SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                         -----------------------------

                                   FORM 10-KSB
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                        COMMISSION FILE NUMBER 000-23041

                        KARTS INTERNATIONAL INCORPORATED
           (Name of Small Business Issuer as Specified in Its Charter)


                 Nevada                                     75-2639196
        (State of Incorporation)                       (I.R.S. Employer
                                                        Identification No.)

         62204 Commercial Street                              70456
              P.O. Box 695                                  (Zip Code)
        Roseland, Louisiana 70456
         (Address of Principal
          Executive Offices)

                                 (504) 747-1111
                (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12 (b) of the Exchange Act: None

         Securities registered under Section 12 (g) of the Exchange Act:
                         Common Stock, $0.001 par value
                                (Title of Class)
                    Redeemable Common Stock Purchase Warrants
                                (Title of Class)

         Check whether the issuer (1) has filed all reports required to be filed
by  Section 13 or 15 (d) of the  Exchange  Act during the past 12 months (or for
such shorter  period that the issuer was required to file such  reports) and (2)
has been subject to such filing requirements for the past 90 days.
         Yes  X    No

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of the  issuer's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         The issuer's net revenues for the fiscal year ended  December 31, 1999,
were $11,997,785.

         The issuer had 5,799,320  shares of common stock and  1,832,500  public
warrants outstanding as of March 24, 2000.

         The aggregate  market value of the voting and  non-voting  common stock
held by non-affiliates  of the issuer,  computed by reference to the average bid
and asked prices of such common stock as of March 24, 2000, was $3,084,849.



<PAGE>


                      1999 ANNUAL REPORT (SEC FORM 10-KSB)

                                      INDEX

                       Securities and Exchange Commission
                           Item Number and Description



                                     PART I

Item 1.   Business.............................................................3
Item 2.   Properties..........................................................16
Item 3.   Legal Proceedings...................................................16
Item 4.   Submission of Matters to a Vote of Security Holders.................17

                                     PART II

Item 5.   Market for the Company's Common Stock and Related
              Stockholder Matters.............................................17
Item 6.   Management's Discussion and Analysis or Plan of Operation...........18
Item 7.   Consolidated Financial Statements...................................24
Item 8.   Changes in And Disagreements With Accountants on Accounting and
              Financial Disclosure............................................24

                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act...............24
Item 10.  Executive Compensation..............................................26
Item 11.  Security Ownership of Certain Beneficial Owners and Management......32
Item 12.  Certain Relationships and Related Transactions......................33

                                     PART IV

Item 13.   Exhibits, Financial Statements and Reports on Form 8...............34

               SIGNATURES, FINANCIAL STATEMENTS AND EXHIBIT INDEX

Signatures....................................................................37
Financial Statements.........................................................F-1
Exhibit Index



<PAGE>


                                     PART I

         Management believes that this Annual Report on Form 10-KSB for the year
ended  December  31,  1999  contains   forward-looking   statements,   including
statements  regarding,  among other items, the Company's future plans and growth
strategies and anticipated trends in the industry in which the Company operates.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, many of which are beyond
the  Company's  control.  Actual  results  could  differ  materially  from these
forward-looking  statements  as  a  result  of  the  factors  described  herein,
including,  among others,  regulatory or economic influences.  In light of these
risks and  uncertainties,  there can be no  assurance  that the  forward-looking
information  contained  in  this  Annual  Report  on  Form  10-KSB  will in fact
transpire or prove to be accurate.

ITEM 1.  BUSINESS
         --------
General

         Karts International Incorporated, a Nevada corporation (the "Company"),
through  its  wholly-owned  subsidiaries,   Brister's  Thunder  Karts,  Inc.,  a
Louisiana   corporation   ("Brister's"),   USA  Industries,   Inc.,  an  Alabama
corporation  ("USA"),  Straight Line  Manufacturing,  Inc.  ("Straight Line"), a
Michigan   corporation,   and  KINT,  L.L.C.,  a  limited  liability   Louisiana
corporation  ("KINT"),  designs,  manufactures and distributes  recreational fun
karts ("Fun Karts"), also referred to as "go karts." Fun Karts are four-wheeled,
gas-powered  vehicles  typically equipped with engines of 5 to 13 horsepower and
purchased by consumers  principally for off-road  recreational  use. The Company
shipped  approximately  15,000 Fun Karts to dealers  and mass  merchandisers  in
1999,  which the  Company  believes  represents  approximately  11% of the total
domestic  Fun Kart market.  Consolidated  revenues of the Company for the fiscal
year ended December 31, 1999 were  approximately  $12.0 million as compared with
combined  revenues  of  approximately  $8.3  million  for the fiscal  year ended
December 31, 1998. The Company  operates  manufacturing  facilities in Roseland,
Louisiana and Prattville,  Alabama  maintains its executive offices in Roseland,
Louisiana.

         The kart industry is comprised of three principal segments,  Fun Karts,
racing and concession  karts. Fun Karts, the largest segment,  are karts sold to
consumers for general  recreational use. Racing karts are specially designed for
use on established tracks in a controlled racing  environment.  Concession karts
are designed for use by amusement and entertainment  centers which provide karts
and facilities for customers' use on a rental basis.  Management  estimates that
in 1999  approximately  159,000  karts were sold in the  United  States of which
approximately  140,000 were Fun Karts,  11,000 racing karts and 8,000 concession
karts. Historically, the Company, through its subsidiaries, has concentrated its
efforts in the Fun Karts market.

         The Company offers a product line of  approximately 32 Fun Kart models,
differentiated by frame size, drive train, seating capacity, tire size and tread
The Company's models offer a wide range of standard and optional  features which
enhance the safety, operation,  riding comfort and performance of its Fun Karts.
Such features include the exclusive,  patented automatic throttle override; full
brush cage;  safety  flag;  three kinds of drive  trains,  including  live axle,
single wheel pull and torque converter;  clutch lubrication  system;  high speed
bearings;  adjustable  throttle and seats; steel rims; band and disc brakes; and
Tecumseh Products Company and Honda engines.  The end-users of the Company's Fun
Karts are  primarily  7- to  17-year-old  males,  living  with their  parents in
suburban and rural markets. Typical Fun Kart purchasers are parents who purchase
Fun Karts for their children.

         The  Company  relies on a broad and  diversified  national  independent
dealer network, mass merchandisers and manufacturing representatives to sell its
products.  In 1999,  the Company sold 48% of its  products  through its over 700
dealers,  primarily lawn and garden stores,  motorcycle outlets, hardware stores
and specialty  karts  dealers,  located in 40 states.  The major markets for the
Company's Fun Karts are in the  Southeast  and  Southwest  regions of the United
States.  In  1999,  the  Company  sold  approximately  26% of its Fun  Karts  to
approximately 250 dealers located in Louisiana,  Texas, Mississippi and Florida.
Although there are no formal dealer agreements,  the Company, for the benefit of
certain of its higher volume dealers,  will agree not to sell to other retailers
in a limited  geographic area  surrounding the high volume dealer.  For eligible
dealers,  the Company  offers a dealer floor plan financing  program  through an
unaffiliated financial services company.

                                      -3-

<PAGE>

         In  1998,  the  Company   entered  into  contracts  with  a  number  of
manufacturer  representative  organizations  ("MRO") that were selected based on
the territories served,  customer base and product lines being represented.  The
relationship  established  with  these  organizations  not  only  provided  over
eighty-five  additional  salesmen  promoting  the Company's  products,  but also
provided access to a number of mass merchandisers.

         The Company's efforts to increase its sales and production by expanding
its distribution  through the mass  merchandisers has been successful.  In 1998,
the  Company  sold  approximately  1,400 units to 10 mass  merchandisers,  which
represented  approximately  12% of its total  revenue.  During 1999, the Company
expanded its relationship with the mass merchandisers and sold approximately 52%
or 7,800 units to 18 mass merchandisers which accounted for approximately 45% of
its total revenue. The Company plans to grow its mass merchandiser customer base
in order to continue increasing  production volume and to capture a larger share
of the total kart market.

         The  Company's  operating  strategy is to increase its sales and market
share by producing  safe,  high-quality  and  reliable Fun Karts at  competitive
prices;   continue   to   improve   manufacturing   efficiency;   and   continue
diversification of domestic distribution channels. The Company's growth strategy
is to increase its brand and product recognition by innovative  marketing to its
target  users;  broaden its product lines through  improved  product  design and
development;  and expand its  geographic  presence and market share by continued
emphasis on expansion of its domestic dealer and mass merchandiser networks, and
through  potential  acquisitions  of other  manufacturers  of karts and  related
products.

         On a selective basis, the Company  continues to seek  acquisitions that
will expand its existing product lines, market share and distribution  channels.
However, other than an option to purchase 100% of the capital stock of Andretti,
the Company  currently has no agreements or  understandings  with respect to any
such acquisitions and there can be no assurance that the Company will be able to
identify and acquire such businesses or obtain necessary  financing on favorable
terms.

         Unless otherwise indicated herein, the financial,  business activities,
management  and other  pertinent  information  herein  relates on a consolidated
basis to the Company and its wholly-owned subsidiaries, Brister's, USA, Straight
Line and KINT. The Brister's and USA  acquisitions in 1996 and the Straight Line
acquisition in 1998 were  accounted for using the purchase  method of accounting
for business combinations. The Company has allocated the total purchase price to
assets  acquired based on their relative fair value.  Any excess of the purchase
price over the fair value of the assets  acquired was  recorded as goodwill.  At
December 31, 1998, due to the Company's operating history, management recognized
an  impairment  to the  future  recoverability  of good  will  and  charged  all
unamortized  goodwill  at that  date to  operations.  The  financial  and  other
information  regarding  the Company set forth herein  reflects,  for the periods
presented,  the  consolidated  results of operations of the Company,  Brister's,
USA, Straight Line and KINT for the respective periods owned.

         The  address  of the  Company's  principal  executive  office  is 62204
Commercial Street,  P.O. Box 695,  Roseland,  Louisiana 70456, and its telephone
number is (504) 747-1111. The Company maintains manufacturing  facilities at 202
Challenge  Avenue,  Prattville,  Alabama  36067 and Highway 51 South,  Roseland,
Louisiana 70456.

                                      -4-

<PAGE>

Recent Developments

During  1999,  the  Company  began  to  market  the  concept  of  private  label
manufacturing of go-karts to several perspective accounts. The targeted accounts
were companies that had a strong brand name recognition,  an established  dealer
base and did not  manufacture or sell go-karts.  At the end of 1999, the Company
was  successful  in reaching an agreement  with Polaris  Industries,  Inc.,  the
world's largest maker of snowmobiles, to develop, manufacture and sell a line of
Polaris karts through the Polaris dealer network.  In February 2000, the Company
announced that an exclusive,  three year licensing agreement had been signed and
the new product line would be introduced  in March,  2000.  The Company  expects
this relationship to significantly increase its dealer based volume during 2000.

Operating Strategy

         Produce  Safe,  High  Quality  and  Reliable  Fun Karts at  Competitive
Prices. The Company believes that it is one of the leaders in the development of
safety-related  features  for Fun  Karts,  which,  along  with  price,  is a key
consideration  for  the  Fun  Kart  purchaser,  the  parent  of  the  seven-  to
17-year-old male. The Company believes it was the first  manufacturer in the Fun
Karts industry to provide full safety cages and adjustable seats,  which are now
standard  features  on most Fun Karts.  The  Company is the  exclusive  Fun Kart
manufacturer  installing its patented  automatic throttle override system on Fun
Karts.   Producing   high  quality,   reliable   products   increases   customer
satisfaction,  and the Company  believes  this is one of the key elements of its
success in the highly  competitive  karts  industry.  The Company  believes  its
strategy of selling its Fun Karts through  independent dealers and selected mass
merchandisers  helps to ensure that the Company's  products are competitive with
those of other manufacturers in terms of safety, consumer acceptability, product
design, quality and price.

         Continue to Improve Manufacturing Efficiency.  Management believes that
greater  productivity  will reduce operating  costs. By  standardizing  the base
frame  and  components  on each of the major  lines of Fun  Karts,  the  Company
expects to reduce  volume  purchase  prices and  decrease  assembly  costs.  The
Company believes that modernization of its manufacturing facilities is essential
to  improving  the quality of the  Company's  products and  promoting  the price
competitiveness of its Fun Karts. The Company intends to expand and renovate, as
necessary,  its  manufacturing  facilities,  purchase new equipment and maintain
strict cost  controls as a means to enhance the  production  of high quality Fun
Karts.  In 1998  and  1999,  the  Company  made  capital  expenditures  totaling
approximately   $950,000   for   manufacturing   facilities   and/or   leasehold
improvements,  equipment purchases and expansion and relocation of the corporate
offices to Roseland, Louisiana.

         Diversification  of  Domestic  Distribution  Channels.  The  historical
marketing  strategy  of the  Company  has  been to  build a  broad  and  diverse
independent dealer base, primarily in Louisiana,  Texas, Mississippi and Florida
by offering  safe,  high quality and  reliable Fun Karts that are  competitively
priced and timely  delivered.  In 1998, the Company entered into agreements with
several MROs that were selected based on the territories  served,  customer base
and product lines being  represented.  The  relationship  established with these
organizations not only provided over eighty-five  additional  salesmen promoting
the  Company's  products,   but  also  provided  access  to  a  number  of  mass
merchandisers.  The Company's future marketing  efforts are designed to maintain
and expand its  independent  dealer network in the South and West regions of the
United States through direct  communications  with dealers,  engaging additional
MROs and attendance at industry trade shows such as the  International  Lawn and
Garden  Show.  The Company also plans to assist  dealers with their  selling and
marketing efforts with Company-sponsored  seminars,  discount or rebate programs
and  advertising,  including  product videos and brochures,  leaflets,  posters,
signs and other miscellaneous  promotional items for use by dealers. The Company
will also seek to increase sales to mass merchandisers with direct communication
and the engagement of additional MROs.  Although the Company believes that sales
to mass merchandisers offers a significant growth opportunity,  the Company will
seek to obtain a  reasonable  balance  between its dealer and mass  merchandiser
distribution networks and will attempt to avoid a high concentration of sales to
any one or group of dealers or mass merchandisers.

                                      -5-

<PAGE>

Growth Strategy

         Increasing Product Recognition By Innovative Marketing to Target Users.
A 1998  survey  estimated  that  Fun Kart  industry's  sales  were  made to only
approximately  0.7% of the estimated 20 million 7- to  17-year-old  males in the
United States, the Company's target users. The Company believes that if it is to
further penetrate its target market,  the Company must advertise in media easily
accessible by this group and attractively and prominently  display its Fun Karts
in locations  and at events  frequented  by young males and their  parents.  The
Company  advertises  its  products  in  national  youth-oriented  magazines  and
periodicals,  on the Internet and to a lesser extent,  on billboards,  radio and
television. The Company maintains a home page on the Internet (thunderkarts.com,
sportskart.com  and  usafunkarts.com)  and has sponsored  local events such as a
Babe Ruth Baseball Tournament, Arbor Day festival and parades.

         Improve Product Design and Development. The Company believes that it is
a leader in the development of safety features for its Fun Karts,  due primarily
to its emphasis on continuous  research and development of safety related items.
The Company, primarily through the efforts of Charles Brister, the President and
Chief  Executive  Officer,  has  developed a number of  technological  advances,
including  the automatic  throttle  override and  automatic  clutch  lubrication
systems,  which have  significantly  improved its products.  The Company in 1998
employed additional  engineering personnel primarily to continue the development
of innovative safety and technological  features for the Company's Fun Karts and
to develop new products,  including  the  Company's new off-road  3-1/2 h.p. Fun
Bike.  During 1999,  the Company  began  developing  two new karts,  an off road
mini-bike  and several new design  features that will be part of the new Polaris
go-kart line  scheduled for  introduction  during the first quarter of 2000. The
Company  will  continue to develop and  distribute  optional  Fun Kart parts and
accessories  to dealers for sales to Fun Kart  purchasers.  The Company may also
develop  a line of  helmets,  jackets,  boots and  other  related  items for its
dealers and mass merchandisers to complement sales of Fun Karts.

         Expansion of  Geographic  Presence.  The Company  intends to expand its
geographic presence and increase its market share within and outside of its core
and contiguous markets by continued emphasis on the development and expansion of
its dealer  and mass  merchandiser  networks,  establishing  relationships  with
independent  sales  representatives  to serve regions of the United States which
are currently  underpenetrated  by the Company and possible  acquisition of kart
manufacturers and related businesses that offer synergistic growth opportunities
for the Company.  During 1999, the Company  established a distributor in western
Canada and believes  that the Canadian  market offers  significant  sales growth
opportunity for the Company's products.

                                      -6-

<PAGE>

Acquisition Strategy

         The  Company  continually   evaluates   acquisition   opportunities  of
operating  entities or product  lines  compatible  with its current  operations.
Target  companies  will be in the Fun Karts or related  business or will provide
the Company with complementary capabilities such as manufacturing,  distribution
or shipping.  Future acquisition  candidates are anticipated to be (i) companies
having  three or more years  operating  history  and annual  revenues  up to $15
million,  (ii)  businesses  with  different  or expanded  distribution  channels
through  which the Company may market its current  and/or future  products,  and
(iii)  companies with existing  manufacturing  capabilities  which may allow the
Company  greater  operating  efficiencies  through  vertical  integration of its
manufacturing  and  assembly  functions.  Except  for  the  Option  to  purchase
Andretti, the Company is not a party to any agreements,  commitments, letters of
intent or understandings with any acquisition candidate.

         Management  believes  that it will be  necessary  to obtain  additional
financing  prior  to a major  acquisition.  The  Company  anticipates  that  the
financing of any acquisition will be paid in cash,  issuance of capital stock or
debt  instruments,  or a  combination  thereof.  To the extent  that the Company
issues capital stock in any acquisition,  its stockholders may incur dilution in
their  investment in the Company.  The issuance of debt to finance  acquisitions
may result in the encumbrance of Company assets, impede the Company's ability to
obtain bank financing, decrease the Company's liquidity and adversely affect the
Company's ability to declare dividends to its stockholders.

Product Lines

         The Company produces a full line of Fun Karts,  currently consisting of
35 models which are variations on 15 different  frames available in a variety of
colors  which are sold at prices  ranging  from $500 to  $4,000.  The models are
differentiated   by  drive  train  (single  wheel  pull,  live  axle  or  torque
converter),  engine size (5 h.p. to 13 h.p.), seating (single or double),  tires
(turf,  ATV,  kleat),  tires  (4" to  8"),  frame  size  and  suspension  (shock
absorbers).  The Company  markets its Fun Karts under the brand names of Thunder
Karts, USA Fun Karts and Sport Karts.

