UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB - -------------------------------------------------------------------------------- (Mark one) XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --------- ACT OF 1934 For the quarterly period ended September 30, 1997 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 For the transition period from to - -------------------------------------------------------------------------------- Commission File Number: 0-23041 KARTS INTERNATIONAL INCORPORATED (Exact name of small business issuer as specified in its charter) Nevada 75-2639196 (State of incorporation) (IRS Employer ID Number) 109 Northpark Boulevard, Suite 210, Covington, LA 70433 (Address of principal executive offices) (504) 875-7350 (Issuer's telephone number) - -------------------------------------------------------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: November 11, 1997: Common Stock: 4,855,133 shares Common Stock Warrants: 2,282,525 Transitional Small Business Disclosure Format (check one): YES NO X KARTS INTERNATIONAL INCORPORATED Form 10-QSB for the Quarter ended September 30, 1997 Table of Contents Page Part I - Financial Information Item 1 Financial Statements 3 Item 2 Management's Discussion and Analysis or Plan of Operation 20 Part II - Other Information Item 1 Legal Proceedings 22 Item 2 Changes in Securities 22 Item 3 Defaults Upon Senior Securities 23 Item 4 Submission of Matters to a Vote of Security Holders 23 Item 5 Other Information 23 Item 6 Exhibits and Reports on Form 8-K 23 Part III - Information required by Rule 463 - Report of Offering of Securities and Use of Proceeds Therefrom 23 2 Part 1 - Item 1 Financial Statements S. W. HATFIELD + ASSOCIATES certified public accountants Members: American Institute of Certified Public Accountants SEC Practice Section Information Technology Section Texas Society of Certified Public Accountants Independent Accountant's Report ------------------------------- Board of Directors and Shareholders Karts International Incorporated We have reviewed the accompanying consolidated balance sheet as of September 30, 1997 of Karts International Incorporated (a Nevada corporation) and Subsidiaries and the accompanying consolidated statement of operations for the nine and three months ended September 30, 1997 and 1996 and the consolidated statement of cash flows for the nine months ended September 30, 1997 and 1996. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression on an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. S. W. HATFIELD + ASSOCIATES Dallas, Texas November 7, 1997 Use our past to assist your future sm P. O. Box 820392 o Dallas, Texas 75382-0392 o 214-342-9635 9236 Church Road, Suite 1040 o Dallas, Texas 75231 o 800-244-0639 214-342-9601 (fax) o SWHCPA@aol.com (e-mail) 3 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1997 and December 31, 1996 (Unaudited) (Audited) September 30, December 31, 1997 1996 ------------ ------------ Assets Current Assets Cash on hand and in banks $ 1,958,821 $ 630,028 Accounts receivable Trade, net of allowance for doubtful accounts of $2,447 and $5,000, respectively 500,718 1,795,802 Other 2,348 1,052 Recoverable income taxes 225,000 -- Inventory 1,289,638 958,381 Prepaid expenses 209,312 6,027 ------------ ------------ Total current assets 4,185,837 3,391,290 ------------ ------------ Property and equipment Building and improvements 372,509 331,360 Equipment 720,545 317,665 Transportation equipment 76,987 57,050 Furniture and fixtures 77,820 65,299 ------------ ------------ 1,247,861 771,374 Accumulated depreciation (115,120) (34,598) ------------ ------------ 1,132,741 736,776 Land 32,800 32,800 ------------ ------------ Net property and equipment 1,165,541 769,576 ------------ ------------ Other assets Goodwill, net of accumulated amortization of approximately $327,068and $151,286, respectively 5,532,355 5,708,137 Organization costs, net of accumulated amortization of approximately $33,527 and $17,139, respectively 75,727 92,116 Loan fees, net of accumulated amortization of approximately $122,033 and $20,120, respectively -- 101,913 Other 6,161 19,060 ------------ ------------ Total other assets 5,614,243 5,921,226 ------------ ------------ Total Assets $ 10,965,621 $ 10,082,092 ============ ============ - Continued - The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 4 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED September 30, 1997 and December 31, 1996 (Unaudited) (Audited) September 30, December 31, 1997 1996 ------------ ------------ Liabilities and Shareholders' Equity Current liabilities Note payable to a bank $ 7,685 $ 140,020 Current maturities of long-term debt 14,384 116,390 Accounts payable - trade 654,572 766,833 Other accrued liabilities 13,157 90,472 Accrued income taxes payable 76,919 269,217 ------------ ------------ Total current liabilities 766,717 1,382,932 ------------ ------------ Long-term liabilities Long-term debt, net of current maturities Related parties 20,304 3,200,000 Banks and individuals 219,877 132,660 ------------ ------------ Total liabilities 1,006,898 4,715,592 ------------ ------------ Commitments and contingencies Convertible preferred stock $0.001 par value. 