1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1997
REGISTRATION NO. 333-24145
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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KARTS INTERNATIONAL INCORPORATED
(Name of Small Business Issuer in its Charter)
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NEVADA 3944 75-2639196
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Identification No.)
Classification Code
Number)
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KARTS INTERNATIONAL INCORPORATED V. LYNN GRAYBILL, CHIEF EXECUTIVE OFFICER
109 NORTHPARK BOULEVARD, SUITE 210 109 NORTHPARK BOULEVARD, SUITE 210
COVINGTON, LOUISIANA 70433 COVINGTON, LOUISIANA 70433
(504) 875-7350 (504) 875-7350
(Address and Telephone Number of Principal (Name, Address and Telephone Number
Executive of Agent for Service)
Offices and Principal Place of Business)
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Copies to:
RICHARD B. GOODNER, ESQ.
LOOPER, REED, MARK & MCGRAW ROBERT E. ALTENBACH, ESQ.
INCORPORATED JOHNSON & MONTGOMERY
4100 THANKSGIVING TOWER ONE BUCKHEAD PLAZA
1601 ELM STREET 3060 PEACHTREE ROAD, N.W., SUITE 400
DALLAS, TEXAS 75201 ATLANTA, GEORGIA 30305
PHONE NO. (214) 954-4135 PHONE NO. (404) 262-1000
FAX NO. (214) 953-1332 FAX NO. (404) 262-1222
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ] ________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock(2), $.001 par value(2) . . . . . . 3,360,000 $ 5.06 $17,001,600 $5,151.48
- -------------------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase Warrants(3)(5) 1,610,000 $0.125 $ 201,250 $ 60.98
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Underwriters' Warrants(4)(5) . . . . . . . . . 140,000 $ 7.52 $ 1,052,800 $ 319.00
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Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,531.46(6)
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(1) Estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c) under the
Securities Act of 1933. The price per share of Common Stock
has been calculated on the basis of the average of the
closing bid and ask prices per share as quoted on the
NASD Electronic Bulletin Board on March 26, 1997, which were
$4.50 and $5.625 per share, respectively.
(2) Includes (i) 1,400,000 shares of Common Stock offered hereby,
(ii) 1,400,000 shares of Common Stock issuable upon exercise
of the Redeemable Common Stock Purchase Warrants (the
"Warrants") offered hereby, (iii) 210,000 shares of Common
Stock subject to the Underwriters' overallotment option,
(iv) 210,000 shares of Common stock issuable upon exercise
of 210,000 Warrants subject to the Underwriters'
overallotment option, and (v) 140,000 shares of Common Stock
issuable upon exercise of 140,000 warrants subject to
Underwriters' Warrants.
(3) Includes 1,400,000 Warrants offered hereby and 210,000
Warrants subject to the Underwriters' over-allotment option.
(4) Underwriters' Warrants to purchase up to 140,000 units
consisting of an aggregate of 140,000 shares of Common
Stock and 140,000 Warrants exercisable at 145% of the
estimated offering prices of the Common Stock and Warrants.
(5) Pursuant to Rule 416, this Registration Statement also covers
such indeterminate number of shares of Common Stock as may be
issuable upon exercise of the referenced warrants pursuant to
antidilution provisions.
(6) The amount of $5,531.46 was previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 1, 1997
PROSPECTUS
KARTS INTERNATIONAL INCORPORATED
1,400,000 SHARES OF COMMON STOCK AND
1,400,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Karts International Incorporated, a Nevada corporation (the "Company"),
hereby offers 1,400,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), and 1,400,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") (the "Offering"). The shares of Common Stock and the Warrants
offered hereby (sometimes hereinafter collectively referred to as the
"Securities") may be purchased separately. The Company anticipates the
Securities will be offered to the public at approximately $4.50 per share of
Common Stock and $0.125 per Warrant. Each Warrant is transferable immediately
upon issuance and entitles the holder thereof to purchase one share of Common
Stock at the initial public offering price per share of Common Stock during the
four-year period commencing on the first anniversary of the effective date of
this Offering (the "First Exercise Date"). The Warrants are redeemable by the
Company at a redemption price of $0.01 per Warrant, at any time after the First
Exercise Date, upon 30 days' written notice to the holders thereof, if the
average closing price of the Common Stock equals or exceeds twice the initial
public offering per share of Common Stock for the 20 consecutive trading days
ending three days prior to the date of the notice of redemption. See
"Description of Securities."
The Company's Common Stock is listed for trading on the Electronic Bulletin
Board of the National Association of Securities Dealers, Inc. (the "NASD")
under the symbol "KINT". On June 30, 1997, the closing bid and ask prices of
the Common Stock were $4.00 and $5.00 per share, respectively. There is no
trading market for the Warrants. The Company has applied to include the shares
of Common Stock and Warrants offered hereby on the Nasdaq SmallCap Market under
the symbols "KINT" and "KINTW," respectively. The Company's Securities have not
yet been approved for quotation on the Nasdaq SmallCap Market and there can be
no assurance that an active trading market will develop or if such market is
developed it will be sustained. See "Common Stock Price Ranges and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT
IN THE COMMON STOCK AND WARRANTS OFFERED HEREBY, INCLUDING, WITHOUT LIMITATION,
A RISK THAT THIS PROSPECTUS MAY NOT BE CURRENT DURING THE EXERCISE PERIOD OF
THE WARRANTS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING DISCOUNTS PROCEEDS TO
TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
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Per Share of Common Stock . . . . . . . $__________ $__________ $__________
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Per Warrant . . . . . . . . . . . . . . $__________ $__________ $__________
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Total(3) . . . . . . . . . . . . . $__________ $__________ $__________
==================================================================================================================
(1) Does not include compensation to Argent Securities, Inc. as the managing
underwriter (the "Representative") among the companies underwriting this
Offering (the "Underwriters") in the form of (i) a 3% non-accountable
expense allowance, (ii) warrants to purchase up to 140,000 shares of Common
Stock and 140,000 Warrants exercisable at 145% of the price per share of
Common Stock offered hereby and 145% of the price per warrant offered hereby
(the "Underwriters' Warrants") and (iii) a financial advisory agreement for
the Representative to act as an investment banker for the Company for a
period of two years for an aggregate fee of $48,000 payable at the closing
of the Offering. In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $445,000, including the non-accountable expense allowance payable to the
Underwriters.
(3) The Company has granted the Underwriters a 45-day over-allotment option to
purchase up to 210,000 additional shares of Common Stock and 210,000
additional Warrants on the same terms and conditions as set forth above. If
all such additional shares are purchased by the Underwriters, the total
Price to Public will be $_______________, the total Underwriting Discounts
and Commissions will be $_______________ and the total Proceeds to the
Company will be $_______________. See "Underwriting."
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The Securities offered by this Prospectus are being offered by the
Underwriters named herein on a "firm commitment" basis subject to prior sale,
when, as and if accepted by the Underwriters, approval of certain legal matters
by counsel for the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer without notice and
reject any order in whole or in part. It is expected that delivery of the
certificates representing the Securities will be made at the offices of Argent
Securities, Inc., Atlanta, Georgia on or about ____________________, 1997.
Argent Securities, Inc.
The Date of this Prospectus is , 1997
3
AVAILABLE INFORMATION
The Company has filed with the U.S. Securities and Exchange Commission
(the "Commission") a Registration Statement on Form SB-2 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered hereby. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the Commission. This
Prospectus contains a summary of the material provisions of all material
contracts, agreements or other documents filed as exhibits to the Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract, agreement or other document referred to herein are necessarily
summaries of the material provisions of such contracts, agreements or other
documents and, where such contract, agreement or other document is an exhibit
to the Registration Statement, each such statement is qualified in all respects
by the provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof. For further information with respect to
the Company and the Securities offered hereby, reference is hereby made to the
Registration Statement and to the schedules and exhibits thereto.
The Registration Statement may be inspected, without charge, and
copies may be obtained, at prescribed rates, at the public reference facilities
of the Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected, without charge, at the Commission's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. In addition, copies of the Registration
Statement may be obtained by mail, at prescribed rates, from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549.
ADDITIONAL INFORMATION
As a result of this Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the public reference facilities and
regional offices referred to above. The Commission also maintains a Web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding issuers of securities which file electronically
with the Commission. The Company intends to furnish its stockholders with
annual reports containing consolidated financial statements certified by its
independent auditors and with quarterly reports for each of the first three
quarters of each fiscal year containing unaudited consolidated financial
information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK AND THE WARRANTS, INCLUDING BY ENTERING STABILIZING BIDS,
EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated
herein, the financial, business activities, management and other pertinent
information herein relates on a consolidated basis to the Company and its
wholly-owned subsidiaries, Brister's Thunder Karts, Inc. and USA Industries,
Inc. Each prospective investor is urged to read this Prospectus in its
entirety and to particularly consider the information set forth under the
heading "RISK FACTORS." Unless otherwise indicated, all Common Stock share and
per share data and information in this Prospectus (i) have been adjusted to
give effect to a two-for-three reverse stock split of the Company's Common
Stock effective March 24, 1997 and a one-for-250 reverse stock split of the
Company's Common Stock on February 23, 1996, (ii) assume the conversion, upon
the closing of the Offering, of all outstanding shares of the Company's
Convertible Preferred Stock, par value $0.001 per share (the "Convertible
Preferred Stock") for $625,000 and the issuance of 104,175 shares of Common
Stock to the holders of the Convertible Preferred Stock, (iii) assume issuance
to Convertible Preferred Stockholders of an additional 333,350 1996 Redeemable
Common Stock Purchase Warrants (the "1996 Warrants") upon the closing of the
Offering, (iv) assume no exercise of outstanding options to purchase an
aggregate of 59,355 shares of Common Stock with an exercise price of $5.63 per
share, (v) assume no exercise of outstanding options to purchase an aggregate
of 66,004 shares of Common Stock with an exercise price of $4.875 per share,
(vi) assume no exercise of outstanding warrants, including Warrants offered
hereby, the 1996 Warrants, the Class A Warrants and the Underwriters' Warrants,
and (vii) assume no exercise of the Underwriters' over-allotment option.
THE COMPANY
Karts International Incorporated, a Nevada corporation (the
"Company"), through its wholly-owned subsidiaries, Brister's Thunder Karts,
Inc., a Louisiana corporation ("Brister's") and USA Industries, Inc., an
Alabama corporation ("USA"), designs, manufactures and distributes recreational
fun karts ("Fun Karts"), also referred to as "go karts." Fun Karts are
four-wheeled, gas-powered vehicles typically equipped with engines of 5 to 8
horsepower and purchased by consumers principally for off-road recreational
use. The Company shipped approximately 17,750 Fun Karts to dealers and mass
merchandisers in 1996, which the Company believes represents approximately 14%
of the total domestic Fun Karts market. Proforma consolidated revenues of the
Company for the fiscal year ended December 31, 1996 were approximately $10.7
million as compared with combined revenues of approximately $8.5 million for
the fiscal year ended December 31, 1995. For the three-month period ended
March 31, 1997, the Company's consolidated revenues were approximately $1.3
million, as compared with combined revenues of approximately $1.0 million for
the three-month period ended March 31, 1996. The Company operates
manufacturing facilities in Roseland, Louisiana and Prattville, Alabama, and
maintains its executive offices in Covington, Louisiana. See "The Company" and
"Business."
The karts industry is comprised of three principal segments, Fun
Karts, racing and concession karts. Fun Karts, the largest segment, are karts
sold to consumers for general recreational use. Racing karts are specially
designed for use on established tracks in a controlled racing environment.
Concession karts are designed for use by amusement and entertainment centers
which provide karts and facilities for customers' use on a rental basis.
Management estimates that in 1996 approximately 145,000 karts were sold in the
United States of which approximately 125,000 were Fun Karts, 9,000 racing karts
and 11,000 concession karts. Historically, Brister's and USA have concentrated
their efforts in the Fun Karts market.
The Company offers a complete product line of Fun Karts,
differentiated by drive train, seating capacity, tire size and tread, and frame
size. Thirty-two Fun Kart models are available in three different colors,
black, blue and red, which are sold under the Thunder Karts and USA Fun Karts
brand names. The Company's models offer a wide range of standard and optional
features which enhance the safety, operation, riding comfort and performance of
its Fun Karts. Such features include the exclusive, patented automatic
throttle override; full safety cage; safety flag; three kinds of drive trains,
including live axle, single wheel pull and torque converter; clutch lubrication
system; high speed bearings; adjustable throttle and seats; steel rims; band
and disc brakes; and Briggs & Stratton 5 horsepower engines. The end-users of
the Company's Fun Karts are primarily 7- to 17-year-old males, living with
their parents in suburban and rural markets. Typical Fun Kart purchasers are
parents who purchase Fun Karts for their children.
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The Company relies on a broad and diversified national independent
dealer network and mass merchandisers to sell its Fun Karts. Prior to 1996,
the Company sold its products through its over 700 dealers, primarily lawn and
garden stores, motorcycle outlets, hardware stores and specialty karts dealers,
located in 40 states. The major markets for the Company's Fun Karts are in the
Southeast and Southwest regions of the United States. In 1996, the Company
sold approximately 61% of its Fun Karts to approximately 250 dealers located in
Louisiana, Texas, Mississippi and Florida. Although there are no formal dealer
agreements, the Company, for the benefit of certain of its higher volume
dealers, will agree not to sell to other retailers in a limited geographic area
surrounding the high volume dealer. To become a Fun Kart dealer, the Company
generally requires a retailer to annually purchase six or more Fun Karts.
Dealers usually maintain an inventory of three to five Fun Karts which
increases during the Christmas holiday season. For eligible dealers, the
Company offers a dealer floor plan financing program through an unaffiliated
financial services company.
To broaden its distribution channels, the Company in 1996 began
selling its Fun Karts to two mass merchandisers, Wal-Mart Stores, Inc.
("Wal-Mart") and Sam's Wholesale Club ("Sam's Club"), a division of Wal-Mart
Stores, Inc. In 1996, the Company sold approximately 4,000 of its Fun Karts to
Wal-Mart and Sam's Club, representing approximately 21% of the Company's
proforma revenues for the fiscal year ended December 31, 1996. Management
believes that mass merchandisers represent a significant untapped market for
Fun Karts.
The Company's operating strategy is to increase its sales and market
share by producing safe, high-quality and reliable Fun Karts at competitive
prices; continue to improve manufacturing efficiency; and continue
diversification of domestic distribution channels. The Company's growth
strategy is to increase its brand and product recognition by innovative
marketing to its target users; broaden its product lines through improved
product design and development; and expand its geographic presence and market
share by continued emphasis on expansion of its domestic dealer and mass
merchandiser networks, through further penetration of international markets,
and through acquisitions of manufacturers of karts and related products that
provide synergistic growth opportunities for the Company.
Although the Company is actively seeking acquisitions that will expand
its existing product lines, market share and distribution channels, the Company
currently has no agreements or understandings with respect to any such
acquisitions and there can be no assurance that the Company will be able to
identify and acquire such businesses or obtain necessary financing on favorable
terms.
THE OFFERING
SECURITIES OFFERED
Common Stock . . . . . . . . 1,400,000 shares of Common Stock. See "Description of Securities -- Common Stock."
Warrants . . . . . . . . . . 1,400,000 Warrants. Each Warrant entitles the holder thereof to purchase one share
of Common Stock at the initial public offering price per share of Common Stock
during the four-year period commencing on the first anniversary of the effective
date of this Offering (the "First Exercise Date"). The Warrants are each
redeemable by the Company at a redemption price of $0.01 per Warrant, at any time
after the First Exercise Date, upon thirty days prior written notice to the holders
thereof, if the average closing price of the Common Stock equals or exceeds twice
the initial public offering price per share of Common Stock for the 20 consecutive
trading days ending three days prior to the date of the notice of redemption. See
"Description of Securities -- Redeemable Common Stock Purchase Warrants."
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OUTSTANDING SECURITIES . . . . . . . Securities
Securities Outstanding Upon
Presently Completion of the
Outstanding Offering
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Common Stock(1) . . . . . . . . . . . 2,717,458 4,117,458
Warrants . . . . . . . . . . . . . . -0- 1,400,000
Convertible Preferred Stock(2) . . . 25 -0-
1996 Warrants(2) . . . . . . . . . . 166,675 500,025
Class A Warrants(3) . . . . . . . . . 63,334 63,334
Underwriters' Warrants(4) . . . . . . -0- 140,000
ESTIMATED NET PROCEEDS TO THE
COMPANY . . . . . . . . . . . . . Approximately $5,382,500 if the Securities are sold, and $6,227,487 if the over-
allotment option is fully exercised. See "Use of Proceeds."
USE OF PROCEEDS . . . . . . . . . . . Debt repayment, conversion of preferred stock, purchase of equipment, advertising
and marketing, product development and design, payment of financial advisory fee
to the Representative, working capital and other corporate purposes. See "Use of
Proceeds."
RISK FACTORS . . . . . . . . . . . . This Offering involves a high degree of risk and immediate and substantial
dilution. See "Risk Factors" and "Dilution."
PROPOSED NASDAQ SYMBOLS(5) . . . . . Common Stock -- KINT
Warrants -- KINTW
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(1) Unless otherwise indicated herein, the information contained in this
Prospectus regarding the Company's outstanding securities does not include
(i) 210,000 shares of Common Stock and 210,000 Warrants issuable upon
exercise of the Underwriters' over-allotment option, (ii) the 140,000
shares of Common Stock and 140,000 Warrants issuable upon exercise of the
Underwriters' Warrants, (iii) the 1,963,359 shares of Common Stock
issuable upon the exercise of the outstanding warrants, including the
Warrants offered hereby, and (iv) 125,359 shares of Common Stock issuable
upon the exercise of stock options granted to certain employees and
officers of the Company. See "Management -- Stock Options," "Principal
Stockholders," "Description of Securities" and "Underwriting."
(2) See "The Company -- Recent Financings" and "Description of Securities --
Convertible Preferred Stock, -- 1996 Warrants, and -- Bridge Financing."
(3) See "The Company -- Recent Financings" and "Description of Securities --
Class A Warrants."
(4) See "Underwriting."
(5) The Company has made application with the NASD for inclusion of the
Securities in the NASD's Automated Quotation System ("Nasdaq") SmallCap
Market. The inclusion of the proposed Nasdaq symbols in this Prospectus
Summary is not meant to imply that a trading market may someday exist for
the Securities offered hereby or that the symbols will be assigned to the
Securities of the Company. The Company's Common Stock currently is quoted
on the NASD Electronic Bulletin Board under the symbol "KINT". See
"Common Stock Price Ranges and Dividends."
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SUMMARY HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
The following table presents summary historical financial data of the
Company on either a consolidated basis as of December 31, 1996 and March 31,
1997 or a combined basis as of December 31, 1995 and 1994, respectively, and
March 31, 1996. This information has been derived from the Company's audited
financial statements included elsewhere in this Prospectus or other unaudited
financial information provided by the Company. The summary financial
information should be read in conjunction with "Selected Historical
Consolidated and Combined Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Prospectus.
In the opinion of management, this financial information includes all
material adjustments necessary to present historical results of the Company as
if Karts International Incorporated, Brister's Thunder Karts, Inc. and USA
Industries, Inc. had been a single operating entity as of the first day of the
first period presented. This financial information does not purport to be
indicative of the financial position or the results of operations which would
have actually been obtained if the acquisition transactions had actually been
consummated on the dates indicated. In addition, this financial information
does not purport to be indicative of the financial position or results of
operations that may be obtained in the future.
Year Ended Year Ended Year Ended (Unaudited) (Unaudited)
December 31, December 31, December 31, Three Months Ended Three Months
1996 1995 1994 March 31, 1997 Ended March 31, 1996
(Historical) (Combined) (Combined) (Historical) (Combined)
----------- ----------- ----------- ------------ ----------
STATEMENT OF OPERATIONS DATA:
Revenues, net . . . . . . . . . . . . . . . . . $ 8,327,316 $ 8,514,460 $ 7,069,500 $ 1,300,784 $ 997,493
Cost of goods sold . . . . . . . . . . . . . . 5,842,532 6,184,340 5,186,245 1,154,430 503,635
Operating expenses . . . . . . . . . . . . . . 1,464,890 1,639,583 1,423,933 565,211 344,586
Income from operations . . . . . . . . . . . . 1,019,894 690,537 459,322 (418,857) 150,272
Net income . . . . . . . . . . . . . . . . . . (68,806) 355,701 341,036 (522,918) 34,551
Net income per proforma weighted-
average share of common stock
outstanding
Primary . . . . . . . . . . . . . . . . . . $(0.03) $0.17 $0.16 $(0.19) $0.05
Fully diluted . . . . . . . . . . . . . . . $(0.03) $0.17 $0.16 N/A $0.05
Number of weighted-average shares
of common stock outstanding
Primary . . . . . . . . . . . . . . . . . . 2,083,456 2,083,456 2,083,456 2,742,748 712,531
Fully diluted . . . . . . . . . . . . . . . 2,110,209 2,110,209 2,110,209 N/A 712,531
Proforma income assuming use of proceeds to
retire certain outstanding debt . . . . . . . $ 557,844 $ (427,918)
Proforma earnings per share assuming retirement
of certain outstanding debt
Primary . . . . . . . . . . . . . . . . . . $0.11 $(0.16)
Fully diluted . . . . . . . . . . . . . . . $0.11 N/A
December 31, December 31, December 31, March 31, March 31,
1996 1995 1995 1997 1997
(Historical) (Historical) (Combined) (Unaudited) (As adjusted)(1)
------------------ ------------------- ----------------- ----------------- -----------------
BALANCE SHEET DATA:
Current assets . . . . . . . $ 3,391,290 $ - $ 2,054,177 2,317,233 $ 3,874,733
Total assets . . . . . . . . 10,126,840 - 8,268,481 9,103,309 10,660,809
Current liabilities . . . . . 1,382,932 4,010 1,335,057 780,988 780,988
Total liabilities . . . . . . 4,715,592 4,010 4,610,490 4,214,980 1,014,980
Convertible preferred stock . 625,000 - - 625,000 -
Stockholders' equity . . . . 4,786,248 (4,010) 3,657,991 4,263,329 9,645,829
Working capital . . . . . . . 2,008,358 (4,010) 719,120 1,536,245 3,093,745
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(1) Adjusted to give effect to (i) the sale of 1,400,000 shares of Common Stock
and 1,400,000 Warrants offered hereby at assumed initial public offering
prices of $4.50 per share of Common Stock and $0.125 per Warrant,
respectively, and the application of the net proceeds therefrom and (ii)
conversion of outstanding shares of Convertible Preferred Stock. See "Use
of Proceeds." No effect has been given to the exercise of (i) any
outstanding warrants, including the Warrants offered hereby and the
Underwriters' Warrants, (ii) the Underwriters' over-allotment option, or
(iii) outstanding options. See "Management -- Stock Options," "Description
of Securities" and "Underwriting."
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RISK FACTORS
An investment in the Securities offered hereby involves a high degree
of risk. Prospective investors should consider carefully the following risk
factors in addition to the other information set forth in this Prospectus.
SUBSTANTIAL OFFERING PROCEEDS ALLOCATED FOR PAYMENT TO DIRECTOR AND
CERTAIN STOCKHOLDERS OF THE COMPANY. As a result of the acquisition of
Brister's (the "Brister's Acquisition"), the Company incurred long-term
indebtedness of approximately $3.2 million of which approximately $1.2 million
(22% of net proceeds) will be repaid to Charles Brister, a director and
principal stockholder of the Company, with a portion of the proceeds of the
Offering. The remaining $2 million of long-term debt (37.2% of net proceeds)
will be repaid to the Schlinger Foundation, a principal stockholder of the
Company, upon closing of the Offering. In addition to the $3.2 million debt
repayment (59.2% of net proceeds), the Company will pay to holders of the
Company's Convertible Preferred Stock $625,000 (11.6% of net proceeds) upon the
conversion of the outstanding Convertible Preferred Stock at the closing of the
Offering. After the completion of this Offering, Mr. Brister will have
received approximately $3.2 million from the Company and will own 516,667
shares of Common Stock as a result of the Brister's Acquisition. Upon
conversion of the Convertible Preferred Stock, the holders will receive the
return of their total cash investment while retaining an aggregate of 104,175
shares of Common Stock and 500,025 1996 Warrants at no cost basis. The
purchasers of the Securities in this Offering will have paid a significantly
higher price per share for the Common Stock offered hereby than the holders of
the Convertible Preferred Stock or most of the principal stockholders paid for
their shares of Common Stock, and will have assumed the principal financial
risk for the future success of the Company's business operations. Certain
officers, directors and stockholders of the Company, including Mr. Brister and
the Convertible Preferred Stockholders will enter into lock-up agreements with
the Company and the Representative upon the closing of the Offering for periods
ranging from 18 to 60 months. See "The Company," "Use of Proceeds,"
"Dilution," "Certain Relationships and Related Transactions," "Principal
Stockholders," "Description of Securities -- Convertible Preferred Stock and --
Bridge Financing."
INTEGRATION OF OPERATIONS AS A RESULT OF RECENT ACQUISITIONS. If the
Company is to realize the anticipated benefits of its recent acquisitions,
USA's and Brister's must be integrated and combined efficiently and effectively
with those of the Company. The process of augmenting the manufacturing, supply
and distribution channels, computer and accounting systems and other aspects of
operations, while managing a larger and geographically expanded entity with
additional Fun Kart products, will present a significant challenge to the
Company's management. There can be no assurance that the integration process
will be successful or that the anticipated benefits of these acquisitions will
be fully realized. The dedication of management resources to such integration
may detract attention from the day-to-day business of the Company. The
difficulties of integration may be increased by the necessity of coordinating
geographically separated manufacturing operations, integrating personnel with
disparate business backgrounds and combining different corporate cultures.
There can be no assurance that the Company will be able to achieve any expense
reduction through the removal of duplicative expenses or through economies of
scale, that there will not be substantial costs associated with any such
reductions or that such reductions will not result in a decrease in revenues or
that there will not be other material adverse effects on the Company of these
integrated efforts. Such effects could also materially reduce the short- term
earnings of the Company. See "The Company -- Recent Acquisitions."
RISKS RELATING TO GROWTH AND EXPANSION. Although the Company believes
that the net proceeds from this Offering and projected cash flow from
operations will allow the Company to achieve initial implementation of its
business strategies, there can be no assurance that the Company will have
sufficient funds to completely achieve successful implementation of its plans
to a level that will have a positive effect on its results of operations or
financial condition. The ability of the Company to execute its growth strategy
will also depend on other factors, including ability of sales and marketing
personnel to retain and expand the Company's dealers and mass merchandiser
networks, market acceptance of Company's modified and new products, ability to
further penetrate the Company's target market and increase consumer awareness
of its products by advertising, ability to consummate acquisitions of kart
manufacturers and related businesses, general economic and industry conditions,
and other factors, many of which are beyond the control of the Company. Even
if the Company's revenues and earnings grow rapidly, such growth may
significantly strain the Company's management and its operational and technical
resources. If the Company is successful in obtaining greater market
penetration with
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its products, the Company will be required to deliver increasing volumes of its
products to its customers on a timely basis at a reasonable cost to the
Company. No assurance can be given that the Company can expand its
manufacturing capacity to meet increased product demand or that the Company
will be able to satisfy increased production demands on a timely and
cost-effective basis. There can be no assurance that the Company's growth
strategy will be successful. Further, if one or more of the component parts of
the Company's growth strategy is unsuccessful, there can be no assurance that
such lack of success will not have a material adverse effect on the Company's
results of operations or financial condition. See "Use of Proceeds" and
"Business -- Operating Strategy, -- Growth Strategy and -- Acquisition
Strategy."
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The
Company has historically experienced stronger demand for its products in the
third and fourth quarters of each calendar year. Operating results may
fluctuate due to factors such as the timing of the introduction of new
products, price reductions by the Company and its competitors, demand for the
Company's products, new product mix, delay, cancellation or rescheduling of
orders, performance of third party manufacturers, available inventory levels,
seasonal cost increases and general economic conditions. A significant portion
of the Company's operating expenses are relatively fixed. Since the Company
typically does not obtain long-term purchase orders or commitments from its
customers, it must anticipate the future volume of orders based upon the
historic purchasing patterns of its dealers and mass merchandisers and upon its
discussions with its dealers and representatives of mass merchandisers as to
their future requirements. Cancellations, reductions or delays in orders by a
large customer or group of customers could have a material adverse impact on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Seasonality."
BROAD DISCRETION OVER USE OF PROCEEDS. After debt repayment,
conversion of the outstanding Convertible Preferred Stock and payment of the
expenses of this Offering, the Company intends to use $400,000 of the net
proceeds to purchase equipment (7.4% of net proceeds), $150,000 for advertising
and marketing expenses (2.8% of net proceeds), $100,000 for product development
and design (1.9% of net proceeds), $48,000 for payment of a financial advisory
fee to the Representative (0.9% of net proceeds) and $859,500 for working
capital (16.0% of net proceeds). Management will have broad discretion in
allocating and applying such proceeds and the Company's stockholders will not
have an opportunity to review or vote upon the terms of these unspecified
expenditures. See "Use of Proceeds."
GROWTH STRATEGY AND RISKS RELATING TO FUTURE ACQUISITIONS. One
element of the Company's growth strategy involves growth through the
acquisition of other companies, assets or product lines that would complement
or expand the Company's business. The Company's ability to grow by acquisition
is dependent upon, and may be limited by, the availability of suitable
acquisition candidates and capital. Future acquisitions by the Company could
result in potentially dilutive issuances of securities, the incurrence of debt
and contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially affect the Company's
profitability. In addition, acquisitions involve risks that could adversely
affect the Company's operating results, including the assimilation of the
operations and personnel of acquired companies, and the potential loss of key
employees of acquired companies. There can be no assurance that the Company
will be able to consummate any acquisitions on suitable terms. No commitments
or binding agreements have been entered into to date and there can be no
assurance that acquisitions, if any, can be completed. Although the Company
does not presently plan to use any of the proceeds from this Offering for
acquisitions, the Company does reserve the right to reallocate such proceeds
for use in an acquisition if management believes such acquisition would be in
the best interest to the Company. Other than as required by the Company's
Articles of Incorporation, Bylaws and applicable laws, stockholders of the
Company generally will not be entitled to vote upon such acquisitions. See
"Use of Proceeds" and "Business -- Growth Strategy and -- Acquisition
Strategy."
ADDITIONAL FINANCING WILL BE NEEDED. Upon completion of this
Offering, the Company will have limited financial resources for acquisitions.
The Company will be dependent upon the proceeds from additional financings,
including receiving proceeds from the future exercise of the Warrants of which
there can be no assurance, to facilitate an acquisition. The Company may also
need additional financing to achieve full implementation of its long-term
growth strategy and for working capital. There can be no assurance that
additional financing will be available, or if available, that such financing
will be on favorable terms. See "Use of Proceeds" and "Business -- Growth
Strategy and -- Acquisition Strategy."
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POTENTIAL PRODUCT LIABILITY AND INSURANCE LIMITS. The nature of the
products manufactured by the Company is such that the products may fail due to
material inadequacies or equipment failures. Such a failure may subject the
Company to the risk of product liability claims and litigation arising from
injuries allegedly caused by the improper functioning or design of its
products. As the Company expands its Fun Karts product lines and distributes
more products into the marketplace, the Company's exposure to such potential
liability will also increase. The Company currently maintains $5 million
occurrence basis product liability insurance with a $50,000 self-insured
retention and $5 million maximum per occurrence coverage. The Company
currently has four pending product liability claims, none of which are expected
to exceed the existing policy limits. The Company has never had a claim that
resulted in an award or settlement in excess of insurance coverage. The
Company believes that as its sales of Fun Karts increase, product liability
claims will be inevitable, particularly given the current litigious nature of
American consumers. There is no assurance that the Company's insurance
coverage will be sufficient to fully protect the business and assets of the
Company from all claims, nor can any assurances be given that the Company will
be able to maintain the existing insurance coverage or obtain additional
coverage at commercially reasonable rates. To the extent product liability
losses are beyond the limits or scope of the Company's insurance coverage, the
Company could experience a material adverse effect upon its business,
operations, profitability and assets. See "Business -- Product Liability and
Insurance Limits and -- Legal Proceedings."
PENDING LITIGATION. In addition to product liability claims, the
Company, from time to time, is involved in lawsuits in the ordinary course of
business. On February 4, 1997 a lawsuit was filed in a Mississippi state court
against the Company, Brister's and an unaffiliated insurance broker by the
Company's insurance underwriter to have insurance coverage declared as null and
void for an alleged material misrepresentation on the insurance application.
This action arose as a result of the payment in 1997 by the insurance
underwriter of $700,000 in settlement of a product liability lawsuit against
Brister's and other defendants. The Company intends to file a counterclaim
against the Company's insurance broker relating to possible misrepresentations
made by the insurance broker to the insurance underwriter regarding Brister's
prior product liability claims history. The Company intends to vigorously
defend this lawsuit. The Company is currently engaged in discovery and is
unable to predict the outcome of this litigation. If the Plaintiff is
successful in this litigation and is awarded a judgement for damages, such
judgment could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Legal
Proceedings."
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a
large degree on its ability to retain the services of its existing management
and to attract and retain qualified personnel as necessary in the future. To
provide for continuity of management, the Company has entered into an
employment agreement with V. Lynn Graybill, Chairman of the Board, President
and Chief Executive Officer of the Company. The loss of the services of any
key management personnel or the inability to recruit and retain qualified
personnel in the future could have a material adverse effect on the Company's
business and results of operations. The Company may obtain key man life
insurance policies on the lives of key management personnel, with the proceeds
of the policies to be payable to the Company. While management of the Company
believes that any such policy proceeds would help the Company recruit and
compensate replacements for such individuals, there can be no assurance that
any such proceeds would offset any resulting financial impact of the death of
any key management personnel. See "Management" and "Certain Relationships and
Related Transactions."
CONFLICTS OF INTEREST. Prior to the Offering, certain officers,
directors and related parties have engaged in business transactions with the
Company. Management believes that the terms of these transactions were as
favorable to the Company as those which could have been obtained from
unaffiliated third parties under similar circumstances. All future
transactions between the Company and its affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the disinterested members of the Board of Directors
of the Company. See "The Company" and "Certain Relationships and Related
Transactions."
THE COMPANY DOES NOT OWN ANY PATENTS; DEPENDENCE ON LICENSE AGREEMENT
WITH DIRECTOR. The Company does not own any patents, trademarks or service
marks. However, Mr. Charles Brister, a director and principal stockholder of
the Company, owns certain patents, technology and trademarks which are licensed
to the Company, which allows the Company to use brand names and utilize the
automatic throttle override system ("ATOS") on its Fun Karts. The Company's
success is dependent upon, among other things, its
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continued ability to use these certain patented items and other proprietary
materials. The three-year license agreement with Mr. Brister provides for a
one-time only $10,000 license fee and a royalty payment of $1.00 for each
Company Fun Kart on which the ATOS is installed during the first year of the
agreement. During the second and third year of the license agreement, the
Company will pay to Mr. Brister each year a royalty of $1.00 for each Company
Fun Kart on which the ATOS is installed or $20,000 annually, whichever is
greater. The license agreement expires March 15, 2000. The termination of the
license agreement with Mr. Brister prior to its term would have an adverse
effect upon the Company's ability to produce its current line of Fun Karts.
Furthermore, there can be no assurance that if the license agreement is
terminated prior to its initial term that the Company could find suitable
substitutions for the licensed items and technology or that its Fun Karts,
produced without the licensed items and technology, would receive the same
market acceptance. Also, there is no assurance that the technology licensed to
the Company, or that the Company might license in the future, will quickly
become obsolete due to the development of other, more advanced technology by
competitors of the Company. See "Business -- Product Lines and -- Patents and
Proprietary Technology" and "Certain Relationships and Related Transactions."
RETENTION OF CONTROL. The Company's officers, directors and principal
stockholders beneficially will own approximately 47% of the outstanding shares
of the Company's Common Stock at the completion of the Offering. As a result,
the officers, directors and principal stockholders of the Company will have the
ability to control the day-to-day affairs and the fundamental policies of the
Company. Voting together such stockholders, including the officers and
directors of the Company, could possibly block any major corporate
transactions, such as a merger or sale of substantially all of the Company's
assets, that under Nevada law requires the affirmative vote of holders of a
majority of the outstanding shares of Common Stock of the Company. See
"Management" and "Principal Stockholders."
CONCENTRATION OF MANUFACTURING FACILITIES. The Company's
manufacturing operations are conducted at, and substantially all of the
Company's inventory is maintained in, two facilities, one in Roseland,
Louisiana and the other in Prattville, Alabama. Any significant casualty loss
to, or extended interruptions of operations at, either facility would have a
material adverse effect on the Company. Replacement of the Company's
manufacturing equipment could take several months and would have a material
adverse effect on the Company. See "Business -- Facilities."
INFORMAL SUPPLY ARRANGEMENTS. Most of the component parts, including
engines, wheels, tires, seats, steering wheels, steering tire rods and other
miscellaneous parts, used in the manufacture of the Company's Fun Karts are
purchased from various domestic vendors under informal arrangements. The
Company currently purchases its engines exclusively from Briggs & Stratton.
Although the Company believes its relationship with its vendors to be
excellent, the loss of any vendor, and in particular Briggs & Stratton, may
cause the Company to experience a temporary delay in the production of the
Company's Fun Karts. The Company believes other engine vendors and suppliers
of other component parts necessary for the production of Fun Karts are readily
available. See "Business -- Manufacturing Operations."
DEPENDENCE ON INDEPENDENT DEALERS. The Company has not entered into
written agreements with its Fun Karts dealers and in turn the dealers are under
no obligation to purchase the Company's Fun Karts. In 1996, approximately 79%
of the Company's combined revenues were the result of sales to its independent
dealers and the Company projects that in 1997 approximately 75% of the
Company's revenues will be attributed to sales to independent dealers.
Although no one dealer or group of affiliated dealers accounted for 10% or more
of the Company's 1996 revenues, sales to lawn and garden stores accounted for
approximately 36% of the Company's 1996 unit sales. While the Company believes
that its relations with its independent dealers are generally good, there can
be no assurance that the Company will be able to maintain these relationships,
that a majority of its dealers will continue to sell the Company's Fun Karts or
that the Company will be able to attract and retain quality independent
dealers. If a significant number of the Company's dealers ceased to order Fun
Karts from the Company or if the Company is unable to expand its dealer network
or if there is a significant decrease in sales in the lawn and garden industry,
the Company's financial condition and results of operations would be adversely
affected. See "Business -- Sales and Marketing."
GEOGRAPHIC CONCENTRATION OF SALES. In 1996, the Company sold
approximately 61% of its Fun Karts to approximately 250 dealers located in
Louisiana, Texas, Mississippi and Florida. Although these states,
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particularly Texas and Florida, have been among the fastest growing areas of
the United States and in recent years have enjoyed general economic growth, if
there is a broad base economic decline in these core market areas, consumer
demand for the Company's products may be adversely affected which may
negatively impact the Company's ability to sustain past levels of sales, or to
continue its sales growth or profitability. See "Business -- Sales and
Marketing."
DEPENDENCE ON MAJOR CUSTOMERS. The Company is a provider of Fun Karts
to Wal-Mart and Sam's Club. In 1996, 12% and 9% of the Company's combined
revenues were the result of sales made to Sam's Club and Wal-Mart,
respectively. The Company believes that sales of Fun Karts to Sam's Club and
Wal-Mart will account for approximately 12% and 13%, respectively, of the
Company's 1997 revenues. A delay of over 90 days in the payment of invoices
submitted by the Company to either Wal-Mart or Sam's Club may adversely affect
the Company's working capital. The loss of either the Wal-Mart or Sam's Club
accounts would have a material adverse effect on the financial condition and
results of operations of the Company. See "Business -- Sales and Marketing."
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; MARKET ACCEPTANCE. The
Company believes that the introduction of new, innovative models of Fun Karts
will be important to its future growth, and that it must continue to respond to
changing consumer preferences in the areas of style, function, safety and
technological innovation. Failure by the Company to identify and respond to
such trends could adversely affect consumer acceptance of its product lines
which in turn would adversely affect the Company's results of operations. No
assurances can be given that the Company will be able to successfully develop
new Fun Kart models or that any new or modified Fun Karts will meet with
consumer acceptance in the marketplace or that the Company's current products
will receive continued or increased consumer acceptance. No assurance can be
given that the Company's existing Fun Kart models will continue to be sold at
acceptable margin levels or that the Company will be able to design,
manufacture and distribute new products at acceptable margin levels. See
"Business -- Product Lines."
COMPETITION. The Fun Karts industry is highly competitive, and there
is no assurance that the Company will be able to continue to compete profitably
in this industry in the future. The Company expects that it will continue to
face intense competition as its growth strategy is implemented. Such
competition may result in reduced sales, reduced margins, or both. The Company
is and will be competing with larger, better capitalized companies which may be
better positioned to respond to shifts in consumer demand and other market
based changes. If other companies introduce new and modified products before
the Company achieves significant market expansion, the Company could experience
growth less than its expectations which could have a material adverse effect on
the Company's financial condition and results of operations. The Company's
ability to continue to compete successfully will depend, to a significant
extent, on its ability to continue to enhance its existing products and to
develop and introduce new products which maintain the Company's technological
position, satisfy a wide range of customer safety requirements and maintain or
expand market acceptance of the Company's products. See "Business --
Competition."
COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Management believes certain
states, including California, have proposed legislation involving emission or
other safety standards for the type of gas powered engines installed on the
Company's Fun Karts. The Company is currently unable to predict whether such
legislation will be enacted in the future and, if so, the ultimate impact on
the Company and its operations. Additionally, consumer protection laws exist
in many states in which the Company currently markets its products. Any
violation of such laws or regulations could have a material adverse effect on
the Company. The Company's manufacturing facilities are inspected by the
Occupational Safety and Health Administration. The Company believes that it is
generally in compliance in all material respects with all currently applicable
federal and state laws and regulations. Federal, state and local environmental
regulations are not expected to have a material effect on the Company's
operations. However, if the Company acquires existing manufacturing operations
which are in violation of such consumer or environmental laws and regulations,
such violations may have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Government Regulations."
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchase price of the Common
Stock substantially exceeds the net tangible book value of the Common Stock.
