-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BeBzyghjzXAgxZX2oKrzaN+hKWIa2gMM96mqSYmiTbQb1AIkNuNmssrH5gsZcgmB /8aotKYUpvMEsYuJdStlRw== 0000950134-97-004271.txt : 19970529 0000950134-97-004271.hdr.sgml : 19970529 ACCESSION NUMBER: 0000950134-97-004271 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19970528 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KARTS INTERNATIONAL INC CENTRAL INDEX KEY: 0001010077 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 752639196 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-24145 FILM NUMBER: 97614986 BUSINESS ADDRESS: STREET 1: 109 NORTHPARK BOULEVARD STREET 2: SUITE 210 CITY: COVINGCOVINGTON STATE: LA ZIP: 70433 BUSINESS PHONE: 5048757350 MAIL ADDRESS: STREET 1: 109 NORTHPARK BOULEVARD STREET 2: SUITE 210 CITY: COVINGTON STATE: LA ZIP: 70433 SB-2/A 1 AMENDMENT NO. 1 TO FORM SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1997 REGISTRATION NO. 333-24145 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------- KARTS INTERNATIONAL INCORPORATED (Name of Small Business Issuer in its Charter) ------------------------------- NEVADA 3944 75-2639196 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.) ------------------------------- 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) ------------------------------- 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
------------------------------- 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. [ ] ------------------------------- CALCULATION OF REGISTRATION FEE
==================================================================================================================================== 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 - ------------------------------------------------------------------------------------------------------------------------------------ Underwriters' Warrants(4)(5) . . . . . . . . . 140,000 $7.52 $1,052,800 $319.00 - ------------------------------------------------------------------------------------------------------------------------------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,531.46(6) - ------------------------------------------------------------------------------------------------------------------------------------
(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 $5476.31 was previously paid. ------------------------- 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. ================================================================================ 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 MAY 28, 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. Each Warrant is transferable immediately upon issuance and entitles the holder thereof to purchase one share of Common Stock at a price of $4.50 per share (or at the initial public offering price per share of Common Stock, whatever price that may be) 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 $9.00 per share (or 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 May 27, 1997, the closing bid and ask prices of the Common Stock were $4.00 and $5.00 per share, respectively. 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. ------------------------------ 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.
====================================================================================================================== PRICE UNDERWRITING DISCOUNTS PROCEEDS TO TO PUBLIC AND COMMISSIONS(1) COMPANY(2) - ---------------------------------------------------------------------------------------------------------------------- Per Share of Common Stock . . . . . . . $__________ $__________ $__________ - ---------------------------------------------------------------------------------------------------------------------- Per Warrant . . . . . . . . . . . . . . $__________ $__________ $__________ - ---------------------------------------------------------------------------------------------------------------------- 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 $387,250, 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." ------------------------------ 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 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." -2- 4 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. -3- 5 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 a price of $4.50 per share (or at the initial public offering price per share of Common Stock, whatever price that may be) 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 $9.00 per share (or twice the initial public offering price per share of Common Stock, whatever price that may be), 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." -4- 6
OUTSTANDING SECURITIES . . . . . . . Securities Securities Outstanding Upon Presently Completion of the Outstanding Offering ----------- ------------------ Common Stock(1) . . . . . . . . . . . 2,717,653 4,117,653 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 $5,440,250 if the Securities are sold, and $6,285,237 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, 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 ______________________________ (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." -5- 7 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 Ended 1996 1995 1994 March 31, 1997 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 . . . . . . . . . . . 1,458,847 1,639,583 1,423,933 555,929 344,586 Income from operations . . . . . . . . . 1,025,937 690,537 459,322 (409,575) 150,272 Net income . . . . . . . . . . . . . . . 468,346 355,701 341,036 (489,427) 34,551 Net income per proforma weighted- average share of common stock outstanding Primary . . . . . . . . . . . . . . . $0.22 $0.17 $0.16 ($0.18) $0.05 Fully diluted . . . . . . . . . . . . $0.22 $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 $ 768,346 retire certain outstanding debt . . . . Proforma earnings per share assuming retirement of certain outstanding debt Primary . . . . . . . . . . . . . . . $0.37 Fully diluted . . . . . . . . . . . . $0.36
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 $ 3,932,483 Total assets . . . . . . . . . . . . . . . . . . . . 10,094,717 - 8,268,481 9,104,677 10,719,927 Current liabilities . . . . . . . . . . . . . . . . . 1,382,932 4,010 1,335,057 780,987 780,987 Total liabilities . . . . . . . . . . . . . . . . . . 4,715,592 4,010 4,610,490 4,214,979 1,014,979 Convertible preferred stock . . . . . . . . . . . . . 625,000 - - 625,000 - Stockholders' equity . . . . . . . . . . . . . . . . 4,754,125 (4,010) 3,657,991 4,264,698 9,704,948 Working capital . . . . . . . . . . . . . . . . . . . 2,008,358 (4,010) 719,120 1,536,246 3,151,496
- ------------------------------ (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." -6- 8 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 (36.8% 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 (58.8% of net proceeds), the Company will pay to holders of the Company's Convertible Preferred Stock $625,000 (11.5% 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 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 -7- 9 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 (1.8% of net proceeds) and $965,250 for working capital (17.7% 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." -8- 10 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 -9- 11 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, -10- 12 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 -11- 13 immediate substantial dilution in the net tangible book value per share of the Common Stock after this Offering in the amount of $3.60 per share or 80% 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." 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. 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." 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 4,221,828 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 154,809 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 2,667,019 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, as amended (the "Securities Act"). Subject to the volume and holding period limitations of Rule 144 and the "lock-up" agreements described below, 2,305,879 currently outstanding shares of Common Stock will be eligible for sale under Rule 144 ninety days 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 -12- 14 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 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 $9.00 per share (or twice the initial public offering price per share of Common Stock, whatever price that may be) 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 -13- 15 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 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 the 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. If the Company is unable to satisfy the requirements for continued quotation on Nasdaq SmallCap Market, trading in the Common Stock and Warrants offered hereby -14- 16 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 consulting agreement with the Representative for consulting services for a two year period for aggregate fees payable to the Representative of $48,000. Any of the foregoing relationships may adversely impact the Company's business, operating results or financial condition, or its ability to raise additional capital for its business should the need arise during the term of the above agreements. See "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. -15- 17 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 early 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, together acquired 46,834 shares of the Company's Common Stock from the then majority stockholder 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. 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 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 early 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 15, 1996, the Company concluded the private sale of 233,334 shares of Common Stock to 13 investors for aggregate gross proceeds of $525,000. Additionally, 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"). The Schlinger Note will be paid with a portion of the proceeds from this Offering. See "-- Brister's Acquisition," "Use of Proceeds," "Management" and "Certain Relationships and Related Transactions." 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 -16- 18 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 166,668 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 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 -17- 19 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. -18- 20 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 (through May 20, 1997) $ 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 May 27, 1997, the closing bid and ask prices for the Common Stock were $ 4.00 and $ 5.00, respectively, per share. As of May 27, 1997, 2,717,653 shares of Common Stock were issued and outstanding. The Company believes that its Common Stock is held of record and beneficially by approximately 500 persons. 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." -19- 21 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 $5,440,250 (based on an assumed public offering price of $4.50 per share of Common Stock and $0.125 per Warrant or approximately $6,285,237 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 36.8% Payment of Brister Notes(3) . . . . . . . . . . . . . . . . . . . . . . 1,200,000 22.0 Conversion of Preferred Stock . . . . . . . . . . . . . . . . . . . . . 625,000 11.5 Purchase of Equipment(4) . . . . . . . . . . . . . . . . . . . . . . . 400,000 7.4 Advertising and Marketing(5) . . . . . . . . . . . . . . . . . . . . . 150,000 2.8 Product development and design(6) . . . . . . . . . . . . . . . . . . . 100,000 1.8 Working Capital and General Corporate Purposes(7) . . . . . . . . . . . 965,250 17.7 ---------- ---- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,440,250 100.0% ========= =====
- ------------------------------ (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) Working capital will be increased to $1,810,237 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. -20- 22 DILUTION At March 31, 1997, the Company had a net tangible book value of approximately ($1.65) million or approximately $(0.61) 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 $3.79 million or approximately $0.90 per share, representing an immediate increase in net tangible book value of $1.51 per share to existing stockholders, and an immediate dilution in net tangible book value of $3.60 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 . . . . . . . . . . . . . . . $(0.61) Increase per share attributable to new investors . . . . . . . . . . . . . . . . . . 1.51 ------ Proforma net tangible book value per share after the Offering(2) . . . . . . . . . . . . . . 0.90 ------- Dilution of net tangible book value per share to new investors attributable to purchase of Common Stock by new investors . . . . . . . . . . . . . . . $ 3.60 ======
- ------------------------------ (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 . . 2,717,653 66.0% $4,289,789 41.9% $1.63 New investors . . . . . . 1,400,000 34.0 5,950,000 58.1 $4.50 --------- ------ ----------- ------ Total . . . . . 4,117,653 100.0% $10,239,789 100.0% ========= ===== ========== ======
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." -21- 23 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; 2,717,653 shares issued and outstanding; 4,221,828 as adjusted(3) . . . . . 2,718 1,504 4,222 Additional paid-in capital . . . . . . . . . . . . . . . . . 4,774,905 5,263,746 10,038,651 Common stock warrants; 463,336 warrants issued and outstanding; 1,863,336 as adjusted . . . . . . . . . . -- 175,000 175,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . (512,925) -- (512,925) ---------- -------------- ------------ Total stockholders' equity . . . . . . . . . . . . . . . . 4,264,698 5,440,250 9,704,948 ---------- -------------- ------------ Total capitalization . . . . . . . . . . . . . . . . . . . $8,650,465 $ 1,615,250 $ 10,265,715 ========= ============= ===========
- ------------------------------ (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." -22- 24 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 . . . . . . . . . . . 1,458,847 1,639,583 1,423,933 555,929 344,586 Income from operations . . . . . . . . . 1,025,937 690,537 459,322 (409,575) 150,272 Net income . . . . . . . . . . . . . . . 468,346 355,701 341,036 (489,427) 34,551 Net income per proforma weighted-average share of common stock outstanding Primary . . . . . . . . . . . . . . . $0.22 $0.17 $0.16 ($0.18) $0.05 Fully diluted . . . . . . . . . . . . $0.22 $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 . . $ 768,346 Proforma earnings per share assuming retirement of certain outstanding debt Primary . . . . . . . . . . . . . . . $0.37 Fully diluted . . . . . . . . . . . . $0.36
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 $ 3,932,483 Total assets . . . . . . . . . . . . . . . . . . . 10,094,717 - 8,268,481 9,104,677 10,719,927 Current liabilities . . . . . . . . . . . . . . . . 1,382,932 4,010 1,335,057 780,987 780,987 Total liabilities . . . . . . . . . . . . . . . . . 4,715,592 4,010 4,610,490 4,214,979 1,014,979 Convertible preferred stock . . . . . . . . . . . . 625,000 - - 625,000 - Stockholders' equity . . . . . . . . . . . . . . . 4,754,125 (4,010) 3,657,991 4,264,698 9,704,948 Working capital . . . . . . . . . . . . . . . . . . 2,008,358 (4,010) 719,120 1,536,246 3,151,496
- ------------------------------ (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." -23- 25 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 166,668 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." -24- 26 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 versus 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 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 $1.154 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 $211,000 from approximately $345,000 for the first combined quarter of 1996 to approximately $556,000 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 $(489,000) 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 $(0.18) 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. -25- 27 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. Operating expenses for 1996 and 1995, respectively, were approximately $2.5 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." 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 -26- 28 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 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. Additionally, the Company 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 -27- 29 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." -28- 30 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 -29- 31 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. -30- 32 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 -31- 33 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 -32- 34 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 -33- 35 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." -34- 36 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 -35- 37 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 -36- 38 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 -37- 39 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. -38- 40 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. -39- 41 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." -40- 42 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 -41- 43 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. -42- 44 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. -43- 45 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 The Company has yet to adopt a formal stock compensation plan for its management and key employees. The Company intends to adopt a stock compensation plan as it believes that such a plan is necessary to retain current management and employ additional qualified personnel. A stock option plan which is adopted by the Company will have terms that are normally accepted in the industry and for public entities. The Board of Directors of the Company has, however, reserved for issuance up to 133,333 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. During 1996, the Company issued to certain employees 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 Company issued to certain employees, including John V. Callegari, Jr., the Vice President, Administration and Chief Executive Officer of the Company, and Lawrence E. Schwall, III, the Vice President, Sales and Marketing of the Company, options to purchase an aggregate of 66,004 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. Mr. Callegari and Mr. Schwall each received options to purchase 6,667 shares of Common Stock for $4.875 per share. 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. 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. -44- 46 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 46,834 shares of the Company's Common Stock from the then majority stockholder 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," "Management," and "Principal Stockholders." 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 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 -45- 47 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 approximately $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. 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. -46- 48 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 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 -47- 49 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. -48- 50 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 Mr. Evans 1996 Warrants issued 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. 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 "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. -49- 51 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 4,221,828 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 -50- 52 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 a price of $4.50 per share or at the initial public offering price per share of Common Stock, whatever price that may be, 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 $9.00 per share (or 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 -51- 53 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 $18,000. 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 -52- 54 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 $25,000.00) as additional compensation for investment banking services and three percent of the offering proceeds (or $18,750.00) 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 -53- 55 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. -54- 56 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 4,221,828 (4,431,828 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 4,221,828 shares of Common Stock to be outstanding after the Offering, 2,667,019 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, 2,305,879 shares of Common Stock would be eligible for sale under Rule 144 ninety days 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 -55- 57 upon conversion of the Convertible Preferred Stock, the 1996 Warrants or 500,025 shares of Common Stock 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. 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. -56- 58 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 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, 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. -57- 59 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 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. -58- 60 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 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. -59- 61 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-31 Proforma Consolidated Statement of Income for the year ended December 31, 1996 F-32 Proforma Consolidated Statement of Income for the year ended December 31, 1995 F-33 Proforma Consolidated Statement of Income for the year ended December 31, 1994 F-34 Notes to Proforma Consolidated Financial Information F-35 BRISTER'S THUNDER KARTS, INC. Accountant's Review Report F-36 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 62 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 $23,770 and $19,514 respectively 127,982 104,741 Loan costs, net of accumulated amortization of $20,960 and $20,120, respectively 101,073 101,913 Goodwill, net of accumulated amortization of $205,835 and $151,286, respectively 5,653,587 5,708,137 ------------ ------------ TOTAL OTHER ASSETS 5,908,405 5,933,851 ------------ ------------ TOTAL ASSETS $ 9,104,677 $ 10,094,717 ============ ============
- 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 63 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 327,232 766,833 Accrued liabilities 41,938 90,472 Accrued income taxes payable 85,042 269,217 ------------ ------------ TOTAL CURRENT LIABILITIES 780,987 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 4,214,979 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. 2,717,653 issued and outstanding, respectively 2,718 2,718 Additional paid-in capital 4,774,905 4,774,905 Retained earnings (512,925) (23,498) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 4,264,698 4,754,125 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,104,677 $ 10,094,717 ============ ============
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 64 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 74,401 439 ------------ ------------ TOTAL OPERATING EXPENSES 555,929 3,211 ------------ ------------ INCOME FROM OPERATIONS (409,575) (3,211) OTHER INCOME (EXPENSES) Interest and other miscellaneous 51,286 -- Interest expense (131,138) (14,715) ------------ ------------ INCOME BEFORE INCOME TAXES (489,427) (17,926) INCOME TAX (EXPENSE) BENEFIT -- -- ------------ ------------ NET LOSS $ (489,427) $ (17,926) ============ ============ Earnings per share of common stock outstanding Primary $ (0.18) $ (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 65 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 $ (489,427) $ (17,926) Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 95,884 579 (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 (672,310) 41,116 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 49,210 (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 (27,497) (52,690) Proceeds from sale of fixed assets 6,666 -- Purchases of property and equipment (152,367) -- ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (173,198) (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 $ 134,237 $ 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 66 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 67 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 2,742,748 712,531 =========== =========== Net income $ (489,427) $ (17,926) =========== =========== Per share amount $ (0.18) $ (0.03) =========== ===========
The convertible preferred stock is considered anti-dilutive for the three months ended March 31, 1997 and 1996, respectively. F-7 68 [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/ S. W. HATFIELD + ASSOCIATES S. W. HATFIELD + ASSOCIATES Dallas, Texas February 28, 1997 (except for Note I as to which the date is March 6, 1997) F-8 69 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 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 $19,514 and $-0-, respectively 104,741 -- Goodwill, net of accumulated amortization of approximately $151,286 and $-0-, respectively 5,708,137 -- -------------- ------------ TOTAL OTHER ASSETS 5,933,851 -- -------------- ------------ TOTAL ASSETS $ 10,094,717 $ -- ============== ============
- CONTINUED - The accompanying notes are an integral part of these consolidated financial statements. F-9 70 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; 2,717,653 and 83,441 shares issued and outstanding, respectively 2,718 83 Additional paid-in capital 4,774,905 487,751 Accumulated deficit (23,498) (491,844) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 4,754,125 (4,010) ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,094,717 $ -- ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-10 71 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 205,397 -- ----------- ----------- TOTAL OPERATING EXPENSES 1,458,847 630 ----------- ----------- INCOME (LOSS) FROM OPERATIONS 1,025,937 (630) OTHER INCOME (EXPENSE) Interest expense (396,589) -- Interest and other income 32,573 -- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 661,921 (630) INCOME TAXES 193,575 -- ----------- ----------- NET INCOME (LOSS) $ 468,346 $ (630) =========== =========== Net income (loss) per weighted-average share of common stock outstanding Primary $ 0.22 nil =========== =========== Fully diluted $ 0.22 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 72 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES (formerly Sarah Acquisition Corporation) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1996 and 1995
Convertible Preferred Stock Common Stock Shares Amount Shares Amount ------- -------- ---------- ------------ BALANCES AT JANUARY 1, 1995, AS REPORTED -- $ -- 31,254,621 $ 1,563 Retirement of treasury stock -- -- (102,600) -- Effect of 1 for 250 reverse stock split, post treasury stock retirement, including rounding, as of February 23, 1996 -- -- (31,027,405) (1,438) Effect of 2 for 3 reverse stock split, including rounding, as of March 24, 1997 -- -- (41,175) (42) ------- -------- ---------- ------------ BALANCES AT JANUARY 1, 1995, AS RESTATED -- -- 83,441 83 Net loss for the year -- -- -- -- ------- -------- ---------- ------------ BALANCES AT DECEMBER 31, 1995 -- -- 83,441 83 Sale of common stock to current and former directors in February 1996 -- -- 1,017,545 1,018 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 Additional paid-in Accumulated Treasury capital deficit Stock Total ------------ ------------ --------- --------- BALANCES AT JANUARY 1, 1995, AS REPORTED $ 492,940 $ (491,214) $ (6,669) $ (3,380) Retirement of treasury stock (6,669) -- 6,669 -- Effect of 1 for 250 reverse stock split, post treasury stock retirement, including rounding, as of February 23, 1996 1,438 -- -- -- Effect of 2 for 3 reverse stock split, including rounding, as of March 24, 1997 42 -- -- -- ------------ ------------ --------- --------- BALANCES AT JANUARY 1, 1995, AS RESTATED 487,751 (491,214) -- (3,380) Net loss for the year -- (630) -- (630) ------------ ------------ --------- --------- BALANCES AT DECEMBER 31, 1995 487,751 (491,844) -- (4,010) Sale of common stock to current and former directors in February 1996 1,371 -- -- 2,389 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
- CONTINUED - The accompanying notes are an integral part of these consolidated financial statements. F-12 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 Preferred Stock Common Stock Shares Amount Shares Amount ---------- ---------- ---------- ---------- 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 2,717,653 $ 2,718 ========== ========== ========== ========== Additional paid-in Accumulated Treasury capital deficit Stock Total ---------- ---------- ---------- ---------- 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. 14,517 -- -- 15,000 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 -- 68,346 -- 468,346 ---------- ---------- ---------- ---------- BALANCES AT DECEMBER 31, 1996 $4,774,905 $ (23,498) $ -- $4,754,125 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-13 74 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 $ 468,346 $ (630) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 225,517 -- Common stock issued for compensation 15,000 -- (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 75 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 $ 15,000 $ -- ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-15 76 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 majority of the issued and outstanding shares of common stock of the Company between unrelated third parties. It was the intent of the new majority shareholder 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 77 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 78 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 $ 340,343 $ 121,324 =========== =========== Earnings per share $ 0.10 $ 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 79 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 80 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 81 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 82 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 83 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 $ 156,675 $ -- Deferred -- -- ----------- ----------- 156,675 -- ----------- ----------- State: Current 36,900 -- Deferred -- -- ----------- ----------- 36,900 -- ----------- ----------- Total $ 193,575 $ -- =========== ===========
F-23 84 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 $ 225,053 $ -- Increase (decrease) in income taxes resulting from: State income taxes 36,900 -- 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 85 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 required 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 86 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. 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 $1,451. Between March 14, 1996 and 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. 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. F-26 87 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, 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 $15,000 consulting contract with a company owned by an officer and director of the Company. 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, the Company sold 5,000 Units, consisting of 5,000 restricted, unregistered 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. The Class A common stock warrants may be used to purchase one (1) restricted, unregistered 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). 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 restricted, unregistered 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, the Company privately 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-27 88 KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES (formerly Sarah Acquisition Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - STOCK OPTIONS The Company's Compensation Committee of the 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-28 89 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-29 90 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 $ 468,346 $ (630) ========== ========== Per share amount $ 0.22 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 $ 468,346 $ (630) ========== ========== Per share amount $ 0.22 nil ========== ==========
F-30 91 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-31 92 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 1,650,039 277,666 223,947 -- 2,151,652 Depreciation and amortization 205,397 14,687 40,849 83,091 344,024 ----------- --------- ----------- -------- ------------ Total operating expenses 1,855,436 292,353 264,796 83,091 2,495,676 ----------- --------- ----------- -------- ------------ INCOME FROM OPERATIONS 629,348 270,758 (227,239) (83,091) 589,776 OTHER INCOME (EXPENSE) Litigation settlements -- (17,379) -- -- (13,379) Interest and other 32,573 448 -- -- 33,021 ----------- --------- ----------- -------- ------------ INCOME BEFORE INCOME TAXES 661,921 253,827 (227,239) (83,091) 605,418 PROVISION FOR INCOME TAXES (193,575) (89,675) -- -- (283,250) ----------- --------- ----------- -------- ------------ NET INCOME $ 468,346 $ 164,152 $ (227,239) $(83,091) $ 322,168 =========== ========= =========== ======== ============ Pro Forma earnings per weighted-average share of common stock $ 0.10 ============ Pro Forma number of weighted-average shares of common stock outstanding 3,119,592 ============
F-32 93 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 $ (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-33 94 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 $ (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-34 95 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-35 96 [S. W. HATFIELD + ASSOCIATES LETTERHEAD] ACCOUNTANT'S REVIEW REPORT Shareholders and Board of Directors Brister's Thunder Karts, Inc. We have reviewed the accompanying balance sheet of Brister's Thunder Karts, Inc.(a Louisiana corporation and a wholly-owned subsidiary of Karts International Incorporated ) as of March 31, 1996 and the related statements of income, changes in retained earnings and cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Brister's Thunder Karts, Inc. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of 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 financial statements in order for them to be in conformity with generally accepted accounting principles. /s/ S. W. HATFIELD + ASSOCIATES S. W. HATFIELD + ASSOCIATES Dallas, Texas May 10, 1996 F-36 97 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 98 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 99 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 year $ 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-39 100 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-40 101 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-41 102 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-42 103 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-43 104 [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/ S. W. HATFIELD + ASSOCIATES S. W. HATFIELD + ASSOCIATES Dallas, Texas March 9, 1996 F-44 105 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-45 106 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-46 107 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-47 108 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 FLOES 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-48 109 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-49 110 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-50 111 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-51 112 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-52 113 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-53 114 ================================================================================ 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 . . . . . . . . . . . . . . . . . . . 16 Common Stock Price Ranges and Dividends . . . . . 19 Dividend Policy . . . . . . . . . . . . . . . . . 19 Use of Proceeds . . . . . . . . . . . . . . . . . 20 Dilution . . . . . . . . . . . . . . . . . . . . 21 Capitalization . . . . . . . . . . . . . . . . . 22 Selected Historical Consolidated and Combined Financial Information . . . . . . . . . . . . . 23 Management's Discussion and Analysis of Financial Condition and Results of Operations . 24 Business . . . . . . . . . . . . . . . . . . . . 29 Management . . . . . . . . . . . . . . . . . . . 41 Certain Relationships and Related Transactions . 45 Principal Stockholders . . . . . . . . . . . . . 49 Description of Securities . . . . . . . . . . . . 50 Shares Eligible for Future Sale . . . . . . . . . 55 Underwriting . . . . . . . . . . . . . . . . . . 56 Legal Matters . . . . . . . . . . . . . . . . . . 59 Experts . . . . . . . . . . . . . . . . . . . . . 59 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 -------------------- ================================================================================ 115 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 . . . . . . . . . . . . . . . . . . . 15,000.00 Transfer agent and registrar fees . . . . . . . . . . . . . . . . . . . 5,000.00 Printing and engraving expenses . . . . . . . . . . . . . . . . . . . . 50,000.00 Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . 85,000.00 Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . 15,000.00 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,161.17 ---------------- TOTAL $ 387,250.00 ================
II-1 116 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 $625,000.00. 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) $25,000.00 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 $25,000.00) as additional compensation for investment banking services and three percent of the offering proceeds (or $18,750.00) for non-accountable expenses. II-2 117 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 representations made by each purchaser. b. PRIVATE OFFERING COMPLETED ON MARCH 15, 1996. On March 15, 1996, the Company concluded the private sale of 233,334 shares of Common Stock at a purchase price of $2.25 per share for total gross proceeds of $525,000. Information concerning the sale of such securities is as follows:
No. of Shares Date of Sale Purchaser Consideration ------ ------------ --------- ------------- 37,778 March 15, 1996 The Brian Schlinger Trust $85,000 11,667 March 15, 1996 The Evert I. Schlinger, 26,250 Jr. Trust 23,334 March 15, 1996 Warren G. Schlinger 52,500 11,667 March 15, 1996 James C. Hays, M.D. 26,250 23,334 March 15, 1996 Stephen F. Chadwick 52,500 11,667 March 15, 1996 Dexter H. Housley 26,250 23,334 March 15, 1996 Forrest Johnson 52,500 11,667 March 15, 1996 Mark Mazanski 26,250 23,334 March 15, 1996 Christopher C. Jones 52,500 11,667 March 15, 1996 Larry W. Gonser 26,250 23,334 March 15, 1996 Kenneth A. Owen 52,500 11,667 March 15, 1996 Robert G. Farris 26,250 8,889 March 15, 1996 Franklin Gornick 20,000 -------- --------- 233,334 $ 525,000 ======== =========
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. II-3 118 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 Act for an exemption from the registration requirements of the Act. The purchaser signed a subscription agreement, which included certain representations made by such purchaser. The purchaser was not affiliated with the Company. 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 relied upon the exemption from registration provided in Section 4(2) of the Act 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. The shares of Common Stock were issued to Mr. Brister based on certain investment representations by Mr. Brister including that he (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, (iv) is an "accredited investor" as defined in Rule 501(a) of Regulation D promulgated under the Securities Act, and (v) is acquiring the shares of Common Stock of the Company for his own account, for investment purposes and 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 relied upon the exemption from registration provided in Section 4(2) of the Act 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 USA Shareholders had access to information concerning the Company, its financial condition, assets, management and proposed activities. The shares of Common Stock were issued to the USA Shareholders based on certain investment representations by the USA shareholders, including 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 II-4 119 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. Each USA Shareholder represented to the Company that they (i) have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of their investment in the Company's shares of Common Stock and have the financial ability to assume the monetary risks associated therewith, (ii) are able to bear the complete loss of their investment in the shares of Common Stock of the Company, and (iii) are 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 shares of 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 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. Mr. Schlinger has represented to the Company that he is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D. The Company relied upon the exemption from registration provided in Section 4(2) of the Act 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. The shares of Common Stock were issued to the Foundation based on certain investment representations by the Foundation, including representations 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) was a sophisticated and knowledgeable investor in the type of securities acquired from the Company. The Company has impressed the stock certificates representing the shares of Common Stock with a restrictive legend. 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 967,545 restricted shares of Common Stock to HFG for $1,451 cash. 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 relied upon the exemption from registration provided in Section 4(2) of the Securities Act 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 (i) 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, (ii) Mr. Little and HFG had the ability to bear economically a total loss of their investment in the Company, and (iii) Mr. Little and HFG were sophisticated and knowledgeable investors in the type of securities acquired from 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. II-5 120 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 relied upon the exemption from registration provided in Section 4(2) of the Securities Act 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 (i) the Company's securities were acquired by HFG for its own account, for investment purposes only and not with a view towards distribution thereof, (ii) HFG had the ability to bear economically a total loss of its investment in the Company, and (iii) was a sophisticated and knowledgeable investor in the type of securities acquired from 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. 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 relied upon the exemption from registration provided in Section 4(2) of the Securities Act 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 (i) 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, (ii) Mr. Graybill had the ability to bear economically a total loss of his investment in the Company, and (iii) was a sophisticated and knowledgeable investor in the type of securities acquired from the Company. The Company has impressed the stock certificates representing the shares of Common Stock issued to Mr. Graybill with a restrictive legend. II-6 121 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 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.
II-7 122
Exhibit Number Description of Exhibit ------ ----------------------------------------------------------------- 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** $1,000,000.00 Subordinated Promissory Note, dated March 15, 1996, payable to Charles Brister, executed by Brister's Thunder Karts, Inc., as maker. 10.6** $200,000 Promissory Note, dated April 1, 1996, payable to Charles Brister, executed by the Company, as maker. 10.7** Commercial Security Agreement, by and among Charles Brister, as secured party, Brister's Thunder Karts, Inc., as borrower, and Robert W. Bell and Gary C. Evans, as pledgors. 10.8** $2,000,000.00 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. 10.19* $300,000.00 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 $300,000.00 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 $300,000.00 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 $300,000.00 Universal Note referenced as Exhibit 10.19.
II-8 123
Exhibit Number Description of Exhibit ------ ----------------------------------------------------------------- 10.23* $500,000 Loan Agreement, dated October 1, 1996, by and between USA Industries, Inc., as debtor, and Deposit Guaranty National Bank of Louisiana, as secured party, relating to the $500,000.00 Universal Note referenced as Exhibit 10.24. 10.24* $500,000.00 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 $500,000.00 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. 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. 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, II-9 124 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-10 125 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. 1 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 27th day of May, 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, May 27, 1997 -------------------------------------- Chairman of the Board of Directors V. Lynn Graybill /s/ Timothy P. Halter* Vice President, Secretary and May 27, 1997 -------------------------------------- Director Timothy P. Halter /s/ John V. Callegari, Jr.* Vice President, Administration and May 27, 1997 -------------------------------------- Chief Financial Officer John V. Callegari, Jr. /s/ Charles Brister* Director May 27, 1997 -------------------------------------- Charles Brister /s/ Joseph R. Mannes* Director May 27, 1997 -------------------------------------- Joseph R. Mannes /s/ Ronald C. Morgan* Director May 27, 1997 -------------------------------------- Ronald C. Morgan /s/ Robert W. Bell* Director May 27, 1997 -------------------------------------- Robert W. Bell /s/ Gary C. Evans* Director May 27, 1997 -------------------------------------- Gary C. Evans *By: /s/ V. Lynn Graybill ---------------------------------- V. Lynn Graybill, Attorney-in-fact
II-11 126 INDEX TO 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 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.
127 INDEX TO EXHIBITS
Exhibit Number Description of Exhibit ------ ----------------------------------------------------------------- 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** $1,000,000.00 Subordinated Promissory Note, dated March 15, 1996, payable to Charles Brister, executed by Brister's Thunder Karts, Inc., as maker. 10.6** $200,000 Promissory Note, dated April 1, 1996, payable to Charles Brister, executed by the Company, as maker. 10.7** Commercial Security Agreement, by and among Charles Brister, as secured party, Brister's Thunder Karts, Inc., as borrower, and Robert W. Bell and Gary C. Evans, as pledgors. 10.8** $2,000,000.00 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. 10.19* $300,000.00 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 $300,000.00 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 $300,000.00 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 $300,000.00 Universal Note referenced as Exhibit 10.19.
128 INDEX TO EXHIBITS
Exhibit Number Description of Exhibit ------ ----------------------------------------------------------------- 10.23* $500,000 Loan Agreement, dated October 1, 1996, by and between USA Industries, Inc., as debtor, and Deposit Guaranty National Bank of Louisiana, as secured party, relating to the $500,000.00 Universal Note referenced as Exhibit 10.24. 10.24* $500,000.00 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 $500,000.00 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. 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. EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 1,400,000 Shares of Common Stock and 1,400,000 Redeemable Common Stock Purchase Warrants of KARTS INTERNATIONAL INCORPORATED UNDERWRITING AGREEMENT Atlanta, Georgia May ___, 1997 ARGENT SECURITIES, INC. 3340 Peachtree Road, N.E. Suite 450 Atlanta, Georgia 30326 Gentlemen: Karts International Incorporated, a Nevada corporation (the "Company"), confirms its agreement with Argent Securities, Inc. ("Argent"), and each of the other underwriters named in Schedule I hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 11), for whom Argent is acting as representative (in such capacity, Argent shall hereinafter be referred to as the "Representative"), with respect to the sale by the Company, and the purchase by the Underwriters, acting severally and not jointly, of One Million Four Hundred Thousand (1,400,000) shares (the "Shares") of the Company's common stock, par value $.001 per share (the "Common Stock"), and One Million Four Hundred Thousand (1,400,000) Redeemable Common Stock Purchase Warrants (the "Redeemable Warrants") ("Firm Securities"), each of the Redeemable Warrants entitles the holder thereof to purchase one share of Common Stock at an exercise price of $______ per share pursuant to a warrant agreement (the "Warrant Agreement") between the Company and the warrant agent, set forth in Schedule II, and with respect to the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 210,000 additional Shares and 210,000 Redeemable Warrants (the "Additional Securities") for the purpose of covering over-allotments, if any. The aforesaid Firm Securities together with all or any part of the Additional Securities are hereinafter collectively referred to as the "Securities." The Company also proposes to issue and sell to the Underwriters for an approximate price of $140 ($0.001 per warrant), non-callable warrants entitling the Underwriters' to purchase from the Company an Underwriters' Page 1 2 Warrant (the "Underwriters' Warrant") for the purchase of an aggregate of 140,000 Shares (the "Underwriters' Shares") and 140,000 Redeemable Common Stock Purchase Warrants (the "Underwriters' Warrants"). The shares of Common Stock issuable upon exercise of the Redeemable Warrants and the Underwriters' Warrants are hereinafter sometimes referred to as the "Warrant Shares." The Shares, the Redeemable Warrants, the Common Stock and Underwriters' Shares, Underwriters' Warrants, and the Warrant Shares are more fully described in the Registration Statement (as defined in Subsection 1(a) hereof) and the Prospectus (as defined in Subsection 1(a) hereof) referred to below. Unless the context otherwise requires, all references to the "Company" shall include all subsidiaries (as defined in Subsection 2(c) hereof) referred to below and identified in the Prospectus, as if separately stated herein. All representations, warranties and opinions of counsel shall cover such subsidiaries. 1. Representations and Warranties of the Company. The Company represents and warrants to and agrees with each of the Underwriters as of the date hereof, and as of the Closing Date and any Option Closing Date, (as defined in Subsection 2 (c) hereof), if any, as follows: (a) The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement, and an amendment or amendments thereto, on Form SB-2 (File No. 333-24145) under the Act (the "Registration Statement"), including a prospectus subject to completion relating to the Shares and Redeemable Warrants which registration statement and any amendment or amendments have been prepared by the Company in material compliance with the requirements of the Act and the rules and regulations of the Commission under the Act. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective, or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. If an abbreviated registration statement is prepared and filed with the Commission in accordance with Rule 462(b) under the Act (an "Abbreviated Registration Statement"), the term "Registration Statement" as used in this Agreement includes the Abbreviated Registration Statement. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). The term "Preliminary Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration Page 2 3 statement at the time of the initial filing of the registration statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. (b) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus, the Registration Statement or Prospectus or any part thereof and no proceedings for a stop order have been instituted or are pending or, to the best knowledge of the Company, threatened. Each of the Preliminary Prospectus, the Registration Statement and Prospectus at the time of filing thereof conformed in all material respects with the requirements of the Act and the Rules and Regulations, and neither the Preliminary Prospectus, the Registration Statement or Prospectus at the time of filing thereof contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein and necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of the Underwriters expressly for use in such Preliminary Prospectus, Registration Statement or Prospectus. (c) When the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Date and each Option Closing Date and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, the Registration Statement and the Prospectus will contain all material statements which are required to be stated therein in material compliance with the Act and the Rules and Regulations, and will in all material respects conform to the requirements of the Act and the Rules and Regulations; neither the Registration Statement, nor any amendment thereto, at the time the Registration Statement or such amendment is declared effective under the Act, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus at the time the Registration Statement becomes effective, at the Closing Date and at any Option Closing Date, will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in conformity with information supplied to the Company in writing by or on behalf of the Underwriters expressly for use in the Registration Statement or Prospectus or any amendment thereof or supplement thereto. (d) The Company has been duly organized and is now, and at the Closing Date and any Option Closing Date will be, validly existing as a corporation in good standing under the laws of the State of Nevada. Other than the Company's Subsidiaries (as defined in Section (e)), the Company does not own, directly or indirectly, an interest in any corporation, partnership, trust, joint venture or other business entity; provided, that the foregoing shall not be applicable to the investment of the net proceeds from the sale of the Securities in short-term, low-risk investments as set forth under "Use of Proceeds" in the Prospectus. The Company is duly qualified and licensed Page 3 4 and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of its properties or the character of its operations require such qualification or licensing, except where the failure to so register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company and the subsidiaries taken as a whole (a "Material Adverse Effect"). The Company has all requisite power and authority (corporate and other), and has obtained any and all necessary material applications, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; the Company is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all material federal, state, local and foreign laws, rules and regulations; and the Company has not received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, would have a Material Adverse Effect. The disclosures in the Registration Statement concerning the effects of federal, state, local, and foreign laws, rules and regulations on the Company's business as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. (e) The Company's subsidiaries (collectively, the "Subsidiaries") include Brister's Thunder Karts, Inc. and USA Industries, Inc. Each Subsidiary is a corporation duly organized, validly existing and in good standing in the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not, singly or in the aggregate, have a Material Adverse Effect; all of the outstanding shares of capital stock of each of the Subsidiaries, have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest, equity or other encumbrance. (f) The Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus under "Capitalization" and will have the adjusted capitalization set forth therein on the Closing Date and the Option Closing Date, if any, based upon the assumptions set forth therein, and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for the Company to issue any capital stock, rights, warrants, options or other securities, except for this Agreement and as otherwise described in the Prospectus. The Securities, the Additional Securities, Underwriters Shares, the Underwriter's Warrants, and the Warrant Shares and all other securities issued or issuable by the Company conform or, when issued and paid for, will conform in all material respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly Page 4 5 authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company, or similar contractual rights granted by the Company. The Securities, the Additional Securities, the Underwriters' Shares, and the Underwriter's Warrants to be issued and sold by the Company hereunder, and the Warrant Shares issuable upon exercise of the Redeemable Warrants and the Underwriter's Warrants and payment therefor, are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof and thereof, will be validly issued, fully paid and non-assessable and will conform in all material respects to the descriptions thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities, the Additional Securities, the Underwriters' Shares, and the Underwriter's Warrants, and the Warrant Shares has been duly and validly taken; and the certificates representing the Securities, the Underwriter's Warrants, and the Warrant Shares will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Securities to be sold by the Company hereunder, the Underwriters will acquire good and marketable title to such Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever. (g) The financial statements of the Company, together with the related notes and schedules thereto, included in the Registration Statement, the Preliminary Prospectus and the Prospectus fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and such financial statements have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved. There has been no material adverse change or development involving a prospective change in the condition, financial or otherwise, or in the earnings, business affairs, position, prospects, value, operation, properties, business, or results of operation of the Company, whether or not arising in the ordinary course of business, since the dates of the financial statements included in the Registration Statement and the Prospectus and the outstanding debt, the property, both tangible and intangible, and the business of the Company, conforms in all material respects to the descriptions thereof contained in the Registration Statement and in the Prospectus. (h) S. W. Hatfield + Associates, whose report is filed with the Commission as a part of the Registration Statement, is an independent certified public accountant as required by the Act. (i) The Company (i) has paid all federal, state, local, and foreign taxes for which it is liable, including, but not limited to, withholding taxes and taxes payable under Chapters 21 through 24 of the Internal Revenue Code of 1986 (the "Code"), (ii) has furnished all tax and information returns it is required to furnish pursuant to the Code, and has established adequate reserves for such taxes which are not due and payable, and (iii) does not have knowledge of any tax Page 5 6 deficiency or claims outstanding, proposed or assessed against it (other than certain state or local tax returns, as to which the failure to file, singly or in the aggregate, would not have a Material Adverse Effect.) (j) The Company maintains insurance, which is in full force and effect, of the types and in the amounts which it reasonably believes to be necessary for its business, including, but not limited to, personal and product liability insurance covering all personal and real property owned or leased by the Company against fire, theft, damage and all risks customarily insured against. (k) There is no action, suit, proceeding, inquiry, investigation, litigation or governmental proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending (to the knowledge of the Company) or threatened against (or circumstances known to the Company that may give rise to the same), or involving the properties or business of the Company which: (i) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all respects); or (ii) singly or in the aggregate would have a Material Adverse Effect. (l) The Company has full legal right, power and authority to enter into this Agreement, the Underwriters' Warrant and the Warrant Agreement and to consummate the transactions provided for in such agreements; and this Agreement, the Underwriters' Warrant and the Warrant Agreement have each been duly and properly authorized, executed and delivered by the Company. Each of this Agreement, the Underwriters' Warrant and the Warrant Agreement, constitutes a legal, valid and binding agreement of the Company, subject to due authorization, execution and delivery by the Representative and/or the Underwriters, enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law). Neither the Company's execution or delivery of this Agreement, the Underwriters' Warrant, and the Warrant Agreement, its performance hereunder and thereunder, its consummation of the transactions contemplated herein and therein, nor the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest defect or other restriction or equity of any kind whatsoever upon any property or assets (tangible or intangible) of the Company pursuant to the terms of: (i) the Articles of Incorporation or By-Laws of the Company; (ii) any material license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which the Company is bound or to which any of its properties or assets (tangible or intangible) is or may be subject, other than conflicts that, singly or in the aggregate, will not have a Material Page 6 7 Adverse Effect; or (iii) any statute, judgment, decree, order, rule or regulation applicable to the Company of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its activities or properties. (m) No consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance of the Securities pursuant to the Prospectus and the Registration Statement, the performance of this Agreement and the transactions contemplated hereby, except such as have been or may be obtained under the Act or may be required under state securities or Blue Sky laws in connection with (i) the Underwriters' purchase and distribution of the Securities to be sold by the Company hereunder; or (ii) the issuance and delivery of the Underwriters' Warrant, the Underwriters' Shares, the Underwriter's Warrants, the Redeemable Warrants or the Warrant Shares. (n) All executed agreements or copies of executed agreements filed as exhibits to the Registration Statement to which the Company is a party or by which the Company may be bound or to which any of its assets, properties or businesses may be subject have been duly and validly authorized, executed and delivered by the Company, and constitute the legal, valid and binding agreements of the Company, enforceable against it in accordance with its respective terms. The descriptions contained in the Registration Statement of contracts and other documents are accurate in all material respects and fairly present the information required to be shown with respect thereto by the Act and the Rules and Regulations and there are no material contracts or other documents which are required by the Act or the Rules and Regulations to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (o) Subsequent to the respective dates as of which information is set forth in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has not: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money in any material amount; (ii) entered into any transaction other than in the ordinary course of business; (iii) declared or paid any dividend or made any other distribution on or in respect of its capital stock; or (iv) made any changes in capital stock, material changes in debt (long or short term) or liabilities other than in the ordinary course of business, material changes in or affecting the general affairs, management, financial operations, stockholders equity or results of operations of the Company. (p) Subsequent to the respective dates as of which information is set forth in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, no default exists in the due performance and observance of any material term, covenant or condition of any license, contract, indenture, mortgage, installment sales agreement, Page 7 8 lease, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the property or assets (tangible or intangible) of the Company is subject or affected. (q) To the best knowledge of the Company, the Company has generally enjoyed a satisfactory employer-employee relationship with its employees and is in compliance in all material respects with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. (r) To the best knowledge of the Company, since its inception, the Company has not incurred any liability arising under or as a result of the application of the provisions of the Act. (s) Subsequent to the respective dates as of which information is set forth in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company does not presently maintain, sponsor or contribute to, and never has maintained, sponsored or contributed to, any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan" or a "multi-employer plan" as such terms are defined in Sections 3(2), 3(l) and 3(37) respectively of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA. (t) The Company is not in violation in any material respect of any domestic or foreign laws, ordinances or governmental rules or regulations to which it is subject, except to the extent that any such violation would not, singly or in the aggregate, have a Material Adverse Effect. (u) No holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company exercisable for or convertible or exchangeable for securities of the Company have the right to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company within twelve (12) months of the date hereof or to require the Company to file a registration statement under the Act during such twelve (12) month period, except such registration rights as have been waived or disclosed in the Prospectus. (v) Neither the Company, nor, to the Company's best knowledge, any of its employees, directors, principal stockholders or affiliates (within the meaning of the Rules and Regulations) has taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or otherwise. Page 8 9 (w) Except as described in the Prospectus, to the best of the Company's knowledge, none of the patents, patent applications, trademarks, service marks, trade names and copyrights, or licenses and rights to the foregoing presently owned or held by the Company is in dispute or are in any conflict with the right of any other person or entity within the Company's current area of operations nor has the Company received notice of any of the foregoing. To the best of the Company's knowledge, the Company: (i) owns or has the right to use, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, all patents, trademarks, service marks, trade names and copyrights, technology and licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing; and (ii) except as set forth in the Prospectus, is not obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, trademark, service mark, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. (x) Except as described in the Prospectus, to the best of the Company's knowledge, the Company owns and has the unrestricted right to use all material trade secrets, trademarks, trade names, know-how (including all other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, designs, processes, works of authorship, computer programs and technical data and information (collectively herein "Intellectual Property") required for or incident to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company, free and clear of and without violating any right, lien, or claim of others, including without limitation, former employers of its employees; provided, however, that the possibility exists that other persons or entities, completely independently of the Company, or employees or agents, could have developed trade secrets or items of technical information similar or identical to those of the Company. (y) The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property owned or leased by it free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes or assessments not yet due and payable. (z) The Company has obtained such duly executed legally binding and enforceable agreements as required by the Representative pursuant to which the Company's President and certain Directors and affiliates described in the Prospectus, have agreed not to, directly or indirectly, offer to sell, sell, grant any option for the sale of, assign, transfer, pledge, hypothecate or otherwise encumber any of their shares of Common Stock or other securities of the Company (either pursuant to Rule 144 of the Rules and Regulations or otherwise) or dispose of any beneficial Page 9 10 interest therein for certain periods of up to __ months subject to earlier release upon the Company's achievement of certain performance thresholds, following the effective date of the Registration Statement without the prior written consent of the Representative. The Company will cause the Transfer Agent, as defined below, to mark an appropriate legend on the face of stock certificates representing all of such shares of Common Stock and other securities of the Company. (aa) Except as disclosed in the Prospectus, the Company has not incurred any liability and there are no arrangements or understandings for services in the nature of a finder's or origination fee with respect to the sale of the Securities or any other arrangements, agreements, understandings, payments or issuances with respect to the Company or any of its officers, directors, employees or affiliates that may adversely affect the Underwriters' compensation, as determined by the NASD. (bb) The Securities have been approved for quotation on the Nasdaq SmallCap Market of the Nasdaq Stock Market, Inc., subject to official notice of issuance. (cc) Neither the Company nor to the Company's best knowledge any of its respective officers, employees, agents or any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency (domestic or foreign) or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist the Company in connection with any actual or proposed transaction) which: (a) might subject the Company, or any other such person to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign); (b) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company; or (c) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company's internal accounting controls are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act 1977, as amended. (dd) Except as set forth in the Prospectus, and to the best knowledge of the Company, no officer, director or principal stockholder of the Company, or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Rules and Regulations) of any such person or entity or the Company, has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, except with respect to the beneficial ownership of not more than 1% of the outstanding shares of capital stock of any publicly-held entity; or (ii) a beneficial interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Relationships and Related Page 10 11 Transactions," there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, and any officer, director, or principal stockholder of the Company, or any affiliate or associate of any such person or entity, which is required to be disclosed pursuant to Rule 404 of Regulation S-B. (ee) Any certificate signed by any officer of the Company and delivered to the Underwriters or to the Underwriters' Counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. (ff) The Company has entered into an employment agreement with V. Lynn Graybill as described in the Prospectus. Unless waived by the Representative, the Company shall use its reasonable efforts at reasonable cost to obtain a key-man life insurance policy in the amount of not less than $1,000,000 on the life of Mr. Graybill, which policy shall be owned by the Company and shall name the Company as the sole beneficiary thereunder. (gg) No securities of the Company have been sold by the Company since its date of incorporation, except as disclosed in Part II of the Registration Statement. (hh) The minute books of the Company have been made available to Underwriter's Counsel and contain a complete summary of all meetings and actions of the Board of Directors and Shareholders of the Company since the date of its incorporation. 