25 shares allocated, issued and outstanding -- 625,000 ------------ ------------ Shareholders' equity Preferred stock - $0.001 par value 10,000,000 shares authorized None issued and outstanding -- -- Common stock - $0.001 par value 14,000,000 shares authorized 4,621,633 and 2,717,458 shares issued and outstanding, respectively 4,622 2,718 Common stock warrants 193,905 -- Additional paid-in capital 11,989,802 6,190,192 Accumulated deficit (2,229,606) (1,451,410) ------------ ------------ Total shareholders' equity 9,958,723 4,741,500 ------------ ------------ Total Liabilities and Shareholders' Equity $ 10,965,621 $ 10,082,092 ============ ============ The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 5 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Nine and Three months ended September 30, 1997 and 1996 Nine months Nine months Three months Three months ended ended ended ended September 30, September 30, September 30, September 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Net Sales $ 4,365,014 $ 3,581,286 $ 1,849,782 $ 2,431,133 ----------- ----------- ----------- ----------- Cost of sales Purchases, direct labor and related costs 3,389,670 2,340,917 1,238,019 1,633,633 Depreciation 68,285 14,331 22,717 3,038 ----------- ----------- ----------- ----------- Total cost of sales 3,457,955 2,355,248 1,260,736 1,636,671 ----------- ----------- ----------- ----------- Gross profit 907,059 1,226,038 589,046 794,462 ----------- ----------- ----------- ----------- Operating expenses Research and development 24,703 -- 2,846 -- Selling, general and administrative expenses 1,185,163 679,213 350,362 386,949 Compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting costs -- 1,430,287 -- -- Depreciation and amortization 323,928 116,702 147,112 63,757 ----------- ----------- ----------- ----------- Total operating expenses 1,533,794 2,226,202 500,320 450,706 ----------- ----------- ----------- ----------- Income (Loss) from operations (626,735) (1,000,164) 88,726 343,756 Other income (expense) Interest expense (372,043) (230,111) (103,100) (93,937) Other 80,849 2,118 20,027 6,757 ----------- ----------- ----------- ----------- Income before income taxes (917,929) (1,228,157) 5,653 256,576 Income taxes Currently receivable (payable) 139,733 (77,848) 139,733 (82,153) ----------- ----------- ----------- ----------- Net income (loss) $ (778,196) $(1,306,005) $ 145,386 $ 174,423 =========== =========== =========== =========== Income (loss) per weighted- average share of common stock outstanding $ (0.28) $ (0.76) $ 0.05 $ 0.08 =========== =========== =========== =========== Weighted-average number of shares of common stock outstanding 2,828,951 1,718,235 3,048,302 2,310,987 =========== =========== =========== =========== The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 6 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 1997 and 1996 Nine months Nine months ended ended September 30, September 30, 1997 1996 ------------- ------------- Cash flows from operating activities Net income (loss) for the period $ (778,196) $(1,306,005) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 384,838 139,661 Reorganization and restructuring costs and related effect of common stock issuances at less than "fair value" -- 1,430,287 Operating expenses paid with common stock -- 15,000 (Increase) Decrease in: Accounts receivable 1,293,788 (755,005) Income taxes recoverable (225,000) -- Inventory (331,257) (181,307) Prepaid expenses (203,285) (276,257) Organization costs -- (52,690) Other 12,899 (6,640) Increase (Decrease) in: Accounts payable and other accrued liabilities (189,576) 536,238 Accrued income taxes payable (192,298) 81,932 ----------- ----------- Cash flows used in operating activities (228,087) (374,786) ----------- ----------- Cash flows from investing activities Cash acquired in acquisition of Brister's Thunder Karts, Inc. -- 488,047 Cash paid for acquisition of Brister's Thunder Karts, Inc. -- (2,256,065) Cash received on sale of property and equipment 6,666 -- Cash paid for property and equipment (476,149) (36,185) ----------- ----------- Cash flows used in investing activities (469,483) (1,804,203) ----------- ----------- Cash flows from financing activities Net activity on short-term note payable (132,335) 100,000 Proceeds from long-term notes payable -- 2,000,000 Principal payments on long-term note payable (2,211,721) (85,446) Cash paid for loan costs -- (16,783) Cash paid to retire convertible preferred stock (625,000) -- Proceeds from sale of common stock and warrants 6,393,905 562,389 Cash paid for costs to sell common stock (1,398,486) (163,100) ----------- ----------- Cash flows provided by financing activities 2,026,363 2,397,060 ----------- ----------- Increase in cash 1,328,793 218,071 Cash at beginning of period 630,028 -- ----------- ----------- Cash at end of period $ 1,958,821 $ 218,071 =========== =========== - Continued - The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 7 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Nine months ended September 30, 1997 and 1996 Nine months Nine months ended ended September 30, September 30, 1997 1996 -------------- ------------- Supplemental disclosure of interest and income taxes paid Interest paid for the period $ 412,517 $ 221,483 ========== ========== Income taxes paid (refunded) for the period $ 277,565 $ 48,606 ========== ========== 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 ========== ========== Loan origination fees settled with common stock $ - $ 10,500 ========== ========== Transportation equipment purchased with note payable $ 17,236 $ - ========== ========== Long-term debt converted to common stock $1,000,000 $ - ========== ========== The financial information included herein has been prepared by management without audit by independent certified public accountants. See accompanying accountants' review report. The accompanying notes are an integral part of these financial statements. 