Purchasers of the Common Stock will experience an
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immediate substantial dilution in the net tangible book value per share of the
Common Stock after this Offering in the amount of $3.61 per share or 80.2% of
the price per share of Common Stock paid by the investors in this Offering
(assuming an offering price of $4.50 per share). See "Dilution."
POTENTIAL ADDITIONAL DILUTION TO PUBLIC INVESTORS. In connection with
the Company's private offering of securities completed on March 31, 1996 (the
"March 1996 Offering"), the Company and Halter Financial Group, Inc. ("HFG"), a
financial consulting company owned and operated by Timothy P. Halter, an
officer and director of the Company, have agreed to issue additional shares of
Common Stock to participants in the March 1996 Offering if on March 31, 1998
(the "Offering Valuation Date") the average closing bid price of the Common
Stock for the ten trading days prior to and including the Offering Valuation
Date (the "Stock Market Value") does not equal or exceed $4.50 per share. If
such an adjustment is required on the Offering Valuation Date, each participant
in the March 1996 Offering will receive for no additional consideration an
additional number of shares of Common Stock necessary to increase the Stock
Market Value per share of the Common Stock acquired in the March 1996 Offering
to $4.50 per share. HFG has placed into escrow 233,333 shares of the
Company's Common Stock (the "HFG Escrow Shares") to be issued to participants
in the March 1996 Offering if an adjustment is required. If on the Offering
Valuation Date the Stock Market Value of the Common Stock is less than $2.25
per share, the Company will be obligated to also issue the number of additional
shares of Common Stock necessary to increase the Stock Market Value per share
of the Common Stock acquired in the March 1996 Offering to $4.50 per share. If
the Company is required to issue additional shares to participants in the
March 1996 Offering, investors in this Offering as well as the Company's other
stockholders may incur a significant decrease of their ownership interest in
the Company, with a resulting dilution in the net tangible book value per share
of the Common Stock. See "The Company -- Recent Financings," "Dilution,"
"Certain Relationships and Related Transactions," "Principal Stockholders" and
"Shares Eligible For Future Sale."
ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation and
Bylaws contain provisions that may have the effect of discouraging certain
transactions involving an actual or threatened change of control of the
Company. In addition, the Board of Directors of the Company has the authority
to issue up to 10,000,000 shares of preferred stock in one or more series and
to fix the preferences, rights and limitations of any such series without
stockholder approval. The ability to issue preferred stock could have the
effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to gain control of the Company, or otherwise could
adversely affect the market price of the Common Stock. The Company does not
currently have any plans, arrangements, commitments or understandings to issue
any additional shares of preferred stock. See "Description of Securities."
DIVIDEND POLICY. The Company has not paid or declared any cash
dividends with respect to its Common Stock or Convertible Preferred Stock, nor
does it anticipate any such payments or declarations in the foreseeable future.
Any future dividends will be declared at the discretion of the Board of
Directors of the Company and will depend, among other things, on the Company's
earnings, if any, its financial requirements for future operations and growth,
and such other factors as the Company may then deem appropriate. The Company
has agreed that, for a period of two years from the closing of this Offering,
without the consent of the Representative, it shall not redeem or issue any of
its securities or pay any dividends, or make any other cash distributions in
respect of its securities, in excess of the amount of the Company's current or
retained earnings recognized from and after the closing date of this Offering.
Investors should not rely on the receipt of dividends in the near future or at
any time in the future when evaluating the merits of an investment in the
Securities. See "Dividend Policy" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of
Common Stock in the public market following the completion of the Offering
could have an adverse effect on the market price of the Common Stock. There
will be approximately 4,221,633 shares of Common Stock outstanding immediately
after the Offering, including the 1,400,000 shares offered hereby and the
104,175 shares to be issued upon the conversion of the Convertible Preferred
Stock. Upon completion of the Offering, all of the shares of Common Stock
offered hereby and approximately 89,912 shares of Common Stock held by current
stockholders of the Company will be eligible for public sale without
restrictions, except for shares purchased by affiliates (those controlling or
controlled by or under common control with the Company and generally deemed to
include officers and directors) of the Company. The remaining approximately
2,731,721 shares of the Company's Common Stock are "restricted securities" as
that term is defined under Rule 144 promulgated under the Securities Act of
1933,
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as amended (the "Securities Act"). Subject to the volume and holding period
limitations of Rule 144 and the "lock-up" agreements described below, 2,460,879
outstanding shares of Common Stock are eligible for sale under Rule 144 after
the completion of the Offering. None of the Company's currently outstanding
restricted securities are eligible for sale under Rule 144(k). Holders of
approximately 1,376,221 shares of Common Stock, including the holders of the
Convertible Preferred Stock, officers and directors of the Company, will agree
to "lock-up" their shares of Common Stock for periods ranging from 18 to 60
months after the completion of the Offering. No prediction can be made as to
the effect, if any, that future sales of additional shares of Common Stock or
the availability of such shares for sale under Rule 144, other applicable
exemptions or otherwise will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Stock. See "Principal
Stockholders" and "Shares Eligible for Future Sale."
POSSIBLE SALE OF SHARES OF COMMON STOCK DURING LOCK-UP PERIODS. The
holders of the Convertible Preferred Stock have agreed not to sell or otherwise
dispose of any of the 104,175 shares of Common Stock to be issued upon
conversion of the Convertible Preferred Stock or underlying the 1996 Warrants
for a period of 18 months after the closing of the Offering; provided the
shares of Common Stock issuable upon exercise of the 1996 Warrants may be
subject to demand registration rights and subsequently sold by the holders
thereof if the Company calls for the redemption of the Warrants or 1996
Warrants within 18 months after the completion of this Offering. All officers
and directors of the Company who are current stockholders of the Company have
agreed not to sell or dispose any shares of Common Stock held by them without
the prior written consent of the Representative until two years after the
effective date of this Offering. Furthermore, officers or directors whose
total compensation is more than $100,000 per year, or who own 5% or more of the
Company's outstanding securities, have agreed not to sell or dispose of any
shares of Common Stock held by them without the prior written consent of the
Representative for a period of five years after completion of this Offering.
Officers and directors of the Company who are subject to a five-year lock-up
provision shall have the right to have such restriction released at a rate of
20% per annum during the five year lock-up period based upon the Company's
achievement of certain goals with respect to the following: (i) annual revenue
growth of 20% or more, (ii) annual earnings per share growth of 20% or more,
and (iii) annual price of stock growth of 20% or more. With regard to V. Lynn
Graybill, the Chairman of the Board and Chief Executive Officer of the Company,
the lock-up provisions, to which Mr. Graybill would be subject, will be
terminated after the termination of Mr. Graybill's Employment Agreement, unless
such agreement is otherwise extended. The possibility that substantial amounts
of Common Stock may be sold in the public market prior to the expiration of the
lock- up periods may adversely affect the prevailing market price for the
Common Stock and could impair the Company's ability to raise additional capital
through the sale of its equity securities. See "Shares Eligible for Future
Sale."
EXERCISE OF UNDERWRITERS' WARRANTS. In connection with this Offering,
the Company will sell to the Underwriters, for nominal consideration, warrants
(the "Underwriters' Warrants") to purchase an aggregate of 140,000 shares of
Common Stock and 140,000 Warrants. The Underwriters' Warrants will be
exercisable commencing one year after the date of this Prospectus (the
"Effective Date") and ending five years after such date at an exercise price of
145% of the price per share of the Common Stock and 145% of the price per
Warrant offered hereby. The terms of the Warrants underlying the Underwriters'
Warrants shall be the same as those Warrants offered to the public, except such
Warrants are not subject to redemption. The holders of the Underwriters'
Warrants will have the opportunity to profit from a rise in the market price of
the Common Stock, if any, without assuming the risk of ownership. At any time
when the holders of the Underwriters' Warrants might be expected to exercise
them, the Company probably would be able to obtain additional equity capital on
terms more favorable than those provided by the Underwriters' Warrants. The
Company may find it more difficult to raise additional equity capital if it
should be needed for the business of the Company while the Underwriters'
Warrants are outstanding. To the extent that any of the Underwriters' Warrants
are exercised, the ownership interest of the Company's stockholders may be
diluted. The Company also has granted registration rights to the Underwriters
with respect to the 140,000 shares of the Common Stock, the 140,000 Warrants
and the 140,000 shares of Common Stock issuable upon exercise of the 140,000
Warrants. See "Underwriting."
IMPACT ON MARKET OF WARRANT EXERCISE. In the event of the exercise of
a substantial number of the outstanding warrants of the Company, including the
Warrants offered hereby, within a reasonably short period
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of time after the right to exercise commences, the resulting increase in the
amount of Common Stock of the Company in the trading market could substantially
affect the market price of the Common Stock. See "Description of Securities --
Redeemable Common Stock Purchase Warrants, -- 1996 Warrants and -- Class A
Warrants" and "Underwriting."
ADJUSTMENTS TO OUTSTANDING WARRANTS EXERCISE PRICE AND EXERCISE DATE.
The Company, in its sole discretion, may reduce the exercise price of the
outstanding warrants of the Company, including the Warrants offered hereby,
and/or extend the time within which such warrants may first be exercised.
Further, in the event the Company issues certain securities or makes certain
distributions to holders of its Common Stock, the exercise price of such
warrants may be reduced. Any such price reduction in the exercise price of
outstanding warrants will provide less money for the Company and possibly
adversely affect the market price of the Securities. See "Description of
Securities -- Redeemable Common Stock Purchase Warrants, -- 1996 Warrants and
- -- Class A Warrants."
REDEMPTION OF WARRANTS. The Warrants are subject to redemption by the
Company, at any time after the First Exercise Date at a price of $0.01 per
Warrant, upon 30 days prior written notice to the holders thereof, if the
average closing bid price for the Common Stock equals or exceeds twice the
initial public offering price per share of Common Stock for the 20 consecutive
trading days ending on the third day prior to the date of notice of redemption.
In the event that the Warrants are called for redemption by the Company,
Warrantholders will have 30 days during which they may exercise their rights to
purchase shares of Common Stock. In the event a current prospectus is not
available, the Warrants may not be exercised and the Company will be precluded
from redeeming the Warrants. If holders of the Warrants elect not to exercise
them upon notice of redemption thereof, and the Warrants are subsequently
redeemed prior to exercise, the holders thereof will lose the benefit of the
difference between the market price of the underlying Common Stock as of such
date and the exercise price of such Warrants, as well as any possible future
price appreciation in the Common Stock. As the result of an exercise of the
Warrants, existing stockholders would be diluted and the market price of the
Common Stock may be adversely affected. If a Warrantholder fails to exercise
his rights under the Warrants prior to the date set for redemption, then the
Warrantholder will be entitled to receive only the redemption price, $0.01 per
Warrant. The 1996 Warrants are subject to redemption by the Company upon the
same terms as the Warrants at any time after November 15, 1997 until May 15,
2000 when the 1996 Warrants expire. See "Description of Securities --
Redeemable Common Stock Purchase Warrants and -- 1996 Warrants" and "Shares
Eligible for Future Sale -- Lock-up Agreements."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH
THE EXERCISE OF THE WARRANTS. The Company will be able to issue shares of its
Common Stock upon the exercise of the Warrants only if (i) there is a current
prospectus relating to the Common Stock issuable upon exercise of the Warrants
under an effective registration statement filed with the Commission and (ii)
such Common Stock is then qualified for sale or exempt therefrom under
applicable state securities laws of the jurisdiction in which the various
holders of Warrants reside. Although the Company has undertaken to use its
best efforts to maintain the effectiveness of a current prospectus covering the
Common Stock subject to the Warrants offered hereby, there can be no assurance
that the Company will be successful in doing so. After a registration
statement becomes effective, it may require continuous updating by the filing
of post-effective amendments. A post- effective amendment is required (i)
when, for a prospectus that is used more than nine months after the effective
date of the registration statement the information contained therein (including
the certified financial statements) is as of a date more than 16 months prior
to the use of the prospectus, (ii) when facts or events have occurred which
represent a fundamental change in the information contained in the registration
statement, or (iii) when any material change occurs in the information relating
to the plan of distribution of the securities registered by such registration
statement. The Company anticipates that this Registration Statement will
remain effective for a least nine months following the date of this Prospectus,
assuming a post-effective amendment is not filed by the Company. The Company
intends to qualify the sale of the Securities in a limited number of states,
although certain exemptions under certain state securities laws may permit the
Warrants to be transferred to purchasers in states other than those in which
the Warrants were initially qualified. The Company will be prevented, however,
from issuing Common Stock upon exercise of the Warrants in those states where
exemptions are unavailable and the Company has failed to qualify the Common
Stock issuable upon exercise of the Warrants. The Company may decide not to
seek, or may not be able to obtain qualification of the issuance of such Common
Stock in all of the states in which the ultimate purchasers of the Warrants
reside. In such case, the Warrants of those purchasers will expire
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and have no value if such Warrants cannot be exercised or sold. Accordingly,
the market for the Warrants may be limited because of the foregoing
requirements. See "Description of Securities -- Redeemable Common Stock
Purchase Warrants."
NO ASSURANCE OF ACTIVE PUBLIC MARKET; POSSIBLE VOLATILITY OF COMMON
STOCK. Although the Common Stock is quoted on the NASD Electronic Bulletin
Board and the Company has made application to have the Common Stock and
Warrants listed on the Nasdaq SmallCap Market, there can be no assurance that
an active public market for the Common Stock or the Warrants will develop or be
sustained after the Offering. The offering price of the Securities offered
hereby has been determined by negotiations among the Company and the
Representative based upon the trading market of the Company's Common Stock on
the NASD Electronic Bulletin Board. The trading price of the Common Stock and
Warrants could be subject to wide fluctuations in response to quarter to
quarter variations in operating results, announcements of innovations or new
products by the Company or its competitors, and other events or factors. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations which affects the market price of securities of publicly
traded companies and which have often been unrelated to the operating
performance of these companies. Broad market fluctuations may adversely affect
the market price of the Common Stock and Warrants. See "Common Stock Price
Ranges and Dividends," "Description of Securities," "Shares Eligible for Future
Sale" and "Underwriting".
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP MARKET AND RISKS
OF COMMON STOCK TRADING BELOW $5.00 PER SHARE. Nasdaq recently approved
changes to the standards for companies to remain listed on the SmallCap Market,
including, without limitation, new corporate governance standards, a new
requirement that a listed company have net tangible assets of $2,000,000,
market capitalization of $35,000,000 or net income of $500,000 and other
qualitative requirements. The Company's securities have not been approved for
listing on the Nasdaq SmallCap Market and there can be no assurance that an
active trading market will develop or if such market is developed it will be
sustained. If the Company's securities are listed and the Company then became
unable to satisfy the requirements for continued quotation on Nasdaq SmallCap
Market, trading in the Common Stock and Warrants offered hereby would be
conducted in the over-the-counter market in what are commonly referred to as
the "pink sheets" or on the NASD Electronic Bulletin Board. As a result, an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the price of the Common Stock and Warrants offered hereby. In addition,
if the Common Stock and Warrants are suspended or terminated from Nasdaq
SmallCap Market and at such time the Common Stock has a market price of less
than $5.00 per share, then the sale of such securities would become subject to
certain regulations adopted by the Commission which imposes sales practice
requirements on broker- dealers. For example, broker-dealers selling such
securities must, prior to effecting the transaction, provide their customers
with a document which discloses the risks of investing in the Common Stock and
Warrants. Furthermore, if the person purchasing the securities is someone
other than an accredited investor or an established customer of the broker-
dealer, the broker-dealer must also approve the potential customer's account by
obtaining information concerning the customer's financial situation, investment
experience and investment objectives. The broker-dealer must also make a
determination whether the transaction is suitable for the customer and whether
the customer has sufficient knowledge and experience in financial matters to be
reasonably expected to be capable of evaluating the risk of transactions in the
security. Accordingly, if the Common Stock and Warrants are suspended or
terminated from Nasdaq SmallCap Market and are trading for less than $5.00 per
share, the Commission's rules may limit the number of potential purchasers of
the securities.
CONTINUING RELATIONSHIP WITH REPRESENTATIVE; POTENTIAL INFLUENCE. In
connection with this Offering, the Company will have certain continuing
relationships with the Representative, some of which may adversely affect the
Company's results of operations. The Company has agreed with the
Representative that (i) it will sell to the Underwriters the Underwriters'
Warrant (including the grant of "piggyback" and demand registration rights),
(ii) it will pay, under certain conditions, to the Underwriters a warrant
solicitation fee equal to 5% of the exercise price of the Warrants exercised,
(iii) it will use its best efforts to cause the election to its Board of
Directors one designee of the Representative, and (iv) it will enter into a
financial advisory agreement with the Representative for financial consulting
services for a two year period for aggregate fees of $48,000, to be prepaid in
full at the closing of the Offering. Additionally, the Representative will be
entitled to a finder's fee if it originates a financing or other business
transaction for the Company. Any of the foregoing relationships may adversely
impact the Company's business, operating results or financial condition, or its
ability to raise
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additional capital for its business should the need arise during the term of
the above agreements. See "Use of Proceeds" and "Underwriting."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. Management believes
that this Prospectus contains forward-looking statements, including statements
regarding, among other items, the Company's future plans and growth strategies
and anticipated trends in the industry in which the Company operates. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond
the Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described herein,
including, among others, regulatory or economic influences. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this Prospectus will in fact transpire or prove to be
accurate.
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THE COMPANY
HISTORICAL
The Company was originally incorporated on February 28, 1984 as
Rapholz Silver Hunt, Inc. under the laws of the State of Florida. In June
1984, April 1986 and November 1987, respectively, the Company changed its name
to Great Colorado Silver, Inc., Great Colorado Silver Valley Development
Company and J.R. Gold Mines, Inc., respectively. In January 1996, the Company
changed its name to Sarah Acquisition Corporation. In 1987, the Company
completed an initial public offering of its securities and was engaged in the
mining industry, principally through joint ventures with related parties
involving mining properties located in Colorado. In 1989, the Company began
experiencing financial difficulties and did not have sufficient cash flow to
meet its obligations as they became due. By December 31, 1989, the Company had
liquidated substantially all of its assets and ceased its business operations.
From December 1989 until March 31, 1996, the Company had no
significant assets, liabilities or business operations. On December 15, 1995,
a former director of the Company and Halter Financial Group, Inc. ("HFG"), a
financial consulting firm owned by Timothy P. Halter, an officer and director
of the Company, each acquired for $10,000, 15,776 and 15,858 shares of Common
Stock, respectively (or an aggregate of 31,634 shares for approximately $0.63
per share), from the then controlling stockholders of the Company.
Subsequently, on February 20, 1996, the Company sold 50,000 restricted shares
of its Common Stock to a former unaffiliated director of the Company for $938
cash. On March 7, 1996, the Company sold an additional 967,545 restricted
shares of Common Stock to HFG for $1,451 cash. Of the 967,545 shares acquired
by HFG, 233,333 shares represent the HFG Escrow Shares which were placed into
escrow under the terms of the Company's March 1996 private offering. See
"Management," "Certain Relationship and Related Transactions" and "Principal
Stockholders."
On February 23, 1996, the Company was reincorporated in the State of
Nevada through a merger with Karts International Incorporated, a Nevada
corporation, incorporated on February 21, 1996. The Company was the surviving
entity and changed its corporate name to Karts International Incorporated. The
reincorporation merger also had the effect of a one-for-250 reverse split of
the Company's issued and outstanding Common Stock.
On February 28, 1997, to be effective on March 24, 1997, the Company's
Board of Directors approved a two-for-three reverse stock split and a
corresponding reduction of the authorized shares of Common Stock. The issued
and outstanding shares of Common Stock shown in the historical consolidated and
combined financial statements included elsewhere in this Prospectus reflect the
effect of the March 24, 1997 reverse stock split as if this reverse stock split
had occurred as of the beginning of the first period presented.
RECENT FINANCINGS
HFG and a former director of the Company acquired control of the
Company in December 1995 in order to utilize it as a suitable entity for a
possible merger or acquisition of a company that offered growth potential in a
manufacturing industry. In January 1996, HFG identified Brister's Thunder
Karts, Inc., a Louisiana corporation ("Brister's"), a manufacturer of Fun
Karts, as a possible acquisition candidate. On March 31, 1996, the Company
concluded the private sale of 233,333 shares of Common Stock to 13 investors
for aggregate gross proceeds of $525,000 (the "March 1996 Offering").
Additionally, on March 15, 1996, the Company obtained a $2 million loan (the
"Schlinger Note") from The Schlinger Foundation (the "Foundation") which
provides for interest at 14% per annum with interest only payable until March
14, 1999. Principal payments of $399,996 are due on March 14, 1999 and March
14, 2000 with a final principal payment of $1,200,008 due on March 14, 2001.
The Schlinger Note is secured by accounts receivable, inventory, property and
equipment owned or acquired by the Company. The Company paid the Foundation
$21,000, consisting of $10,500 cash and the issuance of 70,000 shares of Common
Stock, as additional consideration for the loan. The proceeds from the private
offer and sale of securities and the loan proceeds from the Schlinger Note were
utilized by the Company to fund the acquisition of Brister's (the "Brister's
Acquisition") and pay related expenses. The Schlinger Note will be paid with a
portion of the proceeds from this Offering. See "Risk
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Factors -- Potential Additional Dilution to Public Investors," "-- Brister's
Acquisition," "Use of Proceeds," "Management," "Certain Relationships and
Related Transactions" and "Principal Stockholders."
On July 2, 1996, the Company sold to an unaffiliated investor 3,334
shares of Common Stock and 66,667 Class A Warrants for a total consideration of
$17,500. Each Class A Warrant entitles the holder to purchase one share of
Common Stock at an exercise price of $5.25 per share until December 31, 1997.
The proceeds from this offering were utilized by the Company for working
capital. See "Description of Securities -- Class A Warrants."
On November 15, 1996, the Company completed a private offer and sale
of 25 Units to 17 accredited investors for total proceeds of $625,000 (the
"Bridge Financing"). Each Unit consisted of one share of Convertible Preferred
Stock and 6,667 1996 Warrants. Each 1996 Warrant entitles the holder to
purchase, for a period of 42 months after November 15, 1996 one share of the
Company's Common Stock at an exercise price of $4.50 per 1996 Warrant subject
to further adjustment in certain circumstances. The Representative acted as
placement agent for the Company in this offering and received certain
compensation. On March 6, 1997, the Company offered to each holder of the
Convertible Preferred Stock the option of either (i) receiving a refund of
their cash investment with interest at 12% per annum as consideration for
assigning their Convertible Preferred Stock and 1996 Warrants to the Company or
(ii) agreeing to the conversion of the Convertible Preferred Stock at the
completion of this Offering upon previously agreed terms along with the
issuance of an additional 13,334 1996 Warrants for each share of Convertible
Preferred Stock held as further consideration for waiving certain registration
rights and agreeing to certain lock-up provisions with respect to the Common
Stock issuable upon conversion of the Convertible Preferred Stock and the 1996
Warrants. The Company has been advised by all the holders of the Convertible
Preferred Stock that they will accept the latter option. See "Description of
Securities -- Convertible Preferred Stock, -- 1996 Warrants and -- Bridge
Financing."
ACQUISITIONS
BRISTER'S ACQUISITION. Effective at the close of business on March
31, 1996, the Company acquired all of the issued and outstanding shares of
common stock of Brister's from Charles Brister, a director and principal
stockholder of the Company, in exchange for $2 million cash; a subordinated $1
million promissory note with variable interest rates, maturing in 2003 and a
$200,000 promissory note bearing 10% interest, with interest and principal
payable quarterly beginning April 1, 1997 with a maturity date of April 1, 1998
or upon successful completion of an underwritten public offering of the
Company's securities (collectively, the "Brister Notes"); and 516,667 shares of
Common Stock of the Company with an aggregate market value of $3.1 million or
$6.00 per share. The $6.00 price per share was the average of the closing bid
and ask prices of the Company's Common Stock as quoted on the NASD Electronic
Bulletin Board on the 30th day after the Company's Common Stock was listed on
the NASD Electronic Bulletin Board. Additionally, the Company entered into (i)
a Consulting Agreement with Mr. Brister which expired on December 31, 1996,
(ii) a five-year License Agreement under which the Company received the right
to use certain intellectual property owned and developed by Mr. Brister and
(iii) a five-year Non-Competition Agreement with Mr. Brister. Brister's has
been manufacturing Fun Karts in Roseland, Louisiana since 1959. The Company
will pay the Brister Notes with a portion of the proceeds of this Offering.
See "Use of Proceeds," "Business -- Patents and Proprietary Technology,"
"Management," "Certain Relationships and Related Transactions" and "Principal
Stockholders."
USA ACQUISITION. Effective at the close of business on November 21,
1996, the Company acquired all of the issued and outstanding shares of common
stock of USA Industries, Inc. ("USA"), a Fun Karts manufacturer located in
Prattville, Alabama, for $250,000 cash and the issuance of 166,667 restricted
shares of Common Stock valued by the USA shareholders and the Company at an
aggregate of $750,000 or $4.50 per share (the "USA Acquisition"). Each USA
shareholder, Jerry Michael Allen, Angela T. Allen, Johnny C. Tucker and Carol
Y. Tucker, received $62,500 cash and 41,667 restricted shares of the Company's
Common Stock. The price per share of the Company's Common Stock issued to the
USA shareholders was based on the closing bid price per share of the Company's
Common Stock on the closing date of the USA Acquisition. See "Note B --
Acquisition of Subsidiaries of Notes to Consolidated Financial Statements" and
"Note I -- Capital Stock Transactions of Notes to Consolidated Financial
Statements."
The purchase price paid by the Company for the acquisition of
Brister's and USA was determined as a result of arms-length negotiations
between unrelated representatives of the Company and the then shareholders of
Brister's and USA, respectively. In negotiating and agreeing upon the
respective purchase price of Brister's
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and USA, Company management (i) evaluated the respective market share,
geographic markets and the condition and capacity of each entities'
manufacturing facility; (ii) analyzed the economic benefits and feasibility of
each entity's product lines, management of each respective entity, the overall
growth strategy of the Company and any potential economies of scale which could
result from each respective acquisition; and (iii) projected future product
demand, estimated the fair market value of Brister's and USA's tangible assets
and liabilities, reviewed historical book value of each entity, and the
historical results of operations and the overall market position of each
respective entity.
Unless otherwise indicated herein, the financial, business activities,
management and other pertinent information herein relates on a consolidated
basis to the Company and its wholly-owned subsidiaries, Brister's and USA. The
Brister's and USA Acquisitions were accounted for using the purchase method of
accounting for business combinations. The Company has allocated the total
purchase price to assets acquired based on their relative fair value. Any
excess of the purchase price over the fair value of the assets acquired has
been recorded as goodwill. The financial and other information regarding the
Company set forth herein reflects, for the periods presented, either the
consolidated or combined results of operations of the Company, Brister's and
USA as if the respective acquisitions had occurred on January 1, 1994 (the
first day of the first financial period presented herein). See "Selected
Historical Consolidated and Combined Financial Information."
The address of the Company's principal executive office is 109
Northpark Boulevard, Suite 210, Covington, Louisiana 70433, and its telephone
number is (504) 875-7350. The Company maintains manufacturing facilities at
202 Challenge Avenue, Prattville, Alabama 36067 and Highway 51 South, Roseland,
Louisiana 70456.
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COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's Common Stock is traded on the NASD Electronic Bulletin
Board under the symbol "KINT". The following table sets forth the range of
high and low closing bid prices for the Common Stock for the periods indicated
as reported by the National Quotation Bureau, Incorporated. These prices
represent inter-dealer prices, without adjustment for retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
Common Stock
Bid Price(1)
------------------------------------------------
Calendar Year 1997 Low High
------------------ ---------------------- ------------------------
First Quarter $4.13 $4.88
Second Quarter $4.00 $4.50
Common Stock
Bid Price
------------------------------------------------
Calendar Year 1996 Low High
------------------ ---------------------- ------------------------
Second Quarter(2) $5.63 $5.63
Third Quarter $4.13 $5.63
Fourth Quarter $4.13 $4.88
- ------------------------------
(1) Prices have been adjusted to reflect a two-for-three reverse stock split
of the Company's Common Stock effective March 24, 1997.
(2) The Common Stock began trading on the NASD Electronic Bulletin Board on
June 27, 1996.
On June 30, 1997, the closing bid and ask prices for the Common Stock
were $4.00 and $5.00, respectively, per share. As of June 30, 1997, 2,717,458
shares of Common Stock were issued and outstanding. The Company believes that
its Common Stock is held of record and beneficially by approximately 350 to 400
persons and believes that upon completion of this Offering, it will have in
excess of 500 stockholders. See "Shares Eligible for Future Sale."
DIVIDEND POLICY
The Company has not paid or declared any dividends with respect to its
Common Stock or Convertible Preferred Stock, nor does it anticipate paying any
cash dividends or other distributions on its Common Stock in the foreseeable
future. Any future dividends will be declared at the discretion of the Board
of Directors of the Company and will depend, among other things, on the
Company's earnings, if any, its financial requirements for future operations
and growth and such other facts as the Company may then deem appropriate. The
Company has agreed that, for a period of two years from the closing of this
Offering, without the consent of the Representative, it shall not redeem or
issue any of its securities or pay any dividends, or make any other cash
distributions in respect of its securities, in excess of the amount of the
Company's current or retained earnings recognized from and after the closing
date of this Offering. See "Underwriting."
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,400,000 shares of the Common Stock and 1,400,000 Warrants offered hereby are
estimated to be approximately $5,382,500 (based on an assumed public offering
price of $4.50 per share of Common Stock and $0.125 per Warrant or
approximately $6,227,487 if the Underwriters' over-allotment option is
exercised in full) after deducting Underwriters' discounts and commission and
estimated offering expenses. The Company intends to use the net proceeds from
the sale of the Securities offered hereby (assuming no exercise of the
Underwriters' over-allotment option) for the purposes and in the approximate
percentages as set forth in the following table:
Approximate
Approximate Percentage
Application of Proceeds(1) Dollar Amount of Net Proceeds
-------------------------- ---------------- ------------------
Payment of Schlinger Note (2) . . . . . . . . . . . . . . . . . . . . . $2,000,000 37.2%
Payment of Brister Notes(3) . . . . . . . . . . . . . . . . . . . . . . 1,200,000 22.2
Conversion of Preferred Stock . . . . . . . . . . . . . . . . . . . . . 625,000 11.6
Purchase of Equipment(4) . . . . . . . . . . . . . . . . . . . . . . . 400,000 7.4
Advertising and Marketing(5) . . . . . . . . . . . . . . . . . . . . . 150,000 2.8
Product Development and Design(6) . . . . . . . . . . . . . . . . . . . 100,000 1.9
Payment of Financial Advisory Fee(7) . . . . . . . . . . . . . . . . . 48,000 0.9
Working Capital and General Corporate Purposes(8) . . . . . . . . . . . 859,500 16.0
---------- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,382,500 100.0%
========== =====
______________________________
(1) Proceeds, if any, received upon the exercise of the Underwriters'
over-allotment option will be used for working capital and general
corporate purposes.
(2) See "The Company -- Recent Financings," "Certain Relationships and Related
Transactions" and "Principal Stockholders."
(3) Charles Brister, a director and principal stockholder of the Company, is
the holder of the Brister Notes. See "The Company -- Acquisitions; Brister
Acquisition," "Management," "Certain Relationships and Related
Transactions" and "Principal Stockholders."
(4) The Company intends to purchase a powder paint system and tube bending
machine for its manufacturing facility in Prattville, Alabama. See
"Business -- Operating Strategy; Continue to Improve Manufacturing
Efficiency."
(5) The Company intends to increase its penetration of its target market by
enhancing potential customers' awareness of its products by advertising in
youth-oriented magazines, motorcycle, lawn and garden, hardware and outdoor
power equipment trade magazines, establishment of a Company home page on
the Internet, displaying and promoting the Company's products at NASCAR
races and related events and traditional print, billboard and, to a lesser
extent, television and radio media. See "Business -- Growth Strategy;
Increasing Brand and Product Recognition by Innovative Marketing to Target
Users and -- Sales and Marketing."
(6) In 1997, the Company will introduce its new Big Thunder Kart line which
will utilize a torque converter, new tire design and existing standard
features of the Company's Fun Karts. The Company also intends to develop
and distribute additional optional Fun Kart parts and accessories which can
be sold by dealers to customers at the point of sale. The Company may also
develop a line of helmets, jackets, boots and other related items for its
dealers and mass merchandisers to complement sales of Fun Karts. See
"Business -- Growth Strategy; Improve Product Design and Development and --
Product Lines."
(7) The Company will enter into a financial advisory agreement with the
Representative for financial consulting services for a two year period for
aggregate fees of $48,000 to be prepaid in full at the closing of the
Offering. Additionally, the Representative will be entitled to a finder's
fee if it originates a financing or other business transactions for the
Company. See "Underwriting."
(8) Working capital will be increased to $1,704,487 if the Underwriters'
over-allotment option is exercised. Working capital includes, but is not
limited to, carrying additional receivables associated with increased
sales, costs for expansion of existing facilities, personnel costs related
to expansion of Company's product lines and increased sales, acquisition
expenses and other general and administrative expenses.
The Company may find it necessary or advisable to reallocate the net
proceeds within the categories described above if its assumptions regarding
present plans and future revenues and expenditures prove inaccurate. Any
change in the allocation of funds will be at the discretion of the Company's
Board of Directors. The Company believes that the net proceeds of the Offering
will be adequate to fund the proposed business operations of the Company for
approximately 12 to 18 months. Proceeds, if any, from the exercise of the
Warrants are currently intended to be used for general corporate purposes. The
Company also reserves the right to allocate a portion of the net proceeds for
acquisitions and the payment of legal, accounting and other expenses associated
with acquisitions. No commitments or binding agreements have been entered into
by the Company for any such acquisitions. Until the proceeds of this Offering
are used for the purposes stated above, the Company may invest them temporarily
in interest-bearing securities such as certificates of deposit, United States
governmental obligations or money market funds or instruments.
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DILUTION
At March 31, 1997, the Company had a net tangible book value of
approximately ($1.62) million or approximately $(0.60) per share of Common
Stock. Net tangible book value per share of Common Stock equals the tangible
assets of the Company, less all liabilities, divided by the total number of
shares of Common Stock outstanding, without giving effect to the possible
exercise of outstanding stock options and warrants. After giving effect to the
sale of the 1,400,000 shares of Common Stock offered hereby (at an assumed
offering price of $4.50 per share) and the 1,400,000 Warrants offered hereby
(at an assumed offering price of $0.125 per Warrant) and the receipt of the
estimated net proceeds therefrom, the proforma net tangible book value of the
Company as of March 31, 1997 would have been approximately $3.76 million or
approximately $0.89 per share, representing an immediate increase in net
tangible book value of $1.49 per share to existing stockholders, and an
immediate dilution in net tangible book value of $3.61 per share to purchasers
of the Securities offered hereby. The following table illustrates the
resulting dilution with respect to the Common Stock offered hereby:
Public offering price (per share of Common Stock)(1) . . . . . . . . . . . . . . . . . . . . . $ 4.50
Net tangible book value per share as of March 31, 1997 . . . . . . . . . . . . . . . . $(0.60)
Increase per share attributable to new investors . . . . . . . . . . . . . . . . . . . 1.49
------
Proforma net tangible book value per share after the Offering(2) . . . . . . . . . . . . . . . 0.89
-------
Dilution of net tangible book value per share to new investors
attributable to purchase of Common Stock by new investors . . . . . . . . . . . . . . . . $ 3.61
=======
- ------------------------------
(1) Represents the anticipated public offering price per share of Common Stock
(excluding Warrants) before deduction of underwriting discounts and
commissions and estimated expenses of the Offering.
(2) Assuming no exercise of outstanding warrants or options, including the
Warrants offered hereby and the Underwriters' Warrants or the exercise of
the Underwriters' over-allotment option. See "Description of Securities"
and "Underwriting."
The following table sets forth the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price per share by existing stockholders and new investors purchasing
shares of Common Stock in this Offering:
Shares Purchased Total Consideration
---------------------- ------------------------- Average Price
Amount Percent Amount Percent Per Share
--------- ----------- ------------ ----------- --------------
Existing stockholders . . 2,717,458 66.0% $4,289,789 40.5% $1.58
New investors . . . . . . 1,400,000 34.0 6,300,000 59.5 $4.50
--------- ------ ---------- ------
Total . . . . . 4,117,458 100.0% $10,589,789 100.0%
========= ===== ========== ======
The foregoing table gives effect to the sale of the shares of Common
Stock offered hereby (assuming an offering price of $4.50 per share and without
giving effect to the underwriting discount and expenses of the Offering) and
does not give effect to the exercise of any warrants or options, including the
Warrants offered hereby, or the exercise of the Underwriters' over-allotment
option. See "The Company," "Management -- Stock Options," "Certain
Relationships and Related Transactions," "Principal Stockholders" and
"Description of Securities."
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted giving effect to the sale by the Company of
1,400,000 shares of Common Stock (assuming an offering price of $4.50 per
share) and 1,400,000 Warrants (assuming an offering price of $0.125 per
Warrant) and by giving effect to the anticipated use of proceeds derived
therefrom. This table has not been adjusted to give effect to the exercise of
the Underwriters' over- allotment option, the exercise of any outstanding
warrants or options, including the Warrants offered hereby and the
Underwriters' Warrants. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
March 31, 1997
------------------------------------------
Actual Adjustments(1) As Adjusted
----------- --------------- -------------
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 317,690 $ -- $ 317,690
Current maturities of long-term debt . . . . . . . . . . . . 9,085 -- 9,085
Long-term debt(2) . . . . . . . . . . . . . . . . . . . . . . 3,433,992 (3,200,000) 233,992
Convertible Preferred Stock, $0.001 par value; 25 shares
issued and outstanding; none as adjusted(3) . . . . . . . . 625,000 (625,000) --
---------- -------------- ------------
Total debt and debt equivalents . . . . . . . . . . . . . . 4,385,767 (3,825,000) 560,767
---------- -------------- ------------
Common Stock, $0.001 par value; 2,717,458 shares
issued and outstanding; 4,221,633 as adjusted(3) . . . . . 2,718 1,504 4,222
Additional paid-in capital . . . . . . . . . . . . . . . . . 5,344,180 5,205,996 10,550,176
Common stock warrants; 563,359 warrants issued
and outstanding; 1,963,359 as adjusted . . . . . . . . . . -- 175,000 175,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . (1,083,569) -- (1,083,569)
---------- -------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . 4,263,329 5,382,500 9,645,829
---------- -------------- ------------
Total capitalization . . . . . . . . . . . . . . . . . . . $8,649,096 $ 1,557,500 $ 10,206,596
========== ============== ============
- ---------------
(1) As adjusted giving effect to the sale by the Company of the 1,400,000
shares of Common Stock and 1,400,000 Warrants offered hereby and the
application of the proceeds therefrom. See "Use of Proceeds,"
"Description of Securities" and "Underwriting."
(2) For a description of the Brister Notes and Schlinger Note to be paid with a
portion of the proceeds of this Offering, see "The Company," "Certain
Relationships and Related Transactions" and "Note F -- Long-Term Debt of
Notes to Consolidated Financial Statements."
(3) Assumes conversion of all outstanding shares of Convertible Preferred Stock
for $625,000 and the issuance of 104,175 shares of Common Stock. See "The
Company -- Recent Financings" and "Description of Securities -- Bridge
Financing."
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SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
The following selected financial information has been presented in a
consolidated format for the periods ended December 31, 1996 and March 31, 1997
and a combined format for the periods ended December 31, 1995 and 1994 and
March 31, 1996, respectively. This information has been derived from the
audited financial statements of the Company and Brister's. The information
pertaining to USA is unaudited.
The Company was dormant from 1989 until the first quarter of 1996.
The Company's purchase of 100% of the issued and outstanding stock of Brister's
was effective April 1, 1996. The Company's purchase of 100% of the issued and
outstanding stock of USA was effective November 22, 1996. The information
presented herein reflects either the consolidated or combined results of
operations of all entities as if the respective acquisitions had occurred on
January 1, 1994 (the first day of the first period presented).
In the opinion of management, this financial information includes all
material adjustments necessary to present historical results of the Company as
if Karts International Incorporated, Brister's Thunder Karts, Inc. and USA
Industries, Inc. had been a single operating entity as of the first day of the
first period presented. This financial information does not purport to be
indicative of the financial position or the results of operations which would
have actually been obtained if the acquisition transactions had actually been
consummated on the dates indicated. In addition, this financial information
does not purport to be indicative of the financial position or results of
operations that may be obtained in the future.
This financial information should be read in conjunction with the
historical consolidated financial statements and notes thereto of the Company
and its wholly-owned subsidiaries, Brister's and USA, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
Year Ended Year Ended Year Ended (Unaudited) (Unaudited)
December 31, December 31, December 31, Three Months Ended Three Months Ended
1996 1995 1994 March 31, 1997 March 31, 1996
STATEMENT OF OPERATIONS DATA: (Historical) (Combined) (Combined) (Historical) (Combined)
----------- ------------ ------------- -------------- ---------------
Revenues, net . . . . . . . . . . . . . . . $ 8,327,316 $ 8,514,460 $ 7,069,500 $ 1,300,784 $ 997,493
Cost of goods sold . . . . . . . . . . . . 5,842,532 6,184,340 5,186,245 1,154,430 503,635
Operating expenses . . . . . . . . . . . . 1,464,890 1,639,583 1,423,933 565,211 344,586
Income from operations . . . . . . . . . . 1,019,894 690,537 459,322 (418,857) 150,272
Net income . . . . . . . . . . . . . . . . (68,806) 355,701 341,036 (522,918) 34,551
Net income per proforma weighted-average
share of common stock outstanding
Primary . . . . . . . . . . . . . . . . $(0.03) $0.17 $0.16 $(0.19) $0.05
Fully diluted . . . . . . . . . . . . . $(0.03) $0.17 $0.16 N/A $0.05
Number of weighted-average shares
of common stock outstanding
Primary . . . . . . . . . . . . . . . . 2,083,456 2,083,456 2,083,456 2,742,748 712,531
Fully diluted . . . . . . . . . . . . . 2,110,209 2,110,209 2,110,209 N/A 712,531
Proforma income assuming use of proceeds
to retire certain outstanding debt . . . $ 557,844 $(427,918)
Proforma earnings per share assuming
retirement of certain outstanding debt
Primary . . . . . . . . . . . . . . . . $0.11 $(0.16)
Fully diluted . . . . . . . . . . . . . $0.11 N/A
December 31, December 31, December 31, March 31, March 31,
1996 1995 1995 1997 1997
BALANCE SHEET DATA: (Historical) (Historical) (Combined) (Unaudited) (As adjusted)(1)
------------- ----------- ------------- ------------ ----------------
Current assets . . . . . . . . . . . . . . . . . . . $ 3,391,290 $ - $ 2,054,177 2,317,233 $ 3,874,733
Total assets . . . . . . . . . . . . . . . . . . . . 10,126,840 - 8,268,481 9,103,309 10,660,809
Current liabilities . . . . . . . . . . . . . . . . . 1,382,932 4,010 1,335,057 780,985 780,988
Total liabilities . . . . . . . . . . . . . . . . . . 4,715,592 4,010 4,610,490 4,214,980 1,014,980
Convertible preferred stock . . . . . . . . . . . . . 625,000 - - 625,000 -
Stockholders' equity . . . . . . . . . . . . . . . . 4,786,248 (4,010) 3,657,991 4,263,329 9,645,829
Working capital . . . . . . . . . . . . . . . . . . . 2,008,358 (4,010) 719,120 1,536,245 3,093,745
- ---------------
(1) Adjusted to give effect to (i) the sale of 1,400,000 shares of Common Stock
and 1,400,000 Warrants offered hereby at assumed initial public offering
prices of $4.50 per share of Common Stock and $0.125 per Warrant,
respectively, and the application of the net proceeds therefrom and (ii)
conversion of outstanding shares of Convertible Preferred Stock. See "Use
of Proceeds." No effect has been given to the exercise of (i) any
outstanding warrants, including the Warrants offered hereby and the
Underwriters' Warrants, (ii) the Underwriters' over-allotment option, or
(iii) outstanding options. See "Management -- Stock Options," "Description
of Securities" and "Underwriting."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed
under "Risk Factors -- Forward-Looking Statements and Associated Risk."