         The Company  believes  its Fun Karts enjoy a premier  image in its core
markets  and that its Fun Karts  have a  reputation  for  quality,  performance,
style,  comfort,  ride and handling.  The Company's models offer a wide range of
standard and optional  features  which  enhance the  operation,  safety,  riding
comfort and performance of its Fun Karts.  Such features  include band brakes or
disc brakes, automatic throttle override system, rack and pinion steering, shock
absorbers,  electric  start,  5 to 13  horsepower  engines,  clutch lube system,
powder paint, high speed bearings, safety flag and full brush cages.

         The Company  believes that it is a leader in the  development of safety
features for its Fun Karts, due primarily to its emphasis on continuous research
and  development of safety related items.  The Company has developed a number of
technological advances,  including the automatic throttle override and automatic
clutch lubrication systems, which have significantly improved its products.

         The Company's  automatic  throttle  override  system was named the 1995
Product  of the  Year  for the  recreational  kart  industry  by Kart  Marketing
International,  a trade  magazine  for the kart  industry.  This safety  feature
prohibits throttling and braking at the same time, regardless of the position of
the gas pedal. If the brake pedal is depressed slightly,  the engine will revert
to the idle position  immediately,  and will not let throttling engage until the
pedal is released. Significant benefits of this system are enhancement of safety
for  inexperienced  drivers;  stopping of  simultaneous  braking and throttling;
easier braking; and extended brake life.

                                      -7-

<PAGE>

         Charles Brister,  the Company's  President and Chief Executive Officer,
has  designed  for the  benefit of the Company a safety fuel tank and filler cap
which is a new  product  to  prevent a small  internal  combustion  engine  from
operating  unless  the fuel cap is firmly in place on the tank.  This  apparatus
will minimize the  opportunity for a flash fire to start and injure the operator
of equipment  which uses a small engine with an  integrated  fuel tank such as a
lawn mower, go kart or string trimmer.

         The  safety  fuel tank and  filler  cap has been  designed  in  several
different configurations to accommodate the variety of integrated fuel tanks now
being produced.  It has been developed both as a product to be incorporated into
the design and  manufacture  of new fuel  tanks and as a  retrofit  for  engines
already in use. Utilizing either a magnetic,  photoelectric or mechanical switch
that is interfaced between the fuel tank and filler cap, the device disables the
engine's  ignition  system  when the filler  cap is moved from its fully  closed
position.  Disabling the ignition system on a small internal  combustion  engine
immediately  stops a running engine and then prevents it from  restarting  until
the fuel cap is replaced and the integrated switch sensors close the circuit.

         The Company  will be the  exclusive  licensee  of this  product for the
go-kart market and it is anticipated that the Company will issue sub-licenses to
several  fuel  tank,  fuel  cap or  small  engine  manufacturers  to  facilitate
application of this technology to non go-kart related industries.

Manufacturing Operations

         The Company operates  manufacturing  facilities in Roseland,  Louisiana
and  Prattville,   Alabama.   Fun  Kart  production   levels  at  the  Company's
manufacturing  plants varies  depending on the season.  Between January and May,
the  Company  generally  utilizes  a  ten-hour  work day four days a week at its
plants. In June, the work week expands to five days and peaks in November at six
days.  From  June  through  December,   daily  output  from  all  facilities  is
approximately   100-125  Fun  Karts.   Management  believes  that  with  limited
renovation of its current facilities, the Company will be able to meet projected
increased customer demand for the Company's products for the foreseeable future.
Additional labor at reasonable costs is readily available in the vicinity of the
Company's manufacturing facilities.

         The Fun Karts  manufacturing  process is  primarily  one of welding and
assembly at various work  stations.  The Company buys  directly  from mills both
pre-cut and uncut tubular steel used in the  manufacturing of the frames.  Since
the price  differential  between  pre-cut and uncut  tubular steel is relatively
small, it is more  cost-effective,  particularly for pieces that are certain not
to change,  to purchase  pre-cut tubular steel. The steel is cut and bent during
the manufacturing  process to the frame specifications for the Company's various
Fun Kart models. Most of the other Fun Karts component parts, including engines,
wheels,  tires,  seats,  steering  wheels,  steering tie rods and  miscellaneous
parts,  are purchased  from various  domestic  vendors.  The Company  depends on
Tecumseh  and Honda for its  engines,  and the loss of all of these  vendors may
cause the Company to  experience  a  temporary  delay in the  production  of the
Company's Fun Karts.  The Company believes other engine vendors and suppliers of
other  component  parts  necessary  for the  production of Fun Karts are readily
available.

                                      -8-

<PAGE>

Quality Control, Warranties and Service

         The  Company  adheres  to strict  quality  standards  and  continuously
refines its production  procedures to increase  productivity and reduce warranty
claims.  Each Fun Kart is inspected and numbered  during assembly for compliance
with certain quality control  standards.  The Company  provides the purchaser of
its Fun Karts  with a 90-day  limited  warranty  against  certain  manufacturing
defects in the Fun Kart's  construction.  There are also direct  warranties that
are provided by the manufacturer of the engine and certain  component parts. The
Company's  Fun Karts are usually  serviced by the  dealers.  The Company has not
historically  incurred  any  significant  warranty  claims  and have never had a
recall of any of its products.

Patents and Proprietary Technology

         The Company  does not own any  patents,  trademarks  or service  marks.
However, Charles Brister,  President,  Chief Executive Officer and a director of
the  Company,  owns  certain  patents and  trademarks  which are licensed to the
Company and which allows the Company to use certain  brand names and utilize the
automatic throttle override system ("ATOS") on its Fun Karts.

         In 1997,  the Company and Mr. Brister  entered into an agreement  which
provided for an initial  $10,000  license fee and a royalty payment of $1.00 for
each  Company  Fun Kart on which the ATOS was  installed.  During the second and
third year of the  agreement,  the  Company  agreed to pay a royalty  payment of
$1.00 for each  Company  Fun Kart on which  the ATOS was  installed  or  $20,000
annually whichever is greater. In 1998, the Company paid Mr. Brister $10,000 for
the  initial  license  fee and owes Mr.  Brister a total of $40,000 for 1998 and
1999 royalties under the agreement.

         The Company, in October 1998, entered into a license agreement with Mr.
Daniel  Smock,  former  owner  of  Straight  Line,  for the  exclusive  right to
manufacture the "SportKarts"  product line. The term of the licensing  agreement
is for the life of the patents applied for by Mr. Smock which are anticipated to
expire in the year  2013.  Mr.  Smock is to be paid a royalty of $10.00 for each
Fun Kart which is  manufactured,  after  October 31,  1998,  with the design and
processes developed by Mr. Smock.

Sales and Marketing

         Sales. The Company primarily relies on a broad and diversified national
independent  dealer network to sell its Fun Karts. The Company sells directly to
approximately 700 dealers located in 40 states,  with most dealers  concentrated
in the Southeast and Southwest regions of the United States. The Company in 1999
sold  approximately  26% of its  Fun  Karts  to  approximately  250  dealers  in
Louisiana, Texas, Mississippi and Florida.

         The Company  believes that its  independent  dealer network enables the
Company to achieve  broader  distribution  of its  products  than if the Company
operated its own retail outlets. Selling through independent dealers also allows
the Company to avoid the  substantial  investment  in  management  and  overhead
associated with the operation of company-owned  retail stores. In addition,  the
Company's strategy of selling its products through  independent dealers helps to
ensure  that  the  Company's  Fun  Karts  are  competitive  with  those of other
manufacturers in terms of consumer  acceptability,  product design,  quality and
price.  Accordingly,  a  component  of the  Company's  business  strategy  is to
continually strengthen its dealer relations.  The Company believes its relations
with its independent dealers are good.

         While  there are no formal  dealer  agreements,  the  Company,  for the
benefit of certain of its higher volume dealers, will agree not to sell to other
dealers in a limited  geographic area  surrounding the location of a high volume
dealer.  Credit terms are typically 2% net 10 days, net 30 days. For dealers who
meet  certain  credit  requirements,  the  Company  offers a dealer  floor  plan
financing program through an unaffiliated  financial services company. The floor
plan  agreement  may be  terminated  at any time by the Company or the financial
services  company  with 30 days  written  notice to the  other  party and may be
terminated  by the  financial  services  company upon an event of default by the
Company,  which  includes  failure by the Company to pay any amounts owed to the
lender  when due,  cessation  of  business  or  bankruptcy  of the  Company or a
material adverse change in the Company's  financial  condition.  The Company, at
its  option,  will  allow  approved  dealers  up to 120  days  of  interest-free
financing under the floor plan agreement.  The floor plan  arrangements  require
the Company to repurchase units in the event of dealer default. The Company does
not currently have any  significant  contingent  liability  under the repurchase
obligation of the floor plan agreement.

                                      -9-

<PAGE>

         During  1999,  the Company  sold  approximately  7,800 units to 18 mass
merchandisers,  which  represented  approximately  52% of unit  sales.  Sales to
dealers,  including lawn and garden stores,  motorcycle  shops,  karts specialty
stores,  automobile parts dealers and hardware stores,  accounted for 48% of the
Company's 1999 unit sales. With the addition of the Polaris dealer network,  the
Company  estimates  that sales of its products to  independent  dealers and mass
merchandisers will be approximately 65% and 35%, respectively, in 2000. Although
the  Company  believes  that sales to mass  merchandisers  offers a  significant
growth opportunity, the Company will seek to obtain a reasonable balance between
its dealer and mass  merchandisers  distribution  networks  and will  attempt to
avoid a high  concentration  of sales to any one or  group  of  dealers  or mass
merchandisers.

         In January  1998,  the  Company  formed a Louisiana  limited  liability
corporation,  KINT,  L.L.C.,  as a wholly-owned  subsidiary.  KINT was activated
during July 1998 for the purpose of  organizing  a sale and  marketing  company,
conducting  business  under the name Bird  Promotions,  focusing  on the sale of
customized  promotional Fun Karts to various national companies.  In March 1999,
the Company ceased  operations within this subsidiary and consolidated the sales
and marketing  efforts within other operating  subsidiaries of the Company.  The
Company  intends on using this  entity to sell and market the new  Polaris  kart
line in 2000.

         The Company has two main modes of delivery to its dealers.  The Company
delivers  directly  to  Louisiana,   Alabama  and  Mississippi  dealers,   using
Company-owned  trucks  with  trailers  that can  carry up to 27 Fun  Karts.  All
Louisiana,  Alabama and Mississippi delivery routes are designed to be completed
during a single day. All other dealers and mass merchandisers  receive their Fun
Karts by common carrier, freight collect F.O.B. dealer. The Company is committed
to achieving a turnaround  from order date to shipment of one to two days in the
off  season,  and three to seven days in peak  season.  Fun Karts are  delivered
completely  assembled,  except for the installation of the  accompanying  safety
cages.

         Marketing. The historical marketing strategy of the Company has been to
build a broad and diverse  independent  dealer base,  primarily in the Southeast
and  Southwest  regions of the United  States,  the Company's  core markets,  by
offering safe, high-quality and reliable Fun Karts that are competitively priced
and  timely  delivered.  In  1998  the  Company  added  38  new  dealers,  three
distributors,   over  100  independent   sales   representatives   and  10  mass
merchandisers to its existing distribution  channels. In 1999, the Company added
8 mass  merchandisers  and  approximately  30 new dealers.  The Company's future
marketing  efforts are  designed to maintain and expand its  independent  dealer
network  in the South and West  regions  of the  United  States  and in  foreign
markets through direct communications with dealers and assisting them with their
selling and  marketing  efforts with  Company-sponsored  seminars,  discounts or
rebate  products  and  advertising,  including  product  videos  and  brochures,
leaflets,  posters, signs and other miscellaneous promotion and items for use by
dealers. The Company will also seek to increase sales to mass merchandisers with
direct communication,  engaging additional independent sales representatives and
attendance  by Company  representatives  at Fun Kart and industry  related trade
shows.  The Company  believes  that  attendance  at trade shows will allow it to
promote its products to a  diversified  group of dealers and mass  merchandisers
currently targeted by the Company.

                                      -10-

<PAGE>

         The  Company's  advertising  and  promotional  materials  emphasize the
safety-related  features  built into the  Company's  Fun Karts.  The Company has
adopted this advertising strategy in order to promote the concept that it is fun
and safe for  children  to own and operate  Fun Karts.  The  Company  intends to
increase  potential  customers'  awareness  of its  products by  advertising  in
youth-oriented  magazines;  motorcycle,  lawn and garden,  hardware  and outdoor
power equipment trade magazines; displaying and promoting the Company's products
at NASCAR races and related events; and traditional  print,  billboard and, to a
lesser extent, television and radio media. The Company believes that if it is to
further penetrate its target market,  the Company must advertise in media easily
accessible by this group and attractively and prominently  display its Fun Karts
in locations and at events frequented by young males and their parents.

Seasonality

         Most Fun Karts are sold during the last  quarter of the  calendar  year
and are typically  purchased as Christmas  gifts by parents for their  children.
Sales of Fun Karts are  generally  the lowest  during the first  quarter of each
year. Since the Company  typically does not obtain long-term  purchase orders or
commitments  from its customers,  it must anticipate the future volume of orders
based  upon  the   historic   purchasing   patterns  of  its  dealers  and  mass
merchandisers and upon its discussions with its dealers and  representatives  of
mass merchandisers as to their future requirements. Cancellations, reductions or
delays by a major customer could have a material adverse impact on the Company's
business,  financial  condition and results of operations.  Traditionally,  many
dealers have sold Fun Karts only during the Christmas holiday season. Management
believes  that  with  the  continued  expansion  of it  business  with  the mass
merchandisers and the adding of the Polaris dealer network,  it will continue to
experience some mitigation of the historically  seasonal nature of the Company's
Fun Karts sales.

Customers

         In  1999,  approximately  48%  of  the  Company's  sales  were  to  its
independent dealers and the Company projects that it will sell approximately 65%
of its Fun Karts to independent dealers, including the Polaris dealers, in 2000.
The Company had only one customer  accounted  for more than 10% of the Company's
1999 sales.  This customer  purchased  11.2% of the units sold which resulted in
10.6% of the Company's total 1999 revenue. The Company does not believe that any
one mass merchandiser or any dealer or group of affiliated  dealers will account
for 10% or more of the Company's 2000 revenues.

Backlog

         The Company  typically  fills and ships  customer  orders within 3 to 7
days of receipt of the order and, therefore, maintains no significant backlog.

Governmental Regulations

         Consumer  protection  laws  exist in many  states in which the  Company
markets its  products.  Any violation of such laws or  regulations  could have a
material adverse effect on the Company. The Company's  manufacturing  facilities
are inspected by the Occupational Safety and Health Administration.  The Company
believes that it is generally in  compliance  in all material  respects with all
currently applicable federal and state laws and regulations.  Federal, state and
local  environmental  regulations  are not expected to have a material effect on
the  Company's  operations.  However,  if the Company in the future  acquires an
entity which is in violation of consumer or environmental  laws and regulations,
such violations may have a material adverse effect on the Company's operations.

                                      -11-

<PAGE>

         Management believes certain states, including California, have proposed
legislation  involving  emission  or  other  safety  standards  for the  type of
gas-powered  type engines  installed on the Company's Fun Karts.  The Company is
currently  unable to predict  whether  such  legislation  will be enacted in the
future and, if so, the ultimate impact on the Company and its operations.

Employees

         As of March 15, 2000, the Company  employed  approximately 72 employees
which are employed on a full-time or part-time  basis.  Eighteen  employees  are
administration  and sales  personnel,  nine are plant management and supervisory
personnel and the remainder are hourly employees  involved in manufacturing  and
shipping. In spite of the seasonal nature of sales, the Company attempts to keep
all personnel employed  year-round and increases the hours per work week to meet
seasonal demand.

         Labor  costs  for  the  Company  at  its  manufacturing  facilities  is
comparable to labor costs in its respective markets. The Company's employees are
not  represented by a union or subject to a collectively  bargaining  agreement.
The Company has never  experienced  a strike or work  stoppage and considers its
relations with its employees to be excellent.

Competition

         The Fun Karts industry is highly competitive, and there is no assurance
that the  Company  will be able to compete  profitably  in this  industry in the
future. The Company expects that it will continue to face intense competition as
its business and acquisition  strategies are  implemented.  Such competition may
result in reduced sales,  reduced  margins,  or both. The Company is and will be
competing  with  larger,  better  capitalized  companies  which  may  be  better
positioned  to respond to shifts in  consumer  demand and other  market  related
changes.  If other  companies  introduce  new and modified  products  before the
Company achieves significant market expansion, the Company may experience growth
below  projected  levels  which  could  have a  material  adverse  effect on the
Company's operating results.  However, the Company believes that it will be able
to compete effectively with its competitors by diversifying its product line and
expanding  its  market  share  through   implementation   of  its  business  and
acquisition strategies.

Business Risk Factors

         Liquidity  Contingency.  The Company's financial statements  (contained
elsewhere  herein) were  prepared  assuming  that the Company will continue as a
going concern.  The Company's  independent  auditor, in its report regarding the
Company's financial statements, expressed the fact that the Company has suffered
recurring  losses from operations and experienced  seasonality of product demand
which is focused in the last four months of the calendar year which impacts cash
flow during the first eight months of the year.  These factors  raise  liquidity
concerns as to the Company's  ability to continue to finance its working capital
needs. See "Management's  Discussion and Analysis or Plan of Operation" and Note
B to the Consolidated Financial Statements.

         Operating  Losses;  Recent Senior  Management  Turnover.  For the years
ended December 31, 1999, 1998 and 1997, the Company  experienced net losses from
operations of approximately $2,163,000,  $3,930,000 and $580,000,  respectively,
and has  utilized  cash in operating  activities  of  approximately  $3,484,000,
$3,213,000 and $220,000, respectively. Additionally, the Company has experienced
senior  management  turnover in both January 1998 and 1999. The Company's former
management was unable to operate the Company's facilities in a manner that would
allow the  Company  to meet  demand  for  product  production  during the fourth
quarter  of  1998  and,  accordingly,   incurred  short-term  financing  from  a
non-financial   institution  lender  to  provide  liquidity.   Further,   former
management spent considerable time and financial resources in exploring possible
merger or  acquisition  candidates and the results of these efforts were for the
most part unsuccessful and diverted  management time and resources from customer
demands for product during the Company's  heaviest demand period.  The Company's
continued  existence is dependent upon its ability to generate  sufficient  cash
flows  from  operations  to  support  its daily  operations  as well as  provide
sufficient resources to retire existing liabilities on a timely basis.

                                      -12-

<PAGE>

         No  Assurance  of Funding  for  Additional  Capital  Requirements.  The
Company will require  additional  financing to satisfy  working capital and cash
flow  requirements for its business  operations.  There can be no assurance that
additional  financing  will be available,  or if available,  that such financing
will be on favorable terms. Any such failure to secure  additional  financing or
otherwise  maintain adequate liquidity could have a material adverse effect upon
the financial condition and results of operations of the Company.