8 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Organization and description of business Karts International Incorporated (formerly Sarah Acquisition Corporation) (Company) was originally incorporated on February 28, 1984 as Rapholz Silver Hunt, Inc. under the laws of the State of Florida. In June 1984, April 1986, and November 1987, respectively, the Company changed its corporate name to Great Colorado Silver, Inc., Great Colorado Silver Valley Development Company and J. R. Gold Mines, Inc. In January 1996, the Company changed its corporate name to Sarah Acquisition Corporation. The Company has had no significant business operations 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. During February and March 1996, the Company sold or issued an aggregate 1,634,650 post-March 24, 1997 reverse split shares of restricted, unregistered common stock to a former director and a company controlled by a current officer and director during the Company's reorganization phase. The differential between the aggregate cash proceeds of approximately $2,039 and the "fair value" of the shares issued created a one-time accounting charge to operations for compensation expense related to reorganization, restructuring and consulting expenses of approximately $1,430,000. These transactions are more fully discussed in Note J - Common Stock Transactions. On March 15, 1996, effective at the close of business on March 31, 1996, the Company acquired 100.0% of the issued and outstanding stock of Brister's Thunder Karts, Inc. (a Louisiana corporation), a "fun kart" manufacturer located in Roseland, Louisiana for total consideration of approximately $6,100,000. This acquisition was accounted for as a purchase. 9 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note A - Organization and description of business - continued On November 20, 1996, effective at the close of business on November 21, 1996, the Company acquired 100.0% of the issued and outstanding stock of USA Industries, Inc. (an Alabama corporation), a "fun kart" manufacturer located in Prattville, Alabama for total consideration of approximately $1,000,000. This acquisition was accounted for as a purchase. During interim periods, the Company follows the accounting policies set forth in its Registration Statement under The Securities Act of 1933 on Form SB-2 filed with the Securities and Exchange Commission. 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 in its Registration Statement under The Securities Act of 1933 on Form SB-2 when reviewing the interim financial results presented herein. In the opinion of management, the accompanying interim financial statements, prepared in accordance with the instructions for Form 10-QSB, 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. The Company has a concentration of key raw material suppliers for kart engines. In the event of any disruption in engine availability, if any, the Company may experience a negative economic impact. The Company does not anticipate any foreseeable interruption in engine availability and believes that alternate suppliers are available. The accompanying consolidated financial statements contain the accounts of Karts International Incorporated and its wholly-owned subsidiaries, Brister's Thunder Karts, Inc. and USA Industries, Inc. All significant intercompany transactions have been eliminated. The consolidated entities are collectively referred to as Company. Note B - Summary of significant accounting policies 1. Cash and cash equivalents The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. Cash overdraft positions may occur from time to time due to the timing of making bank deposits and releasing checks, in accordance with the Company's cash management policies. 10 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note B - Summary of significant accounting policies - continued 2. Accounts and advances receivable In the normal course of business, the Company extends unsecured credit to virtually all of its customers which are located in the Southeastern United States, principally Texas, Louisiana, Mississippi, Alabama, Georgia and Florida. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. During 1996, the Company had an international sale of approximately $35,000 and experienced no credit risk exposure as a result of this transaction. The Company anticipates continuing international sales in future periods and is developing credit policies related to this revenue segment. 3. Inventory Inventory consists of steel, engines and other related raw materials used in the manufacture of "fun karts". These items are carried at the lower of cost or market using the first-in, first-out method. 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. 11 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note B - Summary of significant accounting policies - continued 7. Goodwill Goodwill represents the excess of the purchase price of acquired subsidiaries over the fair value of net assets acquired and is amortized over 25 years using the straight-line method. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company adopted the policy of evaluating all qualifying assets as of the end of each reporting quarter. 8. Income taxes The Company utilizes the asset and liability method of accounting for income taxes. At September 30, 1997 and December 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. 