OVERVIEW
The Company had no significant business operations from 1989 through
March 1996. Prior to that time, the Company was engaged in the mining
industry, principally through joint ventures with related parties involving
mining properties located in Colorado. The Company is in the business of
manufacturing and marketing Fun Karts for the consumer market. See "The
Company" and "Business."
Effective at the close of business on March 31, 1996, the Company
purchased 100% of the issued and outstanding stock of Brister's, a Louisiana
corporation organized on August 2, 1976, from Charles Brister, a director and
principal stockholder of the Company, for a total purchase price of $6.3
million (the "Brister's Acquisition"). The purchase price was paid with $2.0
million cash, $1.2 million Brister Notes and the issuance to Mr. Brister of
516,667 shares of restricted Common Stock valued at $3.1 million. The
Brister's Acquisition was accounted for using the purchase method of accounting
for business combinations. The Company allocated the total purchase price to
assets acquired based on their relative fair values. Any excess of the
purchase price over the fair value of the assets acquired is recorded as
goodwill. Results of operations of Brister's are included in the Company's
consolidated financial statements beginning on the effective date of the
Brister's Acquisition. See "The Company -- Acquisitions; Brister Acquisition,"
"Management," "Certain Relationships and Related Transactions" and "Principal
Stockholders."
Effective at the close of business on November 21, 1996, the Company
purchased 100% of the issued and outstanding stock of USA, an Alabama
corporation organized on January 2, 1992, from four USA shareholders for a
total purchase price of $1,000,000 (the "USA Acquisition"). The purchase price
was paid with $250,000 in cash and the issuance to the USA shareholders of an
aggregate of 166,667 restricted shares of the Company's Common Stock valued at
$750,000. The USA Acquisition was accounted for using the purchase method of
accounting for business combinations. The Company allocated the total purchase
price to assets acquired based on their relative fair value. Any excess of the
purchase price over the fair value of the assets acquired is recorded as
goodwill. Results of operations of USA are included in the Company's
consolidated financial statements beginning on the effective date of the USA
Acquisition.
The following discussion reflects historical consolidated financial
data for the periods ended December 31, 1996 and March 31, 1997 and reflects
combined financial information for the periods ended December 31, 1995 and 1994
and March 31, 1996, respectively. In the opinion of management, the financial
information presented herein includes all material adjustments necessary to
present historical results of the Company as if the Company, Brister's and USA
had been a single operating entity as of the first day of the first period
presented. The financial information presented herein and the accompanying
discussion does not purport to be indicative of the financial position or the
results of operations which would have been obtained if the acquisition
transactions had actually been consummated on the dates indicated. See
"Selected Historical Consolidated and Combined Financial Information."
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1997 AS COMPARED TO QUARTER ENDED MARCH 31,
1996. The financial information discussed herein is derived from the unaudited
financial records of the Company for the period ended March 31, 1997 and from
the unaudited combined financial records of Brister's and USA, respectively,
for the period ended March 31, 1996.
For the first quarter of 1997, the Company realized net revenues of
approximately $1.3 million as compared to approximately $997,000 for Brister's
and USA combined during the first quarter of 1996. This increase in sales is
primarily attributable to mass merchandiser sales by Brister's and USA during
the first three months of 1997
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since this distribution channel had not been developed during the comparable
time period of the preceding year. The Company continues to experience slow
seasonal product demand during the first quarter of each operating year. This
seasonality has been somewhat mitigated by the addition of the mass
merchandiser distribution channel; however, a complete elimination of weak
first quarter sales due to seasonality is not anticipated to occur.
Costs of sales related to direct and indirect costs, exclusive of
depreciation, for the first quarter of 1997 increased to approximately $1.132
million as compared to approximately $504,000 for Brister's and USA combined
during the first quarter of 1996. The increase in cost of sales was primarily
due to the Company adjusting its standard cost model during the quarter ended
March 31, 1997. The adjustments to the standard cost model created a higher
and, in the opinion of management, more conservative cost of sales calculation.
Gross profit for the quarter ended March 31, 1997 was approximately $146,000
(or approximately 11% of net revenues) compared to approximately $94,000 (or
approximately 9% of net revenues) for the combined quarter ended March 31,
1996.
Operating expenses increased by approximately $220,000 from
approximately $345,000 for the first combined quarter of 1996 to approximately
$565,000 for the first quarter of 1997. The majority of the increase relates
to increased expenses, principally officer salaries and amortization of
goodwill, related to the Company's general corporate office overhead expenses
that were not present in the first quarter of 1996. These expenditure levels
are anticipated to remain relatively constant during future periods.
Net income for the quarter ended March 31, 1997 was approximately
$(523,000) compared to approximately $35,000 for the combined quarter ended
March 31, 1996. The aforementioned increase in cost of sales and the increase
in operating expenses are the principal reasons for this decrease in net
income. Primary earnings per share for the first quarter 1997 were
approximately $(0.19) as compared to approximately $0.05 for the first combined
quarter of 1996.
CONSOLIDATED FISCAL YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO
COMBINED FISCAL YEAR ENDED DECEMBER 31, 1995. The Company, on a consolidated
basis, realized net sales for the year ended December 31, 1996 of approximately
$10.7 million as compared to combined revenues of approximately $8.5 million
for the year ended December 31, 1995 or an increase of approximately 25%.
Management attributes the increase in sales primarily to the continued
development of the Brister's and USA dealer base and the addition of two mass
merchandisers as a distribution channel. Management estimates that unit sales
growth in the Fun Kart industry has been in the 12% to 15% range from 1991
through 1995. In 1996, industry-wide unit sales were relatively stagnant.
Management believes the stagnant unit sales in 1996 were the result of high
consumer debt, less than anticipated retail Christmas sales, unusual national
weather patterns and weak sales performance in the lawn and garden industry, a
principal network of dealers for Fun Karts.
Prior to the USA Acquisition, USA had revenues of approximately $1.4
million and incurred a net loss of approximately $227,000 for the period from
January 1, 1996 to November 21, 1996. Management anticipates that USA will
increase its Fun Kart sales to approximately $2.5 million with a resulting
income before tax of approximately $200,000 for 1997. Management attributes
the anticipated increase in sales volume and income for USA during 1997 to be a
result of anticipated sales of Fun Karts to Wal-Mart and expense controls and
monitoring procedures installed by Company management at the USA facilities.
As a result of the USA Acquisition, the Company improved its geographic market
penetration, manufacturing capacity, product line and dealer network which
management believes will result in additional sales of Fun Karts during 1997.
The Company incurred cost of sales of approximately $7.6 million for
1996 as compared to approximately $6.2 million in 1995. These costs allowed
the Company to achieve a gross margin of approximately $3.1 million in 1996 and
approximately $2.3 million in 1995 or approximately 28% and 27%, respectively.
Management continues to focus on expanding its distribution channels to include
the optimum balance among dealers (lawn/garden, hardware, cycle stores, etc.),
mass merchandisers, home centers, farm stores and other distribution channels.
In addition, management has restructured its cost accounting system to more
effectively manage costs at each of its subsidiary manufacturing locations.
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Operating expenses for 1996 and 1995, respectively, were approximately
$2.1 million and $1.8 million. Key expense increases from 1995 to 1996 were
related to (i) interest expense which increased approximately $302,000 due to
costs related to the Brister's Acquisition, (ii) product liability insurance
expenses which increased approximately $265,000 due to increased sales volume
and increased coverage required by the Company's major customers, and goodwill
amortization expenses related to the Brister's and USA Acquisitions increased
approximately $172,000. All other operating expenses were maintained at the
same relative levels as the previous year by improved cost controls.
Operating expenses reflect historical levels even though significant
interest, insurance and amortization expenses were added in 1996. Additional
sales volume and effective management control of variable operating expenses
contributed to maintaining the relatively constant operating expense
relationship to sales on a percentage basis.
COMBINED FISCAL YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO COMBINED
FISCAL YEAR ENDED DECEMBER 31, 1994. The Company realized combined net sales
for the year ended December 31, 1995 of approximately $8.5 million as compared
to approximately $7.0 million combined net sales for the year ended 1994 or an
increase of approximately 13%. Management attributes the increase in sales to
the addition of approximately 80 dealers during 1995 and the implementation of
a qualified dealer floor plan financing program.
The Company incurred cost of sales of approximately $6.2 million for
1995 compared to approximately $5.1 million in 1994. The Company achieved a
gross margin of approximately $2.3 million in 1995 and approximately $1.9
million in 1994 or approximately 27% and 26%, respectively. Costs of sales
increased in 1995 as compared to 1994 as a direct result of increased unit
sales in 1995.
Operating expenses for 1995 and 1994, respectively, were approximately
$1.8 million and $1.6 million. Operating expenses in 1995 were maintained at
approximately the same relative percent of sales as in previous years due to
management monitoring of expenses during the period.
ADDITIONAL OPERATIONS INFORMATION. In 1996 the Company settled
several product liability lawsuits with a cumulative charge to operations of
approximately $44,000. The Company currently has four product liability
lawsuits outstanding, none of which are expected to exceed existing product
liability insurance policy limits. The Company has never had a claim that
resulted in an award or settlement in excess of insurance coverage. There is
no assurance that the Company's insurance coverage of $5,000,000 per occurrence
and $5,000,000 aggregate will be sufficient to fully protect the business and
assets of the Company from all claims, nor can any assurances be given that the
Company will be able to maintain the existing coverage or obtain additional
coverage at commercially reasonable rates. Management believes that it has
process controls on its product operations, product labeling, operator's
manuals, and design features which will assist in a successful defense of any
present or future product liability claim. To the extent product liability
losses are beyond the limits or scope of the Company's insurance coverage, the
Company could experience a material adverse effect upon its business,
operations, profitability and assets. See "Business -- Product Liability and
Insurance Limits and -- Legal Proceedings."
The Company sold certain securities to a former director and current
officers and directors of the Company during the Company's reorganization phase
prior to the acquisition of Brister's. Based on the "fair value" of these
transactions, the Company incurred an accounting charge of approximately
$531,000 to earnings for the differential between the impacted fair value of
these transactions and the actual cash proceeds received. Future charges of
this type may occur based on future exercise of outstanding stock options
and/or stock warrants and the market price of the Company's securities at the
date of exercise. See "Certain Relationships and Related Transactions".
SEASONALITY
The Company experiences significant seasonality in its sales pattern
with only approximately 26% of its sales recognized in the first half of the
year. Historically, approximately 28% and 46% of total sales are realized in
the third and fourth quarters, respectively. Sales of Fun Karts are generally
the lowest during the first quarter of each year. Since the Company typically
does not obtain long-term purchase orders or commitments from its customers, it
must anticipate the future volume of orders based upon the historic
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purchasing patterns of its dealers and mass merchandisers and upon its
discussions with its dealers and representatives of mass merchandisers as to
their future requirements. Cancellations, reductions or delays by a large
volume dealer or mass merchandiser could have a material adverse impact on the
Company's business, financial condition and results of operations.
Traditionally, many dealers have sold Fun Karts only during the
Christmas holiday season. Recent market growth can be attributed to many of
these dealers beginning to sell Fun Karts year round. The Company believes
that if its business strategies are successfully implemented in 1997 and future
years, there will be some additional mitigation of the seasonality aspect of
the Company's Fun Karts sales. The Company also intends to offset the seasonal
aspects of its current business operations through acquisitions of
manufacturers of product lines that are compatible with the Company's business
objectives and offer product diversity which have year round demand.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company acquired Brister's and USA with approximately
$2,250,000 cash, issuance of approximately $3.2 million in promissory notes and
issuance of approximately 683,334 shares of Common Stock. The Company intends
to retire the Brister Notes and the Schlinger Note, totalling $3.2 million,
with a portion of the proceeds of this Offering.
As of December 31, 1996 and December 31, 1995, respectively, the
Company had positive working capital of approximately $4.7 million and $0.7
million, respectively. The Company experienced negative cash flow from
operations of approximately $223,000 for calendar 1996. This deficiency was
principally caused by increases in trade accounts receivable attributable to
sales to mass merchandisers. An aggregate of approximately $535,000 in cash
resided in Brister's and USA as of their respective acquisition effective
dates which in turn offset this deficiency. The Company also received
approximately $123,000 in trade accounts receivable receipts from mass
merchandiser customers on January 2, 1997.
Additionally, the Company spent approximately $533,642 in indirect
costs associated with the acquisition of Brister's and USA. These amounts were
funded through the private placement of Company securities in March 1996 and
November 1996 and are not anticipated to recur in future periods.
During the years ended December 31, 1996 and 1995, respectively, the
Company expended approximately $72,000 and $113,000 for capital assets and/or
improvements. The Company has budgeted capital resource requirements of
approximately $400,000 during 1997. See "Use of Proceeds."
USA has currently available to it a $500,000 revolving line of credit
from Deposit Guaranty National Bank of Louisiana ("Deposit Guaranty"), which
matures on September 30, 1997. The credit line is secured with certain
purchase orders and accounts receivable due USA on its Wal-Mart accounts
receivable. The interest rate on the revolving line is at the lending
institution's prime rate (8.5% at March 31, 1997). There was no outstanding
loan balance on the credit facility at March 31, 1997. The USA credit line is
guaranteed by the Company. During the term of the credit line, the Company
must maintain a net worth of not less than $2.5 million and a ratio of current
assets to current liabilities of not less than 1.5 to 1.0 as of the last day of
each fiscal quarter. As of March 31, 1997, the Company was in compliance with
all material covenants, financial ratios and restrictions under the loan
agreement between USA, the Company and Deposit Guaranty. It is management's
opinion that the USA revolving credit facility is renewable under similar terms
and will be adequate for any anticipated short-term credit requirements for
USA.
Brister's has a $300,000 revolving credit line with Deposit Guaranty
which matures on August 11, 1997. The credit line is secured with accounts
receivables due Brister's on its Sam's Club accounts. The Company has
guaranteed payment of the Brister's credit line. The interest rate on the
Brister's credit line is 8.25% per annum. Management believes that the
Brister's credit facility is renewable under similar terms and will be adequate
for short-term credit requirements for Brister's. At March 31, 1997, the
Brister's credit line balance was $300,000. Management anticipates that the
Brister's credit line balance will be reduced during the second and third
fiscal quarters as payment is received on outstanding accounts receivables,
including the Sam's Club
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accounts. At April 30, 1997, the Company had approximately $500,000
outstanding accounts receivable of which approximately $150,000 was owned by
Sam's Club.
It is anticipated that the net proceeds from this offering will be
used to repay $3.2 million in long-term indebtedness, $400,000 in capital
expenditures and $150,000 in special marketing promotions. The repayment of
the Company's long-term debt will yield interest expense reductions of
approximately $400,000 during the 12 month period after retirement of the debt.
These interest savings will generate additional working capital resources for
the Company. The proforma effect of these savings for the year ended December
31, 1996 yields additional after-tax income of approximately $198,000 or $0.10
per share. See "Use of Proceeds."
The Company expects that its cash flow from operations, along with its
currently available lines of credit, will be sufficient to meet its financing
requirements over the next 12 to 18 months. This is a projection, however, and
no assurance can be given that the Company's cash flow from operations and from
its available lines of credit will be available to meet the Company's cash
requirements over the next 12 to 18 months. See "Risk Factors" and "Use of
Proceeds" for a discussion of certain important factors that could materially
impact this projection.
The Company's management does not believe that inflation has had a
significant effect on the Company's operations during the last several years.
The Company's management believes that USA and Brister's have historically been
able to pass on increased costs of production to the price charged for their
products; however, no assurance can be given that the Company will continue to
be able to pass on such increased costs in the future.
Liquidity requirements mandated by future business acquisitions or
expansions, if any are specifically identified or undertaken, are not readily
determinable at this time as no substantive plans have been formulated by
management. Upon completion of this Offering, the Company will have limited
financial resources for acquisitions. The Company will be dependent upon the
proceeds from additional financings, including receiving proceeds from the
future exercise of the Warrants of which there can be no assurance, to
facilitate an acquisition. The Company may also need additional financing to
achieve full implementation of its long-term growth strategy and for working
capital. There can be no assurance that additional financing will be
available, or if available, that such financing will be on favorable terms.
See "Use of Proceeds" and "Business -- Growth Strategy and -- Acquisition
Strategy."
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BUSINESS
GENERAL
The Company, through its wholly-owned subsidiaries, Brister's and USA,
designs, manufactures and distributes Fun Karts, also referred to as "go
karts." Fun Karts are four-wheeled, gas-powered vehicles typically equipped
with engines of 5 to 8 horsepower and purchased by consumers principally for
off-road recreational use. The Company shipped approximately 17,750 Fun Karts
to dealers and mass merchandisers in 1996, which the Company believes
represents approximately 14% of the total domestic Fun Karts market. Proforma
consolidated revenues of the Company for the fiscal year ended December 31,
1996 were approximately $10.7 million as compared with revenues of
approximately $8.5 million for the fiscal year ended December 31, 1995. For
the three-month period ended March 31, 1997, the Company's revenues were
approximately $1.3 million as compared with combined revenues of approximately
$1.0 million for the three-month period ended March 31, 1996. The Company
operates manufacturing facilities in Roseland, Louisiana and Prattville,
Alabama, and maintains its executive offices in Covington, Louisiana.
The karts industry is comprised of three principal segments, Fun
Karts, racing and concession karts. Fun Karts, the largest segment, are karts
sold to consumers for general recreational use. Racing karts are specially
designed for use on established tracks in a controlled racing environment.
Concession karts are designed for use by amusement and entertainment centers
which provide karts and facilities for customers' use on a rental basis.
Management estimates that in 1996 approximately 145,000 karts were sold in the
United States of which approximately 125,000 were Fun Karts, 9,000 racing karts
and 11,000 concession karts. Historically, Brister's and USA have concentrated
their efforts in the Fun Karts market.
The Company offers a complete product line of Fun Karts,
differentiated by drive train, seating capacity, tire size and tread design.
Thirty-two Fun Kart models are available in three different colors, black, blue
and red, which are sold under the Thunder Karts and USA Fun Karts brand names.
The Company's models offer a wide range of standard and optional features which
enhance the safety, operation, riding comfort and performance of its Fun Karts.
Such features include the exclusive, patented automatic throttle override; full
safety cage; safety flag; three kinds of drive trains, including live axle,
single wheel pull and torque converter; clutch lubrication system; high speed
bearings; adjustable throttle and seats; steel rims; band and disc brakes; and
Briggs & Stratton 5 horsepower engines. The end-users of the Company's Fun
Karts are primarily 7- to 17-year-old males, living with their parents in
suburban and rural markets. Typical Fun Kart purchasers are parents who
purchase Fun Karts for their children.
The Company relies on a broad and diversified national independent
dealer network and mass merchandisers to sell its Fun Karts. Prior to 1996,
the Company sold its products through its over 700 dealers, primarily lawn and
garden stores, motorcycle outlets, hardware stores and specialty karts dealers,
located in 40 states. The major markets for the Company's Fun Karts are in the
Southeast and Southwest regions of the United States. In 1996, the Company
sold approximately 61% of its Fun Karts to approximately 250 dealers located in
Louisiana, Texas, Mississippi and Florida. Although there are no formal dealer
agreements, the Company, for the benefit of certain of its higher volume
dealers, will agree not to sell to other retailers in a limited geographic area
surrounding the high volume dealer. To become a Fun Kart dealer, the Company
generally requires a retailer to annually purchase six or more Fun Karts.
Dealers usually maintain an inventory of three to five Fun Karts which
increases during the Christmas holiday season. For eligible dealers, the
Company offers a dealer floor plan financing program through an unaffiliated
financial services company.
To broaden its distribution channels, the Company in 1996 began
selling its Fun Karts to two mass merchandisers, Wal-Mart Stores, Inc.
("Wal-Mart") and Sam's Wholesale Club ("Sam's Club"), a division of Wal-Mart
Stores, Inc. In 1996, the Company sold approximately 4,000 of its Fun Karts to
Wal-Mart and Sam's Club, representing approximately 21% of the Company's
revenues for the fiscal year ended December 31, 1996. Management believes that
mass merchandisers represent a significant untapped market for Fun Karts.
The Company's operating strategy is to increase its sales and market
share by producing safe, high-quality and reliable Fun Karts at competitive
prices; continue to improve manufacturing efficiency; and continue
diversification of domestic distribution channels. The Company's growth
strategy is to increase its brand and
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product recognition by innovative marketing to its target users; broaden its
product lines through improved product design and development; and expand its
geographic presence and market share by continued emphasis on expansion of its
domestic dealer and mass merchandiser networks, through further penetration of
international markets, and through acquisitions of manufacturers of karts and
related products that provide synergistic growth opportunities for the Company.
Although the Company is actively seeking acquisitions that will expand
its existing product lines, market share and distribution channels, the Company
currently has no agreements or understandings with respect to any such
acquisitions and there can be no assurance that the Company will be able to
identify and acquire such businesses or obtain necessary financing on favorable
terms.
INDUSTRY OVERVIEW
Management does not believe that specific reliable public information
with respect to Fun Kart sales is available since the go-kart industry is
substantially composed of private, family-owned manufacturers which are not
required to publicly report financial and operational information. Management
has, instead, relied upon reports of kart engine sales from Briggs & Stratton,
the industry's primary source for engines, and information obtained from Kart
Marketing International ("KMI"), a kart industry marketing publication.
The karts industry consists of three major segments: Fun Karts, used
for private recreational activities; racing karts, raced by competitors on an
estimated 550 kart racing tracks in the United States; and concession karts,
sold to family amusement and entertainment centers for use as rental units.
Management believes the history of karts dates to 1956, when a
hobbyist built the first kart, which consisted of a 2-cycle, 2- 1/2 horsepower
engine, a tubular chassis and semi-pneumatic tires. Karts were initially sold
for approximately $150 each. During 1957, Rod and Custom Magazine coined the
name "go-kart." In December 1957, the Go-Kart Club of America was formed,
which set chassis requirements and created racing classes. By 1960, there were
an estimated 100 kart manufacturers in the United States, which were mostly
small family-owned businesses. The Company believes there are currently four
principal Fun Kart manufacturers in the United States, which includes the
Company, Carter Brothers Manufacturing, Manco Products and Ken-Bar
Manufacturing. Management estimates that the Company, which had approximately
14% market share, plus its three primary competitors accounted for over 60% of
the Fun Karts sold in the United States in 1996.
In 1995, there were an estimated 70,000 kart racers and significantly
more Fun Kart enthusiasts in the United States and Canada, according to KMI.
Annually, according to KMI, nearly 20 million Americans ride concession karts
at tracks and family entertainment centers. Kart racing was a contributor to
the development of various NASCAR and IndyCar drivers, including Al Unser Jr.,
Michael Andretti, Jeff Gordon, Emerson Fittipaldi, and Bobby Labonte, who began
their driving careers as kart racers. During 1997, Bobby Labonte has committed
to endorse and promote the Company's products and will appear at various
Company-sponsored and other events to promote the Company's Fun Karts. See "--
Sales and Marketing."
In 1996, management believes, as a result of its research,
approximately 125,000 Fun Karts were sold in the United States as compared with
1995 sales of approximately 124,000 Fun Karts, while 1995 sales represented an
approximate 13% increase over 1994 sales of approximately 110,000 Fun Karts.
Sales in 1994 represented an 11% increase over 1993 sales of approximately
98,000 Fun Karts. In 1996, the Company sold approximately 17,750 Fun Karts,
which represents approximately 14% of the Fun Karts market as compared with
1995 sales of approximately 13,000 Fun Karts or approximately 11% of the Fun
Kart market.
The other two industry segments, racing and concession karts, are
significantly smaller than the Fun Karts market. Sales of racing karts, karts
used by racers on established tracks, were estimated by KMI at approximately
9,000 in 1995. Concession karts, used by commercial providers of tracks for
entertainment, were estimated at approximately 10,500 units in 1995, according
to KMI. Management believes that 1996 sales of concession and racing karts
were similar to 1995 sales. Each of these segments is addressed by different
manufacturers than those manufacturing Fun Karts.
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The typical end-user customer of the Company's Fun Karts is a 7-17
year old male, living with his parents primarily in the suburban and rural
markets. The Company believes that at least 90% of its end users are young
males. This is a significant sector of the population, as the 7-17 year old
male population in 1995, according to the Bureau of the Census, was estimated
at 22 million. Typical Fun Karts purchasers are the parents, who buy Fun Karts
as gifts for their children.
Although annual industry-wide sales of Fun Karts increased
significantly during 1994 and 1995, there was a nominal increase in unit sales
industry wide during 1996. Management believes the nominal increase in unit
sales industry wide during 1996 was the result of high consumer debt, less than
anticipated retail Christmas sales, unusual national weather patterns and weak
sales performance in the lawn and garden industry, a principal network of
dealers for Fun Karts. Management believes there are several key factors which
may increase industry wide Fun Kart demand and accordingly sales in future
periods:
o UNDERPENETRATED MARKET. According to census estimates, the
target market of 7- to 17-year-old males is projected to grow
from 22 million in 1995 to 25 million in the year 2000.
Annual Fun Karts sales are only to approximately 0.6% of the
total 7- to 17-year-old male population.
o GROWTH IN DISTRIBUTION CHANNELS. Management believes that
mass merchandisers and international dealers represent
significant untapped markets for Fun Karts. Additionally,
management believes independent dealer distribution channels,
consisting primarily of lawn and garden stores, hardware
stores, motorcycle dealers and automotive parts stores, remain
underpenetrated; for example, the Company believes that less
than 5% of the motorcycle dealers and less than 10% of the
lawn and garden stores located in the United States sell Fun
Karts.
o ASSOCIATION WITH MOTORSPORTS. The Company believes that the
association of Fun Karts with the dynamic motorsports industry
will increase consumer interest in these products.
Motorsports is the fastest growing spectator sport segment in
the United States. Attendance at the Winston Cup series of
races has more than tripled since 1980. More than 80 million
households watched live television motor races during 1995.
Sales of NASCAR licensed goods, which have grown nine-fold
since 1990 to over $500 million, are expected to reach $1
billion in two years.
SEASONALITY
Most Fun Karts are sold during the last quarter of the year and are
typically purchased as Christmas gifts by parents for their children. Sales of
Fun Karts are generally the lowest during the first quarter of each year.
Since the Company typically does not obtain long-term purchase orders or
commitments from its customers, it must anticipate the future volume of orders
based upon the historic purchasing patterns of its dealers and mass
merchandisers and upon its discussions with its dealers and representatives of
mass merchandisers as to their future requirements. Cancellations, reductions
or delays by a large volume dealer or mass merchandiser could have a material
adverse impact on the Company's business, financial condition and results of
operations.
Traditionally, many dealers have sold Fun Karts only during the
Christmas holiday season. Recent market growth can be attributed to many of
these dealers beginning to sell Fun Karts year round. The Company believes
that if its business strategies are successfully implemented in 1997 and future
years, there will be some mitigation of the seasonality aspect of the Company's
Fun Karts sales. The Company also intends to offset the seasonal aspects of
its current business operations through acquisitions of manufacturers of
product lines that are compatible with the Company's business objectives and
offer product diversity which have year round demand.
OPERATING STRATEGY
PRODUCE SAFE, HIGH QUALITY AND RELIABLE FUN KARTS AT COMPETITIVE
PRICES. The Company believes that it is one of the leaders in the development
of safety-related features for Fun Karts, which, along with price, is
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a key consideration for the Fun Kart purchaser, the parent of the 7- to
17-year-old male. The Company believes it was the first manufacturer in the
Fun Karts industry to provide full safety cages and adjustable seats, which are
now standard features on most Fun Karts. The Company is the exclusive Fun Kart
manufacturer installing its patented automatic throttle override system on Fun
Karts. Producing high quality, reliable products increases customer
satisfaction, and the Company believes this is one of the key elements of its
success in the highly competitive karts industry. The Company believes its
strategy of selling its Fun Karts through independent dealers and selected mass
merchandisers helps to ensure that the Company's products are competitive with
those of other manufacturers in terms of safety, consumer acceptability,
product design, quality and price. See "-- Product Lines."
CONTINUE TO IMPROVE MANUFACTURING EFFICIENCY. Management believes
that greater productivity will reduce operating costs. By installing a
standard single Briggs & Stratton 5 horsepower engine on all of its Fun Karts,
the Company expects to reduce volume purchase prices and decrease assembly
costs. The Company believes that modernization of its manufacturing facilities
is essential to improving the quality of the Company's products and promoting
the price competitiveness of its Fun Karts. The Company intends to expand and
renovate, as necessary, its manufacturing facilities, purchase new equipment
and maintain strict cost controls as a means to enhance the production of high
quality Fun Karts. In particular, the Company plans capital expenditures of
approximately $400,000 during the next six months including the installation of
a powder paint system and tube bending machine at its manufacturing plant in
Prattville, Alabama. Management continuously reviews the floor plan of its
manufacturing facilities to determine revisions that will enhance manufacturing
efficiency. The Company believes that the maximum annual capacity of its
manufacturing facilities is approximately 28,000 Fun Karts. Management
believes it would be necessary to increase its manufacturing and shipping
personnel from approximately 80 employees to 150 employees to achieve maximum
annual capacity of the Company's manufacturing facilities. Additional labor at
reasonable costs is readily available in the vicinity of the Company's
manufacturing facilities. Management believes that with limited expansion of
its current facilities, the Company will be able to meet projected increased
customer demand for the Company's products for the foreseeable future. See "--
Manufacturing Operations."
DIVERSIFICATION OF DOMESTIC DISTRIBUTION CHANNELS. The historical
marketing strategy of Brister's and USA has been to build a broad and diverse
independent dealer base, primarily in Louisiana, Texas, Mississippi and Florida
by offering safe, high quality and reliable Fun Karts that are competitively
priced and timely delivered. To broaden its distribution channels, the
Company, in 1996, began selling its Fun Karts to two mass merchandisers,
Wal-Mart and Sam's Club. The Company's future marketing efforts are designed
to maintain and expand its independent dealer network in the South and West
regions of the United States through direct communications with dealers,
engaging independent sales representatives and attendance at industry trade
shows. The Company also plans to assist dealers with their selling and
marketing efforts with Company-sponsored seminars, discount or rebate programs
and advertising, including product videos and brochures, leaflets, posters,
signs and other miscellaneous promotional items for use by dealers. The
Company will also seek to increase sales to mass merchandisers with direct
communication and the engagement of independent sales representatives.
Although the Company believes that sales to mass merchandisers offers a
significant growth opportunity, the Company will seek to obtain a reasonable
balance between its dealer and mass merchandiser distribution networks and will
attempt to avoid a high concentration of sales to any one or group of dealers
or mass merchandisers. See "Risk Factors -- Dependence on Independent Dealers;
Dependence on Major Customers" and "-- Sales and Marketing."
GROWTH STRATEGY
INCREASING BRAND AND PRODUCT RECOGNITION BY INNOVATIVE MARKETING TO
TARGET USERS. In 1995, the Fun Kart industry's sales were made to only
approximately 0.6% of the estimated 22 million 7- to 17-year-old males in the
United States, the Company's target users. The Company believes that if it is
to further penetrate its target market, the Company must advertise in media
easily accessible by this group and attractively and prominently display its
Fun Karts in locations and at events frequented by young males and their
parents. The Company intends to increase its penetration of this market by
enhancing potential customers' awareness of its products by advertising in
youth-oriented publications, as well as motor racing and motorcycle
publications, establishment of a Company home page on the World Wide Web
portion of the Internet, displaying and promoting the Company's products at
NASCAR races, which may include appearances by NASCAR driver
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Bobby Labonte pursuant to his promotional agreement with the Company, and
traditional print, billboard and to a lesser extent, television and radio
media.
IMPROVE PRODUCT DESIGN AND DEVELOPMENT. Historically, Brister's has
been a leader within the Fun Karts industry in the development of safety and
performance enhancing items for Fun Karts. One of the benefits of the
acquisition of USA was the addition of a line of torque converter Fun Karts,
which are being sold under the USA brand name. In 1997, the Company will
introduce its new Big Thunder Kart line which will utilize a torque converter,
new tire design and existing standard features of the Company's Fun Karts,
including large custom seats and 3400 rpm 5 horsepower Briggs & Stratton
engines. The Company also intends to develop and distribute additional
optional Fun Kart parts and accessories which can be sold by dealers to
customers at the point of sale of the Company's Fun Karts. Such accessories
may include face shields, repair and lube kits, caps and tee-shirts. The
Company may also develop a line of helmets, jackets, boots and other related
items for its dealers and mass merchandisers to complement sales of Fun Karts.
EXPANSION OF GEOGRAPHIC PRESENCE. The Company intends to expand its
geographic presence and increase its market share within and outside of its
core and contiguous markets by continued emphasis on the development and
expansion of its dealer and mass merchandiser networks, establishing
relationships with independent sales representatives to serve regions of the
United States which are currently underpenetrated by the Company and possible
acquisition of kart manufacturers and related businesses that offer synergistic
growth opportunities for the Company. Also during calendar 1996, the Company
had its first shipment of Fun Karts of approximately 70 Karts into the
international market, and believes international sales offer a significant
market for the Company's products. Although the Company is actively seeking
acquisitions that would meet its strategic objectives, it currently has no
agreements or understandings with respect to any such acquisition and there can
be no assurance that the Company will be successful in its acquisition efforts.
Further, the ability of the Company to effect its strategic plans will be
dependent upon its obtaining financing for such acquisitions, which there can
be no assurance will be available.
ACQUISITION STRATEGY
The Company continually evaluates acquisition opportunities of
operating entities or product lines compatible with its current operations.
Target companies will be in the Fun Karts or related business or will provide
the Company with complementary capabilities such as manufacturing, distribution
or shipping. Acceptable acquisition candidates are expected to be (i)
companies having three or more years operating history and annual revenues from
$5 to $15 million, (ii) businesses with different or expanded distribution
channels through which the Company may market its current and/or future
products, and (iii) companies with existing manufacturing capabilities which
may allow the Company greater operating efficiencies through vertical
integration of its manufacturing and assembly functions. There are no present
agreements, commitments, letters of intent or understandings with any
acquisition candidates. The Company intends to aggressively pursue growth
through acquisitions, subject to financial and managerial resources.
Management believes that it will be necessary to obtain additional
financing prior to a major acquisition. The Company anticipates that the
financing of any acquisition will be paid in cash, issuance of capital stock or
debt instruments, or a combination thereof. To the extent that the Company
issues capital stock in any acquisition, purchasers of the Securities in this
Offering may incur dilution in their investment in the Company. The issuance
of debt to finance acquisitions may result in the encumbrance of Company
assets, impede the Company's ability to obtain bank financing, decrease the
Company's liquidity and adversely affect the Company's ability to declare
dividends to its stockholders.
PRODUCT LINES
The Company produces a full line of Fun Karts, currently consisting of
32 models which are variations on 15 different frames available in three
different colors, black, blue and red. The models are differentiated by drive
train (single wheel pull, live axle or torque converter), seating (single or
double), tires (standard or custom) and frame size. The Company markets its
Fun Karts under the brand names of Thunder Karts and USA Fun Karts, which
includes the Blackhawk, Coyote, Eagle, Cobra and Land Runner models. The
Company's Fun Karts are sold at suggested retail prices ranging from $599 to
$1,399. The Company markets its USA
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Cobra Fun Kart model exclusively to Wal-Mart and its Thunder Kart Blackhawk
model to Sam's Club. The Company's Thunder Kart SLXL, Thunder Kart XL700,
Thunder Kart Blackhawk and USA Cobra models accounted for 24%, 17%, 14% and 9%,
respectively, of the Company's 1996 unit sales.
The Company believes its Fun Karts enjoy a premier image in its core
markets and that its Fun Karts have a reputation for quality, performance,
style, comfort, ride and handling. The Company's models offer a wide range of
standard and optional features which enhance the operation, safety, riding
comfort and performance of its Fun Karts. Such features include band brakes, 5
horsepower Briggs & Stratton engine, automatic throttle override system, full
safety cage, automatic clutch lubrication system, powder paint, high speed
bearings and safety flag. The Company's USA Coyote Fun Kart has oversize
wheels and has the added features of a torque converter and disc brakes.
The Company believes that it is a leader in the development of safety
features for its Fun Karts, due primarily to its emphasis on continuous
research and development of safety related items. The Company, principally
through the efforts of Charles Brister, a director and principal stockholder of
the Company, has developed a number of technological advances, including the
automatic throttle override and automatic clutch lubrication systems, which
have significantly improved its products. Mr. Brister will continue to devote
a portion of his time on a project basis for the development of innovative
safety and technological features for the Company's Fun Karts. See "The
Company -- Acquisitions; Brister's Acquisition," "Management," "Certain
Relationships and Related Transactions" and "Principal Stockholders."
The Company's patented, exclusive automatic throttle override system
was named the 1995 Product of the Year for the recreational kart industry by
Kart Marketing International, a trade magazine for the kart industry. This
safety feature prohibits throttling and braking at the same time, regardless of
the position of the gas pedal. If the brake pedal is depressed slightly, the
engine will revert to the idle position immediately, and will not let
throttling engage until the pedal is released. Significant benefits of this
system include virtual elimination of throttle runaways; enhancement of safety
for inexperienced drivers; stopping of simultaneous braking and throttling;
easier braking; and extended brake life. The Company has an exclusive license
from Mr. Brister to use the automatic throttle override system on its Fun
Karts. See "-- Patents and Proprietary Technology" and "Certain Relationships
and Related Transactions."
The Company believes it was the first manufacturer in the Fun Karts
industry to provide safety cages and adjustable seats, which are now standard
features on most Fun Karts. Further, the Company is the only manufacturer in
the industry that has an automatic chain adjuster, a spring activated device
that constantly puts tension on the chain. Because a chain typically lengthens
as it heats up, this product reduces the chance of the chain disconnecting from
the sprocket and causing injury to the operator. The Company was also one of
the first Fun Karts manufacturers to introduce the powder paint process, which
significantly reduces harmful emissions during the painting process. The
Company believes it is currently the only major Fun Karts manufacturer using
the automatic throttle override system. Additionally, the Company has its own
custom designed tire treads manufactured to its specifications. Introduced in
1994, the Company's automatic clutch lubrication system releases grease as
needed to the clutch bushing on Fun Karts, which reduces wear and extends the
life of the clutch. This system was licensed by Mr. Charles Brister, a
director of the Company, to Briggs & Stratton, prior to the Brister
Acquisition, and is being installed on the Company's Fun Karts as well as
certain of its competitors.
MANUFACTURING OPERATIONS
The Company, through its two wholly-owned subsidiaries, operates
manufacturing facilities in Roseland, Louisiana and Prattville, Alabama. The
Company's manufacturing facilities include a 48,000 square foot building in
Roseland and a 20,000 square foot facility located in Prattville. The
management of the Company's manufacturing facilities typically consists of a
plant manager, a production manager, a material manager and a quality control
manager. These mid-level managers control operations of the respective
manufacturing facilities, with assistance and guidance from the Company's
executive officers. The Roseland facility is leased from Mr. Charles Brister,
a director of the Company, and the Company owns the Prattville facility which
includes a two-acre tract of land. See "Facilities" and "Certain Relationships
and Related Transactions."
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Management believes the Prattville facility could be expanded to a
40,000 square foot facility on the existing land. The Company has an option to
acquire two acres adjacent to its Prattville facility for future expansion.
The Prattville plant is located in a planned industrial park with adequate
support utilities and freight services. Future expansion of the Roseland
facility would be limited due to the unavailability of adjacent real estate.
See "Facilities."
Fun Kart production levels at the Company's manufacturing plants
varies depending on the season. Between January and May, the Company generally
utilizes a ten-hour work day four days a week at its plants. In June, the work
week expands to five days and peaks in November at six days. From June through
December, daily output is approximately 125 to 150 Fun Karts. The Company
believes that the maximum annual capacity of its manufacturing facilities is
approximately 28,000 Fun Karts. The Company believes it would be necessary to
increase its manufacturing and shipping personnel from approximately 80
employees to 150 employees to achieve maximum annual capacity of the Company's
manufacturing facilities. Additional labor at reasonable costs is readily
available in the vicinity of the Company's manufacturing facilities.
Management believes that with limited expansion of its current facilities, the
Company will be able to meet projected increased customer demand for the
Company's products for the foreseeable future.