         Substantial  Indebtedness;  Debt Service Capability.  The Company has a
substantial  amount of long-term and short-term debt under its credit facilities
and accounts  payable.  There can be no  assurance  that the  operations  of the
Company will generate  sufficient cash flows to service such debt. The Company's
leverage poses  substantial risk in that it could limit the Company's ability to
respond to  industry  changes or economic  downturns,  as well as its ability to
satisfy its funding needs for operations or to raise debt or equity capital.

         Consequences  of Default under Credit  Facilities.  The Company has two
lines of credit with a non-financial  institution  lender for up to $3.5 million
of which  approximately  $2.7 million was  outstanding at December 31, 1999. The
lines of credit are secured with the Company's  accounts  receivable,  inventory
and equipment and are subject to standard  affirmative  and negative  covenants,
including maintaining certain levels of working capital and minimum tangible net
worth. The credit lines were  restructured in March 1999 with the condition that
the Company must obtain a minimum of $1.5  million of new equity  capital by May
6, 1999.  An extension was granted to the Company and it  successfully  met this
condition as of June 30, 1999.  These credit  facilities  came up for renewal on
March 1, 2000.  The Company  requested and was granted an extension  until April
15, 2000 so it could better  forecast the results of a private  placement of the
Company's  common stock dated February 7, 2000,  the backlog  resulting from the
introduction of the Polaris kart line and the Company's future cash needs. It is
expected  that the  Company and KBK will renew the credit  facilities  in April.
Failure  to renew or any  default  under  its  credit  facilities  would  have a
material  adverse effect upon the Company's  financial  condition and results of
operation.

         Dependence on Key  Personnel.  The  Company's  success will depend to a
large degree on its ability to retain the  services of its  existing  management
and to attract qualified  personnel in the future. On January 19, 1999,  Charles
Brister  resumed  the office of  President  and Chief  Executive  Officer of the
Company. The loss of the services of Mr. Brister or any key management personnel
or the inability to recruit and retain  qualified  personnel in the future could
have a  material  adverse  effect  on the  Company's  business  and  results  of
operations.  The Company may obtain key man life insurance policies on the lives
of key management personnel,  with the proceeds of the policies to be payable to
the  Company.  While  management  of the Company  believes  that any such policy
proceeds  would help the Company  recruit and compensate  replacements  for such
individuals,  there can be no assurance  that any such proceeds would offset any
resulting financial impact of the death of any key management personnel.

         Dependence  on  Product   Development  and   Modification   and  Market
Acceptance.  The Company's continued growth is dependent upon increased consumer
awareness  and  acceptance  of the  Company's  existing  and  new  products.  No
assurances  can be given that the Company will be able to  successfully  develop
new products, modify existing products or that any new or modified products will
meet with consumer  acceptance in the marketplace or that the Company's  current
products will receive continued or increased consumer  acceptance.  No assurance
can be given that the  Company's  existing  products will continue to be sold at
acceptable  margin  levels  or  that  the  Company  will  be  able  to  develop,
manufacture and distribute new products at acceptable margin levels.

                                      -13-

<PAGE>


         Dependence on License  Agreement  with Executive  Officer.  Mr. Charles
Brister, President, Chief Executive, a director and principal stockholder of the
Company,  owns certain patents,  technology and trademarks which are licensed to
the Company, which allows the Company to use certain brand names and utilize the
automatic  throttle  override  system  on its Fun  Karts.  The  Brister  license
agreement expires March 15, 2000 and is expected to be renewed.  The termination
of the license  agreement with Mr. Brister could have an adverse effect upon the
Company's ability to produce its current line of Fun Karts.  Furthermore,  there
can be no  assurance  that if the  license  agreement  is not  renewed  that the
Company could find suitable  substitutions for the licensed items and technology
or that its Fun Karts, produced without the licensed items and technology, would
receive  the  same  market  acceptance.  Also,  there is no  assurance  that the
technology  licensed to the Company,  or that the Company  might  license in the
future,  will quickly  become  obsolete due to the  development  of other,  more
advanced technology by competitors of the Company.

         Dependence upon Company's  Ability to Manage Growth and Expansion.  The
Company's  ability to manage its growth,  if any, will require it to continue to
improve  and  expand its  management,  operational  and  financial  systems  and
controls.  Any  measurable  growth  in the  Company's  business  will  result in
additional demands on its management,  administrative,  operation, financial and
technical resources.  There can be no assurance that the Company will be able to
successfully  address these additional  demands.  There also can be no assurance
that the Company's  operating and financial  control systems will be adequate to
support its future  operations  and  anticipated  growth.  Failure to manage the
Company's  growth  properly  could  have a  material  adverse  effect  upon  the
Company's business,  financial condition and results of operations.  The Company
may  also  seek  additional   acquisitions  of  related  businesses  that  could
complement  or expand the Company's  business.  In the event the Company were to
identify an appropriate  acquisition  candidate,  there is no assurance that the
Company  would be able to  successfully  negotiate,  finance or  integrate  such
acquired properties or businesses into current operations.  Furthermore, such an
acquisition  could cause a diversion of management's  time and resources.  There
can be no  assurance  that a given  acquisition,  when  consummated,  would  not
materially adversely effect the Company's business and results of operations.

         The Year 2000  Issue.  The year 2000  issue is the  result of  computer
programs  using two  digits  rather  than four to define  the  applicable  year.
Date-sensitive  software may recognize a date using "00" as the year 1900 rather
than the year 2000.  This could  result in system  failures or  miscalculations,
causing  disruptions  of  operations,   including,  among  others,  a  temporary
inability to process  transactions,  send  invoices or engage in similar  normal
business activities.  The Company did not believe that the year 2000 issue would
have a material effect on its network, computer systems or operations;  however,
it assessed the potential  impact of the year 2000 issue.  After minimal changes
and upgrades to some of its hardware and software,  the Company  considered  its
information  systems  prepared for the year 2000. As of the date of this report,
the  Company  has not  experienced  any  significant  failure  of the  Company's
information  systems and is not aware of any system  failures on the part of its
external vendors, network providers or critical suppliers.

         Seasonality  and  Fluctuations  in  Quarterly  Operating  Results.  The
Company has  historically  experienced  stronger  demand for its products in the
third and fourth quarters of each calendar year. Operating results may fluctuate
due to factors such as the timing of the  introduction  of new  products,  price
reductions  by the  Company  and  its  competitors,  demand  for  the  Company's
products,  new product  mix,  delay,  cancellation  or  rescheduling  of orders,
performance of third party manufacturers,  available inventory levels,  seasonal
cost increases and general  economic  conditions.  A significant  portion of the
Company's  operating  expenses are relatively fixed. Since the Company typically
does not obtain long-term purchase orders or commitments from its customers,  it
must  anticipate the future volume of orders based upon the historic  purchasing
patterns of its dealers and mass merchandisers and upon its discussions with its
dealers  and   representatives   of  mass   merchandisers  as  to  their  future
requirements.  Cancellations, reductions or delays in orders by a large customer
or group of  customers  could have a material  adverse  impact on the  Company's
business, financial condition and results of operations.

                                      -14-

<PAGE>


         Potential  Product  Liability and Insurance  Limits.  The nature of the
products  manufactured and marketed by the Company is such that the products may
fail due to material  inadequacies  or  equipment  failures.  Such a failure may
subject  the  Company to the risk of  product  liability  claims and  litigation
arising from injuries allegedly caused by the improper  functioning or design of
its  products.  As the Company  expands its product lines and  distributes  more
products  into  the  marketplace,  the  Company's  exposure  to  such  potential
liability  will also  increase.  The  Company  currently  maintains  $6  million
occurrence  basis  product  liability  insurance  with  a  $25,000  self-insured
retention  and $5 million  maximum per  occurrence  coverage.  The Company has 7
pending  product  liability  claims,  none of which are  expected  to exceed the
existing  policy  limits.  The Company has never had a claim that resulted in an
award or settlement in excess of insurance  coverage.  The Company believes that
if it is successful in the sale and  distribution  of a large number and variety
of Fun Karts and related products,  product liability claims will be inevitable,
particularly given the current litigious nature of American consumers.  There is
no assurance  that such  insurance  coverage will be sufficient to fully protect
the business and assets of the Company from all claims,  nor can any  assurances
be given that the Company  will be able to  maintain  the  existing  coverage or
obtain  additional  coverage at  commercially  reasonable  rates.  To the extent
product  liability  losses  are  beyond  the  limits  or scope of the  Company's
insurance coverage,  the Company could experience a material adverse effect upon
its business, operations, profitability and assets.

         Pending  Litigation.  In  addition  to product  liability  claims,  the
Company,  from time to time,  is involved in lawsuits in the ordinary  course of
business.  On February 4, 1997 a lawsuit was filed in a Mississippi  state court
against the  Company,  Brister's  and an  unaffiliated  insurance  broker by the
Company's insurance  underwriter to have insurance coverage declared as null and
void for an alleged  material  misrepresentation  on the insurance  application.
This  action  arose  as a  result  of the  payment  in  1997  by  the  insurance
underwriter  of $700,000 in settlement of a product  liability  lawsuit  against
Brister's and other defendants.  In 1999, summary judgement was granted in favor
of the Company  dismissing  the  insurance  underwriter's  claim.  The insurance
underwriter  appealed the matter to the U.S.  Fifth Circuit Court of Appeals and
the appeal was denied. See "Legal Proceedings."

         Delisting of Securities  from Nasdaq SmallCap  Market.  On September 8,
1999,  Nasdaq  advised the Company  that its shares of Common Stock and Warrants
were  delisted  from  Nasdaq   SmallCap  Market  for  failing  to  maintain  the
maintenance  standards required for continued listing of the securities.  As the
Company's Common Stock and Warrants were dropped off the SmallCap  Market,  they
began trading on the NASD Electronic Bulletin Board.

          After  the  delisting,  the sale of the  Company's  Common  Stock  and
Warrants became subject to certain  regulations  adopted by the Commission which
imposes   sales   practice   requirements   on   broker-dealers.   For  example,
broker-dealers selling such securities must, prior to effecting the transaction,
provide their  customers with a document which  discloses the risks of investing
in  the  Company's  Common  Stock  and  Warrants.  Furthermore,  if  the  person
purchasing  the  securities is someone  other than an accredited  investor or an
established  customer of the broker-dealer,  the broker-dealer must also approve
the  potential  customer's  account  by  obtaining  information  concerning  the
customer's financial situation, investment experience and investment objectives.
The  broker-dealer  must also make a  determination  whether the  transaction is
suitable for the customer and whether the customer has sufficient  knowledge and
experience  in  financial  matters to be  reasonably  expected  to be capable of
evaluating  the risk of  transactions  in the security.  While the  Commission's
rules may limit the number of potential  purchasers of the  securities,  trading
activity of the Company's Common Stock has increased since the delisting.

                                       -15-

<PAGE>

<TABLE>

<CAPTION>

ITEM 2.  PROPERTIES
         ----------

Facilities

         The following  table sets forth  information  concerning  the Company's
facilities:


                      Date Leased                              Expiration of     Approximate
      Location        or Acquired       Description              Lease Term     Square Footage
-------------------   -----------  -------------------------   --------------   --------------
<S>                   <C>          <C>                         <C>              <C>
Roseland, Louisiana       1998     Corporate Offices(1)             2000             2,400

Roseland Louisiana        1996     Manufacturing facility(1)        2000            48,000

Prattville, Alabama       1996     Manufacturing facility            (2)            25,000

</TABLE>

--------------------
(1)  The Company and Charles Brister,  President,  Chief Executive Officer and a
     director of the Company,  have  entered into a Real Estate  Option Right of
     First Refusal  Agreement  which  provides that the Company may, at its sole
     option,  purchase the Roseland facility from Mr. Brister for $550,000.  The
     option  expires on December  31,  2000.  The Company and Mr.  Brister  have
     entered into a lease  agreement,  which expires in 2000, for this facility,
     which includes the corporate  offices.  The monthly lease payment is $6,025
     with certain  adjustments.  The Company believes these terms are comparable
     to  existing  market  rates  in the  region.  The  Company  in  1998  spent
     approximately   $293,000  for  leasehold   improvements   at  the  Roseland
     manufacturing  facility  and  added  approximately  2,400  square  feet  of
     additional executive office space at a cost of approximately  $145,000. See
     "Certain Relationships and Related Transactions."
(2)  The  Prattville  facility is situated on a two-acre  tract of land owned by
     the  Company.  This  property is subject to a mortgage  held by a financial
     institution with a principal balance of approximately  $206,000 at December
     31, 1999 with interest at the financial institution's commercial base rate.
     The Company is obligated to make monthly payments of principal and interest
     of $2,626 until 2010. The Company, in 1999, spent approximately $58,000 for
     building improvements at the Prattville facility.


ITEM 3.  LEGAL PROCEEDINGS
         -----------------

         The nature of the products  manufactured and marketed by the Company is
such  that the  products  may fail due to  material  inadequacies  or  equipment
failures.  Such a  failure  may  subject  the  Company  to the  risk of  product
liability  claims and litigation  arising from injuries  allegedly caused by the
improper  functioning  or design of its  products.  As the  Company  expands its
product lines and distributes more products into the marketplace,  the Company's
exposure to such potential  liability will also increase.  The Company currently
maintains $6 million occurrence basis product liability insurance with a $25,000
self-insured  retention  and $5 million  maximum per  occurrence  coverage.  The
Company has 7 pending product  liability  claims,  none of which are expected to
exceed  the  existing  policy  limits.  The  Company  has never had a claim that
resulted in an award or settlement in excess of insurance coverage.  The Company
believes that if it is successful in the sale and distribution of a large number
and variety of Fun Karts and related products,  product liability claims will be
inevitable,   particularly  given  the  current  litigious  nature  of  American
consumers. There is no assurance that such insurance coverage will be sufficient
to fully protect the business and assets of the Company from all claims, nor can
any  assurances  be given that the Company will be able to maintain the existing
coverage or obtain additional coverage at commercially  reasonable rates. To the
extent product  liability losses are beyond the limits or scope of the Company's
insurance coverage,  the Company could experience a material adverse effect upon
its business, operations, profitability and assets.

                                      -16-

<PAGE>


         In addition to product  liability  claims,  the  Company,  from time to
time, is involved in lawsuits in the ordinary course of business.  Such lawsuits
have not  resulted in any  material  losses to date,  and,  except as  discussed
below,  the Company does not believe  that the outcome of any existing  lawsuits
would have a material adverse effect on its business.

         On February 4, 1997 a lawsuit  was filed in Federal  District  Court in
New  Orleans,  Louisiana  against the  Company,  Brister's  and an  unaffiliated
insurance  broker  by the  Company's  insurance  underwriter  to have  insurance
coverage declared as null and void for an alleged material  misrepresentation on
the insurance application.  This action arose as a result of the payment in 1997
by the insurance  underwriter  of $700,000 in settlement of a product  liability
lawsuit against Brister's and other defendants.  In 1999, a summary judgment was
granted in favor of the Company  dismissing the insurance  underwriter's  claim.
The insurance underwriter appealed the matter to the U.S. Fifth Circuit Court of
Appeals and the appeal was denied.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

         The Company had no matters  requiring a vote of security holders during
the fourth quarter of fiscal 1999 or the first quarter of fiscal 2000.


                                     PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
         ---------------------------------------------------------------------

         Until  September 8, 1999, the Company's  Common Stock and Warrants were
traded on the Nasdaq SmallCap Market system under the symbol "KINT" and "KINTW",
respectively.  On September  8, 1999,  the  Company's  Common Stock and Warrants
began trading on the NASD Electronic  Bulletin  Board.  The following table sets
forth the range of high and low closing bid prices for the Common  Stock and the
Warrants for the periods indicated as reported by the National Quotation Bureau,
Incorporated. These prices represent inter-dealer prices, without adjustment for
retail  mark-ups,  mark-downs or commissions  and do not  necessarily  represent
actual transactions.

                             Common Stock                      Warrants
                             Bid Price(1)                      Bid Price
 Calendar Year 1999      Low             High            Low             High
 ------------------     -----            -----          -----            -----
 First Quarter          $0.44            $1.00          $0.03            $0.31
 Second Quarter         $0.31            $0.56          $0.03            $0.19
 Third Quarter          $0.31            $0.81          $0.03            $0.16
 Fourth Quarter         $0.21            $0.38          $0.00            $1.06


                             Common Stock                      Warrants
                             Bid Price(1)                      Bid Price
 Calendar Year 1998      Low             High            Low             High
 ------------------     -----            -----          -----            -----
 First Quarter          $2.75            $3.75          $0.56            $1.19
 Second Quarter         $1.94            $3.63          $0.50            $0.88
 Third Quarter          $1.38            $3.38          $0.25            $0.69
 Fourth Quarter         $0.28            $1.88          $0.06            $0.25




                                      -17-

<PAGE>



(1) Prices have been adjusted to reflect a two-for-three  reverse stock split of
the Company's  Common Stock  effective  March 24, 1997.
(2) The Common Stock and Warrants  traded on the Nasdaq  SmallCap  Market  under
the  symbols  "KINT" and"KINTW", respectively, on September 9, 1997 to September
8, 1999.
(3) The Common Stock traded on the NASD Electronic  Bulletin Board from June 27,
1996 to September 9, 1997.  The Common  Stock and  Warrants  resumed  trading on
September 8, 1999.

        On March 24,  2000,  the closing bid and ask prices for the Common Stock
were $.75 and $.75,  respectively,  per share and the closing bid and ask prices
for the  Warrants  were  $0.03  and  $0.10 per  Warrant.  As of March 24,  2000,
5,799,320  shares of Common  Stock were  issued and  outstanding  and  1,832,500
Warrants were outstanding.

        Holders.  As of March 24, 2000,  the Company  estimates  that there were
approximately  570 record and beneficial  holders of the Company's Common Stock,
including those whose share are held in broker accounts,  and  approximately 300
record and beneficial holders of the Warrants.

        Dividends.  The  Company  has not paid or declared  any  dividends  with
respect to its Common Stock nor does it anticipate  paying any cash dividends or
other  distributions on its Common Stock in the foreseeable  future.  Any future
dividends  will be declared at the  discretion  of the Board of Directors of the
Company and will depend, among other things, on the Company's earnings,  if any,
its financial requirements for future operations and growth and such other facts
as the  Company  may then deem  appropriate.  The  Company  may issue  shares of
preferred  stock in the future which may contain  restrictions on the payment of
dividends.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
        ---------------------------------------------------------

Caution Regarding Forward-Looking Information

        This annual  report  contains  certain  forward-looking  statements  and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to  the  Company  or  management.   When  used  in  this  document,   the  words
"anticipate,"   "believe,"   "estimate,"   "expect"  and  "intend"  and  similar
expressions,  as they relate to the Company or its  management,  are intended to
identify forward-looking statements. Such statements reflect the current view of
the  Company   regarding  future  events  and  are  subject  to  certain  risks,
uncertainties  and  assumptions,  including the risks and  uncertainties  noted.
Should  one or more of  these  risks or  uncertainties  materialize,  or  should
underlying assumptions prove incorrect,  actual results may vary materially from
those  described  herein  as  anticipated,   believed,  estimated,  expected  or
intended. In each instance,  forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.