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). In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128 specifies new standards designed to improve the EPS information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision, and (c) revising the contingent share provisions and the supplemental EPS data requirements. 12 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note B - Summary of significant accounting policies - continued 10. Accounting standards to be adopted - continued FAS 128 also makes a number of changes to existing disclosure requirements. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company has not yet determined the impact of the implementation of FAS 128. Note C - 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. 13 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note C - Convertible preferred stock - Continued 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. All issued and outstanding shares of convertible preferred stock were retired upon the successful completion of a public offering of the Company's common stock in September 1997. Note D - Common stock transactions On February 23, 1996, the Company was reincorporated in the State of Nevada by means of a merger with and into Karts International Incorporated, a Nevada corporation incorporated on February 21, 1996. The Company was the surviving entity and changed its corporate name to Karts International Incorporated. The reincorporation merger had the effect of a one for 250 reverse split of the Company's issued and outstanding common stock. The reincorporation merger also modified the Company's capital structure to authorize the issuance of up to 20,000,000 shares of $0.001 par value common stock and authorized the issuance of up to 10,000,000 shares of $0.001 par value Preferred Stock. The effect of this transaction has been reflected in the accompanying financial statements as of the beginning of the first period presented. On February 28, 1997, to be effective on March 24, 1997, the Company's Board of Directors approved a two (2) for three (3) reverse stock split and a corresponding reduction of the authorized shares of common stock in anticipation of a proposed underwritten public offering of the Company's common stock during 1997. This reverse stock split reduced the authorized shares of common stock from 20,000,000 to 14,000,000. The issued and outstanding shares of common stock shown in the accompanying financial statements reflect the ultimate effect of the March 24, 1997 reverse stock split as if this second reverse split had occurred as of the beginning of the first period presented in the accompanying consolidated financial statements. On February 20, 1996, the Company sold 18,750,000 restricted, unregistered pre-reorganization shares of common stock (75,000 equivalent post-reorganization shares) (50,000 post-March 24, 1997 reverse split shares) to a former Company director for cash of approximately $938. The transaction was recorded by the Company based on the imputed "fair value" of the securities issued as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The imputed fair value of this transaction was calculated at a "fair value" of approximately $1.13 per share or approximately $56,500. The differential between the imputed fair value and the actual cash paid was recorded as a component of compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting expenses in the accompanying consolidated statement of operations. 14 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note D - Common stock transactions - Continued On March 7, 1996, the Company sold 1,101,317 restricted, unregistered post-reorganization shares (734,212 post- March 24, 1997 reverse split shares) of common stock to an entity owned by an officer and director of the Company for cash of approximately $1,101. The transaction was recorded by the Company based on the imputed "fair value" of the securities issued as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The imputed fair value of this transaction was calculated at a "fair value" of approximately $1.13 per share or approximately $829,660. The differential between the imputed fair value and the actual cash paid was recorded as a component of compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting expenses in the accompanying consolidated statement of operations. On March 7, 1996, the Company sold 350,000 restricted, unregistered post-reorganization shares (233,333 post- March 24, 1997 reverse split shares) of common stock to an entity owned by an officer and director of the Company for cash of approximately $350. These shares were placed into an escrow account to satisfy potential future obligations of the Company and the affiliated company under the private placement memorandum discussed in the following paragraph. Due to the contingent nature of the ultimate ownership of these shares, these shares are excluded from the respective earnings per share calculation. 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. 