2. Purchase, Sale and Delivery of the Securities, Additional Securities and Agreement to Issue Underwriters' Warrant. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter, severally and not jointly, agree to purchase from the Company at the price per share and the price per warrant set forth below, that proportion of the number of Common Stock and Redeemable Warrants set forth in Schedule I opposite the name of such Underwriter that such number of Common Stock and Redeemable Warrants bears to the total number of shares of Common Stock and Redeemable Warrants, respectively, subject to such adjustment as the Underwriters in their discretion shall make to eliminate any sales or purchases of fractional Securities, plus any additional numbers of Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) In addition, on the basis of the representations, warranties, covenants and agreements, herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional 210,000 Shares from the Company and 210,000 Redeemable Warrants at the prices set forth below. The option granted hereby will expire 45 days after the date of this Agreement, and may be Page 11 12 exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Additional Securities upon notice by the Representative to the Company setting forth the number of Additional Securities as to which the Underwriters are then exercising the option and the time and date of payment and delivery for such Additional Securities. Any such time and date of delivery shall be determined by the Underwriters, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Date, as defined in paragraph (c) below, unless otherwise agreed to between the Representative and the Company. In the event such option is exercised, each of the Underwriters, acting severally and not jointly, shall purchase such number of Option Securities then being purchased which shall have been allocated to such Underwriter by the Representative, and which such Underwriter shall have agreed to purchase, subject in each case to such adjustments as the Underwriters in their discretion shall make to eliminate any sales or purchases of fractional Securities. Nothing herein contained shall obligate the Underwriters to make any over-allotments. No Additional Securities shall be delivered unless the Firm Securities shall be simultaneously delivered or shall theretofore have been delivered as herein provided. (c) Payment of the purchase price for, and delivery of certificates for, the Firm Securities shall be made at the offices of counsel to the Representative in Atlanta, Georgia, or at such other place as shall be agreed upon by the Underwriters and the Company. Such delivery and payment shall be made at 10:00 a.m. (New York City time) on ___________, 1997 or at such other time and date as shall be designated by the Representative but not less than three (3) nor more than five (5) business days after the effective date of the Registration Statement (such time and date of payment and delivery being hereafter called "Closing Date"). In addition, in the event that any or all of the Additional Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for such Additional Securities shall be made at the above-mentioned office or at such other place and at such time (such time and date of payment and delivery being hereinafter called "Option Closing Date") as shall be agreed upon by the Representative and the Company on each Option Closing Date as specified in the notice from the Representative to the Company. Delivery of the certificates for the Additional Securities and the Additional Securities, if any, shall be made to the Underwriters against payment by the Underwriters of the purchase price for the Securities and the Option Securities, if any, to the order of the Company as the case may be by certified check in New York Clearing House funds or, at the election of the Representative, all or a portion of the funds may be paid by Bank wire transfer of funds or by Representative's commercial check. Certificates for the Firm Securities and the Additional Securities, if any, shall be in definitive, fully registered form, shall bear no restrictive legends and shall be in such denominations and registered in such names as the Underwriters may request in writing at least two (2) business days prior to Closing Date or the relevant Option Closing Date, as the case may be. The certificates or the Depository Trust Corporation electronic notifications, as the case may be, for the Securities and the Additional Securities, if any, shall be made available to the Underwriters at the above-mentioned office or such other place as the Underwriters may designate for inspection, checking and packaging no later than 9:30 a.m. on the last business day prior to Closing Date or the relevant Option Closing Date, as the case may be. Page 12 13 The purchase price of the Common Stock and Redeemable Warrants to be paid by each of the Underwriters, severally and not jointly, to the Company for the Securities purchased under Clauses (a) and (b) above will be $______ per Share and $______ per Redeemable Warrant (which price is net of the Underwriters' discount and commissions). The Company shall not be obligated to sell any Securities hereunder unless all Securities to be sold by the Company are purchased hereunder. The Company agrees to issue and sell 1,400,000 shares of the Common Stock and the Company agrees to issue and sell 1,400,000 Redeemable Warrants to the Underwriters in accordance herewith. (d) On the Closing Date, the Company shall issue and sell to the Underwriters the Underwriters' Warrant at a purchase price of $140.00, which purchase option shall entitle the holders thereof to purchase an aggregate of 140,000 Shares and 140,000 Warrants. The Underwriters' Purchase Option shall be exercisable for a period of four (4) years commencing one (1) year from the closing date of the Registration Statement at an initial exercise price equal to one hundred twenty percent (145%) of the initial public offering price of the Shares and Redeemable Warrants. The Underwriter's Purchase Option Agreement and form of Purchase Option Certificate shall be substantially in the form filed as an Exhibit to the Registration Statement. Payment for the Underwriters' Warrant shall be made on Closing Date. The Company has reserved and shall continue to reserve a sufficient number of Shares for issuance upon exercise of the Underwriters' Warrant. 3. Public Offering of the Securities. As soon after the Registration Statement becomes effective and as the Representative deems advisable, but in no event more than three (3) business days after such effective date, the Underwriters shall make a public offering of the securities (other than to residents of or in any jurisdiction in which qualification of the Securities is required and has not become effective) at the price and upon the other terms set forth in the Prospectus. The Underwriters may allow such concessions and discounts upon sales to other dealers as set forth in the Prospectus. 4. Covenants of the Company. The Company covenants and agrees with each of the Underwriters as follows: (a) The Company shall use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as practicable and will not at any time, whether before or after the effective date of the Registration Statement, file any amendment to the Registration Statement or supplement to the Prospectus or file any document under the Exchange Act (i) before termination of the offering of the Securities by the Underwriters, which the Underwriters shall not previously have been advised and furnished with a copy, or (ii) to which the Underwriters shall have objected or (iii) which is not in compliance with the Act, the Exchange Act or the Rules and Regulations. Page 13 14 (b) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Underwriters and confirm by notice in writing: (i) when the Registration Statement, as amended, becomes effective, if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A and when any post-effective amendment to the Registration Statement becomes effective; (ii) of the issuance by the commission of any stop order or of the initiation, or the threatening of any proceeding, suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of the Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or the institution or proceeding for that purpose; (iii) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (iv) of the receipt of any comments from the Commission; and (v) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. If the Commission or any state securities commission or regulatory authority shall enter a stop order or suspend such qualification at any time, the Company will make every effort to obtain promptly the lifting of such order. (c) The Company shall file the Prospectus (in form and substance satisfactory to the Underwriters) or transmit the Prospectus by a means reasonably calculated to result in filing with the Commission pursuant to Rule 424(b)(1) (or, if applicable and if consented to by the Underwriters pursuant to Rule 424(b)(4)) not later than the Commission's close of business on the earlier of (i) the second business day following the execution and delivery of this Agreement and (ii) the fifth business day after the effective date of the Registration Statement. (d) The Company will give the Underwriters notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Securities which differs from the corresponding prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Rules and Regulations), will furnish the Underwriters with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such prospectus to which the Underwriters or Johnson & Montgomery ("Underwriters' Counsel") shall reasonably object. (e) The Company shall cooperate in good faith with the Underwriters, and Underwriters' Counsel, at or prior to the time the Registration Statement becomes effective, in endeavoring to qualify the Securities for offering and sale under the securities laws of such jurisdictions as the Underwriters may reasonably designate, and shall cooperate with the Underwriters and Underwriters' Counsel in the making of such applications, and filing such documents and shall furnish such information as may be required for such purpose; provided, however, the Company shall not be required to: (i) qualify as a foreign corporation or file a general Page 14 15 consent to service of process in any such jurisdiction; or (ii) qualify or "blue sky" in any state which requires a lock-up of inside securities for a period greater than five (5) years (or such earlier date if the Representative has exercised the Underwriters' Warrant). In each jurisdiction where such qualification shall be effected, the Company will, unless the Underwriters agree that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction to continue such qualification. (f) During the time when the Prospectus is required to be delivered under the Act, the Company shall use all reasonable efforts to comply with all requirements imposed upon it by the Act and the Exchange Act, as now and hereafter amended and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and the Prospectus, or any amendments or supplements thereto. If at any time when the Prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Underwriters promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act, each such amendment or supplement to be reasonably satisfactory to Underwriters' Counsel, and the Company will furnish to the Underwriters a reasonable number of copies of such amendment or supplement. (g) As soon as practicable, but in any event not later than 45 days after the end of the 12-month period commencing on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statement occurs (90 days in the event that the end of such fiscal quarter is the end of the Company's fiscal year), the Company shall make generally available to its security holders, in the manner specified in Rule 158(b) of the Rules and Regulations, and to the Underwriters, an earnings statement which will be in such form and detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement need not be audited unless required by the Act, covering a period of at least 12 consecutive months after the effective date of the Registration Statement. (h) During a period of five (5) years after the date hereof and provided that the Company is required to file reports with the Commission under Section 12 of the Exchange Act, the Company will provide the Representative's director Designee or Attendee, as defined herein, copies of the below described documents prior to release where applicable and will furnish to its stockholders and to the Underwriter as soon as practicable, annual reports (including financial statements audited by independent public accountants): Page 15 16 (i) as soon as they are available, copies of all reports (financial or other) mailed to stockholders; (ii) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; (iii) every press release and every material news item or article of interest to the financial community in respect of the Company and any future subsidiaries or their affairs which was released or prepared by the Company; (iv) any additional information of a public nature concerning the Company and any future subsidiaries or their respective businesses which the Underwriters may reasonably request; (v) a copy of any Schedule 13D, 13G, 14D-1, 13E-3 or 13E-4 received or filed by the Company from time to time; (vi) such other information as may be requested with reference to the property, business, stockholders and affairs of the Company and its subsidiaries. During such five-year period, if the Company has active subsidiaries, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (i) For as long as the Company is required to file reports with the Commission under Section 12 of the Exchange Act, the Company will maintain a Transfer Agent and a Warrant Agent, which may be the same entity, and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer and Warrant Agent) for its Common Stock and Redeemable Warrants. (j) The Company will furnish to the Underwriters or pursuant to the Underwriters' direction, without charge, at such place as the Underwriters may designate, copies of each Preliminary Prospectus, the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Underwriters may reasonably request. (k) Neither the Company, nor its officers or directors, nor affiliates of any of them (within the meaning of the Rules and Regulations) will take, directly or indirectly, any action Page 16 17 designed to, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company. (1) The Company shall apply the net proceeds from the sale of the Securities in substantially the manner, and subject to the provisions, set forth under "Use of Proceeds" in the Prospectus. Except for the redemption of the Company's outstanding Convertible Preferred Stock as disclosed in the Prospectus, no portion of the net proceeds will be used directly or indirectly to acquire any securities issued by the Company. (m) The Company shall timely file all such reports, forms or other documents as may be required (including but not limited to a Form SR as may be required pursuant to Rule 463 under the Act) from time to time, under the Act, the Exchange Act, and the Rules and Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Rules and Regulations. (n) The Company shall furnish to the Underwriters as early as practicable prior to each of the date hereof, the Closing Date and each Option Closing Date, if any, but no later than two (2) full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company (which in no event shall be as of a date more than forty-five (45) days prior to the date of the Registration Statement) which have been read by the Company's independent public accountants, as stated in their letters to be furnished pursuant to Section 6(k) hereof. (o) For a period of five (5) years from the Closing Date (or such earlier date if the Representative has exercised the Underwriters' Warrant), the Company shall furnish to the Underwriters at the Company's sole expense, (i) daily consolidated transfer sheets relating to the Securities upon the Representative's reasonable request; (ii) a list of holders of Securities upon the Representative's reasonable request; (iii) a list of, if any, the securities positions of participants in the Depository Trust Company upon the Representative's reasonable request. (p) For a period of five (5) years after the effective date of the Registration Statement (or such earlier date if the Representative has exercised the Underwriters' Warrant), the Company shall use its best efforts to cause two (2) individuals (the "Designees") selected by the Representative to be elected to the Board of Directors of the Company (the "Board"), if requested by the Representative. Alternatively, the Representative shall be entitled to appoint an individual who shall be permitted to attend all meetings of the Board (the "Advisor") and to receive all notices and other correspondence and communications sent by the Company to members of the Board. Upon election to the Board, the Designees shall be entitled to call special meetings of the Board and to serve on the Audit and Compensation Committees. The Designees may be removed by the Board only for "justifiable cause" as that term is defined in the Employment Contract between the Company and V. Lynn Graybill. The Company shall reimburse the Representative's Designees or Advisor for his or her out-of-pocket expenses reasonably incurred and authorized in advance by the Company in connection with his or her attendance of the Board meetings and a fee equal to the Page 17 18 amount paid to the other outside directors of the Company. The Designee or Advisor shall also be entitled to participate in any Stock Option Plans of the Company for non-employees. To the extent permitted by law, the Company agrees to indemnify and hold the Designee (as a director or Advisor) and the Representative harmless against any and all claims, actions, awards and judgements arising out of his or her service as a director or Advisor and in the event the Company maintains a liability insurance policy affording coverage for the action of its officer and directors, to include such Designee and the Representative as an insured under such policy. (q) For a period equal to the lesser of (i) five (5) years from the date hereof, or (ii) the sale to the public of the Warrant Shares, the Company will use its best efforts not to take any action or actions which may prevent or disqualify the Company's use of Forms S-1 or, if applicable, S-2 and S-3 (or other appropriate form) for the registration under the Act of the Warrant Shares. (r) For a period of five (5) years from the date hereof, the Company shall use its best efforts at its cost and expense to maintain the listing of the Securities on the Nasdaq SmallCap Market or NASDAQ National Market System if the Company meets all of the requirements and qualifications promulgated by the NASD. (s) On or before the effective date of the Registration Statement, the Company shall retain or make arrangements to retain a financial public relations firm and a publicist reasonably satisfactory to the Representative which shall be continuously engaged from such engagement date to a date 24 months from the effective date of the Registration Statement. Upon the expiration of such two (2) year period, such engagement shall continue until the expiration of any lock-up period provided for in the Lock-Up Agreement(s) with certain officers and directors of the Company subject to the Company's right to terminate any such firm with the consent of the Underwriter's director Designees. Further, the Company shall engage for a period of two years at least three firms (one of which shall be the Representative and one of which shall be Standard & Poor's Stock Reports Professional Edition) which are reasonably acceptable to the Representative to provide industry research and advice to the Company. Upon the expiration of such two-year period, such engagement shall continue until the expiration of any lock-up period provided hereunder, subject to the Company's right to terminate any such firm with the consent of the Underwriters' director designee. (t) The Company shall (i) file a Form 8-A with the Commission providing for the registration under the Exchange Act of the Securities and (ii) promptly take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and/or Moody's OTC Manual and to continue such inclusion for a period of not less than five (5) years, as soon as practicable, but in no event more than five (5) business days' after the effective date of the Registration Statement. (u) Following the Effective Date of the Registration Statement and for a period of five (5) years thereafter (or such earlier date if the Representative has exercised the Underwriters' Page 18 19 Warrant), the Company shall, at its sole cost and expense, prepare and file such blue sky trading applications with such jurisdictions as the Representative may reasonably request after consultation with the Company, and on the Representative's request, furnish the Underwriters with a secondary trading survey prepared by securities counsel to the Company. (v) The Company shall not amend or alter any term of any written employment agreement nor Lock-Up Agreement between the Company and any executive officer, director or affiliate, during the term thereof, in a manner more favorable to such employee or entity, without the express written consent of the Representative until such time as the Underwriter's Purchase Option has been exercised in full. (w) Until the completion of the distribution of the Securities, the Company shall not, without the prior written consent of the Representative and Underwriters' Counsel, which consent shall not be unreasonably withheld, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in the ordinary course of the Company's business consistent with past practices with respect to the Company's operations. (x) Commencing one (1) year from the date hereof, upon the exercise of any Warrant, the exercise of which was solicited by the Underwriters in accordance with the applicable rules and regulations of the NASD prevailing at the time of such solicitation, the Company shall pay to the soliciting Underwriter a fee of 5% of the aggregate exercise price of such Warrant (the "Warrant Solicitation Fee") within five (5) business days of such exercise, so long as the Underwriters provided bona fide services in exchange for the Warrant Solicitation Fee and the Underwriters have been specifically designated in writing by the holders of the Warrants as the broker. The Company further agrees that it will not solicit the exercise of any Warrant other than through the Underwriters, unless either: (i) the Underwriters cannot legally solicit the exercise of the Warrants at the time of such solicitation; (ii) the Representative declines, in writing, to solicit the exercise of the Warrants within five (5) business days of such a written request by the Company; or (iii) the Representative consents to the solicitation of the exercise of the Warrants by the Company or another entity. (y) The Company will use its best efforts to maintain its registration under the Exchange Act in effect for a period of five (5) years from the Closing Date. (z) For a period of twenty-four (24) months commencing on the Effective Date (or such earlier date if the Representative has exercised the Underwriters' Warrant), except with the written consent of the Underwriters, which consent shall not be unreasonably withheld, the Company will not issue or sell, directly or indirectly, any shares of its capital stock, or sell or grant options, or warrants or rights to purchase any shares of its capital stock, except pursuant to (i) this Agreement, (ii) the Underwriters' Warrants, (iii) warrants and options of the Company heretofore issued and described in the Prospectus, and (iv) the grant of options and the issuance of shares issued Page 19 20 upon exercise of options issued or to be issued under a stock option plan to be adopted in the future by the Company with terms that are reasonable for a public entity the size of the Company which is described in the Prospectus; except that, during such period, the Company may issue up to ______ shares pursuant to certain employee stock options as is described in the Prospectus, and issue securities in connection with an acquisition, merger or similar transaction, provided that such securities are not publicly registered or issued pursuant to Regulation S of the Act, and the acquirer of the securities is not granted registration rights with respect thereto which are effective prior to 24 months after the Effective Date and until the Underwriter's Purchase Option is exercised, the Underwriter grants its consent. Notwithstanding anything to the contrary set forth in the prior sentence, the Company may not issue any class or series of Preferred Stock for a period of 24 months from the Effective Date without the unanimous vote or consent of all members of the Board of Directors of the Company. Prior to the Effective Date, the Company will not issue any options or warrants without the prior written consent of the Underwriters. (aa) The Company will not file any registration statement relating to the offer or sale of any of the Company's securities, including any registration statement on Form S-8, during the 12 months following the Closing Date without the Underwriters' prior written consent. (bb) Subsequent to the dates as of which information is given in the Registration Statement and Prospectus and prior to the Closing Dates, except as disclosed in or contemplated by the Registration Statement and Prospectus, (i) the Company will not have incurred any liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business; (ii) there shall not have been any change in the capital stock, funded debt (other than regular repayments of principal and interest on existing indebtedness) or other securities of the Company, any adverse change in the condition (financial or other), business, operations, income, net worth or properties, including any loss or damage to the properties of the Company (whether or not such loss is insured against), which could adversely affect the condition (financial or other), business, operations, income, net worth or properties of the Company; and (iii) the Company shall not pay or declare any dividend or other distribution on its Common Stock or its other securities or redeem or repurchase any of its Common Stock or other securities. (cc) The Company, for a period of twenty-four (24) months following the Effective Date (or such earlier date if the Representative has exercised the Underwriters' Warrant), shall not redeem any of its securities, and shall not pay any dividends or make any other cash distribution in respect of its securities in excess of the amount of the Company's current or retained earnings derived after the Effective Date without obtaining the Underwriters' prior written consent, which consent shall not be unreasonably withheld. The Underwriters shall either approve or disapprove such contemplated redemption of securities or dividend payment or distribution within five (5) business days from the date the Underwriters receive written notice of the Company's proposal with respect thereto; a failure of the Underwriters to respond within the five (5) business day period shall be deemed approval of the transaction. Page 20 21 (dd) The Company maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences, and (v) all quarterly reports filed on Form 10-Q shall be reviewed by the Company's accountant in accordance with SAS 71. (ee) The Company, for a period of twenty-four (24) months following the Effective Date (or such earlier date if the Representative has exercised the Underwriters' Warrant), shall implement the following procedures: (i) Thirty days prior to fiscal year end, the President will present to the Board of Directors a business plan to be adopted by the Board of Directors at fiscal year end. The business plan will include the following: a) quarterly projections - including balance sheet, profit/loss statement and cash flow statements with underlying assumptions b) upon board approval, this document becomes the annual budget (ii) No later than the 20th day of each month, the Company will provide the Board with comparative financial statements for the previous month showing actual balance sheet, profit/loss and cash flow vs. budget with written explanations for deviation in excess of $50,000 or 10% of line item presented. (iii) Monthly Board meetings (which may be by telephone) by the 25th of each month to include discussion of the Monthly Report and approval of any changes to the business plan based on change of circumstances. (iv) Implementation of a compensation committee, which will be headed by an outside director and include one of the Underwriters' Designee Directors, to make recommendations to the Board for compensation for all outside consultants, officers and outside directors. (v) Implementation of an audit committee which will have as its members one of the Underwriters Designee Directors and one outside Director. Page 21 22 If the Company fails to comply with or breaches any provisions of this Section 4 of this Agreement, the Underwriters may cause the Company to retain one or more consultants, accountants or other professionals to assist the Company in curing the breach or failure and the Company will reimburse such third party directly for costs and expenses incurred. (ff) Financial Advisory Agreement. On the Closing Date, the Company shall execute a Financial Advisory Agreement with you for services, which shall include without limitation (i) advising the Company in connection with possible acquisitions (ii) facilitating shareholder communications and relations, including the preparation of the Company's annual report and (iii) advising and assisting the Company with long-term financial planning, corporate reorganization, expansion and capital structure and other financial matters. Such agreement shall have a term of two years and provide for compensation of $2,000 per month which amount shall be prepaid in full on the Closing Date. The Financial Advisory Agreement shall further provide that during the term of such agreement, in the event that you (i) introduce, negotiate or arrange on the Company's behalf a non-public equity financing or (ii) arrange on the Company's behalf a non-public debt financing or (iii) arrange for the purchase or sale of assets, or for a merger acquisition or joint venture for the Company, then the Company will compensate you (based on the Transaction Value, as defined below) for such services in an amount equal to: 5% on the first $1,000,000 of the Transaction Value; 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; 1% on the amount in excess of $5,000,000. "Transaction Value" shall mean the aggregate value of all cash, securities and other property (i) paid to the Company, its affiliates or their shareholders in connection with any transaction referred to above involving any investment in or acquisition of the Company or any affiliates (or the assets of either), (ii) paid by the Company or any affiliate in any such transaction involving an investment in or acquisition of another party or its equity holdings by the Company or any affiliate, or (iii) paid or contributed by the Company or any affiliate and by the other party or parties in the event of any such transaction involving a merger, consolidation, joint venture or similar joint enterprise or undertaking. The value of any such securities (whether debt or equity) or other property shall be the fair market value thereof as determined by mutual agreement of the Company and the Underwriters or by an independent appraiser jointly selected by the Company and the Underwriters. 5. Payment of Expenses. (a) The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date (to the extent not paid at the Closing Date) all expenses and fees (other than Page 22 23 fees of Underwriters' Counsel, except as provided in (iv) below) incident to the performance of the obligations of the Company under this Agreement, including, without limitation: (i) the fees and expenses of accountants and counsel for the Company; (ii) all costs and expenses incurred in connection with the preparation, duplication, printing, filing, delivery and mailing (including the payment of postage with respect thereto) of the Registration Statement and the Prospectus and any amendments and supplements thereto and the printing, mailing and delivery of this Agreement, the Selected Dealer Agreements, the Agreement Among Underwriters, Underwriters Questionnaires, Powers of Attorney and related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus and any amendments thereof or supplements thereto supplied to the Underwriters in quantities as hereinabove stated; (iii) the printing, engraving, issuance and delivery of the Securities including any transfer or other taxes payable thereon; (iv) disbursements and fees of Underwriters' Counsel in connection with the qualification of the Securities under state or foreign securities or "Blue Sky" laws and determination of the status of such securities under legal investment laws, including the costs of printing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments Survey," if any, which Underwriters' Counsel blue sky fees (exclusive of filing fees and disbursements) shall be $1,000 for each state in which application for registration or qualification is made up to an aggregate of $35,000 for all states combined; (v) fees and expenses of the transfer agent; (vi) the fees payable to the NASD; (vii) the fees and expenses incurred in connection with the listing of the Securities on the Nasdaq SmallCap Market and any other fees for application and admission to a registered Stock Exchange for which the Underwriter requires the Company to register its Securities; (viii) fees and expenses for any tombstone advertisements reasonably requested by the Representative; (ix) Closing Binders; and (x) Lucite cubes containing a miniature definite Prospectus. All fees and expenses payable to the Underwriters shall be payable at the Closing Date or Option Closing Date, as applicable. (b) If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 6, Section 10(a) or Section 12, the Company shall reimburse and indemnify the Underwriters for all of their out-of-pocket expenses reasonably incurred in connection with the transactions contemplated hereby. (c) The Company further agrees that, in addition to the expenses payable pursuant to subsection (a) of this Section 5, it will pay to the Underwriters a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Securities, $__________ of which has been paid to date to the Underwriters. The Company will pay the remainder of the non-accountable expense allowance on the Closing Date by direct payment to third parties for fees and expenses including, but not limited to, fees and expenses of Underwriter's Counsel and the balance by deduction from the proceeds of the offering contemplated herein. In the event the Underwriters elect to exercise the over-allotment option described in Section 2(b) hereof, the Company further agrees to pay to the Underwriters on the Option Closing Date (by deduction from the proceeds of the offering) a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Option Securities. Page 23 24 6. Conditions of the Underwriters' Obligations. The obligations of the Underwriters hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company herein as of the Closing Date and each Option Closing Date, if any, as if they had been made on and as of the Closing Date or each Option Closing Date, as the case may be; the accuracy on and as of the Closing Date or Option Closing Date, if any, of the statements of officers of the Company made pursuant to the provisions hereof; and the performance by the Company on and as of the Closing Date and each Option Closing Date, if any, of each of its covenants and obligations hereunder and to the following further conditions: (a) The Registration Statement shall have become effective not later than 5:00 P.M., New York City time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Underwriters, and, at Closing Date and each Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Underwriter and Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, the price of the Securities and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Underwriters of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. (b) The Underwriters shall not have advised the Company that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Underwriters' opinion, is material or omits to state a fact which, in the Underwriters' opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Underwriters' reasonable opinion, is material, or omits to state a fact which, in the Underwriters' reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) On or prior to the Closing Date and each Option Closing Date, as the case may be, the Underwriters shall have received from Underwriters' Counsel, such opinion or opinions with respect to the organization of the Company the validity of the Securities, the Registration Statement, the Prospectus and other related matters as the Underwriters reasonably may request and such counsel shall have received such papers and information as they request to enable them to pass upon such matters. Page 24 25 (d) At the Closing Date and the Option Closing Date the Underwriters shall have received an opinion of Looper, Reed, Mark & McGraw, counsel to the Company, dated the Closing Date, or Option Closing Date, as the case may be, addressed to the Underwriter and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) The Company: (A) has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Nevada with full corporate power and authority to own and operate its properties and to carry on its business as set forth in the Registration Statement and Prospectus; (B) to the best knowledge of such counsel, the Company is duly registered or qualified as a foreign corporation in all jurisdictions in which by reason of maintaining an office in such jurisdiction or by owning or leasing real property in such jurisdiction it is required to be so registered or qualified except where failure to register or qualify does not have, singly or in the aggregate, a Material Adverse Effect; and (C) to the best knowledge of such counsel, the Company has not received any notice of proceedings relating to the revocation or modification of any such registration or qualification. (ii) The Registration Statement, each Preliminary Prospectus that has been circulated and the Prospectus and any post-effective amendments or supplements thereto (other than the financial statements, schedules and other financial and statistical data included therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and Regulations and the conditions for use of a registration statement on Form SB-2 have been satisfied by the Company. Such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company and representatives of the Underwriters at which the contents of the Registration Statement, the Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, on the basis of the foregoing, no facts have come to the attention of such counsel which lead them to believe that either the Registration Statement or any amendment thereto at the time such Registration Statement or amendment became effective or the Prospectus as of the date thereof contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or to make the statements therein in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Registration Statement or Prospectus or with respect to statements or omissions made therein in reliance upon information furnished in writing to the Company on behalf of any Underwriter expressly for use in the Registration Statement or the Prospectus). (iii) To the best of such counsel's knowledge, the Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus as of the date indicated therein, under "Capitalization." The Shares, Redeemable Warrants, the Purchase Option, Page 25 26 the Underwriters' Warrants, and the Warrant Shares conform in all material respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof, to counsel's best knowledge, are not subject to personal liability by reason of being such holders, and none of such securities were issued in violation of the preemptive rights of any holder of any security of the Company. (iv) The issuance of the Shares, Redeemable Warrants and the Warrant Shares have been duly authorized and when issued and paid for in accordance with this Agreement and the Warrant Agreement, respectively, will be validly issued, fully paid and non-assessable securities of the Company. The holders of the Securities when issued and paid for, will not be subject to personal liability by reason of being such holders. To the best of such counsel's knowledge, the Securities are not and will not be subject to the preemptive or similar contractual rights of any shareholder of the Company. All corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken. The certificates representing the Shares and Redeemable Warrants are in due and proper form. (v) Based solely on telephonic, verbal confirmation provided to such counsel by the staff of the Commission, the Registration Statement and all post-effective amendments, if any, have become effective under the Act, and, if applicable, filing of all pricing information has been timely made in the appropriate form under Rule 430A, and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and to the best of such counsel's knowledge, no proceedings for that purpose have been instituted or are pending or threatened or contemplated under the Act; and any required filing of the Prospectus pursuant to Rule 424(b) has been made. (vi) To the best of such counsel's knowledge, (A) there are no material contracts or other documents required to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration Statement and the Prospectus and filed as exhibits thereto, and (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto regarding such material contracts or other documents to which the Company is a party or by which it is bound, are accurate in all material respects and fairly represent the information required to be shown by Form SB-2 and the Rules and Regulations. (vii) This Agreement, the Underwriters Purchase Option Agreement, the Warrant Agreement, and the Financial Consulting Agreement have each been duly and validly authorized, executed and delivered by the Company, and assuming that it is a valid and binding agreement of the Underwriters, so as the case may be, constitutes a legal, valid and binding agreement of the Company enforceable as against the Company in accordance with its respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement Page 26 27 of creditors rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law or pursuant to public policy). (viii) Neither the execution or delivery by the Company of this Agreement, the Underwriter's Purchase Option Agreement, and the Warrant Agreement, nor its performance hereunder or thereunder, nor its consummation of the transactions contemplated herein or therein, nor the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, nor the issuance of the securities conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a material default under, or result in the creation or imposition of any material lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon any property or assets (tangible or intangible) of the Company pursuant to the terms of (A) the Articles of Incorporation of the Company, or (B) to the best knowledge of such counsel, and except to the extent it would not have a Material Adverse Effect on the Company, any statute, judgment, decree, order, rule or regulation applicable to the Company of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body, having jurisdiction over the Company or any of its respective activities or properties. (ix) No consent, approval, authorization or order, and no filing with, any court, regulatory body, government agency or other body, (other than such as may be required under state securities laws, as to which no opinion need be rendered) is required in connection with the issuance by the Company of the Securities pursuant to the Prospectus and the Registration Statement, the performance of this Agreement, the Underwriters' Warrant, the Financial Consulting Agreement and the Warrant Agreement by the Company, and the taking of any action by the Company contemplated hereby or thereby, which has not been obtained. (x) To the best of such counsel's knowledge, except as described in the Prospectus, no person, corporation, trust, partnership, association or other entity holding securities of the Company has the contractual right to include and/or register any securities of the Company in the Registration Statement, require the Company to file any registration statement or, if filed, to include any security in such registration statement for twelve months from the date hereof. (xi) After the public offering, the Securities will be eligible for listing on the Nasdaq SmallCap Market. In rendering such opinion such counsel may rely, (A) as to matters involving the application of laws other than the laws of the United States, the corporate laws of Nevada and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and in substance reasonably satisfactory to Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters' Counsel, familiar with the applicable laws, and (B) as to matters of fact, to the extent they deem Page 27 28 proper, on certificates and written statements of responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company; provided, that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and, in their opinion, the Underwriters and they are justified in relying thereon. (e) At each Option Closing Date, if any, the Underwriters shall have received the an opinion of counsel to the Company, each dated the Option Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel confirming as of Option Closing Date the statements made by such firm, in their opinion, delivered on the Closing Date. (f) On or prior to each of the Closing Date and the Option Closing Date, Underwriters' Counsel shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in subsection (c) of this Section 6, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. (g) Prior to the Closing Date and each Option Closing Date, if any: (i) there shall have been no material adverse change nor development involving a prospective change in the condition, financial or otherwise, prospects or the business activities of the Company, whether or not in the ordinary course of business, from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company, from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is materially adverse to the Company; (iii) the Company shall not be in material default under any provision of any instrument relating to any outstanding indebtedness; (iv) no material amount of the assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; (v) no action, suit or proceeding, at law or in equity, shall have been pending or to its knowledge threatened against the Company, or affecting any of its properties or businesses before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement and Prospectus; and (vi) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated, threatened or contemplated by the Commission. (h) At the Closing Date and each Option Closing Date, if any, the Underwriters shall have received a certificate of the Company signed by the principal executive officer and by the Page 28 29 chief financial or chief accounting officer of the Company, dated the Closing Date or Option Closing Date, as the case may be, to the effect that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to such Closing Date or Option Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of each of such person's knowledge, are contemplated or threatened under the Act; (iii) The Registration Statement and the Prospectus and, if any, each amendment and each supplement thereto, contain all statements and information required to be included therein, and none of the Registration Statement, the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and neither the Preliminary Prospectus nor any supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and except as otherwise contemplated therein: (A) the Company has not incurred up to and including the Closing Date or the Option Closing Date as the case may be, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent; (B) the Company has not paid or declared any dividends or other distributions on its capital stock; (C) the Company has not entered into any transactions not in the ordinary course of business; (D) there has not been any change in the capital stock or any increase in long-term debt or any increase in the short-term borrowings (other than any increase in the short term borrowings in the ordinary course of business) of the Company; (E) the Company has not sustained any material loss or damage to its property or assets, whether or not insured; (F) there is no litigation which is pending or threatened against the Company which is required to be set forth in an amended or supplemented Prospectus which has not been set forth; (v) Neither the Company nor any of its officers or affiliates shall have taken, and the Company, its officers and affiliates will not take, directly or indirectly, any action designed to, or which might reasonably be expected to, cause or result in the stabilization or manipulation of the price of the Company's securities to facilitate the sale or resale of the Shares. Page 29 30 References to the Registration Statement and the Prospectus in this subsection (i) are to such documents as amended and supplemented at the date of such certificate. (i) By the Closing Date, the Underwriters shall have received clearance from NASD as to the amount of compensation allowable or payable to the Underwriters, as described in the Registration Statement. (j) At the time this Agreement is executed, the Representative shall have received a letter, dated such date, addressed to the Representative in form and substance satisfactory in all respects (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) to the Underwriters, from S. W. Hatfield + Associates: (i) confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the applicable Rules and Regulations; (ii) stating that it is their opinion that the condensed financial statements and supporting schedules of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations thereunder and that the Underwriters may rely upon the opinion of S.W. Hatfield + Associates with respect to the financial statements and supporting schedules included in the Registration Statement; (iii) stating that, on the basis of a limited review which included a reading of the latest available unaudited interim condensed financial statements of the Company (with an indication of the date of the latest available unaudited interim condensed financial statements), a reading of the latest available minutes of the stockholders and board of directors and the various committees of the boards of directors of the Company, consultations with officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (A) the unaudited condensed financial statements of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited condensed financial statements of the Company included in the Registration Statement, or (B) at a specified date not more than five (5) days prior to the effective date of the Registration Statement, there has been any change in the capital stock, or any increase in total borrowings of the Company, or any decrease in the stockholders' equity or working capital of the Company as compared with amounts shown in the financial statements included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any change or decrease, setting forth the amount of such change or decrease, and (C) during the period from ____________ to a specified date not more than five (5) days prior to the effective date of the Registration Statement, there was any decrease in revenue, net earnings or increase in net income Page 30 31 or earnings per common share of the Company, in each case as compared with the corresponding period of the prior year other than as set forth in or contemplated by the Registration Statement, or, if there was any such decrease, setting forth the amount of such decrease; (iv) stating that they have compared specific dollar amounts, numbers of Securities, percentages of revenue and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures did not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and (v) statements as to such other matters incident to the transaction contemplated hereby as the Underwriters may reasonably request. (k) At the Closing Date and each Option Closing Date, the Underwriters shall have received from S. W. Hatfield + Associates, a letter, dated as of the Closing Date, or Option Closing Date, as the case may be, to the effect that they reaffirm that statements made in the letter furnished pursuant to Subsection (j) of this Section, except that the specified date referred to shall be a date not more than five days prior to the Closing Date and, if the Company has elected to rely on Rule 430A of the Rules and Regulations, to the further effect that they have carried out procedures as specified in clause (iii) of subsection (j) of this Section with respect to certain amounts, percentages and financial information as specified by the Underwriters and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (iii). (l) On each of the Closing Date and the Option Closing Date, if any, there shall have been duly tendered to the Underwriters for the several Underwriters' accounts the appropriate number of Securities. (m) No order suspending the sale of the Securities in any jurisdiction designated by the Underwriters pursuant to subsection (e) of Section 4 hereof shall have been issued on either the Closing Date or the Option Closing Date, if any, and no proceedings for that purpose shall have been instituted or to its knowledge or that of the Company shall be contemplated. If any condition to the Underwriters' obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Underwriters may terminate this Agreement or, if the Underwriters so elect, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. Page 31 32 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each of the Underwriters, including specifically each person who may be substituted for an Underwriter as provided in Section 11 hereof and each person, if any, who controls any Underwriter ("controlling person") within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), whatsoever (including but not limited to any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever), as such are incurred, to which such Underwriter or such controlling person may become subject under the Act, the Exchange Act or any other federal or state statutory laws or regulations at common law or otherwise or under the laws of foreign countries arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained (i) in any Preliminary Prospectus (except that the indemnification contained in this paragraph with respect to any preliminary prospectus shall not inure to the benefit of the Underwriter or to the benefit of any person controlling the Underwriter on account of any loss, claim, damage, liability or expense arising from the sale of the Securities by the Underwriter to any person if a copy of the Prospectus, as amended or supplemented, shall not have been delivered or sent to such person within the time required by the Act, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus, as amended and supplemented, and such correction would have eliminated the loss, claim, damage, liability or expense), the Registration Statement or the Prospectus (as from time to time amended and supplemented); (ii) in any post-effective amendment or amendments or any new registration statement and prospectus in which is included securities of the Company issued or issuable upon exercise of the Underwriters' Warrant; or (iii) in any application or other document or written communication (in this Section 8 collectively called "application") executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, Nasdaq Stock Market, Inc. or any other securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in the light of the circumstances under which they were made), unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to any Underwriter by or on behalf of such Underwriter expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, in any post-effective amendment, new registration statement or prospectus or in any application, as the case may be, or (iv) any failure of the Company to comply with any provision of this Underwriting Agreement resulting in a claim or loss to the Underwriters. The indemnity agreement in this subsection (a) shall be in addition to any liability which the Company may have at common law or otherwise. Page 32 33 (b) Each of the Underwriters agrees severally, but not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each other person, if any, who controls the Company within the meaning of Section 20 of the Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to the Underwriters but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto in any post-effective amendment, new registration statement or prospectus, or in any blue sky application or any other such application made in reliance upon, and in strict conformity with, written information furnished to the Company with respect to any Underwriter by such Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any post-effective amendment, new registration statement or prospectus, or in any such application, provided that such written information or omissions only pertain to disclosures in the Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto, in any post-effective amendment, new registration statement or prospectus or in any such application, provided, further, that the liability of each Underwriter to the Company shall be limited to the amount of the net proceeds of the Offering received by the Company. The Company acknowledges that the statements with respect to the public offering of the Securities set forth under the heading "Underwriting" and the stabilization legend and the last paragraph of the cover page in the Prospectus have been furnished by the Underwriters expressly for use therein and any information furnished by or on behalf of the Underwriter filed in any jurisdiction in order to qualify the Securities under State Securities laws or filed with the Commission, the NASD or any securities exchange constitute the only information furnished in writing by or on behalf of the Underwriters for inclusion in the Prospectus and the Underwriters hereby confirm that such statements and information are true and correct. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, suit or proceeding, such indemnified party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 7, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 7 except to the extent that it has been prejudiced in any material respect by such failure or from any liability which it may have otherwise avoided). In case any such action is brought against any indemnified party, and it notifies an indemnifying party or parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing the indemnified party or parties shall have the right to employ its or their own counsel in any such case but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying Page 33 34 parties in connection with the defense of such action at the expense of the indemnifying party, (ii) the indemnifying parties shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnifying party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 7 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided however, that such consent was not unreasonably withheld. (d) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 7, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party in lieu of indemnifying such indemnified party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or liabilities (or actions in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified on the other hand from the offering of the Securities or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (A) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In any case where the Company is the contributing party and the Underwriters are the indemnified party the relative benefits received by the Company on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses) bear to the total underwriting discounts and commissions received by the Underwriters hereunder, in each case as set forth in the table on the Cover Page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or Page 34 35 payable by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions in respect thereof) referred to above in this subdivision (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subdivision (d), the Underwriters shall not be required to contribute any amount in excess of the amount of the net proceeds of the Offering received by the Company. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls the Company within the meaning of the Act, each officer of the Company who has signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company, subject in each case to this subparagraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this subparagraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this subparagraph (d), or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 8. Representations and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or contained in certificates of officers of the Company submitted pursuant hereto, shall be deemed to be representations, warranties and agreements at the Closing Date and the Option Closing Date, as the case may be, and such representations, warranties and agreements of the Company and the indemnity agreements contained in Section 7 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter, the Company, or any controlling person, and shall survive termination of this Agreement or the issuance and delivery of the Securities to the Underwriters. 9. Effective Date. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at any time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification on Wednesday, May 27 of the effectiveness of the Registration Statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company. Page 35 36 10. Termination. (a) The Underwriters shall have the right to terminate this Agreement (i) if any calamitous domestic or international event or act or occurrence has materially disrupted, or in the Underwriters' opinion will in the immediate future materially disrupt general securities markets in the United States; or (ii) if trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, or in the over-the-counter market shall have been suspended or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a war or major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium in foreign exchange trading has been declared; or (vi) if the Company shall have sustained a material adverse loss, whether or not insured, by reason of fire, flood, accident or other calamity that materially impairs the investment quality of the Securities; or (vii) if there shall have been such material adverse change in the conditions or prospects of the Company, involving a change not contemplated by the Registration Statement. (b) Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including, without limitation, pursuant to Sections 9 and 10 hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 11. Substitution of the Underwriters. If one or more of the Underwriters shall fail (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 6, Section 10 or Section 12 hereof) to purchase the Securities which it or they are obligated to purchase on such date under this Agreement (the "Defaulted Securities), the Underwriters shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other Underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Underwriters shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the total number of Firm Securities to be purchased on such date, the non-defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all nondefaulting Underwriters; or (b) if the number of Defaulted Securities exceeds 10% of the total number of Firm Securities, this Agreement shall terminate without liability on the part of any non-defaulting Underwriters. Page 36 37 No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of any default by such Underwriter under this Agreement. In the event of any such default which does not result in a termination of this Agreement, the Underwriters shall have the right to postpone the Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. 12. Default by the Company. If the Company shall fail at the Closing Date or any Option Closing Date, as applicable, to sell and deliver the number of Securities which it is obligated to sell hereunder on such date, then this Agreement shall terminate (or, if such default shall occur with respect to any Option Securities to be purchased on an Option Closing Date, the Underwriters may at the Underwriters option, by notice from the Underwriters to the Company, terminate the Underwriters' several obligations to purchase Securities from the Company on such date) without any liability on the part of any non-defaulting party other than pursuant to Section 5 and Section 7 hereof. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. 13. Notices. All notices and communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representative at Argent Securities, Inc., 3340 Peachtree Road, Suite 450, Atlanta, GA 30326, with a copy to Johnson & Montgomery, One Buckhead Plaza, 3060 Peachtree Road, N.W., Suite 400, Atlanta, Georgia 30305, Attention: Robert E. Altenbach, Esq. Notices to the Company shall be directed to Karts International Incorporated, 109 Northpark Blvd, Suite 210, Covington, Louisiana 70433, Attention: V. Lynn Graybill, with a copy to Looper Reed Mark & McGraw, 4100 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201, Attention: Richard B. Goodner, Esq. 14. Parties. This Agreement shall inure solely to the benefit of and shall be binding upon, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 7 hereof, and their respective successors, legal representatives and assigns, and their respective heirs and legal representatives and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 15. Construction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia without giving effect to the choice of law or conflict of laws principles. Page 37 38 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to be one and the same instrument. If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, KARTS INTERNATIONAL INCORPORATED By: ------------------------------ CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN ON BEHALF OF THEMSELVES AND THE OTHER SEVERAL UNDERWRITERS NAMED IN SCHEDULE I HERETO: Argent Securities, Inc., as Representative of the Several Underwriters By: -------------------------------------- Name: L. Phillips Reames Title: Chairman Page 38 39 SCHEDULE I