The Fun Karts manufacturing process is primarily one of welding and
assembly at various work stations. The Company buys directly from mills both
pre-cut and uncut tubular steel used in the manufacturing of the frames. Since
the price differential between pre-cut and uncut tubular steel is relatively
small, it is more cost-effective, particularly for pieces that are certain not
to change, to purchase pre-cut tubular steel. The steel is cut and bent during
the manufacturing process to the frame specifications for the Company's various
Fun Kart models. Most of the other Fun Karts component parts, including
engines, wheels, tires, seats, steering wheels, steering tie rods and
miscellaneous parts, are purchased from various domestic vendors. The Company
depends on Briggs & Stratton for its engines, and the loss of this vendor may
cause the Company to experience a temporary delay in the production of the
Company's Fun Karts. The Company believes other engine vendors and suppliers
of other component parts necessary for the production of Fun Karts are readily
available.
QUALITY CONTROL, WARRANTIES AND SERVICE
The Company adheres to strict quality standards and continuously
refines its production procedures to increase productivity and reduce warranty
costs. Each Fun Kart is inspected and numbered during assembly for compliance
with certain quality control standards. The Company provides the purchaser of
its Fun Karts with a 90-day limited warranty against certain manufacturing
defects in the Fun Kart's construction. There are also direct warranties that
are provided by the manufacturer of the engine and certain component parts.
The Company's Fun Karts are usually serviced by the dealers. Neither Brister's
nor USA have historically incurred any significant warranty claims and have
never had a recall of any of their products.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company does not own any patents, trademarks or service marks.
However, Charles Brister, a director of the Company, owns certain patents and
trademarks which are licensed to the Company and which allows the Company to
use certain brand names and utilize the automatic throttle override system
("ATOS") on its Fun Karts. The Company's success is dependent upon, among
other things, its continued ability to use these certain patented items and
trademarks. There can be no assurance that any patents or trademarks which may
be issued to the Company, or which the Company may license from third parties
or Mr. Brister, will not be challenged, invalidated or circumvented, or that
any rights granted thereunder would provide proprietary protection to the
Company. The Company will continue to implement protective measures and
intends to aggressively defend its proprietary rights. See "Certain
Relationships and Related Transactions."
The Company, in March 1996, entered into a license agreement with
Charles Brister under which Mr. Brister has licensed to the Company for a
period of five years (at no cost to the Company during the first year) all of
the Intellectual Property (as hereinafter defined), which was owned by Mr.
Brister on March 15, 1996, and all Intellectual Property developed and/or owned
by Mr. Brister at any time subsequent to March 15, 1996. After the first year
of the license agreement, the Company and Mr. Brister agreed to enter into
subsequent agreements defining the license fee and royalty payments based on
terms at least as favorable as Mr. Brister has
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received, or could have received, in arms'-length transactions with third
parties. "Intellectual Property" is defined as all domestic and foreign
letters, patents, patent applications, patent licenses, software licenses and
know-how licenses, trade names, trademarks, copyrights, unpatented inventions,
service marks, trademark registrations and applications, service mark
registration and applications and copyright registration and applications owned
or used by Brister's in the operation of its business.
On March 15, 1997, the Company and Mr. Brister entered in an addendum
to the License Agreement and a related Royalty Agreement which provides for the
payment of a one-time license fee and future royalties, respectively, by the
Company to Mr. Brister for the use by the Company for a three-year period of
the ATOS developed and patented by Mr. Brister. The Company has paid Mr.
Brister an initial $10,000 license fee and agreed during the first year of the
three year extension to pay him a royalty of $1.00 for each Company Fun Kart on
which the ATOS was installed. During the second and third year of the
agreement, the Company agreed to pay during each year a royalty of $1.00 for
each Company Fun Kart on which the ATOS was installed or $20,000 annually
whichever is greater.
SALES AND MARKETING
SALES. The Company primarily relies on a broad and diversified
national independent dealer network to sell its Fun Karts. The Company sells
directly to approximately 700 dealers located in 40 states, with most dealers
concentrated in the Southeast and Southwest regions of the United States. In
1996, the Company sold approximately 61% of its Fun Karts to approximately 250
dealers in Louisiana, Texas, Mississippi and Florida. The Company continues to
expand its dealer network, with 82 dealers added in 1995 and 15 dealers added
in 1996.
The Company believes that its independent dealer network enables the
Company to achieve broader distribution of its products than if the Company
operated its own retail outlets. Selling through independent dealers also
allows the Company to avoid the substantial investment in management and
overhead associated with the operation of company-owned retail stores. In
addition, the Company's strategy of selling its products through independent
dealers helps to ensure that the Company's Fun Karts are competitive with those
of other manufacturers in terms of consumer acceptability, product design,
quality and price. Accordingly, a component of the Company's business strategy
is to continually strengthen its dealer relations. The Company believes its
relations with its independent dealers are good.
While there are no formal dealer agreements, the Company, for the
benefit of certain of its higher volume dealers, will agree not to sell to
other dealers in a limited geographic area surrounding the location of a high
volume dealer. To become a dealer, the Company generally requires a retailer
to annually purchase six or more Fun Karts. Most dealers keep an inventory of
three to five Fun Karts, which increases during the Christmas holiday season.
Credit terms are 30 days with no discount. For dealers who meet certain credit
requirements, the Company offers a dealer floor plan financing program through
an unaffiliated financial services company. The floor plan agreement may be
terminated at any time by the Company or the financial services company with 30
days written notice to the other party and may be terminated by the financial
services company upon an event of default by the Company, which includes
failure by the Company to pay any amounts owed to the lender when due,
cessation of business or bankruptcy of the Company or a material adverse change
in the Company's financial condition. The Company, at its option, will allow
approved dealers up to 120 days of interest- free financing under the floor
plan agreement. The floor plan arrangements require the Company to repurchase
units in the event of dealer default. The Company does not currently have any
significant contingent liability under the repurchase obligation of the floor
plan agreement.
In 1996, the Company emphasized both the retention of existing dealers
through Company-sponsored seminars and the expansion of its dealer network.
For the first time in the Company's history, in 1996, 70 Fun Karts were
exported to a foreign market, the United Kingdom. Other foreign dealer
prospects are being investigated by the Company in Canada, Brazil, Austria,
Germany, Australia and Argentina. Typical domestic dealers include lawn and
garden shops, hardware stores, motorcycle shops, automobile parts stores and
specialty karts dealers. The Company believes the dealer distribution channel
is underpenetrated. The Company estimates that less than 10% of the lawn and
garden stores and less than 5% of the motorcycle dealers in the United States
sell Fun Karts. Dealer sales are made through Company personnel under the
supervision of Mr. Lawrence E. Schwall, III, the Company's Sales and Marketing
Vice President. The Company does not currently engage
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independent manufacturers representatives; however, it is investigating the
possibility of contracting with such representatives for the purpose of
servicing underpenetrated regions of the United States as well as foreign
markets. In 1995, substantially all of the Company's product sales were to
independent dealers. See "Management."
To broaden its distribution channels, the Company in 1996 began
selling its Fun Karts to mass merchandisers, Wal-Mart and Sam's Club. Wal-Mart
purchased approximately 1,500 Fun Karts, while Sam's Club purchased
approximately 2,500 Fun Karts, collectively representing approximately 21% of
the Company's 1996 unit sales. Sales to lawn and garden stores, motorcycle
shops, karts specialty stores, automobile parts dealers, hardware stores and
other dealers accounted for 36.3%, 13.9%, 7.4%, 6.5%, 6.3 and 7%, respectively,
of the Company's 1996 unit sales. The Company estimates that sales of its
products to independent dealers and mass merchandisers will be approximately
75% and 25%, respectively, in 1997. Although the Company believes that sales
to mass merchandisers offers a significant growth opportunity, the Company will
seek to obtain a reasonable balance between its dealer and mass merchandisers
distribution networks and will attempt to avoid a high concentration of sales
to any one or group of dealers or mass merchandisers. See "Risk Factors --
Dependence on Independent Dealers; Dependence on Major Customers."
The Company has two main modes of delivery to its dealers. The
Company delivers directly to Louisiana and Alabama dealers, using four pickup
trucks with trailers that can carry 27 Fun Karts per truck. All Louisiana and
Alabama delivery routes are designed to be completed during a single day. All
other dealers and mass merchandisers receive their Fun Karts by common carrier,
collected F.O.B. dealer. The typical turnaround from order date to shipment is
one to two days in the off season, and three to seven days in peak season. Fun
Karts are delivered completely assembled, except for the installation of the
accompanying safety cages.
MARKETING. The historical marketing strategy of Brister's and USA has
been to build a broad and diverse independent dealer base, primarily in the
Southeast and Southwest regions of the United States, by offering safe, high-
quality and reliable Fun Karts that are competitively priced and timely
delivered. To improve its market share position, in 1996, the Company added 15
new dealers and the Wal-Mart and Sam's Club networks to its existing
distribution channels. The Company's future marketing efforts are designed to
maintain and expand its independent dealer network in the South and West
regions of the United States and in foreign markets through direct
communications with dealers and assisting them with their selling and marketing
efforts with Company-sponsored seminars, discounts or rebate products and
advertising, including product videos and brochures, leaflets, posters, signs
and other miscellaneous promotion and items for use by dealers. The Company
will also seek to increase sales to mass merchandisers with direct
communication, engaging independent sales representatives and attendance by
Company representatives at Fun Kart and industry related trade shows. The
Company believes that attendance at trade shows will allow it to promote its
products to a diversified group of dealers and mass merchandisers currently
targeted by the Company. The Company also intends to implement a complete part
and accessories sales program including such items as helmets, jackets, boots
and shirts, which will be sold to its dealers and mass merchandisers. Parts
and accessories may be ordered by toll-free telephone contact with the
Company's representatives and overnight service is available if required.
The Company's advertising and promotional materials emphasize the
safety-related features built into the Company's Fun Karts. The Company has
adopted this advertising strategy in order to promote the concept that it is
fun and safe for children to own and operate Fun Karts. Additionally, the
Company intends to increase its penetration of its target market by enhancing
potential customers' awareness of its products by advertising in youth-oriented
magazines, motorcycle, lawn and garden, hardware and outdoor power equipment
trade magazines, establishment of a Company home page on the Internet,
displaying and promoting the Company's products at NASCAR races and related
events and traditional print, billboard and, to a lesser extent, television and
radio media. The Company believes that if it is to further penetrate its
target market, the Company must advertise in media easily accessible by this
group and attractively and prominently display its Fun Karts in locations and
at events frequented by young males and their parents.
To enhance its marketing program, the Company, on January 21, 1997,
entered into a one-year promotional agreement with NASCAR driver, Bobby
Labonte. Under the terms of the agreement, Mr. Labonte will be the national
spokesperson for the Company's products and will appear at various
Company-sponsored and industry trade shows to promote the Company's Fun Karts.
The Company will also have the right to display
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a Company decal on Mr. Labonte's #44 Busch Grand National racing car. Mr.
Labonte will receive approximately $104,000 for his services during 1997 plus
reimbursement of travel, food and lodging expenses. The Company has the option
to renew the agreement for 1998 on similar terms.
CUSTOMERS
In 1996, approximately 79% of the Company's sales were to its
independent dealers and the Company projects that it will sell approximately
75% of its Fun Karts to independent dealers in 1997. No one dealer or group of
affiliated dealers accounted for 10% or more of the Company's 1996 sales. In
1996, 12% and 9% of the Company's sales were made to Sam's Club and Wal-Mart,
respectively. The Company believes that Sam's Club and Wal-Mart will account
for approximately 12% and 13%, respectively, of the Company's 1997 revenues.
The loss of either the Wal-Mart or Sam's Club accounts would have a material
adverse effect on the financial condition and results of operations of the
Company.
BACKLOG
The Company typically fills and ships customer orders within 3 to 7
days of receipt of the order and, therefore, maintains no significant backlog.
FACILITIES
The following table sets forth information concerning the Company's
facilities:
Date Leased Expiration of Approximate
Location or Acquired Description Lease Term Square Footage
--------------------------- ------------- --------------------------- -------------- ----------------
Covington, Louisiana 1996 Corporate Offices(1) 2001 3,400
Roseland Louisiana 1996 Manufacturing facility(2) 1998 48,000
Prattville, Alabama 1996 Manufacturing facility (3) 20,000
- ------------------------------
(1) The monthly lease payment is $4,058 with adjustments for Consumer Price
Index.
(2) The Company and Charles Brister, a director of the Company, have entered
into a Real Estate Option Right of First Refusal Agreement. This agreement
provides that the Company may, at its sole option, purchase the Roseland
facility for an aggregate purchase price of $550,000. The option can be
exercised after December 31, 1997 and expires on December 31, 2000. On
March 15, 1996, the Company and Mr. Brister entered into a lease agreement
for this facility which provides for a two-year primary term with a
two-year renewal option. The monthly lease payment is $6,025 with
adjustments for increases in the Consumer Price Index. The Company
believes these terms are comparable to existing market rates in the region.
Approximately 45,000 square feet is used for manufacturing and 3,000 square
feet is used for office space at the Roseland facility. See "Certain
Relationships and Related Transactions."
(3) The Prattville facility is situated on a two-acre tract of land owned by
the Company. This property is subject to a mortgage held by a financial
institution with a principal balance of approximately $232,000 at March 31,
1997 with interest at the financial institution's commercial base rate (10%
at March 31, 1997). The Company is obligated to make monthly payments of
principal and interest of $2,626 until 2010. The Prattville facility could
be expanded to 40,000 square feet on the existing land. The Company has an
option to acquire two acres adjacent to its existing facilities for future
expansion. The Prattville facility is located in a planned industrial park
with adequate support utilities and freight services.
GOVERNMENTAL REGULATIONS
Consumer protection laws exist in many states in which the Company markets
its products. Any violation of such laws or regulations could have a material
adverse effect on the Company. The Company's manufacturing facilities are
inspected by the Occupational Safety and Health Administration. The Company
believes that it is generally in compliance in all material respects with all
currently applicable federal and state laws and regulations. Federal, state
and local environmental regulations are not expected to have a material effect
on the Company's operations. However, if the Company in the future acquires an
entity which is in violation of consumer or environmental laws and regulations,
such violations may have a material adverse effect on the Company's operations.
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Management believes certain states, including California, have proposed
legislation involving emission or other safety standards for the type of
gas-powered type engines installed on the Company's Fun Karts. The Company is
currently unable to predict whether such legislation will be enacted in the
future and, if so, the ultimate impact on the Company and its operations.
EMPLOYEES
The Company employs approximately 96 employees of which 56 are employed on
a full-time basis. Eight employees are administration and sales personnel,
four are plant management and supervisory personnel and 84 hourly employees are
involved in manufacturing and shipping. In spite of the seasonal nature of
sales, the Company attempts to keep all personnel employed year-round and
increases the hours per work week to meet seasonal demand.
Cost of manufacturing labor for the Company is between $5.00 and $9.00 per
hour, which is comparable to labor costs in its respective markets. The
Company's employees are not represented by a union or subject to a collectively
bargaining agreement. The Company has never experienced a strike or work
stoppage and considers its relations with its employees to be excellent.
COMPETITION
The Fun Karts industry is highly competitive, and there is no assurance
that the Company will be able to continue to compete profitably in this
industry in the future. The Company expects that it will continue to face
intense competition as its business and acquisition strategies are implemented.
Such competition may result in reduced sales, reduced margins, or both. The
Company is and will be competing with larger, better capitalized companies
which may be better positioned to respond to shifts in consumer demand and
other market related changes. If other companies introduce new and modified
products before the Company achieves significant market expansion, the Company
may experience growth below projected levels which could have a material
adverse effect on the Company's operating results. However, the Company
believes that it will be able to compete effectively with its competitors by
diversifying its product line and expanding its market share through
implementation of its business and acquisition strategies.
The Company has identified three major competitors in the Fun Karts
industry, Manco Productions, a Fort Wayne, Indiana-based company, Carter
Brothers Manufacturing, a Brundidge, Alabama-based company, and Ken-Bar
Manufacturing, a Cornelia, Georgia-based company. Management estimates that
the Company, which had approximately 14% market share, plus its three primary
competitors accounted for over 60% of the Fun Karts sold in the United States
in 1996.
PRODUCT LIABILITY AND INSURANCE LIMITS
The nature of the products manufactured and marketed by the Company is such
that the products may fail due to material inadequacies or equipment failures.
Such a failure may subject the Company to the risk of product liability claims
and litigation arising from injuries allegedly caused by the improper
functioning or design of its products. As the Company expands its product
lines and distributes more products into the marketplace, the Company's
exposure to such potential liability will also increase. The Company currently
maintains $5 million occurrence basis product liability insurance (with
coverage being provided in respect of accidents which occurred during the
policy year, regardless of when the related claim is made) with a $50,000
self-insured retention and $5 million maximum per occurrence coverage. The
Company has four pending product liability claims. None of the current claims
are expected to exceed the existing policy limits. The Company has never had a
claim that resulted in an award or settlement in excess of insurance coverage.
At December 31, 1996, the Company had accrued $100,000 for the defense and
possible payment of pending claims. The Company believes that if it is
successful in the sale and distribution of a large number and variety of Fun
Karts and related products, product liability claims will be inevitable,
particularly given the current litigious nature of American consumers. There
is no assurance that such insurance coverage will be sufficient to fully
protect the business and assets of the Company from all claims, nor can any
assurances be given that the Company will be able to maintain the existing
coverage or obtain additional coverage at commercially reasonable rates. To
the extent product liability losses are beyond the limits or scope of the
Company's insurance coverage, the Company could experience a material adverse
effect upon its business, operations, profitability and assets.
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LEGAL PROCEEDINGS
In addition to product liability claims, the Company, from time to time, is
involved in lawsuits in the ordinary course of business. Such lawsuits have
not resulted in any material losses to date, and, except as discussed below,
the Company does not believe that the outcome of any existing lawsuits would
have a material adverse effect on its business.
On February 4, 1997 a lawsuit was filed in a Mississippi state court
against the Company, Brister's and an unaffiliated insurance broker by the
Company's insurance underwriter to have insurance coverage declared as null and
void for an alleged material misrepresentation on the insurance application.
This action arose as a result of the payment in 1997 by the insurance
underwriter of $700,000 in settlement of a product liability lawsuit against
Brister's and other defendants. The Company intends to file a counterclaim
against the Company's insurance broker relating to possible misrepresentations
made by the insurance broker to the insurance underwriter regarding Brister's
prior product liability claims history. The Company intends to vigorously
defend this lawsuit. The Company is currently engaged in discovery and is
unable to predict the outcome of this litigation. If the Plaintiff is
successful in this litigation and is awarded a judgement for damages against
the Company and Brister's, such judgment could have a material adverse effect
on the Company's business, financial condition and results of operations.
Under the terms of the Brister's Acquisition, the Company may offset certain
product liability claims against certain shares of the Common Stock of the
Company issued to Mr. Charles Brister, a director and principal stockholder of
the Company, as partial consideration for the Brister's Acquisition. See "The
Company -- Acquisitions; Brister's Acquisition," "Management," "Certain
Relationships and Related Transactions" and "Principal Stockholders."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company:
Name Age Position
---- --- --------
V. Lynn Graybill(1)(2) 52 Chairman of the Board, President and Chief Executive Officer
John V. Callegari, Jr. 44 Vice President, Administration and Chief Financial Officer
Lawrence E. Schwall, III 36 Vice President, Sales and Marketing
Timothy P. Halter(1) 30 Vice President, Secretary and Director
Charles Brister(1) 45 Director
Joseph R. Mannes(2) 38 Director
Ronald C. Morgan 49 Director
Robert W. Bell(2) 59 Director
Gary C. Evans 40 Director
- ---------------
(1) Members of the Company's Compensation Committee.
(2) Members of the Company's Audit Committee.
The Company may employ such additional management personnel as the
Board of Directors of the Company deems necessary. The Company has not
identified nor reached an agreement or understanding with any other individuals
to serve in such management positions, but does not anticipate any difficulty
in employing qualified individuals.
Directors of the Company are elected by the stockholders at each
annual meeting and serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Officers are elected to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed or their earlier resignation or removal from office.
Information regarding the directors and management of the Company is
set forth below.
V. Lynn Graybill is the Chairman of the Board, President and Chief
Executive Officer of the Company and has served in those capacities since March
1996. From September 1993 to March 1996, Mr. Graybill served as President of
Capacity of Texas, Inc., a specialty vehicle engineering and manufacturing
subsidiary of Collins Industries (Nasdaq: COLL), which sold products through an
international dealer organization. From 1988 to 1993, Mr. Graybill was
President and Chief Executive Officer of Peerless Chain Company, a 200 employee
$30 million sales consumer hardware company selling to hardware stores, farm
implement and supply stores, automotive parts stores, large mass merchandisers
and home centers in the United States. From 1985 to 1988, Mr. Graybill was
Division President of Harlan Tractor Corporation, a 90 employee $10 million
sales manufacturer of specialty vehicles, including ground support vehicles for
the airline industry. From 1980 to 1985, Mr. Graybill was Vice President of
Leland Truck Equipment Company, a 300 employee $30 million sales manufacturer
and retail distributor of truck parts and equipment. From 1972 to 1980, Mr.
Graybill worked in various supervisory, engineering, accounting, safety, union
contract administration and production control positions at Harnischfeger
Corporation, a Fortune 500 manufacturer of hydraulic truck and ground cranes.
Mr. Graybill received a B.S. degree in Industrial Management from Central
Missouri State University.
John V. Callegari, Jr., is the Vice President, Administration and
Chief Financial Officer of the Company and has served in these capacities since
November 1996. Mr. Callegari is responsible for all accounting matters,
Exchange Act reporting, cash management, risk management, audit and taxes,
human
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resources and information systems for the Company. Prior to joining the
Company, Mr. Callegari served as Chief Financial Officer of Con Pac, Inc. from
May 1994 to May 1996. Con Pac, Inc. is a manufacturer of folding cartons, and
while with Con Pac, Inc., Mr. Callegari had responsibilities similar to those
which he has with the Company. From January 1992 to May 1994, Mr. Callegari
served as Executive Vice President and Chief Financial Officer of Sunport
Medical Corporation, a medical diagnostic imaging and rehabilitation company
with 12 clinics in the State of Texas, and was responsible for accounting
matters, Exchange Act reporting, investor relations and risk management. From
March 1982 to December 1991, Mr. Callegari served as Director of Finance of
Stewart Enterprises, a multi-divisional holding company with worldwide
interests in real estate, construction and insurance companies, and was
responsible for all accounting matters, including corporate acquisition
accounting. Mr. Callegari is a Certified Public Accountant and received his
B.S. degree in Accounting from Louisiana State University.
Lawrence E. Schwall, III, is the Vice President, Sales and Marketing
of the Company and has served in this capacity since January 1997. Mr.
Schwall's responsibilities include overseeing the development of the Company's
sales and marketing strategies, market forecasting, and the development and
presentation of product knowledge seminars for the Company's dealers and mass
merchandisers. From December 1995 to January 1997, Mr. Schwall served as
Territory Manager -- Commercial Lawn and Garden Dealers for Homelite, Inc., a
subsidiary of Deere & Co. Homelite, Inc. is a manufacturer of hand-held
products. While with Homelite, Inc., Mr. Schwall was responsible for producing
training seminars for the company's customers. From August 1987 to December
1995, Mr. Schwall was OEM Engine Sales Manager for Delta Power, Inc. and was
responsible for the sale and marketing of engines to existing customers and
prospective accounts throughout the southern region of the United States. Mr.
Schwall also served with the industrial division of Briggs & Stratton as
communications liaison for Delta Power, Inc.
Timothy P. Halter has been Vice President, Secretary and a director of
the Company since February 1996. Since May 1995, Mr. Halter has served as
President of Halter Financial Group, Inc., a Dallas, Texas based financial
consulting firm. From 1991 to 1995, Mr. Halter was President of Halter Capital
Corporation, a diversified holding company. Mr. Halter also serves on the
Board of Directors of Duncanville National Bank, located in Duncanville, Texas.
Charles Brister is a director of the Company and has served in this
capacity since March 1996. He served as President and Chief Executive Officer
of Brister's from 1986 to April 1996.
Joseph R. Mannes has been a director of the Company since July 1996,
and since February 1996 has been the Chief Financial Officer, Secretary and
Treasurer of Interactive Creations Incorporated ("ICI"), a corporation offering
real-time internet gaming services. From 1987 until joining ICI, Mr. Mannes
was First Vice President in the Corporate Finance Department of Rauscher Pierce
Refsnes, Inc., a Dallas, Texas stock brokerage company. From 1982 to 1987, Mr.
Mannes was in the commercial lending division of the First National Bank of
Boston, where he attained the position of Assistant Vice President. Mr. Mannes
worked in both the Special Industry Group and the High Technology Group at
First National Bank of Boston. Mr. Mannes graduated with an MBA in Accounting
and Finance from the Wharton School, Graduate Division, of the University of
Pennsylvania in 1982 and an A.B. from Dartmouth College in 1980. Mr. Mannes is
a Chartered Financial Analyst.
Ronald C. Morgan has been a director of the Company since July 1996.
Since June 1980, Mr. Morgan has served as Chief Operating Officer, Executive
Vice President and Director of The Leather Factory, Inc., an AMEX listed
company ("TLF"). Mr. Morgan was a co-founder of TLF. Mr. Morgan was employed
by the Tandy Leather Company for ten years prior to 1980, eventually attaining
the position of Vice-President -- Eastern Division. Mr. Morgan received a B.S.
degree from West Texas State University.
Robert W. Bell has been a director of the Company since July 1996. He
served as Chairman, President and Chief Executive Officer of NewCare Health
Corporation from 1987 to January 1997, when he retired. NewCare Health
Corporation is a Nasdaq SmallCap Market-listed nursing home company. From 1981
to 1987, Mr. Bell was President of R.W.B. Realty, a Louisiana corporation that
sponsored public and private limited partnerships that owned, built and
operated nursing homes and medical office buildings. From 1964 to 1981, Mr.
Bell was President and Chairman of Bell Realty and Land Company, a residential
land development and home construction business in Mississippi.
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Gary C. Evans has been a director of the Company since July 1996. Mr.
Evans has served as President, Chief Executive Officer and a director of Magnum
Hunter Resources, Inc. ("Magnum"), an American Stock Exchange oil and gas
exploration and development company, since December 1995. Mr. Evans previously
served as Chairman, President and Chief Executive Officer of Hunter Resources,
Inc. ("Hunter") from September 1992 until its merger with Magnum. From
December 1990 to September 1992, he served as President and Chief Operating
Officer of Hunter. From 1985 to 1990, he was the founder and President of
Sunbelt Energy, Inc., prior to its merger with Hunter. From 1981 to 1985, Mr.
Evans was associated with the Mercantile Bank of Canada where he held various
positions including Vice President and Manager of the Energy Division of the
southwestern United States. From 1977 to 1981, he served in various capacities
with National Bank of Commerce (currently BankTexas, N.A.) including Credit
Manager and Credit Officer. Mr. Evans serves on the Board of Directors of
Digital Communications Technology Corporation, an American Stock Exchange
listed company.
There are no family relationships among any of the Company's officers
and directors.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued for services,
including salary and bonus amounts, rendered in all capacities for the Company
to its Chief Executive Officer. No other executive officer of the Company
received remuneration in excess of $100,000 during the referenced periods. All
other compensation related tables required to be reported have been omitted as
there has been no applicable compensation awarded to, earned by or paid to any
of the Company's executive officers in any fiscal year to be covered by such
tables.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
----------------------------- -----------------------------
Awards
-----------------------------
Securities
Other Annual Restricted Underlying
Name/Title Year Salary/Bonus Compensation Stock Awards Options/SARs
---------- ---- ------------ ------------ ------------ ------------
V. Lynn Graybill, Chairman of the 1996 $ 121,731 $15,000(1) -0- -0-
Board, Chief Executive Officer
and President
- ---------------
(1) Represents a signing bonus equal to 10% of Mr. Graybill's base salary,
which was paid by issuing Mr. Graybill 140,000 restricted shares of Common
Stock of the Company. See "-- Employment Agreements."
EMPLOYMENT AGREEMENTS
On March 15, 1996, the Company entered into a three-year Employment
Agreement (the "Employment Agreement") with V. Lynn Graybill, whereby Mr.
Graybill agreed to serve as Chairman of the Board, President and Chief
Executive Officer of the Company. The Employment Agreement is for a term of
three years and provides Mr. Graybill with an annual base salary of $150,000.
Upon execution of the Employment Agreement, Mr. Graybill received a signing
bonus of $15,000 (the "Bonus"). The Bonus was paid with the issuance by the
Company to Mr. Graybill of 140,000 shares of Common Stock (the "Graybill
Shares"), subject to a buy-back option of the Company. In year two of the
Employment Agreement, which ends on March 15, 1998, the Company may buy back up
to 70,000 Graybill Shares for $8,400 or $0.12 per share and in year three,
which ends on March 15, 1999, up to 35,000 Graybill Shares for $4,200 or $0.12
per share if Mr. Graybill is either terminated for cause or Mr. Graybill
terminates his employment voluntarily prior to the expiration of the Employment
Agreement. If the Employment Agreement is terminated for any reason other than
for cause or voluntarily by Mr. Graybill, the buy back option available to the
Company is terminated. Mr. Graybill may also receive performance based
incentive stock options to purchase shares of Common Stock at a price equal to
the market value of the Common Stock on the date of issuance, as determined by
the Board of Directors. Mr. Graybill receives benefits commensurate with his
title including medical insurance and other benefits offered to executive
management of the Company. Mr. Graybill is responsible for the day-to- day
operations of the Company and for the preparation of the Company's annual
budget, monthly operating financial statements, quarterly presentations
addressing qualitative and quantitative issues of the operations of the
Company, and any and all other matters requested by the Board of Directors.
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The Employment Agreement restricts the ability of Mr. Graybill to
compete with the Company (the "Covenant Not to Compete") by becoming involved
directly or indirectly with any business that designs, manufactures,
distributes or markets Fun Karts during the term of the Employment Agreement or
for a period of three years following the termination of the Employment
Agreement by either Mr. Graybill or the Company. The enforceability of the
Covenant Not to Compete is governed by the statutory and case law authority of
the State of Texas. Generally, a covenant not to compete is enforceable in the
State of Texas if the limitations contained therein are reasonable as to the
time, geographical area and scope of the activity which they cover.
Enforceability is generally determined on a case by case basis and hinges on
the showing that the limitations are reasonable and they are necessary to
protect the goodwill or other business interest of the entity seeking
enforcement. The Company believes the Covenant Not to Compete is enforceable
in light of the foregoing standards. However, if its enforceability is
challenged in a court of law, the Covenant Not to Compete may be substantially
altered to limit the scope of its application.
To provide for continuity of management, the Company may enter into
employment agreements with other members of its executive management staff.
STOCK OPTIONS
On July 23, 1996, the Board of Directors of the Company adopted a
stock option plan providing for the reservation of 66,667 shares of Common
Stock for options to be granted to employees of the Company at the discretion
of the Compensation Committee of the Board of Directors. In July 1996, the
Company issued to 30 employees, who were neither officers nor directors of the
Company, options to purchase an aggregate of 59,355 shares of Common Stock at
an exercise price of $5.63 per share which are exercisable one year after the
date of grant and expire at various times during 2001.
On January 30, 1997, the Board of Directors of the Company adopted a
stock option plan providing for the reservation of 66,667 shares of Common
Stock for options to be granted to employees of the Company. On January 30,
1997, the Company issued to each of John V. Callegari, Jr., the Vice President,
Administration and Chief Financial Officer of the Company, and Lawrence E.
Schwall, III, the Vice President, Sales and Marketing of the Company, options
to purchase 6,667 shares of Common Stock at an exercise of $4.875 per share
which are exercisable after January 30, 1998 and expire on January 30, 2002.
Also on January 30, 1997, the Company issued to 61 employees, who were neither
officers nor directors of the Company, options to purchase an aggregate of
52,670 shares of Common Stock at an exercise price of $4.875 per share which
are exercisable after January 30, 1998 and expire on January 30, 2002.
The exercise price per share of all options issued by the Company was
based on the closing bid price of the Company's Common Stock as quoted on the
Electronic Bulletin Board of NASD on the date of grant of such options. The
Company intends to adopt a qualified stock compensation plan after completion
of this Offering as it believes it is necessary to retain current management
and employ additional qualified personnel. Any stock option plan which is
adopted by the Company will have terms that are normally accepted in the
industry and for public entities.
COMPENSATION OF DIRECTORS
Each Director of the Company is entitled to receive annual
compensation of $6,000 for attendance of meetings of the Board of Directors of
the Company and for serving on any committees of the Board of Directors of the
Company. The Company will reimburse directors for out-of-pocket expenses of
attending meetings.
COMMITTEES
The Board of Directors of the Company has established a Compensation
Committee and Audit Committee. The Compensation Committee makes
recommendations to the Board of Directors regarding the compensation of
executive officers and administers the Company's employee benefit plans, if
any. The Audit Committee is comprised of a majority of independent directors
and its functions are to recommend to the Board of Directors the engagement of
the Company's independent public accountants, review with such accountants the
plans for and the results and scope of their auditing engagement and certain
other matters relating to their services as provided to the Company.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From December 1989 until March 31, 1996, the Company had no
significant assets, liabilities or business operations. On December 15, 1995,
a former director of the Company and HFG, a financial consulting firm owned by
Timothy P. Halter, an officer and director of the Company, together acquired
31,634 shares of the Company's Common Stock from the then controlling
stockholders of the Company. Subsequently, on February 20, 1996, the Company
sold 50,000 restricted shares of its Common Stock to a former director of the
Company for $938 cash. On March 7, 1996, the Company sold 967,545 restricted
shares of Common Stock to HFG for $1,451 cash. See "The Company --
Historical," "Management," and "Principal Stockholders."
In connection with the Company's March 1996 Offering, the Company and
HFG have agreed to issue additional shares of Common Stock to participants in
the March 1996 Offering if on March 31, 1998 (the "Offering Valuation Date")
the average closing bid price of the Common Stock for the ten trading days
prior to and including the Offering Valuation Date (the "Stock Market Value")
does not equal or exceed $4.50 per share. If such an adjustment is required on
the Offering Valuation Date, each participant in the March 1996 Offering will
receive for no additional consideration an additional number of shares of
Common Stock necessary to increase the Stock Market Value per share of the
Common Stock acquired in the March 1996 Offering to $4.50 per share. HFG has
placed into escrow 233,333 shares of Common Stock (the "HFG Escrow Shares") to
be issued to participants in the March 1996 Offering if an adjustment is
required. The HFG Escrow Shares are subject to the terms and conditions of
that certain Escrow Agreement, dated March 31, 1996 (the "Escrow Agreement"),
by and between HFG, Securities Transfer Corporation, as escrow agent, and the
Company. If on the Offering Valuation Date the Stock Market Value of the
Common Stock is less than $2.25 per share, the Company will be obligated to
also issue the number of additional shares of Common Stock necessary to
increase the Stock Market Value per share of the Common Stock acquired in the
March 1996 Offering to $4.50 per share. If on the Offering Valuation Date, the
Stock Market Value is equal to or greater than $4.50 per share, the HFG Escrow
Agreement will terminate and the HFG Escrow Shares will be delivered to HFG.
Also, any remaining HFG Escrow Shares after any required distribution to the
Original March 1996 Offering participants will be returned to HFG. The Company
is under no obligation to issue to HFG any additional shares of Common Stock as
reimbursement for any HFG Escrow Shares that may be distributed to participants
in the March 1996 Offering. The obligation of the Company and HFG to deliver
additional shares on the Offering Valuation Date applies only to original
participants in the March 1996 Offering who own shares purchased in the March
1996 Offering on the Offering Valuation Date. See "Risk Factors -- Potential
Additional Dilution to Public Investors," "The Company -- Recent Financings,"
"Dilution," "Principal Stockholders" and "Shares Eligible For Future Sale."
In January 1996, concurrent with the execution of the Brister's stock
purchase agreement, the Company entered into a consulting agreement with HFG
whereby HFG agreed to assist the Company with its corporate reorganization,
capital raising activities, employment of legal and accounting firms and the
Brister's Acquisition. For the benefit of the Company, HFG paid to Brister's a
deposit of $20,000 to cover Brister's legal and auditing expenses in the event
the Brister's Acquisition was not consummated. Additionally, HFG agreed to pay
all legal and other professional fees relating to the reorganization and
recapitalization of the Company, and the Brister's Acquisition, if the
Brister's Acquisition was not consummated. For such services and assumption of
contingent liabilities, the Company agreed to pay HFG a consulting fee of
$15,000 and reimbursement of expenses only if the Brister's Acquisition was
consummated. The $15,000 consulting fee was payable by the Company at the
Brister's closing in cash and/or a number of Brister's Escrow Shares (as
defined below) to be determined at the valuation date (as defined below). In
accordance with the terms of the HFG consulting agreement, if Mr. Brister
received 500,000 or more of the Brister's Escrow Shares, the Company would pay
the consulting fee with a cash payment of $10,000 and the delivery of the
remaining Brister's Escrow Shares, if any, to HFG. If Mr. Brister received
less than 500,000 of the Brister's Escrow Shares, the $15,000 consulting fee
would be satisfied by delivery to HFG of the remaining Brister's Escrow Shares.
In July 1996, HFG received 483,333 Brister's Escrow Shares as full payment of
the $15,000 consulting fee. Additionally, at the Brister's closing, HFG
received reimbursement of $36,400 from the Company for legal and other
professional fees paid by HFG relating to the Company's reorganization and
Brister's Acquisition. Brister's also returned to HFG the initial $20,000
deposit.
The Company in March 1996 entered into a second consulting agreement
with HFG which provided for an annual payment of $10,000 to HFG for assisting
the Company with its financial public relations and stockholder communications.
The HFG consulting agreement expired in March 1997 and has been renewed for an
additional one-year period on similar terms. Timothy P. Halter, the President
and sole owner of HFG, is
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a principal stockholder of the Company and the Vice President, Secretary and a
director of the Company. See "Management" and "Principal Stockholders."
At the closing of the Brister's Acquisition, effective at the close of
business on March 31, 1996, 1,000,000 shares of the Company's Common Stock (the
"Brister's Escrow Shares") were issued and delivered to an escrow agent to be
held until the valuation date for such shares. Under the terms of the
Brister's stock purchase agreement, Mr. Charles Brister, a director and
principal stockholder of the Company, was to receive, in addition to other
consideration, the number of Brister's Escrow Shares having a market value of
$3.1 million on the valuation date. The valuation date was defined in the
Brister's stock purchase agreement as the 30th day following the listing date
of the Company's Common Stock on the NASD Electronic Bulletin Board. On the
valuation date (July 29, 1996), the market value, as defined in the Brister's
stock purchase agreement, was the average of the closing bid and ask prices per
share of the Company's Common Stock as quoted on the NASD Electronic Bulletin
Board or $6.00 per share. The Company, in July 1996, delivered to Mr. Brister
516,667 of the Brister's Escrow Shares.
The Company also issued Mr. Brister a subordinated note in the
principal amount of $1,000,000 payable over a seven-year period (the
"Subordinated Note"), a $200,000 note with 10% interest, with interest and
principal payable quarterly beginning April 1, 1997 and with a maturity date of
April 1, 1998 or upon successful completion of an underwritten public offering
of the Company's securities (collectively, the "Brister Notes"). Interest on
the Subordinated Note accrues at the rate of 8% per annum in year one and
increases 1% per year thereafter to a maximum of 14% per annum in year seven.
Payments due under the Subordinated Note are to be made in quarterly
installments with interest only being due and payable for the first three years
of the Subordinated Note. The principal amount of the Subordinated Note is
payable in installments of $250,000 per year commencing in year four and ending
in year seven. The Subordinated Note is subordinated to the prior payment of
the principal of and interest on all other indebtedness of the Company then
outstanding, whether secured or unsecured. The Subordinated Note is secured
with securities having a market value of at least $1.0 million owned by Robert
W. Bell and Gary C. Evans, directors of the Company. The Brister Notes,
approximately $1.2 million, will be paid to Mr. Brister with a portion of the
proceeds of this Offering. See "The Company -- Acquisitions; Brister's
Acquisition," "Use of Proceeds," "Management" "Principal Stockholders."
Mr. Brister has deposited 83,334 shares of the Company's Common Stock
owned by him (the "Offset Shares") into an escrow account to offset any amounts
that may be owing at any time by Mr. Brister or Brister's to the Company or HFG
as a result of (i) a claim of products liability for Fun Karts manufactured
prior to the close of the Brister's Acquisition which results in either a
settlement or award of damages in excess of stated insurance policy limits or
(ii) any failure or breach of any representation, warranty, agreement or
covenant of Brister's or Mr. Brister under the terms of the Brister's stock
purchase agreement. If HFG or the Company determines that an offset is
appropriate, notice will be given to Mr. Brister at least 10 days prior to the
disposition of the Offset Shares. If conditions upon which the offset are
based are cured by Mr. Brister during that period, no offset will be
undertaken. However, upon an event of offset, both HFG and the Company have
sole discretion to sell or otherwise dispose of the number of Offset Shares
necessary to satisfy any outstanding liability or obligation imposed upon
either HFG or the Company. All remaining Offset Shares, upon the expiration of
the two-year offset period, will be returned to Mr. Brister. See "Business --
Legal Proceedings."
Concurrent with the Brister's Acquisition, the Company and Mr. Brister
entered into a Real Estate Option Right of First Refusal Agreement. Under the
terms of this agreement, the Company may, at its sole option, purchase the real
property and improvements upon which the Facilities are located for an
aggregate purchase price of $550,000. The option can be exercised commencing
on January 1, 1998 and expires on December 31, 2000. The Company and Mr.
Brister have also entered into a lease agreement for the Facilities which
provides for a two-year primary term with a two-year renewal option. The
monthly lease payment for the Facilities is $6,025 with adjustments for
increases in the Consumer Price Index. The Company believes these terms are
comparable to existing market rates in the region. See "Business --
Facilities."
The Company, in March 1996, entered into a license agreement with
Charles Brister under which Mr. Brister has licensed to the Company for a
period of five years (at no cost to the Company during the first year) all of
the Intellectual Property (as hereinafter defined), which was owned by Mr.
Brister on March 15, 1996, and all Intellectual Property developed and/or owned
by Mr. Brister at any time subsequent to March 15, 1996.
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After the first year of the license agreement, the Company and Mr. Brister
agreed to enter into subsequent agreements defining the license fee and royalty
payments based on terms at least as favorable as Mr. Brister has received, or
could have received, in arms'-length transactions with third parties.