15 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note D - Common stock transactions - Continued On March 15, 1996, the Company acquired 100% of the issued and outstanding stock of Brister's Thunder Karts, Inc., a Louisiana corporation, in exchange for $2,000,000 in cash; a subordinated $1,000,000 promissory note payable bearing variable interest rates, as defined therein, maturing in 2003; and restricted, unregistered common stock of the Company having an aggregate market value of $3,100,000, as defined in the Stock Purchase Agreement. The $2,000,000 cash payment was funded by a promissory note from an unrelated third party bearing interest at 14.0% per annum and maturing in 2000. Final settlement was satisfied in July 1996 with the issuance of 775,000 restricted, unregistered post-reorganization shares (516,667 post-March 24, 1997 reverse stock split shares) having a market value of $3,100,000, as defined in the related Stock Purchase Agreement. On March 15, 1996, the Company issued 725,000 restricted, unregistered post-reorganization shares (483,333 post-March 24, 1997 reverse stock split shares) of common stock in settlement of a consulting contract with a company owned by an officer and director of the Company. The transaction was recorded by the Company based on the imputed "fair value" of the securities issued as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The imputed fair value of this transaction was calculated at a "fair value" of approximately $1.13 per share or approximately $546,166. The differential between the imputed fair value and the actual cash paid was recorded as component of compensation expense related to common stock issuances at less than "fair value" for reorganization, restructuring and consulting expenses in the accompanying consolidated statement of operations. On March 15, 1996, in accordance with a January 1996 letter of intent, the Company issued 210,000 restricted, unregistered post-reorganization shares (140,000 post-March 24, 1997 reverse split shares) of common stock to the Company's chief executive officer, valued at $15,000, as additional consideration for the execution of an employment agreement. In July 1996, pursuant to Rule 504 of The Securities Act of 1933, the Company sold 5,000 Units, consisting of 5,000 post-reorganization shares of common stock (3,334 post-March 24, 1997 reverse split shares) and 100,000 Class A common stock warrants (66,667 post-March 24, 1996 reverse stock split warrants) for approximately $17,500 to an unaffiliated investor. The Class A common stock warrants may be exercised to purchase one (1) post-reorganization share of the Company's common stock at a price of $3.50 per share ($5.25 per share, post- March 24, 1997 reverse stock split). The Class A common stock warrants were assigned no value in the accompanying consolidated financial statements. In August 1996, 5,000 warrants (3,334 post-March 24, 1997 reverse split warrants) were exercised for total proceeds of $17,500. The total effect of this transaction was the sale of 10,000 post-reorganization shares (6,667 post-March 24, 1997 reverse split shares) for a total price of $35,000. On November 20, 1996, Company acquired 100% of the issued and outstanding stock of USA Industries, Inc. an Alabama corporation, in exchange for $250,000 in cash and 250,000 restricted, unregistered post-reorganization shares (166,667 post-March 24, 1997 reverse split shares) of restricted, unregistered common stock of the Company having an aggregate market value of $750,000. On September 16, 1997, the Company successfully completed a public offering of 1,550,000 shares of common stock and 1,550,000 Warrants generating approximately $6,400,000 in gross proceeds to the Company. Each warrant allows the holder to purchase one (1) share of common stock at the initial public offering price ($4.00) per share of Common Stock during a four year period commencing on the first anniversary date of the offering. The Warrants are redeemable by the Company at a price of $0.01 at any time after the first anniversary date upon written notice as defined in the offering. 16 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note E - 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. Additionally, an additional 333,350 1996 Warrants were issued to the holders of the Company's convertible preferred stock upon the redemption of these securities. In September 1997, the Company sold 1,550,000 warrants at an offering price of $0.125 per warrant. Each warrant allows the holder to purchase one (1) share of common stock at the initial public offering price ($4.00) per share of Common Stock during a four year period commencing on the first anniversary date of the offering. The Warrants are redeemable by the Company at a price of $0.01 at any time after the first anniversary date upon written notice as defined in the offering. 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 ------- ------ ------- December 31, 1996 Totals 233,335 3,334 230,001 1996 Warrants issued for Convertible Preferred Stock redemption 333,350 - 333,350 $4.50 per share 1997 Warrants sold in secondary stock offering 1,550,000 - 1,550,000 $4.00 per share --------- --------- --------- September 30, 1997 totals 2,116,685 3,334 2,113,351 ========= ========= ========= 17 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note F - 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. During 1997, the Company granted options to purchase up to 59,337 post-March 24, 1997 reverse stock split shares of the Company's common stock to officers and employees of the Company and its operating subsidiaries at an exercise price of $4.875 per share. These options are exercisable after January 30, 1998 and expire on January 30, 2002. Options Options Options granted exercised outstanding Exercise price 1996 options 59,355 - 59,355 $5.63 per share 1997 options 59,337 - 59,337 $4.875 per share ------- -------- ------- Total options 118,692 - 118,692 $5.63 per share ======= ======== ======= Total shares allocated 125,377 ======= Unallocated shares 6,685 ======= Note G - 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 September 30, 1997, approximately $143,465 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. 