Underwriter Number of Securities - ----------- -------------------- Argent Securities, Inc. 1,400,000 Shares of Common Stock 1,400,000 Redeemable Common Stock Purchase Warrants
Page 39 40 SCHEDULE II Warrant Agent - Securities Transfer Corporation Page 40 EX-1.2 3 UNDERWRITERS WARRANT 1 EXHIBIT 1.2 THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933, AS AMENDED, FORMING A PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS EFFECTIVE UNDER SAID ACT, OR UNLESS IN THE OPINION OF COUNSEL TO THE CORPORATION, SUCH OFFER AND SALE IS EXEMPT FROM THE APPLICABLE PROVISIONS OF SECTION 5 OF SAID ACT. WARRANT For the Purchase of _____ Share(s) of Common Stock, Par Value $.001 Per Share and _____ Redeemable Common Stock Purchase Warrant(s) of KARTS INTERNATIONAL INCORPORATED Incorporated Under the Laws of the State of Nevada Void After 5 P.M. New York, New York, time on _____________, ________ No. ______________ Warrant to Purchase _____ Shares THIS IS TO CERTIFY, that, for value received, Argent Securities, Inc., a Georgia, corporation (the "Underwriter"), or registered assigns, is entitled, subject to the terms and conditions hereinafter set forth on or after ________, 1997, and at any time prior to 5 P.M., New York, New York, time on ___________, ______, but not thereafter, to purchase _____ shares of Common Stock, par value $.001 per share ("Common Stock"), and ______ Warrants to purchase ____ share(s) of Common Stock each (the "Warrants"), of KARTS INTERNATIONAL INCORPORATED, a Nevada corporation (the "Corporation"), from the Corporation upon payment to the Corporation of $_____ per share of Common Stock and $_____ per Warrant (the "Purchase Price"), if and to the extent this Warrant is exercised, in whole or in part, during the period this Warrant remains in force, subject in all cases to adjustment as provided in Article II hereof, and to receive certificates representing the Common Stock and Warrants so purchased, upon presentation and surrender to the Corporation of this Warrant, with the form of subscription attached hereto duly executed, and accompanied by payment of the Purchase Price of each Share purchased as provided herein; provided, however, that the exercise price of each Warrant shall be $______ per share of Common Stock purchasable upon exercise of a Warrant, subject to adjustment, but shall contain all other terms and conditions of a warrant. This Warrant shall be redeemable in accordance with the terms of the Redeemable Common Stock Purchase Warrants sold to public investors pursuant to the Company's Prospectus dated ________. This Warrant may not be transferred prior to ________________, ______. 2 ARTICLE I - TERMS OF THE WARRANT Section 1.01 Subject to the provisions of Sections 1.05 and 3.01 hereof, this Warrant may be exercised at any time and from time to time after 9:00 A.M., New York, New York, time, on __________________, 199__ (the "Exercise Commencement Date"), but no later than 5:00 P.M., New York, New York, time on ______________, 19___ (the "Expiration Time"). If _______________, 199__, is a day on which banking institutions are authorized by law to close, then the date on which this Warrant shall expire shall be the next succeeding day which shall not be such a day. If this Warrant is not exercised on or before the Expiration Time it shall become void, and all rights hereunder shall thereupon cease. Section 1.02 (1) The holder of this Warrant (the "Holder") may exercise this Warrant, in whole or in part, upon surrender of this Warrant with the form of subscription attached hereto duly executed, to the Corporation at its corporate office located at 109 Northpark Boulevard, Suite 210 Covington, LA 70433 together with the full Purchase Price for the Securities to be purchased in lawful money of the United States, or by check, bank draft or postal or express money order payable in United States dollars to the order of the Corporation, and upon compliance with and subject to the conditions set forth herein. (2) Upon receipt of this Warrant with the form of subscription duly executed and accompanied by payment of the aggregate Purchase Price for the Securities for which this Warrant is then being exercised, together with all taxes applicable upon such exercise, the Corporation shall cause to be issued certificates for the total number of whole shares of Common Stock and Warrants for which this Warrant is being exercised in such denominations as are required for delivery to the Holder, and the Corporation shall thereupon deliver such certificates to the Holder or its nominee. (3) In case the Holder shall exercise this Warrant with respect to less than all of the Securities that may be purchased under this Warrant, the Corporation shall execute a new Warrant for the balance of the Shares that may be purchased upon exercise of this Warrant and deliver such new Warrant to the Holder. (4) The Corporation covenants and agrees that it will pay when due and payable any and all taxes that may be payable in respect of the issue of this Warrant, or the issue of any shares of Common Stock or Warrants upon the exercise of this Warrant. The Corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issuance or delivery of this Warrant or of the shares of Common Stock or Warrants in a name other than that of the Holder at the time of surrender, and until the payment of such tax the Corporation shall not be required to issue such shares of Common Stock or Warrants. Section 1.03 This Warrant may be split-up, combined or exchanged for another Warrant or Warrants of like tenor to purchase a like aggregate number of Securities. If the Holder desires to split-up, combine, or exchange this Warrant, he shall make such request in writing delivered to the Corporation at its corporate office and shall surrender this Warrant and any other Warrants to be so 3 split-up, combined or exchanged at such office. Upon any such surrender for a split-up, combination or exchange, the Corporation shall execute and deliver to the person entitled thereto a Warrant or Warrants, as the case may be, as so requested. The Corporation shall not be required to effect any split-up, combination or exchange that will result in the issuance of a Warrant entitling the Holder to purchase upon exercise a fraction of the Shares. The Corporation may require the holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split-up, combination or exchange of Warrants. Section 1.04 Prior to due presentment for registration or transfer of this Warrant, the Corporation may deem and treat the Holder, as registered on the books of the Corporation maintained for that purpose, as the absolute owner of this Warrant (notwithstanding any endorsement or notation of ownership or other writing hereon) for the purpose of any exercise hereof and for all other purposes and the Corporation shall not be affected by any notice to the contrary. Section 1.05 Prior to _______, 199__, this Warrant may not be sold, hypothecated, exercised, assigned, or transferred, except to any member of the National Association of Securities Dealers, Inc. participating in the offering contemplated in Section 3.01 hereof and to individuals who are the bona fide officers or partners of the Underwriter or such members, or any successor to their respective businesses or pursuant to the laws of descent and distribution, and thereafter and until its expiration shall be assignable and transferable in accordance with and subject to the provisions of the Securities Act of 1933, as amended (the "Act"), if this Warrant is exercised immediately upon assignment or transfer. If this Warrant is not exercised immediately upon assignment or transfer, this Warrant shall lapse. Section 1.06 Any assignment permitted hereunder shall be made by surrender of this Warrant to the Corporation at its principal office with the Form of assignment attached hereto duly executed and funds sufficient to pay any transfer tax. In such event, the Corporation shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants that carry the same rights upon presentation thereof at the corporate office of the Corporation together with a written notice signed by the Holder, specifying the names and denominations in which such new Warrants are to be issued. Section 1.07 Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Corporation. If, however, at any time prior to the expiration of this Warrant and prior to its exercise, any of the following shall occur: a. the Corporation shall declare any dividend payable in stock to the holders of its Common Stock or make any other distribution in property other than cash to the holders of its Common Stock; or 4 b. the Corporation shall offer to the holders of its Common Stock rights to subscribe for or purchase any shares of any class of stock or any other purchase any shares of any class of stock or any other rights or options or securities exchangeable for or convertible into shares of any class of stock; or c. the Corporation shall effect any reclassification of its Common Stock (other than a reclassification involving merely the subdivision or combination of outstanding shares of Common Stock) or any capital reorganization, or any consolidation or merger (other than a merger in which no distribution of securities or other property is made to holders of Common Stock), or any sale, transfer or other disposition of its property, assets and business substantially as an entirety, or the liquidation, dissolution or winding up of the Corporation; or d. the Corporation shall issue any shares of Common Stock in exchange for shares of preferred stock or indebtedness of the Corporation, other than upon conversion of such shares of preferred stock or indebtedness; then, in each such case, the Corporation shall cause notice of such proposed action to be mailed to the Holder. Such notice shall specify (i) the date on which the books of the Corporation shall close, or a record be taken, for determining holders of Common Stock entitled to receive such stock dividend or other distribution or such rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, dissolution, winding up or exchange shall take place or commence, as the case may be, (ii) the date as of which it is expected that holders of record of Common Stock shall be entitled to receive securities or other property deliverable upon such action, if any such date has been fixed (on such date in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the right to exercise this Warrant shall terminate), and (iii) such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the Commons Stock and other securities and property deliverable upon exercise of this Warrant. Such notice shall be mailed in the case of any action covered by Subsection 1.07(a) and 1.07(b) above, at least ten (10) days prior to the record date of determining holders of the Common Stock for purposes of receiving such payment or offer, and in the case of any action covered by Subsection 1.07(c) or 1.07(d) above, at least ten (10) days prior to the earlier of the date upon which such action is to take place or any record date to determine holders of Common Stock entitled to receive such securities or other property. Without limiting the obligation of the Corporation to provide notice to the Holder of actions hereunder, it is agreed that failure of the Corporation to give notice shall not invalidate such action of the Corporation. Section 1.08 If this Warrant is lost, stolen, mutilated or destroyed, the Corporation shall, on such reasonable terms as to indemnity or otherwise as it may impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as, and in substitution for, this Warrant, which shall thereupon become void. Any such new Warrant shall constitute an independent contractual obligation of the Corporation, whether or not the Warrant so lost, stolen, destroyed or mutilated shall at any time be enforceable by anyone. 5 Section 1.09 (1) The Corporation covenants and agrees that at all times it shall reserve and keep available for the exercise of this Warrant such number of authorized shares of Common Stock and Warrants (and shares of Common Stock underlying such Warrants) as are sufficient to permit the exercise in full of this Warrant. (2) Prior to this issuance of any shares of Common Stock upon exercise of this Warrant or the Warrants, the Corporation shall secure the listing of such shares upon any securities exchange upon which the shares of the Corporation's Common Stock may at the time be listed for trading, if any. (3) The Corporation covenants that all shares of Common Stock when issued upon the exercise of this Warrant or the Warrants will be validly issued, fully paid, nonassessable and free of preemptive rights. ARTICLE II -- ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF COMMON STOCK PURCHASABLE UPON EXERCISE Section 2.01 Subject to the provisions of this Article II, the Purchase Price in effect from time to time shall be subject to adjustment as follows: (a) In the case the Corporation shall (i) declare a dividend or make a distribution on the outstanding shares of its Common Stock in shares of its Common Stock, (ii) subdivide the outstanding shares of its Common Stock into a greater number of shares, (iii) combine the outstanding shares of its Common Stock into a smaller number of shares, (iv) issue any shares of its Common Stock shares, (iv) issue any shares of its Common Stock by reclassification of the Common Stock, then in each case the Purchase Price in effect immediately after the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately before such dividend, distribution, subdivision, combination or reclassification, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such dividend, distribution, subdivision, combination or reclassification. Any shares of Common Stock of the Corporation issuable in payment of a dividend shall be deemed to have been issued immediately prior to the record date for such dividend. (b) All calculations under this Section 2.01 shall be made to the nearest whole cent. Section 2.02 No adjustment in the Purchase Price in accordance with the provisions of Subsection 2.01(a) hereof need be made if such adjustment would amount to a change of less than 1% in such Purchase Price; provided that the amount by which any adjustment is not 6 made by reason of the provisions of this Section 2.02 shall be carried forward and taken into account at the time of any subsequent adjustment in the Purchase Price. Section 2.03 Upon each adjustment of the Purchase Price pursuant to Subsection 2.01(a) each Warrant shall thereupon evidence the right to purchase Shares comprised of the same number of Warrants and that number of shares of Common Stock (calculated to the nearest whole share) obtained by multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment and dividing the product so obtained by the Purchase Price in effect immediately after such adjustment. Section 2.04 In case of any capital reorganization, other than in the cases referred to in Section 2.01 hereof, or the consolidation or merger of the Corporation with or into another corporation (other than a merger or consolidation in which the Corporation is the merger or consolidation in which the Corporation is the continuing corporation and which does not result in any reclassification of the outstanding shares of Common Stock or the conversion of the outstanding shares of Common Stock into shares of other stock or other securities or property), or the sale of the property of the Corporation as an entirety or substantially as an entirety, or the conversion, however effected, of the Corporation into another form of entity (collectively such actions being hereinafter referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of any Warrant (as to the shares of Common Stock subject thereto and in lieu of the number of shares of Common Stock theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock that would otherwise have been deliverable upon the exercise of such Warrant would have been entitled upon such Reorganization if such Warrant had been exercised in full immediately prior to such Reorganization. In case of any Reorganization, appropriate adjustment, as determined in good faith by the Board of Directors of the Corporation, shall be made in the application of the provisions herein set forth with respect to the rights and interests of Warrant holders so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of Warrants. The Corporation shall not effect any such Reorganization, unless upon or prior to the consummation thereof the successor entity, or if the Corporation shall be the surviving entity in any such Reorganization and is not the issuer of the shares of stock or other securities or property to be delivered to holders of shares of the Common Stock outstanding at the effective time thereof, then such issuer shall assume by written instrument the obligation to deliver to the Holder such shares of stock, securities, cash or other property as the Holder shall be entitled to purchase in accordance with the foregoing provisions. In the event of a sale or conveyance or other transfer of all or substantially all of the assets of the Corporation as a part of a plan for liquidation of the Corporation, all rights to exercise any Warrant shall terminate on the date such sale or conveyance or other transfer is to be consummated. Section 2.05 The Corporation may select a firm of independent certified public accountants acceptable to the Holder hereof, which selection may be changed from time to 7 time, to verify the computations made in accordance with this Article II. The certificate, report or other written statement of any such firm shall be conclusive evidence of the correctness of any computation made under this Article II. Section 2.06 Irrespective of any adjustments pursuant to this Article II, Warrants theretofore or thereafter issued need not be amended or replaced, but certificates thereafter issued shall bear an appropriate legend or other notice of any adjustments. Section 2.07 The Corporation shall not be required upon the exercise of any Warrant to issue fractional shares of Common Stock that may result from adjustments in accordance with this Article II to the Purchase Price or number of shares of Common Stock purchasable under each Warrant. If more than one Warrant is exercised at one time by the same Holder, the number of full shares of Common Stock and Warrants that shall be deliverable shall be computed based on the number of shares of Common Stock and Warrants deliverable in exchange for the aggregate number of Warrants exercised. With respect to any final fraction of a share called for upon the exercise of any Warrant or Warrants, the Corporation shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the market value of a share of Common Stock on the business day next preceding the date of such exercise. The Holder, by his acceptance of the Warrant, shall expressly waive any right to receive any fractional share of Common Stock upon exercise of the Warrants. For the purposes of this Section 2.07, the market price per share of Common Stock at any date shall mean the last reported sale price regular way or, in case no such reported sale takes place on such date, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed if that is the principal market for the Common Stock or if not listed or admitted to trading on any national securities exchange or if such national security exchange is not the principal market for the Common Stock, the closing bid price (or closing sales price, if reported) as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or its successor, if any. If the price of the Common Stock is not so reported, then such market price shall mean the last known price paid per share by a purchaser of such stock in an arms' length transaction. All calculations under this Section 2.07 shall be made to the nearest 1/100th of a share. Section 2.08 In no event shall the Purchase Price be adjusted below the par value per share of the Common Stock. ARTICLE III REGISTRATION UNDER THE SECURITIES ACT OF 1933 Section 3.01 The sale of this Warrant and the shares of Common Stock and the Warrants issuable upon exercise of this Warrant have been registered under the Act on Form SB-2, SEC File No. 333-24145 (the "Registration Statement"). 8 Upon exercise, in part or in whole, of this Warrant, the certificates representing in the Warrants shall bear the legend specified thereby and the certificates representing the shares of Common Stock upon such exercise and the shares issuable upon exercise of the Warrants shall bear the following legend: "The shares represented by this certificate have been registered under the Securities Act of 1933, as amended, solely for sale to the holder of a warrant to purchase, which holder may be deemed to be an underwriter of such shares within the provisions and for purposes only of the Securities Act of 1933, as amended. The issuer of these shares will agree to a transfer hereof only if (1) an amended or supplemented prospectus setting forth the terms of the offer has been filed as part of a post-effective amendment to the Registration Statement under which these shares are registered or as part of a new registration statement, if then required, and such post-effective amendment or new registration statement has become effective under the Securities Act of 1933, as amended, or (2) counsel to the issuer is satisfied that no such post-effective amendment or new registration statement is required." The Corporation agrees that it shall be satisfied that no post-effective amendment or new registration statement is required for the public sale of the shares of Common Stock if it shall be presented with a letter from the Staff of the Securities and Exchange Commission (the "Commission") stating in effect that, based upon stated facts that the Corporation shall have no reason to believe are not true in any material respect, the Staff of the Commission will not recommend any action to the Commission if such shares are offered and sold without delivery of a prospectus, and that, therefore, no post-effective amendment to the Registration Statement under which the sale of such shares is registered or new registration statement is required to be filed. Section 3.02 The Corporation agrees and undertakes that, upon written request of the then holder(s) of not less than 50% of the total Warrants that were originally issued to the Underwriter, made at any time within the period commencing one year after ________________, 19___, and ending five (5) years after the effective date of the Registration Statement, the Corporation will file not more than once a registration statement or offering statement under the Act, registering or qualifying, as the case may be, the sale of the Common Stock underlying the Warrants and the Warrants (which are deliverable upon exercise of the Warrants). The Corporation must file a registration statement or offering statement if the Common Stock underlying the Warrants and such Warrants cannot be sold under Regulation A because of the limited exemption. The Corporation agrees to use its best efforts to cause the above filing to become effective. All expenses of such registration or qualification, including but not limited to, legal, accounting and printing fees, will be paid by the Corporation. In addition to the above, the Corporation understands and agrees that if at any time during the period referred to above it should file a registration statement or offering 9 statement pursuant to the Act for a public offering of securities, the Corporation, at its own expense, will offer to the Holder the opportunity to register or qualify the offering and sale of the Shares underlying the Warrants and the Warrants (which are deliverable upon exercise of the Warrants) (limited, in the case of a Regulation A offering, to the amount of the available exemption remaining after all shares of Common Stock to be offered by the Company have been accommodated). This paragraph is not applicable to a registration statement filed with the Commission on Form S-4 or S-8, or any successor Forms, and shall apply only if at least 25% of the underlying shares of Common Stock of this Warrant and such Warrants are so presented for sale. Section 3.03 In connection with any registration under Section 3.02 hereof, the Corporation covenants and agrees as follows: (a) The Corporation shall use its best efforts to have any post-effective amendment or new registration statement declared effective at the earliest possible time, and shall furnish such number of prospectuses as shall reasonably be requested by the Holder selling Shares. (b) The Corporation shall pay all costs, fees, and expenses in connection with all post-effective amendments or new registration statements under Section 3.02 hereof including, without limitation, the Corporation's legal and accounting fees, printing expenses, blue sky fees and expenses, except that the Corporation shall not pay any of the following costs, fees or expenses: (i) underwriting discounts and commissions allocable to the Shares, (ii) state transfer taxes, (iii) brokerage commissions and (iv) fees and expenses of counsel and accountants for the holders of the Warrants, Warrants, and/or shares of Common Stock. (c) The Corporation will take all necessary action to qualify or register the securities included in a post-effective amendment or new registration statement for offering and sale under the securities or blue sky laws of such states as are requested by the holders of such securities, provided that the Corporation shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the law of any such jurisdiction. (d) The Holder shall be entitled to pay the Purchase Price for the Securities and the exercise price of the underlying Warrants purchasable upon the exercise of this Warrant out of the proceeds of any sale of the securities purchasable upon their exercise, provided such exercise and sale occur simultaneously. Section 3.04 (a) The Corporation shall indemnify and hold harmless each person registering the sale of securities pursuant to this Article III (the "Seller") and each underwriter, within the meaning of the Act, who may purchase from or sell for any Seller any of the Shares from and against any and all losses, claims, damages and liabilities caused by any 10 untrue statement or alleged untrue statement of a material fact contained in any post-effective amendment or new registration statement or any supplemented prospectus under the Act included therein required to be filed or furnished by reason of Section 3.02, or caused by any omission or alleged omission to state therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Corporation by such Seller or underwriter expressly for use therein, which indemnification shall include each person, if any, who controls any such Seller or underwriter within the meaning of the Act; provided, however, that the indemnity agreement by the Corporation set forth in this Section 3.04 with respect to any prospectus that shall be subsequently amended or supplemented prior to the written confirmation of the sale of any securities shall not inure to the benefit of any Seller or underwriter from whom the person asserting such securities that are the subject thereof (or to the benefit of any person controlling such Seller or underwriter), if such Seller or underwriter failed to send or give a copy of the prospectus as amended or supplemented to such person at or prior to written confirmation of the sale of such securities to such person and if such amended or supplemented prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage or liability. (b) Each Seller that avails itself of the procedures under Article III shall indemnify, and secure the agreement of any underwriter which the Seller employs to indemnify, the Corporation, its directors, each officer signing the related post-effective amendment or registration statement and each person, if any, who controls the Corporation within the meaning of the Act from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any post-effective amendment or registration statement or any prospectus required to be filed or furnished by reason of Section 3.02, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished in writing to the Corporation by any such Seller or underwriter expressly for use therein. Section 3.05 The agreements in this Article III shall continue in effect regardless of the exercise and surrender of this Warrant. ARTICLE IV -- OTHER MATTERS Section 4.01 The Corporation will from time to time promptly pay, subject to the provisions of paragraph (4) of Section 1.02 hereof, all taxes and charges that may be imposed upon the Corporation in respect of the issuance or delivery of this Warrant or the shares of Common Stock and Warrants purchasable upon the exercise of this Warrant. 11 Section 4.02 All the covenants and provisions of this Warrant by or for the benefit of the Corporation shall bind and inure to the benefit of it successors and assigns hereunder. Section 4.03 Notices or demands pursuant to this Warrant to be given or made by the Holder to or on the Corporation shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, until another address is designated in writing by the Corporation, as follows: Karts International Incorporated 109 Northpark Boulevard, Suite 210 Covington, LA 70433 Attention: President Notices to the Holder provided for in this Warrant shall be deemed given or made by the Corporation if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed to the Holder at his last known address as it shall appear on the books of the Corporation. Section 4.04 The validity, interpretation and performance of this Warrant shall be governed by the substantive laws of the State of _____________________. Section 4.05 Nothing in this Warrant expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Corporation and the Holder any right, remedy or claim under promise or agreement hereof, and all covenants, conditions, stipulations, promises and agreements contained in this Warrant shall be for the sole and exclusive benefit of the Corporation and its successors and of the Holder, its successors and, if permitted, its assignees. Section 4.06 The headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof. IN WITNESS WHEREOF, this, Warrant has been duly executed by the Corporation under its corporate seal as of the ____ day of __________, 1997. KARTS INTERNATIONAL INCORPORATED By: ----------------------------- Name: --------------------------- Title: -------------------------- [CORPORATE SEAL] Attest: - ----------------------------- Secretary 12 KARTS INTERNATIONAL INCORPORATED Subscription Form (To be executed by the registered holder to exercise the right to purchase Common Stock and Warrants evidenced by the foregoing warrant) Karts International Incorporated 109 Northpark Boulevard, Suite 210 Covington, LA 70433 The undersigned hereby irrevocably subscribes for the purchase of _____ shares of your Common Stock and ____ Warrants to purchase ___ shares of your Common Stock pursuant to and in accordance with the terms and conditions of this Warrant, and herewith makes payment, covering the purchase of such Securities. Certificates for the shares of Common Stock and the Warrants should be delivered to the undersigned at the address stated below. If such number of Securities shall not be all of the Securities purchasable hereunder, please deliver a new Warrant of like tenor for the balance of the remaining Securities purchasable hereunder to the undersigned at the address stated below. The undersigned agrees that: (1) the undersigned will not offer, sell, transfer or otherwise dispose of any such shares of Common Stock being purchased hereunder or the shares of Common Stock underlying the Warrants being purchased hereunder unless either (a) a registration statement, or post-effective amendment thereto, covering the sale of such shares of Common Stock has been filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and such sale, transfer or other disposition is accompanied by a prospectus meeting the requirements of Section 10 of the Act forming a part of such registration statement, or post-effective amendment thereto, which is in effect under the Act covering the sale of the shares of Common Stock to be sold, transferred or otherwise disposed of, or (b) counsel acceptable to Karts International Incorporated and satisfactory to the undersigned has rendered an opinion acceptable to the Company in writing and addressed to the Company that such proposed offer, sale, transfer or other disposition of the shares of Common Stock is exempt from the provisions of Section 5 of the Act in view of the circumstances of such proposed offer, sale, transfer or other disposition; (2) the Company may notify the transfer agent for its Common Stock that the certificates for the Common Stock acquired by the undersigned pursuant hereto are not to be transferred unless the transfer agent receives advance from the Company that one or both of the conditions referred to in (1)(a) and (1)(b) above have been satisfied; and (3) the Company may affix the legend set forth in Section 3.01 of this Warrant to the certificates for shares of Common Stock hereby subscribed for and purchasable upon exercise of the Warrants, if such legend is applicable. Dated: Signed: ---------------------- -------------------------- Signature guaranteed: Address ------------------------- ------------------------- ------------------------- 13 KARTS INTERNATIONAL INCORPORATED Assignment Form (To be executed by the registered holder to effect assignment of the foregoing warrant) FOR VALUE RECEIVED _________________________________ hereby sells, assigns and transfers unto _________________________________ the right to purchase _____ shares of Common Stock, par value $.001 per share and ____ Warrants, to purchase _____ shares of such Common Stock of the Corporation purchasable pursuant to the within Warrant, on the terms and conditions set forth therein, and does hereby irrevocably constitute and appoint____________________ and/or its transfer agent Attorney, to transfer on the books of the Corporation Warrants representing such rights, with full power of substitution. Dated: ------------------------- Signed: ---------------------- Signature guaranteed: - ------------------------------ EX-1.3 4 FINANCIAL ADVISORY AGREEMENT 1 EXHIBIT 1.3 FINANCIAL ADVISORY AGREEMENT THIS AGREEMENT (the "Agreement") is made effective ____________, 1997 between Argent Securities, Inc. ("Consultant") and Karts International Incorporation (hereinafter the "Company"). RECITALS A. Company desires to be assured of the association and services of Consultants in order to avail itself of Consultant's experience, skills and abilities, and background and knowledge, to facilitate long range planning, and to execute the Company's business and investment banking needs in an orderly and efficient manner, and is therefore willing to engage Consultant upon the terms and conditions herein contained. B. Consultant agrees to be engaged and retained by the Company and upon said terms and conditions. NOW, THEREFORE, in consideration of the recitals, promises and conditions in this Agreement, the Consultant and Company agree as follows: 1. Consulting Services. Company hereby retains Consultant to become the investment banking consultant to the Company and to render such advice, consultation and information to the Board of Directors and the officers of the Company regarding general financial matters, including, but not limited to, long-term financial planning, expansions, changes in capital structure, shareholder relations, the raising of capital from public and private sources, and investment banking transactions and services, as shall be requested in writing by the President of the Company from time to time. Consultant agrees, upon request, to make itself available to render such services as reasonably requested by the President of the Company and within the scope of this Agreement. 2. Term. Except as otherwise provided in Section 3(b) of this Agreement, the term of this Agreement shall be for a period of two (2) years commencing ___________, 1997. 3. Compensation of Consultants. a. Advisory Fee. In exchange for the services provided hereunder, the Company hereby agrees to pay Consultant an advisory fee equal to $24,000 per year during the term of this Agreement. The Company shall pay $48,000 (representing prepayment in full of the fees for the two-year term of this Agreement) to Consultant on the closing date of the Company's public offering of 1,400,000 shares of the Company's common stock, par value $.001 per share ("Common Stock") and 1,400,000 redeemable warrants to purchase Common Stock, underwritten by Consultant. 2 b. Finder's Fees. In addition to the compensation and expenses paid or payable to Consultant pursuant to Sections 3(a) and 4 hereof, the Company agrees that, if a consultant, directly or indirectly, introduces the Company, during the term of this Agreement, to any person or entity that during the term hereof or within 18 months following the term hereof, provides any investment capital, loan or any other equity or debt financing to the Company or any affiliate thereof, or becomes a party to a merger, acquisition, joint venture, private placement or other similar transaction with the Company or any affiliate thereof, then the Company shall pay Consultant a cash finder's fee. Each cash finder's fee payable to Consultant under this Agreement shall be calculated as a percentage of the Transaction Value (as defined herein) in accordance with the following scale: 5% on the first $1,000,000 of the Transaction Value; 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; 1% on the amount in excess of $5,000,000. "Transaction Value" shall mean the aggregate value of all cash, securities and other property (i) paid to the Company, its affiliates or their shareholders in connection with any transaction referred to above involving any investment in or acquisition of the Company or any affiliates (or the assets of either), (ii) paid by the Company or any affiliate in any such transaction involving an investment in or acquisition of another party or its equity holdings by the Company or any affiliate, or (iii) paid or contributed by the Company or any affiliate and by the other party or parties in the event of any such transaction involving a merger, consolidation, joint venture or similar joint enterprise or undertaking. The value of any such securities (whether debt or equity) or other property shall be the fair market value thereof as determined by mutual agreement of the Company and the Consultants or by an independent appraiser jointly selected by the Company and the Consultant. 4. Expenses. Company agrees to pay all reasonable business expenses authorized in advance by Company in writing and incurred by Consultant in furtherance of the business of Company, including travel, food, lodging and entertainment expenses, upon presentation by Consultant of receipt in form reasonably satisfactory to Company. 5. Relationship of Parties. This Agreement shall not constitute an employer-employee relationship. It is the intention of each party that each Consultant shall be an independent contractor and not an employee of the Company. Consultant shall not have the authority to act as the agent of the Company except when such authority as specifically delegated to Consultant by the Company. Subject to the express provisions herein, the manner and means utilized by Consultant in the performance of Consultant's services hereunder shall be under the sole control of the Consultant. 6. Liability of Consultant. The Company acknowledges that all opinions and advice, whether oral or written, given by Consultant to the Company in connection with this Agreement are intended solely for the benefit and use of the Company in considering the transaction to which they -2- 3 relate, and the Company agrees that no person or entity other than the Company shall be entitled to make use of or rely upon the advice of Consultants to be given hereunder, and no such opinion or advice shall be used by the Company for any other purpose or reproduced, disseminated, quoted or referred to by the Company in communications with third parties at any time, in any manner or for any purpose, nor may the Company make any public reference to Consultant or use Consultant's name in any annual report or any other report or release of the Company without Consultant's prior written consent, except that the Company may, without Consultant's further consent, disclose this Agreement (but not the information provided to the Company by Consultant) in the Company's filings with the Securities and Exchange Commission, if such disclosure is required by law. 7. Notices. Any notice, request, demand or other communication required or permitted hereunder shall be deemed to be properly given when personally served in writing or when deposited in the United States mail, postage prepaid, addressed to the other party at the address appearing at the end of this Agreement. Either party may change its address by written notice make in accordance with this Section. 8. Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, administrators, executors, successors, subsidiaries and affiliates. 9. Governing Law. This Agreement is made and shall be governed and construed in accordance with the laws of the State of Georgia. 10. Assignment. Any attempt by either party to assign any rights, duties or obligations which arise under this Agreement without the prior written consent of the other party shall be void, and shall constitute a breach of the terms of this Agreement. 11. Entire Agreement, Modifications. This Agreement constitutes the entire agreement between the Company and the Consultant. No promises, guarantees, inducements or agreements, oral or written, expressed or implied, have been made other than as contained in this Agreement. This Agreement can only be modified or changed in writing signed by the party or parties to be charged. 12. Termination. This Agreement shall automatically terminate after the initial two (2) year term. If terminated by the Company, such action shall not alter Company's obligation to pay Consultant the agreed upon full compensation described in this Agreement. 13. Litigation Expenses. If any action is brought by either party to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and disbursements in addition to any other relief to which it may be entitled. -3- 4 IN WITNESS WHEREOF, the parties have executed this Agreement on the date indicated at the beginning of this Agreement. Argent Securities, Inc. 3340 Peachtree Road, NE, Suite 450 Atlanta, Georgia 30326 Dated: ----------- ----------------------------------- Name: ---------------------------- Title: --------------------------- Karts International Incorporated 109 Northpark Boulevard, Suite 210 Covington, Louisiana 70433 Dated: ----------- ----------------------------------- Name: ---------------------------- Title: --------------------------- -4- EX-1.4 5 LOCK-UP AGREEMENT 1 EXHIBIT 1.4 May ___, 1997 Argent Securities, Inc. 3340 Peachtree Road, Suite 450 Atlanta, Georgia 30326 RE: KARTS INTERNATIONAL INCORPORATED Gentlemen: The undersigned understands that Karts International Incorporated (the "Company") has filed a Registration Statement on Form SB-2 (the "Registration Statement") with the Securities and Exchange Commission in connection with a proposed public offering (the "Offering") underwritten by Argent Securities, Inc. (the "Underwriter") of 1,400,000 shares of common stock, par value $.001 per share (the "Common Stock") and 1,400,000 warrants (the "Warrants") to purchase shares of Common Stock. In addition, the Underwriter has been granted an option to purchase from the Company up to an additional aggregate of 140,000 shares of Common Stock and 140,000 Warrants for the sole purpose of covering over-allotments, if any. In connection with the Offering, the undersigned agrees that, except as hereinafter provided, such undersigned will not, without the Underwriter's prior written consent, sell, contract to sell or otherwise dispose of any shares of Common Stock issued upon conversion of the Preferred Shares, 1996 Warrants, common stock issued upon exercise of the 1996 Warrants, options, convertible securities, or other equity securities of the Company (including any other securities of the Company issuable upon exercise or conversion of any warrants, options or convertible securities), now owned or hereinafter acquired, whether directly or indirectly or beneficially (as defined in Section 13 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) by such undersigned (all such securities referred to collectively herein as the "Securities") for a period of eighteen months from the effective date ("Effective Date") of the Registration Statement. Notwithstanding the foregoing, the undersigned reserves the right to sell or otherwise dispose of the Securities owned by such undersigned in a privately negotiated transaction, provided that (i) the purchaser agrees in advance in writing with the Underwriters to the restrictions on transfer of the Securities set forth herein and (ii) the disposition is otherwise in accordance with the federal securities and other laws. 2 Argent Securities, Inc. May ___, 1997 Page 2 Further, during the four year period following the Effective Date of the Registration Statement, the undersigned grants to the Underwriters the right of first refusal to sell any and all securities owned by the undersigned which the undersigned may desire to sell, provided that the price and terms of execution offered by the Underwriters are at least favorable as may be obtained by the undersigned from other brokerage firms. The undersigned will permit an appropriate restrictive legend to be applied to all certificates evidencing the Securities and will cause the transfer agent for the Company to note such restriction on the transfer books and records of the Company. This agreement shall be binding upon any pledgee or any transferee of the undersigned and shall be binding on the heirs, legal representatives, transferees and assigns of the undersigned. Any attempted sale, transfer or other disposition in violation of the agreement shall be null and void. The undersigned acknowledges that this agreement was a material inducement to the Underwriters to act as the Company's underwriters and agrees that the Underwriter's remedies at law may be inadequate in the event of a violation of this agreement and, in such event, agrees to pay the Underwriter's costs and expenses, including attorney's fees, of enforcing this agreement, which may include costs of an action seeking to enjoin such violation. The undersigned hereby represents and warrants that, as of the Effective Date, the undersigned owns (or will own) the amount and type of securities set forth below: ----------------------------------------- ----------------------------------------- ----------------------------------------- ---------------------------- Signature ---------------------------- Print Name ---------------------------- Print Address EX-1.5 6 LOCK-UP AGREEMENT 1 EXHIBIT 1.5 LOCK-UP LETTER AGREEMENT May __, 1997 ARGENT SECURITIES, INC. 3340 Peachtree Road, N.E. Suite 450 Atlanta, Georgia 30326 Gentlemen: I am the owner of ________ shares of Common Stock par value of $.01 per share (the "Common Stock") of Karts International Incorporation, a Nevada corporation (the "Company"). The Company intends to conduct an initial public offering of its Common Stock ("IPO") which shall be underwritten by, among others, Argent Securities, Inc. ("Argent") as expressed in a letter of intent between the Company and Argent (the "Letter of Intent") dated January 29, 1997. The undersigned recognizes the benefits which the Company will derive from the IPO. For and in consideration of Argent entering into the Letter of Intent and its willingness to conduct the IPO contemplated thereby on mutually acceptable terms, I hereby agree to the following lock-up arrangement restricting the sale of its Company Common Stock. A. THE LOCK-UP 1. During the period commencing on the date hereof and ending on the date which is 60 months from the closing of the IPO (such period herein referred to as the "Lock-Up Period"), I will not sell, pledge, hypothecate, grant an option for sale or otherwise dispose of, or transfer or grant any rights with respect thereto in any manner (either privately or publicly pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, as amended, or otherwise) any of the shares of Common Stock (directly or indirectly owned or controlled by me on the date hereof) (the "Securities"), without Argent's prior written consent; provided, however, that Securities may be sold or otherwise transferred in a private transaction during the Lock-Up Period so long as the acquiror of the Securities, by written agreement with Argent entered into at the time of acquisition and delivered to Argent prior to the consummation of such acquisition, agrees to be bound by the terms of this Paragraph A.1. for the balance of the Lock-Up Period, and by the terms of Paragraph A.2. below; and, provided further, that the Securities, or any portion thereof, may be transferred (I) by any such transferee to a trust for the benefit of, or as gifts to, either individually or collectively in any number, such transferee, or his or her spouse and children, (a "Permitted Transferee") and in such event the trustee of such trust or donor shall execute this Lock-Up Letter Agreement and agree to be bound thereby; or (ii) by court order or pursuant to the laws of descent and distribution. 2. In the event I desire to sell any of the Securities at any time during the term of the Lock-Up Period or within 12 months after termination of the Lock-Up Period as described below, publicly under Rule 144 or otherwise, I will sell such securities through Argent, so long as the price and terms of execution offered by Argent are at least as favorable as may be obtained from other brokerage firms. 2 3. Notwithstanding the provision of Paragraph 4 below, on __________, 1999, 2000, and 2001, _______ Shares shall be released from the restrictions set forth in Paragraph A(i) and may be sold in accordance with the provisions of Paragraph A(2) above, provided, however, that the price of the Shares must be equal to or in excess of the price of the Shares sold in the IPO, except for any sale made before the second anniversary of the Closing Date where the price of the Shares must be equal to or in excess of $_____ per Share. 4. The Securities shall be released from the restrictions set forth in paragraph A(1) in the increments indicated below upon the Company's achievement of three targets for applicable years as set forth in the following table and the footnotes thereunder (the "Chart").
========================================================================================== EARNINGS PER SHARE OF EARNINGS PER SHARE OF FYE SHARES (a) SHARES (b) STOCK 1/31 ---------------------------------------------------- PRICE Current Cumulative Current Cumulative OF ANNUAL ------- ---------- ------- ---------- SHARES(c) REVENUE ========================================================================================== 1997 0 0 $ $ $ -- - ------------------------------------------------------------------------------------------ 1998 0 0 $ $ $ $ - ------------------------------------------------------------------------------------------ 1999 $ $ $ $ - ------------------------------------------------------------------------------------------ 2000 $ $ $ $ - ------------------------------------------------------------------------------------------ 2001 $ $ $ $ - ------------------------------------------------------------------------------------------ 2002 $ $ $ $ ==========================================================================================
(a) For the year in which the Company attains (i) the earnings per share (EPS) on a cumulative basis, (ii) the target stock price for Shares or (iii) Annual Revenue on a cumulative basis after ______, any Shares not previously released shall be released in addition to the Shares released for the applicable year. In addition, for any fiscal year in which the Company attains earnings per share, target stock price or cumulated Annual Revenue targets applicable to a subsequent fiscal year, any shares eligible for release in such subsequent fiscal year shall also be released. Regardless of whether the EPS target, Target Stock Price or Annual Revenue is achieved, all of the shares shall be released on _________. (b) Earnings per share is defined as net income per share of the Company as reported in its audited financial statements for the applicable fiscal year. (c) The stock price of shares shall be defined as the average of the closing bid sales price of the Common Stock of the last 20 trading days prior to the end of the fiscal year. -2- 3 5. Notwithstanding anything herein to the contrary, all of the Securities shall be released from the restrictions set forth in paragraph A(1), to the extent not previously released, on ________________. B. PROVISIONS APPLICABLE TO SHARES The Company and the undersigned hereby acknowledge and represent that: (a) A copy of this Lock-up Agreement will be available from the Company or its transfer agent upon request and without charge and a copy of this Lock-Up Agreement may be filed with the Securities Commissions of various states, including, without limitation, any state securities commission requiring its availability. (b) A typed legend will be placed on the reverse side of each stock certificate representing the Common Stock covered by the Lock-up Agreement which states that the sale or transfer of the shares evidenced by the certificate is subject to certain restrictions pursuant to an agreement between the shareholder (whether beneficial or of record) and Argent, which agreement is on file with the Company and the Company's stock transfer agent from whom a copy is available, upon request and without charge. (c) The terms and conditions of this Lock-up Agreement can only be modified (including premature termination thereof), upon the written consent of Argent and the prior approval of any state securities commission which requires such consent. (d) Stop transfer instructions will be placed with the transfer agent against all shares of the Company's Common Stock subject to the restrictions contained in paragraph A(1) of this Lock-up Agreement. Notwithstanding the foregoing, shares subject to this Lock-Up Agreement may be transferred by the transfer agent when shares are accompanied by an opinion of company counsel certifying that such transfer is a permitted transfer. (e) This Lock-Up Letter Agreement shall terminate and be of no force and effect if it, or any of Argent's rights and obligations hereunder, are assigned to any third party by Argent. (f) 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. If this agreement is acceptable to Argent, please sign the form of acceptance below and deliver one of the counterparts hereof to me. This will become a binding agreement between us upon execution by each of the parties hereto. -3- 4 Very truly yours, ------------------------------------- V. Lynn Graybill ------------------------------------- (Number of Shares Beneficially Owned) AGREED to and ACCEPTED this ____ day of May, 1997. ARGENT SECURITIES, INC. By ----------------------------- Authorized Signature -4- EX-1.6 7 LOCK-UP AGREEMENT 1 EXHIBIT 1.6 LOCK-UP LETTER AGREEMENT May __, 1997 ARGENT SECURITIES, INC. 3340 Peachtree Road, N.E. Suite 450 Atlanta, Georgia 30326 Gentlemen: I am the owner of ________ shares of Common Stock par value of $.01 per share (the "Common Stock") of Karts International Incorporation, a Nevada corporation (the "Company"). The Company intends to conduct an initial public offering of its Common Stock ("IPO") which shall be underwritten by, among others, Argent Securities, Inc. ("Argent") as expressed in a letter of intent between the Company and Argent (the "Letter of Intent") dated January 29, 1997. The undersigned recognizes the benefits which the Company will derive from the IPO. For and in consideration of Argent entering into the Letter of Intent and its willingness to conduct the IPO contemplated thereby on mutually acceptable terms, I hereby agree to the following lock-up arrangement restricting the sale of its Company Common Stock. A. THE LOCK-UP 1. During the period commencing on the date hereof and ending on the date which is 60 months from the closing of the IPO (such period herein referred to as the "Lock-Up Period"), I will not sell, pledge, hypothecate, grant an option for sale or otherwise dispose of, or transfer or grant any rights with respect thereto in any manner (either privately or publicly pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, as amended, or otherwise) any of the shares of Common Stock (directly or indirectly owned or controlled by me on the date hereof) (the "Securities"), without Argent's prior written consent; provided, however, that Securities may be sold or otherwise transferred in a private transaction during the Lock-Up Period so long as the acquiror of the Securities, by written agreement with Argent entered into at the time of acquisition and delivered to Argent prior to the consummation of such acquisition, agrees to be bound by the terms of this Paragraph A.1. for the balance of the Lock-Up Period, and by the terms of Paragraph A.2. below; and, provided further, that the Securities, or any portion thereof, may be transferred (I) by any such transferee to a trust for the benefit of, or as gifts to, either individually or collectively in any number, such transferee, or his or her spouse and children, (a "Permitted Transferee") and in such event the trustee of such trust or donor shall execute this Lock-Up Letter Agreement and agree to be bound thereby; or (ii) by court order or pursuant to the laws of descent and distribution. 2. In the event I desire to sell any of the Securities at any time during the term of the Lock-Up Period or within 12 months after termination of the Lock-Up Period as described below, publicly under Rule 144 or otherwise, I will sell such securities through Argent, so long as the price and terms of execution offered by Argent are at least as favorable as may be obtained from other brokerage firms. 2 3. Notwithstanding the provision of Paragraph 4 below, on __________, 1999, 2000, and 2001, _______ Shares shall be released from the restrictions set forth in Paragraph A(i) and may be sold in accordance with the provisions of Paragraph A(2) above, provided, however, that the price of the Shares must be equal to or in excess of the price of the Shares sold in the IPO, except for any sale made before the second anniversary of the Closing Date where the price of the Shares must be equal to or in excess of $_____ per Share. 4. The Securities shall be released from the restrictions set forth in paragraph A(1) in the increments indicated below upon the Company's achievement of three targets for applicable years as set forth in the following table and the footnotes thereunder (the "Chart").