Overview

        The Company is in the business of manufacturing  and marketing Fun Karts
for the consumer market.  In March 1996, the Company acquired  Brister's,  a Fun
Kart  manufacturer,  from Charles Brister,  President,  Chief Executive Officer,
director and principal stockholder of the Company, for $6.3 million. In November
1996, the Company acquired USA, a Fun Kart manufacturer located in Alabama, from
four USA stockholders for $1,000,000.

                                      -18-

<PAGE>

        In September 1997, the Company consummated a public offering whereby the
Company  sold an  aggregate  of  1,550,000  shares of Common Stock at a price of
$4.00 per share,  and  1,550,000  Warrants at $0.125 per Warrant  ("1997  Public
Offering").  Each Warrant  entitles the holder  thereof to purchase one share of
Common Stock at an exercise price of $4.00 per share during the four year period
commencing on September 9, 1998 (the "First  Exercise  Date").  The Warrants are
redeemable  by the Company at a redemption  price of $0.01 per  Warrant,  at any
time after the First Exercise Date,  upon thirty (30) days written notice to the
Warrant  holders,  if the average  closing  price of the Common  Stock equals or
exceeds  $8.00 per share of Common  Stock for the 20  consecutive  trading  days
ending three days prior to the date of the notice of redemption.

        The Company received net proceeds of  approximately  $5,017,650 from the
sale of the  securities  offered in the 1997 Public  Offering  after  payment of
offering expenses and underwriting discounts and commissions.  Proceeds from the
1997 Public  Offering were used as follows:  (i) $2,250,000 for the repayment of
indebtedness,  including  payment to Mr.  Brister for a portion of the  purchase
price  for  Brister's;  (ii)  $625,000  for  the  redemption  of  the  Company's
Convertible  Preferred Stock; (iii) $48,000 for a financial advising fee payable
to J.P. Turner & Company,  L.L.C., the representative of the underwriters of the
1997 Public Offering;  (iv) $200,000 for product  development;  (v) $400,000 for
advertising  and  marketing  expenses;  and  (vi)  the  remaining  approximately
$1,700,000 for working capital purposes.

        Under the  terms of the 1997  Public  Offering,  the  underwriters  were
granted an over-allotment option to purchase 232,500 additional shares of Common
Stock and 232,500 additional Warrants.  The over-allotment  option was exercised
and the  transaction  closed in October  1997,  with the Company  selling to the
underwriters  an additional  232,500  shares of Common Stock for $4.00 per share
and 232,500  additional  Warrants  for $0.125 per  Warrant  for net  proceeds of
approximately  $834,385  after  payment of offering  expenses  and  underwriting
discounts and commissions.  Net proceeds from the exercise of the over-allotment
option was being used for working capital purposes.

        On October  27,  1998,  the Company  purchased  100.0% of the issued and
outstanding stock of Straight Line Manufacturing,  Inc. (a Michigan corporation)
(Straight  Line)  for a total  purchase  price of  approximately  $400,000.  The
acquisition  was  effective  at the close of business on October 31,  1998.  The
purchase price was paid with 182,648 shares of restricted,  unregistered  Common
Stock of the  Company.  Straight  Line was  incorporated  as the  successor to a
Michigan  sole  proprietorship  on August 1, 1997 under the laws of the State of
Michigan and is in the  business of  manufacturing  and  marketing  large,  full
suspension "fun karts" for the consumer market.

        On  June  3,  1999,  the  Company  issued   $1,500,000  of  convertible,
subordinated  debentures resulting in net proceeds of approximately  $1,466,900.
On June 30,  1999,  the Company  also  received  net  proceeds of  approximately
$1,235,140  from a private  placement  of  1,550,000  shares  of 9%  cumulative,
convertible  preferred  stock.  Proceeds  from these  transactions  were used to
reduce the  Company's  trade  accounts  payable and provide  additional  working
capital.

        In August 1999, the Company moved the manufacturing of the Straight Line
product  line to its  Prattville,  Alabama  facility  and  closed  its  Michigan
facility.  The closing of the  Michigan  facility was part of an overall plan to
increase  capacity  utilization  while reducing  overhead  expenses  through the
consolidation of its operations.

                                      -19-

<PAGE>

        The  financial   information   discussed  herein  is  derived  from  the
historical  consolidated  financial statements of the Company for the respective
years  ended  December  31, 1999 and 1998.  The  following  discussion  reflects
historical consolidated financial data for the periods as indicated below.

Results of Operations

        Year Ended  December  31, 1999 as compared  to Year Ended  December  31,
1998. The Company reported revenues of approximately  $12.0 million for the year
ended  December 31, 1999,  compared to $8.2 million for year ended  December 31,
1998, a 46% increase.  These results reflect significant improvement in both the
volume and average selling price of the Company's products.  The Company's sales
continue to show a high degree of  seasonality,  however efforts to mitigate the
historical pattern by expanding its sales to mass merchandisers  whose demand is
less seasonal have been effective.  The Company intends to continue  identifying
opportunities to establish new customers whose demand for the Company's products
would be during the first half of the year.

        The Company  incurred cost of sales of $11.3 million and $8.8 million in
1999  and  1998,   respectively.   This  resulted  in  gross   profit/(loss)  of
approximately  $0.7  million  for the year  ended  December  31,  1999 and ($0.6
million) for the year ended  December 31, 1998.  Gross profit for the year ended
December  31, 1999 was  favorably  effected  by  increased  volume and  improved
selling  margins.  Both unit sales increases and  consolidation of the Company's
manufacturing activities allowed the Company to improve utilization of its labor
force and  manufacturing  capacity  thereby  reducing the per unit  burden.  The
Company increased its selling prices in 1999,  especially on those units that it
identified as being underpriced  during their  introductory  period during 1998.
Other direct costs were controlled and remained  approximately the same as costs
incurred during 1998 while unit volume increased by approximately 25%.

        Selling,  general and administrative expenses totaled approximately $2.8
million for the year ended  December  31, 1999  compared to  approximately  $3.4
million for the year ended  December 31,  1998.  The Company was  successful  in
reducing these expenses by approximately  18% through the cost reduction efforts
which  began  during  the  second  quarter  of 1999.  The  Company  reduced  its
management  and support  staff and  implemented  new cost  controls to bring its
expenses  back into line with its current  volume.  The Company will continue to
monitor its staffing and allow future  increases only to the extent necessary to
support increased sales and manufacturing activity.

        Other income (expense) totaled approximately $(0.2 million) for the year
ended  December 31, 1999 compared to $(6.1  million) for the year ended December
31, 1998. The decrease in expense is largely attributable to the one-time charge
to  operations  of  approximately  $5.8 million to recognize  the  impairment of
future  recoverability of goodwill  recorded in 1998.  Additionally in 1998, the
Company  charged  to  operations   approximately   $289,000  for  reorganization
expenses.  Interest  expense  increased to  approximately  $396,000 for the year
ended December 31, 1999 from  approximately  $92,000 for the year ended December
31, 1998.  This was due to a higher level of borrowing on the Company's  working
capital lines of credit and the $1,500,000 in new debt.

        Net  loss  for  the  year  ended   December  31,  1999  was  reduced  to
approximately  $2,366,000 from a net loss of approximately  $10,073,000 incurred
for the year ended  December 31, 1998.  Basic loss per share was $0.42 and $2.05
for the years ended December 31, 1999 and 1998, respectively.

                                      -20-

<PAGE>

        Year Ended  December  31, 1998 as compared  to Year Ended  December  31,
1997. The Company reported  revenues of approximately  $8.2 million for the year
ended  December 31, 1998  compared to $7.6  million for year ended  December 31,
1997, a 7.9%  increase.  These results  continue to reflect weak product  demand
during the first half of the each fiscal year due  primarily to  seasonality  of
sales. The Company manufactured  approximately 2,500 go-karts, mainly during the
second and third  quarters,  for a competitor  in an attempt to mitigate some of
the  seasonality of the Company's  manufacturing  operations.  While the Company
does not anticipate  manufacturing go-karts for competitor(s) in future periods,
other  contract  manufacturing  is  anticipated  in future periods to attempt to
better utilize the Company's  facilities and equipment  during the first half of
the year.  Additionally,  the Company is  continuing to expand its sales to mass
merchandisers  whose  demand is less  seasonal in an effort to improve its sales
during traditional slow demand periods.

        The Company  incurred  cost of sales of $8.8 million and $6.0 million in
1998  and  1997,   respectively.   This  resulted  in  gross   profit/(loss)  of
approximately  ($0.6  million)  for the year ended  December  31,  1998 and $1.6
million for the year ended  December 31,  1997.  Gross profit for the year ended
December 31, 1998 was  adversely  effected by  underpricing  the  Company's  new
product lines, extending additional pricing discount terms in order to establish
the Company's products with new mass  merchandisers,  inefficient  purchasing of
materials  and the  write-off of obsolete  inventory  which was caused by design
changes  to the  Company's  product  lines.  Cost  of  sales  in 1998  was  also
negatively  effected by  unfavorable  labor  variances  resulting  from employee
turnover,  ineffective  scheduling of the  workforce and overtime  premium paid.
Other direct costs increased approximately $1.0 million to $2.0 million for year
ended December 31, 1998 compared to $1.0 million in 1997.  Freight expense,  one
of the  significant  component of other direct  costs,  increased  approximately
$200,000 in 1998 verses  1997.  The  increase  was due to design  changes in the
product line that reduced  number of units that  comprised a truckload  quantity
and the  Company's  inability  to ship  complete  orders  which were  prepaid by
customers.  These  changes and  operating  inefficiencies  caused the Company to
incur  additional  freight expense when units to complete a customer's order had
to be shipped separately. Other direct costs increased by approximately $135,000
due to the inclusion of the operating results of Straight Line and KINT LLC.

        Selling,  general and administrative expenses totaled approximately $3.4
million for the year ended  December  31, 1998  compared to  approximately  $2.1
million for the year ended  December 31, 1997.  Selling  expenses  accounted for
approximately  $160,000 of the  increase  over the prior year largely due to the
additional commission expense paid to independent  manufacturers  representative
organizations  which were added to the Company's sales force during 1998 and the
addition  of a  sales/marketing  executive  at  the  Company's  USA  subsidiary.
Professional  fees and travel  expenses  increased  approximately  $120,000  and
$160,000, respectively, over the prior year as a result of increased acquisition
activity  subsequently  abandoned,  increased travel resulting from expansion of
the Company's sales  territory and the relocation and temporary  living expenses
of several  non-Louisiana  based  executives  and management  personnel.  Salary
expense  increased  approximately  $285,000 due to the  Company's  additional of
several  administrative  and  operational  professionals  and the  inclusion  of
salaries  at the  Straight  Line  and  KINT LLC  subsidiaries.  Included  in the
Company's operating expenses for the year ended December 31, 1998 was a one-time
non-cash charge of approximately  $413,000 related to the release of shares that
had been held in escrow to settle a contingency associated with the 1996 private
offering of securities.

                                      -21-

<PAGE>

        Other income (expense) totaled approximately $(6.1 million) for the year
ended  December 31,  1998,  a $5.5  million  change from the 1997 total of $(0.6
million).  The increase in expense is largely  attributable to a one-time charge
to  operations  of  approximately  $5.8 million to recognize  the  impairment of
future  recoverability of goodwill. As a result of this action, the Company will
not incur any  charges to  operations  for  amortization  of  goodwill in future
periods.  Additionally, the Company charged to operations approximately $289,000
to  establish  a  reserve  for an  anticipated  1999  relocation  of some of its
subsidiary operations and reorganizing its management team during the year ended
December 31, 1998. These increase in expenses were slightly offset by a decrease
in interest expense from approximately  $508,000 for the year ended December 31,
1997 to  approximately  $92,000 for the same period in 1998.  The  reduction  in
interest expense is due to the retirement of approximately  $2.2 million of debt
in late 1997 using the proceeds from the Company's 1997 public stock offering.

        Additional Operations  Information.  The Company currently has 7 product
liability  lawsuits  outstanding,  none of which are expected to exceed existing
product  liability  insurance  policy limits.  The Company has never had a claim
that resulted in an award or settlement in excess of insurance  coverage.  There
is no  assurance  that  the  Company's  insurance  coverage  of  $6,000,000  per
occurrence  and  $5,000,000  aggregate  will be  sufficient to fully protect the
business and assets of the Company from all claims,  nor can any  assurances  be
given that the Company will be able to maintain the existing  coverage or obtain
additional coverage at commercially  reasonable rates.  Management believes that
it has process controls on its product operations,  product labeling, operator's
manuals,  and design  features which will assist in a successful  defense of any
present or future  product  liability  claim.  To the extent  product  liability
losses are beyond the limits or scope of the Company's insurance  coverage,  the
Company  could   experience  a  material   adverse  effect  upon  its  business,
operations, profitability and assets.

Seasonality

        The Company  experiences  significant  seasonality  in its sales pattern
with only  approximately 25% of its revenue  recognized in the first half of the
year.  Sales of Fun Karts are  generally  the lowest during the first quarter of
each  calendar  year.  Since the  Company  typically  does not obtain  long-term
purchase orders or commitments from its customers, it must anticipate the future
volume of orders based upon the historic  purchasing patterns of its dealers and
mass  merchandisers  and its current  on-going  discussions with its dealers and
representatives  of  mass   merchandisers  as  to  their  future   requirements.
Cancellations,   reductions   or  delays  by  a  large  volume  dealer  or  mass
merchandiser  could have a material  adverse  impact on the Company's  business,
financial condition and results of operations.

        Traditionally;  many of the  Company's  dealers have sold Fun Karts only
during the Christmas  holiday season.  Recent market growth can be attributed to
some of these  dealers  beginning to sell Fun Karts on a year round basis and to
an  increasing  number  of  mass   merchandisers  who  sell  karts.  Since  mass
merchandisers are not typically constrained by the limited floor space that tend
to force the dealers into seasonal  purchasing of karts,  the Company intends to
increase mass merchandiser  sales to mitigate the highly seasonal buying pattern
of its traditional  dealer base. The Company also intends to offset the seasonal
aspects of its current business  operations through acquisition of manufacturers
or  introduction  of new product  lines that are  compatible  with the Company's
business  objectives  and offer product  diversity  which have either year round
demand or that are counter-seasonal to its existing product lines.

Liquidity and Capital Resources

        At  December  31,  1999,  the Company had  negative  working  capital of
approximately   $(218,000)   as  compared  to   negative   working   capital  of
approximately  $(518,000) at December 31, 1998. The Company experienced negative
cash flow  from  operations  of  approximately  $3,484,000  and  $3,213,000  for
calendar 1999 and 1998, respectively.

        During the year ended  December 31, 1999,  the Company  expended cash of
approximately  $222,000 on capital improvements;  consisting of expansion of its
manufacturing  facilities,  leasehold improvements and equipment Additional cash
expenditures of  approximately  $14,000 were made for legal fees associated with
the acquisition of the Option to acquire Andretti.

                                      -22-

<PAGE>

        During the year ended  December 31, 1998,  the Company  expended cash of
approximately  $747,000 on capital  improvements;  consisting  of  renovation of
manufacturing  facilities,  leasehold improvements,  equipment and the expansion
and relocation of its corporate offices to Roseland, Louisiana.  Additional cash
expenditures,  aggregating  approximately  $156,000,  were made for 1)  expenses
related to the  acquisition of the Company's  Straight Line  subsidiary,  2) the
initial  payment  on a  covenant  not to compete  executed  by the  former  sole
shareholder  of Straight Line and 3) to partially  fund the  acquisition  of the
Option to acquire Andretti.

        During  the  year  ended  December  31,  1997,   the  Company   expended
approximately  $477,000 for capital  assets and/or  improvements,  including the
purchase of a powder paint system and tube bending machine for its manufacturing
facility in Prattville, Alabama.

        Additionally,  the Company used, in 1997, the net proceeds from the 1997
Public  Offering to repay $2.2 million in long-term  indebtedness,  the $300,000
Brister's  credit  facility  with a  financial  institution  and to support  the
Company's fixed asset programs and research and development efforts.

        The 1999 cash  consumption  by operating  and investing  activities  was
funded from the net proceeds  from the sale of 1,550,000  shares of 9% preferred
stock  and from the  issuance  of  $1,500,000  of  subordinated  debentures.  In
addition,  the Company increased its line of credit from KBK Financial,  Inc., a
non-financial  institution  lender (KBK) secured by its accounts  receivables to
$2.5 million.

        While  the  Company  has  made  significant  progress  in  reducing  its
operational losses, continued increases in volume and strict control of expenses
will be  necessary  for the Company to return to  profitability.  The  Company's
continued  existence is dependent upon its ability to generate  sufficient  cash
flows  from  operations  to  support  its daily  operations  as well as  provide
sufficient  resources to retire existing liabilities and obligations on a timely
basis.

        To mitigate the Company's negative cash flow from operations, management
has taken the following  actions to stabilize the Company's  financial  position
for future  periods:  1) initiated  plans to raise  additional  equity through a
private  placement  of common  stock;  2)  initiated  plans to relocate  its USA
Industries  operation to Roseland,  Louisiana,  and 3) entered into an exclusive
three  licensing  agreement with Polaris  Industries,  Inc. to produce a line of
karts for sale through their existing dealer network.

        Management believes that its efforts to raise additional capital through
the sale of equity securities and/or new debt financing will provide  additional
cash flows. However,  there can be no assurance that the Company will be able to
obtain additional funding or, that such funding, if available,  will be obtained
on terms favorable to or affordable by the Company.

        The  Company's  management  does not believe  that  inflation  has had a
significant  effect on the Company's  operations  during the last several years.
The Company's  management believes that USA and Brister's have historically been
able to pass on increased  costs of  production  to the price  charged for their
products;  however,  no assurance can be given that the Company will continue to
be able to pass on such increased costs in the future.

        In  the  event  that  the  Company  identifies  a  compatible   business
acquisition or expansion  candidate in future periods,  if any are  specifically
identified or undertaken;  the Company has limited  financial  resources for the
completion  of these  efforts.  The Company will be dependent  upon the proceeds
from  additional  financings,  including  receiving  proceeds  from  the  future
exercise of the  Warrants of which there can be no  assurance,  to  facilitate a
major  acquisition.  The Company may also need  additional  financing to achieve
full  implementation  of its long-term  growth strategy and for working capital.
There can be no assurance that  additional  financing  will be available,  or if
available, that such financing will be on favorable terms.