18 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Note G - Commitments and contingencies - Continued Litigation - continued The Company anticipates no material impact to either the results of operations, its financial condition or liquidity based on the uncertainty of outcome, if any, of existing litigation, either collectively and/or individually, at this time. Contingent stock issuances The terms of the March 31, 1996 private placement memorandum require the Company and/or a company owned by a current officer and director to issue additional shares to the original investors in the private placement memorandum in the event that the Company's securities, as listed on a published exchange or electronic bulletin board, does not equal $3.00 per share ($4.50 per share, as adjusted by the March 24, 1997 reverse stock split) on March 31, 1998 (the second anniversary date of the closing of the private placement memorandum offering). The issuance of additional shares, if any is required, to the original investors will be done without additional compensation to the Company. To facilitate this contingency, the Company sold 350,000 restricted, unregistered post-reorganization shares (233,333 post-March 24, 1997 reverse split shares) of common stock to an entity owned by an officer and director of the Company for cash of approximately $350. These shares were placed into an escrow account for the benefit of the original investors. In the event that no additional shares are required to be issued to the original investors, the shares held in escrow will be returned to the company owned by a current officer and director of the Company. The Company is unable to predict the fair value of these shares placed into escrow or the impact, if any, that such valuation will have on the Company's Statement of Income for the period ending March 31, 1998. Note H - Subsequent Event On October 24, 1997, the Company closed the Underwriter's over-allotment option on its secondary stock offering. This option sold an additional 232,500 shares of common stock at $4.00 per share and 232,500 Common Stock Warrants at $0.125 per warrant. This transaction generated approximately $959,000 in gross proceeds to the Company. 19 Part I - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company had no significant business operations from 1989 through March 1996. Prior to that time, the Company was engaged in the mining industry, principally through joint ventures with related parties involving mining properties located in Colorado. The Company is in the business of manufacturing and marketing Fun Karts for the consumer market. Effective at the close of business on March 31, 1996, the Company purchased 100% of the issued and outstanding stock of Brister's Thunder Karts, Inc. (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 in notes payable to Mr. Brister (the 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 was recorded as goodwill. Results of operations of Brister's are included in the Company's consolidated financial statements beginning on the effective date of the Brister' s Acquisition Effective at the close of business on November 21, 1996, the Company purchased 100.0% of the issued and outstanding stock of USA Industries, Inc. (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 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 was 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 September 30, 1997, and 1996, respectively. Results of Operations Nine months ended September 30, 1997 as compared to nine months ended September 30, 1996 The financial information discussed herein is derived from the historical consolidated financial statements of the Company for the respective nine month periods ended September 30, 1997 and 1996. The Company consummated the Brister's Acquisition effective as of the close of business on March 31, 1996. Accordingly, the nine month period ended September 30, 1996 was the first two quarters of control of Brister's by the Company. The Company, through its Brister's and USA subsidiaries, experiences significant seasonality of sales with more than 50.0% of its sales occurring during the fourth quarter of the calendar year. The amounts discussed in this section reflect the consolidated results of the Company's ownership of Brister's from April 1, 1996 through September 30, 1996 and the consolidated results of the Company's ownership of both Brister's and USA for the entire nine month period presented for 1997. The Company experienced gross revenues of approximately $4.4 million for the nine months ended September 30, 1997 compared to $3.6 million for the comparable period of 1996. For the three month period from July to September, the Company experienced gross revenues of approximately $1.8 million for the 1997 period and approximately $2.4 million for the 1996 period. These results continue to reflect weak product demand due primarily to seasonality of sales. 