (747,466)
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. (14,457) (23,544)
------------ ------------
Net cash used in investing activities (236,535) (902,544)
------------ ------------
Cash flows from financing activities
Increase (decrease ) in cash overdraft (9,153) 9,153
Net activity on bank and other lines of credit 1,159,290 1,494,762
Principal payments on long-term debt (34,592) (26,798)
Cash received on debenture payable 1,500,000 --
Cash received on notes payable to affiliates 174,279 --
Cash paid on notes payable to affiliates (43,759) --
Cash received on sale of convertible preferred stock 1,525,000 --
Cash paid for brokerage and placement fees related
to sale of convertible preferred stock (314,860) --
------------ ------------
Net cash provided by financing activities 3,956,205 1,477,117
------------ ------------
Increase (decrease) in cash 235,949 (2,638,056)
Cash at beginning of year 163,690 2,801,746
------------ ------------
Cash at end of year $ 399,639 $ 163,690
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
December 31, 1999 and 1998
1999 1998
--------- ---------
<S> <C> <C>
Supplemental disclosure of interest
and income taxes paid
Interest paid for the year $ 382,231 $ 87,881
========= =========
Income taxes paid (refunded) for the year - net $ -- $(199,345)
========= =========
Supplemental disclosure of non-cash
investing and financing activities
Vehicles and equipment purchased with notes payable $ 80,479 $ 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
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<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.
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 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.
F-10
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - LIQUIDITY CONTINGENCY
During the four years ended December 31, 1999, the Company has experienced
cumulative net losses from operations and has utilized cash in operating
activities of approximately $7,000,000. 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.
During March 2000, the Company has received $505,000 in private transactions
from the sale of common stock and has commitments for approximately an
additional $1,100,000 to provide working capital.
Further, during the first quarter of 2000, the Company has acquired an exclusive
OEM licensing agreement to manufacture a line of "sport karts" for a domestic
manufacturer of personal watercraft and off-road vehicles.
Management is of the opinion that these events will allow for the provision of
adequate liquidity for the subsequent 12 month period. However, if necessary,
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.
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.
F-11
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - ACQUISITION OF SUBSIDIARIES - Continued
Pro forma unaudited results of operations relating to the acquisition of
Straight Line, as though the acquisition had occurred as of January 1, 1998, is
as follows:
1998
------------
Revenues $ 8,379,695
Net income (loss) $(10,280,600)
Earnings per share - basic $ (2.09)
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.
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.
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,
1999 and 1998, inventory consisted of the following components:
1999 1998
---------- ----------
Raw materials $1,701,639 $1,909,822
Work in process 167,633 92,330
Finished goods 345,406 127,797
---------- ----------
$2,214,678 $2,129,949
========== ==========
F-12
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Property, plant and equipment
-----------------------------
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5. 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.
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. As of December
31, 1998, 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, 1999 and 1998, 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, 1999 and 1998, the deferred
tax asset related to the Company's net operating loss carryforward was
fully reserved.
F-13
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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, 1999 and 1998, the
outstanding warrants and options are deemed to be anti-dilutive due to the
Company's net operating loss position.
11. Reclassifications
-----------------
Certain 1998 amounts have been reclassified to conform to the 1999
financial statement presentations.
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, 1999 and 1998, the
Company and its subsidiaries had credit risk exposures in excess of the FDIC
coverage as follows:
Highest Lowest Number of days
Entity exposure exposure with exposure
------------------------------ -------- -------- --------------
Year ended December 31, 1999
Karts International Incorporated $155,329 $5,683 31
Brister's Thunder Karts, Inc. $585,601 $ 968 139
USA Industries, Inc. $181,416 $ 400 114
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
F-14
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - CONCENTRATIONS OF CREDIT RISK - Continued
Additionally, the Company utilizes a lockbox system for the collection and
deposit of receipts on trade accounts receivable for each operating subsidiary
and a corporate cash concentration sweep account whereby all excess cash funds
are concentrated into one primary depository account with a financial
institution. The Company and the financial institution then participate in
uncollateralized reverse-repurchase agreements which are settled on a
"next-business day" basis for the investment of surplus cash funds. During 1999
and 1998, the Company had unsecured amounts invested in reverse repurchase
agreements on a daily basis from February 1997 through December 31, 1999. As of
December 31, 1999 and 1998, the Company had an unsecured outstanding reverse
repurchase agreement of approximately $368,039 and $83,000, respectively. The
Company incurred no losses during 1999 and 1998 as a result of any of these
unsecured situations.