                                      -23-

<PAGE>

Year 2000 Modifications

        The year 2000 date change is believed to affect  virtually all computers
and  organizations.  The Company has  undertaken a  comprehensive  review of its
information  systems  including  its main computer  hardware and  software,  its
personal computers' hardware and software and associated  peripheral devices and
general telecommunication systems. In addition, the Company has held discussions
with its  software  supplier  with  respect  to the year 2000 date  change.  The
Company did not have to modify or replace significant  portions of its software.
The Company completed its  modifications  prior to December 31, 1999 and through
the date of this report has not experienced any  significant  difficulties  with
its  information  systems or that of any of its suppliers,  shippers or business
partners.

ITEM 7.  CONSOLIDATED FINANCIAL STATEMENTS
         ---------------------------------

         See Index to Financial  Statements  and  Financial  Statement  Schedule
beginning on Page F-2

ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         -----------------------------------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------

        There are not and have not been any  disagreements  between  the Company
and its  accountants  on any matter of  accounting  principles  or  practices or
financial statement disclosure.

                                    PART III

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,  PROMOTERS   AND   CONTROL  PERSONS;
         -----------------------------------------------------------------------
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
         -------------------------------------------------

Directors and Executive Officers

        The  following  table  sets forth  certain  information  concerning  the
directors and executive officers of the Company:

   Name                         Age          Position
   ----                         ---          --------
   Timothy P. Halter(1)         33           Chairman, Secretary and Director

   Charles Brister(1)(2)        47           President, Chief Executive  Officer
                                             and Director

   Richard N. Jones             47           Vice President, Administration  and
                                             Chief Financial Officer

   Lawrence E. Schwall, III     37           Vice President, Sales and Marketing

   Joseph R. Mannes(2)          41           Director

   Ronald C. Morgan(2)          52           Director

   Gary C. Evans(1)             43           Director

-------------------
(1)      Members of the Company's Compensation Committee.
(2)      Members of the Company's Audit Committee.

                                      -24-

<PAGE>

         The Company  may employ such  additional  management  personnel  as the
Board  of  Directors  of the  Company  deems  necessary.  The  Company  has  not
identified nor reached an agreement or understanding  with any other individuals
to serve in such management positions, but does not anticipate any difficulty in
employing qualified individuals.

         Directors of the Company are elected by the stockholders at each annual
meeting and serve until the next annual meeting of  stockholders  or until their
successors  are duly  elected  and  qualified.  Officers  are  elected to serve,
subject to the discretion of the Board of Directors,  until their successors are
appointed or their earlier resignation or removal from office.

         Information  regarding the  directors and  management of the Company is
set forth below.

         Timothy P.  Halter has been  Secretary  and a director  of the  Company
since February  1996,  and Chairman  since  February  1998.  Since May 1995, Mr.
Halter has served as President of Halter Financial Group, Inc., a Dallas,  Texas
based financial  consulting firm. From 1991 to 1995, Mr. Halter was President of
Halter Capital Corporation, a diversified holding company.

         Charles Brister is President and Chief Executive Officer of the Company
and has served in this capacity  since  January  1999.  He previously  served as
President and Chief  Executive  Officer of Brister's from 1986 to April 1996. He
has been a Director of the Company since March 1996.

         Richard  N.  Jones  is Vice  President,  Administration  and the  Chief
Financial  Officer of the Company.  Mr. Jones joined the Company in October 1998
and was elected to his current  positions  in March 1999.  From  January 1996 to
October 1998, Mr. Jones served as Vice President -  Manufacturing  and Treasurer
for Andretti, a manufacturer of concession  go-karts.  From June 1991 to January
1996, Mr. Jones was the Chief Financial Officer for Apogee Plastic Technologies,
Inc., a vertically  integrated  plastic  manufacturer that supplied computer and
communication   enclosures  for  IBM,  Motorola,  Texas  Instruments  and  other
customers. From February 1978 to April 1991, Mr. Jones worked for Hughes Supply,
Inc.,  a NYSE listed  manufacturer  and  wholesale  distributor  of  electrical,
plumbing  and HVAC  equipment  and  supplies.  During  his  tenure as  Corporate
Controller,  he  was  involved  in  both  a  secondary  public  offering  and  a
convertible  debenture  offering,  as well as numerous  acquisitions.  Mr. Jones
graduated with a BSBA from the University of Central Florida in 1978.

         Lawrence E. Schwall, III, is the Vice President, Sales and Marketing of
the Company and has served in this capacity  since January 1997.  Mr.  Schwall's
responsibilities  include  overseeing the development of the Company's sales and
marketing strategies,  market forecasting,  and the development and presentation
of product knowledge seminars for the Company's dealers and mass  merchandisers.
From December 1995 to January 1997, Mr.  Schwall  served as Territory  Manager--
Commercial  Lawn and Garden Dealers for Homelite,  Inc., a subsidiary of Deere &
Co. Homelite, Inc. is a manufacturer of hand-held products. While with Homelite,
Inc.,  Mr.  Schwall was  responsible  for  producing  training  seminars for the
company's  customers.  From August 1987 to December  1995,  Mr.  Schwall was OEM
Engine Sales Manager for Delta Power,  Inc. and was responsible for the sale and
marketing of engines to existing customers and prospective  accounts  throughout
the  southern  region of the United  States.  Mr.  Schwall  also served with the
industrial  division  of Briggs & Stratton as  communications  liaison for Delta
Power, Inc.

                                      -25-

<PAGE>

         Joseph R. Mannes has been a director  of the  Company  since July 1996,
and since  October  1998 has been  Chief  Financial  Officer  and  Secretary  of
Clearwire  Technologies,  Inc., a company offering  broadband  wireless Internet
connectivity.  From  February  1996 until  October 1998 was the Chief  Financial
Officer,  Secretary and Treasurer of Interactive Creations Incorporated ("ICI"),
and subsequently was General Manager of I-Magic Online (its successor company) a
corporation offering real-time internet gaming services. From 1987 until joining
ICI, Mr. Mannes was First Vice President in the Corporate Finance  Department of
Rauscher Pierce Refsnes,  Inc., a Dallas,  Texas stock brokerage  company.  From
1982 to 1987,  Mr. Mannes was in the  commercial  lending  division of the First
National  Bank of Boston,  where he  attained  the  position of  Assistant  Vice
President.  Mr.  Mannes worked in both the Special  Industry  Group and the High
Technology Group at First National Bank of Boston.  Mr. Mannes graduated with an
MBA in Accounting and Finance from the Wharton School, Graduate Division, of the
University of Pennsylvania  in 1982 and an A.B. from Dartmouth  College in 1980.
Mr. Mannes is a Chartered Financial Analyst.

         Ronald C. Morgan has been a director  of the  Company  since July 1996.
Since June 1980,  Mr. Morgan has served as Chief  Operating  Officer,  Executive
Vice President and Director of The Leather Factory, Inc., an AMEX listed company
("TLF").  Mr.  Morgan was a co-founder  of TLF.  Mr.  Morgan was employed by the
Tandy  Leather  Company for ten years prior to 1980,  eventually  attaining  the
position of Vice-President-- Eastern Division. Mr. Morgan received a B.S. degree
from West Texas State University.


         Gary C. Evans has been a director of the Company  since July 1996.  Mr.
Evans has served as President,  Chief Executive Officer and a director of Magnum
Hunter  Resources,  Inc.  ("Magnum"),  an American  Stock  Exchange  oil and gas
exploration and development  company,  since December 1995. Mr. Evans previously
served as Chairman,  President and Chief Executive  Officer of Hunter Resources,
Inc.  ("Hunter") from September 1992 until its merger with Magnum. From December
1990 to September  1992, he served as President and Chief  Operating  Officer of
Hunter.  From 1985 to 1990, he was the founder and President of Sunbelt  Energy,
Inc.,  prior to its  merger  with  Hunter.  From  1981 to 1985,  Mr.  Evans  was
associated  with the Mercantile  Bank of Canada where he held various  positions
including Vice President and Manager of the Energy Division of the  southwestern
United States.  From 1977 to 1981, he served in various capacities with National
Bank of Commerce (currently BankTexas, N.A.) including Credit Manager and Credit
Officer.

         There are no family  relationships  among any of the Company's officers
and directors.

Section 16(a) Beneficial Ownership Report Compliance

         The  Company  is not  aware  of  any  transactions  in its  outstanding
securities by or on behalf of any director,  executive  officer or 10% holder of
the Common  Stock  which  would  require  the filing of any report  pursuant  to
Section 16(a) that was not filed by the Company.

ITEM 10. EXECUTIVE COMPENSATION
         ----------------------

         The  following  Summary  Compensation  Table sets forth,  for the years
indicated,  all cash  compensation  paid,  distributed  or accrued for services,
including  salary  and bonus  amounts,  by the  Company  to its Chief  Executive
Officer.  No other  executive  officer of the Company  received  remuneration in
excess of $100,000 during the referenced periods.  Certain  compensation related
tables   required  to  be  reported   have  been  omitted  since  no  applicable
compensation was awarded to, earned by or paid to any of the Company's executive
officers in any fiscal year to be covered by such tables.


                                      -26-

<PAGE>

<TABLE>

<CAPTION>

                         Summary Compensation Table
                                                                                            Long-Term
                                                     Annual                               Compensation
                                                  Compensation                               Awards
                                                  ------------                            ------------
                                                                                                   Securities
                                                                 Other Annual      Restricted      Underlying
Name/Title                              Year      Salary/Bonus   Compensation     Stock Awards    Options/SARs
                                        ----      ------------   ------------     ------------    ------------
<S>                                     <C>       <C>            <C>              <C>             <C>
Charles Brister, President and          1999        $137,500      $  -0-              -0-           450,000
Chief Executive Office

Robert M. Aubrey, former President      1998        $140,625      $22,825(2)          -0-           200,000
 and Chief Executive Officer(1)

V. Lynn Graybill, former Chairman       1997        $131,250      $  -0-              -0-             -0-
of the Board, Chief Executive           1996        $121,731      $15,000(4)          -0-             -0-
 Officer and President(3)

</TABLE>

-------------------
(1)  Effective January 13, 1999,  Robert M. Aubrey resigned as President,  Chief
     Executive  Officer and a member of the Board of  Directors  of the Company.
     See "--Employment Agreements and Related Matters."
(2)  Principally housing and transportation allowance.
(3)  Effective  January 15, 1998, V. Lynn  Graybill  resigned as Chairman of the
     Board,   Chief  Executive  Officer  and  President  of  the  Company.   See
     "--Employment Agreements and Related Matters."
(4)  Represents  a signing  bonus equal to 10% of Mr.  Graybill's  base  salary,
     which was paid by issuing Mr. Graybill 140,000  restricted shares of Common
     Stock of the Company.

Employment Agreements and Related Matters

         In January  1999,  Charles  Brister  was  elected  President  and Chief
Executive  Officer of the Company.  He will receive an annual salary of $150,000
to be paid  after the end of the year in shares of the  Company's  Common  Stock
based  on a  formula  to be  determined  by the  Board of  Directors.  Effective
February,  2000,  Mr. Brister will receive his annual salary in cash. On October
19, 1999,  the Company's  Board of Directors  ratified an  Employment  Agreement
dated August 1, 1999 with Charles  Brister to serve as the  Company's  President
and Chief Executive  Officer for a period of three years  beginning  February 1,
1999,  with an automatic  one year  extension  unless  either the Company of the
President  provides  a thirty  (30)  day  written  notice  not to  continue  the
Agreement.  This  Agreement  provides  the  President  with an annual  salary of
$150,000  per year,  payable  in either  common  stock of the  Company  or cash.
Further,  the President was granted  450,000  options to purchase  shares of the
Company's  common stock at 100% of the closing bid price of the Company's common
stock on the date of  ratification  and the options vest as follows:  100,000 at
the ratification date of this Agreement,  150,000 on the second anniversary date
of this Agreement;  and 200,000 on the third anniversary date of this Agreement.
Additionally,  the  President  may be eligible to receive an annual  bonus which
shall be in the form of (a)  options  to  purchase  up to  50,000  shares of the
Company's common stock,  which shall vest immediately upon grant and expire five
years  from the grant date and (b) cash,  not to exceed  15% of the  President's
base salary.

         Effective  January  30,  1998,  the  Company  entered  into  three-year
Employment Agreement (the "Employment Agreement") with Robert M. Aubrey, whereby
Mr.  Aubrey  agreed to serve as  President  and Chief  Executive  Officer of the
Company. The Employment Agreement provided Mr. Aubrey with an annual base salary
of  $150,000  and  options  to  purchase  200,000  shares of Common  Stock at an
exercise price of $3.25 per share. See "-- Stock Options."

         Effective  January 13, 1999,  Robert M. Aubrey  resigned as  President,
Chief Executive  Officer and as a director of the Company.  On January 20, 1999,
the Company and Mr.  Aubrey  entered  into a Settlement  Agreement  and Full and
Final  Release  of All  Claims  (the  "Aubrey  Agreement")  for the  purpose  of
satisfying and  discharging  all  obligations of the Company to Mr. Aubrey under
the Employment  Agreement.  The Aubrey Agreement provides that the Company shall
forgive up to $19,000 of  non-reimbursable  expenses  incurred by Mr. Aubrey and
pay to Mr.  Aubrey  one  week  of  earned  vacation.  In  consideration  for the
foregoing,   Mr.   Aubrey   agreed  to  adhere   to  the   non-competition   and
non-solicitation  covenants set forth in the Employment  Agreement until January
13, 2001. As part of his separation from the Company,  the Company issued to Mr.
Aubrey options to purchase  15,000 shares of Common Stock at an option  exercise
price of $1.06 per share which  options  were  granted to replace the options to
purchase  200,000 shares of Common Stock that were canceled at  separation.  The
options are vested and expire on January 20, 2004.

                                      -27-

<PAGE>


         In January 1998,  V. Lynn  Graybill  resigned as Chairman of the Board,
Chief  Executive  Officer  and  President  of the  Company.  The Company and Mr.
Graybill entered into a Mutual Release and Separation  Agreement,  dated January
15,  1998  (the  "Graybill  Agreement"),  for  the  purpose  of  satisfying  and
discharging  all  obligations of the Company to Mr.  Graybill under the terms of
Mr. Graybill's  Employment  Agreement,  dated March 15, 1996. Under the terms of
the Graybill  Agreement,  the Company paid to Mr. Graybill a one time payment of
$208,100 (the "Severance Amount"). As additional consideration for the Severance
Amount,   Mr.   Graybill   agreed   to  adhere   to  the   non-competition   and
non-solicitation  covenants contained in his Employment  Agreement until January
15, 2001.

         To provide for  continuity  of  management,  the Company may enter into
employment agreements with other members of its executive management staff.

Stock Options

         In July 1996,  the Company  issued to 30  employees,  who were  neither
officers  nor  directors  of the  Company,  options to purchase an  aggregate of
59,355  shares of Common  Stock at an exercise  price of $5.63 per share,  which
options are currently exercisable and expire at various times during 2001.

         In January  1997,  the  Company  issued to an  officer  of the  Company
options to purchase  6,667 shares of Common Stock at an exercise price of $4.875
per share,  which options are  exercisable  and expire on January 30, 2002.  The
Company also issued to employees, who were neither officers nor directors of the
Company, options to purchase an aggregate of 52,670 shares of Common Stock at an
exercise  price of $4.875 per share,  which  options  are also  exercisable  and
expire on January 30, 2002.

         During the fiscal year ended December 31, 1998, the Company  granted to
certain of its employees  options to purchase an aggregate of 265,000  shares of
Common Stock at exercise  prices  ranging  from $1.06 to $3.50 per share,  which
options expire  periodically  from January 31 to December 31, 2003. Of the total
number of options issued during fiscal 1998,  options to purchase 200,000 shares
of Common Stock were issued to Robert M.  Aubrey,  which  options were  canceled
upon Mr.  Aubrey's  resignation  as an officer  and  director  of the Company in
January 1999,  and an aggregate of 35,000  options were granted  pursuant to the
Company's 1998 Stock Compensation Plan. See "-- 1998 Stock Compensation Plan."

         During the fiscal year ended December 31, 1999, the Company  granted to
certain of its employees  options to purchase an aggregate of 120,000  shares of
Common Stock at exercise  prices  ranging from $0.375 to $0.31 per share,  which
options  expire  periodically  from October 19, 2004 to December  31,  2004.  In
addition,  the Company granted Mr. Aubrey an option to purchase 15,000 shares of
Common Stock at an exercise price of $1.06 per share which expire on January 20,
2004 as part of his resignation  settlement;  to Charles Brister,  President and
CEO of the  Company,  options to purchase  450,000  shares of Common Stock at an
exercise  price of $0.375 per share,  which  options  expire  periodically  from
October 19, 2004 through October 19, 2006, and to Richard Jones, Chief Financial
Officer of the Company, options to purchase 225,000 shares of Common Stock at an
exercise  price of $0.375 per share,  which  options  expire  periodically  from
October 19, 2004 through October 19, 2006.

                                      -28-

<PAGE>

<TABLE>

<CAPTION>

                        Option/Grants in Last Fiscal Year

        Name/Title             Number of Securities   Percent of Total Options   Exercise Price   Expiration Date
                                Underlying Options     Granted to Employees in      ($/sh)
                                     Granted                Fiscal 1998
---------------------------    --------------------   ------------------------   --------------   ---------------
<S>                            <C>                    <C>                        <C>              <C>
Charles Brister, President            450,000                  55.6                 $  0.375      See footnote (1)
and Chief Executive Officer

-----------------------
(1) The options to purchase the listed shares expire  periodically  from October
19, 2004 through October 19, 2006.

                     Aggregate Fiscal Year-End Option Values


                                       Number of                     Value of
                                      Securities                  Unexercised No
                                      Underlying                   Market Value
                                      Unexercised                   Options at
                                      Options at                  Fiscal Year End
                                    Fiscal Year-End

        Name/Title            Exercisable   Unexercisable   Exercisable   Unexercisable
---------------------------   -----------   -------------   -----------   -------------

Charles Brister, President      100,000        350,000        $37,500       $131,250
and Chief Executive Officer

</TABLE>

         The exercise  price per share of all options  issued by the Company was
based on the closing bid price of the Company's Common Stock as quoted on either
the NASD  Electronic  Bulletin Board or the Nasdaq  SmallCap  Market system,  as
applicable, on the date of grant of such options.