20 Some seasonality effects were mitigated during 1997 through mass merchandiser sales; however, it is improbable that the Company will be able to maintain a significant sales level into the mass merchandiser sales channel for future periods. Management is pursuing additional venues, including other potential mass merchandiser customers, and methods to improve its sales during traditional slow demand periods. Selling, general and administrative expenses were approximately $1.5 million during the nine months ended September 30, 1997 as compared to approximately $2.2 million for the nine months ended September 30, 1996. In the first quarter of 1996, the Company incurred a one time non-cash charge to earnings of approximately $1.43 million related to fair value recognition on common stock sold or issued to a former director and to Halter Financial Group, Inc., an entity related to a current company director, for reorganization and restructuring costs, at less than "fair value" as defined in the appropriate accounting standards. For the period of July to September, 1997 and 1996, respectively, the Company incurred operating expenses of approximately $500,000 and $450,000. The increases during the comparable nine month periods are attributable to the maturation of the Company's operations, including the ownership and operation of the Brister's and USA subsidiaries for the entire period presented during 1997. The cost levels for the June through September periods of both 1997 and 1996 are relatively constant with the principal reason for the approximately $50,000 increase due to the addition of general corporate overhead expenses. Management anticipates that current 1997 expenditure levels will remain relatively constant during future periods. Through the third quarter of 1997, the Company incurred approximately $25,000 in research and development expenses related to new products and improvements to existing products. While specific research and development expenditure levels have not been developed by management, it is anticipated that these types of expenses will be present in future periods at fluctuating levels, primarily dependent upon available resources. For the nine month period ended September 30, 1997, the Company incurred a net loss of approximately $917,000 as compared to a net loss of approximately $1.23 million, including the one-time accounting charge discussed above, for the comparable nine month period ended September 30, 1996. For the three month period from July through September 1997, the Company experienced a net income before income taxes of approximately $5,600 as compared to net income before income taxes of approximately $256,000 for the comparable three month period ended September 30, 1996. Management attributes the increase in the net loss for the first nine months of Fiscal 1997 compared to the comparable period of Fiscal 1996 to increased general corporate overhead expenses, an adjustment to the Company's standard cost model for cost of goods sold in 1997 and the overall seasonality of market demand for the Company's products. Primary earnings (loss) per share were approximately $(0.28) per share for the nine months ended September 30, 1997 and approximately $(0.76) per share for the nine months ended September 30, 1996. Excluding the one time accounting charge, the nine months ended September 30, 1996 had a proforma earnings per share of approximately $0.07 per share. For the three month period from June through September 1997 and 1996, the Company experienced net income per weighted-average share of approximately $0.05 and $0.08 per share, respectively. Additional Operations information. In 1997, the Company settled several product liability lawsuits with a cumulative charge to operations of approximately $44,000. The Company currently has six product liability lawsuits outstanding, none of which are expected to exceed existing product liability insurance policy limits. The Company has never had a claim that resulted in an award or settlement in excess of insurance coverage. There is no assurance that the Company's insurance coverage of $5,000,000 per occurrence and $5,000,000 aggregate will be sufficient to fully protect the business and assets of the Company from all claims, nor can any assurances be given that the Company will be able to maintain the existing coverage or obtain additional coverage at commercially reasonable rates. Management believes that it has process controls on its product operations, product labeling, operator's manuals, and design features which will assist in a successful defense of any present or future product liability claim. To the extent product liability losses are beyond the limits or scope of the Company's insurance coverage, the Company could experience a material adverse effect upon its business, 21 operations, profitability and assets. Liquidity and Financial Condition With respect to the comparative balance sheet, consolidated assets of $l0.9 million at September 30, 1997 were $809 thousand higher than the $10.1 million at December 31, 1996. This increase was principally attributable to an increase in current assets of $575 thousand and an increase in net property and equipment of $395 thousand. Consolidated liabilities of $1.1 million at September 30, 1997 were $3.6 million lower than the year end balance of $4.7 million. The decrease was primarily the result of the payoff of the Company's long term debt by way of its successful secondary public offering completed in September 1997. The proceeds from the public offering also were the reason the cash balance increased by $1.3 million from December 31, 1997 to September 30, 1997. Although Karts International Incorporated is a seasonal business with 50% or more of its sales being historically recorded in the fourth calendar quarter, management believes its cash reserves and inventory levels are sufficient to insure adequate manufacturing and shipment of finished goods. Additionally, management feels its 1997 plant additions insures the company