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components:
Estimated
1999 1998 useful life
----------- ----------- -------------
Building and improvements $ 1,030,269 $ 925,713 5 to 25 years
Equipment 1,071,416 947,015 5 to 10 years
Transportation equipment 218,618 130,740 3 to 5 years
Furniture and fixtures 138,392 152,670 5 years
----------- ----------- -------------
2,458,695 2,156,138
Accumulated depreciation (522,023) (288,741)
----------- -----------
1,936,672 1,867,367
Land 32,800 32,800
----------- -----------
Net property and equipment $ 1,969,472 $ 1,900,197
=========== ===========
Total depreciation expense charged to operations for the years ended December
31, 1999 and 1998 was approximately $233,282 and $151,303, respectively.
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.
F-15
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $3,500,000.
One line of credit note is tied to the Company's aggregate trade accounts
receivable balances, not to exceed $2,5000,000 (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, 1999 and 1998, respectively, an aggregate of
approximately $2,724,005 and $1,550,924 was 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
April 2000 and are anticipated to be renewed.
The notes bear interest at the Lender's Base Rate plus 3.0% (11.50% at December
31, 1999). 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.
The Inventory LOC originally contained 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. This condition was not met
and a waiver was granted by the lender. Additionally, the Agreement contains
certain restrictive covenants related to the Company's business operations and
financial ratios. As of December 31, 1999 and 1998, the Company was not in
compliance with all covenants in the Agreement. The lender notified the Company
on February 28, 2000 and February 22, 1999, respectively, of certain defaults on
the Agreement and the lender granted waivers of applicable defaults.
F-16
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - NOTES PAYABLE TO BANKS AND OTHERS - Continued
The Company's Straight Line subsidiary had two separate term lines of credit
open at December 31, 1998:
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. This note was paid
in full during Calendar 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. This note was paid in full during Calendar 1999.
A recap of notes payable consist of the following:
1999 1998
---------- ----------
Accounts receivable line of credit $1,724,915 $ 698,486
Inventory line of credit 999,090 800,000
$60,000 corporate line of credit - 56,734
$10,000 personal line of credit - 9,495
---------- ----------
Total notes payable $2,724,005 $1,564,715
========== ==========
NOTE J - LONG-TERM DEBT TO RELATED PARTIES
Long-term debt consists of the following:
1999 1998
--------- ---------
$225,000 note payable to the Company's President
and Chief Executive Officer. Interest at 8.0%.
Accrued interest payable monthly. Principal and
accrued, but unpaid, interest is due on demand.
The loan is unsecured $ 212,055 $ -
$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. - 50,000
F-17
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - LONG-TERM DEBT TO RELATED PARTIES - Continued
1999 1998
-------- --------
$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 17,340 73,875
-------- --------
Total related party long-term debt $229,395 $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, 1999 and 1998:
1999 1998
-------- --------
$22,678 capital lease payable to a finance company
Interest at 7.86%. Payable in monthly installments
of approximately $2,144, including accrued interest
Collateralized by equipment owned by Karts
International Incorporated $ 6,792 $ --
$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. 11,071 15,075
$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. 10,324 17,849
F-18
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - LONG TERM DEBT TO BANKS AND OTHERS - Continued
1999 1998
-------- --------
<S> <C> <C>
$17,829 installment note payable to a bank. Interest at 8.25%.