"Intellectual Property" is defined as all domestic and foreign letters,
patents, patent applications, patent licenses, software licenses and know-how
licenses, trade names, trademarks, copyrights, unpatented inventions, service
marks, trademark registrations and applications, service mark registration and
applications and copyright registration and applications owned or used by
Brister's in the operation of its business.
On March 15, 1997, the Company and Mr. Brister entered in an addendum
to the License Agreement and a related Royalty Agreement which provides for the
payment of a one-time license fee and future royalties, respectively, by the
Company to Mr. Brister for the use by the Company for a three-year period of
the automatic throttle override system ("ATOS") developed and patented by Mr.
Brister. The Company paid Mr. Brister an initial $10,000 license fee and
agreed during the first year of the three year extension to pay him a royalty
of $1.00 for each Company Fun Kart on which the ATOS was installed. During the
second and third year of the agreement, the Company agreed to pay during each
year a royalty of $1.00 for each Company Fun Kart on which the ATOS was
installed or $20,000 annually, whichever is greater.
Pursuant to the terms of the Brister's Acquisition, the Company
entered into a consulting agreement with Charles Brister which expired on
December 31, 1996. Under the consulting agreement, Mr. Brister provided
certain consulting services to the Company and its subsidiaries. In
consideration for these services, Mr. Brister received $400 per day for
consulting services provided at the Company's principal place of business and
$800 per day for consulting services provided while traveling in connection
with Company business. During 1996, Mr. Brister received $10,070 from the
Company for consulting fees. The Company intends to employ Mr. Brister on a
project by project basis during 1997 under similar terms as the 1996 consulting
agreement to develop innovative safety and technological features for the
Company's Fun Karts and to assist management with the development and design of
new products.
In connection with the Brister's Acquisition, Charles Brister and the
Company entered into two Non-Competition Agreements. The first Non-Competition
Agreement (the "Texas Agreement") provides that Mr. Brister will not compete
with the Company (a) in any jurisdiction in which the Company or any of its
subsidiaries or affiliates is duly qualified to transact business, (b) within
any marketing area in which the Company is doing a substantial amount of
business or (c) by directly or indirectly owning, managing, operating,
controlling or being employed by any entity engaged in a business which is in
competition with that being conducted by the Company. Mr. Brister is subject
to the Texas Agreement until March 15, 2001. The Texas Agreement is governed
by the laws of the State of Texas and does not cover Mr. Brister's activities
in the State of Louisiana. The enforceability of the Texas Agreement is
governed by the statutory and case law authority of the State of Texas.
Generally, a covenant not to compete is enforceable in the State of Texas if
the limitations contained therein are reasonable as to the time, geographical
area and scope of the activity which they cover. Enforceability is generally
determined on a case by case basis and hinges on the showing that the
limitations are reasonable and they are necessary to protect the goodwill or
other business interest of the entity seeking enforcement. The Company
believes that the Texas Agreement is enforceable in light of the foregoing
standards.
The Company and Mr. Brister also entered into the Non-Competition
Agreement (Louisiana Only) (the "Louisiana Agreement") for the purpose of
defining Mr. Brister's covenant not to compete within the State of Louisiana.
Under the Louisiana Agreement, Mr. Brister is prohibited from engaging in the
same activities as enumerated in the Texas Agreement within the State of
Louisiana for a period of two years from March 15, 1996. The enforceability of
the Louisiana Agreement is governed by the statutory and case law authority of
the State of Louisiana. Generally, a covenant not to compete is enforceable in
the State of Louisiana if the parishes within Louisiana in which a party can
not compete are defined and the agreement is not for a term in excess of two
years. Enforceability is generally determined on a case by case basis. The
Company believes that the Louisiana Agreement is enforceable in light of the
foregoing standards.
To finance the Brister's Acquisition, the Company issued a promissory
note in the principal amount of $2,000,000 (the "Schlinger "Note") payable to
The Schlinger Foundation, a California non-profit public benefit corporation
(the "Foundation"). The Schlinger Note bears interest at the rate of 14% per
annum and is due and payable on or before March 15, 2001. Interest on the Note
is payable monthly with the principal to be paid in annual installments of
$399,996 in 1998, $399,996 in 1999 and $1,200,008 and 2000. The Schlinger Note
is
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secured by a first lien and security interest in all of the Company's
equipment, accounts receivable and inventory. As further consideration for the
$2,000,000 loan, the Company paid the Foundation $21,000, consisting of $10,500
cash and issued the Foundation 70,000 restricted shares of Common Stock. In
July 1996, the Foundation purchased an additional 200,000 shares of Common
Stock from HFG for $600,000 or $3.00 per share. Evert I. Schlinger, the
trustee of the Foundation, also owns 219,048 shares of the Company's Common
Stock which he purchased in April 1996 from HFG for $115,000 or $0.52 per
share. On March 15, 1996, two trusts of which Mr. Schlinger is the trustee
purchased 49,445 shares of Common Stock from the Company for $111,250 or $2.25
per share. Timothy P. Halter, an officer, director and principal stockholder
of the Company, is the President and sole owner of HFG. The Company intends to
pay the Schlinger Note with a portion of the proceeds of this Offering. See
"The Company -- Recent Financings," "Use of Proceeds," "Management" and
"Principal Stockholders."
Mr. Jerry M. Allen, a Vice President and former shareholder of USA, a
subsidiary of the Company, received $62,500 cash and 41,667 shares of the
Company's Common Stock as a result of the USA Acquisition. See "The Company --
Acquisitions; USA Acquisition."
On November 15, 1996, Mr. Gary C. Evans, a director of the Company,
purchased a Unit from the Company for $25,000 in connection with the Company's
Bridge Financing. See "The Company -- Recent Financings." "Management,"
"Principal Stockholders," "Description of Securities -- Bridge Financing" and
"Shares Eligible for Future Sale -- Lock-up Agreements."
The Company believes that all the foregoing related-party transactions
were on terms no less favorable to the Company than could reasonably be
obtained from unaffiliated third parties. All future transactions with
affiliates will be approved by a majority of disinterested directors of the
Company and on terms no less favorable to the Company than those that are
generally available from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
ownership of the Company's shares of Common Stock as of May 15, 1997 by each of
its directors, executive officers and persons known by the Company to
beneficially own 5% or more of the outstanding shares of the Common Stock and
all executive officers and directors as a group.
Shares Beneficially Percentage of Shares Percentage of Shares
Owned Prior to and Beneficially Owned Beneficially Owned
Name(1) After the Offering Prior to the Offering After the Offering(2)
---- ------------------ --------------------- ---------------------
V. Lynn Graybill(3) . . . . . . . . . . . . . . . 140,000 5.2 3.3
John V. Callegari(4) . . . . . . . . . . . . . . 667 * *
Lawrence E. Schwall, III(5) . . . . . . . . . . . -0- -0- -0-
Charles Brister(6) . . . . . . . . . . . . . . . 516,667 19.0 12.2
Joseph R. Mannes(7) . . . . . . . . . . . . . . . 63,734 2.3 1.5
Ronald C. Morgan(7) . . . . . . . . . . . . . . . 3,334 * *
Robert W. Bell(7) . . . . . . . . . . . . . . . . 14,445 * *
Gary C. Evans(8) . . . . . . . . . . . . . . . . 38,613 1.4 *
Timothy P. Halter(9) . . . . . . . . . . . . . . 495,253 18.2 11.7
Halter Financial Group, Inc.(9) . . . . . . . . . 495,253 18.2 11.7
Schlinger Foundation(10) . . . . . . . . . . . . 489,048 18.0 11.6
Evert I. Schlinger(11) . . . . . . . . . . . . . 538,493 19.8 12.7
Blair L. Smith(12) . . . . . . . . . . . . . . . 179,134 6.6 4.2
Officers and directors as a group (9 persons) . . 1,272,713 46.4 30.0
---------- ------- ------
Total . . . . . . . . . . . . . . . . . 1,990,340 72.6% 46.9%
======= ======
- ---------------
*Less than 1%.
(1) Unless otherwise indicated, each person named in the table has sole voting
and investment power with respect to the shares beneficially owned. Also,
unless otherwise indicated, the address of each beneficial owner identified
below is: c/o Karts International Incorporated, 109 Northpark Boulevard,
Suite 210, Covington, Louisiana 70433.
(2) Includes the issuance of 104,175 shares of Common Stock issuable upon the
conversion of the Convertible Preferred Stock.
(3) Mr. Graybill is a director and the Chairman of the Board, President and
Chief Executive Officer of the Company. See "Management -- Employment
Agreement."
(4) Mr. Callegari is Vice President, Administration and Chief Financial Officer
of the Company. See "Management."
(5) Mr. Schwall is Vice President, Sales and Marketing of the Company. See
"Management."
(6) Mr. Brister is a director of the Company. See "The Company --
Acquisitions; Brister's Acquisition," "Management" and "Certain
Relationships and Related Transactions."
(7) Messrs. Mannes, Morgan and Bell are directors of the Company. See
"Management."
(8) Mr. Evans is a director of the Company. Includes 4,167 shares of Common
Stock issuable upon conversion of one share of Convertible Preferred Stock
owned by Mr. Evans. Includes 6,667 shares of Common Stock and 13,334
shares of Common Stock underlying 1996 Warrants issued to Mr. Evans in
connection with the Bridge Financing and conversion of the Convertible
Preferred Stock. See "Management," "Certain Relationships and Related
Transactions," "Description of Securities -- 1996 Warrants and -- Bridge
Financing" and "Shares Eligible for Future Sale -- Lock-up Agreements."
(9) Mr. Halter, the Vice President, Secretary and director of the Company, is
the sole stockholder, director and president of HFG and is therefore deemed
to have beneficial ownership of the shares of Common Stock held by HFG.
Includes the 233,333 shares of Common Stock subject to the HFG Escrow
Agreement. HFG may be deemed a promoter of the Company. HFG and Mr.
Halter's address is 4851 LBJ Freeway, Suite 201, Dallas, Texas 75244. See
"Risk Factors -- Potential Additional Dilution to Public Investors," "The
Company -- Historical," "Management" and "Certain Relationships and Related
Transactions."
(10) The Schlinger Foundation ("Foundation") beneficially owns 270,000 shares
of the Company's Common Stock. See "The Company -- Recent Financings" and
"Certain Relationships and Related Transactions." Mr. Schlinger is the
sole trustee of the Foundation and has sole voting and dispositive power
over the shares held by the Foundation. However, Mr. Schlinger does not
assert any ownership interest in any of the shares of Common Stock of the
Company owned by the Foundation. Mr. Schlinger owns 219,048 of the shares
of Common Stock of the Company for his own account. See "Certain
Relationships and Related Transactions."
(11) Includes 270,000 shares of Common Stock owned by the Foundation, 219,048
shares of Common Stock owned by Mr. Schlinger for his own account, 37,778
shares of Common Stock held by the Brian Schlinger Trust and 11,667 shares
of Common Stock held by the Evert I. Schlinger Jr. Trust. Mr. Evert I.
Schlinger is the sole trustee of the Brian Schlinger and Evert I.
Schlinger, Jr. Trusts and has sole voting and dispositive power over the
shares held by these trusts. However, Mr. Evert I. Schlinger does not
claim any ownership interest in any of the shares of Common Stock owned by
either the Brian Schlinger Trust or the Evert I. Schlinger, Jr. Trust.
(12) Mr. Smith's address is 4900 Ridgeview, Parker, Texas 75002.
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52
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000
shares of preferred stock, $0.001 par value, and 14,000,000 shares of Common
Stock, $0.001 par value per share. Upon completion of this Offering, there
will be approximately 4,221,633 million shares of Common Stock issued, which
includes the 104,175 shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock. Except for the 25 shares of Convertible Preferred
Stock previously issued, there are no other outstanding shares of preferred
stock.
The following description of certain matters relating to the Common
Stock, Preferred Stock, Convertible Preferred Stock, Redeemable Common Stock
Purchase Warrants, 1996 Warrants and Class A Warrants is a summary and is
qualified in its entirety by the provisions of the Company's Articles of
Incorporation and Bylaws.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the payment of preferential dividends with
respect to any preferred stock that from time to time may be outstanding. In
the event of the dissolution, liquidation or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of all liabilities of the Company and subject to the prior
distribution rights of the holders of any preferred stock that may be
outstanding at that time. The holders of Common Stock do not have cumulative
voting rights or preemptive or other rights to acquire or subscribe for
additional, unissued or treasury shares. Accordingly, the holders of more than
50% of the issued and outstanding Common Stock voting for the election of
directors can elect all of the directors if they choose to do so, and in such
event, the holders of the remaining shares of Common Stock voting for the
election of the directors will be unable to elect any person or persons to the
Board of Directors. All outstanding shares of Common Stock are, and when
issued, the shares of Common Stock offered hereby, will be fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue 10,000,000 shares of
preferred stock, $0.001 par value per share, in one or more series, and to fix
the rights, preferences, qualifications, privileges, limitations or
restrictions of each such series without any further vote or action by the
stockholders, including the dividend rights, dividend rate, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences, and the number of shares
constituting any series or the designations of such series. Except for the
Convertible Preferred Stock, no shares of preferred stock have been issued.
The Company does not currently have any plans, arrangements, commitments or
understandings to issue any additional shares of preferred stock.
CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock constitutes a single series of
preferred stock. The Company may in the future issue additional series of
preferred stock but may not reissue any initially issued shares of Convertible
Preferred Stock that have been redeemed or converted into Common Stock unless
such shares are included in a different series of preferred stock.
The following is a summary of the terms and provisions of the
Convertible Preferred Stock:
DIVIDENDS. Holders of shares of the Convertible Preferred Stock are
not entitled to receive cash dividends or cash equivalent value stock dividends
of Common Stock.
CONVERSION RIGHTS. Upon the occurrence of certain events, including,
the closing of this Offering, the Company has the option to require the holders
of the Convertible Preferred Stock to convert the Convertible
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53
Preferred Stock into either (a) $25,000 and 4,167 shares of Common Stock
("Option One"), or (b) 8,334 shares of Common Stock ("Option Two"). If for any
reason the Company does not complete a public offering of the securities by
November 15, 1997, each share of Convertible Preferred Stock will be
automatically converted into 8,334 shares of Common Stock. The Company does
not currently have any plans, arrangements, commitments or understandings to
issue any additional shares of Convertible Preferred Stock. See "The Company
- -- Recent Financings," "Use of Proceeds," "-- Bridge Financing" and "Shares
Eligible for Future Sale -- Lock-up Agreements."
Holders of Convertible Preferred Stock converted into Common Stock
will be entitled to the same rights applicable at the time of conversion to
other holders of Common Stock. The holders of the shares of the Convertible
Preferred Stock have no preemptive rights with respect to any securities of the
Company.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Company, the holders of shares of the Convertible Preferred
Stock are entitled to receive out of assets of the Company available for
distribution to stockholders, before any distribution of assets is made to
holders of Common Stock or any other junior stock, liquidating distributions in
the amount of $25,000 per share. If upon any liquidation, dissolution or
winding up of the Company, the assets distributable to the holders of the
Convertible Preferred Stock to any such distribution on a parity with the
Convertible Preferred Stock are insufficient to fully pay the preferential
amount, the holders of the Convertible Preferred Stock and of such other
preferred stock will share ratably in such distribution of assets in proportion
to the full respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of shares of the Convertible Preferred Stock will not be
entitled to any further participation in any distribution of assets by the
Company. Neither a consolidation or merger of the Company with another
corporation nor a sale or transfer of all or part of the Company's assets for
cash or securities will be considered a liquidation, dissolution or winding up
of the Company.
The right of the Company, and the rights of its creditors and
stockholders (including holders of the Convertible Preferred Stock), to
participate in the distribution of the assets of any subsidiary of the Company
upon any liquidation or reorganization of such subsidiary, or otherwise, will
be subject to the prior claims of creditors of such subsidiary (except to the
extent the Company may itself be a creditor with recognized claims against such
subsidiary).
VOTING RIGHTS. The holders of shares of Convertible Preferred Stock
have no voting rights.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Each Warrant entitles the holder thereof to purchase one share of
Common Stock at the initial public offering price per share of Common Stock for
a period of four years commencing on the first anniversary of the Effective
Date of this Offering (the "First Exercise Date"). Each Warrant is redeemable
by the Company at a redemption price of $0.01 per Warrant at any time after the
First Exercise Date, upon 30 days' prior written notice to the holders thereof,
if the average closing bid price of the Common Stock, as reported on the
principal exchange upon which the Common Stock is traded, equals or exceeds
twice the initial public offering price per share of Common Stock for 20
consecutive trading days ending three days prior to the date of the notice of
redemption. Pursuant to applicable federal and state securities laws, and in
the event a current prospectus is not available, the Warrants may not be
exercised by the holders thereof and the Company will be precluded from
redeeming the Warrants. There can be no assurance that the Company will not be
prevented by financial or other considerations from maintaining a current
prospectus. Any Warrantholder who does not exercise prior to the redemption
date, as set forth in the Company's notice of redemption, will forfeit the
right to purchase the Common Stock underlying the Warrants, and after the
redemption date or upon conclusion of the exercise period, any outstanding
Warrants will become void and be of no further force or effect, unless extended
by the Board of Directors of the Company. See "Underwriting" for the terms of
the warrants issuable pursuant to the Underwriters' Warrants.
The number of shares of Common Stock that may be purchased is subject
to adjustment upon the occurrence of certain events including a dividend
distribution to the Company's stockholders, or a subdivision, combination or
reclassification of the outstanding shares of Common Stock. Further, the
Warrant exercise price
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is subject to adjustment in the event the Company issues additional stock or
rights to acquire stock at a price per share that is less than the current
market price per share of Common Stock on the record date established for the
issuance of additional stock or rights to acquire stock. The term "current
market price" is defined as the average of the daily closing prices for the 20
consecutive trading days ending three days prior to the record date. However,
the Warrant exercise price will not be adjusted in the case of the issuance or
exercise of options pursuant to the Company's stock option plans, the issuance
or exercise of the Underwriters' Warrants (or the Warrants included therein),
or any other options or warrants outstanding as of the date of this Offering.
The Warrant exercise price is also subject to adjustment in the event of a
consolidation or merger where a distribution by the Company is made to a
stockholder of the Company's assets or evidences of indebtedness (other than
cash or stock dividends) or pursuant to certain subscription rights or other
rights to acquire Common Stock.
In order for a holder to exercise his Warrants, there must be a
current registration statement on file with the Commission and various state
securities commissions to cover registration of the shares of Common Stock
underlying the Warrants. The Company intends to maintain a current
registration statement while the Warrants are exercisable. The maintenance of
a currently effective registration statement could result in substantial
expense to the Company, and there is no assurance that the Company will be able
to maintain a current registration statement covering the shares issuable upon
exercise of the Warrants. The Company believes it will be to qualify the
shares of Common Stock underlying the Warrants for sale in those states where
the Securities are to be offered. The Warrantholders may be deprived of any
value for the Warrants if a current prospectus covering the shares issuable
upon the exercise thereof is not kept effective or if such underlying shares
are not qualified in the states in which the holders of the Warrants reside.
In addition, if the Company merges with a business which does not have and
cannot obtain audited financial statements, holders of the Warrants will be
unable to exercise their Warrants because the Company will be unable to provide
a current prospectus.
The Warrants may be exercisable on surrender of the applicable Warrant
certificate on or prior to expiration of the applicable Warrant exercise
period, with the form on the reverse side of the certificate executed as
indicated, and accompanied by payment of the full exercise price for the number
of Warrants being exercised. Subject to certain limitations, a commission is
payable to the Underwriters upon exercise of the Warrants. See "Underwriting."
1996 WARRANTS
Each of the 500,025 outstanding 1996 Warrants entitles the holder
thereof to purchase, up until May 15, 2000, one share of Common Stock at an
exercise price of $4.50 per share, subject to adjustment in certain
circumstances. The Company may redeem the 1996 Warrants for $.01 per warrant
at any time after November 15, 1997 and until such warrants expire on May 15,
2000, when the average of the daily closing bid price of the Common Stock
equals $9.00 or more per share on any 20 consecutive trading days ending within
15 days of the date on which notice of redemption is given. The Company will
provide holders of the 1996 Warrants with at least 30 days written notice of
the Company's intention to redeem the 1996 Warrants. See "The Company --
Recent Financings," "-- Bridge Financing" and "Shares Eligible for Future Sale
- -- Lock-up Agreements."
CLASS A WARRANTS
The Company has outstanding 63,334 Class A Warrants, with each Class A
Warrant entitling the holder thereof to purchase one share of Common Stock at
an exercise price of $5.25 on or before December 31, 1997. The Class A
Warrants were sold as part of an offering comprised of an aggregate of 3,333
shares of Common Stock and 66,667 Class A Warrants for an aggregate of $17,500
proceeds. On August 15, 1996, the holder of the Class A Warrants exercised
3,333 Class A Warrants and received 3,333 shares of Common Stock for $17,500.
See "The Company -- Recent Financings."
BRIDGE FINANCING
On November 15, 1996, the Company concluded the private sale of 25
Units (the "Units") for total proceeds of $625,000.00 (the "Bridge Financing").
Each Unit consisted of one share of Convertible Preferred Stock and 6,667 1996
Warrants. A total of 25 shares of Convertible Preferred Stock and 166,675 1996
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Warrants were sold. Each 1996 Warrant entitles the holder thereof to purchase,
for a period of 42 months after November 15, 1996, one share of the Common
Stock at an exercise price of $4.50 per 1996 Warrant, subject to adjustment in
certain circumstances. Under the terms of the Bridge Financing, the Company
has the right to require the holders of the Convertible Preferred Stock to
convert their shares into either (a) $25,000 and 4,167 shares of the Common
Stock ("Option 1") or (b) 8,334 shares of Common Stock ("Option 2") if the
Company is able to complete a public offering of its securities prior to
November 15, 1997. Under either option, the investor will continue to hold the
1996 Warrants. If for any reason the Company does not complete a public
offering of its securities by November 15, 1997, each share of Convertible
Preferred Stock will be automatically converted into 8,334 shares of Common
Stock. On March 6 1997, the Company offered to each holder of the Convertible
Preferred Stock the option of either (i) receiving a refund of their cash
investment with interest at 12% per annum as consideration for assigning their
Convertible Preferred Stock and 1996 Warrants to the Company or (ii) agreeing
to the conversion of their Convertible Preferred Stock at the completion of
this Offering upon previously agreed terms along with the issuance of an
additional 13,334 1996 Warrants for each share of Convertible Preferred Stock
converted as further consideration for the agreement by the holders of
Convertible Stock to waive certain registration rights and agreeing to certain
lock-up provisions with respect to the Common Stock received on conversion of
the Convertible Preferred Stock and the 1996 Warrants. The Company has been
advised by all holders of the Convertible Preferred Stock that they will accept
the latter option. See "Shares Eligible for Future Sale -- Lock-up
Agreements."
The Representative acted as placement agent with regard to this
private offering. As placement agent, the Representative received a commission
of eight percent of the offering proceeds (or $50,000), four percent of the
offering proceeds (or $25,000) as additional compensation for investment
banking services and three percent of the offering proceeds (or $18,750) for
non-accountable expenses. See "Underwriting."
CERTAIN PROVISION OF THE ARTICLES OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Articles of Incorporation
("Articles") and Bylaws ("Bylaws") of the Company concern matters of corporate
governance and the rights of stockholders. The ability of the Board of
Directors to issue shares of preferred stock and to set the voting rights,
preferences and other terms thereof, may be deemed to have an anti-takeover
effect and may discourage takeover attempts not first approved by the Board of
Directors (including takeovers which certain stockholders may deem to be in
their best interests). To the extent takeover attempts are discouraged,
temporary fluctuations in the market price of the Common Stock, which may
result from actual or rumored takeover attempts, may be inhibited. These
provisions, together with the ability of the Board to issue preferred stock
without further stockholder action, also could delay or frustrate the removal
of incumbent directors or the assumption of control by stockholders, even if
such removal or assumption would be beneficial to stockholders of the Company.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy contest, even if they could be favorable to the interests of
stockholders, and could potentially depress the market price of the Common
Stock. The Board of Directors believes that these provisions are appropriate
to protect the interests of the Company and all of its stockholders.
MEETINGS OF STOCKHOLDERS. The Bylaws provide that a special meeting
of stockholders may be called by the President of the Company, the Board of
Directors or the holders of not less than 10% of the outstanding Common Stock
entitled to vote at such a meeting unless otherwise required by law. The
Company's Bylaws provide that only those matters set forth in the notice of the
special meeting may be considered or acted upon at the special meeting, unless
all stockholders entitled to vote are present and consent.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Company's Articles
provide that a director of the Company will not be personally liable to the
Company or its stockholders for monetary damages for any act or omission in
good faith. By its terms, and in accordance with applicable state law,
however, this provision does not eliminate or limit the liability of a director
of the Company for any breach of duty based upon an act or omission (i)
involving appropriation in violation of duty of any business opportunity of the
Company, (ii) involving acts or omissions that are not in good faith or which
involve intentional misconduct or a knowing violation of the law, or (iii)
involving unlawful distributions or transactions from which the director
derived an improper personal benefit. The Articles provide further that the
Company shall indemnify its directors, except in such matters as to which the
director shall be adjudged liable for his own negligence or intentional
misconduct in the performance of his duty. A similar indemnification and
limitation of liability provision in the Company's
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Bylaws also extends such protection to officers of the Company. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers, or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company is aware that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
AMENDMENT OF BYLAWS. The Bylaws provide that the Bylaws may be
altered, amended or repealed by the Board of Directors. Such action by the
Board of Directors requires the affirmative vote of a majority of the directors
present at such meeting.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon the completion of this Offering and assuming conversion of the
Convertible Preferred Stock, the Company's authorized but unissued capital
stock will consist of approximately 9,778,172 million shares of Common Stock
and 10,000,000 shares of preferred stock. One of the effects of the
authorized, but unissued capital stock may be to enable the Board of Directors
to render more difficult or to discourage an attempt to obtain control of the
Company by means of a tender offer, proxy contest or otherwise, and thereby to
protect the continuity of the Company's management. If in the due exercise of
its fiduciary obligations, for example, the Board of Directors were to
determine that a takeover proposal was not in the Company's best interests,
such shares could be issued by the Board of Directors without stockholder
approval in one or more private or public offerings or other transactions that
might prevent or render more difficult or costly the completion of the proposed
takeover transaction by diluting the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group, by creating a
substantial voting block of institutional or other investors that might
undertake to support the position of the incumbent Board of Directors, by
effecting an acquisition that might complicate or preclude the takeover, or
otherwise. In this regard, the Company's Articles grants the Board of
Directors broad power to establish the rights and preferences of the
authorized, but unissued preferred stock, one or more series of which would be
issued entitling holders to vote separately as a class on any proposed merger
or consolidation, to convert preferred stock into a larger number of shares of
Common Stock or other securities, to demand redemption at a specified price
under prescribed circumstances related to a change in control, or to exercise
other rights designed to impede a takeover. The issuance of shares of
preferred stock pursuant to the Board's authority described above could
decrease the amount of earnings and assets available for distribution to
holders of Common Stock, and adversely affect the rights and powers, including
voting rights, of such holders and may have the effect of delaying, deferring
or preventing a change in control of the Company. The Board of Directors does
not currently intend to seek stockholder approval prior to any issuance of
authorized, but unissued stock, unless otherwise required by law.
TRANSFER AGENT
The transfer agent for the Company's Common Stock and Warrant Agent
for the Warrants is Securities Transfer Corporation, 16910 Dallas Parkway,
Suite 100, Dallas, Texas 75248.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market
following the completion of the Offering could have an adverse effect on the
market price of the Common Stock. Upon completion of the Offering, there will
be approximately 4,221,633 (4,431,633 if the Underwriters' over-allotment
option is exercised in full) shares of Common Stock outstanding, which includes
the 104,175 shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock. The Securities offered hereby will be eligible for public
sale without restriction, except for shares purchased by affiliates of the
Company (those controlling or controlled by or under common control with the
Company and generally deemed to include officers and directors). Of the
4,221,633 shares of Common Stock to be outstanding after the Offering,
2,731,721 shares will be deemed "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act. Additionally,
there will be outstanding as of the closing of the Offering, options and
warrants to purchase an aggregate 2,228,718 shares of Common Stock (2,438,718
if the Underwriters' over-allotment option is exercised in full), including (i)
1,400,000 shares of Common Stock issuable upon exercise of the Warrants offered
hereby, (ii) 140,000 shares issuable upon exercise of the Underwriters'
Warrants, (iii) 500,025 shares issuable upon exercise of the 1996 Warrants,
(iv) 63,334 shares issuable upon exercise of the Class A Warrants, and (v)
125,359 shares of Common Stock issuable upon exercise of options granted to
employees of the Company, which, when issued in connection with the terms of
such options and warrants, will be restricted shares under the Securities Act.
See "Management" and "Description of Securities."
Effective April 29, 1997, the Commission adopted amendments to Rule
144 to shorten the holding period for restricted securities, generally being
those securities purchased in unregistered private placements. As a result of
these amendments, and subject to satisfaction of certain other conditions, a
person, including an affiliate of the Company (or persons whose shares are
aggregated into such affiliate), who has owned restricted shares of Common
Stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of one
percent of the total number of outstanding shares of the same class or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the sale. Subject to the volume and holding period
limitations of Rule 144 and the lock-up agreements described below, 2,460,879
outstanding shares of Common Stock are eligible for sale under Rule 144 after
the completion of the Offering. Holders of approximately 1,376,221 shares of
Common Stock, including the holders of the Convertible Preferred Stock,
officers and directors of the Company, will agree to "lock-up" their shares of
Common Stock for periods ranging from 18 to 60 months after the completion of
the Offering. A person who has not been an affiliate of the Company for at
least the three months immediately preceding the sale and who has beneficially
owned shares of Common Stock for at least two years is entitled to sell such
shares under Rule 144(k) without regard to any of the limitations described
above. As of the commencement of the Offering, no restricted shares of Common
Stock would be eligible for sale under the provisions of Rule 144(k).
The possibility that substantial amounts of Common Stock may be sold
in the public market may adversely affect the prevailing market price for the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities.
REGISTRATION RIGHTS
The holders of the Underwriters' Warrants have been granted
registration rights to require the Company, at the Company's expense, to
register under the Securities Act the 140,000 Underwriters' Warrants and the
140,000 shares of Common Stock underlying the Underwriters' Warrants. See
"Underwriting." The holders of the Convertible Preferred Stock have certain
registration rights with respect to the 500,025 shares of Common Stock issuable
upon exercise of the 1996 Warrants. Any exercise of such registration rights
by the holders of these securities may hinder the Company's efforts to obtain
future financing and may have an adverse effect on the market price of the
Common Stock.
LOCK-UP AGREEMENTS
The holders of the Convertible Preferred Stock have agreed not to sell
or otherwise dispose, for a period of 18 months after the completion of this
Offering, any of the 104,175 shares of Common Stock to be issued upon
conversion of the Convertible Preferred Stock, the 1996 Warrants or 500,025
shares of Common Stock
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issuable upon exercise of the 1996 Warrants; provided the shares of Common
Stock issuable upon exercise of the 1996 Warrants are subject to demand
registration rights and may be subsequently sold by the holders thereof if the
Company calls for the redemption of the Warrants or 1996 Warrants within 18
months after the completion of this Offering. See "Description of Securities
- -- Bridge Financing."
All officers and directors of the Company who are existing
stockholders of the Company have agreed not to sell or dispose of any shares of
Common Stock held by them without the prior written consent of the
Representative until two years after the effective date of this Offering.
Furthermore, officers and directors whose total compensation is more than
$100,000 per year, or who own 5% or more of the Company's outstanding
securities, have agreed to enter into a compensation and lock-up agreement for
a period of five years to commence upon completion of this Offering. Officers
and directors of the Company who are subject to a five-year lock-up provision
shall have the right to have such restriction released at a rate of 20% per
annum for a period of five years based upon the Company's achievement of
certain goals with respect to the following: (i) annual revenue growth of 20%
or more, (ii) annual earnings per share growth of 20% or more, and (iii) annual
price of stock growth of 20% or more. With regard to V. Lynn Graybill, the
Chairman of the Board and Chief Executive Officer of the Company, the
afore-referenced lock-up provisions, to which Mr. Graybill would be subject,
will be terminated after the termination of Mr. Graybill's Employment
Agreement, unless such Agreement is otherwise extended. See "Management -
Employment Agreements."
UNDERWRITING
The underwriters named below (the "Underwriters") for whom Argent
Securities, Inc. is acting as Representative (the "Representative"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement between the Company and the Representative (the "Underwriting
Agreement"), to purchase from the Company, and the Company has agreed to sell
to the Underwriter, the aggregate number of shares of Common Stock and Warrants
set forth opposite their names below:
Number of Number of
Underwriters Shares Warrants
------------ ------ --------
Argent Securities, Inc. . . . . . . . . . . . . . . . . . . . . . .
------------------------- -------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
========================= =========================
The Underwriters are committed to purchase and pay for all of the
shares of Common Stock and Warrants offered hereby if any shares of Common
Stock and Warrants are purchased. The shares of Common Stock and Warrants
subject to this Offering are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel and to various other
conditions.
The Underwriters have advised the Company that the Underwriters
propose to offer the shares of Common Stock and Warrants subject to this
Offering to the public at the public offering price set forth on the cover page
of this Prospectus. The Underwriters may allow to certain dealers who are
members of the NASD a concession not in excess of $.___ per share of Common
Stock and at $.___ per Warrant and such dealers may reallow a concession of not
in excess $.___ per share of Common Stock and $.___ per Warrant to certain
other dealers who are members of the NASD.
The Company has granted to the Representative an option, exercisable
for 45 days from the date of this Prospectus, to purchase up to 210,000
additional shares of Common Stock and 210,000 additional Warrants at the public
offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Representative may exercise this
option on one occasion, in whole or in part, solely for the purpose of covering
over-allotments, if any, made in connection with the sale of the shares of
Common Stock and Warrants offered hereby.
In connection with this Offering, certain Underwriters and selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common
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Stock and Warrants. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
persons may bid for or purchase Common Stock or Warrants for the purpose of
stabilizing their respective market prices. The Underwriters also may create a
short position for the account of the Underwriters by selling more shares of
Common Stock or Warrants in connection with the Offering than they are
committed to purchase from the Company, and in such case may purchase shares of
Common Stock or Warrants in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters
may also cover all or a portion of such short position by exercising the
over-allotment option. In addition, the Representative, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of other Underwriters, the
selling concession with respect to shares of Common Stock and Warrants that are
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock and
Warrants at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
The Company has agreed with the Representative that the Company will
pay to the Underwriters a warrant solicitation fee (the "Warrant Solicitation
Fee") equal to 5% of the exercise price of the Warrants which are exercised
pursuant to a solicitation of exercise of the Warrants or in connection with a
redemption and to the extent not inconsistent with the guidelines of the NASD
and the rules and regulations of the Commission (including NASD Notice to
Members 81-38). Such Warrant Solicitation Fee will be paid to the Underwriters
if (a) the market price of the Common Stock on the date that any Warrant is
exercised is greater than the exercise price of the Warrant; (b) the exercise
of such Warrant was solicited by the Underwriters; (c) prior specific written
approval for exercise is received from the customer if the Warrant is held in a
discretionary account; (d) disclosure of this compensation agreement is made
prior to or upon the exercise of such Warrant; (e) solicitation of the exercise
is not in violation of Regulation M of the Exchange Act; (f) the Underwriters
provided bona fide services in exchange for the Warrant Solicitation Fee; and
(g) the Underwriters have been specifically designated in writing by the
holders of the Warrants as the broker. Unless granted an exemption by the
Commission from Regulation M under the Exchange Act, the Underwriters will be
prohibited from engaging in any market making activities or solicited brokerage
activities with respect to the Securities for the period from five business
days prior to any solicitation by the Underwriters of the Exercise of any
Warrant until the termination of such solicitation activity by the
Underwriters. The foregoing five-day restriction period is reduced by one day
where the security has an average daily trading volume of $100,000 and the
public float for the issuer's equity securities is at least $25 million; and
there is no restrictive period where the average daily trading volume of the
security is $1 million and the public float for the issuer's equity securities
is at least $150 million. As a result, the Underwriters may be unable to
continue to provide a market for the Securities during certain periods while
the Warrants are exercisable.
The Representative has informed the Company that the Underwriters do
not intend to confirm sales of shares of Common Stock or Warrants offered
hereby to any accounts over which they exercise discretionary authority.
Prior to this Offering, the Company's Common Stock has been traded on
the NASD Electronic Bulletin Board. As a result, the public offering price of
the Common Stock offered hereby has been determined by negotiations among the
Company and the Representatives based on the prior trading history of the
Company's Common Stock.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance of three percent of the gross proceeds of this Offering, none
of which has been paid to date. The Company also has agreed to pay all
expenses in connection with registering or qualifying the shares of Common
Stock and Warrants offered hereby for sale under the laws of the states in
which the Securities are sold by the Underwriters (including expenses of
counsel retained for such purpose by the Underwriters) and the expense of all
pre- and post-closing advertisements relating to this Offering.
The Company has agreed to sell to the Representative for an aggregate
purchase price of $140 ($.001 per warrant), warrants entitling the
Representative to purchase from the Company 140,000 shares of Common
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Stock and 140,000 Warrants (10 percent of the securities sold in the Offering)
at an exercise price of 145% of the price per share of Common Stock offered
hereby and 145% of the price per Warrant offered hereby. The Underwriters'
Warrants may not be transferred or exercised for one year from the date of this
Prospectus, except to officers and partners of the Underwriters or members of
the underwriting or selling group, if any, and are exercisable during the
year-year period commencing one year from the date of this Prospectus (the
"Warrant Exercise Term").
During the Warrant Exercise Term, the holders of the Underwriters'
Warrants are given, at nominal cost, the opportunity to profit from a rise in
the market price of the Company's Common Stock. To the extent that the
Underwriters' Warrants are exercised, dilution to the percentage ownership of
the Company's stockholders will occur. Further, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected since the holders of the Underwriters' Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain additional equity capital on terms more favorable to the company than
those provided in the Underwriters' Warrants. Any profit realized by the
Representative on sale of the Underwriters' Warrants or the underlying
securities may be deemed additional underwriting compensation. The Company has
further agreed to place an indeterminable number of shares of Common Stock,
underlying the exercise of the Underwriters' Warrants, including additional
shares of Common Stock issuable in the event any of the anti-dilution
provisions set forth in the instruments evidencing such Underwriters' Warrants
are triggered. Subject to certain limitations and exclusions, the Company has
agreed, at the request of the holders of a majority of the Underwriters'
Warrants, to register the Underwriters' Warrants, and the underlying shares of
Common Stock, under the Securities Act on two occasions during the Warrant
Exercise Term; one such occasion shall be at the Company's expense. The
Company has also agreed to include such Underwriters' Warrants and underlying
shares of Common Stock in any appropriate registration statement filed by the
Company for five years from the date of this Prospectus. See "Shares Eligible
for Future Sale."
All officers and directors, as of the Effective Date, have agreed with
the Representative in writing not to sell, assign or transfer any of their
shares of the Company's securities without the Representative's prior written
consent for periods ranging from 18 to 60 months from the Effective Date,
subject to certain conditions. Also, the holders of the Company's Convertible
Preferred Stock have agreed to certain lock-up provisions for the securities
received upon redemption of the Convertible Preferred Stock for 18 months,
subject to certain conditions. See "Shares Eligible for Future Sale -- Lock-up
Agreement."
The Company has agreed to enter into a financial advisory agreement
with the Representative for them to offer financial consulting services to the
Company for a period of two years commencing on the closing date of the
Offering for an aggregate of $48,000, which amount shall be prepaid in full at
the closing of the Offering. Such consulting services are to include
evaluating the Company's capital requirements for future growth and expansion,
advising the Company as to alternative methods and sources of financing and
advising management of the Company regarding potential business opportunities.
If the Representative originates a financing or a merger, acquisition, joint
venture or other transaction to which the Company is a party, the
Representative will be entitled to receive a finder's fee in consideration for
origination of such transaction. Such finder's fee shall be calculated as a
percentage of the value of the applicable transaction in accordance with the
following schedule: 5% on the first $1,000,000; 4% on the amount from
$1,000,001 to $2,000,000; 3% on the amount from $2,000,001 to $3,000,000; 2% on
the amount from $3,000,001 to $4,000,000; 1% on the amount from $4,000,001 to
$5,000,000; and 1% on the amount above $5,000,000.
The Representative will have the right, for a period of five years
following the completion of this Offering or until the Underwriters' Warrants
have been exercised in full, whichever comes first, to each designate a nominee
for election to the Board or, in lieu thereof, to have a representative attend
all Board meetings of the Company. Any such nominee may be a director,
officer, partner, employee or affiliate of the Representative. The Company
(and its current directors and officers) have agreed to support any such
nominee designated by the Representative. The Representative has advised the
Company that they have not presently identified any designees to nominate for
election to the Board.
The Company has agreed that, for a period of two years from the
closing of the Offering, without the consent of the Representative, it shall
not redeem or issue any of its securities or pay any dividends, or make
-59-
61
any other cash distributions in respect of its securities, in excess of the
amount of the Company's current or retained earnings recognized from and after
the closing date. See "Dividend Policy."
For a period of four years following the completion of this Offering,
the officers and directors of the Company have agreed to effect any permitted
sales of their shares of Common Stock through the Representative provided that
the price and terms of executed offered by the Representative are at least as
favorable as those that may be obtained from other brokerage firms.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The foregoing includes a summary of the principal terms of the
Underwriting Agreement and does not purport to be complete. Reference is made
to the copy of the form of Underwriting Agreement filed as an exhibit to the
Company's Registration Statement of which this Prospectus forms a part.
LEGAL MATTERS
Certain legal matters in connection with the validity of the
Securities offered hereby are being passed upon for the Company by Looper,
Reed, Mark & McGraw Incorporated, Dallas, Texas. Certain legal matters in
connection with this Offering will be passed upon for the Underwriters by
Johnson & Montgomery, Atlanta, Georgia. Richard B. Goodner, a member of
Looper, Reed, Mark & McGraw Incorporated, owns 12,000 shares of Common Stock of
the Company.
EXPERTS
The consolidated financial statements for fiscal years ended December
31, 1996, 1995 and 1994 for the Company, to the extent of and for the periods
indicated in the reports, have been audited by S. W. Hatfield + Associates,
independent certified public accountants, and are included in this Prospectus
in reliance upon the authority of said firm as experts in accounting and
auditing in giving said reports.