1998 Compensation Plan

         On May 27,  1998,  the  stockholders  of the Company  approved the 1998
Stock  Compensation Plan of Karts  International  Incorporated (the "1998 Plan")
and reserved  1,000,000  shares of Common Stock for issuance under the plan. The
1998 Plan terminates on April 1, 2008 unless previously  terminated by the Board
of Directors.  The 1998 Plan is administered by the Compensation  Committee (the
"Committee")  or the entire  Board of Directors  as  determined  by the Board of
Directors.

         Eligible  participants  in the 1998 Plan include  full time  employees,
directors  and  advisors of the Company and its  subsidiaries.  Options  granted
under the 1998  Plan are  intended  to  qualify  as  "incentive  stock  options"
pursuant to the provisions of Section 422 of the Internal  Revenue Code of 1986,
as amended (the "Code"),  or options  which do not  constitute  incentive  stock
options ("nonqualified options") as determined by the Committee.

         Under the 1998  Plan the  Company  may also  grant  "Restricted  Stock"
awards.  "Restricted Stock" represents shares of Common Stock issued to eligible
participants under the 1998 Plan subject to the satisfaction by the recipient of
certain  conditions  and  enumerated  in the  specific  Restricted  Stock grant.
Conditions  which may be imposed  include,  but are not  limited  to,  specified
periods of  employment,  attainment  of personal  performance  standards  or the
overall performance of the Company.  The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1998 Plan to promote
the development of the Company,  and may be used by the Company as another means
of attracting and retaining  qualified  individuals to serve as employees of the
Company or its subsidiaries.

                                      -29-

<PAGE>


         Incentive stock options may be granted only to employees of the Company
or a subsidiary  who, in the judgment of the Committee,  are responsible for the
management or success of the Company or a subsidiary and who, at the time of the
granting of the incentive stock option, are either an employee of the Company or
a  subsidiary.  No incentive  stock option may be granted under the 1998 Plan to
any individual who would,  immediately  before the grant of such incentive stock
option,  directly or  indirectly,  own more than ten percent  (10%) of the total
combined  voting  power of all classes of stock of the  Company  unless (i) such
incentive  stock  option is granted at an option price not less than one hundred
ten  percent  (110%)  of the fair  market  value of the  shares  on the date the
incentive  stock option is granted and (ii) such incentive  stock option expires
on a date not later than five years from the date the incentive  stock option is
granted.

         The purchase  price of the shares of the Common Stock offered under the
1998 Plan must be one hundred  percent  (100%) of the fair  market  value of the
Common Stock at the time the option is granted or such higher  purchase price as
may be determined by the Committee at the time of grant;  provided,  however, if
an incentive  stock option is granted to an  individual  who would,  immediately
before the grant,  directly or indirectly own more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company, the purchase
price of the shares of the Common Stock covered by such  incentive  stock option
may not be less than one hundred ten percent  (110%) of the fair market value of
such shares on the day the  incentive  stock  option is  granted.  If the Common
Stock is listed upon an established stock exchange or exchanges, the fair market
value of the Common Stock shall be the highest closing price of the Common Stock
on the day the option is granted  or, if no sale of the Common  Stock is made on
an  established  stock  exchange on such day, on the next preceding day on which
there  was a sale of such  stock.  If there is no market  price  for the  Common
Stock,  then the Board of  Directors  and the  Committee  may,  after taking all
relevant facts into consideration, determine the fair market value of the Common
Stock.

         Options are exercisable in whole or in part as provided under the terms
of the  grant,  but in no  event  shall  an  option  be  exercisable  after  the
expiration of ten years from the date of grant.  Except in case of disability or
death, no option shall be exercisable after an optionee ceases to be an employee
of the Company,  provided that the Committee  shall have the right to extend the
right to exercise for a period not longer than three months  following  the date
of  termination  of an optionee's  employment.  If an  optionee's  employment is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year  following the date of termination of the
optionee's  employment.  If an optionee  dies while in the employ of the Company
and shall not have fully exercised his options,  the options may be exercised in
whole or in part at any time within one year after the  optionee's  death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.

         Under the 1998 Plan, an individual  may be granted one or more options,
provided that the aggregate fair market value (determined at the time the option
is granted) of the shares covered by incentive  options which may be exercisable
for the first time during any  calendar  year shall not exceed  $100,000.  There
presently are outstanding  options to purchase 855,000 shares of Common Stock at
prices ranging from $0.31 to $2.98 per share.

                                      -30-

<PAGE>

Compensation of Directors

         Each Director of the Company is entitled to receive annual compensation
of $6,000 for  attendance  of meetings of the Board of  Directors of the Company
and for serving on any committees of the Board of Directors of the Company.  The
Chairman  of the  Board of the  Company  is also  entitled  to  receive  monthly
compensation of $5,000 for every month in which such  individual  serves in such
capacity.  The Company  will  reimburse  directors  for  out-of-pocket  expenses
incurred for attending meetings.

Meetings and Committees of the Board of Directors

         The business of the Company is managed under the direction of the Board
of Directors.  The Board of Directors met on five occasions during calendar 1999
and acted by unanimous  consent in lieu of meeting on one occasions  during such
period.

         The Board of Directors of the Company has  established  a  Compensation
Committee and Audit Committee.  The Compensation Committee makes recommendations
to the Board of Directors  regarding the compensation of executive  officers and
administers  the Company's  employee  benefit  plans,  if any. The  Compensation
Committee met on two occasions  during  calendar  1999.  The Audit  Committee is
comprised  of a majority  of  independent  directors  and its  functions  are to
recommend to the Board of Directors the engagement of the Company's  independent
public  accountants,  review with such accountants the plans for and the results
and scope of their  auditing  engagement  and certain other matters  relating to
their  services as  provided  to the  Company.  The Audit  Committee  met on one
occasions during calendar 1999.

                                      -31-

<PAGE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

         The following table sets forth certain  information with respect to the
ownership of the  Company's  shares of Common Stock as of March 24, 2000 by each
of its  directors,  executive  officers  and  persons  known by the  Company  to
beneficially  own 5% or more of the  outstanding  shares of the Common Stock and
all executive officers and directors as a group.
                                                                   Percentage of
                                                        Shares         Shares
                          Name(1)                    Beneficially   Beneficially
                          ------                        Owned          Owned
                                                     ------------  -------------

Charles Brister(2)...................................   674,007         11.4
Richard N. Jones(3)..................................    67,924          1.2
Lawrence E.  Schwall, III(4).........................    30,297           *
Joseph R. Mannes(5)..................................    67,364          1.2
Ronald C. Morgan(5)..................................     6,964           *
Gary C. Evans(6).....................................    54,744           *
Timothy P. Halter(7).................................   578,260         10.0
Halter Financial Group, Inc.(7)......................   578,260         10.0
Schlinger Foundation(8)..............................   592,581         10.2
Linda S. Neubauer(9).................................   337,838          5.8
Officers and directors as a group (7 persons)(10).... 1,479,560         24.6

------------------
*Less than 1%.
(1)  Unless otherwise indicated,  each person named in the table has sole voting
     and investment power with respect to the shares  beneficially  owned. Also,
     unless otherwise indicated, the address of each beneficial owner identified
     below is: c/o Karts  International  Incorporated,  62204 Commercial Street,
     P.O. Box 695, Roseland, Louisiana 70456.
(2)  Includes  options to purchase 100,000 shares of Common Stock at an exercise
     price of $0.375 per share  exercisable  until October 19, 2004. Mr. Brister
     is the President,  Chief  Executive  Officer and a director of the Company.
     See "Certain Relationships and Related Transactions."
(3)  Includes  options to purchase  60,000 shares of Common Stock at an exercise
     price of $1.50 to $0.375  per share  exercisable  until  October 1, 2003 or
     October 19, 2004. Mr. Jones is the Vice President, Administration and Chief
     Financial Officer of the Company.
(4)  Includes  options to purchase  26,667 shares of Common Stock at an exercise
     price of $4.875 to $0.31 per share  exercisable  until  January 30, 2002 or
     December 31, 2004.  Mr. Schwall is Vice  President,  Sales and Marketing of
     the Company.
(5)  Messrs. Mannes and Morgan are directors of the Company.
(6)  Mr. Evans is a director of the Company.  Includes  20,001  shares of Common
     Stock underlying warrants owned by Mr. Evans.
(7)  Mr.  Halter,  the  Chairman  of the Board,  Secretary  and  director of the
     Company,  is  the  sole  stockholder,  director  and  president  of  Halter
     Financial  Group,  Inc.  ("HFG") and is therefore deemed to have beneficial
     ownership of the shares of Common  Stock held by HFG. HFG and Mr.  Halter's
     address is 14160  Dallas  Parkway,  Suite 950,  Dallas,  Texas  75240.  See
     "Certain Relationships and Related Transactions."
(8)  The Schlinger  Foundation's address is c/o Evert Schlinger,  Trustee,  1944
     Edison Street, Santa Ynez, California 93460.
(9)  Ms. Neubauer's  address is 487 John Anderson Drive,  Ormond Beach,  Florida
     32174.
(10) Includes  20,001 shares of Common Stock  underlying  warrants  owned by Mr.
     Evans,  options to purchase  26,667  shares of the  Company's  Common Stock
     granted to Mr. Schwall., options to purchase 60,000 shares of the Company's
     Common Stock granted to Mr. Jones and options to purchase 100,000 shares of
     the Company's Common Stock granted to Mr. Brister.

                                      -32-

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

         In March 1996,  the Company in a private  sale sold  233,333  shares of
Common Stock to 13 investors  (the  "Investors")  for $525,000  (the "March 1996
Offering").  In  connection  with the March 1996  Offering,  the Company and HFG
agreed to issue  additional  shares of Common Stock to the Investors if on March
31, 1998 (the "Offering  Valuation  Date") the average  closing bid price of the
Common  Stock  for the 10  trading  days  prior to and  including  the  Offering
Valuation  Date (the "Stock  Market  Value")  did not equal or exceed  $4.50 per
share, such that each Investor would receive for no additional  consideration an
additional  number of shares of Common  Stock  necessary  to increase  the Stock
Market  Value per share of the Common  Stock  acquired  to $4.50 per share.  HFG
placed into escrow 233,333  shares of Common Stock (the "HFG Escrow  Shares") to
be issued to  Investors  if an  adjustment  was  required.  Based upon the Stock
Market Value of the Company  Stock on the  Offering  Valuation  Date,  Investors
received an aggregate of 95,624 HFG Escrow  Shares.  The  remaining  137,709 HFG
Escrow Shares were released from escrow and delivered to HFG.

         The Company and Mr.  Brister  have  entered  into a Real Estate  Option
Right of First Refusal Agreement for the Roseland  facility.  Under the terms of
this agreement,  the Company may, at its sole option, purchase the real property
and  improvements  for $550,000.  The option  expires on December 31, 2000.  The
Company  and Mr.  Brister  have  also  entered  into a lease  agreement  for the
Roseland manufacturing facility,  including the corporate offices, which expires
in 2000.  The monthly  lease  payment for the  Roseland  facility is $6,025 with
certain adjustments. The Company believes these terms are comparable to existing
market rates in the region.

         On March 17,  1999,  the  Company  executed  a  promissory  note in the
principal  amount of $200,000 to Charles  Brister,  the Company's  President and
Chief  Executive  Officer.  Interest  at 8% per annum is  payable  monthly  with
principal  due at the earlier of receipt by the Company of at least $1.5 million
from the sale of equity or June 17, 1999. Mr. Brister  converted the amount owed
on this note and subsequent  loans into shares of the 9%  Convertible  Preferred
Stock sold through the Private Placement dated March 31, 1999.

         The Company believes that all the foregoing related-party  transactions
were on terms no less favorable to the Company than could reasonably be obtained
from unaffiliated third parties. All future transactions with affiliates will be
approved by a majority of disinterested directors of the Company and on terms no
less  favorable  to the Company  than those that are  generally  available  from
unaffiliated third parties.

                                      -33-

<PAGE>


                                                       PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
         ------------------------------------------------------

(a)(1)   Financial Statements: See Index to Consolidated Financial Statements on
         page F-2.

(a)(2)   Exhibits:


Exhibit
Number                         Description of Exhibit
------                         ----------------------

2.1*      Agreement  and Plan of Merger,  dated April 16,  1996,  by and between
          Sarah Acquisition Corporation and the Company.

2.2*      Stock Purchase Agreement,  dated January 16, 1996, by and among Halter
          Financial  Group,  Inc. on behalf of the  Company,  Brister's  Thunder
          Karts,  Inc., and Charles Brister  (Schedules  have been omitted,  but
          will be furnished to the Commission upon request).

2.3*      Amendment to Stock  Purchase  Agreement,  dated March 15, 1996, by and
          among Halter Financial Group, Inc. on behalf of the Company, Brister's
          Thunder Karts, Inc., and Charles Brister (Schedules have been omitted,
          but will be furnished to the Commission upon request).

2.4*      Stock  Purchase  Agreement,  dated  October 4, 1996,  by and among the
          Company,  USA Industries,  Inc., Jerry Michael Allen, Angela T. Allen,
          Johnny C. Tucker,  and Carol Y. Tucker  (Schedules  have been omitted,
          but will be furnished to the Commission upon request).

2.5*      Consulting  Agreement,  dated January 16, 1996, by and between  Halter
          Financial Group, Inc. and Sarah Acquisition Corporation.

3.1*      Articles of Incorporation of the Company.

3.2*      Bylaws of the Company.

3.3*      Certificate to Decrease Authorized Shares of Common Stock, dated March
          12, 1997.

4.1*      Specimen of Common Stock Certificate.

4.2*      Form of Warrant Agreement covering the Warrants.

4.3*      Form of Redeemable Common Stock Purchase Warrants issued in connection
          with the sale of the Warrants.

4.4*      Form  of  Redeemable  Common  Stock  Purchase  Warrant  issued  in the
          Company's private offering of Units,  completed November 15, 1996 (the
          "1996 Warrants").

4.5*      Form of Common Stock Purchase Warrant issued in the Company's offering
          of Units  pursuant to Rule 504,  completed  July 2, 1996 (the "Class A
          Warrants").

4.6*      Certificate of  Designation  Establishing  Series of Preferred  Stock,
          filed with the Secretary of State of Nevada on November 15, 1996.

4.7*      Specimen of Convertible Preferred Stock Certificate.

4.8       Form of Stock Warrant issued on March 8, 1999 to KBK Financial, Inc.

10.1*     Lease  Agreement,  dated  March 18,  1996,  by and  between  Northpark
          Properties, L.L.C. and the Company.

10.2*     License  Agreement,  dated March 15, 1996,  by and between the Company
          and Charles Brister.

                                      -34-

<PAGE>

10.3*     Addendum  "A" to  License  Agreement,  dated  March 15,  1997,  by and
          between the Company and Charles Brister.

10.4*     Royalty  Agreement,  dated March 15, 1997,  by and between the Company
          and Charles Brister.

10.5*     $1,000,000 Subordinated Promissory Note, dated March 15, 1996, payable
          to Charles  Brister,  executed by Brister's  Thunder  Karts,  Inc., as
          maker.

10.6*     $200,000  Promissory  Note,  dated  April 1, 1996,  payable to Charles
          Brister, executed by the Company, as maker.

10.7*     Commercial  Security  Agreement,  by and  among  Charles  Brister,  as
          secured party,  Brister's Thunder Karts, Inc., as borrower, and Robert
          W. Bell and Gary C. Evans, as pledgors.

10.8*     $2,000,000  Promissory  Note,  dated  March 15,  1996,  payable to The
          Schlinger  Foundation,  executed  by the  Company,  as  maker,  and by
          Brister's Thunder Karts, Inc., as pledgor.

10.9*     Commercial Security Agreement,  by and among The Schlinger Foundation,
          as secured  party,  the Company,  as borrower,  and Brister's  Thunder
          Karts, Inc., as pledgor.

10.10*    Vendor Agreement,  dated June 5, 1996, by and between Wal-Mart Stores,
          Inc. and Brister's Thunder Karts, Inc.

10.11*    Vendor  Agreement,  dated September 30, 1996, by and between  Wal-Mart
          Stores, Inc. and USA Industries, Inc.

10.12*    Floor Plan  Agreement,  dated September 9, 1996, by and among Deutsche
          Financial  Services  Corporation,  the Company,  and Brister's Thunder
          Karts, Inc.

10.13*    Guaranty of Vendor,  dated September 9, 1996,  executed by the Company
          and  Brister's  Thunder  Karts,  Inc. in favor of  Deutsche  Financial
          Services Corporation.

10.14*    Employment Agreement, as amended, dated March 15, 1996, by and between
          the Company and V. Lynn Graybill.

10.15*    Consulting  Engagement Letter, dated February 19, 1997, by and between
          Charles Brister, as consultant, and the Company.

10.16*    Letter  Agreement,  dated  January  21,  1997,  by and  between  Bobby
          Labonte, as national spokesman for the Company, and the Company.

10.17*    Consulting Agreement, dated March 16, 1997, by and between the Company
          and Halter Financial Group, Inc.

10.18*    Form of Private Placement  Subscription  Participation  Option Notice,
          dated March 6, 1997,  relating to the Company's  November 1996 private
          offering.

10.19*    $300,000  Universal  Note,  dated August 13, 1996,  payable to Deposit
          Guaranty National Bank,  executed by Brister's Thunder Karts, Inc., as
          borrower.

10.20*    Security  Agreement,  dated August 13, 1996, by and between  Brister's
          Thunder Karts, Inc., as debtor, and Deposit Guaranty National Bank, as
          secured party,  relating to the $300,000  Universal Note referenced as
          Exhibit 10.19.

10.21*    Collateral  Pledge  Agreement,  dated  August 13,  1996,  by Brister's
          Thunder Karts,  Inc., as pledgor,  relating to the $300,000  Universal
          Note referenced as Exhibit 10.19.

10.22*    Guaranty,   dated  August  13,  1996,  executed  by  the  Company,  as
          guarantor,  for the  benefit of Deposit  Guaranty  National  Bank,  as
          lender,  and Brister's Thunder Karts,  Inc., as borrower,  relating to
          the $300,000 Universal Note referenced as Exhibit 10.19.

                                      -35-

<PAGE>

10.23*    $500,000  Loan  Agreement,  dated  October 1, 1996, by and between USA
          Industries,  Inc., as debtor,  and Deposit  Guaranty  National Bank of
          Louisiana,  as secured party,  relating to the $500,000 Universal Note
          referenced as Exhibit 10.24.

10.24*    $500,000  Universal  Note,  dated  October 1, 1996, by and between USA
          Industries,  Inc., as borrower, and Deposit Guaranty National Bank, as
          lender.

10.25*    Security  Agreement,  dated  October  1,  1996,  by  and  between  USA
          Industries,  Inc., as debtor,  and Deposit  Guaranty  National Bank of
          Louisiana,  as secured party,  relating to the $500,000 Universal Note
          referenced as Exhibit 10.24.