Payable in monthly installments of approximately $561,
including accrued interest. Final maturity in January 2002
Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. 14,077 --
$20,000 installment note payable to a bank. Interest at 8.0%
Payable in monthly installments of approximately $406,
including accrued interest. Final maturity in June 2004
Collateralized by a vehicle owned by Brister's Thunder Karts, Inc. 18,322 --
$20,000 installment note payable to a bank. Interest at 8.0%
Payable in monthly installments of approximately $406, including
accrued interest. Final maturity in July 2004. Collateralized
by a vehicle owned by Brister's Thunder Karts, Inc. 18,587 --
$22,650 installment note payable to a bank. Interest at 8.5%
Payable in monthly installments of approximately $466, including
accrued interest. Final maturity in October 2004. Collateralized
by a vehicle owned by Brister's Thunder Karts, Inc. 21,706 --
$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. 205,598 217,371
$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
$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. 8,110 14,042
</TABLE>
F-19
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - LONG TERM DEBT TO BANKS AND OTHERS - Continued
1999 1998
--------- ---------
$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. 8,995 11,947
--------- ---------
Total long-term debt to banks and individuals 323,582 277,695
Less current maturities (57,482) (35,289)
--------- ---------
Long-term portion $ 266,100 $ 242,406
========= =========
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
2000 $ 57,483
2001 43,094
2002 32,302
2003 29,283
2004 26,002
2005 - 2009 115,238
2010 - 2014 20,180
--------
Totals $323,582
========
NOTE L - DEBENTURE PAYABLE
On June 3, 1999, the Company issued a $1,500,000 debenture payable to a
foundation who is also a shareholder in the Company. The debenture matures on
May 31, 2004 and bears interest at 12.0%. The debenture requires monthly
payments of interest only. The debenture may be converted into common stock of
the Company at an exchange rate of $0.375 per share at any time at the option of
the debenture holder and the Company may require conversion if the closing price
of the Company's common stock is in excess of $4.00 per share for 25 consecutive
trading days. The debenture may be prepaid in total or in part on or after the
2nd anniversary date of the debenture upon 30 days notice being given by the
Company and the payment of a 12.0% liquidation charge of the amount being
prepaid. The debenture is collateralized by all cash, accounts receivable,
inventory and equipment owned by the Company and its subsidiaries, subordinate
to the Company's line of credit facility with a non-financial institution
lender.
All parties to the debenture agreement have agreed to defer the effective date
of any conversion feature until such time that the conversion provisions are
approved at the next annual shareholders' meeting, which was held on August 31,
1999. The conversion measure was approved at the Company's annual shareholder's
meeting.
F-20
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - INCOME TAXES
The components of income tax (benefit) expense for the years ended December 31,
1999 and 1998, respectively, are as follows:
1999 1998
-------- --------
Federal:
Current $(10,000) $ (3,388)
Deferred - -
-------- --------
(10,000) (3,388)
-------- --------
State:
Current (7,144) (11,372)
Deferred - -
-------- --------
(7,144) (11,372)
-------- --------
Total $(17,144) $(14,760)
======== ========
As of December 31, 1999, the Company has a net operating loss carryforward of
approximately $5,000,000 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, 1999 and 1998,
respectively, differed from the statutory federal rate of 34 percent as follows:
1999 1998
----------- -----------
<S> <C> <C>
Statutory rate applied to earnings (loss) before income taxes $ (798,560) $(3,412,796)
Increase (decrease) in income taxes resulting from:
State income taxes (7,144) (11,372)
Non-deductibility 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
Other, including reserve for deferred tax asset 788,560 1,310,537
----------- -----------
Income tax expense $ (17,144) $ (3,388)
=========== ===========
</TABLE>
NOTE N - 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
$74,700 and $72,300 for each of the years ended December 31, 1999 and 1998,
respectively.
F-21
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - RELATED PARTY TRANSACTIONS - Continued
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 O - CONVERTIBLE PREFERRED STOCK
Through May 31, 1999, the Company sold $1,550,000 in Convertible Preferred Stock
(Preferred Stock) subject to a Private Placement Memorandum. The Preferred Stock
bears a dividend of 9.0%, payable semi-annually in either cash or common stock
of the Company. The Preferred Stock is convertible into shares of common stock
at a conversion rate of $0.25 per share at the option of the holder at any time
between issuance and June 30, 2003. The Preferred Stock mandatorily converts to
common stock on June 30, 2003. The Preferred Stock is redeemable by the Company
on or after March 31, 2000, in whole or part, at the option of the Company at a
redemption price of 109%, plus accrued dividends, if any. The dividend payable
at December 31, 1999 was paid in February 2000 with the issuance of 225,022
shares of restricted, unregistered common stock.