-60-
62
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
INDEX TO FINANCIAL STATEMENTS F-1
KARTS INTERNATIONAL INCORPORATED
- --------------------------------
Consolidated Balance Sheets
as of March 31, 1997 and December 31, 1996 F-2
Consolidated Statement of Operations
for the three months ended March 31, 1997 and 1996 F-4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Certified Public Accountants F-8
Consolidated Balance Sheets
as of December 31, 1996 and 1995 F-9
Consolidated Statements of Operations
for the years ended December 31, 1996 and 1995 F-11
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1996 and 1995 F-12
Consolidated Statements of Cash Flows
for the years ended December 31, 1996 and 1995 F-14
Notes to Consolidated Financial Statements F-16
Introduction to Proforma Consolidated Financial Information F-32
Proforma Consolidated Statement of Income
for the year ended December 31, 1996 F-33
Proforma Consolidated Statement of Income
for the year ended December 31, 1995 F-34
Proforma Consolidated Statement of Income
for the year ended December 31, 1994 F-35
Notes to Proforma Consolidated Financial Information F-36
BRISTER'S THUNDER KARTS, INC.
- -----------------------------
Balance Sheet as of March 31, 1996 F-37
Statement of Income and Changes in Retained Earnings
for the three months ended March 31, 1996 F-38
Statement of Cash Flows
for the three months ended March 31, 1996 F-39
Notes to Financial Statements F-40
Report of Independent Certified Public Accountants F-44
Balance Sheets as of December 31, 1995 and 1994 F-45
Statements of Income
for the years ended December 31, 1995 and 1994 F-46
Statement of Changes in Shareholder's Equity
for the years ended December 31, 1995 and 1994 F-47
Statements of Cash Flows
for the years ended December 31, 1995 and 1994 F-48
Notes to Financial Statements F-50
F-1
63
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
ASSETS
(Unaudited) (Audited)
March 31, December 31,
1997 1996
------------ ------------
CURRENT ASSETS
Cash on hand and in bank $ 677,737 $ 630,028
Accounts receivable
Trade, net of allowance for doubtful
accounts of approximately $5,000
and $5,000, respectively 511,070 1,795,802
Other 1,544 1,052
Inventory 913,602 958,381
Prepaid expenses 213,280 6,027
------------ ------------
TOTAL CURRENT ASSETS 2,317,233 3,391,290
------------ ------------
PROPERTY AND EQUIPMENT - AT COST
Buildings and related improvements 334,362 331,360
Equipment 450,487 317,665
Furniture and fixtures 65,784 65,299
Vehicles 57,050 57,050
------------ ------------
907,683 771,374
Less accumulated depreciation (61,444) (34,598)
------------ ------------
846,239 736,776
Land 32,800 32,800
------------ ------------
NET PROPERTY AND EQUIPMENT 879,039 769,576
------------ ------------
OTHER ASSETS
Deposits and other 25,763 19,060
Organization costs, net of accumulated
amortization of $35,050 and $25,557
respectively 154,869 136,864
Loan costs, net of accumulated amortization
of $45,170 and $20,120, respectively 76,863 101,913
Goodwill, net of accumulated amortization
of $209,880 and $151,286, respectively 5,649,542 5,708,137
------------ ------------
TOTAL OTHER ASSETS 5,907,037 5,965,974
------------ ------------
TOTAL ASSETS $ 9,103,309 $ 10,126,840
============ ============
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-2
64
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
March 31, 1997 and December 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited) (Audited)
March 31, December 31,
1997 1996
------------ ------------
CURRENT LIABILITIES
Note payable to a bank $ 317,690 $ 140,020
Current portion of long-term debt 9,085 116,390
Accounts payable - trade 327,233 766,833
Accrued liabilities 41,938 90,472
Accrued income taxes payable 85,042 269,217
------------ ------------
TOTAL CURRENT LIABILITIES 780,988 1,382,932
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities
Related parties 3,200,000 3,200,000
Banks and individuals 233,992 132,660
------------ ------------
TOTAL LIABILITIES 4,214,980 4,715,592
------------ ------------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE PREFERRED STOCK
$0.001 par value. 25 shares allocated, issued and
outstanding 625,000 625,000
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock - $0.001 par value. 10,000,000 shares
authorized. None issued and outstanding -- --
Common stock - $0.001 par value. 14,000,000 shares
authorized. 2,717,458 issued and outstanding, respectively 2,718 2,718
Additional paid-in capital 5,344,180 5,344,180
Accumulated deficit (1,083,569) (560,650)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,263,329 4,786,248
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,103,309 $ 10,126,840
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-3
65
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 1997 and 1996
(Unaudited) (Unaudited)
Three months Three months
ended ended
March 31, March 31,
1997 1996
------------- ------------
REVENUES
Kart sales $ 1,300,784 $ --
----------- -----------
COST OF SALES
Purchases and direct expenses 1,132,947 --
Depreciation 21,483 --
----------- -----------
Total cost of sales 1,154,430 --
----------- -----------
GROSS PROFIT 146,354 --
----------- -----------
OPERATING EXPENSES
General and administrative expenses 481,528 2,772
Depreciation and amortization 83,683 439
----------- -----------
TOTAL OPERATING EXPENSES 565,211 3,211
----------- -----------
INCOME FROM OPERATIONS (418,857) (3,211)
OTHER INCOME (EXPENSES)
Interest and other miscellaneous 51,286 --
Interest expense (155,348) (14,715)
----------- -----------
INCOME BEFORE INCOME TAXES (522,919) (17,926)
INCOME TAX (EXPENSE) BENEFIT -- --
----------- -----------
NET LOSS $ (522,919) $ (17,926)
=========== ===========
Earnings per share of common stock outstanding
Primary $ (0.19) $ (0.03)
=========== ===========
Weighted-average number of shares outstanding 2,742,748 712,531
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-4
66
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1997 and 1996
(Unaudited) (Unaudited)
Three months Three months
ended ended
March 31, March 31,
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (522,919) $ (17,926)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 129,376 579
(Increase) decrease in
Accounts receivable 1,284,240 (100)
Inventory 44,779 --
Prepaid expenses (213,956) (27,665)
Increase (decrease) in
Accounts payable and other accrued liabilities (672,309) 41,116
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,211 (3,996)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition of Brister's Thunder Karts, Inc. -- (2,043,552)
Cash paid for reorganization expenses (27,498) (52,690)
Proceeds from sale of fixed assets 6,666 --
Purchases of property and equipment (152,367) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (173,199) (2,096,242)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from sale of common stock -- 290,201
Proceeds from long-term borrowings -- 2,000,000
Proceeds from bank line of credit 200,000 --
Cash paid for loan costs -- (12,731)
Payments on long-term borrowings (28,303) --
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES 171,697 2,277,470
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 47,709 177,232
Cash and cash equivalents at beginning of period 630,028 --
----------- -----------
Cash and cash equivalents at end of period $ 677,737 $ 177,232
=========== ===========
SUPPLEMENTAL DISCLOSURES OF INTEREST AND INCOME TAXES PAID
Interest paid during the period $ 163,397 $ 2,301
=========== ===========
Income taxes paid (refunded) $ 184,175 $ --
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
F-5
67
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Karts International Incorporated (formerly Sarah Acquisition Corporation)
(Company) was originally incorporated on February 28, 1984 as Rapholz Silver
Hunt, Inc. under the laws of the State of Florida. In June 1984, April 1986,
and November 1987, respectively, the Company changed its corporate name to
Great Colorado Silver, Inc., Great Colorado Silver Valley Development Company
and J. R. Gold Mines, Inc. In January 1996, the Company changed its corporate
name to Sarah Acquisition Corporation.
On February 23, 1996, the Company was reincorporated in the State of Nevada by
means of a merger with and into Karts International Incorporated, a Nevada
corporation incorporated on February 21, 1996. The Company was the surviving
entity and changed its corporate name to Karts International Incorporated. The
reincorporation merger had the effect of a one for 250 reverse split of the
Company's issued and outstanding common stock.
The reincorporation merger also modified the Company's capital structure to
authorize the issuance of up to 20,000,000 shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par
value Preferred Stock. On February 28, 1997, to be effective on March 24,
1997, the Company's Board of Directors approved a two (2) for three (3) reverse
stock split and a corresponding reduction of the authorized shares of common
stock in anticipation of a proposed underwritten public offering of the
Company's common stock during 1997. The issued and outstanding shares of
common stock shown in the accompanying financial statements reflect the
ultimate effect of the March 24, 1997 reverse stock split as if this second
reverse split had occurred as of the beginning of the first period presented in
the accompanying consolidated financial statements.
On March 15, 1996, effective at the close of business on March 31, 1996, the
Company acquired 100.0% of the issued and outstanding stock of Brister's
Thunder Karts, Inc. (a Louisiana corporation), a "fun kart" manufacturer
located in Roseland, Louisiana for total consideration of approximately
$6,100,000. This acquisition was accounted for as a purchase.
On November 20, 1996, effective at the close of business on November 21, 1996,
the Company acquired 100.0% of the issued and outstanding stock of USA
Industries, Inc. (an Alabama corporation), a "fun kart" manufacturer located in
Prattville, Alabama for total consideration of approximately $1,000,000. This
acquisition was accounted for as a purchase.
During interim periods, the Company follows the accounting policies set forth
in its audited financial statements as of and for the year ended December 31,
1996 presented elsewhere in this section. The December 31, 1996 balance sheet
data was derived from audited financial statements of the Company, but does not
include all disclosures required by generally accepted accounting principles.
Users of financial information provided for interim periods should refer to the
annual financial information and footnotes contained elsewhere in this section
when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements are
unaudited, prepared in accordance with the instructions for Form 10-QSB and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of
operations and cash flows of the Company for the respective interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal
year ending December 31, 1997.
F-6
68
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - BASIS OF PRESENTATION - CONTINUED
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company has a concentration of key raw material suppliers for kart engines.
In the event of any disruption in engine availability, if any, the Company may
experience a negative economic impact. The Company does not anticipate any
foreseeable interruption in engine availability and believes that alternate
suppliers are available.
The accompanying consolidated financial statements contain the accounts of
Karts International Incorporated and its wholly-owned subsidiaries, Brister's
Thunder Karts, Inc. and USA Industries, Inc, as appropriate based upon their
respective acquisition date(s). All significant intercompany transactions have
been eliminated. The consolidated entities are collectively referred to as
Company.
NOTE 2 - LITIGATION
The Company's subsidiaries continue as named defendant in several product
liability lawsuits related to its "fun karts". The Company and its
subsidiaries continue to have commercial liability coverage to cover these
exposures with a $50,000 per claim self-insurance clause. The Company is
vigorously contesting each lawsuit and has accrued management's estimation of
the Company's exposure in each situation. Additionally, the Company maintains
a reserve for future litigation equal to the "per claim" self-insurance amount
times the four-year rolling average of lawsuits filed naming the Company as a
defendant.
On February 7, 1997, litigation was filed against the Company and Brister's in
an action to have Brister's product liability insurance coverage (discussed in
the preceding paragraph) declared null and void as a result of a payment by
Brister's insurance underwriter in settlement of a product liability lawsuit.
Legal counsel continues to be of the opinion that this action has questionable
merit and the determination of an outcome, if any, is unpredictable at this
time. The Company is vigorously defending the action. Additionally, the
Company is pursuing a counteraction against the underwriter's agent for
potential misrepresentations made by the agent to the underwriter regarding
Brister's during the acquisition of the aforementioned commercial liability
insurance coverage.
The Company anticipates no material impact to either the results of operations,
its financial condition or liquidity based on the uncertainty of outcome, if
any, of existing litigation, either collectively and/or individually, at this
time.
NOTE 3 - CALCULATION OF EARNINGS PER SHARE
1997 1996
------------- -----------
Primary
Weighted-average shares outstanding 2,717,288 712,531
Net effect of dilutive stock options and warrants based on
the treasury stock method using average market price 25,460 --
----------- -----------
Total weighted-average shares outstanding 2,742,728 712,531
=========== ===========
Net income $ (522,919) $ (17,926)
=========== ===========
Per share amount $ (0.19) $ (0.03)
=========== ===========
The convertible preferred stock is considered anti-dilutive for the three
months ended March 31, 1997 and 1996, respectively.
F-7
69
[S. W. HATFIELD + ASSOCIATES LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Karts International Incorporated
(formerly Sarah Acquisition Corporation)
We have audited the accompanying consolidated balance sheets of Karts
International Incorporated (a Nevada corporation) (formerly Sarah Acquisition
Corporation, a Florida corporation) and Subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Karts International
Incorporated (formerly Sarah Acquisition Corporation) and Subsidiaries as of
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the years then ended in conformity with generally
accepted accounting principles.
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
February 28, 1997 (except for
Note I as to which the date
is March 6, 1997)
F-8
70
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED BALANCE SHEET
December 31, 1996 and 1995
ASSETS
1996 1995
------------- --------------
CURRENT ASSETS
Cash on hand and in bank $ 630,028 $ --
Accounts receivable
Trade, net of allowance for doubtful accounts
of $5,000 and $-0-, respectively 1,795,802 --
Other 1,052 --
Inventory 958,381 --
Prepaid expenses 6,027 --
------------ --------------
TOTAL CURRENT ASSETS 3,391,290 --
------------ --------------
PROPERTY AND EQUIPMENT - AT COST 771,374 --
Accumulated depreciation (34,598) --
------------ --------------
736,776 --
Land 32,800 --
------------ --------------
NET PROPERTY AND EQUIPMENT 769,576 --
------------ --------------
OTHER ASSETS
Deposits and other 19,060 --
Loan costs, net of accumulated
amortization of approximately $20,120 and $-0-, respectively 101,913 --
Organization costs, net of accumulated
amortization of approximately $25,557 and $-0-, respectively 136,864 --
Goodwill, net of accumulated
amortization of approximately $151,286 and $-0-, respectively 5,708,137 --
------------ --------------
TOTAL OTHER ASSETS 5,965,974 --
------------ --------------
TOTAL ASSETS $ 10,126,840 $ --
============ ==============
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
71
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED BALANCE SHEET - CONTINUED
December 31, 1996 and 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
------------ -------------
CURRENT LIABILITIES
Notes payable to banks $ 140,020 $ --
Current maturities of notes payable 116,390 --
Accounts payable - trade 766,833 4,010
Other accrued liabilities
Payroll and sales taxes payable 55,944 --
Interest payable 33,099 --
Other 1,429 --
Federal and State income taxes payable 269,217 --
------------ ------------
TOTAL CURRENT LIABILITIES 1,382,932 4,010
------------ ------------
LONG-TERM LIABILITIES
Notes payable, net of current maturities
Related parties 3,200,000 --
Banks and individuals 132,660 --
------------ ------------
TOTAL LIABILITIES 4,715,592 4,010
------------ ------------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE PREFERRED STOCK
$0.001 par value. 25 shares allocated,
issued and outstanding 625,000 --
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock - $0.001 par value 10,000,000
shares authorized, 25 shares allocated; -0- and
-0- shares issued and outstanding, respectively -- --
Common stock - $0.001 par value 14,000,000
shares authorized; 2,717,458 and 83,441 shares
issued and outstanding, respectively 2,718 83
Additional paid-in capital 5,344,180 487,751
Accumulated deficit (560,650) (491,844)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,786,248 (4,010)
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 10,126,840 $ --
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
72
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31, 1996 and 1995
1996 1995
----------- -----------
REVENUES
Kart sales $ 8,327,316 $ --
----------- -----------
COST OF SALES
Purchases 4,910,692 --
Direct labor 570,842 --
Other direct costs 360,998 --
----------- -----------
TOTAL COST OF SALES 5,842,532 --
----------- -----------
GROSS PROFIT 2,484,784 --
----------- -----------
OPERATING EXPENSES
Salaries and related costs 427,025 --
Insurance 353,944 --
Other operating expenses 472,481 630
Depreciation and amortization 211,440 --
----------- -----------
TOTAL OPERATING EXPENSES 1,464,890 630
----------- -----------
INCOME (LOSS) FROM OPERATIONS 1,019,894 (630)
OTHER INCOME (EXPENSE)
Interest expense (396,589) --
Effect of common stock issuances
at less than "fair value" (531,109) --
Interest and other income 32,573 --
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 124,769 (630)
INCOME TAXES (193,575) --
----------- -----------
NET INCOME (LOSS) $ (68,806) $ (630)
=========== ===========
Net income (loss) per weighted-average
share of common stock outstanding
Primary $ (0.03) nil
=========== ===========
Fully diluted $ (0.03) nil
=========== ===========
Weighted-average number of shares
of common stock outstanding
Primary 2,083,456 124,616
=========== ===========
Fully diluted 2,110,209 124,616
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
73
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
Convertible Additional
Preferred Stock Common Stock paid-in
Shares Amount Shares Amount capital
------ ------ ---------- -------- ----------
BALANCES AT JANUARY 1, 1995,
AS REPORTED -- $ -- 31,254,621 $ 1,563 $ 492,940
Retirement of treasury stock -- -- (102,600) -- (6,669)
Effect of 1 for 250 reverse stock split,
post treasury stock retirement,
including rounding, as of February 23, 1996 -- -- (31,027,405) (1,438) 1,438
Effect of 2 for 3 reverse stock split,
including rounding, as of March 24, 1997 -- -- (41,370) (42) 42
----- ------ ----------- ------- ---------
BALANCES AT JANUARY 1, 1995,
AS RESTATED -- -- 83,246 83 487,751
Net loss for the year -- -- -- -- --
----- ------ ----------- ------- ---------
BALANCES AT DECEMBER 31, 1995 -- -- 83,246 83 487,751
Sale of common stock
to current and former directors in
February 1996, including "fair
value" adjustment -- -- 784,212 785 532,352
Accumulated Treasury
deficit Stock Total
----------- --------- ---------
BALANCES AT JANUARY 1, 1995,
AS REPORTED $(491,214) $ (6,669) $ (3,380)
Retirement of treasury stock -- 6,669 --
Effect of 1 for 250 reverse stock split,
post treasury stock retirement,
including rounding, as of February 23, 1996 -- -- --
Effect of 2 for 3 reverse stock split,
including rounding, as of March 24, 1997 -- -- --
--------- -------- --------
BALANCES AT JANUARY 1, 1995,
AS RESTATED (491,214) -- (3,380)
Net loss for the year (630) -- (630)
--------- -------- --------
BALANCES AT DECEMBER 31, 1995 (491,844) -- (4,010)
Sale of common stock
to current and former directors in
February 1996, including "fair
value" adjustment -- -- 533,137
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
74
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS'
EQUITY - CONTINUED Years ended December
31, 1996 and 1995
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
Sale of common stock
to related party for escrow
agreement related to March
1996 private placement
agreement -- $ -- 233,333 $ 233
under private placement
memorandum in March 1996 -- -- 233,333 233
less cost of raising capital -- -- -- --
under private sale document in July 1996 -- -- 6,667 7
Sale of convertible preferred
stock under private placement
memorandum in November 1996 25 625,000 -- --
Issuance of common stock for
payment of January 1996 professional
services for corporate reorganization
and consulting related to the then-
proposed acquisition of Brister's
Thunder Karts, Inc. -- -- 483,333 483
settlement of January 1996 negotiated
employment contract signing bonus -- -- 140,000 140
payment of March 1996 loan
origination fees -- -- 70,000 70
July 1996 settlement of the acquisition
of Brister's Thunder Karts, Inc. -- -- 516,667 517
November 1996 acquisition of
USA Industries, Inc. -- -- 166,667 167
Net income for the year -- -- -- --
---- -------- --------- ------
BALANCES AT DECEMBER 31, 1996 25 $625,000 2,717,458 $2,718
==== ======== ========= ======
Additional
paid-in Accumulated Treasury
capital deficit Stock Total
------------ ------------ --------- -----------
Sale of common stock
to related party for escrow
agreement related to March
1996 private placement
agreement $ 127 $ -- $ -- $ 350
under private placement
memorandum in March 1996 524,767 -- -- 525,000
less cost of raising capital (163,100) -- -- (163,100)
under private sale document in July 1996 34,993 -- -- 35,000
Sale of convertible preferred
stock under private placement
memorandum in November 1996 -- -- -- --
Issuance of common stock for
payment of January 1996 professional
services for corporate reorganization
and consulting related to the then-
proposed acquisition of Brister's
Thunder Karts, Inc. 52,684 -- -- 53,167
settlement of January 1996 negotiated
employment contract signing bonus 14,860 -- -- 15,000
payment of March 1996 loan
origination fees 10,430 -- -- 10,500
July 1996 settlement of the acquisition
of Brister's Thunder Karts, Inc. 3,099,483 -- -- 3,100,000
November 1996 acquisition of
USA Industries, Inc. 749,833 -- -- 750,000
Net income for the year -- (68,806) -- (68,806)
----------- --------- --------- -----------
BALANCES AT DECEMBER 31, 1996 $ 5,344,180 $(560,650) $ -- $ 4,786,248
=========== ========= ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
75
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, 1996 and 1995
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the year $ (68,806) $ (630)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 231,560 --
Effect of common stock issued
at less than "fair value" 546,109 --
(Increase) Decrease in:
Accounts receivable-trade and other (770,825) --
Inventory 154,485 --
Prepaid expenses and other 82,517 --
Increase (Decrease) in:
Accounts payable (458,548) 630
Other accrued liabilities 3,944 --
Income taxes payable 165,675 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (113,889) --
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (71,734) --
Cash paid for reorganization costs (109,255) --
Cash acquired in acquisition of Brister's
Thunder Karts, Inc. and USA Industries, Inc. 535,425 --
Cash paid for acquisition of Brister's
Thunder Karts, Inc. and USA Industries, Inc. (2,533,642) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,179,206) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from bank line of credit 100,000 --
Cash proceeds from long-term note payable 2,000,000 --
Cash paid for long-term note origination fees (16,783) --
Principal payments on long-term debt (89,633) --
Cash received from sale of convertible preferred stock 625,000 --
Cash paid for brokerage and placement fees
related to sale of convertible preferred stock (94,750) --
Cash received from sale of common stock 657,139 --
Cash paid for brokerage and placement fees
related to sale of common stock (257,850) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,923,123 --
----------- -----------
INCREASE IN CASH 630,028 --
Cash at beginning of year -- --
----------- -----------
CASH AT END OF YEAR $ 630,028 $ --
=========== ===========
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
76
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
Years ended December 31, 1996 and 1995
1996 1995
---------- ----------
SUPPLEMENTAL DISCLOSURE OF INTEREST
AND INCOME TAXES PAID
Interest paid for the year $ 348,730 $ --
========== ==========
Income taxes paid for the year $ 28,000 $ --
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Acquisition price of Brister's Thunder Karts, Inc.
settled with common stock and a note payable $4,100,000 $ --
========== ==========
Acquisition price of USA Industries, Inc. settled
with common stock $ 750,000 $ --
========== ==========
Loan origination fees settled with common stock $ 10,500 $ --
========== ==========
Organization costs settled with common stock $ 53,166 $ --
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
77
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Karts International Incorporated (formerly Sarah Acquisition Corporation)
(Company) was originally incorporated on February 28, 1984 as Rapholz Silver
Hunt, Inc. under the laws of the State of Florida. In June 1984, April 1986,
and November 1987, respectively, the Company changed its corporate name to
Great Colorado Silver, Inc., Great Colorado Silver Valley Development Company
and J. R. Gold Mines, Inc. In January 1996, the Company changed its corporate
name to Sarah Acquisition Corporation.
The Company has had no significant business operations since 1989. Prior to
that time, the Company was involved in the mining industry, principally through
joint ventures with related parties involving mining properties located in
Colorado.
In December 1995, the Company experienced a change in control due to the
transfer of a controlling position in issued and outstanding shares of common
stock of the Company between unrelated third parties. It was the intent of the
new controlling shareholders and management to seek a suitable situation for
merger or acquisition.
On February 23, 1996, the Company was reincorporated in the State of Nevada by
means of a merger with and into Karts International Incorporated, a Nevada
corporation incorporated on February 21, 1996. The Company was the surviving
entity and changed its corporate name to Karts International Incorporated. The
reincorporation merger had the effect of a one for 250 reverse split of the
Company's issued and outstanding common stock.
The reincorporation merger also modified the Company's capital structure to
authorize the issuance of up to 20,000,000 shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par
value Preferred Stock. The effect of this transaction has been reflected in
the accompanying financial statements as of the beginning of the first period
presented.
On February 28, 1997, to be effective on March 24, 1997, the Company's Board of
Directors approved a two (2) for three (3) reverse stock split and a
corresponding reduction of the authorized shares of common stock in
anticipation of a proposed underwritten public offering of the Company's common
stock during 1997. The issued and outstanding shares of common stock shown in
the accompanying financial statements reflect the ultimate effect of the March
24, 1997 reverse stock split as if this second reverse split had occurred as of
the beginning of the first period presented in the accompanying consolidated
financial statements.
On March 15, 1996, effective at the close of business on March 31, 1996, the
Company acquired 100.0% of the issued and outstanding stock of Brister's
Thunder Karts, Inc. (a Louisiana corporation), a "fun kart" manufacturer
located in Roseland, Louisiana for total consideration of approximately
$6,100,000. This acquisition was accounted for as a purchase.
On November 20, 1996, effective at the close of business on November 21, 1996,
the Company acquired 100.0% of the issued and outstanding stock of USA
Industries, Inc. (an Alabama corporation), a "fun kart" manufacturer located in
Prattville, Alabama for total consideration of approximately $1,000,000. This
acquisition was accounted for as a purchase.
F-16
78
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS - CONTINUED
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company has a concentration of key raw material suppliers for kart engines.
In the event of any disruption in engine availability, if any, the Company may
experience a negative economic impact. The Company does not anticipate any
foreseeable interruption in engine availability and believes that alternate
suppliers are available.
The accompanying consolidated financial statements contain the accounts of
Karts International Incorporated and its wholly-owned subsidiaries, Brister's
Thunder Karts, Inc. and USA Industries, Inc. All significant intercompany
transactions have been eliminated. The consolidated entities are collectively
referred to as Company.
NOTE B - ACQUISITION OF SUBSIDIARIES
On March 15, 1996, the Company purchased 100.0% of the issued and outstanding
stock of Brister's Thunder Karts, Inc. (a Louisiana corporation) for a total
purchase price of approximately $6,100,000. The acquisition was effective at
the close of business on March 31, 1996. The purchase price was paid with
$2,000,000 cash, a note payable for $1,000,000 and 775,000 shares (516,667
post-March 24, 1997 reverse split shares) of restricted, unregistered common
stock of the Company. Brister's Thunder Karts, Inc. (Brister's) was formed on
August 2, 1976 under the laws of the State of Louisiana. Brister's is in the
business of manufacturing and marketing motorized "fun karts" for the consumer
market. Results of operations of Brister's are included in the consolidated
financial statements beginning on the effective date of the acquisition.
This acquisition was accounted for using the purchase method of accounting for
business combinations. The Company allocates the total purchase price to
assets acquired based on their relative fair value. Any excess of the purchase
price over the fair value of the assets acquired is recorded as goodwill.
Purchase price $ 6,100,000
Assets acquired (2,017,394)
Liabilities assumed 781,367
-----------
Goodwill related to Brister's $ 4,863,973
===========
On November 20, 1996, the Company purchased 100.0% of the issued and
outstanding stock of USA Industries, Inc. (an Alabama corporation) for a total
purchase price of approximately $1,000,000. The acquisition was effective at
the close of business on November 21, 1996. The purchase price was paid with
$250,000 cash and 250,000 shares (166,667 post-March 24, 1997 reverse split
shares) of restricted, unregistered common stock of the Company. USA
Industries, Inc. (USA) was formed on January 2, 1992 under the laws of the
State of Alabama. USA is in the business of manufacturing and marketing
motorized "fun karts" for the consumer market. Results of operations of USA
are included in the consolidated financial statements beginning on the
effective date of the acquisition.
F-17
79
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITION OF SUBSIDIARIES - CONTINUED
This acquisition was accounted for using the purchase method of accounting for
business combinations. The Company allocates the total purchase price to
assets acquired based on their relative fair value. Any excess of the purchase
price over the fair value of the assets acquired is recorded as goodwill.
Purchase price $ 1,000,000
Assets acquired (1,496,970)
Liabilities assumed 1,492,420
-----------
Goodwill related to USA $ 995,450
===========
Pro forma unaudited results of operations relating to the acquisition of
Brister's and USA, as though the acquisition had occurred as of the beginning
of the first period presented, is as follows:
1996 1995
------------ ----------
Revenues $ 10,698,824 $8,514,460
============ ==========
Net income (loss) $ (214,984) $ 121,324
============ ==========
Earnings per share $ (0.07) $ 0.04
============ ==========
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
The Company considers all cash on hand and in banks, certificates of
deposit and other highly-liquid investments with maturities of three months
or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts and advances receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located in the Southeastern United
States, principally Texas, Louisiana, Mississippi, Alabama, Georgia and
Florida. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts receivable shown on the balance sheet at the date of
non-performance.
During 1996, the Company had an international sale of approximately $35,000
and experienced no credit risk exposure as a result of this transaction.
The Company anticipates continuing international sales in future periods
and is developing credit policies related to this revenue segment.
F-18
80
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. Inventory
Inventory consists of steel, engines and other related raw materials used
in the manufacture of "fun karts". These items are carried at the lower of
cost or market using the first-in, first-out method. As of December 31,
1996, inventory consisted of the following components:
Raw materials $875,450
Work in process 37,661
Finished goods 45,270
--------
$958,381
========
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5. Loan costs
Costs incurred to acquire notes payable and to facilitate the sale of
convertible preferred stock are deferred and amortized as a component of
interest expense over the life of the related financing using the
straight-line method. In the event of debt retirement using the proceeds
of future equity offerings, the related unamortized loan costs will be
reclassified as a cost of capital and offset against additional paid-in
capital related to the specific equity sale proceeds.
6. Organization costs
Costs related to the restructuring and reorganization of the Company have
been capitalized and are being amortized over a five year period,
commencing March 15, 1996, using the straight-line method.
7. Goodwill
Goodwill represents the excess of the purchase price of acquired
subsidiaries over the fair value of net assets acquired and is amortized
over 25 years using the straight-line method.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", the Company adopted the policy of evaluating all
qualifying assets as of the end of each reporting quarter.
F-19
81
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
8. Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes. At December 31, 1996 and 1995, the deferred tax asset and
deferred tax liability accounts, as recorded when material, are entirely
the result of temporary differences. Temporary differences represent
differences in the recognition of assets and liabilities for tax and
financial reporting purposes, primarily accumulated depreciation and
amortization. No valuation allowance was provided against deferred tax
assets, where applicable.
9. Income (Loss) per share
Primary earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and common
stock equivalents (primarily outstanding options and warrants). Common
stock equivalents represent the dilutive effect of the assumed exercise of
the outstanding stock options and warrants, using the treasury stock
method. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of the conversion factor of outstanding
convertible preferred stock at the highest optional conversion rate. In
all instances, the exercise of outstanding options and warrants and the
conversion of convertible preferred stock is assumed to occur at either the
beginning of the respective period presented or the date of issuance,
whichever is later.
10. Accounting standards to be adopted
Upon the adoption of a formal stock compensation plan, the Company
anticipates using the "fair value based method" of accounting for
compensation based stock options pursuant to Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Under the fair value based method, compensation cost will be measured at
the grant date of the respective option based on the value of the award and
will be recognized as a charge to operations over the service period, which
will usually be the respective vesting period of the granted option(s).
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components:
Estimated
1996 1995 useful life
--------- ------------- --------------
Building and improvements $ 331,360 $ -- 5 to 25 years
Equipment 317,665 -- 5 to 10 years
Transportation equipment 57,050 -- 3 to 5 years
Furniture and fixtures 65,299 -- 5 years
--------- --------
771,374 --
Accumulated depreciation (34,598) --
--------- --------
736,776 --
Land 32,800 --
--------- --------
Net property and equipment $ 769,576 --
========= ========
Total depreciation expense charged to operations for the years ended December
31, 1996 and 1995 was approximately $34,598 and $-0-, respectively.
F-20
82
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - NOTES PAYABLE
Notes payable consist of the following:
1996 1995
-------- ------
$300,000 line of credit payable to a bank
Interest at 8.25%. Principal and accrued
interest payable at maturity. Maturity in
August 1997. Secured solely by accounts
receivable due from a specific customer and
guaranteed by the Company $100,000 $ --
$40,020 term note payable to a bank. Interest
at 10.5%. Principal and accrued interest
payable at maturity. Secured by accounts
receivable, inventory and equipment of USA
Industries, Inc. Paid in full in January 1997 40,020 --
-------- ------
Total notes payable $140,020 $ --
======== ======
Additionally, USA has a line of credit with a bank, bearing interest at the
bank's prime interest rate and matures on September 30, 1997. Advances on this
line are made at the rate of 40% per qualifying purchase order received by USA
(as defined in the line of credit agreement) and an additional 45% of each
eligible receivable (as defined in the line of credit agreement). The total
available credit available is $500,000 and no amounts are outstanding at
December 31, 1996. The USA line of credit is collateralized by specific
accounts receivable from a single significant customer of USA and is also
guaranteed by the Company.
The lines of credit are maintained at the same bank and the USA line of credit
contains certain restrictive covenants related to the maintenance of certain
current ratios and minimum net worth. The Company was in compliance with all
covenants as of December 31, 1996.
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
----------- --------
Related parties
- ---------------
$2,000,000 note payable to a Foundation.
Interest at 14.0%. Interest payable on the
15th day of each month beginning on
March 15, 1996. All accrued but unpaid
interest due on March 14, 2001. Principal
payable as follows: $399,996 on March 14,
1999; $399,996 on March 14, 2000; $1,200,008
on March 14, 2001. Secured by accounts
receivable, inventory, property and equipment
owned or acquired by the Company. $2,000,000 $ -
F-21
83
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - LONG-TERM DEBT - CONTINUED
1996 1995
------------ --------------
Related parties - continued
$1,000,000 payable to the former shareholder
of Brister's Thunder Karts, Inc. Interest
payable at 8.0% in the first loan year and
escalating 1.0% per year to a maximum of
14.0% in the seventh loan year. Interest
only payable quarterly, starting June 30,
1996. All unpaid but accrued interest is due
at maturity. Principal payable in annual
installments of $250,000 starting on March 31,
2000. Collateralized by certain assets valued
at $1 million owned by certain members of
the Company's Board of Directors 1,000,000 --
$200,000 note payable to the former shareholder
of Brister's Thunder Karts, Inc. Interest payable
at 10.0%. Payable in quarterly installments,
including interest, of $20,000, $55,000,
$53.750, $52,500 and $51,250, respectively,
commencing on April 1, 1997. Final maturity
in April 1998 or immediately upon successful
completion of an underwritten public offering
of the Company's securities. Collateralized by
certain assets valued at $1 million owned by
certain members of the Company's Board of
Directors 200,000 --
--------- ----
Total related party long-term debt 3,200,000 --
--------- ----
Banks and individuals
$240,020 mortgage note payable to a bank. Interest
at the Bank's Commercial Base Rate (9.75% at
December 31, 1996). Payable in monthly installments
of approximately $2,626, including accrued interest
Final maturity in August 2010. Collateralized by
land and a building owned by USA Industries, Inc. 235,089 --
$9,348 installment note payable to a bank. Interest
at 10.0%. Payable in monthly installments of
approximately $303, including accrued interest
Final maturity in April 1999. Collateralized by
transportation equipment owned by USA
Industries, Inc. 7,553 --
F-22
84
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - LONG-TERM DEBT - CONTINUED
1996 1995
------------ ---------
Banks and individuals - continued
$27,677 note payable to an individual. Interest
at 7.0%. Payable in semi-monthly installments
of approximately $200, including interest
Secured by equipment owned by Brister's 6,408 --
----------- ------
Total long-term debt to banks and individuals 249,050 --
----------- ------
Total long-term debt 3,449,050 --
Less current maturities (116,390) --
----------- ------
Long-term portion $ 3,332,660 $ --
=========== ======
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ -----------
1997 $ 116,390
1998 115,030
1999 411,958
2000 661,809
2001 1,463,085
2002-2006 588,270
2007-2010 92,508
----------
Totals $3,449,050
==========
NOTE G - INCOME TAXES
The components of income tax expense for the years ended December 31, 1996 and
1995, respectively, are as follows:
1996 1995
-------- ------
Federal:
Current $106,675 $ --
Deferred -- --
-------- ------
106,675 --
-------- ------
State:
Current 36,900 --
Deferred -- --
-------- ------
36,900 --
-------- ------
Total $193,575 $ --
======== ======
F-23
85
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - INCOME TAXES - CONTINUED
The Company's income tax expense for the years ended December 31, 1996 and
1995, respectively, differed from the statutory federal rate of 34 percent as
follows:
1996 1995
--------- ------
Statutory rate applied to earnings (loss) before income taxes $ 42,421 $ --
Increase (decrease) in income taxes resulting from:
State income taxes 36,900 --
Non-deductiability of adjustment for common
stock issued at less than "fair value" 182,632
Difference caused by use of statutory amortization
periods for deduction of goodwill (37,724) --
Utilization of pre-acquisition net operating loss
of USA Industries, Inc. (38,173) --
Other 7,519 --
--------- ------
Income tax expense $ 193,575 $ --
========= ======
NOTE H - RELATED PARTY TRANSACTIONS
The Company leases its manufacturing facilities under an operating lease with
the former owner of Brister's, who is also a Company shareholder and director.
Concurrent with the closing of the acquisition of Brister's, the Company and
the former owner executed a new lease agreement for a primary two-year term
expiring in 1998 and an additional two-year renewal option. The monthly lease
payment will remain at $6,025 per month with annual adjustments for increases
based upon the Consumer Price Index.
Concurrent with the acquisition of Brister's, the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal
Agreement. This agreement provides that the Company may, at its sole option,
purchase the real property and improvements in Roseland, Louisiana currently
utilized by the Company or its subsidiary for an aggregate purchase price of
$550,000. The option may be exercised commencing on January 1, 1998 and
expires on December 31, 2000.
In January 1996, concurrent with the execution of a letter of intent related to
a Stock Purchase Agreement whereby the Company acquired 100.0% of the issued
and outstanding stock of Brister's, the Company entered into a consulting
contract with a company owned by an officer and director of the Company whereby
the consulting company would provide all necessary legal, capital and other
related professional services, exclusive of accounting and auditing services,
related to the reorganization, recapitalization and consummation of the
acquisition of Brister's for a fee of $15,000. The payment of the fee was
contingent upon the successful consummation of the Brister's acquisition. The
fee was ultimately settled with the differential between 1,500,000 pre-reverse
stock split unregistered, restricted common stock (1,000,000 post-reverse split
shares) escrowed to close the acquisition of Brister's and the actual number of
shares to be issued to the then owners of Brister's, pursuant to the applicable
settlement terms of the Stock Purchase Agreement and the consulting contract.
Upon final settlement, the $15,000 fee was paid through the issuance of
approximately 725,000 pre- reverse stock split shares (483,333 post-reverse
stock split shares) to the consulting company.
F-24
86
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - CONVERTIBLE PREFERRED STOCK
The Company has 10,000,000 shares of Preferred Stock (Preferred Shares)
authorized for issuance.
In October 1996, the Company's Board of Directors allocated 25 shares of the
authorized number to facilitate the private placement of said shares as a
component of an Equity Unit (Unit) to be sold through a Private Placement
Memorandum (PPM). The PPM was fully subscribed and closed in November 1996.
Each $25,000 Unit consisted of one (1) share of convertible preferred stock and
10,000 redeemable common stock purchase warrants. The PPM raised total gross
proceeds of approximately $625,000 and net proceeds of approximately $530,250
to the Company.
The Preferred Shares require mandatory conversion upon either the effectiveness
of a public offering of the Company's common stock pursuant to a Registration
Statement or upon the first anniversary date of the PPM closing date. In the
event that the conversion is triggered by a public offering, each Preferred
Share will be converted, at the holder's option, into either $25,000 cash and
the issuance of 6,250 shares of restricted, unregistered common stock or 12,500
shares of restricted, unregistered common stock. In either situation, the
holder retains piggyback registration rights for the shares of common stock
issued in the conversion. In the event that the conversion is triggered by the
first anniversary date of the PPM closing, each Preferred Share will be
converted to 12,500 shares of restricted, unregistered common stock, subject to
identical piggyback registration rights.
In January 1997, the Company began undertaking a secondary public offering of
common stock pursuant to a Form SB-2 Registration Statement (secondary
offering). In accordance with guidance and instructions from the National
Association of Securities Dealers (NASD) related to the Company's application
for listing on the "NASDAQ Small-Cap Market", the NASD requested certain
modifications to the terms and conditions underlying the sale and issuance of
the Preferred Shares and their conversion terms.
On March 6, 1997, the Company offered to each holder of the Convertible
Preferred Stock the option of either (i) receiving a refund of $25,000 (the
initial Unit price) plus simple interest at 12.0% per annum as consideration
for assigning their Convertible Preferred Stock and 1996 Warrants to the
Company or (ii) agreeing to the conversion of the Convertible Preferred Stock
at the completion of a pending secondary offering upon the previously agreed
terms along with the issuance of an additional 13,334 1996 Warrants for each
share of Convertible Preferred Stock held as additional consideration for
waiving certain registration rights and agreeing to certain lock-up provisions
with respect to the Common Stock issuable upon conversion of the Convertible
Preferred Stock and the 1996 Warrants. The lock-up agreement requires that the
holder must unconditionally agree to a lock-up of all of the holder's
securities (the Preferred Shares and any securities that the Preferred Shares
are convertible into and all originally issued redeemable common stock purchase
warrants) whereby these designated securities may not be sold by the holder for
a period of approximately 18 months from the closing date of the secondary
offering. Upon release of the lock-up terms, the holder will be permitted to
sell the aforementioned securities under the terms and conditions of Rule 144
of the U. S. Securities and Exchange Commission. Further, the holder will be
deemed to be an affiliate of the underwriter in the secondary offering and, as
such, will not be eligible to purchase any securities offered in the secondary
offering.
F-25
87
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - COMMON STOCK TRANSACTIONS
On February 23, 1996, the Company was reincorporated in the State of Nevada by
means of a merger with and into Karts International Incorporated, a Nevada
corporation incorporated on February 21, 1996. The Company was the surviving
entity and changed its corporate name to Karts International Incorporated. The
reincorporation merger had the effect of a one for 250 reverse split of the
Company's issued and outstanding common stock.