=================================================================================================== RELEASE PERCENTAGE OF EARNINGS PER SHARE OF SHARES (a) SHARES (b) STOCK FYE ----------------------- ---------------------- PRICE OF ANNUAL 1/31 Current Cumulative Current Cumulative SHARES(c) REVENUE ---- ------- ------------ ------- ---------- ---------- ------- =================================================================================================== 1997 0 0 $ $ $ -- 1998 0 0 $ $ $ $ 1999 $ $ $ $ 2000 $ $ $ $ 2001 $ $ $ $ 2002 $ $ $ $ ===================================================================================================
(a) For the year in which the Company attains (i) the earnings per share (EPS) on a cumulative basis, (ii) the target stock price for Shares or (iii) Annual Revenue on a cumulative basis after ______, any Shares not previously released shall be released in addition to the Shares released for the applicable year. In addition, for any fiscal year in which the Company attains earnings per share, target stock price or cumulated Annual Revenue targets applicable to a subsequent fiscal year, any shares eligible for release in such subsequent fiscal year shall also be released. Regardless of whether the EPS target, Target Stock Price or Annual Revenue is achieved, all of the shares shall be released on _________. (b) Earnings per share is defined as net income per share of the Company as reported in its audited financial statements for the applicable fiscal year. (c) The stock price of shares shall be defined as the average of the closing bid sales price of the Common Stock of the last 20 trading days prior to the end of the fiscal year. - 2 - 3 5. Notwithstanding anything herein to the contrary, all of the Securities shall be released from the restrictions set forth in paragraph A(1), to the extent not previously released, on ________________. B. PROVISIONS APPLICABLE TO SHARES The Company and the undersigned hereby acknowledge and represent that: (a) A copy of this Lock-up Agreement will be available from the Company or its transfer agent upon request and without charge and a copy of this Lock-Up Agreement may be filed with the Securities Commissions of various states, including, without limitation, any state securities commission requiring its availability. (b) A typed legend will be placed on the reverse side of each stock certificate representing the Common Stock covered by the Lock-up Agreement which states that the sale or transfer of the shares evidenced by the certificate is subject to certain restrictions pursuant to an agreement between the shareholder (whether beneficial or of record) and Argent, which agreement is on file with the Company and the Company's stock transfer agent from whom a copy is available, upon request and without charge. (c) The terms and conditions of this Lock-up Agreement can only be modified (including premature termination thereof), upon the written consent of Argent and the prior approval of any state securities commission which requires such consent. (d) Stop transfer instructions will be placed with the transfer agent against all shares of the Company's Common Stock subject to the restrictions contained in paragraph A(1) of this Lock-up Agreement. Notwithstanding the foregoing, shares subject to this Lock-Up Agreement may be transferred by the transfer agent when shares are accompanied by an opinion of company counsel certifying that such transfer is a permitted transfer. (e) This Lock-Up Letter Agreement shall terminate and be of no force and effect if it, or any of Argent's rights and obligations hereunder, are assigned to any third party by Argent. - 3 - 4 If this agreement is acceptable to Argent, please sign the form of acceptance below and deliver one of the counterparts hereof to me. This will become a binding agreement between us upon execution by each of the parties hereto. Very truly yours, ---------------------------------------- ---------------------------------------- (Number of Shares Beneficially Owned) AGREED to and ACCEPTED this ____ day of May, 1997. ARGENT SECURITIES, INC. By ----------------------------- Authorized Signature - 4 - EX-1.7 8 SELECTED DEALERS AGREEMENT 1 EXHIBIT 1.7 _______ Shares of Common Stock and ______ Redeemable Common Stock Purchase Warrants KARTS INTERNATIONAL INCORPORATED SELECTED DEALER AGREEMENT May ___, 1997 Gentlemen: We have agreed as the underwriter (the "UNDERWRITER") named in the enclosed prospectus (the "PROSPECTUS"), subject to the terms and conditions of an Underwriting Agreement dated May __, 1997 (the "UNDERWRITING AGREEMENT"), to purchase from Karts International Incorporated., a Nevada corporation (the "Company") ____ shares of Common Stock, par value $.001 per share (the "PUBLIC SHARES") and ____ Redeemable Common Stock Purchase Warrants (the "PUBLIC WARRANTS"). We may also purchase as many as ________ additional shares of Common Stock and ____ Redeemable Common Stock Purchase Warrants (the "OPTION SECURITIES") from the Company pursuant to Section 2 (1)) of the Underwriting Agreement. The Securities are more particularly described in the Prospectus, additional copies of which will be supplied in reasonable quantities upon request. We are offering a portion of the Public Shares and Warrants for sale to selected dealers (the "SELECTED DEALERS"), among whom we are pleased to include you, at the public offering price, less a concession in the amount set forth in the Prospectus under "UNDERWRITING." This offering is made subject to delivery of the Public Shares and Warrants and their acceptance by the Underwriter, to the approval of all legal matters by our counsel, and to the terms and conditions herein set forth, and may be made on the basis of the reservation of the Public Shares and Warrants or an allotment against subscription. We will advise you by telegram of the method and terms of the offering. Acceptances should be sent to Argent Securities, Inc., 3340 Peachtree Road, N.E., Suite 450, Atlanta, Georgia 30326, Attention: L. Phillips Reames. Subscription books may be closed by us at any time without notice, and we reserve the right to reject any subscription in whole or in part, but notification of allotments against and rejections of subscriptions will be made as promptly as practicable. 2 Any of the Public Shares and Warrants purchased by you hereunder are to be promptly offered by you to the public at the public offering price, as set forth in the Prospectus, except as herein otherwise provided and except that a reallowance from any such public offering price not in excess of the amount set forth in the Prospectus under "UNDERWRITING" may be allowed to dealers who are members in good standing of the National Association of Securities Dealers, Inc. (the "NASD"), or foreign dealers or institutions not eligible for membership in said association who agree to abide by the conditions with respect to foreign dealers and institutions set forth in your confirmation below. We may buy Public Shares and Warrants from, or sell Public Shares and Warrants to, any Selected Dealer, and any Selected Dealer may buy Public Shares and Warrants from, or sell Public Shares and Warrants to, any other Selected Dealer at the public offering price less all or any part of the concession set forth in the Prospectus; after the Public Shares and Warrants are released for sale to the public, we are authorized to vary the offering price of the Public Shares and Warrants and other selling terms. If, prior to the termination of this Agreement, we purchase or contract to purchase any Public Shares and Warrants which were purchased by you from us or any Selected Dealer at a concession from the public offering price (or any Public Shares and Warrants which we believe have been substituted therefor) you hereby agree that we may: (i) require you to pay us on demand an amount equal to the concession on such Public Shares and Warrants; (ii) sell for your account the Public Shares and Warrants so purchased and debit or credit your account with the loss or profit resulting from such sale; or (iii) require you to purchase such Public Shares and Warrants at a price equal to the total cost of such purchase including commissions and transfer taxes (if any) on redelivery. Public Shares and Warrants accepted or allotted hereunder shall be paid for in full at the public offering price, at the office of Argent Securities, Inc., 3340 Peachtree Road, N.E., Suite 450, Atlanta, Georgia 30326 (or such other place as you may be instructed) prior to 8:30 a.m., New York City time, on such day after the public offering date as we may advise three (3) days after the effective date, by certified or official bank check payable in New York Clearing House funds to the order of Argent Securities, Inc. against delivery of certificates. If Public Shares and Warrants are purchased and paid for by you hereunder at the public offering price, the concession will be paid to you after the termination of this Agreement. We have been advised by the Company that a registration statement (Registration No. 333-24145) (the "REGISTRATION STATEMENT") for the Public Shares and Warrants, filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the benefit of the Company) you will comply with the applicable requirements of the Act and of the Securities Exchange Act of 1934, as amended, and the terms and conditions set forth in the Prospectus. No person is authorized by the Company or the Underwriter to give or rely on any information or to make any representations not contained in the Prospectus in connection with the sale of Public Shares and Warrants. You are not authorized to act as agent for the Company or the Underwriter in offering the Public Shares and Warrants to the public or otherwise. Nothing contained herein shall constitute or be construed to make the Selected Dealers partners with the Underwriter or with one another. -2- 3 We shall not be under any liability (except for our own want of good faith) for or in respect of the validity or value of, or title to, any Public Shares and Warrants; the form or completeness of, or the statements contained in, or the validity of, the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto or any other letters or instruments executed by or on behalf of the Company or others; the form or validity of the agreement for the purchase of the Public Shares and Warrants or this Agreement; the delivery of the Public Shares and Warrants; the performance by the Company or others of any agreement on its or their part; or any matter in connection with any of the foregoing; provided, however, that nothing in this paragraph shall be deemed to relieve the Underwriter from any liability under the Act. You, by your confirmation below, represent that: (i) you are a member in good standing of the NASD or are a foreign bank or dealer not eligible for membership in the NASD which agrees to make no offers or sales of Public Shares and Warrants within the United States, its territories or its possessions, or to persons who are citizens thereof or residents therein, (ii) neither you nor any of your directors, officers, partners or "PERSONS ASSOCIATED WITH" you (as defined in the By-Laws of the NASD) nor, to your knowledge, any "RELATED PERSON" (as defined by the NASD in its Interpretation of Article III, Section I of its Rules of Fair Practice, as amended) or any other broker-dealer, have participated or intend to participate in any transaction or dealing as to which documents or information are required to be filed with the NASD pursuant to such Interpretation, and as to which such documents or information have not been so filed as required. You agree not to, at any time prior to the termination of this Agreement, bid for, purchase, sell or attempt to induce others to purchase or sell, directly or indirectly, any Public Shares and Warrants other than (a) as provided for in this Agreement or the Underwriting Agreement relating to the Public Shares and Warrants, or (1) purchases or sales as broker on unsolicited orders for the account of others. In making the sales of Public Shares and Warrants, if you are a member of the NASD, you will comply with all applicable rules of the NASD, including, without limitation, the NASD's Interpretation of Article II, Section I of its Rules of Fair Practice with respect to Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice, or if you are a foreign bank or dealer, you agree to comply with such Interpretation of Sections 8, 24 and 36 of such Article as though you were such a member and Section 25 of such Article as it applies to a nonmember broker or dealer in a foreign country. Further, pursuant to Securities Act Release No. 4968, you will distribute a Preliminary Prospectus to all persons reasonably expected to be purchasers of shares from you at least 48 hours prior to the time you expect to mail confirmation. Upon written application to us, we will inform you as to the advice we have received from counsel concerning the jurisdictions in which the Public Shares and Warrants have been qualified for sale or are exempt under the respective securities or blue sky laws of such jurisdictions, but we have not assumed and will not assume any obligation or responsibility as to the right of any Selected Dealer to sell the Public Shares and Warrants in any jurisdiction. -3- 4 As Underwriter, we shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the offering or arising thereunder. We shall not be under any obligation to you except for obligations expressly assumed by us in this Agreement. You agree, upon our request, at any time or times prior to the termination of this Agreement, to report to us the number of Public Shares and Warrants purchased by you pursuant to the provisions hereof which then remain unsold. Selected Dealers will be governed by the conditions herein set forth until this Agreement is terminated. This Agreement will terminate at the close of business on the 30th business day after the public offering of the Public Shares and Warrants, but, in our discretion, may be extended by us for a further period or periods not exceeding 30 business days in the aggregate and in our discretion, whether or not extended, may be terminated at any earlier time. Notwithstanding the termination of this Agreement, you shall remain liable for your proportionate amount of any claim, demand or liability which may be asserted against you alone, or against you together with other dealers purchasing Public Shares and Warrants upon the terms hereof, or against us, based upon the claim that the Selected Dealers, or any of them, constitute an association, an unincorporated business or other entity. This Agreement shall be construed in accordance with the laws of the State of Georgia without giving effect to conflict of laws principles. In the event that you agree to purchase Public Shares and Warrants in accordance with the terms hereof, and of the aforementioned telegram, kindly confirm such agreement by competing and signing the form provided for that purpose on the enclosed duplicate hereof and returning it to us promptly. All communications from you should be addressed to Argent Securities, Inc., 3340 Peachtree Road, N.E., Suite 450, Atlanta, Georgia 30326, Attention: L. Phillips Reames. Any notice from us to you shall be deemed to have been duly given if mailed or telegraphed to you at this address to which this letter is mailed. Very truly yours, ARGENT SECURITIES, INC. By: -------------------------------------- Name: ---------------------------- Title: ---------------------------- -4- 5 May ___, 1997 Argent Securities, Inc. 3340 Peachtree Road, N.E. Suite 450 Atlanta, Georgia 30326 Attention: L. Phillips Reames Gentlemen: We hereby confirm our agreement to purchase ____ shares of Public Shares and _____ Warrants (as such term is defined in the Selected Dealer Agreement), of Karts International Incorporated, subject to the terms and conditions of the foregoing Agreement and your telegram to us referred to herein. We hereby acknowledge receipt of the definitive Prospectus relating to the Public Shares and Warrants, and we confirm that in purchasing Public Shares and Warrants we have relied upon no statements whatsoever, written or oral, other than the statements in such Prospectus. We have made a record of our distribution of preliminary prospectuses and, when furnished with copies of any revised preliminary prospectus, we have, upon your request, promptly forwarded copies thereof to each person to whom we had theretofore distributed preliminary prospectuses. We confirm that we have complied and will comply with all of the requirements of Rule 15c2-8 of the Securities Exchange Act of 1934. We hereby represent that we are a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or, if we are not such a member, we are a foreign dealer or institution not eligible for membership in said Association which agrees to make no sales within the United States, its territories or its possessions or to persons who are citizens thereof or residents therein. If we are a member of the NASD, we agree to comply with all applicable rules of the NASD, including, without limitation, the provisions of Section 24 of Article III of the Rules of Fair Practice of the NASD, or, if we are such a foreign dealer or institution, we agree to comply with all applicable rules of the NASD, including, without limitation, the NASD's Interpretation with Respect to Free-Riding and Withholding and Sections 8, 24 and 36 of such article as if we were such a member, and Section 25 of such Article as it applies to a non-member broker or dealer in a foreign country. 6 Pursuant to your telegram, we hereby subscribe for an allotment of ____ shares of Common Stock and ____ Redeemable Common Stock Purchase Warrants, and acknowledge a concession of $._____ from the $______ public offering price of the Public Shares and Warrants. - ----------------------------------- ----------------------------------- Corporate or Firm Name of (Signature of Authorized. Selected Dealer Official or Partner) - ----------------------------------- ----------------------------------- Address Date Accepted - ----------------------------------- ----------------------------------- Telephone Tax I.D.# -2- EX-4.2 9 WARRANT AGREEMENT 1 EXHIBIT 4.2 WARRANT AGREEMENT WARRANT AGREEMENT dated as of ____________, 1997 between Karts International Incorporated, a Nevada corporation, having its principal place of business at 109 Northpark Boulevard, Suite 210, Covington, Louisiana 70433, (the "Company") and Securities Transfer Corporation, a Texas corporation, having its principal place of business at 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248 (the "Warrant Agent"). W I T N E S S E T H : WHEREAS, the Company proposes to issue and sell to the public in a secondary public offering (the "Secondary Offering") 1,400,000 shares of the Company's Common Stock, par value $.001 per share ("Shares"), and 1,400,000 Redeemable Common Stock Purchase Warrants (the "Public Warrants") (plus an additional 210,000 shares and 210,000 Warrants to cover overallotments); WHEREAS, the Company also proposes to issue and sell to Argent Securities, Inc. (the "Underwriter") in the Secondary Offering an option to purchase 140,000 Shares and 140,000 Warrants (the "Underwriter Warrants" and together with the Public Warrants sometimes hereinafter referred to as the "Warrants"); WHEREAS, the Warrants shall be evidenced by certificates substantially in the form of Exhibit A annexed hereto (the "Warrant Certificate"), each Warrant entitling the holder thereof to purchase one share of Common Stock; WHEREAS, the Warrants will have an exercise price of $_______ per share of Common Stock, subject to certain adjustments (the "Warrant Price"), will be exercisable commencing on the first anniversary of the effective date of the Secondary Offering ("First Exercise Date") until a date which is the fifth anniversary of the effective date of the Secondary Offering ("Last Exercise Date"), unless extended by the Company, and, except for the Underwriter's Warrants, will be exercisable during any period of time fixed for that Warrant's redemption in a Redemption Notice (hereinafter defined in Section 2.03), which period of time will terminate on a stated Redemption Date (hereinafter defined in Section 2.03); WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act in connection with the issuance, registration, transfer, exchange and replacement of the Warrant Certificates and exercise of the Warrants; and WHEREAS, the Company and the Warrant Agent desire to set forth in this Agreement the terms and conditions upon which the Warrant Certificates shall be issued, transferred, exchanged and placed and the Warrants exercised, and to provide for the rights of the holders of the Warrants; 2 NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and the respective undertakings herein below set forth, the Company and the Warrant Agent agree as follows: ARTICLE I ISSUANCE AND EXECUTION OF WARRANTS SECTION 1.01. The Company hereby appoints the Warrant Agent to act on behalf of the Company in accordance with the terms and conditions herein set forth, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with such provisions. SECTION 1.02. The Warrant Certificates for the Warrants shall be issued in registered form only. The text of the Warrant Certificate, including the form of assignment and subscription printed on the reverse side thereof, shall be substantially in the form of Exhibit A annexed hereto, which text is hereby incorporated in this Agreement by reference as though fully set forth herein and to whose terms and conditions the Company and the Warrant Agent hereby agree. Each Warrant Certificate shall evidence the right, subject to the provisions of this Agreement and of such Warrant Certificate, to purchase the number of validly issued, fully paid and non-assessable shares of Common Stock, as that term is defined in Section 1.05 of this Agreement, stated therein, free of preemptive rights, subject to adjustment as provided in Article III of this Agreement. SECTION 1.03. Upon the written order of the Company, signed by the President or any Vice President, and the Secretary, Treasurer, Assistant Secretary or Assistant Treasurer of the Company, the Warrant Agent shall issue and register Warrants in the names and denominations specified in that order, and will countersign and deliver Warrant Certificates evidencing the same in accordance with that order. Each Warrant Certificate shall be dated the date of its countersignature. Each Warrant Certificate shall be executed on behalf of the Company by the manual or facsimile signature of the President of the Company, under its corporate seal, affixed or facsimile, attested by the manual or facsimile signature of the Secretary of the Company and shall be countersigned manually by the Warrant Agent. The Warrant Certificates shall not be valid for any purpose unless so countersigned. In case any officer whose facsimile signature has been placed upon any Warrant Certificate shall have ceased to be such before such Warrant Certificate is issued, it may be issued with the same effect as if such officer had not ceased to be such on the date of issuance. SECTION 1.04. Except as otherwise expressly stated herein, all terms used in the Warrant Certificate have the meanings provided in this Agreement. SECTION 1.05. As used herein, the term "Common Stock" shall mean the aggregate number of shares that the Company, by its Certificate of Incorporation, as from time to time amended, is authorized to issue, which are not limited by its Certificate of Incorporation to a fixed sum or percentage of the book value in respect of the rights of the holders thereof to participate in -2- 3 dividends or in distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up the Company. SECTION 1.06. The Warrant Agent understands and agrees that the Public Warrants and shares of Common Stock are being sold separately in the Secondary Offering and that the Shares and the Public Warrants will be traded separately immediately upon the closing of the Secondary Offering. ARTICLE II WARRANT PRICE, DURATION AND EXERCISE OF WARRANTS, CALL OF WARRANTS AND TRADING OF WARRANTS SECTION 2.01. (a) Each Warrant shall entitle the person in whose name at the time the Warrant shall be registered upon the books to be maintained by the Warrant Agent for that purpose (the "Warrant Holder"), subject to the provisions of the Warrant Certificates and of this Agreement, to purchase from the Company any time on or after the First Exercise Date but at or before the Last Exercise Date, up to the number of shares of Common Stock stated therein, as adjusted, at the Warrant Price in effect at such date, payable in full at the time of purchase in the manner provided in Section 2.02 of this Agreement. (b) Each Warrant shall be exercisable in accordance with the terms herein and in the Warrant Certificate which, among other things, contains certain terms as to the Warrant Price. SECTION 2.02. (a) The Warrant Holder may exercise a Warrant, in whole or in part, by surrender of the Warrant Certificate, with the form of subscription thereon duly executed by the Warrant Agent at its corporate office, together with the Warrant Price for each share of Common Stock to be purchased in lawful money of the United States, or by certified check, bank draft, or postal or express money order payable in United States Dollars to the order of the Company. (b) Upon receipt of a Warrant Certificate with the form of election to purchase thereon duly executed and accompanied by payment of the aggregate Warrant Price for the shares of Common Stock for which the Warrant is then being exercised, the Warrant Agent shall requisition from the transfer agent certificates for the total number of the shares of Common Stock for which the Warrant is being exercised in such names and denominations as are required for delivery to the Warrant Holder, and the Warrant Agent shall thereupon deliver such certificates to or in accordance with the instructions of the Warrant Holder. The Company covenants and agrees that it has duly authorized and directed its transfer agent (and will authorize and direct all its future transfer agents) to comply with all such requests of the Warrant Agent. -3- 4 (c) In case any Warrant Holder shall exercise his Warrant with respect to less than all of the shares of Common Stock that may be purchased under the Warrant, a new Warrant Certificate for the balance shall be countersigned and delivered to or upon the order of the Warrant Holder. (d) The Company covenants and agrees that it will pay when due and payable any and all taxes which may be payable in respect to the issuance of Warrants, or the issuance of any shares of Common Stock upon the exercise of Warrants. However, neither the Company nor the Warrant Agent shall be required to issue or deliver any Warrant Certificate or shares of Common Stock in a name other than that of the Warrant Holder at the time of surrender if any tax is payable in respect of such transfer until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's satisfaction that such tax has been paid or shall not be due and payable. In the event that any transfer tax is due and payable, the Warrant Agent shall be under no obligation to issue or deliver any Warrant Certificate or shares of Common Stock in a name other than that of the Warrant Holder until the Company has notified the Warrant Agent that the transfer tax, if any, has been paid, or in the alternative, that no transfer tax is due and payable by reason of an exemption. (e) The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently account to the Company for all moneys received by the Warrant Agent for the purchase of shares of Common Stock upon the exercise of Warrants. (f) The Warrant Agent covenants and agrees that upon the exercise of any of the Warrants, the Warrant Agent shall provide written notice to the Company at 109 Northpark Boulevard, Suite 210, Covington, Louisiana 70433 and to the Underwriter at its office at 3340 Peachtree Street, NE, Suite 450, Atlanta, Georgia 30326, the expense of which notice shall be borne by the Company. Each notice shall contain the name of the exercising Warrant Holder, the number of shares of Common Stock that the Warrant Holder has elected to purchase, the purchase price paid on a per share basis and the cumulative number of Warrants exercised by all of the Warrant Holders as of the date of the transaction which is the subject of the aforesaid notice. Such notice shall be made on the date of the exercise of the Warrant. Nothing contained herein shall be construed so as to prevent the Warrant Agent from providing the information required in this Section 2.02 (f) in a consolidated or tabular form, provided that all other provisions of this Section are complied with. (g) The Warrant Agent covenants and agrees that it shall provide a list of each and every holder of the Warrants to the Company and the Underwriter at such time or from time to time as shall be required by the Company or the Underwriter, but in no event shall such a list be provided less frequently than once per annum at a date as shall be determined by the Company. SECTION 2.03. (a) Commencing on the first anniversary of the effective date of the Secondary Offering, the Company may, subject to the conditions set forth herein, redeem all, but not less than all, the Warrants then outstanding at a redemption price of $.001 per Warrant upon not less -4- 5 than thirty (30) days prior written notice (the "Redemption Notice") to the holders thereof provided that the average closing price of the Common Stock for the 20 consecutive trading days ending three (3) days prior to the date of the Redemption Notice is at least $_____, subject to adjustment for stock dividends, stock splits and other anti-dilution provisions as provided for under Article III herein. For purposes of this Section 2.03, "closing price" at any date shall be deemed to be: (i) the last sale price regular way as reported on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or (ii) if the Common Stock is not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices regular way for the Common Stock as reported by the Nasdaq National Market or Nasdaq Small Cap Market of the Nasdaq Stock Market, Inc. ("NASDAQ") or (iii) if the Common Stock is not listed or admitted for trading on any national securities exchange, and is not reported by NASDAQ, the average of the closing bid and asked prices in the over-the-counter market as furnished by the National Quotation Bureau, Inc. or if no such quotation is available, the fair market value of the Common Stock as determined in good faith by the Board of Directors of the Company. The Redemption Notice shall be deemed effective upon mailing and the time of mailing is the "Effective Date of the Notice". The Redemption Notice shall state a redemption date not less than thirty (30) days from the Effective Date of the Notice (the "Redemption Date") . No Redemption Notice shall be mailed unless all funds necessary to pay for redemption of all Warrants then outstanding shall have first been set aside by the Company in trust with the Warrant Agent for the benefit of all Warrant Holders so as to be and continue to be available therefor. The redemption price to be paid to the Warrant Holders will be $____ for each share of the Common Stock of the Company to which the Warrant Holder would then be entitled upon exercise of the Warrant being redeemed, as adjusted from time to time as provided herein (the "Redemption Price"). In the event the number of shares of Common Stock issuable upon exercise of the Warrant being redeemed are adjusted pursuant to Article III hereof, then upon each such adjustment the Redemption Price will be adjusted by multiplying the Redemption Price in effect immediately prior to such adjustment by a fraction, the numerator of which is the number of shares of Common Stock issuable upon exercise of the Warrant being redeemed immediately prior to such adjustment and the denominator of which is the number of shares of Common Stock issuable upon exercise of such Warrant being redeemed immediately after such adjustment. The Warrants may only be redeemed if the Company has in effect a current Registration Statement or post-effective amendment covering the shares underlying the Warrants. The Warrant Holders may exercise their Warrants between the Effective Date of the Notice and the Redemption Date, such exercise being effective if done in accordance with Section 2.02 (a), and if the Warrant Certificate, with form of election to purchase duly executed and the Warrant Price, as applicable for such Warrant subject to redemption for each share of Common Stock to be purchased is actually received by the Warrant Agent at its office located at 16910 Dallas Parkway, Suite 100, Dallas, TX 75248, no later than 5:00 P.M. New York time on the Redemption Date. (b) If any Warrant Holder does not wish to exercise any Warrant being redeemed, the Warrant Holder should mail such Warrant to the Warrant Agent at its office located at 16910 Dallas Parkway, Suite 100, Dallas, TX 75248, after receiving the Redemption Notice required by this Section. If such Redemption Notice shall have been so mailed, and if on or before the Effective Date of the Notice all funds necessary to pay for redemption of all Warrants then outstanding shall -5- 6 have been set aside by the Company in trust with the Warrant Agent for the benefit of all Warrant Holders so as to be and continue to be available therefor, then, on and after said Redemption Date, notwithstanding that any Warrant subject to redemption shall not have been surrendered for redemption, the obligation evidenced by all Warrants not surrendered for redemption or effectively exercised shall be deemed no longer outstanding, and all rights with respect thereto shall forthwith cease and terminate, except only the right of the holder of each Warrant subject to redemption to receive the Redemption Price for each share of Common Stock to which he would be entitled if he exercised the Warrant upon receiving the Redemption Notice of the Warrant subject to redemption held by the Holder hereof. (c) Notwithstanding anything contained in this Article II, the Underwriter's Warrants shall not be eligible for redemption by the Company. ARTICLE III ADJUSTMENT OF SHARES OF COMMON STOCK PURCHASABLE AND OF WARRANT PRICE SECTION 3.01. In case the Company shall at any time after the date of this Agreement (i) declare a dividend on the outstanding Common Stock in shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares, or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Warrant Price, and the number and kind of shares of Common Stock receivable upon exercise, in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination, or reclassification shall be proportionately adjusted so that the holder of any Warrant exercised after such time shall be entitled to receive the aggregate number and kind of shares which if such Warrant had been exercised immediately prior to such time, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination, or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. SECTION 3.02. In case the Company after the date hereof shall issue rights, options, or warrants to all holders of Common Stock entitling them to subscribe for or purchase Common Stock (or securities convertible into or exchangeable for Common Stock) at a price per share (or having a conversion price per share, if a security convertible into or exchangeable for Common Stock) less than the "current market price" (as defined in Section 3.04 hereof) per share of Common Stock on the record date established for the issuance of such rights, options or warrants, then, in such case, the Warrant Price shall be adjusted by multiplying the Warrant Price in effect on the record date of such issuance by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the record date for such issuance plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so to be issued (or the aggregate initial conversion price of the convertible securities to be issued or sold) would purchase -6- 7 at such "current market price" and of which the denominator shall be the number of shares of Common Stock outstanding on the record date for such issuance plus the number of additional shares of Common Stock to be issued (or into which the convertible or exchangeable securities to be issued or sold are initially convertible or exchangeable). Such adjustment shall become effective at the close of business on such record date; provided, however, that, to the extent the shares of Common Stock (or securities convertible to or exchangeable for shares of Common Stock) are not delivered, the Warrant Price shall be readjusted after the expiration of such rights, options, or warrants (but only with respect to Warrants exercised after such expiration), to the Warrant Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock actually issued. In case any subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error. Shares of Common Stock owned by or held for the account of the Company or any majority-owned subsidiary shall not be deemed outstanding for the purpose of any such computation. Notwithstanding the foregoing, no adjustment in the Warrant Price or the number of shares of Common Stock issuable upon exercise of the Warrants shall be made upon (i) the issuance of options (or upon exercise thereof) by the Company pursuant to its Stock Option Plans, (ii) the issuance of the Underwriter's Warrants, or (iii) any other options and warrants outstanding as of the date hereof. SECTION 3.03. In case the Company shall distribute to all holders of Common Stock (including any such distribution made to the stockholders of the Company in connection with a consolidation or merger in which the Company is the continuing corporation) evidences of its indebtedness or assets (other than cash dividends distributions and dividends payable in shares of Common Stock), subscription rights, options, or warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding those referred to in Section 3.02 hereof), then, in each case, the Warrant price shall be adjusted by multiplying the Warrant Price in effect immediately prior to the record date for the determination of stockholders entitled to receive such distribution by a fraction of which the numerator shall be the "current market price" per share of Common Stock on such record date, less the fair market value (as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error) of the portion of the evidences of indebtedness or assets so to be distributed, or of such subscription rights, options, or warrants, convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, applicable to the share, and of which the denominator shall be such "current market price" per share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of such distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. -7- 8 SECTION 3.04. For the purpose of any computation under sections 3.02 and 3.03 hereof, the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for the 20 consecutive trading days ending three (3) days prior to such date. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the closing bid price regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the highest reported bid price as furnished by NASDAQ. If on any such date the Common Stock is not quoted on NASDAQ or any such organization, the closing price shall be deemed to be the average of the closing bid and asked prices in the over-the-counter market as reported by the National Quotation Bureau or if no such quotation is available, the fair value of the Common Stock on such date, as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error. SECTION 3.05. No adjustment in the Warrant Price shall be required if such adjustment is less than $____; provided, however, that any adjustments which by reason of this Section 3.05 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article III shall be made to the nearest cent or to the nearest one-thousandth of a share, as the case may be. SECTION 3.06. In any case in which this Article III shall require that an adjustment in the Warrant Price be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the holder of any Warrant exercised after such record date, the shares, if any, issuable upon such exercise over and above the shares, if any, issuable upon such exercise on the basis of the Warrant Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. SECTION 3.07. Upon each adjustment of the Warrant Price as a result of the calculations made in Section 3.01, 3.02, or 3.03 hereof, each Warrant outstanding prior to the making of the adjustment in the Warrant Price shall thereafter evidence the right to purchase, at the adjusted Warrant Price, that number of shares (calculated to the nearest thousandth) obtained by dividing (A) the product obtained by multiplying the number of shares purchasable upon exercise of a Warrant prior to adjustment of the number of shares by the Warrant Price in effect prior to adjustment of the Warrant Price by (B) the Warrant Price in effect after such adjustment of the Warrant Price. SECTION 3.08. In case of any capital reorganization of the Company, or of any reclassification of the Common Stock (other than a reclassification of the Common Stock referred to in Section 3.01 hereof), or in the case of the consolidation of the Company with or the merger of the Company into any other corporation or of the sale, transfer, or lease of the properties and assets of the Company as, or substantially as, an entirety to any other corporation or other entity, each Warrant shall after such capital reorganization, reclassification of Common Stock, consolidation, -8- 9 merger, sale, transfer, or lease, be exercisable, on the same terms and conditions specified in this Agreement, for the number of shares of stock or other securities, assets, or cash to which a holder of the number of shares purchasable (at the time of such capital reorganization, reclassification of Common Stock, consolidation, merger, sale, transfer, or lease) upon exercise of such Warrant would have been entitled upon such capital reorganization, reclassification of Common Stock, consolidation, merger, sale, transfer, or lease; and in any such case, if necessary, the provisions set forth in this Article III with respect to the rights and interests thereafter of the holders of the Warrants shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock, other securities, assets, or cash thereafter deliverable on the exercise of the Warrants. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares shall not be deemed to be a reclassification of the Common Stock for the purposes of this subsection. The Company shall not effect any such consolidation, merger, transfer, or lease, unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the Corporation purchasing, receiving, or leasing such assets or other appropriate corporation or entity shall expressly assume, by written instrument in form satisfactory to the Underwriter, the obligation to deliver to the holder of each Warrant such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and to perform the other obligations of the Company under this Agreement. SECTION 3.09. The Company may make such reductions in the Warrant Price, in addition to those required by this Article III, as it shall, in it sole discretion, determine to be advisable. ARTICLE IV OTHER PROVISIONS RELATING TO RIGHTS OF WARRANT HOLDERS SECTION 4.01. No Warrant Holder, as such, shall be entitled to vote or receive dividends or be deemed the holder of shares of Common Stock for any purposes, nor shall anything contained in any Warrant Certificate be construed to confer upon any Warrant Holder, as such, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent to any action by the Company, whether upon any recapitalization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise, receive dividends or subscription rights, or otherwise, until in connection with the exercise of any Warrant, such Warrant shall have been surrendered and the purchase price or the shares of Common Stock for which such Warrant is being exercised shall have been received by the Warrant Agent; provided, however, that any such surrender and payment on any date when the stock transfer books of the Company shall be closed shall constitute the person or persons in whose name or names the certificate or certificates for those shares of Common Stock are to be issued as the record holder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open and the Warrant surrendered shall not be deemed to have been exercised, in whole or in part, as the case maybe, until such next succeeding day on which stock transfer books are open. -9- 10 SECTION 4.02. The Company covenants and agrees that it shall contemporaneously provide to all Warrant Holders of record any publication, mailing or notice of an event which it shall provide to all of its shareholders of record and which event shall result in the adjustment to the Warrant Price as provided in Article III hereof. For purposes of this Section 4.02, the Warrant Holders of record shall be those Warrant Holders who are of record on a date even with the date chosen by the Company for the purpose of determining the shareholders of record who shall be entitled to receive such publication, mailing or notice. SECTION 4.03. If any Warrant Certificate is lost, stolen, mutilated or destroyed, the Company and the Warrant Agent may, on such terms as to indemnity or otherwise as they may in their discretion reasonably impose, which shall, in the case of a mutilated Warrant Certificate, include the surrender thereof, issue a new Warrant Certificate of like denomination and tenor as, and in substitution for, the Warrant Certificate so lost, stolen mutilated or destroyed. SECTION 4.04. (a) The Company covenants and agrees that at all times it shall reserve and keep available for the exercise of outstanding Warrants such number of authorized shares of Common Stock and the aggregate number and kind of any other securities which the Warrants are exercisable for, pursuant to the provisions of Article III hereof, as are sufficient to permit the exercise in full of such Warrants and that it will make available to the Warrant Agent from time to time a number of duly executed certificates representing shares of Common Stock and other securities, sufficient therefor. (b) The Company shall use its best efforts to secure the listing, upon official notice of issuance, of the shares of Common Stock issuable upon exercise of Warrants upon any securities exchange upon which the Common Stock becomes listed. (c) The Company covenants that all shares of Common Stock issued on exercise of Warrants shall be validly issued, fully paid, non-assessable and free of preemptive rights. (d) The Company has filed a Registration Statement on Form SB-2 (Registration No. 333-24145) for the registration of, among other things, the sale of the Warrants and the shares of Common Stock issuable upon exercise thereof under the Securities Act of 1933, as amended (the "Act"). The Company shall use its best efforts to secure the effectiveness of the Registration Statement under the Act, and to register or qualify such Warrants and shares of Common Stock under the laws of any states in which the sale of the Warrants and shares of Common Stock was registered or qualified at the time of the Secondary Offering and shall use its reasonable good faith efforts to register and qualify such Warrants and shares of Common Stock in such additional states and jurisdictions as may be appropriate. The Company further agrees to use its best efforts to maintain the effectiveness of such Registration Statement and such state qualifications, as aforesaid, by the filing of any and all amendments to the Registration Statement and such state qualifications as may -10- 11 be required from time to time under the Act or the laws of the various states until the expiration or termination of all the Warrants in accordance herewith. (e) The Company will furnish to the Warrant Agent, upon request, an opinion of counsel satisfactory to the Warrant Agent to the effect that (i) a Registration Statement under the Act is then in effect with respect to the Warrants and shares of Common Stock issuable upon the exercise of the Warrants and that the prospectus included therein complies as to form in all material respects, (except as to financial statements, including schedules, and other accounting and financial data, as to which such counsel need express no opinion), with the requirements of the Act and the rules and regulations of the Commission thereunder; or a Registration Statement under the Act with respect to said shares of Common Stock is not required. In the event that said opinion states that such a Registration Statement is in effect, the Company will from time to time furnish the Warrant Agent with current prospectuses meeting the requirements of the Act and such rules and regulations in sufficient quantity to permit the Warrant Agent to deliver a prospectus ("Prospectus") to each Warrant Holder upon exercise thereof. The Company further agrees to pay all fees, costs and expenses in connection with the preparation and delivery to the Warrant Agent of the foregoing opinions and Prospectuses and the above mentioned registrations and other actions, and to immediately notify the Warrant Agent in the event that (i) the Commission shall have issued or threatened to issue any order preventing or suspending the use of any Prospectus; (ii) at any time any Prospectus shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; or (iii) for any reason it shall be necessary to amend or supplement any Prospectus in order to comply with the Act. SECTION 4.05. If the number of shares purchasable upon the exercise of each Warrant is adjusted pursuant to Section 3.07 hereof, the Company shall not be required to issue fractions of shares upon exercise of the Warrants or to distribute share certificates which evidence fractional shares. In lieu of fractional shares, the Company, in its sole discretion, may pay to the registered holders of Warrant Certificates at the time such Warrants are exercised as herein provided an amount in cash equal to the same fraction of the current market value of a share. For purposes of this Section 4.05, the current market value of a share issuable upon the exercise of a Warrant shall be the closing price of a share of Common Stock, as determined pursuant to the second and third sentences of Section 3.04, for the trading day immediately prior to the date of such exercise. ARTICLE V TREATMENT OF WARRANT HOLDERS SECTION 5.01. Prior to due presentment for registration of transfer of any Warrant, the Company and the Warrant Agent may deem and treat the Warrant Holder as the absolute owner of such warrant, notwithstanding any notation of ownership or other writing thereon, for the purpose of any exercise thereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. -11- 12 ARTICLE VI CONCERNING THE WARRANT AGENT AND OTHER MATTERS SECTION 6.01. The Company will from time to time promptly pay, subject to the provisions of Section 2.02 (d) of this Agreement, all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of shares of Common Stock upon the exercise of Warrants. SECTION 6.02. (a) The Warrant Agent may resign and be discharged from its duties under this Agreement upon sixty (60) days notice in writing, mailed to the Company by registered or certified mail, and to each Warrant Holder. The Company may remove the Warrant Agent or any successor warrant agent upon sixty (60) days notice in writing, mailed to the Warrant Agent or successor Warrant Agent, as the case may be, by registered or certified mail, and to each Warrant Holder; provided, however, the Company shall appoint a new Warrant Agent as hereinafter provided and such removal shall not become effective until a successor Warrant Agent has been appointed and has accepted such appointment. If the Warrant Agent shall resign or shall otherwise become capable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of sixty (60) days after it has been notified in writing of such resignation or incapability by the Warrant Agent by a Warrant Holder, who shall, with such notice, submit his Warrant Certificate for inspection by the Company, then any Warrant Holder may apply to any court of competent jurisdiction or the appointment of a successor to the Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or by such a court shall be a registered transfer agent, bank or trust company, subject to the terms and conditions of this Section 6.02, in good standing and incorporated under the laws of any State of the United States, having its principal office in the United States of America. After appointment, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed. The former Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. (b) Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such -12- 13 successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrant Certificates so countersigned, and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificate in its own name or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under this prior name and deliver Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. SECTION 6.03. The Company agrees to pay the Warrant Agent a reasonable fee for all services rendered by it hereunder. The Company also agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense, incurred without gross negligence, willful misconduct or bad faith on the part of the Warrant Agent, arising out of or in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. SECTION 6.04. The Company covenants and agrees that it shall, at the Company's expense, provide to the Warrant Agent copies of its current prospectus, if any, in such quantity as to enable the Warrant Agent to deliver one copy of such current prospectus to such Warrant Holder who shall exercise his rights under a Warrant. Notwithstanding anything else contained in this Section 6.04, the Company shall not be obligated to provide copies of its current prospectus for the purpose of allowing the Warrant Agent to deliver such copies to any Warrant Holder who delivers all of his redeemable warrants for redemption pursuant to Section 2.03 or who shall notice the Company of his intent to permit redemption of all of his Warrants pursuant to Section 2.03 herein or to any person who shall hold any Warrant subject to the terms of this Agreement after the earlier of the Redemption Date or the Last Exercise Date of the Warrants. SECTION 6.05. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrant certificates, by their acceptance thereof, shall be bound: (a) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, that fact or matter, unless other evidence in respect thereof be herein specifically prescribed, may be deemed to be conclusively proved and established by a certificate signed by the President or the Secretary of the Company and delivered to -13- 14 the Warrant Agent. That certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon that certificate. (b) The Warrant Agent shall be liable hereunder only for its own gross negligence, willful misconduct or bad faith. (c) The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates, except its countersignature thereof, or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (d) The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof, except the due execution hereof by the Warrant Agent, or in respect of the validity or execution of any Warrant Certificate, except its countersignature thereof; nor shall it be responsible for any Warrant Certificate; nor shall it be responsible for the adjustment of the Warrant Price or the making of any change in the number of shares of Common Stock required under the provisions of Article III of this Agreement or responsible for the manner, method or amount of any such change or the ascertaining of the existence of facts that would require any such adjustment or change except with respect to the exercise of Warrant Certificates after actual notice of any adjustment of the Warrant Price; nor shall it by any act under this Agreement be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any share of Common Stock will when issued be validly issued, fully paid, non-assessable and free of preemptive rights. (e) The Warrant Agent and any shareholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrant Certificates or other securities of the Company to retain a pecuniary interest in any transaction in which the Company may be interested or contract with or lend money to or otherwise act as fully and freely as though it was not the Warrant Agent or subject to this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (f) The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any officer or assistant officer of the Company, and to apply to any such officer or assistant officer for advice or instructions in connection with its duties, and shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer or assistant officer. (g) The Warrant Agent may consult with its counsel or other counsel satisfactory to it, including counsel for the Company, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, offered, or omitted by it hereunder in good faith and in accordance with the opinion of such counsel. -14- 15 (h) The Warrant Agent shall incur no liability to the Company or to any holder of any Warrant for any action taken by it in reliance upon any Warrant Certificate or certificate for Common Stock, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed, and where necessary, certified or acknowledged, by the proper person or persons. SECTION 6.06. The Warrant Agent may, without the consent or concurrence of the Warrant Holders, by supplemental agreement or otherwise, concur with the Company in making any changes or corrections in this Agreement that (i) it shall have been advised by counsel, who may be counsel for the Company, are required to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained, or (ii) as provided in Section 3.09, the Company deems necessary of advisable and which shall not be inconsistent with the provisions of the Warrant Certificates, provided such changes or corrections do not adversely affect the privileges or immunities of the Warrant Holders. SECTION 6.07. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 6.08. Forthwith upon the appointment after the date thereof of any transfer agent for the Common Stock, or of any subsequent transfer agent for the Common Stock, the Company will file with the Warrant Agent a statement setting forth the name and address of such transfer agent. SECTION 6.09. Notice or demand pursuant to this Agreement to be given or made by the Warrant Agent or by any Warrant Holder to or on the Company shall be sufficiently given or made and effective on the third business day after posting thereof, unless otherwise provided in this Agreement, if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: Karts International Incorporated 109 Northpark Boulevard, suite 210 Covington, Louisiana 70433 Attn: V. Lynn Graybill, President notice or demand pursuant to this Agreement to be given or made by the Company or any Warrant Holder to or on the Warrant Agent shall be sufficiently given or made and effective on the third business day after posting thereof, unless otherwise provided in this Agreement, if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: -15- 16 Securities Transfer Corporation 16910 Dallas Parkway, Suite 100 Dallas TX 75248 Attn: Compliance Department notice or demand pursuant to this Agreement to be given or made by the Company or the Warrant Agent to or on the Underwriter shall be sufficiently given or made and effective on the third business day after posting thereof, unless otherwise provided in this Agreement, if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Underwriter with the Company) as follows: Argent Securities, Inc. 3340 Peachtree Street, Suite 450 Atlanta, Georgia 30326 Attn: L. Phillips Reames notice or demand pursuant to this Agreement to be given or made by the Company or the Warrant Agent to or on any Warrant Holder shall be sufficiently given or made and effective on the third business day after posting thereof, unless otherwise provided in this Agreement, if sent by first-class mail, postage prepaid, addressed to such Warrant Holder at his last known address as it shall appear in the records of the Company, if such notice shall be given by the Company, or, if such notice shall be given by the Warrant Agent, as it shall appear on the register maintained by the Warrant Agent. A copy of any Notice or demand given or made pursuant to this Agreement on the Warrant Agent, Company or Underwriter shall be promptly forwarded by the recipient thereof to each of the Company, Warrant Agent or Underwriter who shall not have received or made such demand or Notice. SECTION 6.10. The validity, interpretation and performance of this Agreement and the Warrants shall be governed by the law of the State of Nevada. SECTION 6.11. Nothing in this Agreement shall be construed to give to any person or corporation other than the parties hereto and the Warrant Holders any right, remedy or claim under promise or agreement hereof. All covenants, conditions, stipulations, promises and agreements contained in this Agreement shall be for the sole and exclusive benefit of the Company and the Warrant Agent and their successors and of the Warrant Holders, and their heirs, representatives, successors, assigns and transferees. SECTION 6.12. A copy of this Agreement shall be available for inspection by any Warrant Holder during the regular business hours and at the corporate office of the Warrant Agent in Dallas, Texas, at which time the Warrant Agent may require any Warrant Holder to submit his Warrant Certificate for inspection by it. -16- 17 SECTION 6.13. This Agreement shall terminate on the Last Exercise Date, or such earlier date upon which all Warrants have been exercised or redeemed, except that the Warrant Agent shall account to the Company pursuant to Section 2.02 (e) of this Agreement for all cash held by it. The provisions of Section 6.03 and 6.04 of this Agreement shall survive such termination. SECTION 6.14. The Article headings in this Agreement are for convenience only and are not part of this Agreement and shall not affect the interpretation thereof. SECTION 6.15. This Agreement may be executed in any number counterparts, each of which is so executed shall be deemed to be an original, and all such counterparts shall together constitute but one and the same agreement. ATTEST: KARTS INTERNATIONAL INCORPORATED By: --------------------------------- V. Lynn Graybill, President and Chief Executive Officer ATTEST: SECURITIES TRANSFER CORPORATION By: --------------------------------- Name: ------------------------ Title: ----------------------- -17- EX-4.3 10 REDEEMABLE COMMON STOCK PURCHASE WARRANTS 1 EXHIBIT 4.3 REDEEMABLE COMMON STOCK PURCHASE WARRANT KARTS INTERNATIONAL INCORPORATED VOID (UNLESS EXTENDED) AFTER 5:00 P.M., NEW YORK CITY TIME, ON __________, 2002 WARRANT WARRANT NUMBER SHARES SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP ____________________ THIS CERTIFIES THAT, for value received, ______________________________________ or registered assigns (the "Warrant Holder"), is entitled to purchase from KARTS INTERNATIONAL INCORPORATED, a Nevada corporation (the "Company"), subject to the terms and conditions hereof and of the Warrant Agreement mentioned below, at any time from ____________________, 1998 until on or before 5:00 p.m., New York City Time, on ____________________, 2002 or on such later date as the Company may determine (the "Expiration Date"), the number of fully paid and nonassessable shares of the Company's Common Stock, $.001 par value (the "Shares") stated above by surrendering this Warrant Certificate with the Subscription Form on the back thereof duly executed at the office or at such other office or agency as the Company may from time to time designate (the "Warrant Agent"), and by paying in full, to the Company in lawful money of the United States, $__________ for each Share as to which this Warrant Certificate is exercisable (the "Warrant Exercise Price"). This Warrant may be redeemed at the option of the Company at any time after 5:00 p.m. New York City time, on ____________________, 1998, at such time as the market price of the Company's Common Stock, $.001 par value, if the average closing bid price for the Common Stock equals or exceeds $__________ per share for a period of twenty (20) consecutive trading days ending on the third day prior to the date of redemption at a redemption price of $.01 per Warrant. The Company shall send to the Warrant Holders being redeemed written notice of redemption by first class mail not less than thirty (30) days prior to the date fixed for redemption. In case the Warrant Holders shall exercise this Warrant with respect to less than all of the Shares that may be purchased hereunder, a new Warrant Certificate for the balance shall be countersigned and delivered to or upon the order of the Warrant Holder. This Warrant Certificate will not be valid and may not be transferred or exercised unless countersigned by the Warrant Agent. This Warrant Certificate is issued under and in accordance with the Warrant Agreement dated as of ____________________, 1997 between the Company and the Warrant Agent (the "Warrant Agreement") and is subject to the terms and provisions contained therein, to all of which terms and provisions the holder of this Warrant Certificate consents by acceptance hereof. In certain contingencies provided for in the Warrant Agreement, the number of Shares subject to purchase hereunder and the purchase price per Share thereof are subject to adjustment. Copies of the Warrant Agreement are on file at the principal corporate office of the Warrant Agent. THIS WARRANT SHALL BE VOID AND OF NO EFFECT (UNLESS EXTENDED) AFTER 5:00 P.M. NEW YORK CITY TIME, ____________________, 2002. WITNESS, the facsimile seal of the Company and the facsimile signatures of its duly authorized officers. Dated: Timothy P. Halter Secretary -1- 2 V. Lynn Graybill President Karts International Incorporated Corporate Seal 1997 Nevada [SEAL] Countersigned and Registered: Securities Transfer Corporation (Dallas, Texas) By Transfer Agent and Registrar Authorized Signature -2- 3 STATEMENT OF OTHER TERMS OF WARRANT 1. The Warrant represented by this Warrant Certificate (the "Warrant") shall expire at and shall not be exercisable after, 5:00 P.M., New York City time, on ____________________, 2002 or on such later date determined by the Company. 