10.26*    Financing Statement,  by and between USA Industries,  Inc., as debtor,
          and Deposit  Guaranty  National Bank of Louisiana,  as secured  party,
          relating to the Universal Note referenced as Exhibit 10.24.

10.27*    Guaranty,  dated  October 1,  1996,  executed  by Karts  International
          Incorporated,  as  guarantor,  for the  benefit  of  Deposit  Guaranty
          National  Bank,  as lender,  and USA  Industries,  Inc.,  as borrower,
          relating to the $500,000 Universal Note referenced as Exhibit 10.24.

10.28*    Placement Agency Agreement, dated November 8, 1996, by and between the
          Company and Argent Securities, Inc.

10.29*    Option  Agreement,  dated  March  15,  1996,  by and  between  Charles
          Brister, as seller, and Brister's Thunder Karts, Inc., as Purchaser.

10.30*    Lease of Commercial Property, dated September 27, 1995, by and between
          Charles  Brister,  as lessor,  and Brister's  Thunder Karts,  Inc., as
          lessee,  as  amended  by that  certain  Amended  Lease  of  Commercial
          Property,  dated  November 30, 1995,  as amended by that certain First
          Amendment to Lease of Commercial Property, dated March 15, 1996.

10.31*    Non-Competition  Agreement,  dated  March  15,  1996,  by and  between
          Charles Brister and the Company.

10.32*    Non-Competition  Agreement  (Louisiana),  dated March 15, 1996, by and
          between Charles Brister and the Company.

10.33*    Form of Non-Qualified  Stock Option Agreement  between the Company and
          the participants in the July 1996 Stock Option Plan.

10.34*    Form of Non-Qualified  Stock Option Agreement  between the Company and
          the participants in the January 1997 Stock Option Plan.

10.35*    Escrow  Agreement,  dated March 31,  1996,  between  Halter  Financial
          Group, Inc., Securities Transfer Corporation and the Company.

10.36*    Letter Agreement  between  Brister's  Thunder Karts,  Inc. and Deposit
          Guaranty  National  Bank  extending  the maturity date of the $300,000
          Universal Note referenced in Exhibit 10.19.

10.37*    Letter  Agreement  between The Schlinger  Foundation  and the Company,
          dated August 28, 1997,  regarding the  conversion of $1 million of the
          principal  amount of the Schlinger  Note into 250,000 shares of Common
          Stock.

                                      -36-

<PAGE>

10.38**   Employment  Agreement,  dated  January  30,  1998,  by and between the
          Company and Robert M. Aubrey.

10.39     Loan Agreement dated September 28, 1998 by and between the Company and
          KBK Financial, Inc.

10.40     First  Amendment to Loan Agreement  dated March 8, 1999 by and between
          the Company,  USA Industries,  Inc., KINT,  L.L.C.,  Brister's Thunder
          Karts, Inc. and KBK Financial, Inc.

10.41     Revolving  Credit  Promissory  Note  (Inventory)  dated  March 8, 1999
          executed in favor of KBK Financial, Inc. by the Company.

10.42     Revolving Credit Promissory Note (Accounts  Receivable) dated March 8,
          1999 executed in favor of KBK Financial, Inc. by the Company.

21.1      Subsidiaries of the Company.

27.1      Financial Data Schedule.


*     Previously filed as an exhibit to the Company's  Registration Statement on
      Form SB-2 (SEC File No. 333-24145) and incorporated by reference herein.
**    Previously  filed as an exhibit  to the  Company's  Annual  Report on Form
      10-KSB for the fiscal year ended December 31, 1997, as filed with the U.S.
      Securities and Exchange Commission on March 30, 1998.

(b)   Reports on Form 8-K:  No  Reports  on  Form  8-K were filed by the Company
      during the last quarter of 1999.


                                   SIGNATURES

         Pursuant  to the  requirements  of Section  13 or Section  15(d) of the
Securities  Exchange Act of 1934,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly authorized, on March
30, 2000.

KARTS INTERNATIONAL INCORPORATED
                     (Registrant)

By: /s/ Charles Brister                 By: /s/ Richard N. Jones
    ---------------------------------   ------------------------------------
    Charles Brister, President, Chief   Richard N. Jones
    Executive Officer and Director      Vice President, Administration and Chief
                                        Financial Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following  persons in the  capacities and on
the dates indicated:

       Signature                       Title                          Date
       ---------                       -----                          ----

/s/ Charles Brister      President, Chief Executive Officer      March 30, 2000
---------------------    and Director
    Charles Brister


/s/ Timothy P. Halter    Chairman of the Board, Secretary        March 30, 2000
---------------------    and Director
    Timothy P. Halter


/s/ Richard N. Jones     Vice President, Administration and      March 30, 2000
---------------------    Chief Financial Officer
    Richard N. Jones


/s/ Joseph R. Mannes     Director                                March 30, 2000
---------------------
    Joseph R. Mannes


/s/ Ronald C. Morgan     Director                                March 30, 2000
---------------------
    Ronald C. Morgan


/s/ Gary C. Evans        Director                                March 30, 2000
---------------------
    Gary C. Evans

                                      -37-

<PAGE>

                               KARTS INTERNATIONAL
                                  INCORPORATED
                                AND SUBSIDIARIES

                              Financial Statements
                                       and
                                Auditor's Report

                           December 31, 1999 and 1998









                               S. W. HATFIELD, CPA
                          certified public accountants

                      Use our past to assist your future sm


<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

                                    CONTENTS


                                                                           Page
                                                                           ----

Report of Independent Certified Public Accountants                          F-3

Consolidated Financial Statements

   Consolidated Balance Sheets
     as of December 31, 1999 and 1998                                       F-4

   Consolidated Statements of Operations and Comprehensive Income
     for the years ended December 31, 1999 and 1998                         F-6

   Consolidated Statement of Changes in Shareholders' Equity
     for the years ended December 31, 1999 and 1998                         F-7

   Consolidated Statements of Cash Flows
     for the years ended December 31, 1999 and 1998                         F-8

   Notes to Consolidated Financial Statements                               F-10





                                                                             F-2

<PAGE>


S. W. HATFIELD, CPA
certified public accountants

Member:    American Institute of Certified Public Accountants
               SEC Practice Section
               Information Technology Section
           Texas Society of Certified Public Accountants


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------


Board of Directors and Shareholders
Karts International Incorporated

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Karts
International  Incorporated  (a  Nevada  corporation)  and  Subsidiaries  as  of
December 31, 1999 and 1998 and the related consolidated statements of operations
and  comprehensive  income,  changes in shareholders'  equity and cash flows for
each of the years then ended. These financial  statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by management,  as well as evaluating  the overall  consolidated
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Karts International
Incorporated  and  Subsidiaries  as of  December  31,  1999  and  1998,  and the
consolidated  results of its operations and its cash flows for each of the years
then ended in conformity with generally accepted accounting principles.




                                                 S. W. HATFIELD, CPA
Dallas, Texas
March 24, 2000 (except for Note B
   as to which the date is March 31, 2000)




                      Use our past to assist your future sm

P. O. Box 820395                               9002 Green Oaks Circle, 2nd Floor
Dallas, Texas  75382-0395                               Dallas, Texas 75243-7212
214-342-9635 (voice)                                          (fax) 214-342-9601
800-244-0639                                                      SWHCPA@aol.com
                                       F-3

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1999 and 1998


                                     ASSETS
                                     ------
                                                              1999           1998
                                                          -----------    -----------
<S>                                                       <C>            <C>
Current assets
   Cash on hand and in bank                               $   399,639    $   163,690
   Accounts receivable
     Trade, net of allowance for doubtful accounts
       of $198,065 and $90,500, respectively                2,485,561      2,310,707
     Other                                                     16,473         40,395
   Inventory                                                2,214,678      2,129,949
   Prepaid expenses                                           350,606        214,231
                                                          -----------    -----------
     Total current assets                                   5,466,957      4,858,972
                                                          -----------    -----------

Property and equipment - at cost                            2,458,695      2,156,138
   Accumulated depreciation                                  (522,023)      (288,741)
                                                          -----------    -----------
                                                            1,936,672      1,867,397
   Land                                                        32,800         32,800
                                                          -----------    -----------
     Net property and equipment                             1,969,472      1,900,197
                                                          -----------    -----------

Other assets
   Deposits and other                                          50,785         21,276
   Note receivable                                            415,685        378,113
   Option to acquire an unrelated entity                      138,001        123,544
   Covenant not to compete, net of accumulated
     amortization of approximately $38,889 and
     $5,556, respectively                                      61,111         94,444
   Organization costs, net of accumulated amortization
     of approximately $82,691 and $60,841, respectively        26,564         48,414
                                                          -----------    -----------
     Total other assets                                       692,146        665,791
                                                          -----------    -----------

TOTAL ASSETS                                              $ 8,128,575    $ 7,424,960
                                                          ===========    ===========

</TABLE>

                                  - Continued -


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-4

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS - CONTINUED
                           December 31, 1999 and 1998


                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------
                                                                   1999            1998
                                                              ------------    ------------
<S>                                                           <C>             <C>
Current liabilities
   Cash overdraft                                             $       --      $      9,153
   Notes payable to banks and others                             2,724,005       1,564,715
   Notes payable to affiliates                                     229,395         123,875
   Current maturities of long-term debt                             57,482          35,289
   Accounts payable - trade                                      2,068,404       2,963,279
   Other accrued liabilities
     Accrued payroll, payroll taxes and sales taxes payable        306,735         131,610
     Accrued reorganization and relocation expenses                   --           288,848
     Other                                                         299,290         257,912
   Federal and State income taxes payable                             --              --
                                                              ------------    ------------
     Total current liabilities                                   5,685,311       5,374,681
                                                              ------------    ------------

Long-term liabilities
   Notes payable, net of current maturities
     Long-term debt, net of current maturities                     266,100         242,406
     Banks and individuals                                       1,500,000            --
                                                              ------------    ------------
     Total liabilities                                           7,451,411       5,617,087
                                                              ------------    ------------

Commitments and contingencies

Shareholders' Equity Preferred stock - $0.001 par value
     10,000,000 shares authorized;
     1,550,000 and -0- issued and
      outstanding, respectively                                      1,550            --
   Common stock - $0.001 par value
     14,000,000 shares authorized;
     5,574,298 and 5,574,298 shares
     issued and outstanding, respectively                            5,574           5,574
   Additional paid-in capital                                   15,611,373      14,377,782
   Accumulated deficit                                         (14,941,333)    (12,575,483)
                                                              ------------    ------------
     Total shareholders' equity                                    677,164       1,807,873
                                                              ------------    ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                    $  8,128,575    $  7,424,960
                                                              ============    ============

</TABLE>



The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-5

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                           December 31, 1999 and 1998


                                                                1999            1998
                                                           ------------    ------------
<S>                                                        <C>             <C>
Revenues
   Kart sales - net                                        $ 11,997,785    $  8,219,646
                                                           ------------    ------------

Cost of sales
   Purchases                                                  7,979,959       5,401,509
   Direct labor                                               1,314,202       1,372,935
   Other direct costs                                         2,036,030       1,925,806
                                                           ------------    ------------
     Total cost of sales                                     11,330,191       8,700,250
                                                           ------------    ------------

Gross profit                                                    667,594        (480,604)
                                                           ------------    ------------

Operating expenses
   Research and development expenses                              7,775          29,770
   Selling expenses                                             459,253         538,309
   General and administrative expenses
     Salaries and related costs                               1,194,002         977,397
     Other operating expenses                                   974,389       1,224,194
   Compensation expense related to common
     stock issuances at less than "fair value"
      for reorganization, restructuring and
     consulting costs                                              --           413,412
   Depreciation and amortization                                139,976         321,309
                                                           ------------    ------------
     Total operating expenses                                 2,775,395       3,504,391
                                                           ------------    ------------

Loss from operations                                         (2,107,801)     (3,984,995)
                                                           ------------    ------------

Other income (expense)
   Interest expense                                            (396,219)        (92,416)
   Relocation and reorganization expenses                          --          (288,848)
   Impairment of future recoverability of goodwill                 --        (5,793,184)
   Interest and other income                                    155,314          71,808
                                                           ------------    ------------

Loss before income taxes                                     (2,348,706)    (10,087,635)

Provision for income taxes                                      (17,144)         14,760
                                                           ------------    ------------

Net loss                                                     (2,365,850)    (10,072,875)

Other comprehensive income                                         --              --
                                                           ------------    ------------

Comprehensive income                                       $ (2,365,850)   $(10,072,875)
                                                           ============    ============

Loss per weighted-average share of
   common stock outstanding, computed
   on net loss - basic and fully diluted                   $      (0.42)   $      (2.05)
                                                           ============    ============

Weighted-average number of shares
   of common stock outstanding - basic and fully diluted      5,574,298       4,920,702
                                                           ============    ============

</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-6

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                     Years ended December 31, 1999 and 1998

                                                Convertible                            Additional
                                              Preferred Stock        Common Stock        paid-in     Accumulated
                                             Shares     Amount     Shares     Amount     capital       deficit       Total
                                           ---------  ---------  ---------  ---------  -----------  ------------  -----------
<S>                                        <C>        <C>        <C>        <C>        <C>          <C>           <C>
Balances at January 1, 1998                        -  $       -  4,854,133  $   4,854  $13,040,090  $ (2,502,608) $10,542,336

"Fair value" adjustment related to
   sale of common  stock to related
   party for escrow agreement
   related to March 1996 private
   placement agreement                             -          -          -          -      641,315             -      641,315
     Less amounts related to costs
     and expenses of raising capital               -          -          -          -     (227,903)            -     (227,903)
Issuance of common stock for
   October 1998 acquisition of
     Straight Line Manufacturing, Inc.             -          -    182,648        183      399,817             -      400,000
   December 1998 payment of
      consulting fees                              -          -    109,589        109       49,891             -       50,000
   December 1998 acquisition of a
     note receivable from Daytona
     Superkarts, Inc.                              -          -    337,838        338      374,662             -      375,000
   December 1998 acquisition of an
     option to acquire 100.0% of the
     issued and outstanding stock of
     Daytona Superkarts, Inc.                      -          -     90,090         90       99,910             -      100,000
Net loss for the year                              -          -          -          -            -   (10,072,875) (10,072,875)
                                           ---------  ---------  ---------  ---------  -----------  ------------  -----------

Balances at December 31, 1998                      -          -  5,574,298      5,574   14,377,782   (12,575,483)   1,807,873

Proceeds from sale of
   Convertible Preferred Stock             1,550,000      1,550          -          -    1,548,450             -    1,550,000
     Less amounts related to costs
     and expenses of raising capital               -          -          -          -     (314,859)            -     (314,859)
Net loss for the year                              -          -          -          -            -    (2,365,850)  (2,365,850)
                                           ---------  ---------  ---------  ---------  -----------  ------------  -----------
Balances at December 31, 1999              1,550,000  $   1,550  5,574,298  $   5,574  $15,611,373  $(14,941,333) $   677,164
                                           =========  =========  =========  =========  ===========  ============  ===========

</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-7

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           December 31, 1999 and 1998


                                                                            1999            1998
                                                                       ------------    ------------
<S>                                                                    <C>             <C>
Cash flows from operating activities
   Net loss for the year                                               $ (2,365,850)   $(10,072,875)
   Adjustments to reconcile net loss to net
      cash provided by operating activities
       Depreciation and amortization                                        299,699         414,369
       Bad debt expense                                                     135,027          87,500
       Interest income accrued on note receivable                           (37,572)           --
       Reorganization and restructuring costs and related
          effect of common stock issuances at less than "fair value"           --           413,412
       Loss on abandonment of leasehold improvements                           --               717
       Impairment of future recoverability of goodwill                         --         5,793,184
       Payment of consulting fees with common stock                            --            50,000
   (Increase) Decrease in:
     Accounts receivable-trade and other                                   (285,960)     (1,937,205)
     Recoverable income taxes                                                  --           184,605
     Inventory                                                              (84,729)     (1,080,102)
     Prepaid expenses and other                                            (177,116)        (54,268)
   Increase (Decrease) in:
     Accounts payable                                                      (379,899)      2,520,118
     Other accrued liabilities                                             (587,321)        605,626
     Income taxes payable                                                      --          (137,710)
                                                                       ------------    ------------
Net cash used in operating activities                                    (3,483,721)     (3,212,629)
                                                                       ------------    ------------

Cash flows from investing activities
   Cash paid for property and equipment                                    (222,078)       (747,466)
   Cash acquired in acquisition of Straight Line Manufacturing, Inc.           --               746
   Cash paid for acquisition of Straight Line Manufacturing, Inc.              --           (82,280)
   Cash paid for covenant not to compete with former
     owner of Straight Line Manufacturing, Inc.                                --           (50,000)
   Cash paid to acquire option to purchase Daytona Superkarts, Inc.         (14,457)        (23,544)
                                                                       ------------    ------------
Net cash used in investing activities                                      (236,535)       (902,544)
                                                                       ------------    ------------

Cash flows from financing activities
   Increase (decrease ) in cash overdraft                                    (9,153)          9,153
   Net activity on bank and other lines of credit                         1,159,290       1,494,762
   Principal payments on long-term debt                                     (34,592)        (26,798)
   Cash received on debenture payable                                     1,500,000            --
   Cash received on notes payable to affiliates                             174,279            --
   Cash paid on notes payable to affiliates                                 (43,759)           --
   Cash received on sale of convertible preferred stock                   1,525,000            --
   Cash paid for brokerage and placement fees related
     to sale of convertible preferred stock                                (314,860)           --
                                                                       ------------    ------------
Net cash provided by financing activities                                 3,956,205       1,477,117
                                                                       ------------    ------------

Increase (decrease) in cash                                                 235,949      (2,638,056)

Cash at beginning of year                                                   163,690       2,801,746
                                                                       ------------    ------------

Cash at end of year                                                    $    399,639    $    163,690
                                                                       ============    ============

</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-8

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                           December 31, 1999 and 1998


                                                                1999        1998
                                                              ---------   ---------
<S>                                                           <C>         <C>
Supplemental disclosure of interest
   and income taxes paid
     Interest paid for the year                               $ 382,231   $  87,881
                                                              =========   =========
     Income taxes paid (refunded) for the year - net          $    --     $(199,345)
                                                              =========   =========

Supplemental disclosure of non-cash
   investing and financing activities

     Vehicles and equipment purchased with notes payable      $  80,479   $  55,295
                                                              =========   =========

     Acquisition price of Straight Line Manufacturing, Inc.
       settled with issuance of common stock                  $    --     $ 400,000
                                                              =========   =========

     Acquisition of a note receivable from Daytona
       Superkarts, Inc. with issuance of common stock         $    --     $ 375,000
                                                              =========   =========

     Acquisition of an option to acquire 100.0% of the
       issued and outstanding stock of Daytona Superkarts,
       Inc. with issuance of common stock                     $    --     $ 100,000
                                                              =========   =========


</TABLE>



The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                                                             F-9

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS

Karts  International  Incorporated  (Company)  was  originally  incorporated  on
February 28, 1984 as Rapholz  Silver Hunt,  Inc.  under the laws of the State of
Florida.  On February 23, 1996, the Company was  reincorporated  in the State of
Nevada by means of a merger with and into Karts  International  Incorporated,  a
Nevada  corporation  incorporated  on  February  21,  1996.  The Company was the
surviving  entity  and  changed  its  corporate  name  to  Karts   International
Incorporated.