The reincorporation merger also modified the Company's capital structure to
authorize the issuance of up to 20,000,000 shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par
value Preferred Stock. The effect of this transaction has been reflected in
the accompanying financial statements as of the beginning of the first period
presented.
On February 28, 1997, to be effective on March 24, 1997, the Company's Board of
Directors approved a two (2) for three (3) reverse stock split and a
corresponding reduction of the authorized shares of common stock in
anticipation of a proposed underwritten public offering of the Company's common
stock during 1997. This reverse stock split reduced the authorized shares of
common stock from 20,000,000 to 14,000,000. The issued and outstanding shares
of common stock shown in the accompanying financial statements reflect the
ultimate effect of the March 24, 1997 reverse stock split as if this second
reverse split had occurred as of the beginning of the first period presented in
the accompanying consolidated financial statements.
On February 20, 1996, the Company sold 18,750,000 restricted, unregistered
pre-reorganization shares of common stock (75,000 equivalent
post-reorganization shares) (50,000 post-March 24, 1997 reverse split shares)
to a former Company director for cash of approximately $938. The transaction
was recorded by the Company based on the imputed "fair value" of the securities
issued as required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". The imputed fair value of this
transaction was calculated at a "fair value" of approximately $0.68 per share
or approximately $34,000. The differential between the imputed fair value and
the actual cash paid was recorded as a component of "other expense" in the
accompanying consolidated statement of operations.
On March 7, 1996, the Company sold 1,451,317 restricted, unregistered
post-reorganization shares (967,545 post-March 24, 1997 reverse split shares)
of common stock to an entity owned by an officer and director of the Company
for cash of approximately $1,101. The transaction was recorded by the Company
based on the imputed "fair value" of the securities issued as required by
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The imputed fair value of this transaction was
calculated at a "fair value" of approximately $0.68 per share or approximately
$499,264. The differential between the imputed fair value and the actual cash
paid was recorded as a component of "other expense" in the accompanying
consolidated statement of operations.
On March 7, 1996, the Company sold 350,000 restricted, unregistered
post-reorganization shares (233,333 post-March 24, 1997 reverse split shares)
of common stock to an entity owned by an officer and director of the Company
for cash of approximately $350. These shares were placed into an escrow
account to satisfy potential future obligations of the Company and the
affiliated company under the private placement memorandum discussed in the
following paragraph.
F-26
88
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - COMMON STOCK TRANSACTIONS - CONTINUED
On March 31, 1996, the Company sold 350,000 restricted, unregistered
post-reorganization shares (233,333 post-March 24, 1997 reverse split shares)
of common stock under a Private Placement Memorandum at a price of $1.50 per
share. The total gross proceeds of the offering were $525,000. Certain
placement costs and commissions related to the sale of the Private Placement
stock, totaling approximately $163,100, were deducted from the gross proceeds
and charged against additional paid-in capital.
The terms of the March 31, 1996 private placement memorandum require the
Company and/or a company owned by a current officer and director to issue
additional shares to the original investors in the private placement memorandum
in the event that the Company's securities, as listed on a published exchange
or electronic bulletin board, does not equal $3.00 per share ($4.50 per share,
as adjusted by the March 24, 1997 reverse stock split) on March 31, 1996 (the
second anniversary date of the closing of the private placement memorandum
offering). The issuance of additional shares, if any is required, to the
original investors will be done without additional compensation to the Company.
To facilitate this contingency, the Company sold 350,000 restricted,
unregistered post-reorganization shares (233,333 post-March 24, 1997 reverse
split shares) of common stock to an entity owned by an officer and director of
the Company for cash of approximately $350. These shares were placed into an
escrow account for the benefit of the original investors. In the event that no
additional shares are required to be issued to the original investors, the
shares held in escrow will be returned to the company owned by a current
officer and director of the Company.
On March 15, 1996, the Company issued 105,000 restricted, unregistered
post-reorganization shares (70,000 post-March 24, 1997 reverse split shares) of
common stock to a Foundation as a component of the loan origination costs to
secure the $2,000,000 note payable. The proceeds of this note payable were
used to satisfy the cash component of the Brister's acquisition cost.
On March 15, 1996, the Company acquired 100% of the issued and outstanding
stock of Brister's Thunder Karts, Inc., a Louisiana corporation, in exchange
for $2,000,000 in cash; a subordinated $1,000,000 promissory note payable
bearing variable interest rates, as defined therein, maturing in 2003; and
restricted, unregistered common stock of the Company having an aggregate market
value of $3,100,000, as defined in the Stock Purchase Agreement. The
$2,000,000 cash payment was funded by a promissory note from an unrelated third
party bearing interest at 14.0% per annum and maturing in 2000. Final
settlement was satisfied in July 1996 with the issuance of 775,000 restricted,
unregistered post-reorganization shares (516,667 post-March 24, 1997 reverse
stock split shares) having a market value of $3,100,000, as defined in the
related Stock Purchase Agreement.
On March 15, 1996, the Company issued 725,000 restricted, unregistered
post-reorganization shares (483,333 post-March 24, 1997 reverse stock split
shares) of common stock in settlement of a consulting contract with a company
owned by an officer and director of the Company. The transaction was recorded
by the Company based on the imputed "fair value" of the securities issued as
required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation". The imputed fair value of this transaction was
calculated at a "fair value" of approximately $0.11 per share or approximately
$53,167. The differential between the imputed fair value and the actual cash
paid was recorded as a component of "organization costs" in the accompanying
consolidated balance sheet.
F-27
89
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - COMMON STOCK TRANSACTIONS - CONTINUED
On March 15, 1996, in accordance with a January 1996 letter of intent, the
Company issued 210,000 restricted, unregistered post-reorganization shares
(140,000 post-March 24, 1997 reverse split shares) of common stock to the
Company's chief executive officer, valued at $15,000, as additional
consideration for the execution of an employment agreement.
In July 1996, pursuant to Rule 504 of The Securities Act of 1933, the Company
sold 5,000 Units, consisting of 5,000 post-reorganization shares of common
stock (3,334 post-March 24, 1997 reverse split shares) and 100,000 Class A
common stock warrants (66,667 post-March 24, 1996 reverse stock split warrants)
for approximately $17,500 to an unaffiliated investor. The Class A common
stock warrants may be exercised to purchase one (1) post-reorganization share
of the Company's common stock at a price of $3.50 per share ($5.25 per share,
post-March 24, 1997 reverse stock split). The Class A common stock warrants
were assigned no value in the accompanying consolidated financial statements.
In August 1996, 5,000 warrants (3,334 post-March 24, 1997 reverse split
warrants) were exercised for total proceeds of $17,500. The total effect of
this transaction was the sale of 10,000 post-reorganization shares (6,667
post-March 24, 1997 reverse split shares) for a total price of $35,000.
On November 20, 1996, Company acquired 100% of the issued and outstanding stock
of USA Industries, Inc. an Alabama corporation, in exchange for $250,000 in
cash and 250,000 restricted, unregistered post-reorganization shares (166,667
post-March 24, 1997 reverse split shares) of restricted, unregistered common
stock of the Company having an aggregate market value of $750,000.
NOTE K - COMMON STOCK WARRANTS
In July 1996, pursuant to Rule 504 of The Securities Act of 1933, the Company
sold 5,000 Units which included 100,000 Class A common stock warrants (Class A
Warrants) (66,667 post-March 24, 1997 reverse stock split warrants), as
discussed in previous footnotes. Each warrant entitles the holder to purchase
one (1) share of common stock at an adjusted price of $5.25 per share through
December 31, 1997.
In November 1996, the Company privately sold 25 units which included 250,000
Redeemable Common Stock Purchase Warrants (1996 Warrants) (166,668 post-March
24, 1997 reverse stock split warrants), as discussed in previous footnotes).
Each warrant entitles the holder to purchase one (1) share of common stock at
$3.00 per share ($4.50 post-March 24, 1997 reverse split), subject to
adjustment in certain circumstances, for a period of 42 months from the closing
date of the offering. The 1996 Warrants are redeemable by the Company at a
price of $0.01 per Warrant at any time after one (1) year from the offering
closing date when the average of the daily closing bid price of the Company's
common stock equals $6.00 or more per share on any 20 consecutive trading days
ending within 15 days of the date on which notice of redemption is given to the
holders. The Company will provide holders of the 1996 Warrants with at least
30 days written notice of the Company's intent to redeem the Warrants.
Warrants Warrants Warrants
granted exercised outstanding Exercise price
--------- --------- ----------- ------------------
Class A Warrants 66,667 3,334 63,333 $5.25 per share
1996 Warrants 166,668 -- 166,668 $4.50 per share
------- ------- -------
Totals 233,335 3,334 230,001
======= ======= =======
F-28
90
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - STOCK OPTIONS
The Company's Board of Directors has allocated an aggregate 188,066 shares of
the Company's common stock (125,377 post- March 24, 1997 reverse stock split
shares) for unqualified stock option plans for the benefit of employees of the
Company and its subsidiaries.
During 1996, the Company granted options to purchase 89,032 shares (59,355
post-March 24, 1997 reverse stock split shares) of the Company's common stock
to employees of the Company and its operating subsidiaries at an exercise price
of $3.75 per share ($5.63 post-March 24, 1997 reverse split). These options
expire at various times during 2001.
Options Options Options
granted exercised outstanding Exercise price
-------- --------- ----------- ------------------
1996 options 59,355 -- 59,355 $5.63 per share
======= == ======
Shares allocated 125,377
=======
NOTE M - COMMITMENTS AND CONTINGENCIES
Litigation
Brister's is named as defendant in several product liability lawsuits related
to its "fun karts". The Company has had and continues to have commercial
liability coverage to cover these exposures with a $50,000 per claim
self-insurance clause as of December 31, 1996. The Company is vigorously
contesting each lawsuit and has accrued management's estimation of the
Company's exposure in each situation. Additionally, the Company maintains a
reserve for future litigation equal to the "per claim" self-insurance amount
times the four-year rolling average of lawsuits filed naming the Company as a
defendant. As of December 31, 1996, approximately $100,000 has been accrued
and charged to operations for anticipated future litigation.
On February 7, 1997, litigation was filed against the Company and Brister's in
an action to have Brister's product liability insurance coverage (discussed in
the preceding paragraph) declared null and void as a result of a payment by
Brister's insurance underwriter in settlement of a product liability lawsuit.
Legal counsel is of the opinion that this action has questionable merit and the
determination of an outcome, if any, is unpredictable at this time. The
Company is vigorously defending the action. Additionally, the Company is
pursuing a counteraction against the underwriter's agent for potential
misrepresentations made by the agent to the underwriter regarding Brister's
during the acquisition of the aforementioned commercial liability insurance
coverage.
The Company anticipates no material impact to either the results of operations,
its financial condition or liquidity based on the uncertainty of outcome, if
any, of existing litigation, either collectively and/or individually, at this
time.
F-29
91
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - COMMITMENTS AND CONTINGENCIES - CONTINUED
Consulting and Patent Licensing
Pursuant to the acquisition of Brister's, the Company entered into a Consulting
Agreement with the former owner of Brister's. The former owner will provide
certain consulting services to the Company or any subsidiary thereof, which
services will not exceed 8 eight-hour work days per month. As consideration
for such services, the former owner will receive $400 per day for consulting
services provided at the Company's principal place of business and $800 per day
for consulting services provided while traveling in connection with Company
business. The former owner is required to maintain the confidentiality of all
Company information.
Pursuant to the acquisition of Brister's, the Company and the former owner of
Brister's entered into a Non-Competition Agreement. The former owner has
agreed not to compete with the Company or any of its subsidiaries for a period
of five years in any jurisdiction in which the Company or any subsidiary is
duly qualified to conduct business or within any marketing area in which the
Company is doing a substantial amount of business or is engaged in a business
similar to that currently operated by the Company. Additionally, the former
owner agreed that during the same five-year period not to interfere with the
employment relationship between the Company and any of its other employees by
soliciting any of such individuals to participate in individual business
ventures.
At the closing of the Brister's acquisition, the Company entered into a
Licensing Agreement with the former owner of Brister's. This agreement
provides that the former owner will (1) license to the Company all of the
Intellectual Property (as defined) currently owned by the former owner and
being used by the Company or any subsidiary at terms at least as favorable as
the former owner has received or could have received in arms-length
transactions with third parties and (2) for a period of five years from the
execution of the Licensing Agreement will license to the Company, at the
Company's sole option, all Intellectual Property developed or owned by the
former owner at any time subsequent to the Closing Date. The license
referenced in section (2) above shall be exclusive to the Company and free of
charge for the first year from the date of invention and thereafter at terms at
least as favorable as the former owner has received or could have received in
arms-length transactions with third parties. Intellectual Property is defined
in the Stock Purchase Agreement as all domestic and foreign letters patent,
patents, patent applications, patent licenses, software licenses and know-how
licenses, trade names, trademarks, copyrights, unpatented inventions, service
marks, trademark registrations and applications, service mark registrations and
applications and copyright registrations and applications owned or used by the
Company or any subsidiary in the operation of its business.
Employment agreement
In March 1996, pursuant to a January 1996 letter agreement, the Company entered
into a long-term employment contract (Agreement) with an individual to serve as
the Company's Chairman of the Board, President and Chief Executive Officer.
The Agreement is for a term of three (3) years and provides for an annual base
salary of $150,000. Upon execution of the Agreement, the individual earned a
signing bonus of 10%, or $15,000, paid with the issuance of 210,000 restricted,
unregistered post-reorganization shares (140,000 post-March 24, 1997 reverse
split shares) of common stock. Under the terms of the Agreement, the Company
may buy-back 140,000 shares in Year 1 of the Agreement at an aggregate price of
$16,800 if the individual is terminated for cause or the individual voluntarily
terminates his employment prior to March 15, 1997; 70,000 shares in Year 2 of
the Agreement at an aggregate price of $8,400 if the individual is terminated
for cause or the individual voluntarily terminates his employment between March
15, 1997 and March 15, 1998; and 35,000 shares in Year 3 of the Agreement at an
aggregate price of $4,200 if the individual is terminated for cause or the
individual voluntarily terminates his employment between March 15, 1998 and
March 15, 1999. If the Agreement is terminated for any reason than for cause
or voluntary termination by the individual, the buy-back option is terminated.
F-30
92
KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(formerly Sarah Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - SIGNIFICANT CUSTOMERS
During the year ended December 31, 1996, the Company had two related customers
responsible for net sales in excess of 10.0% of total net sales.
Total net sales $8,327,316 100.00%
========== ======
Company A $1,316,880 15.81%
Company B 369,460 4.44%
---------- ------
Total significant customers $1,686,340 20.25%
========== ======
NOTE O - EARNINGS PER SHARE CALCULATION
1996 1995
----------- -----------
Primary
Weighted-average shares outstanding 2,079,728 124,616
Net effect of dilutive stock options and warrants
based on the treasury stock method using
average market price 3,728 --
----------- -----------
Total weighted-average shares outstanding 2,083,456 124,616
=========== ===========
Net income $ (68,806) $ (630)
=========== ===========
Per share amount $ (0.03) nil
=========== ===========
Fully diluted
Weighted-average shares outstanding 2,079,728 124,616
Net effect of dilutive stock options and warrants
based on the treasury stock method using
average market price 3,728 --
Assumed conversion of convertible preferred stock
at conversion rate of 8,333 common shares per
preferred share outstanding 26,753 --
----------- -----------
Total weighted-average shares outstanding 2,110,209 124,616
=========== ===========
Net income $ (68,806) $ (630)
=========== ===========
Per share amount $ (0.03) nil
=========== ===========
F-31
93
KARTS INTERNATIONAL INCORPORATED
INTRODUCTION TO PROFORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
Karts International Incorporated (Karts) acquired 100.0% of the issued and
outstanding stock of Brister's Thunder Karts, Inc. (a Louisiana corporation)
(Brister's) at the close of business on March 31, 1996 and 100.0% of the issued
and outstanding stock of USA Industries, Inc. (an Alabama corporation) (USA) as
of the close of business on November 21, 1996.
The purchase price of Brister's was approximately $6,300,000 with approximately
$2,000,000 paid in cash, notes payable to the seller aggregating $1,200,000 and
775,000 shares (516,667 post-March 24, 1997 reverse stock split shares) of
Karts unregistered, restricted common stock.
The purchase price of USA was $1,000,000 with approximately $250,000 paid in
cash at closing and the balance paid in 250,000 shares (166,667 post-March 24,
1997 reverse stock split shares) of Karts unregistered, restricted common stock
equaling $750,000 based upon the closing price of the Company's common stock on
the settlement date.
Both acquisition transactions were accounted for using the purchase method of
accounting for business combinations. Karts allocated the total purchase price
to the assets acquired based upon their respective relative fair value. Any
excess purchase price over the fair value of the assets acquired was recorded
as goodwill.
Brister's USA
Thunder Industries,
Karts, Inc. Inc.
----------- ------------
Purchase price $ 6,300,000 $ 1,000,000
Assets acquired (2,017,394) (1,496,970)
Liabilities assumed 981,367 1,492,420
----------- -----------
Goodwill $ 4,863,973 $ 995,450
=========== ===========
The Proforma Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994 present the consolidated results of continuing operations
of Karts International Incorporated and Subsidiaries and USA Industries, Inc.
as if the acquisitions occurred as of January 1, 1994, as adjusted for the pro
forma effect of the amortization of goodwill.
These proforma statements include all material adjustments necessary to present
proforma historical results of the above described transactions. The proforma
information does not purport to be indicative of the financial position or the
results of operations which would have actually been obtained if the
acquisition transactions had actually been consummated on the dates indicated.
In addition, the proforma financial information does not purport to be
indicative of the financial position or results of operations that may be
obtained in the future.
The proforma information has been prepared by Karts and all calculations have
been made based on assumptions deemed appropriate in the circumstances by
Karts. Certain of these assumptions are set forth under the Notes to Proforma
Consolidated Financial Information.
The proforma financial information should be read in conjunction with the
historical Financial Statements and Notes thereto of Karts International
Incorporated and its wholly-owned subsidiaries, Brister's Thunder Karts, Inc.
and USA Industries, Inc.
F-32
94
KARTS INTERNATIONAL INCORPORATED
COMBINED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
Brister's USA
Thunder Industries, Pro Forma
Karts Karts, Inc. Inc . effect of
International 1/1/96 to 1/1/96 to amortization Pro Forma
Incorporated 3/31/96 11/21/96 of goodwill Combined
------------- ------------- ------------ ------------- -------------
REVENUES
Kart sales $ 8,327,316 $ 916,845 $ 1,454,663 $ -- $ 10,698,824
COST OF GOODS SOLD 5,842,532 353,734 1,417,106 -- 7,613,372
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 2,484,784 563,111 37,557 -- 3,085,452
OPERATING EXPENSES
General and administrative 1,253,450 277,666 223,947 -- 1,755,063
Depreciation and
amortization 211,440 14,687 40,849 83,091 350,067
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,464,890 292,353 264,796 83,091 2,105,130
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,019,894 270,758 (227,239) (83,091) 980,322
OTHER INCOME (EXPENSE)
Litigation settlements -- (17,379) -- -- (17,379)
Effect of common stock
issuances at less than
"fair value" (531,109) -- -- -- (531,109)
Interest and other (364,016) 448 -- -- (363,568)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 124,769 253,827 (227,239) (83,091) 68,266
PROVISION FOR INCOME TAXES (193,575) (89,675) -- -- (283,250)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (68,806) $ 164,152 $ (227,239) $ (83,091) $ (214,984)
============ ============ ============ ============ ============
Pro Forma earnings per
weighted-average share
of common stock $(0.07)
======
Pro Forma number of
weighted-average shares
of common stock outstanding 3,119,592
=========
F-33
95
KARTS INTERNATIONAL INCORPORATED
COMBINED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
Pro Forma
Karts Brister's USA effect of
International Thunder Industries, amortization Pro Forma
Incorporated Karts, Inc. Inc . of goodwill Combined
------------ ------------ ----------- ------------ -----------
REVENUES
Kart sales $ -- $ 7,320,417 $1,194,043 $ -- $ 8,514,460
COST OF GOODS SOLD -- 5,131,735 1,052,605 -- 6,184,340
----- ----------- ---------- --------- -----------
GROSS PROFIT -- 2,188,682 141,438 -- 2,330,120
OPERATING EXPENSES
General and
administrative 630 1,443,155 94,822 -- 1,538,607
Depreciation and
amortization -- 68,815 32,161 234,377 335,353
----- ----------- ---------- --------- -----------
Total operating expenses 630 1,511,970 126,983 234,377 1,873,960
----- ----------- ---------- --------- -----------
INCOME FROM OPERATIONS (630) 676,712 14,455 (234,377) 456,160
OTHER INCOME (EXPENSE)
Litigation settlements -- (130,000) -- -- (130,000)
Interest and other -- 13,263 587 -- 13,850
----- ----------- ---------- --------- -----------
INCOME BEFORE INCOME TAXES (630) 559,975 15,042 (234,377) 340,010
PROVISION FOR INCOME TAXES -- (218,686) -- -- (218,686)
----- ----------- ---------- --------- -----------
NET INCOME (LOSS) $(630) $ 341,289 $ 15,042 $(234,377) $ 121,324
===== =========== ========== ========= ===========
Pro Forma earnings per
weighted-average share
of common stock $0.04
===========
Pro Forma number of
weighted-average shares
of common stock outstanding 3,119,592
===========
F-34
96
KARTS INTERNATIONAL INCORPORATED
COMBINED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
Pro Forma
Karts Brister's USA effect of
International Thunder Industries, amortization Pro Forma
Incorporated Karts, Inc. Inc . of goodwill Combined
------------- ----------- ----------- ------------ -----------
REVENUES
Kart sales $ -- $ 6,203,293 $866,207 $ -- $ 7,069,500
COST OF GOODS SOLD -- 4,421,274 764,971 -- 5,186,245
----- ----------- --------- --------- -----------
GROSS PROFIT -- 1,782,019 101,236 -- 1,883,255
OPERATING EXPENSES
General and administrative 630 1,235,694 77,453 -- 1,313,777
Depreciation and
amortization -- 81,179 28,977 234,377 344,533
----- ----------- --------- --------- -----------
Total operating expenses 630 1,316,873 106,430 234,377 1,658,310
----- ----------- --------- --------- -----------
INCOME FROM OPERATIONS (630) 465,146 (5,194) (234,377) 224,945
OTHER INCOME (EXPENSE)
Interest and other -- 97,414 372 -- 97,786
----- ----------- --------- --------- -----------
INCOME BEFORE INCOME TAXES (630) 562,560 (4,822) (234,377) 322,731
PROVISION FOR INCOME TAXES -- (216,072) -- -- (216,072)
----- ----------- --------- --------- -----------
NET INCOME (LOSS) $(630) $ 346,488 $ (4,822) $(234,377) $ 106,659
===== =========== ========= ========= ===========
Pro Forma earnings per
weighted-average share
of common stock $0.03
===========
Pro Forma number of
weighted-average shares
of common stock outstanding 3,119,592
===========
F-35
97
KARTS INTERNATIONAL INCORPORATED
NOTES TO PROFORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The Proforma Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994 are derived from the historical Statements of Income of
Karts International Incorporated, Brister's Thunder Karts, Inc. and USA
Industries, Inc.
The proforma information reflects the adjustments to record the acquisition of
Brister's Thunder Karts, Inc. by Karts International Incorporated on April 1,
1996 as if the acquisition occurred on January 1, 1994. This transaction was
recorded pursuant to the requirements of Accounting Principles Board Opinion
#16, "Business Combinations", and is accounted for as a purchase.
Additionally, the proforma information reflects the adjustments to record the
acquisition of USA Industries, Inc. by Karts International Incorporated on
November 21, 1996 as if the acquisition occurred on January 1, 1994. This
transaction was recorded pursuant to the requirements of Accounting Principles
Board Opinion #16, "Business Combinations", and is accounted for as a purchase.
The proforma financial information should be read in conjunction with the
historical Financial Statements and Notes thereto of Karts International
Incorporated and its wholly-owned subsidiaries, Brister's Thunder Karts, Inc.
and USA Industries, Inc.
The proforma information does not purport to be indicative of the financial
position or the results of operations which would have actually been obtained
if the acquisition transactions had actually been consummated on the dates
indicated. In addition, the proforma financial information does not purport to
be indicative of the financial position or results of operations that may be
obtained in the future.
The respective pro forma adjustments to the historical financial statements
depicted on the Proforma Consolidated Statements of Income are described below:
(1) Adjustment to amortize approximately $5.86 million in cumulative goodwill
acquired in the respective acquisitions as if both acquisitions had
occurred on January 1, 1994. Goodwill is amortized using a 25 year life
and the straight-line method.
F-36
98
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
BALANCE SHEET
March 31, 1996
UNAUDITED
ASSETS
CURRENT ASSETS
Cash on hand and in bank $ 488,047
Accounts and notes receivable
Trade 239,864
Other 424
Inventory 852,631
Prepaid expenses 101,050
-----------
TOTAL CURRENT ASSETS 1,682,016
-----------
PROPERTY AND EQUIPMENT - AT COST 496,425
Less accumulated depreciation (171,528)
-----------
NET PROPERTY AND EQUIPMENT 324,897
-----------
OTHER ASSETS
Deposits 4,059
-----------
TOTAL ASSETS $ 2,010,972
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 83,235
Current maturities of long-term debt 4,190
Accounts payable and other accrued liabilities 97,394
Federal and State income taxes payable 103,542
-----------
TOTAL CURRENT LIABILITIES 288,361
-----------
LONG-TERM LIABILITIES
Notes payable 5,364
Deferred income tax liability 17,438
-----------
TOTAL LIABILITIES 311,163
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - no par value
1,000 shares authorized, issued
and outstanding 1,000
Retained earnings 1,698,809
-----------
TOTAL SHAREHOLDERS' EQUITY 1,699,809
-----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,010,972
===========
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
F-37
99
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
STATEMENTS OF INCOME AND CHANGES IN RETAINED EARNINGS
Three months ended March 31, 1996
UNAUDITED
REVENUES $ 916,845
COST OF SALES 399,334
-----------
GROSS PROFIT 517,511
OPERATING EXPENSES 299,527
-----------
INCOME FROM OPERATIONS 217,984
OTHER INCOME (EXPENSE) (13,647)
-----------
INCOME BEFORE INCOME TAXES 204,337
INCOME TAX (EXPENSE) (89,675)
-----------
NET INCOME 114,662
RETAINED EARNINGS
At beginning of period 1,584,147
-----------
At end of period $ 1,698,809
===========
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
F-38
100
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
STATEMENTS OF CASH FLOWS
Three months ended March 31, 1996
UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the period $ 114,662
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 20,273
(Increase) Decrease in:
Accounts receivable (86,167)
Inventory (280,632)
Prepaid expenses 50,525
Deposits (4,059)
Increase (Decrease) in:
Accounts payable and other
accrued liabilities (416,388)
Federal income taxes payable 63,054
-----------
NET CASH USED IN OPERATING ACTIVITIES (538,732)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (46,343)
Cash received (advanced) on
other accounts receivable (424)
-----------
NET CASH USED IN INVESTING ACTIVITIES (46,767)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable (26,988)
Principal payments on long-term debt (1,045)
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (28,033)
-----------
DECREASE IN CASH (613,532)
Cash at beginning of period 1,101,579
-----------
Cash at end of period $ 5,338
===========
_____________________________
SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID
Interest paid during the period $ 14,639
===========
Income taxes paid during the period $ 26,621
===========
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
F-39
101
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Brister's Thunder Karts, Inc. (Company) was formed on August 2, 1976 under the
laws of the State of Louisiana. The Company is in the business of
manufacturing and marketing motorized "fun" karts for the consumer market.
Effective at the close of business on March 31, 1996, the Company's sole
shareholder sold 100.0% of the Company's issued and outstanding stock to Karts
International Incorporated (KII). The Company became a wholly-owned subsidiary
of KII at that date.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the instructions for interim financial statements,
are unaudited and contain all material adjustments, consisting only of normal
recurring adjustments necessary to present fairly the financial condition,
results of operations and cash flows of the Company for the respective interim
periods presented. The current period results of operations are not
necessarily indicative of results which ultimately will be reported for the
full fiscal year ending December 31, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
The Company considers all cash on hand and in banks, certificates of
deposit and other highly-liquid investments with maturities of three months
or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts and advances receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout in the
Southeastern United States, principally Texas, Louisiana, Mississippi,
Alabama, Georgia and Florida. Because of the credit risk involved,
management has provided an allowance for doubtful accounts which reflects
its opinion of amounts which will eventually become uncollectible. In the
event of complete non- performance, the maximum exposure to the Company is
the recorded amount of trade accounts receivable shown on the balance sheet
at the date of non-performance.
3. Inventory
Inventory consists of steel, engines and other related raw materials used
in the manufacture of "fun" karts. These items are carried at the lower of
cost or market using the first-in, first-out method. As of March 31, 1996,
inventory consisted of the following components:
Raw materials $506,022
Work in process 211,825
Finished goods 134,784
--------
$852,631
========
F-40
102
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5. Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes. At March 31, 1996 , the deferred tax asset and deferred tax
liability accounts, as recorded when material, are entirely the result of
temporary differences. Temporary differences represent differences in the
recognition of assets and liabilities for tax and financial reporting
purposes, primarily accumulated depreciation and amortization. No
valuation allowance was provided against deferred tax assets, where
applicable.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components:
Estimated
useful life
-----------
Equipment $ 360,368 10 years
Transportation equipment 85,788 3 years
Furniture and fixtures 45,822 7 years
Leasehold improvements 4,447 10 years
---------
496,425
Accumulated depreciation (171,528)
---------
Net property and equipment $ 324,897
=========
NOTE D - NOTES PAYABLE
Notes payable consist of the following:
$137,025 note payable to a finance
company. Interest at 9.20%.
Payable in monthly installments
of approximately $14,290, including
interest. Secured by insurance coverage. $ 83,235
=========
F-41
103
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following:
$27,677 note payable to the Company's
former shareholder. Interest at 7.0%.
Payable in semi-monthly installments
of approximately $200, including interest.
Secured by equipment $ 9,554
Less current portion (4,190)
--------
Long-term portion $ 5,364
========
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ ----------
1996 $4,190
1997 4,494
1998 870
------
$9,554
======
NOTE F - INCOME TAXES
The deferred current tax asset and non-current deferred tax liability on the
March 31, 1996 balance sheet consists of the following:
Current deferred tax asset $ --
Current deferred tax liability --
Valuation allowance for current deferred tax asset --
-------
Net current deferred tax asset $ --
=======
Non-current deferred tax asset $ --
Non-current deferred tax liability 17,438
Valuation allowance for non-current deferred tax asset --
-------
Net non-current deferred tax asset $17,438
=======
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
F-42
104
BRISTER'S THUNDER KARTS, INC.
(a wholly-owned subsidiary of Karts International Incorporated)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - CONTINUED
The components of income tax expense for the three months ended March 31, 1996
is as follows:
Federal:
Current $78,502
Deferred --
-------
78,502
-------
State:
Current 11,173
Deferred --
-------
11,173
-------
Total $89,675
=======
The Company's income tax expense for the three months ended March 31, 1996
differed from the statutory federal rate of 34 percent as follows:
Statutory rate applied to
earnings before income taxes $69,475
Increase (decrease) in income taxes
resulting from:
State income taxes 11,173
Effect of book/tax differences
in depreciation and other tax
basis adjustments 9,027
-------
Income tax expense $89,675
=======
NOTE G - RELATED PARTY TRANSACTIONS
The Company leases its manufacturing facilities and corporate offices under an
operating lease with its sole shareholder. The lease requires payments of
approximately $6,025 per month and the lease expires in December 1996. The
lease contains an extension option for the year beginning January 1997. Total
lease expense for the three months ended March 31, 1996 was approximately
$18,075.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is named as defendant in several lawsuits related to its "fun"
karts. The Company has commercial liability coverage to cover these exposures
with a $25,000 per claim self-insurance clause. The Company is vigorously
contesting each lawsuit and has accrued management's estimation of the
Company's exposure in each situation. Additionally, the Company maintains a
reserve for future litigation equal to the "per claim" self-insurance amount
times the four-year rolling average of lawsuits filed naming the Company as a
defendant. As of March 31, 1996, approximately $50,000 has been accrued and
charged to operations for anticipated future litigation. The Company
anticipates no material impact to either the results of operations, its
financial condition or liquidity based on the uncertainty of outcome, if any,
of existing litigation, either collectively and/or individually, at this time.
F-43
105
[S. W. HATFIELD + ASSOCIATES LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholder
Brister's Thunder Karts, Inc.
We have audited the accompanying balance sheets of Brister's Thunder Karts,
Inc. (a Louisiana corporation) as of December 31, 1995 and 1994 and the related
statements of income, changes in shareholder's equity and cash flows for each
of the two years ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Brister's Thunder Karts, Inc.
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the two years ended December 31, 1995 in conformity with
generally accepted accounting principles.
S. W. HATFIELD + ASSOCIATES
Dallas,Texas
March 9, 1996
F-44
106
BRISTER'S THUNDER KARTS, INC.
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
1995 1994
----------- -----------
CURRENT ASSETS
Cash on hand and in bank $ 1,101,579 $ 521,432
Accounts receivable
Trade 153,697 179,576
Other -- 24,000
Inventory 571,999 381,743
Prepaid expenses 151,575 109,745
----------- -----------
TOTAL CURRENT ASSETS 1,978,850 1,216,496
----------- -----------
PROPERTY AND EQUIPMENT 450,082 349,050
Accumulated depreciation (151,255) (98,444)
----------- -----------
NET PROPERTY AND EQUIPMENT 298,827 250,606
----------- -----------
TOTAL ASSETS $ 2,277,677 $ 1,467,102
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Notes payable $ 110,223 $ 76,881
Current maturities of long-term debt 4,190 3,908
Accounts payable and other accrued expenses 513,782 98,783
Federal and state income taxes payable 40,488 1,271
----------- -----------
TOTAL CURRENT LIABILITIES 668,683 180,843
----------- -----------
LONG-TERM LIABILITIES
Notes payable, net of current maturities 6,409 10,599
Deferred tax liability 17,438 31,802
----------- -----------
TOTAL LIABILITIES 692,530 223,244
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock - no par value
1,000 shares authorized, issued
and outstanding, respectively 1,000 1,000
Retained earnings 1,584,147 1,242,858
----------- -----------
TOTAL SHAREHOLDER'S EQUITY (DEFICIT) 1,585,147 1,243,858
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $ 2,277,677 $ 1,467,102
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-45
107
BRISTER'S THUNDER KARTS, INC.
STATEMENTS OF INCOME
Years ended December 31, 1995 and 1994
1995 1994
----------- -----------
REVENUES
Kart sales $ 7,320,417 $ 6,203,293
----------- -----------
COST OF SALES
Materials 4,350,123 3,805,191
Direct labor 447,654 328,524
Freight 72,687 76,289
Other 261,271 211,270
----------- -----------
TOTAL COST OF SALES 5,131,735 4,421,274
----------- -----------
GROSS PROFIT 2,188,682 1,782,019
----------- -----------
OPERATING EXPENSES
Salaries, wages and related costs 872,502 777,662
Insurance 174,166 180,032
Other general and administrative costs 396,487 278,000
Depreciation and amortization 68,815 81,179
----------- -----------
TOTAL OPERATING EXPENSE 1,511,970 1,316,873
----------- -----------
INCOME FROM OPERATIONS 676,712 465,146
OTHER INCOME (EXPENSES)
Interest and other income 9,043 20,763
Litigation settlements and reserves (130,000) --
Gain on sale of fixed assets 4,220 76,651
----------- -----------
INCOME BEFORE INCOME TAXES 559,975 562,560
INCOME TAXES (218,686) (216,072)
----------- -----------
NET INCOME $ 341,289 $ 346,488
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-46
108
BRISTER'S THUNDER KARTS, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
Years ended December 31, 1995 and 1994
Common Stock
------------------- Retained
# shares Amount earnings Totals
-------- ------ ----------- -----------
BALANCES AT JANUARY 1, 1994 1,000 $1,000 $ 1,069,472 $ 1,070,472
Property dividend to shareholder -- -- (173,102) (173,102)
Net income for the year -- -- 346,488 346,488
----- ------ ----------- -----------
BALANCES AT DECEMBER 31, 1994 1,000 1,000 1,242,858 1,243,858
Net income for the year -- -- 341,289 341,289
----- ------ ----------- -----------
BALANCES AT DECEMBER 31, 1995 1,000 $1,000 $ 1,584,147 $ 1,585,147
===== ====== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-47
109
BRISTER'S THUNDER KARTS, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
1995 1994
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the year $ 341,289 $ 346,488
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 68,815 81,179
Gain on sale of fixed assets (4,220) (76,651)
(Increase) Decrease in:
Accounts receivable 25,879 (55,961)
Inventory (190,256) (289,293)
Prepaid expenses (151,575) --
Increase (Decrease) in:
Accounts payable and
other accrued liabilities 525,222 (28,260)
Income taxes payable 148,962 (192,178)
Deferred tax liability (14,364) 21,277
----------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 749,752 (193,399)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash collected from miscellaneous advances 24,000 35,000
Cash advanced on miscellaneous advances -- (24,000)
Purchase of property and equipment (112,816) (84,822)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (88,816) (73,822)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from shareholder - net (40,381) 40,381
Principal payments on note payable (36,500) --
Principal payments on long-term debt (3,908) (3,645)
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES (80,789) 36,736
----------- ---------
INCREASE (DECREASE) IN CASH 580,147 (230,485)
Cash at beginning of period 521,432 751,917
----------- ---------
CASH AT END OF PERIOD $ 1,101,579 $ 521,432
=========== =========
- CONTINUED -
The accompanying notes are an integral part of these financial statements.
F-48
110
BRISTER'S THUNDER KARTS, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1995 and 1994
1995 1994
-------- --------
SUPPLEMENTAL DISCLOSURE OF
INTEREST AND INCOME TAXES PAID
Interest paid for the period $ 34,773 $ 7,170
======== ========
Income taxes paid for the period $ 84,088 $386,973
======== ========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of insurance through
short-term note payable $137,025 $ --
======== ========
The accompanying notes are an integral part of these financial statements.
F-49
111
BRISTER'S THUNDER KARTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Brister's Thunder Karts, Inc. (Company) was formed on August 2, 1976 under the
laws of the State of Louisiana. The Company is in the business of manufacturing
and marketing motorized "fun" karts for the consumer market.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
The Company considers all cash on hand and in banks, certificates of
deposit and other highly-liquid investments with maturities of three months
or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts and advances receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the
Southeastern United States, principally Texas, Louisiana, Mississippi,
Alabama, Georgia and Florida. Because of the credit risk involved,
management has provided an allowance for doubtful accounts which reflects
its opinion of amounts which will eventually become uncollectible. In the
event of complete non-performance, the maximum exposure to the Company is
the recorded amount of trade accounts receivable shown on the balance sheet
at the date of non-performance.
3. Inventory
Inventory consists of steel, engines and other related raw materials used
in the manufacture of "fun" karts. These items are carried at the lower of
cost or market using the first-in, first-out method. As of December 31,
1995 and 1994, inventory consisted of the following components:
1995 1994
-------- --------
Raw materials $522,849 $223,490
Work in process 49,150 147,360
Finished goods -- 10,893
-------- --------
$571,999 $381,743
======== ========
F-50
112
BRISTER'S THUNDER KARTS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5. Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes. At December 31, 1995 and 1994, the deferred tax asset and
deferred tax liability accounts, as recorded when material, are entirely
the result of temporary differences. Temporary differences represent
differences in the recognition of assets and liabilities for tax and
financial reporting purposes, primarily accumulated depreciation and
amortization. No valuation allowance was provided against deferred tax
assets, where applicable.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following components as of December 31,
1995 and 1994, respectively:
Estimated
1995 1994 useful life
--------- --------- -----------
Equipment $ 314,339 $ 198,688 10 years
Transportation equipment 85,788 98,865 3 years
Furniture and fixtures 45,608 47,150 7 years
Leasehold improvements 4,347 4,347 10 years
--------- ---------
450,082 349,050
Accumulated depreciation (151,255) (98,444)
--------- ---------
Net property and equipment $ 298,827 $ 250,606
========= =========
NOTE D - NOTES PAYABLE
Notes payable consists of the following at December 31, 1995 and 1994,
respectively,
1995 1994
-------- -------
$137,025 note payable to a finance company
Interest at 9.20%. Payable in monthly
installments of approximately $14,290,
including interest. Secured by insurance coverage $110,223 $ --
Note payable to shareholder. Interest at 12.0%
Final payment due December 1995 -- 76,881
-------- -------
$110,223 $76,881
======== =======
F-51
113
BRISTER'S THUNDER KARTS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1994,
respectively,
1995 1994
-------- --------
$27,677 note payable to the Company's
former shareholder. Interest at 7.0%
Payable in semi-monthly installments
of approximately $200, including interest
Secured by equipment $ 10,599 $ 14,507
Less current portion (4,191) (3,908)
-------- --------
Long-term portion $ 6,408 $ 10,599
======== ========
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ -------
1996 $ 4,191
1997 4,494
1998 1,914
-------
$10,599
=======
NOTE F - INCOME TAXES
The deferred current tax asset and non-current deferred tax liability on the
December 31, 1995 and 1994, respectively, balance sheet consists of the
following:
1995 1994
---------- --------
Current deferred tax asset $ -- $ --
Current deferred tax liability -- --
Valuation allowance for current deferred tax asset -- --
---------- --------
Net current deferred tax asset $ -- $ --
========== ========
Non-current deferred tax asset $ -- $ --
Non-current deferred tax liability 17,438 31,802
Valuation allowance for non-current deferred tax asset -- --
---------- --------
Net non-current deferred tax asset $ 17,438 $ 31,802
========== ========
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
F-52
114
BRISTER'S THUNDER KARTS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - CONTINUED
The components of income tax expense (benefit) for the years ended December 31,
1995 and 1994, respectively, are as follows:
1995 1994
--------- --------
Federal:
Current $ 204,000 $171,317
Deferred (14,364) 21,277
--------- --------
189,636 192,594
--------- --------
State:
Current 29,050 23,478
Deferred -- --
--------- --------
29,050 23,478
--------- --------
Total $ 218,686 $216,072
========= ========
The Company's income tax expense (benefit) for the years ended December 31,
1995 and 1994, respectively, differed from the statutory federal rate of 34
percent as follows:
1995 1994
--------- ---------
Statutory rate applied to
earnings before income taxes $ 190,392 $ 191,270
Increase (decrease) in income taxes
resulting from:
State income taxes 29,050 23,478
Deferred income taxes (14,364) 21,277
Effect of incremental tax brackets 13,608 (19,953)
--------- ---------
Income tax expense $ 218,686 $ 216,072
========= =========
NOTE G - RELATED PARTY TRANSACTIONS
The Company leases its manufacturing facilities and corporate offices under an
operating lease with its sole shareholder. The lease requires payments of
approximately $6,025 per month and the lease expires in December 1996. The
lease contains an extension option for the year beginning January 1997. Total
lease expense for the years ended December 31, 1995 and 1994, respectively,
were approximately $70,400 and $60,887.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is named as defendant in several lawsuits related to its "fun"
karts. The Company has commercial liability coverage to cover these exposures
with a $25,000 per claim self-insurance clause. The Company is vigorously
contesting each lawsuit and has accrued management's estimation of the
Company's exposure in each situation. Additionally, the Company maintains a
reserve for future litigation equal to the "per claim" self-insurance amount
times the four-year rolling average of lawsuits naming the Company as a
defendant. As of December 31, 1996, approximately $100,000 has been accrued and
charged to operations for anticipated future litigation. The Company
anticipates no material impact to either the results of operations, its
financial condition or liquidity based on the uncertainty of outcome, if any,
of existing litigation, either collectively and/or individually, at this time.