2. Notwithstanding that the number of Shares purchasable upon the exercise of a Warrant may have been adjusted pursuant to the terms of the Warrant Agreement, the Company shall nonetheless not be required to issue fractions of Shares upon exercise of a Warrant or to distribute Share Certificates that evidence fractional shares. In lieu of fractional shares, there shall be returned to the exercising registered holder of a Warrant upon such exercise an amount in cash, in United States dollars, equal to the amount in excess of that required to purchase the largest number of full Shares. 3. If any Shares issuable upon the exercise of this Warrant require registration or approval of any governmental authority, including, without limitation, the filing of necessary registration statements or amendments or supplements thereto under the Securities Act of 1933, as amended, or the taking of any action under the laws of the United States of America or any political subdivision thereof before such Shares may be validly issued, then the Company covenants that it will in good faith and as expeditiously as possible endeavor to secure such registration or approval or to take such other action, as the case may be: PROVIDED, HOWEVER, there is no assurance such registration or approval can be obtained, and in no event shall such Shares be issued and the Company is hereby authorized to suspend the exercise of all Warrants, for the period during which it is endeavoring to obtain such registration or approval or to take such other action. 4. This Warrant Certificate may be exchanged and is transferable at the principal office of the Warrant Agent by the registered holder hereof or by his duly authorized representative or attorney, upon surrender of this Warrant Certificate duly endorsed or accompanied (if so required by the Company or the Warrant Agent) by a written instrument, or instruments, of transfer satisfactory to the Company or the Warrant Agent. If the right to purchase less than all of the Shares covered hereby shall be so transferred, the registered holder hereof shall be entitled to receive a new Warrant Certificate or Warrant Certificates covering in the aggregate the remaining whole number of Shares. 5. No Warrant Holder, as such, shall be entitled to vote or receive dividends or be deemed the holder of Shares for any purpose, nor shall anything contained in this Warrant Certificate be construed to confer upon any Warrant Holder, as such, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent to any action by the Company (whether upon any recapitalization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings or other action affecting shareholders (except as provided in the Warrant Agreement), receive dividends or subscription rights, or otherwise, until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have been delivered as provided in the Warrant Agreement. 6. The Company and the Warrant Agent may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. 7. This Warrant shall be binding upon any successors or assigns of the Company. SUBSCRIPTION FORM (To Be Executed By The Warrant Holder If He Desire To Exercise The Warrant In Whole Or In Part) To: Karts International Incorporated The undersigned ______________________________________________________ hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, __________ Shares provided for therein and tenders payment herewith to the order of Karts -3- 4 International Incorporated, in the amount of $____________________. The undersigned requests that certificates for such Shares be issued as follows: Name:___________________________________________________________________________ Address:________________________________________________________________________ ________________________________________________________________________________ Soc. Sec. No. or Other I.D. No., if any:________________________________________ Deliver:________________________________________________________________________ Address:________________________________________________________________________ and, if said number of Shares shall not be all the Shares purchasable hereunder, that a new Warrant Certificate(s) for the balance remaining of the Shares purchasable under the Warrant Certificate be registered in the name of, and delivered to, the undersigned at the address stated above. Date: 19 Signature: ----------------------------------- Note: The signature of this Subscription must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. ASSIGNMENT (To Be Signed Only Upon Assignment) For Value Received, the undersigned hereby sells, assigns and transfers onto ___________________________________________________________________________ _______________________________________________________________________ Warrants evidenced by the within Warrant Certificate and appoints _______________________ ________________________________________________________________________________ to transfer said Warrant Certificate and warrants on the books of Karts International Incorporated, with the full power of substitution in the premises. Date: 19 Signature: ----------------------------------- In the presence of: (Signature must conform in all respect to the name of the Warrant Holder specified on the face of the Warrant Certificate, without alteration or enlargement or any change whatsoever, and the signature must be guaranteed in the usual manner.) -4- EX-5.1 11 OPINION OF LOOPER,REED, MARK & MCGRAW 1 EXHIBIT 5.1 [LOOPER, REED, MARK & MCGRAW LETTERHEAD] May 28, 1997 Karts International Incorporated 109 Northpark Boulevard, Suite 220 Covington, Louisiana 70433 Re: Registration Statement on Form SB-2 (SEC File No. 333-24145) Initially Filed with the Securities and Exchange Commission (the "Commission") on March 28, 1997; Amendment No. 1 to Registration Statement Filed with the Commission on May 28, 1997 Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form SB-2 and Amendment No. 1 thereto, SEC File No. 333-24145, (the Registration Statement and Amendment No. 1 thereto being referred to hereinafter as the "Registration Statement"), in connection with the registration of 3,360,000 shares of common stock, $.001 par value (the "Common Stock"), and 1,610,000 Redeemable Common Stock Purchase Warrants (the "Warrants") (with the number of shares of Common Stock registered in the Registration Statement including 1,400,000 shares of Common Stock offered thereby, 1,4000,000 shares of Common Stock issuable upon exercise of the Warrants, 210,000 shares of Common Stock subject to the Underwriter's over-allotment option, 210,000 shares of Common Stock issuable upon exercise of 210,000 Warrants subject to the Underwriter's over-allotment option, and 140,000 shares of Common Stock issuable upon exercise of 140,000 warrants subject to the Underwriter's Warrants). The Common Stock and the Warrants will be issued and sold in the manner described in the Registration Statement and in the exhibits thereto. We have examined the proceedings heretofore taken and are familiar with the procedures proposed to be taken by the Company in connection with the authorization, issuance and sale of the Common Stock and the Warrants. It is our opinion that the Common Stock and the Warrants to be sold by the Company pursuant to the Registration Statement will be, when sold and paid for pursuant to the terms of the Registration Statement, and the exhibits thereto, legally issued, fully paid and non-assessable securities of the Company. Further, it is our opinion that when the Warrants are exercised pursuant to the Warrant Agreement, the shares of Common Stock issuable 2 Karts International Incorporated May 28, 1997 Page 2 upon exercise of the Warrants will be, when issued and paid for pursuant to the respective terms of the Warrant Agreement, and the Registration Statement and the exhibits thereto, legally issued, fully paid and non-assessable shares of the Company. We consent to the use of this opinion as an exhibit to the Registration Statement, and we further consent to the use of our name under the caption "Legal Matters" in the Registration Statement and in the Prospectus which forms a part thereof. Very truly yours, Looper, Reed, Mark & McGraw Incorporated By: /s/ Richard B. Goodner ------------------------------------ Richard B. Goodner RBG:mdp EX-10.19 12 $300,000.00 UNIVERSAL NOTE DATED AUGUST 13, 1996 1 EXHIBIT 10.19 - ------------------------------------------------------------------------------------------------------------------------------ Brister's Thunder Kart's Inc DEPOSIT GUARANTY NATIONAL BANK Loan Number 1006824 PO Box 324 HWY. 16 WEST Date AUGUST 13, 1996 Roseland LA 70456-0324 AMITE, LA. 70422 Maturity Date AUG. 11, 1997 Loan Amount $300,000.00 BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS Renewal Of ___________________ "I" includes each borrower above, "You" means the lender, its successors and assigns. join, severally and solidarily. - ------------------------------------------------------------------------------------------------------------------------------
For value received, I promise to pay to the order of bearer, at your address listed above the PRINCIPAL sum of THREE HUNDRED THOUSAND AND 00/100 Dollars $ 300,000.00 [ ] SINGLE ADVANCE: I will receive all of this principal sum on _______. No additional advances are contemplated under this note. [XX] MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of principal I can borrow under this note. On 08/13/1996 I will receive the amount of $______________ and future principal advances are contemplated. CONDITIONS: The conditions for future advances are AS AGREED UPON BY BANK AND BORROWER [XX] OPEN END CREDIT: You and I agree that I may borrow up to the maximum amount of principal more than one time. This feature is subject to all other conditions and expires on AUGUST 11, 1997. [ ] CLOSED END CREDIT: You and I agree that I may borrow up to the maximum only one time ( and subject to all other conditions). INTEREST: I agree to pay interest on the outstanding principal balance from 08/13/1996 at the rate of 8.250% per year until AUGUST 11, 1997. [ ] VARIABLE RATE: This rate may then change as stated below. [ ] INDEX RATE" The future rate will be N/A the following index rate: N/A [ ] FREQUENCY AND TIMING: The rate on this note may change as often as N/A A change in the interest rate will take effect N/A. [ ] LIMITATIONS: During the term of this loan, the applicable annual interest rate will not be more than N/A % or less than N/A %. EFFECT OF VARIABLE RATE: A change in the interest rate will have the following effect on the payments: [ ] The amount of each scheduled payment will change. [ ] The amount of the final payment will change [ ] _________________________________________________________________. ACCRUAL METHOD: Interest will be calculated on a 365/ACTUAL basis. POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full, as stated below: [XX] on the same fixed or variable rate basis in effect before maturity (as indicated above). [ ] at a rate equal to ______________________________________________. [XX] LATE CHARGE: If a payment is made more than 10 days after it is due, I agree to pay a late charge of LESSER OF $500.00 or 5% OF PAYMENT [ ] ADDITIONAL CHARGES: In addition to interest; I agree to pay the following charges which [ ] are [ ] are not included in the principal amount above: _________________________________________________________________________. PAYMENTS: I agree to pay this note as follows: [XX] INTEREST: I agree to pay accrued interest QUARTERLY BEGINNING 11/11/1996 [XX] PRINCIPAL: I agree to pay the principal ON 08/11/1997 THEN ON 08/11/1997 [ ] INSTALLMENTS: I agree to pay this note in ______payments. The first payment will be in the amount of $_____________ and will be due _______________. A payment of $________________ will be due ______________ thereafter. The final payment of the entire unpaid balance of principal and interest will be due ____________________________________. ADDITIONAL TERMS: CPA# 52367 DTD 08-13-96 SECURITY: BLANKET ACCOUNTS RECEIVABLES IN THE NAME OF SAM'S CLUB - -------------------------------------------------------------------------------- This note is secured by: PURPOSE: The purpose of this loan is LINE OF CREDIT. [ ] the pledge of a Collateral Mortgage Note executed by _____________ as Mortgagor(s) before ___________________ Notary Public dated _____________. SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2). I have received a [ ] a security agreement executed by _______________ dated _________________. copy on today's date. - -------------------------------------------------------------------------------- Signature for Lender Brister's Thunder Kart's Inc. --------------------------------------- /s/ ILLEGIBLE /s/ V. LYNN GRAYBILL - -------------------------------------------------------------------------------- --------------------------------------- - -------------------------------------------------------------------------------- --------------------------------------- ---------------------------------------
(page 1 of 2) 2 APPLICABLE LAW: The law of the state of Louisiana will govern this note. Any term of this note which is contrary to applicable law will not be effective, unless the law permits you and me to agree to such a variation. If any provision of this agreement cannot be enforced according to its terms, this fact will not affect the enforceability of the remainder of this agreement. No modification of this agreement may be made without your express written consent. Time is of the essence in this agreement. PAYMENTS: Each payment I make on this note will first reduce accrued unpaid interest, and then unpaid principal. If you and I agree to a different application of payments, we will describe our agreement on this note. I may prepay a part of, or the entire balance of this loan without penalty, unless we specify to the contrary on this note. Any partial prepayment will not excuse or reduce any later scheduled payment until this note is paid in full (unless, when I make the prepayment, you and I agree in writing to the contrary). The final payment may be more or less than the amount scheduled depending on my payment record. INTEREST: If I receive the principal in more than one advance, each advance will start to earn interest only when I receive the advance. The interest rate in effect on this note at any given time will apply to the entire principal advanced at that time. Notwithstanding anything to the contrary, I do not agree to pay and you do not intend to charge any rate of interest that is higher than the maximum rate of interest you could charge under applicable law for the extension of credit that is agreed to here (either before or after maturity). If any notice of interest accrual is sent and is in error, we mutually agree to correct it, and if you actually collect more interest than allowed by law and this agreement, you agree to refund it to me. INDEX RATE: The index will serve only as a device for setting the rate on this note. You do not guarantee by selecting this index, or the margin, that the rate on this note will be the same rate you charge on any other loans or class of loans to me or other borrowers. ACCRUAL METHOD: The amount of interest that I will pay on this loan will be calculated using the interest rate and accrual method stated on page 1 of this note. For the purpose of interest calculation, the accrual method will determine the number of days in a "year." If no accrual method is stated, then you may use any reasonable accrual method for calculating interest. POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate" (shown on page 1) applies, the term "maturity" means the date of the last scheduled payment indicated on page 1 of this note or the date you accelerate payment on the note, whichever is earlier. SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that you will make only one advance of principal. However, you may add other amounts to the principal if you make any payments described in the "PAYMENTS BY LENDER" paragraph below. MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect that you will make more than one advance of principal. If this is closed end credit, repaying a part of the principal will not entitle me to additional credit. PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am obligated to pay (such as property insurance premiums), then you may treat those payments made by you as advances and add them to the unpaid principal under this note, or you may demand immediate payment of the charges. SET-OFF: I agree that you may set off any amount due and payable under this note against any right I have to receive money from you. "Right to receive money from you" means: (1) any deposit account balance I have with you; (2) any money owed-to me on an item presented to you or in your possession for collection or exchange; and (3) any repurchase agreement or other nondeposit obligation. "Any amount due and payable under this note" means the total amount of which you are entitled to demand payment under the terms of this note at the time you set off, This total includes any balance the due date for which you properly accelerate under this note. If my right to receive money from you is also owned by someone who has not agreed to pay this note, your right of set-off will apply to my interest in the obligation and to any other amounts I could withdraw on my sole request or endorsement. Your right of set-off does not apply to an account or other obligation where my rights are only as a representative. It also does not apply to any Individual Retirement Account or other tax-deferred retirement account. You will not be liable for the dishonor of any check when the dishonor occurs because you set off this debt against any of my accounts. I agree to hold you harmless from any such claims arising as a result of your exercise of your right of set-off. REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a residence that is personal property, the existence of a default and your remedies for such a default will be determined by applicable law, by the terms of any separate instrument creating the security interest and, to the extent not prohibited by law and not contrary to the terms of the separate security instrument, by the "Default" and "Remedies" paragraphs herein. COLLATERAL: If this note is secured by real estate, I pledge the collateral described on page 1 to you to secure repayment of this loan including principal, interest, late charges, attorneys' fees and costs. The pledged collateral will also secure repayment of any and all other debts I owe you, now or in the future, up to a maximum of $50,000,000.00. The pledged collateral will not secure any other debt entered into for primarily personal, family, or household purposes unless so indicated on the note or agreement representing such debt. I have delivered the pledged collateral to you, which is to remain pledged and held in your possession until such time as this loan and all other debts secured by the pledged collateral have been paid in full, including principal, interest, late charges, attorneys' fees and costs. If this note is secured by a security agreement, the terms are set forth in that document. DEFAULT: I will be in default if any one or more of the following occur: (1) I fail to make a payment on time or in the amount due; (2) I fail to keep the property insured, if required; (3) I fail to pay, or keep any promise, on any debt or agreement I have with you; (4) any other creditor of mine attempts to collect any debt I owe him through court proceedings; (5) I die, am declared incompetent, make an assignment for the benefit of creditors, or become insolvent (either because my liabilities exceed my assets or I am unable to pay my debts as they become due); (6) I make any written statement or provide any financial information that is untrue or inaccurate at the time it was provided; (7) I do or fail to do something which causes you to believe that you will have difficulty collecting the amount I owe you; (8) any collateral securing this note is used in a manner or for a purpose which threatens confiscation by a legal authority; (9) I change my name or assume an additional name without first notifying you before making such a change; (10) I fail to plant, cultivate and harvest crops in due season; (11) any loan proceeds are used for a purpose that will contribute to excessive erosion of highly erodible land or to the conversion of wetlands to produce an agricultural commodity, as further explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M. REMEDIES: If I am in default on this note you have, but are not limited to, the following remedies: (1) You may demand immediate payment of all I owe you under this note (principal, accrued unpaid interest and other accrued charges). (2) You may set off this debt against any right I have to the payment of money from you, subject to the terms of the "Set-Off" paragraph herein. (3) You may demand security, additional security, or additional parties to be obligated to pay this note as a condition for not using any other remedy. (4) You may refuse to make advances to me or allow purchases on credit by me. (5) You may use any remedy you have under state or federal law. (6) If secured by real estate, you may demand immediate payment of the pledged note(s) and foreclose under any Collateral Mortgage securing the pledged note(s) in accordance with applicable law, and have the mortgaged property immediately seized and sold under ordinary or executory proceedings, and to apply the proceeds derived from the judicial sale of the mortgaged property to repayment of the above described loan and any other debts secured by the pledged collateral, including principal, interest, late charges, attorneys' fees and costs. By selecting any one or more of these remedies you do not give up your right to later use any other remedy. By waiving your right to declare an event to be a default, you do not waive your right to later consider the event as a default if it continues or happens again. COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection, replevin or any other or similar type of cost if I am in default. In addition, if you hire an attorney to collect this note, I also agree to pay reasonable attorney's fees of 25% of the unpaid debt plus court costs (except where prohibited by law). To the extent permitted by the United States Bankruptcy Code, I also agree to pay the reasonable attorney's fees and costs you incur to collect this debt as awarded by any court exercising jurisdiction under the Bankruptcy Code. WAIVER: I give up my rights to require you to do certain things. I will not require you to: (1) demand payment of amounts due (presentment); (2) obtain official certification of nonpayment (protest); or (3) give notice that amounts due have not been paid (notice of dishonor). I waive all pleas of division and discussion, and agree that my liability under this note shall be "joint, several and solidarity." I also agree to waive all rights that may be waived under Section 3562 of the Louisiana Consumer Credit Law, if applicable, to the fullest extent allowed therein. OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone else has also agreed to pay it (by, for example, signing this form or a separate guarantee or endorsement). You may sue me alone, or anyone else who is obligated on this note, or any number of us together, to collect this note. You may do so without any notice that it has not been paid (notice of dishonor). You may without notice release any party to this agreement without releasing any other party. If you give up any of your rights, with or without notice, it will not affect my duty to pay this note. Any extension of new credit to any of us, or renewal of this note by all or less than all of us will not release me from my duty to pay it. (Of course, you are entitled to only one payment in full.) I agree that you may at your option extend this note or the debt represented by this note, or any portion of the note or debt, from time to time without limit or notice and for any term without affecting my liability for payment of the note. I will not assign my obligation under this agreement without your prior written approval. CREDIT INFORMATION: I agree and authorize you to obtain credit information about me from time to time (for example, by requesting a credit report) and to report to others your credit experience with me (such as a credit reporting agency). I agree to provide you, upon request, any financial statement or information you may deem necessary. I warrant that the financial statements and information I provide to you are or will be accurate, correct and complete. NOTICE: Unless otherwise required by law, any notice to me shall be given by delivering it or by mailing it by first class mail addressed to me at my last known address. My current address is on page 1. I agree to inform you in writing of any change in my address. I will give any notice to you by mailing it first class to your address stated on page 1 of this agreement, or to any other address that you have designated. INSURANCE: You may collect the proceeds (or rebates of unearned premiums) on any insurance policy insuring me (where you are named as loss payee) and on any policy insuring the property securing this note. You will apply any insurance proceeds or rebates toward what I owe you.
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(page 2 of 2) EX-10.20 13 SECURITY AGREEMENT DATED AUGUST 13, 1996 1 EXHIBIT 10.20 - ----------------------------------------------------------------------------------------------------------------------------------- Brister's Thunder Kart's Inc - --------------------------------------------------------------------- PO Box 324 DEPOSIT GUARANTY NATIONAL BANK - --------------------------------------------------------------------- HWY. 16 WEST Roseland LA 70456-0324 AMITE, LA. 70422 - --------------------------------------------------------------------- 72-0797992 - --------------------------------------------------------------------- DEBTOR'S NAME, ADDRESS AND SSN OR TIN SECURED PARTY'S NAME AND ADDRESS ("I" means each Debtor who signs.) ("You" means the Secured Party, its successors and assigns.) - -----------------------------------------------------------------------------------------------------------------------------------
I am entering into this security agreement with you on AUGUST 13, 1996 (date). SECURED DEBTS. I agree that this security agreement will secure the payment and performance of the debts, liabilities or obligations described below that (Check one) [ ] | [X] (name) KARTS INTERNATIONAL, INC. owe(s) to you now or in the future: (Check one below): [X] SPECIFIC DEBT(S). The debt(s), liability or obligations evidenced by (describe): BRISTER'S THUNDER KARTS, INC. and all extensions, renewals, refinancings, modifications and replacements of the debt, liability or obligation. [ ] ALL DEBT(S). Except in those cases listed in the "LIMITATIONS" paragraph on page 2, each and every debt, liability and obligation of every type and description (whether such debt, liability or obligation now exists or is incurred or created in the future and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several). SECURITY INTEREST. To secure the payment and performance of the above described Secured Debts, liabilities and obligations, I give you a security interest in all of the property described below that I now own and that I may own in the future (including, but not limited to, all parts, accessories, repairs, improvements, and accessions to the property), wherever the property is or may be located, and all proceeds and products from the property. [ ] DEPOSIT ACCOUNTS: All deposit accounts in which I have an interest and which are held in your institution. This security interest does not apply if the deposit account: (a) is an IRA or a tax-deferred retirement account; (b) the debt is created by a consumer credit transaction under a credit card plan; or (c) my right of withdrawal arises only in a representative capacity. [ ] INVENTORY: All inventory which I hold for ultimate sale or lease, or which has been or will be supplied under contracts of service, or which are raw materials, work in process, or materials used or consumed in my business. [ ] EQUIPMENT: All equipment including, but not limited to, all machinery, vehicles, furniture, fixtures, manufacturing equipment, farm machinery and equipment, shop equipment, office and recordkeeping equipment, and parts and tools. Any equipment described in a list or schedule which I give to you will also be included in the secured property, but such a list is not necessary for a valid security interest in my equipment. [ ] Farm Products: All farm products including, but not limited to: (a) all poultry and livestock and their young, along with their products and produce; (b) all harvested crops, annual or perennial, and all products of the crops; and (c) all feed, seed, fertilizer, medicines, and other supplies used or produced in my farming operations. [ ] ACCOUNTS, INSTRUMENTS, DOCUMENTS, CHATTEL PAPER AND OTHER RIGHTS TO PAYMENT: All rights I have now and that I may have in the future to the payment of money including, but not limited to: (a) payment for goods sold or leased or for services rendered, whether or not I have earned such payment by performance; and (b) rights to payment arising out of all present and future debt instruments, chattel paper and loans and obligations receivable. The above include any rights and interests (including all liens and security interests) which I may have by law or agreement against any account debtor or obligor of mine. [ ] GENERAL INTANGIBLES: All general intangibles including, but not limited to, tax refunds, applications for patents, patents, copyrights, trademarks, trade secrets, good will, trade names, customer lists, permits and franchises, and the right to use my name. [ ] GOVERNMENT PAYMENTS AND PROGRAMS: All payments, accounts, general intangibles, or other benefits (including, but not limited to, payments in kind, deficiency payments, letters of entitlement, warehouse receipts, storage payments, emergency assistance payments, diversion payments, and conservation reserve payments) in which I now have and in the future may have any rights or interest and which arise under or as a result of any preexisting, current or future Federal or state governmental program (including, but not limited to, all programs administered by the Commodity Credit Corporation and the ASCS). [X] THE SECURED PROPERTY INCLUDES, BUT IS NOT LIMITED BY, THE FOLLOWING: BLANKET ACCOUNTS RECEIVABLES IN THE NAME OF SAM'S CLUB If this agreement covers collateral requiring a legal description, that description is: I am a(n) [ ] individual [ ] partnership [X] corporation I AGREE TO THE TERMS SET OUT ON PAGES 1 AND 2 OF THIS AGREEMENT. I have received a copy of this document on [ ] today's date. ------------------------------------------------ [ ] If checked, file this agreement in the real estate records. Record Owner (if not me): Brister's Thunder Kart's Inc ------------------------------------------- ------------------------------------------------------------ (Debtor's name) - --------------------------------------------------------------------- . - -------------------------------------------------------------------- /s/ V. LYNN GRAYBILL ------------------------------------------------------------ (Debtor's name) The property will be used for [ ] personal [ ] business [ ] agricultural [ ] reasons. DEPOSIT GUARANTY NATIONAL BANK By: - --------------------------------------------------------------------- --------------------------------------------------------- (Secured Party's Name) Title: ------------------------------------------------------ By: ------------------------------------------------------------------ By: --------------------------------------------------------- Title: Title: --------------------------------------------------------------- ------------------------------------------------------
(page 1 of 2) 2 GENERALLY - "You" means the Secured Party identified on page 1 of this agreement. "I," "me" and "my" means each person who signs this security agreement as Debtor and who agrees to give the property described in this agreement as security for the Secured Debts. All terms and duties under this agreement are joint and individual. No modification of this security agreement is effective unless made in writing and signed by you and me. This security agreement remains in effect, even if the note is paid and I owe no other debt to you, until discharged in writing. Time is of the essence in this agreement. APPLICABLE LAW - I agree that this security agreement will be governed by the law of the state of Louisiana. If property described in this agreement is located in another state, this agreement may also, in some circumstances, be governed by the law of the state in which the property is located. To the extent permitted by law, the terms of this agreement may vary applicable law. If any provision of applicable law may not be varied by agreement, any provision of this agreement that does not comply with that law will not be effective. If any provision of this agreement cannot be enforced according to its terms, this fact will not affect the enforceability of the remainder of this agreement. OWNERSHIP AND DUTIES TOWARD PROPERTY - I represent that I own all of the property, or to the extent this is a purchase money security interest I will acquire ownership of the property with the proceeds of the loan. I will defend it against any other claim. Your claim to the property is ahead of the claims of any other creditor. I agree to do whatever you require to protect your security interest and to keep your claim in the property ahead of the claims of other creditors. I will not do anything to harm your position. I will keep books, records and accounts about the property and my business in general. I will let you examine these records at any reasonable time. I will prepare any report or accounting you request, which deals with the property. I will keep the property in my possession and will keep it in good repair and use it only for the purpose(s) described on page 1 of this agreement. I will not change this specified use without your express written permission. I represent that I am the original owner of the property and, if I am not, that I have provided you with a list of prior owners of the property. I will keep the property at my address listed on page 1 of this agreement, unless we agree I may keep it at another location. If the property is to be used in another state, I will give you a list of those states. I will not try to sell the property unless it is inventory or I receive your written permission to do so. If I sell the property I will have the payment made payable to the order of you and me. You may demand immediate payment of the debt(s) if the debtor is not a natural person and without your prior written consent (1) a beneficial interest in the debtor is sold or transferred or (2) there is a change in either the identity or number of members of a partnership or (3) there is a change in ownership of more than 25 percent of the voting stock of a corporation. I will pay all taxes and charges on the property as they become due. You have the right of reasonable access in order to inspect the property. I will immediately inform you of any loss or damage to the property. LIMITATIONS - This agreement will not secure a debt described in the section entitled "Secured Debts" on page 1: 1) if you fail to make any disclosure of the existence of this security interest required by law for such other debt; 2) if this security interest is in my principal dwelling and you fail to provide (to all persons entitled) any notice of right of rescission required by law for such other debt; 3) to the extent that this security interest is in "household goods" and the other debt to be secured is a "consumer" loan (as those terms are defined in applicable federal regulations governing unfair and deceptive credit practices); 4) if this security interest is in margin stock subject to the requirements of 12 C.F.R. Section 207 or 221 and you do not obtain a statement of purpose if required under these regulations with respect to that debt; or 5) if this security interest is unenforceable by law with respect to that debt. PURCHASE MONEY SECURITY INTEREST - For the sole purpose of determining the extent of a purchase money security interest arising under this security agreement: (a) payments on any non-purchase money loan also secured by this agreement will not be deemed to apply to the purchase money loan, and (b) payments on the purchase money loan will be deemed to apply first to the non-purchase money portion of the loan, if any, and then to the purchase money obligations in the order in which the items of collateral were acquired or if acquired at the same time, in the order selected by you. No security interest will be terminated by application of this formula. "Purchase money loan" means any loan the proceeds of which, in whole or in part, are used to acquire any collateral securing the loan and all extensions, renewals, consolidations, and refinancings of such loan. AUTHORITY OF SECURED PARTY TO MAKE ADVANCES AND PERFORM FOR DEBTOR - I agree to pay you on demand any sums you advanced on my behalf including, but not limited to, expenses incurred in collecting, insuring, conserving, or protecting the property or in any inventories, audits, inspections or other examinations by you in respect to the property. If I fail to pay such sums, you may do so for me, adding the amount paid to the other amounts secured by this agreement. All such sums will be due on demand and will bear interest at the highest rate provided in any agreement, note or other instrument evidencing the Secured Debt(s) and permitted by law at the time of the advance. If I fail to perform any of my duties under this security agreement, or any mortgage, deed of trust, lien or other security interest, you may without notice to me perform the duties or cause them to be performed. I understand that this authorization includes but is not limited to, permission to: (1) prepare, file, and sign my name to any necessary reports or accountings; (2) notify any account debtor of your interest in this property and tell the account debtor to make the payments to you or someone else you name, rather than me; (3) place on any chattel paper a note indicating your interest in the property; (4) in my name, demand, collect, receive and give a receipt for, compromise, settle, and handle any suits or other proceedings involving the collateral; (5) take any action you feel is necessary in order to realize on the collateral, including performing any part of a contract or endorsing it in my name; and (6) make an entry on my books and records showing the existence of the security agreement. Your right to perform for me shall not create an obligation to perform and your failure to perform will not preclude you from exercising any of your other rights under the law or this security agreement. INSURANCE - I agree to buy insurance on the property against the risks and for the amounts you require and to furnish you continuing proof of coverage. I will have the insurance company name you as loss payee on any such policy. You may require added security if you agree that insurance proceeds may be used to repair or replace the property. I will buy insurance from a firm licensed to do business in the state where you are located. The firm will be reasonably acceptable to you. The insurance will last until the property is released from this agreement. If I fail to buy or maintain the insurance (or fail to name you as loss payee) you may purchase it yourself. WARRANTIES AND REPRESENTATIONS - If this agreement includes accounts, I will not settle any account for less than its full value without your written permission. I will collect all accounts until you tell me otherwise. I will keep the proceeds from all the accounts and any goods which are returned to me or which I take back in trust for you. I will not mix them with any other property of mine. I will deliver them to you at your request. If you ask me to pay you the full price on any returned items or items retaken by myself, I will do so. If this agreement covers inventory, I will not dispose of it except in my ordinary course of business at the fair market value for the property, or at a minimum price established between you and me. If this agreement covers farm products I will provide you, at your request, a written list of the buyers, commission merchants or selling agents to or through whom I may sell my farm products. In addition to those parties named on this written list, I authorize you to notify at your sole discretion any additional parties regarding your security interest in my farm products. I remain subject to all applicable penalties for selling my farm products in violation of my agreement with you and the Food Security Act. In this paragraph the terms farm products, buyers, commission merchants and selling agents have the meanings given to them in the Federal Food Security Act of 1985. DEFAULT - I will be in default if any one or more of the following occur: (1) I fail to make a payment on time or in the amount due; (2) I fail to keep the property insured, if required; (3) I fail to pay, or keep any promise, on any debt or agreement I have with you; (4) any other creditor of mine attempts to collect any debt I owe him through court proceedings; (5) I die, am declared incompetent, make an assignment for the benefit of creditors, or become insolvent (either because my liabilities exceed my assets or I am unable to pay my debts as they become due); (6) I make any written statement or provide any financial information that is untrue or inaccurate at the time it was provided; (7) I do or fail to do something which causes you to believe that you will have difficulty collecting the amount I owe you; (8) I change my name or assume an additional name without first notifying you before making such a change; (9) failure to plant, cultivate and harvest crops in due season; (10) if any loan proceeds are used for a purpose that will contribute to excessive erosion of highly erodible land or to the conversion of wetlands to produce an agricultural commodity, as further explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M. REMEDIES - If I am in default on this agreement, you have the following remedies: 1) You may demand immediate payment of all I owe you under any obligation secured by this agreement. 2) You may set off any obligation I have to you against any right I have to the payment of money from you. 3) You may demand more security or new parties obligated to pay any debt I owe you as a condition of giving up any other remedy. 4) You may make use of any remedy you have under state or federal law. 5) If I default by failing to pay taxes or other charges, you may pay them (but you are not required to do so). If you do, I will repay to you the amount you paid plus interest at the highest contract rate. 6) You may repossess the property and sell it as provided by law. You may apply what you receive from the sale of the property to: your expenses; your reasonable attorneys' fees and legal expenses (where not prohibited by law); any debt I owe you. If what you receive from the sale of the property does not satisfy the debts, you may take me to court to recover the difference (where permitted by law). I agree that 10 days written notice sent to my address listed on page 1 by first class mail will be reasonable notice to me under the Uniform Commercial Code. If any items not otherwise subject to this agreement are contained in the property when you take possession, you may hold these items for me at my risk and you will not be liable for taking possession of them. 7) In some cases, you may keep the property to satisfy the debt. By choosing any one or more of these remedies, you do not waive your right to later use any other remedy. You do not waive a default if you choose not to use any remedy, and, by electing not to use any remedy, you do not waive your right to later consider the event a default and to immediately use any remedies if it continues or occurs again. FILING - A carbon, photographic or other reproduction of this security agreement or the financing statement covering the property described in this agreement may be used as a financing statement where allowed by law. Where permitted by law, you may file a financing statement which does not contain my signature, covering the property secured by this agreement. CO-MAKERS - If more than one of us has signed this agreement, we are all obligated equally under the agreement. You may sue any one of us or any of us together if this agreement is violated. You do not have to tell me if any term of the agreement has not been carried out. You may release any co-signer and I will still be obligated under this agreement. You may release any of the security and I will still be obligated under this agreement. Waiver by you of any of your rights will not affect my duties under this agreement. Extending this agreement or new obligations under this agreement, will not affect my duty under the agreement, WAIVER/CONFESSION - I hereby waive the benefit of appraisal as provided in the Louisiana Code of Civil Procedure, and all other laws with regard to appraisal upon sales. For purposes of foreclosure under Louisiana executory process procedures, I confess judgment in your favor up to the full amount of the Note, in principal, interest, late charges, costs and attorney's fees, and in the amount of all other funds which you may advance on my behalf for the preservation of the secured property. (page 2 of 2) EX-10.21 14 COLLATERAL PLEDGE AGREEMENT DATED AUGUST 13, 1996 1 EXHIBIT 10.21 COLLATERAL PLEDGE CITIZENS NATIONAL BANK AGREEMENT NO. 52367 NAME Bristers' Thunder Kart, Inc. DATE 8-13-96 ADDRESS PO Box 324; Roseland, LA 70456
DESCRIPTION OF PROPERTY HEREBY PLEDGED QUANTITY (where applicable, give certificate or bond number, par value or maturity date, number of shares or amount) Blanket assignment of accounts receivable in the name of Sam's Club.
The above described property pledged in this agreement shall be used to secure the indebtedness of the undersigned Pledgor (PLEDGOR) and/or the indebtedness of Brister's Thunder Karts, Inc. (DEBTOR) Whereas, the above named PLEDGOR and/or the above named DEBTOR are presently indebted unto the Citizens National Bank (BANK) for loans and advances made and credit extended; and desire to carry on a general banking business with BANK, in the course of which PLEDGOR and/or DEBTOR may from time to time apply for additional loans and advances, renewals thereof and the further extension of credit. In order to secure the performance of all such obligations to BANK and the payment of all such indebtedness within the limitation of amount hereinafter fixed, whether presently existing or hereafter incurred, whether directly or indirectly, and whether primarily or secondarily, and whether represented by notes, drafts, bills, overdrafts, endorsements, guarantees, or otherwise, and any and all renewals or extensions thereof, together with interest thereon and all costs of collection, including attorney's fees. PLEDGOR does by these presents pledge, hypothecate, and deliver unto BANK the property hereinabove described (the receipt and delivery of which Bank does hereby acknowledge), together with all proceeds, monies, income and benefits attributable or accruing to said property which, PLEDGOR is or may hereafter become entitled to receive on account of said property, whether by stock split, stock dividend, or otherwise, including but not by way of limitation all interest and principal payments, and all dividends and other distribution on or with respect to such property whether payable in cash, stock or other property, and all warrants, subscription and other rights. In addition, in the event PLEDGOR shall receive any stock dividend or stock split on the pledged stock, PLEDGOR will immediately deliver same to BANK and immediately provide BANK with properly executed stock powers for each certificate of stock received. All property herein pledged to BANK is hereinafter sometimes called "COLLATERAL." PLEDGOR hereby authorizes and empowers BANK, at its option, to cause any of the COLLATERAL to be transferred to the name of BANK. PLEDGOR further agrees that should any indebtedness secured by this Agreement become due or be declared due in accordance with the provisions hereof, any and all funds deposited to the credit of PLEDGOR in BANK or belonging to PLEDGOR and otherwise in the possession of or under the control of BANK may be immediately applied thereto. If at any time the COLLATERAL should be deemed by BANK to be insufficient to secure the payment of the indebtedness then outstanding, PLEDGOR agrees to furnish within twenty-four (24) hours from demand such additional security or make such payment in reduction of the outstanding indebtedness as may be satisfactory to BANK's reasonable requirements. Upon the failure of PLEDGOR to make such satisfactory arrangements, or upon PLEDGOR's or DEBTOR's failure to pay any portion of the indebtedness contracted by PLEDGOR or DEBTOR promptly at the maturity thereof, then at the sole option of BANK the entire indebtedness secured by this Agreement may be declared due and collectible. In the case of non-payment of the indebtedness secured by this Agreement or any portion thereof at maturity or when otherwise due, BANK is hereby given full and irrevocable authority to sell, assign, transfer and effectively deliver the whole of the COLLATERAL, or any part thereof, or any substitutes therefor, or additions thereto at public or private sale at such time or times as it may elect with or without recourse to judicial proceedings and with or without demand, appraisement, notice or advertisement of any kind, all of which are hereby expressly waived. At any such sale BANK may itself become the purchaser of any and all of the COLLATERAL or other property so sold, free from any right of redemption on the part of any party hereto, which rights is expressly waived, and BANK may thereafter hold and own the same in its own right absolutely. Upon the transfer of the note or notes representing any of the indebtedness secured by this Agreement, BANK may transfer any and all COLLATERAL and thereafter shall be fully discharged from all liability and responsibility with respect to the property so transferred, and the transferee shall be vested with all the powers and rights of BANK with respect to the property transferred. The property described herein shall be held by BANK as general collateral to secure any and all indebtedness due or to become due by PLEDGOR and/or DEBTOR and it shall be conclusively presumed that any and all loans and advances hereafter made to PLEDGOR and/or DEBTOR by BANK shall have been made in accordance with and upon the COLLATERAL pledged in this Agreement, which shall remain in force and effect so long as PLEDGOR or DEBTOR is indebted unto BANK; and it is expressly understood that the possession by BANK of any property of PLEDGOR of any character whatsoever shall conclusively evidence the fact that such property has been delivered in accordance with this Agreement, whether or not the same may be specifically described as contemplated herein. PLEDGOR represents and warrants to BANK that 1. The performance of the obligations under this Agreement and compliance with the provisions and conditions thereof will not violate any of the terms, conditions or provisions of or constitute default under any indenture, mortgage or deed of trust, lease or other contract or agreement to which PLEDGOR is now a party, or by which PLEDGOR may be bound, or violate any of the terms or provisions of PLEDGOR's respective charter or by-laws, or any applicable law, rule, regulation, order, judgment or decree, and furthermore, that PLEDGOR will comply with all applicable laws and all applicable rules, regulations and orders of any public or governmental agency, except those which are being contested in good faith by appropriate proceedings. 2. There are no actions, suits or proceedings pending, or, to PLEDGOR's knowledge, threatened against or affecting PLEDGOR or DEBTOR in any court, or before or by any governmental department, agency or instrumentality, and adverse decision in which might materially affect PLEDGOR's ability to perform the obligations accruing by virtue of this Agreement, or any other agreement with BANK by which PLEDGOR and/or DEBTOR is bound. 3. As to PLEDGOR's own financial statements delivered to BANK, such statements are correct and complete and fairly present the financial condition as of the dates specified therein, and there has been no materially adverse change in PLEDGOR's financial conditions since the date of the last financial statement furnished to BANK. 4. All of PLEDGOR's own warranties and representations to BANK, and the execution of any disclosure or other regulatory forms, are correct and complete. 5. PLEDGOR has been given a reasonable opportunity to obtain knowledge of the essential terms of this Agreement before executing same. PLEDGOR expressly relieves and releases BANK, as pledgee, or any and all liability or responsibility whatever which might arise because of BANK's failure to enforce by judicial process or otherwise any security in pledge in accordance with this Agreement or because of BANK's failure to give any notice or make any demand with regard thereto except when such notice, demand or enforcement is specifically requested or demanded of BANK in writing by PLEDGOR. No delay or omission on the part of BANK in exercising any right or privilege hereunder shall operate as a waiver thereof or as a waiver of any other right or privilege. A waiver on any one or more occasions shall not be construed as a bar to or waiver of any right or remedy on any future occasion. The execution and delivery of this Agreement shall in no manner impair or affect any other security given to BANK by PLEDGOR or DEBTOR, and any security taken hereafter by BANK as security for payment of any indebtedness of, or performance of any obligations by, PLEDGOR and/or DEBTOR shall in no manner impair or affect this Agreement, all such present and future additional security to be considered as cumulative security. Any of the COLLATERAL may be released from this Agreement without altering, varying or diminishing in any way the force, effect, lien, or privilege of this Agreement as to the COLLATERAL not expressly released, and this Agreement shall continue as a pledge, first lien, privilege and encumbrance on all the COLLATERAL not expressly released until all indebtedness and obligations secured hereby have been paid and performed in full and the said COLLATERAL is released by BANK. PLEDGOR shall not assign, transfer, or pledge any COLLATERAL not released from this Agreement; and any attempted assignment, transfer, or pledge of any interest in and to the COLLATERAL shall be null and void and of no effect and shall not deprive BANK of the right to sell or otherwise dispose of or utilize any or all of the COLLATERAL as above provided or necessitate the sale or disposition thereon in parcels. PLEDGOR waives presentment for payment, demand, protest, notice of protest, notice of non-payment, and all please of division and discussion; and PLEDGOR consents to any and all extensions to DEBTOR, and all amendments and additions to any of the indebtedness secured by this Agreement, all without notice. Any notice or demand to PLEDGOR hereunder or in connection herewith may be given and shall conclusively be deemed and considered to have been given and received upon the deposit thereof in the U.S. Mail, duly stamped and addressed to the PLEDGOR at the address shown herein, but actual notice, however given or received, shall always be effective. The terms PLEDGOR and DEBTOR used herein apply to the singular or plural as applicable. Further, if more than one person has signed this Agreement, this shall be construed to be the solidary obligation of each. The limit of the total indebtedness of PLEDGOR and/or DEBTOR secured by this Agreement shall be the total indebtedness of PLEDGOR and/or DEBTOR to BANK, provided, however, in no event shall the limit of the amount of indebtedness secured by this Agreement exceed the sum of Ten Million Dollars ($10,000,000.00). If any clause, sentence or paragraph of this Agreement shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect or invalidate the remainder but shall be confined in its operation to the clause, sentence or paragraph found invalid. This Agreement may be referred to by its number set forth above, and, as so designated, may be amended from time to time, one or more times, by an addendum signed by any one of the parties hereto, and this Agreement, and all such addendums, shall be construed and interpreted in accordance with the laws of the State of Louisiana, and all representations, warranties and agreements therein contained shall inure to the benefit and be binding upon the parties hereto and their respective heirs, successors and assigns. DONE AND SIGNED this 13th day of August, 1996. I/We acknowledge receipt of all collateral described herein. PLEDGOR(S): Date: -------------------- /s/ V. LYNN GRAYBILL - ------------------------- ------------------------------------------- SIGNATURE Brister's Thunder Karts, Inc. ACCEPTED: CITIZENS NATIONAL BANK EX-10.22 15 GUARANTY DATED AUGUST 13, 1996 1 EXHIBIT 10.22 - ------------------------------------------------------------------------------------------ KART'S INTERNATIONAL, INC. DEPOSIT GUARANTY NATIONAL BRISTER'S THUNDER KART'S INC. - ---------------------------- BANK ----------------------------- HWY. 16 WEST P. O. BOX 324 - ---------------------------- AMITE, LA 70422 ----------------------------- 109 NORTH PARK BLVD ROSELAND, LA 70456-0324 - ---------------------------- ----------------------------- COVINGTON, LA 70433 - ---------------------------- ----------------------------- GUARANTOR'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS BORROWER'S NAME AND ADDRESS "I" INCLUDES EACH GUARANTOR "YOU" MEANS THE LENDER, ITS "BORROWER" MEANS EACH ABOVE JOINTLY, SEVERALLY AND SUCCESSORS AND ASSIGNS. PERSON ABOVE. SOLIDARILY. - ------------------------------------------------------------------------------------------