has sufficient capacity to meet the holiday product demands. Capital Requirements During the first nine months of 1997, the Company has invested approximately $476,000 in new property and equipment, principally in the USA facility in Prattville, Alabama. It is anticipated that these additions will improve product quality and increase daily production capacity during peak production periods during the fourth calendar quarter of the year. The Company has identified no further significant capital requirements for the current operating year. Liquidity requirements mandated by future business expansions or acquisitions, if any are specifically identified or undertaken, are not readily determinable at this time as no substantive plans have been formulated by management. Part II - Other Information Item 1 - Legal Proceedings See accompanying notes to the consolidated financial statements Item 2 - Changes in Securities On September 16, 1997, the Company successfully completed the offering and sale of 1,550,000 shares of common stock and 1,550,000 warrants at $4.00 and $0.125 per share/warrant, respectively. Further, the Company sold 155,000 Underwriter's Warrants for $155. The total offering raised gross proceeds of approximately $6,393,905. On October 24, 1997, the Company closed the Underwriter's over-allotment option on its secondary stock offering. This option sold an additional 232,500 shares of common stock at $4.00 per share and 232,500 Common Stock Warrants at $0.125 per warrant. This transaction generated approximately $959,000 in gross proceeds to the Company. 22 Item 3 - Defaults on Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders The Company has held no regularly scheduled, called or special meetings of shareholders during the reporting period. Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K None Part III - Information required by Rule 463 Report of Offering of Securities and Use of Proceeds Therefrom 1a. Effective date of Registration Statement filed on Form SB-2 September 9, 1997 1b. SEC file number assigned to Registration Statement: 333-24143 1c. CUSIP number assigned 485766-20-8 2. Has the offering commenced? If yes, date commenced. Yes, on September 9, 1997 3. Did the offering terminate before any securities were sold? No 4. Did the offering terminate prior to the sale of all securities registered? No 5. Name of managing underwriter J. P. Turner & Company, LLC 6a. Title and code of each class of securities registered Common Stock-EQ Redeemable Common Stock Warrants-OT 6b. Describe the class of securities categorized as "other" Each warrant is transferrable immediately upon issuance and entitles the holder to purchase one share of Common Stock at a price of $4.00 per share during the four year period following the first anniversary date of the offering. 23 7. Indicate the amount and aggregate offering price of securities registered and sold to date for the account of the issuer and for the account of any selling security holder(s) Aggregate price Aggregate Title of Amount of offering Amount offering price security registered amount registered sold of amount sold -------- ---------- ----------------- ------ --------------- FOR THE ACCOUNT OF THE ISSUER - ----------------------------- Common stock 1,550,000 shares $6,200,000 1,550,000 shares $6,200,000 Common stock Warrants 1,550,000 warrants $193,750 1,550,000 warrants $193,750 Underwriter's Warrants 155,000 warrants $155 155,000 warrants $155 FOR THE ACCOUNT OF ANY SELLING SECURITY HOLDER(S) - None 8. State the amount of expenses incurred for the issuer's account in connection with the issuance and distribution of the securities registered for each category listed below: Direct or indirect payments to others Underwriting discounts and commissions $ 831,187 Expenses paid to or for Underwriters 48,000 Other expenses 371,010 Total expenses $1,250,197 9. Indicate net offering proceeds to the issuer after expenses in Item 8. $5,143,708 10. State the amount of net offering proceeds to the issuer used for each of of the purposes listed below: Repayment of indebtedness $2,550,000 Redemption of convertible preferred stock 625,000 Financial advisory fee 48,000 Product development 200,000 Advertising and marketing 400,000 11. Do the use of proceeds in Item 10 represent a material change in the use(s) of proceeds described in the prospectus? No (Remainder of this page left blank intentionally) 24 12. Report of Sales of Securities and Use of Proceeds Therefrom Gross proceeds from Sale of common stock $6,200,000 Sale of common stock warrants 193,905 6,393,905 Expenditures from gross proceeds Underwriter's commissions and discounts 831,187 Payment of financial advisory fee 48,000 Retirement of Schlinger Note payable and accrued interest 1,005,833 Retirement of Brister Notes payable and accrued interest 1,155,958 Retirement of Bank lines of credit and accrued interest 410,587 Redemption of convertible preferred stock 625,000 Legal and accounting fees 515,801 Printing expenses 135,000 Acquisition of equipment 400,000 ---------- Total expenditures through September 30, 1997 5,127,366 --------- Remaining proceeds as of September 30, 1997 $1,266,539 ========= 25 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KARTS INTERNATIONAL INCORPORATED November 11 , 1997 /s/ V. Lynn Graybill ------ -------------------------------- V. Lynn Graybill Chairman of the Board, President and Director November 11 , 1997 /s/ John V. Callegari, Jr. ------ --------------------------------- John V. Callegari, Jr. Chief Financial Officer 26