F-53
115
================================================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES TO
WHICH IT RELATES IN ANY STATE TO ANY PERSON WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . 7
The Company . . . . . . . . . . . . . . . . . . . 17
Common Stock Price Ranges and Dividends . . . . . 20
Dividend Policy . . . . . . . . . . . . . . . . . 20
Use of Proceeds . . . . . . . . . . . . . . . . . 21
Dilution . . . . . . . . . . . . . . . . . . . . 23
Capitalization . . . . . . . . . . . . . . . . . 24
Selected Historical Consolidated and Combined
Financial Information . . . . . . . . . . . . . 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations . 26
Business . . . . . . . . . . . . . . . . . . . . 31
Management . . . . . . . . . . . . . . . . . . . 43
Certain Relationships and Related Transactions . 47
Principal Stockholders . . . . . . . . . . . . . 51
Description of Securities . . . . . . . . . . . . 52
Shares Eligible for Future Sale . . . . . . . . . 57
Underwriting . . . . . . . . . . . . . . . . . . 58
Legal Matters . . . . . . . . . . . . . . . . . . 61
Experts . . . . . . . . . . . . . . . . . . . . . 61
Index to Consolidated Financial Statements . . . F-1
------------------------------
UNTIL __________ (_____ DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
KARTS INTERNATIONAL
INCORPORATED
1,400,000 SHARES OF COMMON STOCK
AND 1,400,000 REDEEMABLE
COMMON STOCK PURCHASE
WARRANTS
-------------------------------
P R O S P E C T U S
-------------------------------
ARGENT SECURITIES, INC.
, 1997
--------------------
================================================================================
116
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation relieve its directors from
liability for monetary damages to the full extent permitted by Nevada law.
Sections 78.751 and 78.752 of the General Corporation Law of the State of
Nevada authorize a corporation to indemnify, among others, any officer or
director against certain liabilities under specified circumstances, and to
purchase and maintain insurance on behalf of its officers and directors. The
Underwriting Agreement between the Company and the Underwriters in connection
with the Offering provides for reciprocal indemnification by each party of the
other and its officers, directors and controlling persons under specified
circumstances.
Article Seventh and Article Eighth of the Company's Articles of
Incorporation, included in Exhibit 3.1 hereto, which provide for certain
limitations on the liability of directors and indemnification of directors and
officers, respectively, are hereby incorporated by reference. The Company's
Articles of Incorporation provide, in general, that no director of the Company
shall be personally liable for monetary damages for breach of the director's
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) an act or
omission not in good faith that constitutes a breach of duty of the director to
the Company or an act or omission that involves intentional misconduct or a
knowing violation of other laws; (iii) a transaction from which the director
received an improper personal benefit, whether or not the benefit resulted from
an action taken within the scope of the director's office; or (iv) any act or
omission for which the liability of a director is expressly provided by an
applicable statute.
Article VII, Section 7 of the Company's Bylaws, included in Exhibit
3.2 hereto, provides, in general, that the Company shall indemnify its
directors and officers under the circumstances defined in Section 78.751 of the
General Corporation Law of the State of Nevada and gives authority to the
Company to purchase insurance with respect to such indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will bear the following estimated expenses incurred in
connection with this Offering:
Item Amount
- ---- ------
SEC registration fee . . . . . . . . . . . . . . . . . . . $ 5,531.46
NASD filing fee . . . . . . . . . . . . . . . . . . . . . . 2,307.37
Nasdaq application and listing fee . . . . . . . . . . . . 10,000.00
Underwriters' non-accountable expense allowance . . . . . . 194,250.00
Blue sky filing fees and expenses . . . . . . . . . . . . . 40,000.00
Transfer agent and registrar fees . . . . . . . . . . . . . 5,000.00
Printing and engraving expenses . . . . . . . . . . . . . . 60,000.00
Legal fees and expenses . . . . . . . . . . . . . . . . . . 105,000.00
Accounting fees and expenses . . . . . . . . . . . . . . . 15,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 7,911.17
------------------
TOTAL $ 445,000.00
==================
II-1
117
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
a. PRIVATE OFFERING COMPLETED ON NOVEMBER 15, 1996.
On November 15, 1996, the Company concluded the private sale of 25
Units (the "Units") for total proceeds of $625,000. Each Unit consisted of
one share of convertible preferred stock, $0.001 par value per share (the
"Convertible Preferred Stock") and 6,667 Redeemable Common Stock Purchase
Warrants (the "1996 Warrants"). A total of 25 shares of Convertible Preferred
Stock and 166,675 1996 Warrants were sold. Each 1996 Warrant entitles the
holder thereof to purchase, for a period of 42 months after November 15, 1996,
one share of the Company's Common Stock at an exercise price of $4.50 per 1996
Warrant, subject to adjustment in certain circumstances. Upon completion of
this Offering, the Company has the option to require the holders of the
Convertible Preferred Stock to convert each share of the Convertible Preferred
Stock into either (a) $25,000 and 4,167 shares of Common Stock or (b) 8,334
shares of Common Stock. Under either option, the investor will continue to
hold the 1996 Warrants. If for any reason the Company does not complete a
public offering of its securities by November 15, 1997, each share of
Convertible Preferred Stock will be automatically converted into 8,334 shares
of Common Stock.
Information concerning the sale of the Units is as follows:
No. of
Units Date of Sale Purchaser Consideration
----- ------------ --------- -------------
1 November 15, 1996 Ervin L. Betts $25,000
2 November 15, 1996 The Bisio Living Trust 50,000
2 November 15, 1996 Central Scale Profit Sharing Plan 50,000
1 November 15, 1996 Dean L. Duncan 25,000
1 November 15, 1996 Gary C. Evans 25,000
2 November 15, 1996 Mathew W. Geisser, Jr. and Barbara E. Geisser 50,000
2 November 15, 1996 Fred M. Harris 50,000
1 November 15, 1996 Roy Henrichs 25,000
1 November 15, 1996 Craig S. Jennings 25,000
1 November 15, 1996 Edward M. Kalinowski, Sr. 25,000
1 November 15, 1996 Harrison J. Kornfield 25,000
1 November 15, 1996 Chris Murray 25,000
2 November 15, 1996 A. L. Park 50,000
2 November 15, 1996 Putich Sales, Inc., DBPP 50,000
1 November 15, 1996 Alex Theriot, Jr. 25,000
1 November 15, 1996 Eva Dell W. Turner Trust 25,000
3 November 15, 1996 Ralph L. Zaun 75,000
-- ---------
25 $ 625,000
== =========
On March 6, 1997, the Company offered to each subscriber to the
offering the option of either receiving a refund of their investment, with
interest applied thereon at a rate of 12% per annum, or retaining the
investment and receiving an additional 13,334 1996 Warrants for each Unit
subscribed for as consideration for waiving certain registration rights and
agreeing to certain lock-up provisions with respect to the Common Stock
issuable upon conversion of the Convertible Preferred Stock and the 1996
Warrants. The Company believes that none of the subscribers will seek a refund
of their initial investment in the Company. Gary C. Evans is a director of the
Company.
Argent Securities, Inc. ("Argent"), Representative of the Underwriters
in the Offering, acted as placement agent with regard to this private offering.
As placement agent, Argent received a commission of eight percent of the
aggregate amount of the offering, four percent of the offering proceeds (or
$25,000) as additional compensation for investment banking services and
three percent of the offering proceeds (or $18,750) for non-accountable
expenses.
II-2
118
With regard to all sales in this offering, the Company relied upon
Rule 506 of Regulation D ("Regulation D") promulgated under the Securities Act
of 1933, as amended (the "Securities Act") for an exemption from the
registration requirements of the Securities Act. The purchasers had access to
information concerning the Company, its financial condition, assets,
management, and proposed activities. For this offering, the Company offered
and sold its securities only to persons who represented to the Company that
they were accredited investors as that term is defined in Rule 501(a) of
Regulation D. Each purchaser represented that he had the ability to bear
economically a total loss of his investment in the Company's securities, was
acquiring the securities for his own account and for investment purposes only
and not for resale or further distribution thereof, and was a sophisticated and
knowledgeable investor who fully understood the risks associated with an
investment in the Company's securities. Each purchaser signed a subscription
agreement, which included certain investment representations made by each
purchaser.
b. PRIVATE OFFERING COMPLETED ON MARCH 31, 1996.
On March 31, 1996, the Company concluded the private sale of 233,333
shares of Common Stock at a purchase price of $2.25 per share for total gross
proceeds of $525,000 (the "March 1996 Offering"). In connection with the
Company's March 1996 Offering, the Company and HFG have agreed to issue
additional shares of Common Stock to participants in the March 1996 Offering if
on March 31, 1998 (the "Offering Valuation Date") the average closing bid price
of the Common Stock for the ten trading days prior to and including the
Offering Valuation Date (the "Stock Market Value") does not equal or exceed
$4.50 per share. If such an adjustment is required on the Offering Valuation
Date, each participant in the March 1996 Offering will receive for no
additional consideration an additional number of shares of Common Stock
necessary to increase the Stock Market Value per share of the Common Stock
acquired in the March 1996 Offering to $4.50 per share. HFG has placed into
escrow 233,333 shares of Common Stock (the "HFG Escrow Shares") to be issued to
participants in the March 1996 Offering if an adjustment is required. The HFG
Escrow Shares are subject to the terms and conditions of that certain Escrow
Agreement, dated March 31, 1996 (the "Escrow Agreement"), by and between HFG,
Securities Transfer Corporation, as escrow agent, and the Company. If on the
Offering Valuation Date the Stock Market Value of the Common Stock is less than
$2.25 per share, the Company will be obligated to also issue the number of
additional shares of Common Stock necessary to increase the Stock Market Value
per share of the Common Stock acquired in the March 1996 Offering to $4.50 per
share. If on the Offering Valuation Date, the Stock Market Value is equal to
or greater than $4.50 per share, the HFG Escrow Agreement will terminate and
the HFG Escrow Shares will be delivered to HFG. The Company is under no
obligation to issue to HFG any additional shares of Common Stock as
reimbursement for any HFG Escrow Shares that may be distributed to participants
in the March 1996 Offering. The obligation of the Company and HFG to deliver
additional shares on the Offering Valuation Date applies only to original
participants in the March 1996 Offering who own shares purchased in the March
1996 Offering on the Offering Valuation Date.
Information concerning the sale of such securities is as follows:
No. of
Shares Date of Sale Purchaser Consideration
------ ------------ --------- -------------
37,778 March 31, 1996 The Brian Schlinger Trust $85,000
11,667 March 31, 1996 The Evert I. Schlinger, Jr. Trust 26,250
23,333 March 31, 1996 Warren G. Schlinger 52,500
11,667 March 31, 1996 James C. Hays, M.D. 26,250
23,333 March 31, 1996 Stephen F. Chadwick 52,500
11,667 March 31, 1996 Dexter H. Housley 26,250
23,333 March 31, 1996 Forrest Johnson 52,500
11,667 March 31, 1996 Mark Mazanski 26,250
23,333 March 31, 1996 Christopher C. Jones 52,500
11,667 March 31, 1996 Larry W. Gonser 26,250
23,333 March 31, 1996 Kenneth A. Owen 52,500
11,667 March 31, 1996 Robert G. Farris 26,250
8,888 March 31, 1996 Franklin Gornick 20,000
------- ---------
233,333 $ 525,000
======= =========
II-3
119
No underwriter participated in any of the sales discussed above, nor
did the Company pay any commissions with respect to these issuances. With
regard to all such sales, the Company relied upon Rule 506 of Regulation D
promulgated under the Securities Act for an exemption from the registration
requirements of the Securities Act. The purchasers had access to information
concerning the Company, its financial condition, assets, management, and
proposed activities. For this offering, the Company offered and sold its
shares to nine investors who represented to the Company that they were
accredited investors as that term is defined in Rule 501(a) of Regulation D.
Messrs. Housley, Mazanski, Gonser and Gornick were non-accredited investors.
Each purchaser represented that he had the ability to bear economically a total
loss of his investment in the Company's securities, was acquiring the
securities for his own account and for investment purposes only and not for
resale or further distribution thereof, and was a sophisticated and
knowledgeable investor who fully understood the risks associated with an
investment in the Company's securities. Each purchaser signed a subscription
agreement, which included certain investment representations made by each
purchaser. No purchaser was affiliated with the Company. Mr. Evert I.
Schlinger owns 219,048 shares of the Company's Common Stock and is the sole
trustee of the Brian Schlinger and Evert I. Schlinger, Jr. Trusts and has
voting and dispositive powers over the shares of Common Stock owned by the
Trusts but disclaims any beneficial ownership of such shares. Warren G.
Schlinger is the brother of Evert I. Schlinger.
c. PRIVATE OFFERING COMPLETED ON JULY 2, 1996.
On July 2, 1996, the Company concluded the private sale of 3,333
shares of Common Stock and 66,667 Class A Warrants Units for a total of $17,500
cash. Each Class A Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $5.25 per share, as adjusted, until December 31,
1997.
Information concerning the sale of such securities is as follows:
No. of No. of
Shares Class A Warrants Date of Sale Purchaser Consideration
------ ---------------- ------------ --------- -------------
3,333 66,667 July 2, 1996 Art Beroff $17,500
No underwriter participated in the sale discussed above, nor did the
Company pay any commissions or fees with respect to said issuance. With regard
to such sale, the Company relied upon Rule 504 of Regulation D promulgated
under the Securities Act for an exemption from the registration requirements of
the Securities Act. The purchaser signed a subscription agreement, which
included certain representations made by such purchaser. The purchaser was not
affiliated with the Company. The proceeds from this offering were utilized by
the Company for working capital purposes.
d. ACQUISITION OF BRISTER'S THUNDER KARTS, INC..
The Company, as partial consideration for the acquisition of all of
the issued and outstanding capital stock of Brister's Thunder Karts, Inc.
("Brister's"), which was effective at the close of business on March 31, 1996,
delivered, in July 1996, to Charles Brister, Brister's sole shareholder and a
current director and principal stockholder of the Company, 516,667 shares of
the Company's Common Stock valued at $3.1 million in accordance with the
provisions of the related stock purchase agreement.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the issuance of 516,667 shares of its Common Stock
to Mr. Brister. No underwriter participated in the transaction, nor did the
Company pay any commission with respect to the issuance of such shares. Mr.
Brister had access to information concerning the Company, its financial
condition, assets, management and proposed activities. Mr. Brister was the
chief executive officer, sole director and shareholder of Brister's prior to
the acquisition and was elected as a director of the Company after the
acquisition. In connection with the Company's reliance upon the exemption from
registration provided in Section 4(2) of the Securities Act, the Company
determined that Mr. Brister (i) had such knowledge and experience in financial
and business matters that he was capable of evaluating the merits and risks of
an investment in the Company and had the financial ability to assume the
monetary risks associated therewith, (ii) was able to bear the complete loss of
his investment in the Company, (iii) had received such other documents and
information as he has requested and had an opportunity to ask questions of and
receive answers from representatives of the Company, and (iv) was acquiring the
shares of Common Stock of the Company for his own account, for investment
purposes and
II-4
120
not with a view to a further distribution thereof. The Company has impressed
the stock certificates representing the 516,667 shares with a restrictive
legend.
e. ACQUISITION OF USA INDUSTRIES, INC..
Effective at the close of business on November 21, 1996, the Company,
as consideration for the acquisition of all of the issued and outstanding
capital stock of USA Industries, Inc. ("USA"), paid an aggregate of $1.0
million payable $250,000 in cash and issued an aggregate of 166,667 shares of
Common Stock to the four shareholders of USA. Pursuant to the stock purchase
agreement between the Company, USA and its shareholders, the Common Stock was
valued at $4.50 per share or an aggregate consideration of $750,000 for 166,667
shares. Each USA shareholder, Jerry Michael Allen, Angela T. Allen, Johnny C.
Tucker and Carol Y. Tucker (the "USA Shareholders"), received $62,500 cash and
41,667 restricted shares of the Company's Common Stock.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the issuance of 166,667 shares of its Common Stock
to the USA Shareholders. No underwriter participated in the transaction, nor
did the Company pay any commissions with respect to the issuance of such
shares. The Company and USA were engaged in similar business activities, the
manufacturing of Fun Karts. The USA Shareholders had access to information
concerning the Company, its financial condition, assets, management and
proposed activities. The USA shareholders represented that they were acquiring
the Company's shares of Common Stock for investment and not with a view to
resale or for further distribution of all or any part thereof in any
transaction which would constitute a "distribution" within the meaning of the
Securities Act. Each USA Shareholder acknowledged to the Company that the
shares of the Company's Common Stock received by each shareholder were
"restricted securities" and had not been registered under the Securities Act
and that the Company was not under any obligation to file a registration
statement with the Securities and Exchange Commission or any state securities
agency with respect to the shares of the Company's Common Stock acquired by
them. In connection with the Company's reliance upon the exemption from
registration provided in Section 4(2) of the Securities Act, the Company
determined that each USA Shareholder (i) had such knowledge and experience in
financial and business matters that they were capable of evaluating the merits
and risks of their investment in the Company's shares of Common Stock and had
the financial ability to assume the monetary risks associated therewith, (ii)
was able to bear the complete loss of their investment in the shares of Common
Stock of the Company, and (iii) was not relying upon any statements or
instruments made or issued by any person other than the Company and its
officers in making their decision to invest in the Company's Common Stock. The
Company has impressed the stock certificates representing the shares with a
restrictive legend. Mr. Jerry M. Allen, a former USA shareholder, is
currently the Vice President of USA.
f. ISSUANCES TO THE SCHLINGER FOUNDATION.
On March 15, 1996, as partial consideration for the $2,000,000.00 loan
(the "Schlinger Note") from The Schlinger Foundation (the "Foundation") to the
Company, the Company paid to the Foundation $21,000, consisting of $10,500 cash
and the issuance of 70,000 restricted shares of Common Stock to the Foundation.
Mr. Evert I. Schlinger who owns 219,048 shares of Common Stock of the Company
is the President and Trustee of the Foundation and has voting and dispositive
powers over the shares of Common Stock owned by the Foundation, although Mr.
Schlinger disclaims any beneficial ownership of such shares. The Company
determined that Mr. Schlinger had a history of providing financing to small
private emerging growth businesses through equity purchases and debt financing
similar to the financing provided to the Company.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuances of the Schlinger
Note and shares of its Common Stock to the Foundation. No underwriter
participated in the issuances, nor did the Company pay any commissions with
respect to these transactions. The Foundation and Mr. Schlinger had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. In connection with the Company's reliance upon the
exemption from registration provided in Section 4(2) of the Securities Act, the
Company determined that (i) the Company's securities were acquired by the
Foundation for its own account, for investment purposes only and not with a
view towards distribution thereof, (ii) the Foundation had the ability to bear
economically a total loss of its investment in the Company, and (iii) the
Foundation and Mr. Schlinger had such knowledge and experience in financial and
business matters that they were capable of evaluating the merits and risks of
an investment in the Company. The Company has impressed the stock certificates
representing the referenced shares of Common Stock with a restrictive legend.
II-5
121
g. ISSUANCES TO FORMER DIRECTOR AND HFG.
On February 20, 1996, the Company sold 50,000 restricted shares of its
Common Stock to Glenn A. Little, a former director of the Company, for $938
cash. Subsequently, on March 7, 1996, the Company sold an aggregate of 967,545
restricted shares of Common Stock to HFG for an aggregate of $1,451 cash. Of
the shares acquired by HFG, 233,333 shares represent the HFG Escrow Shares
placed into escrow under the terms of the March 1996 Offering. Timothy P.
Halter, the President and sole owner of HFG, is a principal stockholder of the
Company and the Vice President, Secretary and a director of the Company.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuances of shares to Mr.
Little and HFG. No underwriter participated in the transactions, nor did the
Company pay any commissions with respect to these transactions. Mr. Little and
HFG had access to information concerning the Company, its financial condition,
assets, management and proposed activities. The shares of Common Stock were
issued to Mr. Little and HFG based on certain investment representations by
them, including representations that the Company's securities were being
acquired by Mr. Little and HFG for their own account, for investment purposes
only and not with a view towards distribution thereof. In connection with the
Company's reliance upon the exemption from registration provided in Section
4(2) of the Securities Act, the Company determined that Mr. Little and HFG (i)
had such knowledge and experience in financial and business matters that they
were capable of evaluating the merits and risks of their investment in the
Company's Common Stock and had the financial ability to assume the monetary
risks associated therewith and (ii) are able to bear the complete loss of their
investment in the shares of Common Stock of the Company.. The Company has
impressed the stock certificates representing the shares of Common Stock issued
to Mr. Little and HFG with a restrictive legend.
h. ISSUANCE OF 483,333 SHARES OF COMMON STOCK TO HFG.
In January 1996, concurrent with the execution of the Brister's stock
purchase agreement, the Company entered into a consulting agreement with HFG
whereby HFG agreed to assist the Company with its corporate reorganization,
recapitalization and the Brister's Acquisition for a fee of $15,000. The
consulting fee was payable at the closing of the Brister's Acquisition in
shares of Common Stock of the Company or $10,000 cash and shares of Common
Stock of the Company, as determined in accordance with the terms of the
consulting agreement and the Brister's stock purchase agreement. The payment
of the consulting fee was contingent upon the successful consummation of the
Brister's Acquisition. The $15,000 consulting fee was subsequently paid by the
Company upon the closing of the Brister's Acquisition with the delivery, in
July 1996, to HFG of 483,333 restricted shares of the Company's Common Stock.
Timothy P. Halter, the President and sole owner of HFG, is a principal
stockholder of the Company and the Vice President, Secretary and a director of
the Company.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuance of securities to
HFG. No underwriter participated in the transaction, nor did the Company pay
any commissions with respect to this transaction. HFG had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. The shares of Common Stock were issued to HFG based
on certain investment representations by HFG, including representations that
the Company's securities were acquired by HFG for its own account, for
investment purposes only and not with a view towards distribution thereof. In
connection with the Company's reliance upon the exemption from registration
provided in Section 4(2) of the Securities Act, the Company determined that HFG
(i) had such knowledge and experience in financial and business matters that it
was capable of evaluating the merits and risks of its investment in the
Company's Common Stock and had the financial ability to assume the monetary
risks associated therewith and (ii) is able to bear the complete loss of its
investment in the shares of Common Stock of the Company. The Company impressed
the stock certificates representing the shares of Common Stock issued to HFG
with a restrictive legend.
i. ISSUANCE OF 140,000 SHARES OF COMMON STOCK TO V. LYNN
GRAYBILL.
On March 15, 1996, the Company entered into a three-year employment
agreement (the "Employment Agreement") with V. Lynn Graybill whereby Mr.
Graybill agreed to serve as Chairman of the Board, President and Chief
Executive Officer of the Company. The Employment Agreement is for a term of
three years and provides Mr. Graybill with an annual base salary of $150,000.
Upon execution of the Employment Agreement, Mr. Graybill received a signing
bonus of $15,000 (the "Bonus"). The Bonus was paid with the issuance by the
Company to Mr.
II-6
122
Graybill of 140,000 shares of Common Stock (the "Graybill Shares"), subject to
a buy-back option of the Company. In year two of the Employment Agreement,
which ends on March 15, 1998, the Company may buy back up to 70,000 Graybill
Shares for $8,400 or $0.12 per share and in year three, which ends on March 15,
1998, up to 35,000 Graybill Shares for $4,200 or $0.12 per share if Mr.
Graybill is either terminated for cause or Mr. Graybill terminates his
employment voluntarily prior to the expiration of the Employment Agreement. If
the Employment Agreement is terminated for any reason other than for cause or
voluntarily by Mr. Graybill, the buy-back option available to the Company is
terminated. Mr. Graybill currently serves as the Company's Chairman of the
Board, President and Chief Executive Officer.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuance of securities to Mr.
Graybill. No underwriter participated in the transaction, nor did the Company
pay any commissions with respect to this transaction. Mr. Graybill had access
to information concerning the Company, its financial condition, assets,
management and proposed activities. The shares of Common Stock were issued to
Mr. Graybill based on certain investment representations by Mr. Graybill,
including representations that the Company's securities were acquired by Mr.
Graybill for his own account, for investment purposes only and not with a view
towards distribution thereof. In connection with the Company's reliance upon
the exemption from registration provided in Section 4(2) of the Securities Act,
the Company determined that Mr. Graybill (i) had such knowledge and experience
in financial and business matters that he was capable of evaluating the merits
and risks of his investment in the Company's Common Stock and had the financial
ability to assume the monetary risks associated therewith and (ii) is able to
bear the complete loss of this investment in the shares of Common Stock of the
Company. The Company has impressed the stock certificates representing the
shares of Common Stock issued to Mr. Graybill with a restrictive legend.
j. ISSUANCES OF OPTIONS.
On July 23, 1996, the Board of Directors of the Company adopted a
stock option plan, the terms and conditions of which are set forth in the
minutes of the Board of Directors meeting of July 23, 1996, providing for the
reservation of 66,667 shares of Common Stock for options to be granted to
employees of the Company. In July 1996, the Company, pursuant to the terms of
the plan adopted by the Board of Directors of the Company and the terms of a
written option agreement between the Company and the respective option holders,
issued to 30 employees, who were neither officers nor directors of the Company,
options to purchase an aggregate of 59,355 shares of Common Stock at an
exercise price of $5.63 per share which are exercisable one year after the date
of grant and expire at various times during 2001.
On January 30, 1997, the Board of Directors of the Company adopted a
stock option plan, the terms and conditions of which are set forth in the
minutes of the Board of Directors meeting of January 30, 1997, providing for
the reservation of 66,667 shares of Common Stock for options to be granted to
employees of the Company. On January 30, 1997, the Company issued to each of
John V. Callegari, Jr., the Vice President, Administration and Chief Financial
Officer of the Company, and Lawrence E. Schwall, III, the Vice President, Sales
and Marketing of the Company, options to purchase 6,667 shares of Common Stock
at an exercise of $4.875 per share which are exercisable after January 30, 1998
and expire on January 30, 2002. Also on January 30, 1997, the Company issued
to 61 employees, who were neither officers nor directors of the Company,
options to purchase an aggregate of 52,670 shares of Common Stock at an
exercise price of $4.875 per share which are exercisable after January 30, 1998
and expire on January 30, 2002.
Each of the foregoing options were granted pursuant to the terms of
the respective plans adopted by the Board of Directors of the Company and a
written option agreement between the Company and the respective option holders.
With regard to the issuances of the options discussed above, the Company relied
upon Rule 701 under the Securities Act for an exemption from the registration
requirements of the Securities Act, since at the time the options were granted
the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended.
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ITEM 27. EXHIBITS.
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement in connection with the Offering.
1.2* Form of Underwriters' Warrant.
1.3* Form of Financial Advisory Agreement between the Company and Argent Securities, Inc.
1.4* Form of Lock-Up Agreement among the Company, Argent Securities, Inc. and the holders of the
Convertible Preferred Stock.
1.5** Form of Lock-Up Agreement among the Company, Argent Securities, Inc. and V. Lynn Graybill,
Chairman of the Board, Chief Executive Officer and President of the Company.
1.6* Form of Lock-Up Agreement among the Company, Argent Securities, Inc. and certain officers and
directors of the Company.
1.7* Form of Selected Dealers Agreement.
2.1** Agreement and Plan of Merger, dated April 16, 1996, by and between Sarah Acquisition
Corporation and the Company.
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 on in connection with the sale of
the Warrants.
4.4** Form of Redeemable Common Stock Purchase Warrant issued in the Company's private offering of
Units, completed November 15, 1996 (the "1996 Warrants").
4.5** Form of Common Stock Purchase Warrant issued in the Company's offering of Units pursuant to
Rule 504, completed July 2, 1996 (the "Class A Warrants").
4.6** Certificate of Designation Establishing Series of Preferred Stock, filed with the Secretary
of State of Nevada on November 15, 1996.
4.7** Specimen of Convertible Preferred Stock Certificate.
5.1** Opinion of Looper, Reed, Mark & McGraw Incorporated regarding legality of the securities
being registered.
10.1** Lease Agreement, dated March 18, 1996, by and between Northpark Properties, L.L.C. and the
Company.
10.2** License Agreement, dated March 15, 1996, by and between the Company and Charles Brister.
10.3** Addendum "A" to License Agreement, dated March 15, 1997, by and between the Company and
Charles Brister.
10.4** Royalty Agreement, dated March 15, 1997, by and between the Company and Charles Brister.
10.5** $1,000,000 Subordinated Promissory Note, dated March 15, 1996, payable to Charles Brister,
executed by Brister's Thunder Karts, Inc., as maker.
II-8
124
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------------------------------------
10.6** $200,000 Promissory Note, dated April 1, 1996, payable to Charles Brister, executed by the
Company, as maker.
10.7** Commercial Security Agreement, by and among Charles Brister, as secured party, Brister's
Thunder Karts, Inc., as borrower, and Robert W. Bell and Gary C. Evans, as pledgors.
10.8** $2,000,000 Promissory Note, dated March 15, 1996, payable to The Schlinger Foundation,
executed by the Company, as maker, and by Brister's Thunder Karts, Inc., as pledgor.
10.9** Commercial Security Agreement, by and among The Schlinger Foundation, as secured party, the
Company, as borrower, and Brister's Thunder Karts, Inc., as pledgor.
10.10** Vendor Agreement, dated June 5, 1996, by and between Wal-Mart Stores, Inc. and Brister's
Thunder Karts, Inc.
10.11** Vendor Agreement, dated September 30, 1996, by and between Wal-Mart Stores, Inc. and USA
Industries, Inc.
10.12** Floor Plan Agreement, dated September 9, 1996, by and among Deutsche Financial Services
Corporation, the Company, and Brister's Thunder Karts, Inc.
10.13** Guaranty of Vendor, dated September 9, 1996, executed by the Company and Brister's Thunder
Karts, Inc. in favor of Deutsche Financial Services Corporation.
10.14** Employment Agreement, as amended, dated March 15, 1996, by and between the Company and V.
Lynn Graybill.
10.15** Consulting Engagement Letter, dated February 19, 1997, by and between Charles Brister, as
consultant, and the Company.
10.16** Letter Agreement, dated January 21, 1997, by and between Bobby Labonte, as national spokesman
for the Company, and the Company.
10.17** Consulting Agreement, dated March 16, 1997, by and between the Company and Halter Financial
Group, Inc.
10.18** Form of Private Placement Subscription Participation Option Notice, dated March 6, 1997, relating
to the Company's November 1996 Offering.
10.19** $300,000 Universal Note, dated August 13, 1996, payable to Deposit Guaranty National Bank,
executed by Brister's Thunder Karts, Inc., as borrower.
10.20** Security Agreement, dated August 13, 1996, by and between Brister's Thunder Karts, Inc., as
debtor, and Deposit Guaranty National Bank, as secured party, relating to the $300,000
Universal Note referenced as Exhibit 10.19.
10.21** Collateral Pledge Agreement, dated August 13, 1996, by Brister's Thunder Karts, Inc., as
pledgor, relating to the $300,000 Universal Note referenced as Exhibit 10.19.
10.22** Guaranty, dated August 13, 1996, executed by the Company, as guarantor, for the benefit of
Deposit Guaranty National Bank, as lender, and Brister's Thunder Karts, Inc., as borrower,
relating to the $300,000 Universal Note referenced as Exhibit 10.19.
10.23** $500,000 Loan Agreement, dated October 1, 1996, by and between USA Industries, Inc., as
debtor, and Deposit Guaranty National Bank of Louisiana, as secured party, relating to the
$500,000 Universal Note referenced as Exhibit 10.24.
10.24** $500,000 Universal Note, dated October 1, 1996, by and between USA Industries, Inc., as
borrower, and Deposit Guaranty National Bank, as lender.
10.25** Security Agreement, dated October 1, 1996, by and between USA Industries, Inc., as debtor,
and Deposit Guaranty National Bank of Louisiana, as secured party, relating to the
$500,000.00 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.
II-9
125
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------------------------------------
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.
21.1** Subsidiaries of the Company.
23.1* Consent of S. W. Hatfield & Associates.
23.2** Consent of Looper, Reed, Mark & McGraw Incorporated (included in its opinion filed as
Exhibit 5.1).
24.1** Power of attorney.
27.1** Financial Data Schedule.
- ------------------------
*Filed herewith.
**Previously filed.
II-10
126
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(a) To include any prospectus required in Section
10(a)(3) of the Act;
(b) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
(c) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company pursuant to the provisions
described under Item 24 above, or otherwise, the Company has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that for purposes of
determining any liability under the Securities Act, (i) the information omitted
from the Prospectus filed as part of this Registration Statement, as permitted
by Rule 430A of the Securities Act and to be contained in the form of
Prospectus to be filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act, shall be deemed to be incorporated by
reference into this Registration Statement at the time it is declared
effective, and (ii) each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-11
127
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment
No. 2 to its registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Covington, State of
Louisiana, on the 30th day of June, 1997.
KARTS INTERNATIONAL INCORPORATED
(Company)
By: /s/ V. Lynn Graybill
-----------------------------------------
V. Lynn Graybill, President and Chief
Executive Officer
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement on Form SB-2 has been signed by the following
persons on behalf of the Company and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ V. Lynn Graybill President, Chief Executive Officer, June 30, 1997
------------------------------------------------------ Chairman of the Board of Directors
V. Lynn Graybill
/s/ Timothy P. Halter* Vice President, Secretary and June 30, 1997
------------------------------------------------------ Director
Timothy P. Halter
/s/ John V. Callegari, Jr.* Vice President, Administration and June 30, 1997
------------------------------------------------------ Chief Financial Officer
John V. Callegari, Jr.
/s/ Charles Brister* Director June 30, 1997
------------------------------------------------------
Charles Brister
/s/ Joseph R. Mannes* Director June 30, 1997
------------------------------------------------------
Joseph R. Mannes
/s/ Ronald C. Morgan* Director June 30, 1997
------------------------------------------------------
Ronald C. Morgan
/s/ Robert W. Bell* Director June 30, 1997
------------------------------------------------------
Robert W. Bell
/s/ Gary C. Evans* Director June 30, 1997
------------------------------------------------------
Gary C. Evans
*By: /s/ V. Lynn Graybill
--------------------------------------------------
V. Lynn Graybill, Attorney-in-fact
II-12
128
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement in connection with the Offering.
1.2* Form of Underwriters' Warrant.
1.3* Form of Financial Advisory Agreement between the Company and Argent Securities, Inc.
1.4* Form of Lock-Up Agreement among the Company, Argent Securities, Inc. and the holders of the
Convertible Preferred Stock.
1.5** Form of Lock-Up Agreement among the Company, Argent Securities, Inc. and V. Lynn Graybill,
Chairman of the Board, Chief Executive Officer and President of the Company.
1.6* Form of Lock-Up Agreement among the Company, Argent Securities, Inc. and certain officers and
directors of the Company.
1.7* Form of Selected Dealers Agreement.
2.1** Agreement and Plan of Merger, dated April 16, 1996, by and between Sarah Acquisition
Corporation and the Company.
2.2** Stock Purchase Agreement, dated January 16, 1996, by and among Halter Financial Group, Inc.
on behalf of the Company, Brister's Thunder Karts, Inc., and Charles Brister (Schedules have
been omitted, but will be furnished to the Commission upon request).
2.3** Amendment to Stock Purchase Agreement, dated March 15, 1996, by and among Halter Financial
Group, Inc. on behalf of the Company, Brister's Thunder Karts, Inc., and Charles Brister
(Schedules have been omitted, but will be furnished to the Commission upon request).
2.4** Stock Purchase Agreement, dated October 4, 1996, by and among the Company, USA Industries,
Inc., Jerry Michael Allen, Angela T. Allen, Johnny C. Tucker, and Carol Y. Tucker (Schedules
have been omitted, but will be furnished to the Commission upon request).
2.5** Consulting Agreement, dated January 16, 1996, by and between Halter Financial Group, Inc. and
Sarah Acquisition Corporation.
3.1** Articles of Incorporation of the Company.
3.2** Bylaws of the Company.
3.3** Certificate to Decrease Authorized Shares of Common Stock, dated March 12, 1997.
4.1** Specimen of Common Stock Certificate.
4.2* Form of Warrant Agreement covering the Warrants.
4.3** Form of Redeemable Common Stock Purchase Warrants issued in connection with the sale of
the Warrants.
4.4** Form of Redeemable Common Stock Purchase Warrant issued in the Company's private offering of
Units, completed November 15, 1996 (the "1996 Warrants").
4.5** Form of Common Stock Purchase Warrant issued in the Company's offering of Units pursuant to
Rule 504, completed July 2, 1996 (the "Class A Warrants").
4.6** Certificate of Designation Establishing Series of Preferred Stock, filed with the Secretary
of State of Nevada on November 15, 1996.
4.7** Specimen of Convertible Preferred Stock Certificate.
5.1** Opinion of Looper, Reed, Mark & McGraw Incorporated regarding legality of the securities
being registered.
10.1** Lease Agreement, dated March 18, 1996, by and between Northpark Properties, L.L.C. and the
Company.
10.2** License Agreement, dated March 15, 1996, by and between the Company and Charles Brister.
10.3** Addendum "A" to License Agreement, dated March 15, 1997, by and between the Company and
Charles Brister.
10.4** Royalty Agreement, dated March 15, 1997, by and between the Company and Charles Brister.
10.5** $1,000,000 Subordinated Promissory Note, dated March 15, 1996, payable to Charles Brister,
executed by Brister's Thunder Karts, Inc., as maker.
129
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------------------------------------
10.6** $200,000 Promissory Note, dated April 1, 1996, payable to Charles Brister, executed by the
Company, as maker.
10.7** Commercial Security Agreement, by and among Charles Brister, as secured party, Brister's
Thunder Karts, Inc., as borrower, and Robert W. Bell and Gary C. Evans, as pledgors.
10.8** $2,000,000 Promissory Note, dated March 15, 1996, payable to The Schlinger Foundation,
executed by the Company, as maker, and by Brister's Thunder Karts, Inc., as pledgor.
10.9** Commercial Security Agreement, by and among The Schlinger Foundation, as secured party, the
Company, as borrower, and Brister's Thunder Karts, Inc., as pledgor.
10.10** Vendor Agreement, dated June 5, 1996, by and between Wal-Mart Stores, Inc. and Brister's
Thunder Karts, Inc.
10.11** Vendor Agreement, dated September 30, 1996, by and between Wal-Mart Stores, Inc. and USA
Industries, Inc.
10.12** Floor Plan Agreement, dated September 9, 1996, by and among Deutsche Financial Services
Corporation, the Company, and Brister's Thunder Karts, Inc.
10.13** Guaranty of Vendor, dated September 9, 1996, executed by the Company and Brister's Thunder
Karts, Inc. in favor of Deutsche Financial Services Corporation.
10.14** Employment Agreement, as amended, dated March 15, 1996, by and between the Company and V.
Lynn Graybill.
10.15** Consulting Engagement Letter, dated February 19, 1997, by and between Charles Brister, as
consultant, and the Company.
10.16** Letter Agreement, dated January 21, 1997, by and between Bobby Labonte, as national spokesman
for the Company, and the Company.
10.17** Consulting Agreement, dated March 16, 1997, by and between the Company and Halter Financial
Group, Inc.
10.18** Form of Private Placement Subscription Participation Option Notice, dated March 6, 1997, relating
to the Company's November 1996 private offering.
10.19** $300,000 Universal Note, dated August 13, 1996, payable to Deposit Guaranty National Bank,
executed by Brister's Thunder Karts, Inc., as borrower.
10.20** Security Agreement, dated August 13, 1996, by and between Brister's Thunder Karts, Inc., as
debtor, and Deposit Guaranty National Bank, as secured party, relating to the $300,000
Universal Note referenced as Exhibit 10.19.
10.21** Collateral Pledge Agreement, dated August 13, 1996, by Brister's Thunder Karts, Inc., as
pledgor, relating to the $300,000 Universal Note referenced as Exhibit 10.19.
10.22** Guaranty, dated August 13, 1996, executed by the Company, as guarantor, for the benefit of
Deposit Guaranty National Bank, as lender, and Brister's Thunder Karts, Inc., as borrower,
relating to the $300,000 Universal Note referenced as Exhibit 10.19.
10.23** $500,000 Loan Agreement, dated October 1, 1996, by and between USA Industries, Inc., as
debtor, and Deposit Guaranty National Bank of Louisiana, as secured party, relating to the
$500,000.00 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.
130
Exhibit
Number Description of Exhibit
------ ----------------------------------------------------------------------------------------------
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.
21.1** Subsidiaries of the Company.
23.1* Consent of S. W. Hatfield & Associates.
23.2** Consent of Looper, Reed, Mark & McGraw Incorporated (included in its opinion filed as
Exhibit 5.1).
24.1** Power of attorney.
27.1** Financial Data Schedule.
- ----------------------------
*Filed herewith.
**Previously filed.