GUARANTY For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce you, at your option, to make loans or engage in any other transactions with borrower from time to time, I absolutely and unconditionally guarantee the full payment of the following debts (as defined herein) when due (whether at maturity or upon acceleration): PRESENT DEBT GUARANTY [ ] I absolutely and unconditionally guarantee to you the payment and performance of the following described debt (including all renewals, extensions, refinancings and modifications) of the borrower: ---------------------------------------------------------------------- PRESENT AND FUTURE DEBT GUARANTY [ ] I absolutely and unconditionally guarantee to you the payment and performance of each and every debt, of every type and description, that the borrower may now or at any time in the future owe you including, but not limited to, the following described debt(s): ---------------------------------------------------------------------- [X] I absolutely and unconditionally guarantee to you the payment and performance of each and every debt, of every type and description, that the borrower may now or at any time in the future owe you, up to the principal amount of $300,000.00 plus accrued interest, attorneys' fees and collection costs referable thereto (when permitted by law), and all other amounts agreed to be paid under all agreements evidencing the debt and securing the payment of the debt. You may, without notice, apply this guaranty to such debts of the borrower as you may select from time to time. DEFINITIONS - As used in this agreement, the terms "I," "we," and "my" mean all persons signing this guaranty agreement, individually and jointly, and their heirs, executors, administrators and assigns. The term "debt" means all debts, liabilities, and obligations of the borrower (including, but not limited to, all amounts agreed to be paid under the terms of any notes or agreements securing the payment of any debt, liability or obligation, overdrafts, letters of credit, guaranties, advances for taxes, insurance, repairs and storage, and all extensions, renewals, refinancings and modifications of these debts) whether now existing or created or incurred in the future, due or to become due, or absolute or contingent, except for any obligations incurred by borrower after the date of this guaranty for which the borrower meets your standard of creditworthiness based on the borrower's own assets and income without the addition of a guaranty, or to which, although you require the addition of a guaranty, the borrower chooses someone other than me to guaranty the obligation. APPLICABLE LAW - This agreement shall be interpreted under the laws of the state of Louisiana, without giving any effect to the principles of conflict of laws. Any term of this agreement that does not comply with applicable law will not be effective if that law does not expressly or impliedly permit variations by agreement. If any part of this agreement cannot be enforced according to its terms, this fact will not affect the balance of this agreement. REVOCATION - I agree that this is an absolute and continuing guaranty. If this guaranty is limited to the payment of a specific debt of the borrower described above, this agreement cannot be revoked and will remain in effect until the debt is paid in full. If this guaranty covers both the borrower's present and future debts, I agree that this guaranty will remain binding on me, whether or not there are any debts outstanding, until three (3) full business days after you have actually received written notice of my revocation or written notice of my death or incompetence. Notice of revocation or notice of my death or incompetence will not affect my obligations under this guaranty with respect to any debts incurred by or for which you have made a commitment to borrower within three (3) full business days after you actually receive such notice, and all renewals, extensions, refinancings, and modifications of such debts. I agree that if any other person signing this agreement provides a notice of revocation to you, I will still be obligated under this agreement for three (3) full business days after I provide a notice of revocation to you. If any other person signing this agreement dies or is declared incompetent, such fact will not affect my obligations under this agreement. OBLIGATIONS INDEPENDENT - I agree that this guaranty is in addition to and does not supercede any previous guaranty. I agree that I am obligated to pay according to the terms of this guaranty even if any other person has agreed to pay the borrower's debt. My obligation to pay according to the terms of this guaranty shall not be affected by the illegality, invalidity or unenforceability of any notes or agreements evidencing the debt, the violation of any applicable usury laws, forgery, or any other circumstances which make the indebtedness unenforceable against the borrower. I will remain obligated to pay on this guaranty even if any other person who is obligated to pay the borrower's debt, including the borrower, has such obligation discharged in bankruptcy, foreclosure, or otherwise discharged by law. In such situations, my obligation shall include post-bankruptcy petition interest and attorneys' fees and any other amounts which borrower is discharged from paying or which do not otherwise accrue to borrower's indebtedness due to borrower's discharge. I will also be obligated to pay you, to the fullest extent permitted by law, any deficiency remaining after foreclosure of any mortgage or security interest securing borrower's debt, whether or not the liability of borrower or any other obligor for such deficiency is discharged by statute or judicial decision. If any payments by borrower to you are thereafter set aside, recovered, rescinded, in whole or in part, are settled by you at your discretion, or are in any way recouped or recovered from you for any reason (including, without limitation, the bankruptcy, insolvency, or reorganization of borrower or any other obligor), then I am obligated to reimburse or indemnify you for the full amount you so pay together with costs, interest, attorneys' fees and all other expenses which you incur in connection therewith. I also agree that if my liability is limited to a stated principal amount (plus other agreed charges), you may allow the borrower to incur debt in excess of the specified amount and apply to the payment of such excess any amounts you receive for payment of the debt from the borrower or any other person, any amounts resulting from any collateral, or amounts received from any other source, without affecting my obligations under this agreement. No modification of this agreement is effective unless in writing and signed by you and me, except that you may, without notice to me and without the addition of a signed writing or my approval; (1) release any borrower or other person who may be liable for borrower's debt, (2) release or substitute any collateral, (3) fail to perfect any security interest or otherwise impair any collateral, (4) waive or impair any right you may have against any borrower or other person who may be liable for borrower's debt, (5) settle or compromise any claim against the borrower or any person who may be liable for the borrower's debt, (6) procure any additional security or persons who agree to be liable for borrower's debt, (7) delay or fail to pursue enforcement of the debt, (8) apply amounts you receive from the borrower or other persons to payment of the debt in any order you select, (9) make any election with respect to the debt provided by law or any agreement with any person liable for the debt, (10) exercise or fail to exercise any rights you have with respect to the debt, (ll) extend new credit to the borrower, or (12) renew, extend, refinance or modify the borrower's debt on any terms agreed to by you and the borrower (including, but not limited to, changes in the interest rate or in the method, time, place or amount of payment) without affecting my obligation to pay under this guaranty. WAIVER - I waive presentment, demand, protest, notice of dishonor, and notice of acceptance of this guaranty. I also waive, to the extent permitted by law, all notices, all defenses and claims that the borrower could assert, any right to require you to pursue any remedy or seek payment from any other person before seeking payment under this agreement, and all other defenses to the debt, except payment in full. You may without notice to me and without my consent, enter into agreements with the borrower from time to time for purposes of creating or continuing the borrower's debt as allowed by this guaranty. I agree that I will be liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure (or repossession) and sale of any collateral without regard to whether borrower's obligation to pay such deficiency is discharged by law. If any payments on the debt are set aside, recovered or required to be returned in the event of the insolvency, bankruptcy or reorganization of the borrower, my obligations under this agreement will continue as if such payments had never been made. I also waive and relinquish all present and future claims, rights, and remedies against borrower or any other obligated party arising out of the creation or my performance of this guaranty. My waiver includes, but is not limited to, the right of contribution, reimbursement, indemnification, subrogation, exoneration, and any right to participate in any claim or remedy you may have against the borrower, collateral, or other party obligated for borrower's debts, whether or not not such claim, remedy, or right arises in equity, or under contract, statute or common law. REMEDIES - If I fail to keep any promise contained in this agreement or any agreement securing this agreement, you may, make this agreement and the borrower's debt immediately due and payable, you may set off this obligation against any right I have to receive money from you (however, you may not set-off against any accounts in which my rights are only as a fiduciary or my IRA or other tax-deferred retirement account), you may use any remedy you have under state or federal law, and you may use any remedy given to you by any agreement securing this agreement. If I die, am declared incompetent, or become insolvent (either because my liabilities exceed my assets or because I am unable to pay my debts as they become due), you may make the debt immediately due and payable. COLLECTION COSTS - Except when prohibited by law, I agree to pay the reasonable costs and expenses you incur to enforce and collect this agreement, including attorneys' fees and court costs. SECURITY - This guaranty is [ ] unsecured [X] secured by ACCOUNTS RECEIVABLE - -------------------------------------- NOTICE TO COSIGNER YOU ARE BEING ASKED TO GUAR- In witness whereof, I have signed my Antee The Debts Described Above. If name and affixed my seal on this 13 You Are Making A "Present And Future day of August, 1996, and by doing so, Debt Guaranty" As Identified Above, agree to the terms of this guaranty You Are Being Asked To Guarantee and acknowledge having read the Notice Present As Well As Future Debts Of to Signor. THE BORROWER ENTERED INTO WITH THIS LENDER. THINK CAREFULLY BEFORE YOU DO. IF THE BORROWER DOESN'T PAY /s/ V. LYNN GRAYBILL (SEAL) THESE DEBTS, YOU WILL HAVE TO. BE -------------------------------------- SURE YOU CAN AFFORD TO PAY IF YOU (SEAL) HAVE TO, AND THAT YOU WANT TO ACCEPT -------------------------------------- THIS RESPONSIBILITY. (SEAL) -------------------------------------- YOU MAY HAVE TO PAY UP TO (SEAL) THE FULL AMOUNT OF THESE DEBTS IF THE -------------------------------------- BORROWER DOES NOT PAY. YOU MAY ALSO HAVE TO PAY LATE FEES OR COLLECTION COSTS, WHICH INCREASE THIS AMOUNT. THE LENDER CAN COLLECT THESE DEBTS FROM YOU WITHOUT FIRST TRYING TO COLLECT FROM THE BORROWER. THE LENDER CAN USE THE SAME COLLECTION METHODS AGAINST YOU THAT CAN BE USED AGAINST THE BORROWER, SUCH AS SUING YOU, GARNISHING YOUR WAGES, ETC. IF THESE DEBTS ARE EVER IN DEFAULT, THAT FACT MAY BECOME PART OF YOUR CREDIT RECORD. - -------------------------------------- (page 1 of 1) EX-10.23 16 LOAN AGREEMENT - OCTOBER 1, 1996 1 EXHIBIT 10.23 [CASHE, LEWIS, MOODY & COUDRAIN LETTERHEAD] LOAN AGREEMENT THIS LOAN AGREEMENT ("Agreement"), dated as of October 1, 1996 is made between USA INDUSTRIES, INC., an Alabama corporation, represented herein by its duly authorized Agent, Kart's International, Incorporated ("Borrower"), and DEPOSIT GUARANTY NATIONAL BANK OF LOUISIANA ("Lender"), who agree as follows: ARTICLE I GENERAL TERMS Section 1.1 Terms Defined Above. As used in this Agreement, the terms "Agreement," "Borrower" and "Lender" shall have the meanings indicated above. Section 1.2 Certain Definitions. As used in this Agreement, the following terms shall have the meanings indicated, unless the context otherwise requires: "Guarantor" shall mean Karts International, Incorporated. "Borrowing Base" shall mean the sum of 40% of each Purchase Order when received by Borrower and converted to an additional 45% (not to exceed 85% )of each Eligible Receivable as shown on the most recent timely submitted borrowing base certificate, not to exceed the maximum aggregate amount of $500,000.00. The amount of the Borrowing Base shall be established at least monthly based on the Borrowing Base Certificate provided by Borrower and as verified by Bank. Any accounts receivable that are Eligible Receivables at any time, but which subsequently fail to meet any of the foregoing requirements, shall forthwith cease to be Eligible Receivables, as the case may be, until such time as they once again meet all of the foregoing requirements. "Purchase Order" shall mean the order received from Wal-Mart Stores, Inc. pursuant to a Vendor's Agreement between Borrower (or its subsidiary) and Wal-Mart. "Eligible Receivable" shall mean the value of accounts receivables outstanding issued to Wal-Mart generated pursuant to a Purchase Order less than sixty (60) days from invoice date. "Borrowing Base Certificate" shall mean the borrowing base certificate described above. "Collateral" shall mean the properties described in the Collateral Documents as security for the Indebtedness. "Collateral Documents" shall mean collectively the documents required by the Lender to obtain the security interest in the Collateral or otherwise guarantee or secure the Indebtedness, as described in Article 3 hereof and as amended from time to time. "Debt" shall mean any and all amounts and/or liabilities owing from time to time by the Borrower to Lender, direct or indirect, liquidated or contingent, now existing or hereafter arising.. "Default" shall mean the occurrence of any of the events specified in Article 7 hereof, whether or not any requirement for notice or lapse of time or other condition precedent has been satisfied. "Event of Default" shall mean the occurrence of any of the events specified in Article 7 hereof, provided that any requirement for notice or lapse of time or any other condition precedent has been satisfied. "Indebtedness" shall mean any and all amounts, liabilities and/or obligations owing from time to time by the Borrower to the Lender or any transferee thereof pursuant to this Agreement, the Note and the Collateral Documents, and whether such amounts, liabilities or obligations be liquidated or unliquidated, now existing or hereafter arising. 1 2 "Loan" shall mean the line of credit described in Article 2 hereof. "Note" shall mean the note described in Article 2 hereof. ARTICLE 2 THE CREDIT Section 2.1 Commitment to Lend. (a) Subject to and upon the terms and conditions contained in this Agreement, and relying on the representations and warranties contained in this Agreement, the Lender agrees to make a revolving line of credit available to the Borrower equal to the lesser of the Borrowing Base (as shown on the most recent timely submitted Borrowing Base Certificate) or $500,000.00 (maximum amount of the credit). The line of credit is represented by a promissory note in the principal amount of $500,000.00, payable to the order of the Lender. The principal shall be payable as set forth in the note. Interest on the note shall accrue and be payable as set forth in the note. The note shall mature one year from the date of the Note. (b) If the date of the Borrowing Base calculation on the most recently submitted Borrowing Base Certificate is more than thirty (30) days prior to a request for advance, the Borrower shall not be entitled to an advance until a timely Borrowing Base Certificate is provided to the Lender. (c) If at any time the outstanding principal balance of the Loan exceeds the Borrowing Base as shown on the most recently timely submitted Borrowing Base Certificate, the Borrower shall prepay the Loan in an amount sufficient to reduce the outstanding principal balance of the Loan to such Borrowing Base. Section 2.2 Loan Advances. (a) The Lender agrees to make advances to the Borrower from time to time on any Business Day in such amounts as the Borrower may request up to the maximum amount of the credit, and the Borrower may make borrowings, repayments (as permitted) and reborrowings in respect thereof. The credit advice resulting from the deposit of the proceeds of any disbursement in the Borrower's account with the Lender or the Lender's copy of any cashier's check representing all or any part of the proceeds or a disbursement shall be deemed prima facie evidence of the Borrower's indebtedness to the Lender on the Loan. Section 2.3 Lockbox Account. The Borrower will establish a lockbox arrangement with the Lender. The Borrower will cause all payments due Borrower under the Vendor's Agreement with Wal-Mart, including but not limited to, invoices, accounts and workorders, to be deposited into such lockbox. Remittances received under the lockbox arrangement will be deposited by the Lender to the Borrower's demand deposit account at the Lender (the "Lockbox Account"). The Borrower hereby directs the Lender to apply, on a daily basis, the proceeds of all accounts deposited in the Lockbox Account to reduce the outstanding principal balance of the Loan, and any excess amounts will be deposited to the Borrower's operating account at the Lender. The Borrower will not disburse funds to its vendors or others from the Lockbox Account. Section 2.4 Use of proceeds. The Borrower shall use the proceeds of the Loan solely to provide working capital necessary for the construction of karts pursuant to a Vendor's Agreement between Borrower and Wal-Mart. ARTICLE 3 SECURITY FOR THE OBLIGATIONS Section 3.1 Security. The Loan shall be secured by the following: (a) Security Agreement executed by the Borrower granting a pledge and security interest in all accounts and general intangibles relating to accounts of the Borrower, and 2 3 specifically the Vendor's Agreement, Purchase Orders and Accounts Receivables with Wal-Mart Stores, Inc. (b) Unconditional Guaranty Agreement executed by Kart's International Incorporated ("Guarantor") in favor of Lender, guaranteeing the repayment of the Debt of Borrower to Lender. ARTICLE 4 REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Agreement, the Borrower and Guarantor each represent and warrant to the Lender (which representations and warranties will survive the extensions of credit under this Agreement) that: Section 4.1 Power and Authorization. The Borrower and Guarantor are each duly authorized and empowered to execute, deliver and perform all documents executed by it. All corporate action on the part of the Borrower and Guarantor requisite for the due creation and execution of all documents relating to this Agreement have been duly and effectively taken. Section 4.2 Financial Condition. All financial statements of the Borrower and Guarantor delivered to Lender fairly and accurately present the financial condition of the parties for whom such statements are submitted and there are no contingent liabilities not disclosed thereby which would adversely affect the financial condition of either. Since the close of the period covered by the latest financial statement delivered to Lender with respect to Borrower and its affiliates, there has been no material adverse change in the assets, liabilities, or financial condition of Borrower or Guarantor. Section 4.3 Title to Collateral. The Collateral is free of all liens and encumbrances except those created in favor of the Lender and those permitted by this Agreement. Furthermore, the Borrower has not heretofore conveyed or agreed to convey or encumber any Collateral in any way, except in favor of the Lender. Section 4.4 Continuing Accuracy. All of the representations and warranties contained in this Article or elsewhere in this Agreement shall be true through and until the date on which all obligations of Borrower and Guarantor under this Agreement and any other documents executed in connection therewith are fully satisfied. Section 4.5 Minimum Net Worth. The Guarantor shall maintain a net worth of not less than $2,500,000.00 as of the last day of each fiscal quarter. For the purposes of this section, "net worth" shall mean the sum of common stock, preferred stock, capital surplus and retained earnings. Section 4.6 Minimum Current Ratio. The Guarantor shall maintain a ratio of current assets to current liabilities of not less than 1.5 to 1.00 as of the last day of each fiscal quarter. ARTICLE 5 AFFIRMATIVE COVENANTS Unless the Lender's prior written consent to the contrary is obtained, the Borrower and Guarantor will at all times comply with the covenants contained in this Agreement and all documents executed pursuant to this Agreement, from the date hereof and for so long as any part of the Indebtedness are outstanding. Section 5.1 Performance of Obligations. The Borrower will repay the Indebtedness according to the reading, tenor and effect of the Note and this Agreement and the Guarantor will pay the Guaranty according to its terms. Section 5.2 Financial Statements and Reports. The Borrower will furnish to the Lender: 3 4 (a) Annual Reports--as soon as available and in any event within one hundred twenty (120) days after the close of each fiscal year, the Borrower and Guarantor shall deliver to Lender the audited balance sheet of each as at the end of such year, the audited statement of income of each for such year, and the audited statement of reconciliation of capital accounts of the Borrower for such year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, accompanied by the unqualified opinions of an independent certified public accountant acceptable to the Lender. (b) Quarterly Reports--as soon as available and in any event within forty five (45) days after the end of each fiscal quarter in each fiscal year, the Borrower and Guarantor shall deliver to the Lender the unaudited balance sheet of Borrower and Guarantor at the end of such period, the unaudited statement of income of the Borrower and Guarantor for such fiscal quarter and for the period from the beginning of the fiscal year to the close of such fiscal quarter, and the unaudited statement of reconciliation of capital accounts of the Borrower and Guarantor for such fiscal quarter and for the period from the beginning of the fiscal year to the close of such fiscal quarter, setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding fiscal year, certified by the chief financial officer of the Borrower and Guarantor. (c) Borrowing Base Certificates--on the first day of each month (or more frequently if determined necessary by the Lender) a borrowing base certificate showing the computation of the Borrowing Base for the Borrower, the amounts outstanding under the Loan, the amounts available under the Loan, all as of the preceding month, and a statement that no Default has occurred, certified correct by the principal financial officer of the Borrower. (d) Other Information--promptly upon the request of the Lender, all regular budgets and such other information regarding the business and affairs and financial condition of the Borrower or Guarantor as the Lender may reasonably request. All balance sheets and other financial reports referred to above shall be in such detail as the Lender may reasonably request and shall conform to generally accepted accounting principles applied on a consistent basis, except only for such changes in accounting principles or practice with which the independent certified public accountants concur. Section 5.3 Further Assurances. The Borrower and Guarantor will promptly (and in no event later than thirty (30) days after written notice from the Lender is received) cure any defects in the creation, execution and delivery of this Agreement, the Note, the Collateral Documents or the Guaranty Agreement. Section 5.4 Reimbursement of expenses. The Borrower will pay all reasonable legal fees incurred by the Lender in connection with the preparation of this Agreement, the Note and the Collateral Documents. The Borrower will, upon request promptly reimburse the Lender for all amounts expended, advanced or incurred by the Lender to satisfy any obligation of the Borrower under this Agreement, or to protect the property or business of the Borrower or to collect the Indebtedness, or to enforce the rights of the Lender under this Agreement, which amounts will include all court costs, attorneys' fees, fees of auditors and accountants, and investigation expenses reasonably incurred by the Lender in connection with any such matters, together with interest at the interest rate set forth in the Note on each such amount from the date that the same is expended, advanced or incurred by the Lender until the date of reimbursement to the Lender. Section 5.5 Insurance. The Borrower will maintain with financially sound and reputable insurers, insurance with respect to its properties and businesses against such liabilities, casualties, risks and contingencies and in such types and amounts as are satisfactory to the Lender. Upon request of the Lender, the Borrower will furnish or cause to be furnished to the Lender from time to time a summary of the insurance coverage of the Borrower in form and substance satisfactory to the Lender and if requested will furnish the Lender original certificates of insurance and/or copies of the applicable policies. 4 5 Section 5.6 Accounts and Records. The Borrower will keep books of record and accounts in which true and correct entries will be made as to all material matters of all dealings or transactions in relation to its business and activities, in accordance with generally accepted accounting principles, consistently applied except for changes in accounting principles or practices with which the independent public accountants for Borrower concur. ARTICLE 6 CONDITIONS OF LENDING Section 6.1 Conditions of Initial Advance. The obligation of the Lender to make the initial advance on the Loan is subject to the accuracy of each and every representation and warranty of the Borrower and Guarantor contained in this Agreement, and to the receipt of the following on or before the Closing Date: (a) Agreement. A duly executed counterpart of this Agreement signed by all the parties hereto. (b) Note. The duly executed Note signed by the Borrower. (c) Articles of Incorporation and Good Standing. Articles of incorporation and certificate of good standing of the Borrower and Guarantor issued by the Secretary of State of its state of incorporation. (d) Corporate Certificate. A certificate of the secretary of the Borrower and Guarantor setting forth as to each (i) resolutions of its board of directors in form and substance satisfactory to the Lender with respect to the authorization of this Agreement, the Note and the Collateral Documents, as the case may be; (ii) copies of the articles of incorporation and bylaws of the Borrower, (iii) its Federal tax identification number, and (iv) the officers authorized to sign such instruments. (e) A duly executed copy of the Vendor's Agreement, certified as a true copy of the original by the Chief Executive Officer of Borrower. (f) Collateral Documents. Duly executed counterparts or originals of the Collateral Documents. (g) Guaranty. The Guaranty Agreement duly executed by the Guarantor. (h) Borrowing Base Certificate. An initial Borrowing Base Certificate. Section 6.2 Each Additional Advance. The obligation of the Lender to make additional advances on the Loan is subject to the satisfaction of each of the following conditions: (a) Each of the representations and warranties of the Borrower and Guarantor contained in this Agreement shall be true and correct on and as of the date of such subsequent advance, except as such representations and warranties relate to matters that are permitted by this Agreement. (b) At the time of each subsequent advance, no Default shall have occurred and be continuing. (c) There shall have occurred no material adverse changes, either individually or in the aggregate, in the assets, liabilities, financial conditions, business operations, affairs or circumstances of the Borrower or Lender from those reflected in the most recent financial statements furnished to the Lender prior to the Closing Date, except to the extent that such changes are permitted by this Agreement. 5 6 ARTICLE 7 DEFAULT Section 7.1 Events of Default. Any of the following events shall be considered an "Event of Default" as that term is used herein: (a) Principal and Interest Payments. The Borrower fails to make payment when due of any principal or interest installment on the Note, any commitment fee or any other Indebtedness to the Lender. (b) Representations and Warranties. Any representation or warranty contained in this Agreement, the Note or any of the Collateral Documents proves to have been incorrect in any material respect as of the date thereof or as of any date subsequent thereto; or any representation, statement (including financial statements), certificate or data furnished or made to the Lender by the Borrower or Guarantor under this Agreement, the Note or any of the Collateral Documents proves to have been untrue in any material adverse respect as of the date as of which the facts therein set forth were stated or certified. (c) Covenants. The Borrower defaults in the observance or performance of any of the covenants or agreements contained in this Agreement, the Note or any of the Collateral Documents, to be kept or performed by the Borrower. ARTICLE 8 MISCELLANEOUS Section 8.1 Notices. Any notice or demand to be given or served to either party shall be given as follows: If to Lender: Deposit Guaranty National Bank of Louisiana Attention: Jack Gautier Post Office Box 2188 Hammond, Louisiana 70404 If to Borrower: USA Industries, Inc. 202 Challenge Avenue Prattville, AL 36067 If to Guarantor: Kart's International, Incorporated Attention: V. Lynn Graybill 109 North Park Blvd., Suite 201 Covington, LA 70433 Any notice or demand may be delivered by United States Mail, registered or certified mail, personal delivery of Facsimile transmission. Section 8.2 Renewal, Extension or Rearrangement. All provisions of this Agreement relating to the Note shall apply with equal force and effect to each and all promissory notes or security instruments hereinafter executed which in whole or in part represent a renewal, extension for any period, increase or rearrangement of any part of the Note. Section 8.3 Amendment. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally or in any manner other than by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. Section 8.4 Invalidity. In the event that any one or more of the provisions contained in this Agreement, the Note or the Collateral Documents shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not 6 7 affect any other provision of this Agreement, the Note or the Collateral Documents. Section 8.5 Survival of Agreements. All representations and warranties of the Borrower herein, and all covenants and agreements herein not fully performed before the effective date of this Agreement, shall survive such date. Section 8.6 Waivers. No course of dealing on the part of the Lender, its officers, employees, consultants or agents, nor any failure or delay by the Lender with respect to exercising any of its rights, powers or privileges under this Agreement, the Note or the Collateral Documents shall operate as a waiver thereof. Section 8.7 Cumulative Rights. The rights and remedies of the Lender under this Agreement, the Note and the Collateral Documents shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. Section 8.8 Time of the Essence. Time shall be deemed of the essence with respect to the performance of all of the terms, provisions and conditions on the part of the Borrower and the Lender to be performed hereunder. Section 8.9 Successors and Assigns; Participants. (a) All covenants and agreements made by or on behalf of the Borrower in this Agreement, the Note and the Collateral Documents shall bind its successors and assigns and shall inure to the benefit of the Lender and its successors and assigns. (b) This Agreement is for the benefit of the Lender and for such other Person or Persons as may from time to time become or be the holders of any of the Indebtedness, and this Agreement shall be transferable and negotiable, with the same force and effect and to the same extent as the Indebtedness may be transferable, it being understood that, upon the transfer or assignment by the Lender of any of the Indebtedness, the legal holder of such Indebtedness shall have all of the rights granted to the Lender under this Agreement. Section 8.10 Relationship Between the Parties. The relationship between the Lender and the Borrower shall be solely that of lender and borrower, and such relationship shall not, under any circumstances whatsoever, be construed to be a joint venture, joint adventure, or partnership. Section 8.11 Limitation of Liability. This Agreement, the Note and the Collateral Documents, are executed by an officer of the Lender, and by acceptance of the Loans, the Borrower agrees that for the payment of any claim or the performance of any obligations hereunder resulting from any default by the Lender, resort shall be had solely to the assets and property of the Lender, and no shareholder, officer, employee or agent of the Lender shall be personally liable therefor. Section 8.12 Governing Law. This Agreement is, and the Note will be, contracts made under and shall be construed in accordance with and governed by the laws of the United States of America and the State of Louisiana. Section 8.13 Counterparts. This Agreement may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 8.14 WAIVER OF JURY TRIAL; SUBMISSION TO JURISDICTION. (a) THE BORROWER, GUARANTOR AND LENDER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (i) THE NOTE, (ii) THIS AGREEMENT, (iii) THE COLLATERAL DOCUMENTS OR (iv) THE GUARANTY AGREEMENT. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES 7 8 A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE BORROWER, GUARANTOR AND LENDER, AND THE BORROWER, GUARANTOR AND THE LENDER HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THE BORROWER, GUARANTOR AND LENDER FURTHER REPRESENT THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. (b) THE BORROWER AND GUARANTOR HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE STATE COURTS OF LOUISIANA AND THE FEDERAL COURTS IN LOUISIANA, AND AGREES THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR BROUGHT TO ENFORCE THE PROVISIONS OF THE NOTE, THIS AGREEMENT AND/OR THE COLLATERAL DOCUMENTS MAY BE BROUGHT IN ANY COURT HAVING SUBJECT MATTER JURISDICTION. Section 8.15 Intervention. Kart's International, Incorporated ("Guarantor") intervenes in this Agreement, acknowledges the terms and conditions hereof and unconditionally agrees to undertake and perform all of the terms and conditions set forth herein IN WITNESS WHEREOF, the undersigned has caused this instrument to be duly executed as of the 1st day of October, 1996. WITNESSES: USA INDUSTRIES, INC. [ILLEGIBLE] By Its Agent, Kart's International, - --------------------------- Incorporated By: /s/ V. LYNN GRAYBILL --------------------------------- /s/ CAROLYN A. MISTOLEE V. Lynn Graybill, President BORROWER - --------------------------- KART'S INTERNATIONAL, INCORPORATED By: /s/ V. LYNN GRAYBILL --------------------------------- V. Lynn Graybill, President GUARANTOR IN WITNESS WHEREOF, the undersigned has caused this instrument to be duly executed as of the 1st day of October, 1996. WITNESSES: DEPOSIT GUARANTY NATIONAL BANK [ILLEGIBLE] OF LOUISIANA - --------------------------- By: [ILLEGIBLE] --------------------------------- LENDER /s/ CAROLYN A. MISTOLEE - --------------------------- 8 EX-10.24 17 UNIVERSAL NOTE DATED OCTOBER 1, 1996 1 EXHIBIT 10.24 092-1006162 Officer #274 Borrower #7504376 COMMERCIAL LOAN - ------------------------------------------------------------------------------------------------------------------------------ USA Industries, Inc. DEPOSIT GUARANTY NATIONAL BANK Loan Number 92-1006162 109 Northpark Blvd. Suite 210 201 N W RAILROAD AVENUE Date October 1, 1996 Covington, La. 70433 HAMMOND, LA. 70401 Maturity Date September 30, 1997 Loan Amount $500,000.00 BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS Renewal Of ___________________ "I" includes each borrower above, "You" means the lender, its successors and assigns. join, severally and solidarily. - ------------------------------------------------------------------------------------------------------------------------------
For value received, I promise to pay to the order of bearer, at your address listed above the PRINCIPAL sum of Five Hundred Thousand And 00/100 Dollars $ 500,000.00 [ ] SINGLE ADVANCE: I will receive all of this principal sum on _______. No additional advances are contemplated under this note. [XX] MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of principal I can borrow under this note. On __________ I will receive the amount of $______________ and future principal advances are contemplated. CONDITIONS: The conditions for future advances are As Agreed Upon By Bank And Borrower [XX] OPEN END CREDIT: You and I agree that I may borrow up to the maximum amount of principal more than one time. This feature is subject to all other conditions and expires on September 30, 1997. [ ] CLOSED END CREDIT: You and I agree that I may borrow up to the maximum only one time ( and subject to all other conditions). INTEREST: I agree to pay interest on the outstanding principal balance from __________ at the rate of 8.250% per year until 00/00/0000. [XX] VARIABLE RATE: This rate may then change as stated below. [XX] INDEX RATE" The future rate will be Equal To the following index rate: Deposit Guaranty Base Rate [XX] FREQUENCY AND TIMING: The rate on this note may change as often as Daily. A change in the interest rate will take effect On The Same Day. [ ] LIMITATIONS: During the term of this loan, the applicable annual interest rate will not be more than N/A % or less than N/A %. EFFECT OF VARIABLE RATE: A change in the interest rate will have the following effect on the payments: [ ] The amount of each scheduled payment will change. [XX] The amount of the final payment will change [ ] _________________________________________________________________. ACCRUAL METHOD: Interest will be calculated on a 365/Actual basis. POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full, as stated below: [XX] on the same fixed or variable rate basis in effect before maturity (as indicated above). [ ] at a rate equal to ______________________________________________. [XX] LATE CHARGE: If a payment is made more than 10 days after it is due, I agree to pay a late charge of Lesser Of $500.00 or 5% Of Payment. [ ] ADDITIONAL CHARGES: In addition to interest; I agree to pay the following charges which [ ] are [ ] are not included in the principal amount above: _________________________________________________________________________. PAYMENTS: I agree to pay this note as follows: [XX] INTEREST: I agree to pay accrued interest Quarterly Beginning 12/30/1996 [XX] PRINCIPAL: I agree to pay the principal On 09/30/1997 Then On 09/30/1997 [ ] INSTALLMENTS: I agree to pay this note in ______payments. The first payment will be in the amount of $_____________ and will be due _______________. A payment of $________________ will be due ______________ thereafter. The final payment of the entire unpaid balance of principal and interest will be due ____________________________________. ADDITIONAL TERMS: CPA# 17397 Dated October 1, 1996 SECURITY: UCC-I On Blanket Accounts Receivable In The Name Of Wal Mart, Inc. Guaranty of Karts International, Inc. - -------------------------------------------------------------------------------- This note is secured by: PURPOSE: The purpose of this loan is Line Of Credit. [ ] the pledge of a Collateral Mortgage Note executed by _____________ as Mortgagor(s) before ___________________ Notary Public dated _____________. SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2). I have received a [ ] a security agreement executed by _______________ dated _________________. copy on today's date. - -------------------------------------------------------------------------------- Signature for Lender USA INDUSTRIES, INC. ----------------------------------------------- By its Agent, Kart's International Incorporated /s/ ILLEGIBLE BY: /s/ V. LYNN GRAYBILL - -------------------------------------------------------------------------------- ------------------------------------------------ V. Lynn Graybill, President - -------------------------------------------------------------------------------- ----------------------------------------------- -----------------------------------------------
(page 1 of 2) 2 APPLICABLE LAW: The law of the state of Louisiana will govern this note. Any term of this note which is contrary to applicable law will not be effective, unless the law permits you and me to agree to such a variation. If any provision of this agreement cannot be enforced according to its terms, this fact will not affect the enforceability of the remainder of this agreement. No modification of this agreement may be made without your express written consent. Time is of the essence in this agreement. PAYMENTS: Each payment I make on this note will first reduce accrued unpaid interest, and then unpaid principal. If you and I agree to a different application of payments, we will describe our agreement on this note. I may prepay a part of, or the entire balance of this loan without penalty, unless we specify to the contrary on this note. Any partial prepayment will not excuse or reduce any later scheduled payment until this note is paid in full (unless, when I make the prepayment, you and I agree in writing to the contrary). The final payment may be more or less than the amount scheduled depending on my payment record. INTEREST: If I receive the principal in more than one advance, each advance will start to earn interest only when I receive the advance. The interest rate in effect on this note at any given time will apply to the entire principal advanced at that time. Notwithstanding anything to the contrary, I do not agree to pay and you do not intend to charge any rate of interest that is higher than the maximum rate of interest you could charge under applicable law for the extension of credit that is agreed to here (either before or after maturity). If any notice of interest accrual is sent and is in error, we mutually agree to correct it, and if you actually collect more interest than allowed by law and this agreement, you agree to refund it to me. INDEX RATE: The index will serve only as a device for setting the rate on this note. You do not guarantee by selecting this index, or the margin, that the rate on this note will be the same rate you charge on any other loans or class of loans to me or other borrowers. ACCRUAL METHOD: The amount of interest that I will pay on this loan will be calculated using the interest rate and accrual method stated on page 1 of this note. For the purpose of interest calculation, the accrual method will determine the number of days in a "year." If no accrual method is stated, then you may use any reasonable accrual method for calculating interest. POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate" (shown on page 1) applies, the term "maturity" means the date of the last scheduled payment indicated on page 1 of this note or the date you accelerate payment on the note, whichever is earlier. SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that you will make only one advance of principal. However, you may add other amounts to the principal if you make any payments described in the "PAYMENTS BY LENDER" paragraph below. MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect that you will make more than one advance of principal. If this is closed end credit, repaying a part of the principal will not entitle me to additional credit. PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am obligated to pay (such as property insurance premiums), then you may treat those payments made by you as advances and add them to the unpaid principal under this note, or you may demand immediate payment of the charges. SET-OFF: I agree that you may set off any amount due and payable under this note against any right I have to receive money from you. "Right to receive money from you" means: (1) any deposit account balance I have with you; (2) any money owed-to me on an item presented to you or in your possession for collection or exchange; and (3) any repurchase agreement or other nondeposit obligation. "Any amount due and payable under this note" means the total amount of which you are entitled to demand payment under the terms of this note at the time you set off, This total includes any balance the due date for which you properly accelerate under this note. If my right to receive money from you is also owned by someone who has not agreed to pay this note, your right of set-off will apply to my interest in the obligation and to any other amounts I could withdraw on my sole request or endorsement. Your right of set-off does not apply to an account or other obligation where my rights are only as a representative. It also does not apply to any Individual Retirement Account or other tax-deferred retirement account. You will not be liable for the dishonor of any check when the dishonor occurs because you set off this debt against any of my accounts. I agree to hold you harmless from any such claims arising as a result of your exercise of your right of set-off. REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a residence that is personal property, the existence of a default and your remedies for such a default will be determined by applicable law, by the terms of any separate instrument creating the security interest and, to the extent not prohibited by law and not contrary to the terms of the separate security instrument, by the "Default" and "Remedies" paragraphs herein. COLLATERAL: If this note is secured by real estate, I pledge the collateral described on page 1 to you to secure repayment of this loan including principal, interest, late charges, attorneys' fees and costs. The pledged collateral will also secure repayment of any and all other debts I owe you, now or in the future, up to a maximum of $50,000,000.00. The pledged collateral will not secure any other debt entered into for primarily personal, family, or household purposes unless so indicated on the note or agreement representing such debt. I have delivered the pledged collateral to you, which is to remain pledged and held in your possession until such time as this loan and all other debts secured by the pledged collateral have been paid in full, including principal, interest, late charges, attorneys' fees and costs. If this note is secured by a security agreement, the terms are set forth in that document. DEFAULT: I will be in default if any one or more of the following occur: (1) I fail to make a payment on time or in the amount due; (2) I fail to keep the property insured, if required; (3) I fail to pay, or keep any promise, on any debt or agreement I have with you; (4) any other creditor of mine attempts to collect any debt I owe him through court proceedings; (5) I die, am declared incompetent, make an assignment for the benefit of creditors, or become insolvent (either because my liabilities exceed my assets or I am unable to pay my debts as they become due); (6) I make any written statement or provide any financial information that is untrue or inaccurate at the time it was provided; (7) I do or fail to do something which causes you to believe that you will have difficulty collecting the amount I owe you; (8) any collateral securing this note is used in a manner or for a purpose which threatens confiscation by a legal authority; (9) I change my name or assume an additional name without first notifying you before making such a change; (10) I fail to plant, cultivate and harvest crops in due season; (11) any loan proceeds are used for a purpose that will contribute to excessive erosion of highly erodible land or to the conversion of wetlands to produce an agricultural commodity, as further explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M. REMEDIES: If I am in default on this note you have, but are not limited to, the following remedies: (1) You may demand immediate payment of all I owe you under this note (principal, accrued unpaid interest and other accrued charges). (2) You may set off this debt against any right I have to the payment of money from you, subject to the terms of the "Set-Off" paragraph herein. (3) You may demand security, additional security, or additional parties to be obligated to pay this note as a condition for not using any other remedy. (4) You may refuse to make advances to me or allow purchases on credit by me. (5) You may use any remedy you have under state or federal law. (6) If secured by real estate, you may demand immediate payment of the pledged note(s) and foreclose under any Collateral Mortgage securing the pledged note(s) in accordance with applicable law, and have the mortgaged property immediately seized and sold under ordinary or executory proceedings, and to apply the proceeds derived from the judicial sale of the mortgaged property to repayment of the above described loan and any other debts secured by the pledged collateral, including principal, interest, late charges, attorneys' fees and costs. By selecting any one or more of these remedies you do not give up your right to later use any other remedy. By waiving your right to declare an event to be a default, you do not waive your right to later consider the event as a default if it continues or happens again. COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection, replevin or any other or similar type of cost if I am in default. In addition, if you hire an attorney to collect this note, I also agree to pay reasonable attorney's fees of 25% of the unpaid debt plus court costs (except where prohibited by law). To the extent permitted by the United States Bankruptcy Code, I also agree to pay the reasonable attorney's fees and costs you incur to collect this debt as awarded by any court exercising jurisdiction under the Bankruptcy Code. WAIVER: I give up my rights to require you to do certain things. I will not require you to: (1) demand payment of amounts due (presentment); (2) obtain official certification of nonpayment (protest); or (3) give notice that amounts due have not been paid (notice of dishonor). I waive all pleas of division and discussion, and agree that my liability under this note shall be "joint, several and solidarity." I also agree to waive all rights that may be waived under Section 3562 of the Louisiana Consumer Credit Law, if applicable, to the fullest extent allowed therein. OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone else has also agreed to pay it (by, for example, signing this form or a separate guarantee or endorsement). You may sue me alone, or anyone else who is obligated on this note, or any number of us together, to collect this note. You may do so without any notice that it has not been paid (notice of dishonor). You may without notice release any party to this agreement without releasing any other party. If you give up any of your rights, with or without notice, it will not affect my duty to pay this note. Any extension of new credit to any of us, or renewal of this note by all or less than all of us will not release me from my duty to pay it. (Of course, you are entitled to only one payment in full.) I agree that you may at your option extend this note or the debt represented by this note, or any portion of the note or debt, from time to time without limit or notice and for any term without affecting my liability for payment of the note. I will not assign my obligation under this agreement without your prior written approval. CREDIT INFORMATION: I agree and authorize you to obtain credit information about me from time to time (for example, by requesting a credit report) and to report to others your credit experience with me (such as a credit reporting agency). I agree to provide you, upon request, any financial statement or information you may deem necessary. I warrant that the financial statements and information I provide to you are or will be accurate, correct and complete. NOTICE: Unless otherwise required by law, any notice to me shall be given by delivering it or by mailing it by first class mail addressed to me at my last known address. My current address is on page 1. I agree to inform you in writing of any change in my address. I will give any notice to you by mailing it first class to your address stated on page 1 of this agreement, or to any other address that you have designated. INSURANCE: You may collect the proceeds (or rebates of unearned premiums) on any insurance policy insuring me (where you are named as loss payee) and on any policy insuring the property securing this note. You will apply any insurance proceeds or rebates toward what I owe you.
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(page 2 of 2) EX-10.25 18 SECURITY AGREEMENT DATED OCTOBER 1, 1996 1 EXHIBIT 10.25 [CASHE, LEWIS, MOODY & COUDRAIN LETTERHEAD] DEBTOR'S NAME, ADDRESS SECURED PARTY'S NAME AND ADDRESS AND SSN OR TIN DEPOSIT GUARANTY NATIONAL BANK USA INDUSTRIES, INC. OF LOUISIANA 63-1059139 Post Office Box 2188 202 Challenge Avenue Hammond, LA 70404 Prattville, AL 36067 ("You" means the Secured Party, its ("I" means each Debtor who signs.) successors and assigns) I am entering into this security agreement with you on October 1, 1996. SECURED DEBTS. I agree that this security agreement will secure the payment and performance of debts, liabilities or obligations described below that USA INDUSTRIES, INC. owes to you now or in the future: SPECIFIC DEBT. The debt, liability or obligation evidenced by Promissory Note in the principal amount of $500,000.00 dated October 1, 1996 and all extensions, renewals, refinancings, modifications and replacements of the debt, liability or obligation. SECURITY INTEREST. To secure the payment and performance of the above described Secured Debts, liabilities and obligations, I give you a security interest in all of the property described below that I now own and that I may own in the future (including, but not limited to, all parts, accessories, repairs, improvements, and accessions to the property), wherever the property is or may be located, and all proceeds and products from the property: ACCOUNTS, INSTRUMENTS, DOCUMENTS, CHATTEL PAPER AND OTHER RIGHTS TO PAYMENT: All rights I have now and that I may have in the future to the payment of money including, but not limited to: (a) payment for goods sold or leased or for services rendered, whether or not I have earned such payment by performance; and (b) rights to payment arising out of all present and future debt instruments, chattel paper and loans and obligations receivable, which I have against any account debtor or obligor of mine in connection with that certain Vendor's Agreement with Wal-Mart Stores, Inc. GENERALLY. "You" means the Secured Party identified hereinabove in this agreement. "I," "me" and "my" means each person who signs this security agreement as Debtor and who agrees to give the property described in this agreement as security for the Secured Debts. All terms and duties under this agreement are joint and individual. No modification of this security agreement is effective unless made in writing and signed by you and me. Time is of the essence in this agreement. APPLICABLE LAW. I agree that this security agreement will be governed by the law of the State of Louisiana. If property described in this agreement is located in another state, this agreement may also, in some circumstances, be governed by the law of the state in which the property is located. To the extent permitted by law, the terms of this agreement may vary applicable law. If any provision of applicable law may not be varied by agreement, any provision of this agreement that does not comply with that law will not be effective. If any provision of this agreement cannot be enforced according to its terms, this fact will not affect the enforceability of the remainder of this agreement. OWNERSHIP AND DUTIES TOWARD PROPERTY. I represent that I own all of the 2 property, or to the extent this is a purchase money security interest I will acquire ownership of the property with the proceeds of the loan. I will defend it against any other claim. Your claim to the property is ahead of the claims of any other creditor. I agree to do whatever you require to protect your security interest and to keep your claim in the property ahead of the claims of other creditors. I will not do anything to harm your position. I will keep books, records and accounts about the property and my business in general. I will let you examine these records at any reasonable time. I will prepare any report or accounting you request, which deals with the property. I will keep the property in my possession and will keep it in good repair and use it only for the purpose(s) described in this agreement. I will not change this specified use without your express written permission. I represent that I am the original owner of the property and, if I am not, that I have provided you with a list of prior owners of the property. I will keep the property at my address listed hereinabove, unless we agree I may keep it at another location. If the property is to be used in another state, I will give you a list of those states. I will not try to sell the property unless it is inventory or I receive your written permission to do so. If I sell the property I will have the payment made payable to the order of you and me. AUTHORITY OF SECURED PARTY TO MAKE ADVANCES AND PERFORM FOR DEBTOR. I agree to pay you on demand any sums you advanced on my behalf including, but not limited to, expenses incurred in collecting, insuring, conserving, or protecting the property or in any inventories, audits, inspections or other examinations by you in respect to the property. If I fail to pay such sums, you may do so for me, adding the amount paid to the other amounts secured by this agreement. All such sums will be due on demand and will bear interest at the highest rate provided in any agreement, note or other instrument evidencing the Secured Debt(s) and permitted by law at the time of the advance. If I fail to perform any of my duties under this security agreement, or any mortgage, deed of trust, lien or other security interest, you may without notice to me perform the duties or cause them to be performed. I understand that this authorization includes, but is not limited to, permission to: (1) prepare, file, and sign my name to any necessary reports or accounting; (2) notify any account debtor of your interest in the property and tell the account debtor to make the payments to you or someone else you name, rather than me; (3) place on any chattel paper a note indicating your interest in the property; (4) in my name, demand, collect, receive and give a receipt for, compromise, settle, and handle any suits or other proceedings involving the collateral; (5) take any action you feel is necessary in order to realize on the collateral, including performing any part of a contract or endorsing it in my name; and (6) to make an entry on my books and records showing the existence of the security agreement. Your right to perform for me shall not create an obligation to perform and your failure to perform will not preclude you from exercising any of your other rights under the law or this security agreement. WARRANTIES AND REPRESENTATIONS. I will not settle any account for less than its full value without your written permission. I will collect all accounts until you tell me otherwise. I will keep the proceeds from all the accounts and any goods which are returned to me or which I take back in trust for you. I will not mix them with any other property of mine. I will deliver them to you at your request. If you ask me to pay you the full price on any returned items or items retaken by myself, I will do so. DEFAULT. I will be in default if any one or more of the following occur: (1) I fail to make a payment on time or in the amount due; (2) I fail to keep the property insured, if required; (3) I fail to pay, or keep any promise, on any debt or agreement I have with you; (4) any other creditor of mine attempts to collect any debt I owe him through court proceedings, (5) I die, am declared incompetent, make an assignment for the benefit of creditors, or become insolvent (either because my liabilities exceed my assets or I am unable to pay my debts as they become due); (6) I make any written statement or provide any financial information that is untrue or inaccurate at the time it was provided; (7) I do or fail to do something which causes you to believe that you will have 3 difficulty collecting the amount I owe you. REMEDIES. If I am in default on this agreement, you have the following remedies: 1) You may demand immediate payment of all I owe you under any obligation secured by this agreement. 2) You may set off any obligation I have to you against any right I have to the payment of money from you. 3) You may demand more security or new parties obligated to pay any debt I owe you as a condition of giving up any other remedy. 4) You may make use of any remedy you have under state or federal law. 5) You may repossess the property and sell it as provided by law. You may apply what you receive from the sale of the property to: your expenses; your reasonable attorneys' fees and legal expenses (where not prohibited by law); any debt I owe you. If what you receive from the sale of the property does not satisfy the debts, you may take me to court to recover the difference (where permitted by law). I agree that 1O days written notice sent to my address listed hereinabove by first class mail will be reasonable notice to me under the Uniform Commercial Code. If any items not otherwise subject to this agreement are contained in the property when you take possession, you may hold these items for me at my risk and you will not be liable for taking possession of them. 6) In some cases, you may keep the property to satisfy the debt. By choosing any one or more of these remedies, you do not waive your right to later use any other remedy. You do not waive a default if you choose not to use any remedy, and, by electing not to use any remedy, you do not waive your right to later consider the event a default and to immediately use any remedies if it continues or occurs again. FILING. A carbon, photographic or other reproduction of this security agreement or the financing statement covering the property described in this agreement may be used as a financing statement where allowed by law. Where permitted by law, you may file a financing statement which does not contain my signature, covering the property secured by this agreement. I am a corporation, duly existing and organized under the laws of the State of Alabama. DEPOSIT GUARANTY NATIONAL I AGREE TO THE TERMS SET OUT IN BANK OF LOUISIANA THIS AGREEMENT. I HAVE RECEIVED A COPY OF THIS DOCUMENT ON TODAY'S DATE. By:/s/ILLEGIBLE /s/ V. LYNN GRAYBILL, President ----------------------- ------------------------------------- Title: EVP USA INDUSTRIES, INC. Debtor -------------------- By: its Agent, Kart's International Incorporated By: /s/ V. LYNN GRAYBILL ------------------------------------- V. Lynn Graybill, President EX-10.26 19 FINANCING STATEMENT - FORM UCC-1 ALA. 1 EXHIBIT 10.26 STATE OF ALABAMA - UNIFORM COMMERCIAL CODE - FINANCING STATEMENT FORM UCC-1 ALA. Important: Read Instructions on Back Before Filling out Form. - ------------------------------------------------------------------------------------------------------------------------------------ [ ] The Debtor is a transmitting No. of Additional This FINANCIAL STATEMENT is presented utility as defined in ALA Sheets Prescribed: to a Filing Officer for filing pursuant CODE 7-9-105(n). to the Uniform Commercial Code. - ------------------------------------------------------------------------------------------------------------------------------------ 1. Return copy or recorded original to: THIS SPACE FOR USE OF FILING OFFICER Andre G. Coudrain Date, Time, Number & Filing Office Cashe, Lewis, Moody & Coudrain P. 0. Box 1509 Hammond, LA 70404 Pre-paid Acct. # ___________________ - ---------------------------------------------------------------------- 2. Name and Address of Debtor (Last Name First if a Person) USA INDUSTRIES, INC. 202 Challenge Avenue Prattville, AL 36067 Social Security/Tax ID # 63-1058139 - ---------------------------------------------------------------------- 2A. Name and Address of Debtor (IF ANY) (Last Name First if a Person) Social Security/Tax ID # ____________________ - ---------------------------------------------------------------------- [ ] Additional debtors on attached UCC-E - ------------------------------------------------------------------------------------------------------------------------------------ 3. SECURED PARTY (Last Name First if a Person) 4. ASSIGNEE OF SECURED PARTY (IF ANY) (Last Name first if a Person) DEPOSIT GUARANTY NATIONAL BANK OF LOUISIANA P.O. BOX 2188 HAMMOND, LA 70404 Social Security/Tax ID# 72-0152936 - ---------------------------------------------------------------------- [ ] Additional secured parties on attached UCC-E - ------------------------------------------------------------------------------------------------------------------------------------
5. The Financing Statement Covers the Following Types (or items) of Property: Accounts, Instruments, Documents, Chattel Paper and 5A. Enter Code(s) From Back of Form That Other Rights to Payment: All rights I have now and Best Describes The Collateral Covered that I may have in the future to the payment By This Filing: of money including, but not limited to,: (a) payment 001 for goods sold or leased or for services rendered, --- --- whether or not I have earned such payment by 101 performance; and (b) rights to payment arising out of --- --- all present and future debt instruments, chattel paper 200 and loans and obligations receivable. The above --- --- includes any rights and interests (including all liens and security interest) which I may have by law or --- --- agreement against any account debtor or obligor of mine, to that certain Vender's Agreement with Wal-Mart --- --- Stores, Inc. --- --- --- --- Check X if covered: [ ] Products of Collateral are also covered.