NOTE P - COMMON STOCK TRANSACTIONS
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.
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.
F-22
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - COMMON STOCK TRANSACTIONS - Continued
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.
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 Q - 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.
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.
F-23
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - COMMON STOCK WARRANTS - Continued
Warrants Warrants
originally outstanding at
issued September 30, 1999 Exercise price
---------- ------------------ ---------------
1996 Warrants 500,018 500,018 $4.50 per share
Underwriter's Warrants 155,000 155,000 $4.00 per share
1997 Warrants 1,782,500 1,782,500 $4.00 per share
--------- ---------
Totals at September 30, 1999 2,504,185 2,437,518
========= =========
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.
NOTE R - STOCK OPTIONS
The Company's Board of Directors has allocated an aggregate 125,377 shares of
the Company's common stock for unqualified stock option plans for the benefit of
employees of the Company and its subsidiaries.
During 1996, the Company granted options to purchase 59,355 shares of the
Company's common stock to employees of the Company and its operating
subsidiaries at an exercise price of $5.63 per share. 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 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.
F-24
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - STOCK OPTIONS - Continued
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.
In January 1999, as part of the Separation Agreement between the Company and its
then President and Chief Executive Officer, the Company issued this individual
options to purchase 15,000 shares of Common Stock at an option exercise price of
$1.06 per share. This option was granted to replace 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.
During the fourth quarter of 1999, the Company granted options to its President,
Vice President of Operations and various employees. These options vested in
various amounts over a period from grant through three years from the grant
date. These options, if not exercised, expire between the fourth and fifth
anniversary date of the option grant. These options are summarized as follows:
Options granted Exercise price
--------------- ----------------
President options 400,000 $0.375 per share
Vice President of Operations options 225,000 $0.375 per share
Employee options 3,000 $0.375 per share
Employee options 117,000 $0.31 per share
There were no exercise of any options during the years ended December 31, 1999
and 1998. The following table summarizes all options granted from 1996 to
December 31, 1999.
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
--------- --------- ---------- ----------- --------------
1996 options 59,335 - - 59,335 $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
1999 options 810,000 - - 810,000 $0.31 - $1.06
--------- --------- ---------- ----------- --------------
Totals 1,200,339 - 216,667 983,672
========= ========= ========== ===========
The weighted average exercise price of all issued and outstanding options at
December 31, 1999 and 1998, respectively, was $1.07 and $3.32.
Had compensation cost for options granted been determined based on the fair
values at the grant dates, as prescribed by SFAS 123, the Company's net loss and
net loss per share would not have changed due to the fact that the exercise
price of the options was substantially higher than the market price at the grant
date.
F-25
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - STOCK OPTIONS - Continued
The calculations to estimate the fair value of the options were made using the
Black-Scholes pricing model which required making significant assumptions. These
assumptions include the expected life of the options, which was determined to be
one year, the expected volatility, which was based on fluctuations of the stock
price over a 12 month period, the expected dividends, determined to be zero
based on past performance, and the risk free interest rate, which was estimated
using the bond equivalent yield of 6.0% at December 31, 1999 and 1998,
respectively.
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.
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.
F-26
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - STOCK OPTIONS - Continued
1998 Compensation Plan - continued
- ----------------------
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.
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 S - COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
The Company and/or it's operating subsidiaries are as defendant(s) 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, 1999. 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.
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-27
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE S - COMMITMENTS AND CONTINGENCIES - Continued
Consulting and Patent Licensing
- -------------------------------
The Company and the former owner executed a Licensing Agreement and a related
Royalty Agreement. These agreements provide 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.
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.
The Agreements are 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 year ended December 30, 1999 and
1998, respectively, the Company paid or accrued approximately $15,242 and
$20,000 under this Agreement.
Employment agreements
- ---------------------
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 this 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. This 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.