- ------------------------------------------------------------------------------------------------------------------------------------ 6. This statement is filed without the debtor's 7. Complete only when filing with the Judge of Probate: signature to perfect a "security interest The initial indebtedness secured by this financing in collateral (check X if so) statement is $ ____________________ [ ] already subject to a security interest in Mortgage tax due (15 cents per $100.00 or fraction another jurisdiction when it was brought thereof) $ ________________________ into this state. --------------------------------------------------------------- 8. [ ] This financing statement covers timber to be [ ] already subject to a security interest in cut, crops, or fixtures and is to be cross indexed another jurisdiction when debtor's location in the real estate mortgage records (Describe changed to this state. real estate and if debtor does not have an interest of record, give name of record owner In Box 5) [ ] which is proceeds of the original collateral --------------------------------------------------------------- described above in which a security interest is perfected. [ ] acquired after a change of name, identity or corporate structure of debtor Signature(s) of Secured Party(ies) [ ] as to which the filing has lapsed (Required only if filed without debtor's Signature - see Box 6) - ------------------------------------------------------------------------------------------------------------------------------------
/s/ V. LYNN GRAYBILL /s/ ILLEGIBLE ------------------------------------------------------ --------------------------------------------------------------- Signatures of Debtor(s) Signature(s) of Secured Party(ies) or Assignee USA Industries, Inc., by its Agent, DEPOSIT GUARANTY NATIONAL BANK OF LOUISIANA ------------------------------------------------------ --------------------------------------------------------------- KART'S International, Incorporated, Signature(s) of Secured Party(ies) or Assignee By: /s/.V. LYNN GRAYBILL, President. ------------------------------------------------------ --------------------------------------------------------------- Type name of Individual or Business Type Name of Individual or Business
EX-10.27 20 GUARANTY DATED OCTOBER 1, 1996 1 EXHIBIT 10.27 - ----------------------------------------------------------------------------------------- KART'S INTERNATIONAL, INC. DEPOSIT GUARANTY NATIONAL USA Industries - ---------------------------- Bank of Louisiana ----------------------------- 109 North Park Blvd., Hammond, Louisiana 202 Challenger Ave - ---------------------------- ----------------------------- Suite 210 Prattville, AL 36067 - ---------------------------- ----------------------------- Covington, LA 70433 - ---------------------------- ----------------------------- GUARANTOR'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS BORROWER'S NAME AND ADDRESS "I" includes each guarantor "You" means the lender, its "Borrower" means each above jointly, severally and successors and assigns. person above. solidarily. - -----------------------------------------------------------------------------------------
GUARANTY For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce you, at your option, to make loans or engage in any other transactions with borrower from time to time, I absolutely and unconditionally guarantee the full payment of the following debts (as defined herein) when due (whether at maturity or upon acceleration): PRESENT DEBT GUARANTY [X] I absolutely and unconditionally guarantee to you the payment and performance of the following described debt (including all renewals, extensions, refinancings and modifications) of the borrower: Promissory Note in the amount of $500,000.00 dated October 1, 1996 PRESENT AND FUTURE DEBT GUARANTY [ ] I absolutely and unconditionally guarantee to you the payment and performance of each and every debt, of every type and description, that the borrower may now or at any time in the future owe you including, but not limited to, the following described debt(s): N/A [ ] I absolutely and unconditionally guarantee to you the payment and performance of each and every debt, of every type and description, that the borrower may now or at any time in the future owe you, up to the principal amount of $ N/A plus accrued interest, attorneys' fees and collection costs referable thereto (when permitted by law), and all other amounts agreed to be paid under all agreements evidencing the debt and securing the payment of the debt. You may, without notice, apply this guaranty to such debts of the borrower as you may select from time to time. DEFINITIONS - As used in this agreement, the terms "I," "we," and "my" mean all persons signing this guaranty agreement, individually and jointly, and their heirs, executors, administrators and assigns. The term "debt" means all debts, liabilities, and obligations of the borrower (including, but not limited to, all amounts agreed to be paid under the terms of any notes or agreements securing the payment of any debt, liability or obligation, overdrafts, letters of credit, guaranties, advances for taxes, insurance, repairs and storage, and all extensions, renewals, refinancings and modifications of these debts) whether now existing or created or incurred in the future, due or to become due, or absolute or contingent, except for any obligations incurred by borrower after the date of this guaranty for which the borrower meets your standard of creditworthiness based on the borrower's own assets and income without the addition of a guaranty, or to which, although you require the addition of a guaranty, the borrower chooses someone other than me to guaranty the obligation. APPLICABLE LAW - This agreement shall be interpreted under the laws of the state of Louisiana, without giving any effect to the principles of conflict of laws. Any term of this agreement that does not comply with applicable law will not be effective if that law does not expressly or impliedly permit variations by agreement. If any part of this agreement cannot be enforced according to its terms, this fact will not affect the balance of this agreement. REVOCATION - I agree that this is an absolute and continuing guaranty. If this guaranty is limited to the payment of a specific debt of the borrower described above, this agreement cannot be revoked and will remain in effect until the debt is paid in full. If this guaranty covers both the borrower's present and future debts, I agree that this guaranty will remain binding on me, whether or not there are any debts outstanding, until three (3) full business days after you have actually received written notice of my revocation or written notice of my death or incompetence. Notice of revocation or notice of my death or incompetence will not affect my obligations under this guaranty with respect to any debts incurred by or for which you have made a commitment to borrower within three (3) full business days after you actually receive such notice, and all renewals, extensions, refinancings, and modifications of such debts. I agree that if any other person signing this agreement provides a notice of revocation to you, I will still be obligated under this agreement for three (3) full business days after I provide a notice of revocation to you. If any other person signing this agreement dies or is declared incompetent, such fact will not affect my obligations under this agreement. OBLIGATIONS INDEPENDENT - I agree that this guaranty is in addition to and does not supercede any previous guaranty. I agree that I am obligated to pay according to the terms of this guaranty even if any other person has agreed to pay the borrower's debt. My obligation to pay according to the terms of this guaranty shall not be affected by the illegality, invalidity or unenforceability of any notes or agreements evidencing the debt, the violation of any applicable usury laws, forgery, or any other circumstances which make the indebtedness unenforceable against the borrower. I will remain obligated to pay on this guaranty even if any other person who is obligated to pay the borrower's debt, including the borrower, has such obligation discharged in bankruptcy, foreclosure, or otherwise discharged by law. In such situations, my obligation shall include post-bankruptcy petition interest and attorneys' fees and any other amounts which borrower is discharged from paying or which do not otherwise accrue to borrower's indebtedness due to borrower's discharge. I will also be obligated to pay you, to the fullest extent permitted by law, any deficiency remaining after foreclosure of any mortgage or security interest securing borrower's debt, whether or not the liability of borrower or any other obligor for such deficiency is discharged by statute or judicial decision. If any payments by borrower to you are thereafter set aside, recovered, rescinded, in whole or in part, are settled by you at your discretion, or are in any way recouped or recovered from you for any reason (including, without limitation, the bankruptcy, insolvency, or reorganization of borrower or any other obligor), then I am obligated to reimburse or indemnify you for the full amount you so pay together with costs, interest, attorneys' fees and all other expenses which you incur in connection therewith. I also agree that if my liability is limited to a stated principal amount (plus other agreed charges), you may allow the borrower to incur debt in excess of the specified amount and apply to the payment of such excess any amounts you receive for payment of the debt from the borrower or any other person, any amounts resulting from any collateral, or amounts received from any other source, without affecting my obligations under this agreement. No modification of this agreement is effective unless in writing and signed by you and me, except that you may, without notice to me and without the addition of a signed writing or my approval; (1) release any borrower or other person who may be liable for borrower's debt, (2) release or substitute any collateral, (3) fail to perfect any security interest or otherwise impair any collateral, (4) waive or impair any right you may have against any borrower or other person who may be liable for borrower's debt, (5) settle or compromise any claim against the borrower or any person who may be liable for the borrower's debt, (6) procure any additional security or persons who agree to be liable for borrower's debt, (7) delay or fail to pursue enforcement of the debt, (8) apply amounts you receive from the borrower or other persons to payment of the debt in any order you select, (9) make any election with respect to the debt provided by law or any agreement with any person liable for the debt, (10) exercise or fail to exercise any rights you have with respect to the debt, (ll) extend new credit to the borrower, or (12) renew, extend, refinance or modify the borrower's debt on any terms agreed to by you and the borrower (including, but not limited to, changes in the interest rate or in the method, time, place or amount of payment) without affecting my obligation to pay under this guaranty. WAIVER - I waive presentment, demand, protest, notice of dishonor, and notice of acceptance of this guaranty. I also waive, to the extent permitted by law, all notices, all defenses and claims that the borrower could assert, any right to require you to pursue any remedy or seek payment from any other person before seeking payment under this agreement, and all other defenses to the debt, except payment in full. You may without notice to me and without my consent, enter into agreements with the borrower from time to time for purposes of creating or continuing the borrower's debt as allowed by this guaranty. I agree that I will be liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure (or repossession) and sale of any collateral without regard to whether borrower's obligation to pay such deficiency is discharged by law. If any payments on the debt are set aside, recovered or required to be returned in the event of the insolvency, bankruptcy or reorganization of the borrower, my obligations under this agreement will continue as if such payments had never been made. I also waive and relinquish all present and future claims, rights, and remedies against borrower or any other obligated party arising out of the creation or my performance of this guaranty. My waiver includes, but is not limited to, the right of contribution, reimbursement, indemnification, subrogation, exoneration, and any right to participate in any claim or remedy you may have against the borrower, collateral, or other party obligated for borrower's debts, whether or not not such claim, remedy, or right arises in equity, or under contract, statute or common law. REMEDIES - If I fail to keep any promise contained in this agreement or any agreement securing this agreement, you may, make this agreement and the borrower's debt immediately due and payable, you may set off this obligation against any right I have to receive money from you (however, you may not set-off against any accounts in which my rights are only as a fiduciary or my IRA or other tax-deferred retirement account), you may use any remedy you have under state or federal law, and you may use any remedy given to you by any agreement securing this agreement. If I die, am declared incompetent, or become insolvent (either because my liabilities exceed my assets or because I am unable to pay my debts as they become due), you may make the debt immediately due and payable. COLLECTION COSTS - Except when prohibited by law, I agree to pay the reasonable costs and expenses you incur to enforce and collect this agreement, including attorneys' fees and court costs. SECURITY - This guaranty is [ ] unsecured [ ] secured by . --------------------- - -------------------------------------- NOTICE TO COSIGNER YOU ARE BEING ASKED TO GUAR- In witness whereof, I have signed my ANTEE THE DEBTS DESCRIBED ABOVE. IF name and affixed my seal on this ____ YOU ARE MAKING A "PRESENT AND FUTURE day of _____________ and by doing so, DEBT GUARANTY" AS IDENTIFIED ABOVE, agree to the terms of this guaranty YOU ARE BEING ASKED TO GUARANTEE and acknowledge having read the Notice PRESENT AS WELL AS FUTURE DEBTS OF to Cosignor. THE BORROWER ENTERED INTO WITH THIS LENDER. THINK CAREFULLY BEFORE YOU DO. IF THE BORROWER DOESN'T PAY KART'S INTERNATIONAL INCORPORATED (SEAL) THESE DEBTS, YOU WILL HAVE TO. BE ---------------------------------------- SURE YOU CAN AFFORD TO PAY IF YOU By: /s/ V.LYNN GRAYBILL (SEAL) HAVE TO, AND THAT YOU WANT TO ACCEPT ---------------------------------------- THIS RESPONSIBILITY. V. Lynn Graybill, President (SEAL) ---------------------------------------- YOU MAY HAVE TO PAY UP TO THE FULL AMOUNT OF THESE DEBTS IF THE BORROWER DOES NOT PAY. YOU MAY ALSO HAVE TO PAY LATE FEES OR COLLECTION COSTS, WHICH INCREASE THIS AMOUNT. THE LENDER CAN COLLECT THESE DEBTS FROM YOU WITHOUT FIRST TRYING TO COLLECT FROM THE BORROWER. THE LENDER CAN USE THE SAME COLLECTION METHODS AGAINST YOU THAT CAN BE USED AGAINST THE BORROWER, SUCH AS SUING YOU, GARNISHING YOUR WAGES, ETC. IF THESE DEBTS ARE EVER IN DEFAULT, THAT FACT MAY BECOME PART OF YOUR CREDIT RECORD. - -------------------------------------- (page 1 of 1) EX-10.28 21 LETTER AGREEMENT DATED NOVEMBER 8, 1996 1 EXHIBIT 10.28 KARTS INTERNATIONAL INCORPORATED November 8, 1996 Argent Securities, Inc. 3340 Peachtree Road, N.E. Suite 450 Atlanta, Georgia 30326 Gentlemen: Karts International Incorporated, a corporation organized and existing under the laws of the state of Nevada (the "COMPANY"), hereby confirms its agreement with you (the "PLACEMENT AGENT") as follows: 1. Description of Transaction. The Company will offer for sale (the "OFFERING") to a limited number of persons meeting certain criteria for "accredited investor" status (as more fully described in the Confidential Private Placement Memorandum dated October 28, 1996, and any exhibits annexed thereto (collectively, the "MEMORANDUM")), an aggregate of twenty-five (25) units ("UNITS"), each Unit at a price of $25,000. Each Unit consists of one share of the Company's convertible Preferred Stock ("Preferred Stock") and 10,000 redeemable common stock purchase warrants (the "WARRANTS"). The Company anticipates filing a registration statement with the Securities and Exchange Commission ("COMMISSION") pursuant to which it will conduct a public offering of its stock (the "PUBLIC OFFERING"). The minimum investment is one Unit or Twenty-Five Thousand Dollars ($25,000) subject to exception in the discretion of the Placement Agent and the Company on a case-by-case basis. The Units are more fully described in the Memorandum. Capitalized words not defined herein shall have the meaning set forth in the Memorandum. 2. Appointment of the Placement Agent. The Company hereby appoints the Placement Agent as its exclusive agent to offer and sell the Units on a "best efforts -- all or none" basis, as set forth in Section 3(d) below. The Placement Agent, on the basis of the representations, warranties, covenants and agreements of the Company, and subject to the conditions contained herein, accepts such appointment and agrees to use its best efforts to sell the Units. It is understood that the Placement Agent has no commitment to sell the Units other than to use its best efforts. 3. Purchase. Sale and Delivery of the Units. On the basis of the representations and warranties contained herein, and subject to the terms and conditions set forth herein, the parties agree that: (a) Regulation D Offering. Neither the offer nor the sale of the Units has been or will be registered with the Securities and Exchange Commission. The Units will be offered and sold in reliance upon the exemption from registration provided by Regulation D ("Reg 2 D") adopted under the Securities Act of 1933, as amended (the "Act"), and will only be sold to "accredited investors" as such term is defined under Reg D; the Units will be offered for sale only in states in which the Units have been qualified or registered for sale or are exempt from such qualification or registration; and the Company will provide to the Placement Agent for delivery to all offerees and purchasers and their representatives, if any, any information, documents and instruments which the Placement Agent and the Company deem necessary to comply with the rules, regulations and judicial and administrative interpretations respecting compliance with applicable state and federal statutes and regulations. (b) Subscription for the Units. Subscription for the Units shall occur by execution and delivery by the subscriber (the "Subscriber") of a Subscription Agreement Questionnaire and Investment Representation (the "Subscription Agreement") in the form annexed to the Memorandum together with such other documents and instruments as are set forth in the Memorandum. (c) Segregation of Funds. Each Subscriber for the Units shall tender a check payable to "Karts International Incorporated, Escrow Account" or wire transfer funds in respect of the amount of the Units subscribed for, which funds shall be held in an interest bearing special bank account (the "Escrow Account") in Fidelity National Bank or such other commercial bank as the Placement Agent shall determine (the "Bank") until the conclusion of the Offering as set forth in the Memorandum. All fees charged by the Bank in connection with the Bank's performance of the functions specified in this Section 3(c), if any, shall be paid by the Company out of the proceeds of the Offering. (d) Closing: Termination of Offering. The "Closing" shall occur at such time as the Offering is completed, but not later than November 29, 1996 (unless otherwise extended for an additional 30 day period by the Company and the Placement Agent ("Termination Date")). The Company shall deliver to the Placement Agent on the Closing Date on behalf of the Subscribers, the Units pursuant to Paragraph 1 of this Agreement against payment therefor, after deducting the amounts set forth in Paragraph 4. If on or before the Termination Date, the Offering is not subscribed for, the Offering shall be terminated and all amounts contained in the Escrow Account will be returned to the Subscribers with interest and without deduction. In the event of such termination of the Offering of the Units, all terms of this Agreement shall be automatically terminated and neither party shall have any further obligation to the other party under this -2- 3 Agreement other than the Company's obligation to pay expenses as set forth herein. 4. Compensation of Placement Agent. As compensation for its services rendered as Placement Agent under this Agreement, and subject to the occurrence of the sale of all of the Units as provided herein, the Placement Agent shall receive the following: (a) A sales commission equal to eight percent (8%) of the aggregate gross proceeds of the Offering payable by deducting the sales commission from the gross proceeds on the Closing Date. "Gross Proceeds" is defined as the total price paid by Subscribers for the Units. (b) A one-time investment banking fee equal to four percent (4%) of the gross proceeds of the Offering. (c) On the Closing Date, the Placement Agent will deduct from the payment for the Units three (3%) percent of the gross proceeds of the Units (less such monies as have been previously paid by the Company to the Placement Agent), as payment for the Placement Agent's non-accountable expense allowance relating to the transactions contemplated hereby. 5. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Placement Agent that: (a) Memorandum. The Company has prepared a Memorandum and its related exhibits, which may be supplemented from time to time, which contains information, accurate as of the date specified therein, of the kind specified by applicable statutes and regulations, including without limitation: (i) Terms of the Offering; (ii) A description of the Units; (iii) A description of the business conducted by the Company; (iv) The financial condition of the Company; (v) Past activities of the Company; (vi) Commissions and compensation to be paid to the Placement Agent in connection with this Offering; -3- 4 (vii) Disclosure in each instance of material contracts, agreements or other business arrangements, which affect or are related to the business conducted and to be conducted by the Company; (viii) Information regarding the Company, its management, material obligations, liabilities, any pending or threatened lawsuits or proceedings, and recent material adverse changes in its financial condition; and (ix) Any appropriate legends and such other information or material as the Placement Agent may deem necessary or desirable to be included therein. The Memorandum, including all exhibits thereto, as of its date and at all times subsequent thereto up to and including the Termination Date does not and will not include any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (b) Additional Information. The Company has provided, and shall provide to the Placement Agent, such information, documents and instruments as may be required under Sections 4(2) and 4(6) of the Act and Reg D for an offer made to accredited investors. (c) Organization; Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Nevada, with full power and authority, corporate and other, and with all licenses, permits, certifications, registrations, approvals, consents and franchises to own or lease and operate its properties and to conduct its business as described in the Memorandum. (d) Governmental Authority. Except for the filing of the Form D under the Act and other than as may be required under applicable state securities or Blue Sky laws, no authorization, approval, consent, order, registration, license or permit of any court or governmental agency or body, is required for the valid authorization, issuance sale and delivery of the Units to Subscribers to the Placement Agent and the consummation by the Company of the transactions contemplated by this Agreement. (e) Corporate Authorization. The Company has full power and authority, corporate and other, to (i) execute, deliver and perform this Agreement, (ii) offer and sell the Units, and (iii) consummate the -4- 5 transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement, the offer and sale of the Units, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement, and the Units, have been duly authorized by all necessary corporate action, and each of this Agreement and, the Units has been duly executed and delivered by the Company. Each of this Agreement and the offer and sale of the Units is the valid and binding obligation of the Company, enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally and the discretion of courts in granting equitable remedies and except that enforceability of the indemnification provisions and the contribution provisions set forth herein may be limited by the federal securities laws of the United States or state securities laws or public policy underlying such laws. The execution, delivery and performance of this Agreement, and the offer and sale of the Units by the Company, and the consummation by the Company of the transactions herein and therein contemplated in the manner described by the Memorandum and the compliance by the Company with the terms of this Agreement, and the Units, do not, and will not, with or without the giving of notice or the lapse of time, or both, (a) result in any violation of the Articles of Incorporation or Bylaws of the Company, (b) result in a breach of or conflict with any of the terms or provisions of, or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company pursuant to, any indenture, mortgage, note, contract, commitment or other agreement or instrument to which the Company is a party or by which the Company or any of its properties or assets are or may be bound or affected; (c) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its properties or its business; or (d) have any material adverse effect on any permit, certification, registration, approval, consent, license or franchise necessary for the Company to own or lease and operate any of its properties and to conduct its business or the ability of the Company to make use thereof. (f) Capitalization. The Company had, at the date or dates indicated in the Memorandum and in its financial statements attached as an exhibit to the Memorandum, a duly authorized and outstanding capitalization as set forth therein. The outstanding shares of the Company's common stock, par value $0.001 per share ("COMMON -5- 6 STOCK"), and preferred stock when issued shall have been duly authorized and validly issued. All such outstanding shares of Common Stock and Preferred Stock, when and if issued, are fully paid and nonassessable. None of such outstanding shares of Common Stock and Preferred Stock, when and if issued, have been issued in violation of the preemptive rights of any security holder of the Company. The offers and sales of such outstanding shares of Common Stock and Preferred Stock, when and if issued, were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws, or exempt from such registration requirements. The authorized shares of outstanding Common Stock and Preferred Stock conform to the description thereof contained in the Memorandum. Except as described in the Memorandum, no holder of any of the Company's securities has any rights, "demand," "piggyback" or otherwise, to have such securities registered. Except as set forth in the Memorandum, on the Termination Date there will be no outstanding options or warrants for the purchase of, or other outstanding rights to purchase, Common Stock, Preferred Stock or securities convertible into Common Stock or Preferred Stock. (g) Authorization of the Units, the Preferred Stock, and the Warrants. The issuance and sale of the Units, the Preferred Stock, and the Warrants have been duly authorized, and when the Units, the Preferred Stock, and the Warrants have been issued and duly delivered against payment therefor as contemplated by this Agreement, the Units, the Preferred Stock, and the Warrants will be validly issued, fully paid and nonassessable. The Units, the Preferred Stock, and the Warrants will not be subject to preemptive rights of any security holder of the Company. Except as set forth in the Memorandum, on the Termination Date, there will be no outstanding warrants or options for the purchase of, or other outstanding rights to purchase Common Stock or Preferred Stock or securities convertible into Common Stock or Preferred Stock. The Units, the Preferred Stock, and the Warrants conform to the description thereof contained in the Memorandum, and such description conforms to the terms set forth in the Memorandum and Articles of Incorporation of the Company. (h) Noncontravention. The Company is not in violation of, or in default under, (i) any term or provision of its Articles of Incorporation, as amended; (ii) any material term or provision or any financial covenants of any indenture, mortgage, contract, commitment or other agreement or instrument to which it is a party or by which it or any of its properties or business is or may be bound or affected; or (iii) any existing material applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or -6- 7 foreign, having jurisdiction over the Company or any of its properties or businesses. The Company owns, possesses or has obtained all material governmental and other licenses, permits, certifications, registrations, approvals or consents and other authorizations necessary to own or lease, as the case may be, and to operate its properties and to conduct its business or operations as currently conducted and all such governmental and other licenses, permits, certifications, registrations, approvals, consents and other authorizations are outstanding and in good standing, and there are no proceedings pending or, to the best of the Company's knowledge, threatened, nor is there any basis therefor, seeking to cancel, terminate or limit such licenses, permits, certifications, registrations, approvals or consents or authorizations. (i) Litigation. Except as set forth in the Memorandum, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, domestic or foreign, or before any private arbitration tribunal, pending, or, to the best of the Company's knowledge, threatened, against the Company or involving the properties or business of the Company, which, if determined adversely to the Company, would, individually or in the aggregate, result in any material adverse change in the financial position, shareholders' equity, results of operations, properties, business, management or affairs of the Company, or which question the validity of the capital stock of the Company, or this Agreement, or of any action taken or to be taken by the Company pursuant to, or in connection with, this Agreement; nor, to the best of the Company's knowledge, is there any basis for any such claim, action, suit, proceeding, arbitration, investigation or inquiry. There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal specifically naming the Company and enjoining the Company from taking, or requiring the Company to take, any action, or to which the Company or its properties or business is bound or subject. (j) Financial Statements. The financial statements and schedules and notes thereto included in the Memorandum are complete, correct and present fairly the financial position of the Company as of the dates thereof, and the results of operations and changes in financial position of the Company for the periods indicated therein, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved except as otherwise stated in the Memorandum. (k) Liabilities. Except as and to the extent reflected or reserved against in the financial statements of the Company included in the -7- 8 Memorandum, the Company as of July 31, 1996, had no material liabilities, debts, obligations or claims asserted against it, whether accrued, absolute, contingent or otherwise, and whether due or to become due, including, but not limited to, liabilities on account of taxes, other governmental charges or lawsuits brought subsequent to such date but before the date hereof. Subsequent to July 31, 1996, the Company has not incurred liabilities or debts or obligations of any nature whatsoever other than those incurred in the ordinary course of its business, loans from shareholders as described in the Company's financial statements and those pertaining to the Offering. (l) Taxes. The Company has filed with the appropriate federal, state and local governmental agencies, and all foreign countries and political subdivisions thereof, all tax returns which are required to be filed (whether relating to income, sales, franchise, withholding, real or personal property or other types of taxes) or has duly obtained extensions of time for the filing thereof, and has paid in full all taxes which have become due pursuant to such returns or claimed to be due by any taxing authority or otherwise due and owing; and the provisions for taxes payable, if any, shown on the consolidated financial statements contained in the Memorandum are sufficient for all accrued and unpaid foreign and domestic taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Each of the tax returns heretofore filed by the Company correctly and accurately reflects the amount of its tax liability thereunder. The Company has withheld, collected and paid all other levies, assessments, license fees and taxes to the extent required and, with respect to payments, to the extent that the same have become due and payable. Except as disclosed in writing to the Placement Agent, the Company has not executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company. (m) Conduct of Business. Since the respective dates as of which information is given in the Memorandum, the Company has not (i) incurred any obligation or liability (absolute or contingent) except obligations and liabilities incurred in the ordinary course of the operation of business of the Company as carried on at and prior to such date and those pertaining to the Offering; (ii) canceled, without payment in full, any notes, loans or other obligations receivable or other debts or claims held by it other than in the ordinary course of -8- 9 business; (iii) sold, assigned, transferred, abandoned, mortgaged, pledged or subjected to lien any of its properties, tangible or intangible, or rights under any contract, permit, license, franchise or other agreement other than sales or other dispositions of goods or services in the ordinary course of business at customary terms and prices; (iv) increased compensation payable to any of its officers, directors or other employees (including in the term "compensation," salaries, fringe benefits, pensions, profit participations and payments or benefits of any kind whatsoever) other than in the ordinary course of business; (v) entered into any line of business other than that conducted by it on such date or entered into any transaction not in the ordinary course of its business; (vi) conducted any line of business in any manner except by transactions customary in the operation of its business as conducted on such date; or (vii) declared, made or paid or set aside for payment any cash or non-cash distribution on any shares of its capital stock. (n) Properties. The Company has good and marketable title in fee simple to all real and personal property (tangible and intangible) owned by it, free and clear of all security interests, charges, mortgages, liens, encumbrances and defects, except such as are described in the Memorandum or such as do not materially affect the value or transferability of such property and do not interfere with the use of such property made, or proposed to be made, by the Company. The leases, licenses or other contracts or instruments under which the Company leases, holds or is entitled to use any property, real or personal, are valid, subsisting and enforceable only with such exceptions as are not material and do not interfere with the use of such property made, or proposed to be made, by the Company, and all rentals, royalties or other payments accruing thereunder which became due prior to the date of this Agreement have been duly paid, and neither the Company nor, to the best of the Company's knowledge, any other party is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default thereunder. The Company has not received notice of any violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties. The Company has adequately insured its properties against loss or damage by fire or other casualty and maintains, in adequate amounts, such other insurance as is usually maintained by companies engaged in the same or similar businesses located in its geographical area. (o) Contracts. Except as set forth in the Memorandum, each contract or other instrument (however characterized or described) to which the Company is a party or by which its properties or businesses is -9- 10 or may be bound or affected and to which reference is made in the Memorandum has been duly and validly executed, is in full force and effect in all material respects and is enforceable against the parties thereto in accordance with its terms, and none of such contracts or instruments has been assigned by the Company and neither the Company nor, to the best of the Company's knowledge, any other party is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. None of the material provisions of such contracts or instruments violates any existing applicable law, rule, regulation, judgment/order or decree of any governmental agency or court having jurisdiction over the Company or any of its assets or businesses. (p) Employment Agreements. The employment, confidentiality and non-competition agreements between the Company and certain of its officers, described in the Memorandum are binding and enforceable obligations upon the respective parties thereto in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws or arrangements affecting creditors' rights generally and subject to principles of equity. (q) Benefit Plans. Except as set forth in the Memorandum, the Company has no employee benefit plans (including, without limitation, profit sharing and welfare benefit plans) or deferred compensation arrangements. (r) Contributions. The Company has not, directly or indirectly, at any time (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution in violation of law or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. (s) Reg D Qualification; Offering Documents. The offer and sale of the Units by the Company has satisfied and on the Closing Date will have satisfied, all of the requirements of Reg D and the Company is not disqualified from the exemption under Rule 506 contained in Reg D by virtue of the disqualification contained in Rule 507. The -10- 11 Memorandum does not contain an untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (t) Finder's Fee. The Company has not incurred any liability for any finder's fees or similar payments in connection with the transactions herein contemplated. (u) Intangibles. The Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, rights, trade secrets, confidential information, processes and formulations used or proposed to be used in the conduct of its business as described in the Memorandum (collectively the "Intangibles"); to the best of the Company's knowledge the Company has not infringed and is not infringing upon the rights of others with respect to the Intangibles, and the Company has not received any notice that it has or may have infringed or is infringing upon the rights of others with respect to the Intangibles; and the Company has not received any notice of conflict with the asserted rights of others with respect to the Intangibles which could, singly or in the aggregate, materially adversely affect its business as presently conducted or prospects, financial condition or results of operations and the Company knows of no basis therefor; and, to the best of the Company's knowledge, no others have infringed upon the Intangibles. (v) Labor Relations. To the best of the Company's knowledge, no labor problem exists with the Company's employees or is imminent which could adversely affect the Company. (w) No Adverse Change. Since the respective dates as of which information is given in the Memorandum and the Company's latest financial statements, the Company has not incurred any material liability or obligation, direct or contingent, or entered into any material transaction, whether or not in the ordinary course of business, and has not sustained any material loss or interference with its business from fire, storm, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and since the respective dates as of which information is given in the Memorandum, there have not been, and prior to the Closing Date there will not be, any changes in the capital stock or any material increases in the long-term debt of the Company or any material adverse change in or affecting the general affairs, management, financial condition, shareholders' equity, results of -11- 12 operations or prospects of the Company, otherwise than as set forth or contemplated in the Memorandum. (x) Regulatory Matters. Except as set forth in the Memorandum, the Company (i) is in all material respects in compliance with the provisions of all federal, state, local and foreign laws, rules and regulations; (ii) has all authorizations, approvals, consents, orders, registrations, licenses or permits of any domestic and foreign court or governmental agency or body relating to matters which are necessary or required to conduct its business; and (iii) has had no material liabilities, debts, obligations or claims asserted against it, whether accrued, absolute, contingent or otherwise, and whether due or to become due, on account of regulatory matters. All information contained in the Memorandum with respect to regulatory authorities, federal, state and foreign laws, and rules and regulations is accurate, complete and true in all material respects and does not omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any certificate signed by an officer of the Company and delivered to the Placement Agent, or to counsel for the Placement Agent, shall be deemed to be a representation and warranty by the Company to the Placement Agent as to the matters covered thereby. 6. Covenants. (a) Memorandum. The Company will furnish the Placement Agent, without charge, as many copies of the Memorandum (and any amended or supplemental Memorandum) as the Placement Agent may reasonably request. If any event occurs as the result of which the Memorandum, as then amended or supplemented, would include an untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements made in light of the circumstances in which they were made not misleading, or if it shall be necessary to amend or supplement the Memorandum to comply with applicable law, the Company will forthwith notify the Placement Agent thereof, and furnish to the Placement Agent in such quantities as may be reasonably requested, an amendment or amended or supplemented Memorandum which corrects such statements or omissions or causes the Memorandum to comply with applicable law. Except as may be necessary to comply with applicable federal and state securities laws, no copies of the Memorandum., or any exhibit thereto, or any material prepared by the Company in connection with the Offering will be given without the prior written permission of the Placement Agent, by the -12- 13 Company or its counsel or by any principal or agent of the Company to any person not a party to this Agreement, unless such person is a director or principal shareholder of, or directly employed by, the Company. (b) State Securities Registration. The Company will provide Placement Agent's counsel with all information which such counsel determines to be necessary and otherwise cooperate with such counsel in order to qualify or register the Units for sale under the securities laws of the states in which offers or sales will be made or to take any necessary action and shall have Company counsel file any necessary forms which are required to obtain an exemption from such qualification or registration in such jurisdictions. The Company will promptly advise the Placement Agent: (i) If any securities regulator of any state shall make a request or suggestion of or to the Company for any amendment to the Memorandum or any registration materials or for any additional information, including the nature and substance thereof; and (ii) Of the issuance of a stop order suspending the qualification of the Units for sale in any state, including the initiation or threatening of any proceeding for such purpose, and the Company will use reasonable commercial efforts to prevent the issuance of such a stop order, or if such an order shall be issued, to obtain the withdrawal thereof at the earliest practicable date. The Company will provide the Placement Agent for delivery to all offerees and purchasers and their representatives any additional information, documents and instruments which the Placement Agent shall deem necessary to comply with the rules, regulations and judicial and administrative interpretations in those states and jurisdictions where the Units are to be offered for sale or sold. The Company will file all post-offering forms, documents or materials and take all other actions required by states in which the Units have been offered or sold. The Placement Agent will not make offers or sales of the Units in any jurisdiction in which the Units have not been qualified or registered, or are not exempt from such qualification or registration. (c) Use of Proceeds. The Company will not use any portion of the proceeds derived from the proposed Offering to repay any indebtedness, other than as set forth in the Memorandum. -13- 14 (d) Reg D Compliance. The Company will comply in all respects with the terms and conditions of Reg D and applicable state securities laws with respect to the Offering and the sale of the Units only to "accredited investors" as set forth in the Memorandum. (e) Restriction on Issuance of Securities. Except as set forth in the Memorandum, during the period commencing on the date hereof and terminating 90 days after the termination of the proposed Offering, the Company will not, without the prior written consent of the Placement Agent, issue additional shares of Common Stock or issue or grant warrants, options or other securities of the Company for the purchase of, exchangeable for or convertible into shares of Common Stock. (f) No Anti-Dilution Adjustment. The issuance of the Units will not give any holder of any of the Company's outstanding options, warrants, or other convertible securities or rights to purchase shares of the Company's Stock, the right to purchase any additional shares of Common Stock and/or the right to purchase shares at a reduced price. (g) Financial Statements. Until the earlier of (i) one (1) year from the date hereof or (ii) the consummation of the Public Offering, the Company will deliver to the Placement Agent no later than the 20th day of each month financial statements with a comparison to the budget for the current month and explanatory notes of any deviation from the budget of more than 10% or a single item of more than $50,000. (h) No Encumbrances. Until the earlier of (i) one (1) year from the date hereof or (ii) the consummation of the Public Offering, the Company will not further pledge any of its assets or further encumber its properties, without the Placement Agent's prior written approval, which approval will not be unreasonably withheld. (i) Restricted Activities. Without the Placement Agent's prior written approval, which approval will not be unreasonably withheld, the Company shall not do any of the following, until the earlier of (i) one (1) year from the date hereof or (ii) the consummation of the Public Offering: (i) Incur any additional indebtedness for borrowed money, exclusive of borrowing under this agreement, or incur any additional indebtedness which by its terms matures more than 12 months from the date of creation thereof. -14- 15 (ii) Enter into any merger or consolidation where the Company is not the survivor, or sell or lease all or substantially all of its assets. (iii) Guarantee, endorse, or otherwise become surety for any obligation of others, except by endorsement of negotiable instruments for deposit or collection in the ordinary course of business. (iv) Sell receivables with or without recourse. 7. Conditions to Placement Agent's Obligations. The obligations of the Placement Agent hereunder will be subject to the accuracy of the representations and warranties of the Company herein contained as of the date hereof and as of each Closing Date, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) Due Qualification or Exemption. (i) The Offering contemplated by this Agreement will become qualified or be exempt from qualification under the securities laws of the several states pursuant to Section 6(b) above not later than the Termination Date, and (ii) at the Termination Date no stop order suspending the sale of the Units shall have been issued, and no proceeding for that purpose shall have been initiated or threatened; (b) No Material Misstatements. The Placement Agent will not have notified the Company that the Blue Sky qualification materials or the Memorandum, or any supplement thereto, contains an untrue statement of a fact which in its opinion is material, or omits to state a fact, which in its opinion is material and is required to be stated therein, or is necessary to make the statements therein not misleading; (c) Compliance with Agreements. The Company will have complied with all agreements and-satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date; (d) Corporate Action. The Company will have taken all necessary corporate action, including, without limitation, obtaining the approval of the Company's board of directors, for the execution and delivery of this Agreement, the performance by the Company of its obligations hereunder and the commencement of the Offering contemplated hereby; (e) Certificate of President. At the Termination Date, the Company will have delivered a certificate of its President to the effect -15- 16 set forth in the preamble and subparagraphs (b), (c) and (d) of this Section 7; (f) Opinion of Counsel. On the Termination Date, the Placement Agent will have received from George Diamond, Esquire ("Company Counsel") a signed opinion, dated as of such Closing Date, reasonably satisfactory to Placement Agent's counsel, to the effect that: (i) The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Nevada, with full power and authority, corporate and other, and, to the best of Company Counsel's knowledge, after due investigation, to own or lease and operate its properties and to conduct its business as described in the Memorandum. (ii) The Company has full power and authority, corporate and other, to execute, deliver and perform this Agreement and the Units and to consummate the transactions contemplated hereby and thereby. (iii) The execution, delivery and performance of this Agreement and the Units, by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement and the Units do not, and will not, with or without the giving of notice or the lapse of time, or both, result in a violation of the Articles of Incorporation of the Company. (iv) All corporate action required to be taken for the authorization, issuance and sale of the Units has been duly, validly and sufficiently taken. The Units are not subject to preemptive rights of any security holder of the Company. The certificates representing the Units, the Notes, and the Common Stock are in proper legal form. (v) Upon delivery of the Units to the Subscribers against full payment therefor as provided in this Agreement, the Subscribers will acquire good title to the Units and clear of all liens, encumbrances, equities, security interests and claims, other than such liens, encumbrances, equities, security interests or claims placed on the securities by the Subscriber therefor. -16- 17 (vi) Company Counsel has inspected the questionnaires delivered to and completed by Subscribers in connection with their proposed investment in the Units. (vii) Company Counsel has participated in reviews and discussions in connection with the preparation of the Memorandum, and in the course of such reviews and discussions, no facts came to its attention which lead it to believe that the Memorandum (except as to the financial statements as to which Company Counsel need not express an opinion), on the Termination Date, contained any untrue statement of a material fact, or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (viii) To the best of Company Counsel's knowledge, after due investigation, the issuance of the Units in the Offering will not give any holder of the Company's outstanding options, warrants or other convertible securities or rights to purchase shares of the Company's Common Stock the right to purchase shares at a reduced price. In rendering its opinion, Company Counsel may rely upon (1) opinions of counsel acceptable to Placement Agent's counsel with respect to matters relating to the laws of any and all foreign jurisdictions, and (2) the certificates of government officials and officers of the Company as to matters of fact; provided that Company Counsel shall state that they have no reason to believe, and do not believe, that they are not justified in relying upon such opinions or such certificates of government officials and officers of the Company as to matters of fact, as the case may be. 8. Conditions of the Company's Obligations. The obligations of the Company hereunder will be subject to the accuracy of the representations and warranties of the Placement Agent contained herein as of the date hereof and as of the Closing Date, to the performance by the Placement Agent of its obligations hereunder and to the following additional conditions: -17- 18 (a) Approval of Subscribers. The Company shall have approved, which approval shall not be unreasonably withheld, each purchaser of the Units; (b) Absence of Certain Events. No stop order suspending the sale of Units has been issued, and no proceeding for that purpose will have been initiated or threatened; (c) No Material Misstatements. The Company will not have notified the Placement Agent that the Blue Sky qualification materials, or the Memorandum, or any amendment or supplement thereto, contains an untrue statement of a fact, which in its opinion is material, or omits to state a fact, which in its opinion is material and is required to be stated therein or is necessary to make the statements therein not misleading, in each case only with respect to information contained therein concerning the Placement Agent; and (d) Blue Sky List. The Placement Agent will have delivered to the Company a list of states in which the financing may be made. 9. Expenses of Sale. The Company will pay or cause to be paid all costs and expenses incident to the Units, whether or not the Offering contemplated hereby is consummated, including, without limitation, the fees, disbursements and expenses of (a) its counsel and accountants, (b) preparing, printing, or otherwise reproducing, and mailing, the Memorandum, and other appropriate documents, and any amendments or supplements thereto (all in such quantities as the Placement Agent may require), (c) registering or qualifying the Units for offer and sale in the applicable states, as specified by the Placement Agent, or obtaining exemptions therefrom, and the fees, expenses and disbursements of Company Counsel in connection therewith, (d) all taxes, if any, on the issuance of the Units, and (e) all other expenses relating to the Offering of the Units, except the Placement Agent will pay all of its expenses including its counsel. 10. Indemnification and Contribution. (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless the Placement Agent and each person, if any, who controls the Placement Agent within the meaning of the Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which the Placement Agent or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained (A) in the Memorandum, or (B) in any blue sky application or other document executed by the -18- 19 Company specifically for that purpose or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify any or all of the Units under the securities laws thereof (any such application, document or information being hereinafter called a "Blue Sky Application"), (ii) the omission or alleged omission to state in the Memorandum or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of a material fact contained in the Memorandum or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and will reimburse the Placement Agent and each such controlling person for any legal or other expenses reasonably incurred by the Placement Agent or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Placement Agent specifically for use with reference to the Placement Agent in the preparation of the Memorandum or any such Blue Sky Application. (b) Indemnification by the Placement Agent. The Placement Agent agrees to indemnify and hold harmless the Company and each person, if any, who controls the Company within the meaning of the Act and the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which the Company or such controlling person may become subject, under the Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained (A) in the Memorandum, or (B) in any Blue Sky Application, or (ii) the omission or alleged omission to state in the Memorandum or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of a material fact contained in the Memorandum, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; in each case to the extent but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written -19- 20 information furnished to the Company by the Placement Agent specifically for use with reference to the Placement Agent in the preparation of the Memorandum or any such Blue Sky Application. (c) Procedure. Promptly after receipt by an indemnified party under this Section 10 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 10, notify in writing the indemnifying party of the commencement thereof; and the omission so to notify the indemnifying party will relieve it from any liability under this Section 10 as to the particular item for which indemnification is then being sought, but not from any other liability which it may have to any indemnified party. In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent that it may wish, jointly with any other indemnifying party, similarly notified, to assume the defense thereof, with counsel who shall be to the reasonable satisfaction of such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 10 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the reasonable judgment of the indemnified party, it is advisable for the indemnified party to be represented by separate counsel, the indemnified party shall have the right to employ a single counsel to represent the indemnified parties who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified parties thereof against the indemnifying party, in which event the fees and expenses of such separate counsel shall be borne by the indemnifying party. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the consent of such indemnifying party which consent shall not be unreasonably withheld. (d) Contribution. If the indemnification provided for in this Section 10 is unavailable to any indemnified party in respect to any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, will contribute to the amount paid or payable by such indemnified party, as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand, and the -20- 21 Placement Agent on the other hand, from the Offering of the Units, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand, and of the Placement Agent on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand, and the Placement Agent on the other hand, shall be deemed to be in the same proportion as the total proceeds from the Offering (net of sales commissions, but before deducting expenses) received by the Company, bear to the commissions received by the Placement Agent. The relative fault of the Company on the one hand, and the Placement Agent on the other hand, will be determined with reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company, and its relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount payable by a party as a result of the losses, claims, damages, liabilities or expenses referred to above will be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. (e) Equitable Considerations. The Company and the Placement Agent agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. 11. Representations and Agreements to Survive Delivery. All representations, warranties and agreements of the Company and of the Placement Agent herein will survive the delivery and execution hereof and the closing hereunder, and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Placement Agent or any person who controls the Placement Agent within the meaning of the Act or by the Company or any person who controls the Company within the meaning of the Act, and will survive delivery of the securities constituting the Units hereunder and any termination of this Agreement. 12. Termination by Placement Agent. The Placement Agent will have the right to terminate this Agreement by giving written notice as herein specified, at any time, at or prior to the Closing Date: -21- 22 under the circumstances in order to accomplish the intents and purposes of this Agreement and to carry out its provisions. 17. Validity. In case any term of this Agreement will be held invalid, illegal or unenforceable, in whole or in part, the validity of any of the other terms of this Agreement will not in any way be affected thereby. 18. Waiver of Breach. The failure of any party hereto to insist upon strict performance of any of the covenants and agreements herein contained, or to exercise any option or right herein conferred in any one or more instances, will not be construed to be a waiver or relinquishment of any such option or right, or of any other covenants or agreements, and the same will be and remain in full force and effect. 19. Entire Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the entire subject matter hereof, and there are no representations, inducements, promises or agreements, oral or otherwise, not embodied herein. Any and all prior discussions, negotiations, commitments and understanding relating thereto, are superseded hereby. There are no conditions precedent to the effectiveness of this Agreement other than as stated herein, and there are no related collateral agreements existing between the parties that are not referred to herein. 20. Counterparts. This Agreement may be executed in counterparts and each of such counterparts will for all purposes be deemed to be an original, and such counterparts will together constitute one and the same instrument. 21. Law. This Agreement will be deemed to have been made and delivered in Atlanta, Georgia and will be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of Georgia. The Company (a) agrees that any legal suit, action or proceeding arising out of or relating to this letter will be instituted exclusively in the Superior Court for Fulton County, Georgia, or in the United States District Court for the Northern District of Georgia, (b) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (c) irrevocably consents to the jurisdiction of the Superior Court for Fulton County, Georgia and the United States District Court for the Northern District of Georgia in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Superior Court for Fulton County, Georgia or in the United States District Court for the Northern District of Georgia and agrees that service of process upon the Company mailed by certified mail to the Company's address will be deemed in every respect effective service of process upon the Company, in any suit, action or proceeding. -23- 23 If the foregoing correctly sets forth our understanding, please so indicate in the space provided below for that purpose, whereupon this letter will constitute a binding agreement between us. KARTS INTERNATIONAL INCORPORATED By: /s/ V. LYNN GRAYBILL ------------------------------ Name: V. Lynn Graybill Title: President CONFIRMED AND ACCEPTED: ARGENT SECURITIES, INC. By: /s/ L. PHILLIPS REAMES ---------------------------- Name: L. Phillips Reames Title: Chairman -24- EX-10.29 22 OPTION AGREEMENT DATED MARCH 15, 1996 1 EXHIBIT 10.29 OPTION AGREEMENT THIS OPTION AGREEMENT is made by and between CHARLES BRISTER, an individual ("Seller") and BRISTER'S THUNDER KARTS, INC., a Louisiana corporation ("Purchaser"). ARTICLE I GRANT OF OPTION For and in consideration of the sum of One Hundred Dollars ($100.00) and other good and valuable consideration (the "Option Consideration"), the receipt and sufficiency of which are hereby acknowledged by Seller, Seller does hereby grant to Purchaser the exclusive, irrevocable right and option (the "Option") to purchase all of that certain tract of land located in the Town of Roseland, Tangipahoa Parish, Louisiana, being described more fully on Exhibit "A" which is attached hereto and incorporated herein by reference, including all interest, if any, of Seller in (i) strips or gores, if any, between the property described on Exhibit "A" and abutting properties and (ii) any land lying in or under the bed or any street, alley, road or right-of-way, opened or proposed, abutting or adjacent to the specifically described property together with all easements, rights and appurtenances pertaining thereto, and being 3.41 acres, more or less (the "Land"). The Option Consideration shall not be refundable to Purchaser for any reason, nor shall the amount thereof be applied as a credit to the Purchase Price (as defined in Section 2.4). ARTICLE II OPTION RIGHTS 2.1 Option Period. The Option shall be exercisable for a period commencing on January 1, 1998 and ending at 12:00 midnight, Central Time, December 31, 2000 (the "Option Period"). 2.2 Termination of Option. In the event that Purchaser fails to exercise this Option in the manner provided in Section 3.1 within the Option Period, all of the rights of Purchaser and all liabilities of Seller hereunder shall cease and terminate without the necessity of any action on the part of Seller. 2.3 Manner of Exercise of Option. If Purchaser elects to exercise the Option, it shall deliver notice of exercise to Seller on or before the expiration of the Option Period. The date on which the notice of exercise is delivered is referred to as the "Exercise Date." 2.4 Purchase Price. The total purchase price ("Purchase Price") for the Property shall be Five Hundred Fifty Thousand and No/100 Dollars ($550,000.00), payable in cash at Closing. ARTICLE III TITLE AND SURVEY 3.1 Title Commitment. Seller shall, as soon as possible, and not later than ten (10) days following Purchaser's written request, cause to be furnished to Purchaser a current ALTA form of Commitment for Owner's Policy of Title Insurance, extended coverage (the "Title Commitment"), issued through a title company acceptable to Purchaser ("Title Company"), describing the Land OPTION AGREEMENT - PAGE 1 2 (which legal description, unless and to the extent modified by the survey prescribed in Section 3.2 below, shall be deemed incorporated into this Agreement), listing Purchaser as the prospective named insured and showing as the policy amount the total Purchase Price for the Property. At such time as Seller causes the Title Commitment to be furnished to Purchaser, Seller shall further cause to be furnished to Purchaser legible true copies of all instruments referred to in the Title Commitment as conditions or exceptions to title to the Land. Purchaser reserves the right to approve or disapprove any and all exceptions to the title to the Land included in the Title Commitment. 3.2 Survey. Seller shall, as soon as possible and not later than twenty (20) days following Purchaser's written request, cause to be prepared and furnished to Purchaser and the Title Company a current survey (the "Survey") of the Land and Improvements, prepared by a properly licensed surveyor acceptable to Purchaser and in a form acceptable to Purchaser. 3.3 No Encumbrances. During the term of this Agreement, Seller shall not permit the Property from being encumbered in any way without the consent of Purchaser. ARTICLE IV CLOSING 4.1 Time and Place of Closing. Provided that all of the conditions of this Agreement shall have been satisfied prior to or on the Closing Date (herein so called), the Closing (herein so called) of this transaction shall take place at the office of the Title Company thirty (30) "business days" after the Exercise Date, unless another date, place and/or time, shall be mutually agreed on in writing by the parties. 4.2 Events of Closing. At the Closing: (a) Seller shall deliver or cause to be delivered to Purchaser the following: (1) a General Warranty Deed, (in form and substance acceptable to Purchaser attached hereto and incorporated herein), duly executed and acknowledged by Seller, conveying to Purchaser indefeasible fee simple title to the Land and Improvements, free and clear of any lien, encumbrance or exception other than the Permitted Exceptions; (2) an ALTA Owner's Policy of Title Insurance (extended coverage) issued by the Title Company conforming to the requirements of Article IV above insuring Purchaser's marketable title in the amount of the Purchase Price (the "Title Policy"). The Title Policy shall be subject to the Permitted Exceptions and the standard printed exceptions, except that the Seller shall cause the Title Company to (a) delete the survey exception, (b) show "none of record" as to restrictive covenants, except for the Permitted Exceptions, (c) limit taxes to the year of Closing and subsequent years, endorsed "not yet due and payable" and subsequent assessments for prior years due to change in land usage or ownership, (d) delete any exception for the rights of parties in possession, (e) delete any exception for visible and apparent easements and underground easements the existence of which may arise by virtue of unrecorded grant or use, and (f) delete any exception for portions of the Property lying within the boundaries of any roads or roadways. OPTION AGREEMENT - PAGE 2 3 (3) a duly executed Affidavit of Non-Foreign Status; (4) ad valorem tax statements for the Property for the calendar year of the Closing (if available and if not previously presented); (5) such evidence of the authority and capacity of Seller and its representatives as Purchaser or the Title Company may reasonably require. (b) Purchaser shall deliver or shall cause to be delivered to Seller the following: (1) the consideration required pursuant to Section 2.4 above; (2) such evidence of the authority and capacity of Purchaser and its representatives as Seller or the Title Company may reasonably require. 4.3 Expenses. Purchaser shall pay the cost of any documentary stamp or other transfer taxes, filing fees, inspection costs, its share of the prorations as set forth in Section 4.4 hereof, and its own attorneys' fees. Seller shall pay its proportionate share of the prorations as set forth in Section 4.4 hereof, its own attorneys' fees, the Survey, and the premium for the Owner's Policy of Title Insurance (including the cost of the survey exception deletion). Except as otherwise provided in this Section, all other expenses hereunder shall be paid by the party incurring such expenses. 4.4 Prorations. Rental income, real and personal property ad valorem taxes, insurance premiums (if and to the extent that Seller's policies are assumed by Purchaser), utility charges and other operating expenses shall be prorated to the Closing, based upon actual days involved. Seller shall be responsible for all ad valorem taxes for any period prior to the Closing. To the extent that the amounts of such charges, expenses, and income referred to in this Section are unavailable at the Closing Date, a readjustment of these items shall be made within thirty (30) days after the Closing. Both expense items and income items shall be prorated as of the Closing Date, with Seller receiving all income for the Closing Date and bearing all expenses for the Closing Date. In connection with the proration of both real and personal property ad valorem taxes, if actual tax figures for the year of Closing are not available at the Closing Date, an estimated, tentative proration of taxes shall be made using tax figures from the preceding year; however, when actual taxes for the year of Closing are available, a corrected proration of taxes shall be made. If such taxes for the year of Closing increase over those for the preceding year Seller shall pay to Purchaser a pro rata portion of such increase, computed to the Closing Date, and conversely, if such taxes for the year of Closing decrease from those of the preceding year Purchaser shall pay to Seller a pro rata portion of such decrease, computed to the Closing Date, any such payment to be made within ten (10) days after notification by either party that such adjustment is necessary. Seller shall, on or before the Closing Date, furnish to Purchaser and the Title Company all information necessary to compute the prorations provided for in this Section. ARTICLE V MISCELLANEOUS 5.1 Notices. All notices, demands, requests, consents and other communications required or permitted hereunder shall be in writing, and shall be deemed to be delivered when actually received, or, if earlier and regardless of whether actually received (except where receipt is specified in this Agreement), within three (3) days following deposit in a regularly maintained, United States OPTION AGREEMENT - PAGE 3 4 postage receptacle, fully prepaid, certified mail, return receipt requested, addressed to the party at its address set forth below or at such other address as such party may have specified theretofore by notice delivered in accordance with this Section and actually received by the addressee: If to Seller: Charles Brister 505 Ellis Road Amite, Louisiana 70422 If to Purchaser: Brister's Thunder Karts, Inc. Highway 51 South Roseland, Louisiana 70456 With a copy to: Looper, Reed, Mark & McGraw 4100 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 Attention: Richard B. Goodner 5.2 Survival. All warranties, representations and agreements contained herein or arising out of the sale of the Property by Seller to Purchaser shall survive the Closing hereof. 5.3 Governing Law; Venue. The laws of the State of Louisiana shall govern the validity, enforcement, and interpretation of this Agreement. The obligations of the parties are performable and venue for any legal action arising out of this Agreement shall lie in Tangipahoa Parish, Louisiana. 5.4 Integration; Modification; Waiver. This Agreement constitutes the complete and final expression of the agreement of the parties relating to the Property, and supersedes all previous contracts, agreements, and understandings of the parties, either oral or written, relating to the Property. This Agreement cannot be modified, or any of the terms hereof waived, except by an instrument in writing (referring specifically to this Agreement) executed by the party against whom enforcement of the modification or waiver is sought. 5.5 Counterpart Execution. This Agreement may be executed in several counterparts, each of which shall be fully effective as an original and all of which together shall constitute one and the same instrument. 5.6 Headings; Construction. The headings which have been used throughout this Agreement have been inserted for convenience of reference only and do not constitute matter to be construed in interpreting this Agreement. Words of any gender used in this Agreement shall be held and construed to include any other gender and words in the singular number shall be held to include the plural, and vice versa, unless the context requires otherwise. The words "herein," "hereof," "hereunder" and other similar compounds of the word "here" when used in this Agreement shall refer to the entire Agreement and not to any particular provision or section. If the last day of any time period stated herein shall fall on a Saturday, Sunday or legal holiday, then the duration of such time period shall be extended so that is shall end on the next succeeding day which is not a Saturday, Sunday or legal holiday. The term "business days" shall mean any day of the week other than Saturday, Sunday or a holiday. OPTION AGREEMENT - PAGE 4 5 5.7 Invalid Provisions. If any one or more of the provisions of this Agreement, or the applicability of any such provision to a specific situation, shall be held invalid or unenforceable, such provision shall be modified to the minimum extent necessary to make it or its application valid and enforceable, and the validity and enforceability of all other provisions of this Agreement and all other applications of any such provision shall not be affected thereby. 5.8 Binding Effect. This Agreement shall be binding upon and inure to the benefit of Seller and Purchaser, and their respective heirs, personal representatives, successors and assigns. Purchaser may assign its rights hereunder without the prior consent of Seller. Upon acceptance of any such assignment by the assignee and the assumption of Purchaser's obligations hereunder, Purchaser shall be relieved of all duties and obligations hereunder. Except as expressly provided herein, nothing in this Agreement is intended to confer on any person, other than the parties hereto and their respective heirs, personal representatives, successors and assigns, any rights or remedies under or by reason of this Agreement. 5.9 Further Acts. In addition to the acts recited in this Agreement to be performed by Seller and Purchaser, Seller and Purchaser agree to perform or cause to be performed at the Closing or after the Closing any and all such further acts as may be reasonably necessary to consummate the transactions contemplated hereby. 5.10 Date of Agreement. The date of this Agreement shall for all purposes be the date of the signature of the last to sign of the parties hereto. 5.11 Time of the Essence. Time is of the essence herein. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on this 15th day of March, 1996. SELLER: /s/ CHARLES BRISTER --------------------------------- Charles Brister PURCHASER: BRISTER'S THUNDER KARTS, INC. By: /s/ V. LYNN GRAYBILL --------------------------- Name: --------------------------- Title: --------------------------- OPTION AGREEMENT - PAGE 5 EX-10.30 23 LEASE OF COMMERCIAL PROPERTY - SEPTEMBER 27, 1995 1 EXHIBIT 10.30 LEASE OF COMMERCIAL PROPERTY PARISH OF TANGIPAHOA STATE OF LOUISIANA Personally came and appeared before me CHARLES BRISTER hereinafter referred to sometimes as "LESSOR" hereby leases to BRISTER'S THUNDER KARTS, INC., represented by the duly authorized undersigned, hereinafter referred to sometimes as "LESSEE". By this instrument, its terms and conditions, lessor(s) does lease to lessee(s) the following described property: 3.41 acres of land in the Town of Roseland, Tangipahoa Parish, Louisiana, and being all of Ten (10) acres Lot 5 lying E. of U.S. Highway 51 and the Southern portion of Lot 4 lying East of U.S. Highway 51, described as follows: From the NE corner of said Lot 4, Roseland Colony measure South 0 deg. 50 min. E., along Western right of way of I.C.R.R. 651.2 feet to NE corner of said 4.41 acres and point of beginning of this survey, thence South 89 deg. 10 min. W. 427.8 feet to eastern right of way line of U.S. Highway 51, thence with said right of way South 33 deg. 48 min. E. at 90.3 feet, a concrete right of way marker at 396.0 feet, another concrete marker and beginning of curve, thence South 30 deg. E. 100 feet, South 27 deg. 45 min. E. 100 feet, South 24 deg. 15 min. E. 100 feet, and South 20 deg. E. 70.6 feet to South line of Lot 5; thence North 0 deg. 50 min. W. along said Western right of way of I.C.R.R. 668.9 feet to point of beginning all as per survey of O.C. Hollister, Surveyor, dated June 25, 1959, with all improvements and equipment. SECTION ONE - TERM This lease is for the period of time from 1 October, 1995 until 31 December, 1996, with option for an additional year, beginning 1 January, 1997. The consideration of the primary term will be for $6,025.00 per month, payable beginning 1 October, 1995, and on the same day of each month thereafter for the term of this lease. The consideration and other terms of the option period are to be negotiated. This lease is not assignable, transferable, or subleaseable in whole and/or in part. 2 The net rental hereinabove fixed for the respective periods above mentioned means that in addition to the said amounts of actual rental, the Lessee will pay all taxes levied by the State and all political sub-division on the leased property for the period covered by this lease, and will pay all insurance and premiums of such policies of fire, tornado, and rental insurance as the Lessor may desire carried against the leased property during the period covered by this lease. The taxes and insurance premiums herein provided to be paid by Lessee are a part of the rent for the leased premises, and, should the Lessee fail to pay promptly and punctually any of said taxes or insurance premiums, the Lessor may, but need not, pay same and recover repayment thereof at once from the Lessee with interest at the rate of eight per cent (8%) per annum from date of payment. Lessee shall obtain fire and hazard insurance upon the leased property during the term of the lease, naming Lessor as loss payee. This shall be with an insurance company with a rating of acceptable solvency licensed to do business in Louisiana. Lessee shall comply in every respect at Lessee's own expense, with the rules and regulations of the Louisiana Fire Prevention Bureau, or those of any similar bureau or association in existence at the time. SECTION TWO - USE OF PREMISES LEASED The premises leased shall be for the purpose of operation of a Go-Kart Manufacturer, yard tools, pressure washers, and the like, and necessary and usually activities pursuant thereto. The Lessee shall not be able to grant right-of-ways, servitude, or easements of any kind, type, or nature. The constructions made by the Lessee shall be done so only with prior written permission of the lessor and shall remain the property of the lessor without prior consent. Lessor shall have the right to inspect premises at any reasonable time. SECTION THREE - UPKEEP OF PREMISES LEASED The premises shall be maintained, mowed, and kept in orderly condition and fashion by the Lessee at the cost of the Lessee. At the cost and expense of the Lessee, the Lessee shall comply with all sanitary laws, ordinances, rules, and orders from the board of health, and rules and orders from other state, parish, and municipal authorities, complying with the rules and regulations of local boards and other organizations of the ______ underwriters of similar authorities. 3 Lessee assumes the maintenance of the plumbing, including fixtures, outlets, and drains, and the protection and repair of same, even when injured by freeze. Lessee will make all necessary repairs, including, repairs to the roof and flooring, to keep the leased property in as good order as it now is; ordinary wear and tear accepted, and is also to keep all toils in repair to conform with good sanitary conditions. The Lessee does not have the right to sublet any part of the leased premises without the written consent of the Lessor. LESSOR will not be responsible for damage caused by leaks in the roof, by bursting of pipes by freezing or otherwise, or by any vices or defects of the leased property, or the consequences thereof, except in the case of positive neglect or failure to take action toward the remedying of such defects within reasonable time after having written notice from Lessee of such defects and the damage caused thereby. Should Lessee fail to promptly notify Lessor, in writing, or any such defects, Lessee will become responsible for any damage resulting to Lessor or other parties. The said premises and appurtenances, including locks, keys, and lighting, heating, plumbing systems, and fixtures and attachments, are delivered in good order and Lessee is obligated to keep all of the same in like good order during the term of this lease; to keep in repair all plumbing, even when injured by freezing; to keep the chimneys, drains, and plumbing cleaned and to deliver them at the expiration of this lease in said condition; to pay all bills for water, light, and similar charges; to comply with all laws and ordinances of the State, City, Board of health, and other public bodies, now in force or which may hereafter be enacted of whatever character, at Lessee's own expense; and to notify Lessor or agent, in writing, any time the leased premises will be unoccupied, so that necessary vacancy permits may be obtained from Lessor's insurance companies, and upon Lessee's failure to do so, Lessor may take such steps as Lessor thinks necessary for Lessor's protection, including retaking possession of the premises without relieving or impairing Lessee's liability. No repair shall be due Lessee except such as may be rendered necessary by fire or other casualty, nor occasioned by fault or negligence of Lessee. Lessor will not be responsible for damages of any sort of any persons or property, however occasioned; and Lessee shall hold Lessor harmless from any claims by or liability to third persons however arising, including or sidewalks adjoining premises. Lessor shall at all time shave the right to enter the premises for the purpose of inspection and making such, if any, repairs as Lessor may be bound for or elect to make. 4 The description in whole or in part of the leased premises by fire or other casualty will not violate this lease. If the premises cannot be repaired or rebuilt within 30 days, the lease shall be terminated. If repair or rebuilding within this time is possible, during the time of said repair or rebuilding, lease rentals shall be suspended, and the lease shall be extended an equal period of time, not to exceed 30 days. The care, maintenance, and repairs of elevators, machinery, glass, or plate glass are assumed by Lessee, together with all liability or claims for damages. Lessee is obligated not to display in, on, or about the leased premises any sign or decoration, the nature of which, in the judgment of Lessor is dangerous, unsightly, or detrimental to the property. SECTION FOUR - SURRENDER OF PREMISES In the event that the lessee fails to abide by and of the terms and/or conditions herewith, and/or any/all amendments hereto, same failure shall be grounds for termination of the lease, and shall render the lessee liable for all court costs, attorney's fees, and other proper and necessary charges, fees, and costs as a result of said failure. If the lease is terminated, lapsed, or for whatever reason lessee fails to abide by this lease and its terms, lessee shall immediately surrender possession and if he fails to do so, he must pay liquidated damages of 5 times the daily rent, and attorney's fees, court costs, and all other costs, fees, and charges, necessary and proper thereto. He waives notice to vacate, does herein confess his judgment, allowing lessor to be placed in possession at once. If, for whatever reason, lessor allows lessee to remain in leased premises after the expiration lapse, or termination of the lease, this shall not be considered a reconduction of the lease. Lessee is bound not to transfer this lease in whole or in part, without the written consent of Lessor; at the end of this lease to return, by actual delivery of the keys, without further notice, possession of the said premises and appurtenances, broom-cleaned and free from any trash whatsoever, delivered in like good order as received, with the usual decay, wear, and tear being accepted only. Lessee is to replace any and all broken glass, and to remove any and all signs painted or placed in or upon the leased premises before leaving. 5 Lessee is obligated not to make any additions or alterations whatsoever, to the premises without written permission. All additions, alterations, improvements made by lessee with or without consent of lessor, no matter how attached (except moveable trade fixtures), must remain the property of the Lessor, unless otherwise stipulated herein. Lessee however, expressly waiving all right to compensation therefore. The lessor, at his option, may require the building to be replaced in its original condition. SECTION FIVE - VACATING PREMISES If the leased premises become vacated or abandoned by the lessee for whatever type of reason because of his ejectment, or if the lessee removes personal property or goods from the lease premises to the prejudices of the lessor's lien, than the rent for the unexpired term shall become due along with the attorney's fees, court costs, and other fees, costs, and charges pertinent thereto, and the lessee shall have option to cancel the lease or to reenter and relet the premises to other parties for such price and terms as he may obtain and apply the net amount realized to the prepayment of the rent due and owing by the lessee herein. SECTION SIX - MISCELLANEOUS Failure of LESSEE to property pay rent, bills, when promptly due at maturity, as stipulated, or any other violation of any of the terms and conditions of this lease, failure to comply with any of the obligations as listed herein, or should voluntary or involuntary bankruptcy proceedings be instituted by, or against LESSEE, or should LESSEE fail in business or become insolvent or make assignment for benefit of creditors, when any of said events shall ipso facto, and without need of formally putting in default, cause all remaining installments to become immediately due and payable, and, at the option of the LESSOR, authorize the cancellation of this lease for the remainder of the unexpired term, and allow LESSOR to recover all actual damages suffered by LESSOR by reason of the cancellation. In this event, LESSOR shall be entitled to take immediate possession of said premises. Lessee hereby assenting thereto and expressly waiving the legal notice to vacate the premises. The attempted seizure of the leasehold by creditors of Lessee, by Writ of ____, attachment, or other, shall void the Lease immediately, at the option of the Lessor. 6 In the event of default by Lessee in any obligation or condition hereof, Lessor is hereby irrevocably authorized to sell at public or private sale, without recourse to judicial proceedings and with or without demand, notice, advertisement, or putting Lessee in default, any or all of the contents of the leased premises, upon which Lessor has a lien, and Lessor may purchase same at the fair value thereof; in the event of any such sale, the proceeds thereof, after the payment of all costs, fees, charges, and expenses of every kind, shall be applied to the satisfaction of all amounts due Lessor and the balance shall along be paid to Lessee. Failure to strictly and promptly enforce these conditions shall not operate as a waiver of Lessors' right, Lessor expressly reserving the right to always enforce prompt payment of rent, or to cancel this lease, regardless of any indulgences or extensions previously granted. Failure to comply with any condition or obligation of this lease will make Lessee liable for any loss or damage sustained by Lessor. Should Lessee at any time use the leased premises or any portion thereof for any illegal or unlawful purpose, or commit, or permit or tolerate the commission therein of any act made punishable by fine or imprisonment under the laws of the United States or the State of Louisiana, or any ordinance of this City or Parish, the remedies set forth in the preceding paragraph shall be available to Lessor immediately without necessity of giving any notice to Lessee. At the expiration of this lease, or its termination for other causes, Lessee is obligated to immediately surrender possession, and should Lessee fail to do so, he consents to pay as liquidated damages five times the rent per day, with attorney's fees, costs, etc. Lessee also expressly waives any notice to vacate at the expiration of this lease and all legal delays, and hereby confesses judgment with costs, placing Lessor in possession to be executed at once. Should Lessor allow or permit Lessee to remain in the leased premises after the expiration of this lease, this shall not be construed as a re-conduction of this lease. No auction sales, etc., shall be conducted on the premises without the written consent of Lessor. 7 Should any claim in favor of Lessor upon this lease be placed in the hands of an agent or attorney to give special attention to the enforcement of such claim, Lessee shall in order to protect Lessor fully against all expenses, pay as fees and compensation to such agent or attorney additional sum of ten percent (10%) of the amount due on such claim, provided that amount be over $1,000.00, and twenty percent (20%) if that amount be $1,000.00 or under, together with all costs, charges, and expenses. Lessor hereby reserves the right to post and to keep posted on the property, card, "For Sale" or "Auction Sale", during the term of this lease, and cords, "For Rent", during the ninety days preceding the expiration of this lease, and Lessee hereby consents to allow the premises to be inspected on an order from Lessor or agent. In the event that Lessee is absent from the City, at any time during the last mentioned period, keys to the premises will be left with some representative of Lessee in order that the property may be shown, and Lessor or agent will be advised in writing where the keys may be obtained. Failure to comply with these conditions and/or obligations of this lease, will allow Lessor to obtain access to the premises so that the property may be shown in any manner and fashion at Lessor's discretion. This instrument shall constitute all of the agreements and obligations of the parties hereto; any amendments hereto shall be reduced to writing to be valid an binding between the parties. WITNESSES: /s/ [ILLEGIBLE] /s/ CHARLES BRISTER - -------------------------------- -------------------------------- CHARLES BRISTER, LESSOR /s/ BRENDA RUSSELL /s/ BRISTER THUNDER KARTS BY - -------------------------------- CHARLES BRISTER -------------------------------- BRISTER'S THUNDER KARTS, INC. by CHARLES BRISTER, PRESIDENT, LESSEE SWORN TO AND SUBSCRIBED BEFORE ME THIS 27th day of SEPTEMBER, 1995. /s/ JODY D. THOMPSON ------------------------------- NOTARY PUBLIC 8 AMENDED LEASE OF COMMERCIAL PROPERTY PARISH OF TANGIPAHOA STATE OF LOUISIANA Personally came and appeared before me CHARLES BRISTER hereinafter referred to sometimes as "LESSOR", and BRISTER'S THUNDER KARTS, INC., represented by the duly authorized undersigned, hereinafter referred to sometimes as "LESSEE". The parties refer to certain instruments entitled "LEASE OF COMMERCIAL PROPERTY", and "MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS OF BRISTER'S THUNDER KARTS, INC.", and "NOTICE OF LEASE", executed by the parties on 27 SEPTEMBER, 1995, the latter having been filed OCTOBER 10, 1995, AT COB 803 PAGE 258, INSTRUMENT #477439, TANGIPAHOA PARISH, CLERK OF COURT. The parties wish to amend the documents, but only insofar as the following regarding the property description. The property described in the Lease of Commercial Property being leased to the lessee was described as follows: 3.41 acres of land in the Town of Roseland, Tangipahoa Parish, Louisiana, and being all of Ten (10) acres Lot 5 lying E. of U.S. Highway 51 and the Southern portion of Lot 4 lying East of U.S. Highway 51, described as follows: From the NE corder of said Lot 4, Roseland Colony measure South 0 deg. 50 min. E., along Western right of way of I.C.R.R. 651.2 feet to NE corner of said 4.41 acres and point of beginning of this survey, thence South 89 deg. 10 min. W. 427.8 feet to eastern right of way line of U.S. Highway 51, thence with said right of way south 33 deg. 48 min, E. at 90.3 feet, and concrete right of way marker at 396.0 feet, another concrete marker and beginning of curve, thence South 30 deg. E. 100 feet, south 27 deg. 34 min. E. 100 feet, South 24 deg. 15 min. E. 100 feet, and South 20 deg. E. 70.6 feet to South line of Lot 5; thence North 0 deg. 50 min. E. along said Western right of way of I.C.R.R. 668.9 feet to point of beginning all as part survey of O.C. Hollister, Surveyor, dated June 25, 1959, with all improvements and equipment. 9 The parties wish to amend the property description being leased to said Lessee from said Lessor, so that it now reads as follows: 1. 3.41 acres of land in the Town of Roseland, Tangipahoa Parish, Louisiana, and being all of Ten (10) acres Lot 5 lying E. of U.S. Highway 51 and the Southern portion of Lot 4 lying East of U.S. Highway 51, described as follows: From the NE corner of said Lot 4, Roseland Colony measure South 0 deg. 50 min. E., along Western right of way of I.C.R.R. 651.2 feet to NE corner of said 4.41 acres and point of beginning of this survey, thence South 89 deg. 10 min. W. 427.8 feet to eastern right of way line of U.S. Highway 51, thence with said right of way South 33 deg. 48 min. E. at 90.3 feet, a concrete right of way marker at 396.0 feet, another concrete marker and beginning of curve, thence South 30 deg. E. 100 feet, South 27 deg. 45 min. E. 100 feet, South 24 deg. 15 min. E. 100 feet, and South 20 deg. E. 70.6 feet to South line of Lot 5; thence North 0 deg. 50 min. W. along said Western right of way of I.C.R.R. 668.9 feet to point of beginning all as per survey of O.C. Hollister, Surveyor, dated June 26, 1959, with all improvements and equipment. 2. A certain piece or parcel of land in the Town of Roseland, Louisiana, containing 2.50 acres, more or less, and being more particularly described as follow, to-wit: 12 acres of land, more or less, being all of Lots 4 and 5 of the Town of Roseland, lying East of Highway 51; LESS and EXCEPT A tract containing 6 acres, more or less, sold by vendor to Wade Garnier by Deed recorded in COB 220 page 541, and LESS AND EXCEPT a 3.41 acre tract sold by vendor to Hood Enterprises, Inc., by deed recorded in COB 239 page 528; being a tract of land bounded now or formerly to the East by I.C.R.R., West by the East line of U.S. Highway 51, and South by Hood Enterprises, Inc., together with all the buildings and improvements thereon. Subject to lifetime usufruct of all of the highway frontage by a depth of 140 feet parallel lines, except the South 25 feet fronting on Highway 51, reserved by Joseph H. Brister. An Act of Revocation of Usufruct was signed by said parties, revoking said usufruct on the 15th day of May, 1986, same filed in the records of the Clerk of Court, Tangipahoa Parish, at COB 0628 page 788, Instrument #0358904, 16 May, 1986. 10 The parties wish to amend the property description being leased to said Lessee from said Lessor, so that it now reads as follows: 1. 3.41 acres of land in the Town of Roseland, Tangipahoa Parish, Louisiana, and being all of Ten (10) acres Lot 5 lying E. of U.S. Highway 51 and the Southern portion of Lot 4 lying East of U.S. Highway 51, described as follows: From the NE corner of said Lot 4, Roseland Colony measure South 0 deg. 50 min. E., along Western right of way of I.C.R.R. 651.2 feet to NE corner of said 4.41 acres and point of beginning of this survey, thence South 89 deg. 10 min. W. 427.8 feet to eastern right of way line of U.S. Highway 51, thence with said right of way South 33 deg. 48 min. E. at 90.3 feet, a concrete right of way marker at 396.0 feet, another concrete marker and beginning of curve, thence South 30 deg. E. 100 feet, South 27 deg. 45 min. E. 100 feet, south 24 deg. 15 min. E. 100 feet, and south 20 deg. E. 70.6 feet South line of Lot 5; thence North 0 deg. 50 min. W. along said Western right of way of I.C.R.R. 668.9 feet to point of beginning all as per survey of O.C. Hollister, Surveyor, dated June 25, 1959, with all improvements and equipment. 2. A certain piece or parcel of land in the Town of Roseland, Louisiana, containing 2.50 acres, more or less, and being more particularly described as follows: to -wit: 12 acres of land, more or less, being all of Lots 4 and 5 of the Town of Roseland, lying East of Highway 51; LESS AND EXCEPT A tract containing 6 acres, more or less, sold by vendor to Wade Garnier by Deed recorded in COB 220 page 541, and LESS AND EXCEPT a 3.41 acre tract sold by vendor to Hood Enterprises, Inc., by deed recorded in COB 239 page 528; being a tract of land bounded now or formerly to the East by I.C.R.R., West by the East line of U.S. Highway 51, and South by Hood Enterprises, Inc., together with all the buildings and improvements thereon. Subject to lifetime usufruct of all of the highway frontage by a depth of 140 feet parallel lines, except the South 25 feet fronting on Highway 51, reserved by Joseph M. Brister. An Act of Revocation of Usufruct was signed by said parties, revoking said usufruct on the 15th day of May, 1986, same filed in the records of the Clerk of Court, Tangipahoa Parish, at COB 0628 page 788, Instrument #0358904, 16 May, 1986. 11 In all other respects in the Lease, notice of Lease Minutes of the Meeting of the Board of Directors of Brister's Thunder Karts, Inc., and other, are confirmed herewith, though not recited herein. IN WITNESS WHEREOF, I have affixed my name in the presence of the two undersigned witnesses, and notary public. SWORN TO AND SUBSCRIBED BEFORE ME this 30th day of NOVEMBER, 1995. WITNESSES: /s/ [ILLEGIBLE] /s/ CHARLES BRISTER - -------------------------------- -------------------------------- CHARLES BRISTER, LESSOR /s/ BRAD ROBERTS /s/ BRISTER'S THUNDER KARTS BY - -------------------------------- CHARLES BRISTER -------------------------------- BRISTER'S THUNDER KARTS, INC. by CHARLES BRISTER, PRESIDENT, LESSEE [ILLEGIBLE] -------------------------------- NOTARY PUBLIC 12 FIRST AMENDMENT TO LEASE OF COMMERCIAL PROPERTY PARISH OF TANGIPAHOA ) ) ss. STATE OF LOUISIANA ) Personally came and appeared before me CHARLES BRISTER, hereinafter referred to as "Lessor" and BRISTER'S THUNDER KARTS, INC., represented by the duly authorized undersigned, hereinafter referred to sometimes as "Lessee." RECITALS 1. Lessor and Lessee executed a Lease of Commercial property dated September 27, 1995 and an Amended Lease of Commercial Property dated November 28, 1995 amending the property description in the September 27, 1995 lease (the September 27, 1995 lease and the November 28, 1995 amended lease are jointly referred to as the "Lease Agreement"). 2. Lessor and Lessee desire to modify the Lease Agreement as hereinafter provided. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. The first and second paragraphs of Section One of the Lease Agreement are hereby deleted in their entirety and the following is substituted in lieu thereof: "SECTION ONE - TERM. This Lease is for the period of time from 1 October, 1995 through 15 March, 1998 ("Primary Term"). Lessee shall have the right and option to extend the term of the Lease for an additional two (2) year period ("Extended Term"), commencing 15 March, 1998, by so notifying Lessor on or before the expiration of the Primary Term. The rent payable during the Primary Term of the Lease Agreement shall be Six Thousand Twenty-Five Dollars ($6,025.00) per month, payable beginning 1 October, 1995, and on the same day of each succeeding month thereafter for the term of the Lease. During the Extended Term, if any, the rent shall be adjusted annually at the commencement of the Extended Term and on the anniversary date thereof, in accordance with the Consumer Price Index in the appropriate jurisdiction. Other conditions of the Extended Term are to be negotiated by Lessor and Lessee. Lessee has the unrestricted right to assign the whole or any part of the Lease Agreement or to sublease the whole or any part of the leased premises to any associated or affiliated corporation or entity a majority of whose stock or interest is owned by Lessee or Lessee's parent company or to any corporation or entity acquiring a majority of the stock or assets of Lessee or Lessee's parent company. Lessee has the unrestricted right to assign the whole or any part of the Lease Agreement or to sublease the whole or any part of the leased premises so long as FIRST AMENDMENT TO LEASE OF COMMERCIAL PROPERTY - PAGE 1 13 the assignee assumes all of Lessee's obligations under the Lease Agreement and the assignee is a good financial risk to the Landlord." 2. All references to the provision of insurance in paragraphs three, four and five of Section One are hereby deleted in their entirety, and the following shall be substituted as the last sentence of paragraph 3 in lieu thereof: "Lessor and Lessee shall mutually agree as to the insurance to be carried against the leased property, and Lessee shall be responsible for the payment of the premiums assessed thereunder, if any." 3. The first paragraph of Section Two of the Lease Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "SECTION TWO - USE OF PREMISES LEASED. This premises leased shall be for the purpose of any commercially reasonable business which is operating in compliance with applicable law." 4. Section Four of the Lease Agreement is hereby amended by deleting the last sentence thereof. 5. The following shall be inserted in the Lease Agreement as Section Six, and existing Section Six shall become Section Seven: "During the term of the Lease Agreement, including any extensions, Lessee shall have a right of first refusal ("Right of First Refusal") to purchase the premises on the same terms and conditions that Lessor is prepared to accept from any third party. When Lessor receives a third party offer to purchase the premises, which Lessor desires to accept, Lessor shall promptly deliver the same, in writing, to Lessee, and Lessee shall thereafter have ten (10) days in which to accept or reject such offer in writing. If Lessee rejects such offer or fails to accept the same in writing within such time, then Lessor shall be free to sell the premises to such third party on the same terms and conditions offered to Lessee in the foregoing manner. If Lessor does not consummate a sale of the premises to such third party, the Right of First Refusal shall apply to any future sale, and Lessor shall be required to submit any future offer to Lessee in the foregoing manner." 6. Renumbered Section Seven of the Lease Agreement is hereby amended by deleting the phrase "when promptly due at maturity," appearing in the first and second lines, and substituting in lieu thereof the following: "within ten (10) days following the due date." 7. Except as amended hereby, the Lease Agreement shall remain in full force and effect as currently written. FIRST AMENDMENT TO LEASE OF COMMERCIAL PROPERTY - PAGE 2 14 WITNESSES: /s/ CHARLES BRISTER - ------------------------------- -------------------------------------- Charles Brister, Lessor BRISTER'S THUNDER KARTS, INC. - ------------------------------- By: /s/ V. LYNN GRAYBILL ----------------------------------- Title: , Lessee -------------------------- STATE OF TEXAS ) ) ss. COUNTY OF DALLAS ) SUBSCRIBED AND SWORN TO before me, the undersigned Notary Public, on this day on this ________ day of March, 1996. -------------------------------------- NOTARY PUBLIC, State of Texas FIRST AMENDMENT TO LEASE OF COMMERCIAL PROPERTY - PAGE 3 EX-10.31 24 NON-COMPETITION AGREEMENT DATED MARCH 15, 1996 1 EXHIBIT 10.31 NON-COMPETITION AGREEMENT THIS NON-COMPETITION AGREEMENT (the "Agreement") is made and entered into as of the 15th day of March, 1996, by and between Karts International Incorporated, a Nevada corporation (the "Company") and Charles Brister ("Brister"), an individual residing in the state of Louisiana. WHEREAS, Brister's Thunder Karts, Inc. ("BTK") is a Louisiana corporation engaged in the business of designing, manufacturing, marketing and distributing go karts; WHEREAS, Brister, the sole shareholder of BTK, has entered into that Stock Purchase Agreement dated the date hereof by and among Halter Financial Group, Inc., BTK and Brister whereby Halter Financial Group, Inc. will cause the Company to acquire all of the issued and outstanding capital stock of BTK from Brister; and WHEREAS, as a condition to closing the transactions contemplated by such Stock Purchase Agreement, Brister is obligated to enter into this Agreement. NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereto agree as follows: 1. COVENANT NOT TO COMPETE; CONFIDENTIALITY. (a) Covenant Not to Compete. Except as provided herein and in that Licensing Agreement dated the date hereof by and between Brister and the Company, during a period of five years from the date hereof (the "Term"), Brister shall not, within any Jurisdiction in which the Company, BTK or any subsidiary or affiliate thereof (collectively referred to herein as the "Company") is duly qualified to do business or within any marketing area in which the Company is doing a substantial amount of business, directly or indirectly own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with, any business of the type and character engaged in and competitive with that conducted by the Company. For these purposes, Brister's ownership of securities of a public company not in excess of one percent of any class of such securities shall not be considered to be in competition with the Company. This Section 1 shall not apply to Mr. Brister's activities in the State of Louisiana, which shall be governed by that Non-competition Agreement (Louisiana Only) dated the date hereof by and between the parties hereto and by the laws of the State of Louisiana. In addition, during the same Term, Brister agrees to refrain from interfering with the employment relationship between the Company and its other employees by soliciting any of such individuals to participate in other business ventures and agrees to refrain from soliciting business from any client or prospective client of the Company for Brister or for 2 any entity in which Brister has an interest. It is the desire and intent of the parties that the provisions of this Section 1 shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, to the extent that the covenants hereunder shall be adjudicated to be invalid or unenforceable in any one such jurisdiction, this Section 1 shall be deemed amended to delete therefrom or reform the portion thus adjudicated to be invalid or unenforceable, such deletion or reformation to apply only with respect to the operation of this Section 1 in the particular jurisdiction in which such adjudication is made. Moreover, each provision of this Agreement is intended to be severable; and in the event that any one or more of the provisions contained in this Agreement shall for any reason be adjudicated to be invalid or unenforceable in any jurisdiction, the same shall not affect the validity or enforceability of any other provisions of this Agreement in that jurisdiction, but this Agreement shall be construed in such jurisdiction as if such invalid or unenforceable provision had never been contained therein. (b) Confidentiality. Brister agrees that he will not divulge to anyone (other than the Company or any persons employed or designated by the Company) any knowledge or information of any type whatsoever of a confidential nature relating to the business of the Company (unless readily ascertainable from public or published information), including, without limitation, discoveries, ideas, designs, specifications, drawings, techniques, models, data, programs, documentation, processes, know-how, customer lists, marketing plans, and financial and technical information. Brister further agrees not to disclose, publish or make use of any such knowledge or information of a confidential nature without the prior written consent of the Company. Notwithstanding the foregoing, Brister may disclose to third parties certain types of intellectual property that he owns subject to the terms and conditions of that Licensing Agreement dated the date hereof by and between Brister and the Company. 2. BREACH BY BRISTER. In the event of the breach by Brister of the terms and conditions of this Agreement to be performed by Brister, or in the event Brister performs services for any person, firm or corporation engaged in a competing line of business with the Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Brister, or to enjoin Brister from performing services for any such other person, firm or corporation. 3. ASSIGNMENT. The rights and obligations of the Company hereunder shall be binding upon and run in favor of the successors and assigns of the Company. In the event of any attempted assignment or transfer of rights hereunder contrary to the provisions hereof, the Company shall have no further liability for payments hereunder. 4. CAPTIONS. This Agreement contains the entire agreement between the parties. 2 3 It may not be changed orally, but only by agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought, and consented to in writing by the Company. Paragraph headings are for convenience of reference only and shall not be considered a part of this Agreement. 5. SEPARATE COUNSEL. Brister hereby expressly acknowledges that he has been advised that he has not been represented by Halter Financial Group, Inc.'s or the Company's attorneys in this matter and has been advised and urged to seek separate legal counsel for advice in this matter. 6. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, The Company has by its appropriate officer signed this Agreement, and Brister has signed this Agreement, on and as of the date first above written. KARTS INTERNATIONAL INCORPORATED By: /s/ V. LYNN GRAYBILL ----------------------------------- Name: V. Lynn Graybill ---------------------------- Title: President --------------------------- /s/ CHARLES BRISTER ---------------------------------------- Charles Brister, individually 3 EX-10.32 25 NON-COMPETITION AGREEMENT (LOUISIANA ONLY)-3/15/96 1 EXHIBIT 10.32 NON-COMPETITION AGREEMENT (LOUISIANA ONLY) THIS NON-COMPETITION AGREEMENT (the "Agreement") is made and entered into as of the 15th day of March, 1996, by and between Karts International Incorporated, a Nevada corporation (the "Company") and Charles Brister ("Brister"), an individual residing in the state of Louisiana. WHEREAS, Brister's Thunder Karts, Inc. ("BTK") is a Louisiana corporation engaged in the business of designing, manufacturing, marketing and distributing go karts; WHEREAS, Brister, the sole shareholder of BTK, has entered into that Stock Purchase Agreement dated the date hereof by and among Halter Financial Group, Inc., BTK and Brister whereby Halter Financial Group, Inc. will cause the Company to acquire all of the issued and outstanding capital stock of BTK from Brister; WHEREAS, the transactions contemplated by the Stock Purchase Agreement include the acquisition of the goodwill of BTK; and WHEREAS, as a condition to closing the transactions contemplated by such Stock Purchase Agreement, Brister is obligated to enter into this Agreement. NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereto agree as follows: 1. COVENANT NOT TO COMPETE. Except as provided in that Licensing Agreement dated the date hereof by and between Brister and the Company, during a period of two years from the date hereof (the "Term"), Brister shall not, within the Parishes located in the State of Louisiana listed on Annex A hereto (the "Area"), so long as the Company engages in or carries on any like business in the Area, directly or indirectly own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with, any business of the type and character engaged in and competitive with that conducted by the Company. For these purposes, Brister's ownership of securities of a public company not in excess of one percent of any class of such securities shall not be considered to be in competition with the Company. Brister hereby acknowledges and represents that the Company engages in business in all of the Parishes listed on Annex A hereto. In addition, during the same Term, Brister agrees to refrain from interfering with the employment relationship between the Company and its other employees by soliciting any of such individuals to participate in other business ventures and agrees to refrain from soliciting business from any client or prospective client of the Company for Brister or for any entity in which Brister has an interest. 2 The parties acknowledge that Brister's business in other areas and the benefits to the Company derived pursuant to the Agreement are such that the restrictions appearing in this Section 1 will not impair Mr. Brister's ability to earn a livelihood. It is the desire and intent of the parties that the provisions of this Section 1 shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, to the extent that the covenants hereunder shall be adjudicated to be invalid or unenforceable in any one such jurisdiction, this Section 1 shall be deemed amended to delete therefrom or reform the portion thus adjudicated to be invalid or unenforceable, such deletion or reformation to apply only with respect to the operation of this Section 1 in the particular jurisdiction in which such adjudication is made. Moreover, each provision of this Agreement is intended to be severable; and in the event that any one or more of the provisions contained in this Agreement shall for any reason be adjudicated to be invalid or unenforceable in any jurisdiction, the same shall not affect the validity or enforceability of any other provisions of this Agreement in that jurisdiction, but this Agreement shall be construed in such jurisdiction as if such invalid or unenforceable provision had never been contained therein. 2. BREACH BY BRISTER. In the event of the breach by Brister of the terms and conditions of this Agreement to be performed by Brister, or in the event Brister performs services for any person, firm or corporation engaged in a competing line of business with the Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Brister, or to enjoin Brister from performing services for any such other person, firm or corporation. 3. ASSIGNMENT. The rights and obligations of the Company hereunder shall be binding upon and run in favor of the successors and assigns of the Company. In the event of any attempted assignment or transfer of rights hereunder contrary to the provisions hereof, the Company shall have no further liability for payments hereunder. 4. CAPTIONS. This Agreement contains the entire agreement between the parties. It may not be changed orally, but only by agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought, and consented to in writing by the Company. Paragraph headings are for convenience of reference only and shall not be considered a part of this Agreement. 5. SEPARATE COUNSEL. Brister hereby expressly acknowledges that he has been advised that he has not been represented by Halter Financial Group, Inc.'s or the Company's attorneys in this matter and has been advised and urged to seek separate legal counsel for advice in this matter. 6. LAW GOVERNING. This Agreement shall be governed by and construed in 2 3 accordance with the laws of the State of Louisiana. IN WITNESS WHEREOF, The Company has by its appropriate officer signed this Agreement, and Brister has signed this Agreement, on and as of the date first above written. KARTS INTERNATIONAL INCORPORATED By: /s/ V. LYNN GRAYBILL ------------------------------------ Name: V. Lynn Graybill ----------------------------- Title: President ---------------------------- /s/ CHARLES BRISTER ---------------------------------------- Charles Brister, individually 3 4 ANNEX A Acadia Madison Allen Morehouse Ascension Natchitoches Assumption Orleans Avoyelles Ouachita Beauregard Plaquemines Bienville Pointe Coupee Bossier Rapides Caddo Red River Calcasieu Richland Caldwell Sabine Cameron St. Bernard Catahoula St. Charles Clairborne St. Helena Concordia St. James De Soto St. John the Baptist East Baton Rouge St. Landry East Carroll St. Martin East Feliciana St. Mary Evangeline St. Tammany Franklin Tangipahoa Grant Tensas Iberia Terrebonne Iberville Union Jackson Vermillion Jefferson Vernon Jefferson Davis Washington Lafayette Webster Lafourche West Baton Rouge LaSalle West Carroll Lincoln West Feliciana Livingston Winn EX-23.1 26 CONSENT OF S.W. HATFIELD & ASSOCIATES 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use in Amendment No. 1 to Form SB-2 Registration Statement under The Securities Act of 1933 of Karts International Incorporated (a Nevada corporation) of our report dated February 28, 1997 (except for Note I as to which the date is March 6, 1997) on the consolidated financial statements of Karts International Incorporated as of December 31, 1996 and 1995 and for each of the years then ended, accompanying the financial statements contained in such Amendment No. 1 to Form SB-2 Registration Statement Under The Securities Act of 1933, and to the use of our name and the statements with respect to us as appearing under the heading "Experts". S. W. HATFIELD + ASSOCIATES Dallas, Texas May 27, 1997 EX-27.1 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF KARTS INTERNATIONAL INCORPORATED FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN AMENDMENT NO. 1 TO FORM SB-2 OF KARTS INTERNATIONAL INCORPORATED. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 677,737 0 567,614 5,000 913,602 2,317,233 640,483 61,444 9,104,677 780,987 0 625,000 0 2,718 4,261,980 9,104,677 1,300,784 1,300,784 1,154,430 1,710,359 79,852 0 131,138 (489,427) 0 (489,427) 0 0 0 (489,427) (0.18) 0
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