F-28
<PAGE>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE S - COMMITMENTS AND CONTINGENCIES - Continued
Employment agreements
- ---------------------
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.
On October 19, 1999, the Company's Board of Directors ratified an Employment
Agreement (Agreement) with an individual to serve as the Company's President and
Chief Executive Officer. The Agreement term was effective as of February 1, 1999
and expires on the third anniversary date of the Agreement with an automatic one
year extension unless either the Company or the President provides a thirty (30)
day written notice not to continue the Agreement. This Agreement provides the
President with an annual salary of $150,000 per year, payable in either common
stock of the Company or cash. At the end of each calendar quarter during the
first calendar year of this Agreement, the Company shall pay the President a
cash portion to satisfy the President's estimated federal and state tax
liability and the balance shall be paid in shares of common stock calculated
based on the closing bid price of the Company's common stock as quoted at the
end of each quarter. Further, the President was granted 450,000 options to
purchase shares of the Company's common stock at 100% of the closing bid price
of the Company's common stock on the ratification date and the options vest as
follows: 100,000 at the ratification date of this Agreement; 150,000 on the
second anniversary date of this Agreement; and 200,000 on the third anniversary
date of this Agreement. Additionally, the President may be eligible to receive
an annual bonus which shall be in the form of (a) options to purchase up to
50,000 shares of the Company's common stock, which shall vest immediately upon
grant and expire five years from the grant date and (b) cash, not to exceed 15%
of the President's base salary.
NOTE T - SIGNIFICANT CUSTOMERS
During the year ended December 31, 1999, the Company had one customer
responsible for more than 10.0% of total net sales. Total sales to this entity
totaled approximately $1,276,000, or approximately 10.6% of total net sales.
During 1999, the Company had no other single or related groups of customers that
aggregated more than 10.0% of total net sales.
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. If this Agreement is terminated as a result
of a Change in Control of the Company, as defined in the Agreement, the
President will be entitled to a cash payment of $200,000 and the immediate
vesting of all open stock options.
F-29
<PAGE>
<TABLE>
<CAPTION>
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE U - SELECTED FINANCIAL DATA (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1999 and 1998, respectively.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended
March 31, June 30, September 30, December 31, December 31,
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1999
- ----
Net revenues $ 1,203,359 $ 2,462,403 $ 3,013,124 $ 5,318,899 $ 11,997,785
Gross profit (169,160) 189,978 248,865 397,911 667,594
Net earnings
from operations (708,387) (340,526) (483,516) (630,372) (2,162,801)
Basic and fully
diluted earnings
per share $ (0.12) $ (0.07) $ (0.10) $ (0.13) $ (0.42)
Weighted-average
number of shares
issued and outstanding 5,574,298 5,574,298 5,574,298 5,574,298 5,574,298
1998
- ----
Revenues $ 509,205 $ 1,222,734 $ 1,885,571 $ 4,602,136 $ 8,219,646
Gross profit (201,595) 196,013 (135,053) (339,969) (480,604)
Net earnings
from operations (630,132) (897,450) (870,615) (1,586,798) (3,984,995)
Basic and fully
diluted earnings
per share $ (0.13) $ (0.18) $ (0.18) $ (1.56) $ (2.05)
Weighted-average
number of shares
issued and outstanding 4,854,133 4,854,133 4,854,133 5,118,238 4,920,702
</TABLE>
F-30
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 1010077
<NAME> Karts International Incorporated
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 399639
<SECURITIES> 0
<RECEIVABLES> 2683626
<ALLOWANCES> 198065
<INVENTORY> 2214678
<CURRENT-ASSETS> 5466957
<PP&E> 2491495
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<TOTAL-ASSETS> 8128575
<CURRENT-LIABILITIES> 2068404
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0
1550
<COMMON> 5574
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<TOTAL-LIABILITY-AND-EQUITY> 8128575
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<CGS> 11330191
<TOTAL-COSTS> 2775395
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<LOSS-PROVISION> 135027
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<INCOME-PRETAX> (2348706)
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<INCOME-CONTINUING> (2365850)
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<CHANGES> 0
<NET-INCOME> (23658500
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