The Company's  two principal  wholly-owned  subsidiaries  are Brister's  Thunder
Karts, Inc. (a Louisiana  corporation),  located in Roseland,  Louisiana and USA
Industries, Inc. (an Alabama corporation), located in Prattville, Alabama. These
two entities manufacture and sell "fun karts" through dealers,  distributors and
mass merchandisers.

On January 5, 1998,  the  Company  formed a new limited  liability  corporation,
KINT,  L.L.C.  (KINT) as a  wholly-owned  subsidiary.  This entity was activated
during  July 1998 for the  purpose  of  creating a sales and  marketing  company
focusing on the sale of customized  promotional  "fun karts" to various national
companies. This subsidiary conducted business operations under the trade name of
"Bird  Promotions".  In March 1999,  Company  management  ceased all  operations
within this subsidiary and consolidated these sales and marketing efforts within
other operating subsidiaries of the Company.

On October 27, 1998, effective at the close of business on October 31, 1998, the
Company  acquired  100.0% of the issued and  outstanding  stock of Straight Line
Manufacturing,  Inc. (a Michigan corporation) (Straight Line), a manufacturer of
large,  full  suspension  "fun karts"  located in Milford,  Michigan,  for total
consideration of approximately $400,000. This acquisition was accounted for as a
purchase.  In addition to the purchase  transaction,  the Company entered into a
covenant not to compete with the former  owner of Straight  Line  Manufacturing,
Inc.  for a period  of at least  three (3)  years  for  total  consideration  of
$100,000, consisting of $50,000 cash and a note payable for $50,000.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

The accompanying consolidated financial statements contain the accounts of Karts
International Incorporated and its wholly-owned subsidiaries,  Brister's Thunder
Karts,  Inc., USA Industries,  Inc., KINT, LLC and Straight Line  Manufacturing,
Inc.  All  significant  intercompany  transactions  have  been  eliminated.  The
consolidated entities are collectively referred to as Company.

For  segment  reporting  purposes,  the Company  operates  in only one  industry
segment and makes all operating  decisions and allocates  resources based on the
best benefit to the Company as a whole.

                                                                            F-10

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE B - LIQUIDITY CONTINGENCY

During the four years ended  December  31,  1999,  the  Company has  experienced
cumulative  net  losses  from  operations  and has  utilized  cash in  operating
activities of approximately  $7,000,000.  The Company's  continued  existence is
dependent upon its ability to generate  sufficient cash flows from operations to
support its daily operations as well as provide  sufficient  resources to retire
existing liabilities and obligations on a timely basis.

During  March 2000,  the Company has received  $505,000 in private  transactions
from  the  sale  of  common  stock  and has  commitments  for  approximately  an
additional $1,100,000 to provide working capital.

Further, during the first quarter of 2000, the Company has acquired an exclusive
OEM  licensing  agreement to  manufacture a line of "sport karts" for a domestic
manufacturer of personal watercraft and off-road vehicles.

Management  is of the opinion that these events will allow for the  provision of
adequate  liquidity for the subsequent 12 month period.  However,  if necessary,
there can be no  assurance  that the Company  will be able to obtain  additional
funding or, that such funding, if available, will be obtained on terms favorable
to or affordable by the Company.


NOTE C - ACQUISITION OF SUBSIDIARIES

On October 27, 1998, the Company  purchased 100.0% of the issued and outstanding
stock of Straight Line Manufacturing,  Inc. (a Michigan  corporation)  (Straight
Line) for a total purchase price of approximately  $400,000. The acquisition was
effective at the close of business on October 31, 1998.  The purchase  price was
paid  with  182,648  shares  of  restricted,  unregistered  common  stock of the
Company.  Straight  Line was  incorporated  as the  successor to a Michigan sole
proprietorship  on August 1, 1997 under the laws of the State of Michigan and in
the business of manufacturing  and marketing large,  full suspension "fun karts"
for the consumer market.  Results of operations of Brister's are included in the
consolidated  financial  statements  beginning  on  the  effective  date  of the
acquisition.

This  acquisition  was accounted for using the purchase method of accounting for
business combinations.  The Company allocates the total purchase price to assets
acquired  based on their  relative fair value.  Any excess of the purchase price
over the fair value of the assets acquired is recorded as goodwill.

         Purchase price                                           $400,000
         Costs incurred to complete the acquisition                 34,506
         Assets acquired                                          (234,328)
         Liabilities assumed                                       354,851
                                                                  --------

         Goodwill related to Straight Line                        $555,029
                                                                  ========

Management of the Company intends to consolidate the operations,  manufacturing,
sales and  marketing of Straight  Line's  products  into the  manufacturing  and
administrative   facilities  of  the  Company's  other  operating  subsidiaries.
Accordingly,  the Company  charged all goodwill  incurred in the  acquisition of
Straight  Line  to   operations   at  the  closing  date  of  the   acquisition.
Additionally,  the Company has accrued, and charged to operations as of December
31, 1998,  approximately  $160,000 in anticipated  costs and expenses related to
the closure of this facility and relocation of its manufacturing  lines to other
production facilities of the Company.

                                                                            F-11

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - ACQUISITION OF SUBSIDIARIES - Continued

Pro forma  unaudited  results  of  operations  relating  to the  acquisition  of
Straight Line, as though the  acquisition had occurred as of January 1, 1998, is
as follows:

                                                                  1998
                                                             ------------
         Revenues                                            $  8,379,695
         Net income (loss)                                   $(10,280,600)
         Earnings per share - basic                          $      (2.09)


NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.   Cash and cash equivalents
     -------------------------

     The  Company  considers  all cash on hand  and in  banks,  certificates  of
     deposit and other highly-liquid investments with maturities of three months
     or less, when purchased, to be cash and cash equivalents.

     Cash  overdraft  positions may occur from time to time due to the timing of
     making bank deposits and releasing checks, in accordance with the Company's
     cash management policies.

2.   Accounts and advances receivable
     --------------------------------

     In the normal course of business,  the Company extends  unsecured credit to
     virtually  all of its  customers  which are located  throughout  the United
     States and are principally concentrated in the southeastern quadrant of the
     country.  Because of the credit risk  involved,  management has provided an
     allowance for doubtful accounts which reflects its opinion of amounts which
     will   eventually   become   uncollectible.   In  the  event  of   complete
     non-performance, the maximum exposure to the Company is the recorded amount
     of trade  accounts  receivable  shown on the  balance  sheet at the date of
     non-performance.

3.   Inventory
     ---------

     Inventory  consists of steel,  engines and other related raw materials used
     in the manufacture of "fun karts".  These items are carried at the lower of
     cost or market using the  first-in,  first-out  method.  As of December 31,
     1999 and 1998, inventory consisted of the following components:

                                                        1999           1998
                                                     ----------     ----------
         Raw materials                               $1,701,639     $1,909,822
         Work in process                                167,633         92,330
         Finished goods                                 345,406        127,797
                                                     ----------     ----------

                                                     $2,214,678     $2,129,949
                                                     ==========     ==========



                                                                            F-12

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

4.   Property, plant and equipment
     -----------------------------

     Property and  equipment are recorded at  historical  cost.  These costs are
     depreciated over the estimated useful lives of the individual  assets using
     the straight-line method.

     Gains and losses from  disposition of property and equipment are recognized
     as incurred and are included in operations.

5.   Covenant not to compete
     -----------------------

     In conjunction with the acquisition of Straight Line  Manufacturing,  Inc.,
     the Company paid $100,000 to the former sole  shareholder  of Straight Line
     for a covenant not to compete for a period of at least three (3) years. The
     consideration  given was $50,000 cash and a note  payable for $50,000.  The
     covenant  is being  amortized  to  operations  over a period of three years
     using the straight line method.

6.   Organization costs
     ------------------

     Costs related to the restructuring  and  reorganization of the Company have
     been  capitalized and are being amortized over a five year period using the
     straight-line method.

7.   Goodwill
     --------

     Goodwill   represents   the  excess  of  the  purchase  price  of  acquired
     subsidiaries  over the fair value of net assets  acquired  and is amortized
     over 25 years using the straight-line method.

     In accordance  with  Statement of Financial  Accounting  Standards No. 121,
     "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
     Assets to be Disposed Of", the Company follows the policy of evaluating all
     qualifying assets as of the end of each reporting  quarter.  As of December
     31, 1998,  management,  upon realization  that 1998 operational  objectives
     were not met,  recorded an impairment of future  recoverability of goodwill
     equivalent  to  100.0%  of  the  unamortized   goodwill   incurred  at  the
     acquisition of Brister's  Thunder Karts,  Inc.,  USA  Industries,  Inc. and
     Straight Line Manufacturing, Inc.

8.   Income taxes
     ------------

     The Company  utilizes  the asset and  liability  method of  accounting  for
     income  taxes.  At December  31, 1999 and 1998,  the deferred tax asset and
     deferred tax liability  accounts,  as recorded when material,  are entirely
     the  result  of  temporary  differences.  Temporary  differences  represent
     differences  in the  recognition  of  assets  and  liabilities  for tax and
     financial  reporting  purposes,   primarily  accumulated  depreciation  and
     amortization.  No valuation  allowance  was provided  against  deferred tax
     assets,  where  applicable.  As of December 31, 1999 and 1998, the deferred
     tax asset  related to the Company's net  operating  loss  carryforward  was
     fully reserved.


                                                                            F-13

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

9.   Advertising
     -----------

     The Company does not conduct any direct  response  advertising  activities.
     For non-direct response advertising, the Company charges the costs of these
     efforts  to  operations  at the  first  time  the  related  advertising  is
     published. For various sales publications, catalogs and other sales related
     items, the Company  capitalizes the development and direct production costs
     and  amortizes  these costs over the  estimated  useful life of the related
     materials,  not to  exceed an  eighteen  (18)  month  period  from  initial
     publication of the materials.

10.  Income (Loss) per share
     -----------------------

     Basic  earnings  (loss) per share is computed  by  dividing  the net income
     (loss) by the weighted-average  number of shares of common stock and common
     stock  equivalents  (primarily  outstanding  options and warrants).  Common
     stock equivalents  represent the dilutive effect of the assumed exercise of
     the  outstanding  stock  options and  warrants,  using the  treasury  stock
     method.  The calculation of fully diluted earnings (loss) per share assumes
     the dilutive effect of the exercise of outstanding  options and warrants at
     either the  beginning  of the  respective  period  presented or the date of
     issuance,  whichever  is later.  As of  December  31,  1999 and  1998,  the
     outstanding  warrants and options are deemed to be anti-dilutive due to the
     Company's net operating loss position.

11.  Reclassifications
     -----------------
     Certain  1998  amounts  have  been  reclassified  to  conform  to the  1999
     financial statement presentations.


NOTE E - CONCENTRATIONS OF CREDIT RISK

The Company  maintains  its cash accounts in financial  institutions  subject to
insurance coverage issued by the Federal Deposit Insurance  Corporation  (FDIC).
Under FDIC rules,  the Company and its  subsidiaries  are  entitled to aggregate
coverage of $100,000 per account type per separate  legal entity per  individual
financial  institution.  During the year ended  December 31, 1999 and 1998,  the
Company and its  subsidiaries  had credit risk  exposures  in excess of the FDIC
coverage as follows:
                                             Highest    Lowest   Number of days
                       Entity               exposure   exposure   with exposure
           ------------------------------   --------   --------  --------------
Year ended December 31, 1999
         Karts International Incorporated   $155,329    $5,683           31
           Brister's Thunder Karts, Inc.    $585,601    $  968          139
               USA Industries, Inc.         $181,416    $  400          114

Year ended December 31, 1998
         Karts International Incorporated   $823,842    $1,806          135
           Brister's Thunder Karts, Inc.    $464,252    $  601          163
               USA Industries, Inc.         $157,606    $  236          198



                                                                            F-14

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE E - CONCENTRATIONS OF CREDIT RISK - Continued

Additionally,  the  Company  utilizes a lockbox  system for the  collection  and
deposit of receipts on trade accounts  receivable for each operating  subsidiary
and a corporate cash  concentration  sweep account whereby all excess cash funds
are  concentrated  into  one  primary   depository   account  with  a  financial
institution.  The Company and the  financial  institution  then  participate  in
uncollateralized   reverse-repurchase   agreements   which  are   settled  on  a
"next-business  day" basis for the investment of surplus cash funds. During 1999
and 1998,  the  Company had  unsecured  amounts  invested in reverse  repurchase
agreements on a daily basis from February 1997 through  December 31, 1999. As of
December  31, 1999 and 1998,  the Company had an unsecured  outstanding  reverse
repurchase agreement of approximately  $368,039 and $83,000,  respectively.  The
Company  incurred  no  losses  during  1999 and 1998 as a result of any of these
unsecured situations.


NOTE F - PROPERTY AND EQUIPMENT

Property and equipment consist of the following components:
                                                                     Estimated
                                             1999         1998      useful life
                                         -----------  -----------  -------------

         Building and improvements       $ 1,030,269  $   925,713  5 to 25 years
         Equipment                         1,071,416      947,015  5 to 10 years
         Transportation equipment            218,618      130,740  3 to  5 years
         Furniture and fixtures              138,392      152,670        5 years
                                         -----------  -----------  -------------
                                           2,458,695    2,156,138
         Accumulated depreciation           (522,023)    (288,741)
                                         -----------  -----------
                                           1,936,672    1,867,367
         Land                                 32,800       32,800
                                         -----------  -----------

         Net property and equipment      $ 1,969,472  $ 1,900,197
                                         ===========  ===========

Total  depreciation  expense  charged to operations for the years ended December
31, 1999 and 1998 was approximately $233,282 and $151,303, respectively.


NOTE G - NOTE RECEIVABLE

In  December  1998,  the Company  acquired a $375,000  note  receivable  from an
unrelated individual payable by an unrelated corporation in exchange for 337,838
shares of  unregistered,  restricted  common stock.  The note  receivable  bears
interest  at 10.0% and is due and  payable  10 days after the  expiration  of an
option  which  the  Company  executed  to  acquire  100.0%  of  the  issued  and
outstanding  stock of the unrelated  corporation  making the note.  This note is
unsecured.



                                                                            F-15

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE H - OPTION TO ACQUIRE AN UNRELATED ENTITY

Effective  December  1, 1998,  the Company  acquired  from an  unrelated  entity
certain assets for cash of $56,000.  The unrelated  entity is a concession  kart
manufacturer  located  in  Daytona  Beach,  Florida.  The  shareholders  of  the
unrelated entity ( Shareholders)  also granted the Company an option (Option) to
acquire 100.0% of the issued and  outstanding  shares of the unrelated  entity's
common stock based on a financial formula defined in the Option.

The Option  expires  upon the  expiration  of the 30-day  period  following  the
unrelated  entity's  fiscal year ending December 31, 2000. The Company issued to
the  Shareholders  an aggregate of 90,090 shares of Common Stock having a market
value of  approximately  $100,000  as payment  for the  Option.  The Option also
provides that unrelated entity can require the Company to exercise the Option if
unrelated  entity achieves  certain  financial goals during the Option term. The
Company  also  has  the  right  during  the  Option  term,  subject  to  certain
conditions,  to acquire for $100 certain intellectual property rights related to
the business of the unrelated entity.

The Company and  unrelated  entity also entered into a  manufacturing  agreement
(Manufacturing  Agreement) which provides that the Company will manufacture,  on
an exclusive basis, the unrelated  entity's  concession karts at a predetermined
per unit price. The Manufacturing Agreement will terminate on the later of March
31, 2001 or the date that the Option is terminated or exercised.


NOTE I - NOTES PAYABLE TO BANKS AND OTHERS

The Company has two lines of credit with an aggregate  face value of $3,500,000.
One  line of  credit  note is tied to the  Company's  aggregate  trade  accounts
receivable  balances,  not to exceed  $2,5000,000  (A/R LOC). The second line of
credit is tied to the  Company's  aggregate  inventory  balances,  not to exceed
$1,000,000  (Inventory  LOC).  The total amounts which may be outstanding at any
one  time,  and the  corresponding  note  principal  advances,  are  tied to the
respective  "Borrowing  Base"  calculations  contained  in  the  Loan  Agreement
(Agreement).  As of December  31, 1999 and 1998,  respectively,  an aggregate of
approximately  $2,724,005  and  $1,550,924  was  outstanding  on these  lines of
credit.  The notes require the interest and fees on the notes to be paid monthly
and all of the Company's trade accounts receivable  collections are deposited to
the lender's benefit to a lockbox  controlled by the lender. The notes mature in
April 2000 and are anticipated to be renewed.

The notes bear  interest at the Lender's Base Rate plus 3.0% (11.50% at December
31,  1999).  Further,  the  Agreement  requires  the payment of a one-time  1.0%
commitment  fee and the payment of a 1/12%  servicing  fee per month on the face
amount of each line of credit during the term of each respective line of credit.

The Inventory LOC originally contained a clause that this line of credit must be
paid in full and held at a $-0- balance between January 1, 1999 and February 28,
1999 for a period of at least 30  consecutive  days.  This condition was not met
and a waiver was granted by the lender.  Additionally,  the  Agreement  contains
certain  restrictive  covenants related to the Company's business operations and
financial  ratios.  As of  December  31,  1999 and 1998,  the Company was not in
compliance with all covenants in the Agreement.  The lender notified the Company
on February 28, 2000 and February 22, 1999, respectively, of certain defaults on
the Agreement and the lender granted waivers of applicable defaults.


                                                                            F-16

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE I - NOTES PAYABLE TO BANKS AND OTHERS - Continued

The  Company's  Straight Line  subsidiary  had two separate term lines of credit
open at December 31, 1998:

   A $60,000  corporate  line of credit  payable  to a bank with an  outstanding
   balance of  approximately  $56,732 at December 31, 1998.  This line of credit
   bears interest at the Bank's base rate plus 1.0% (9.0% at December 31, 1998).
   This line of credit requires monthly  payments of  approximately  2.0% of the
   outstanding  principal plus all accrued, but unpaid,  interest and fees. This
   line of credit is secured by a first mortgage on  residential  property owned
   by the former sole shareholder of Straight Line and the personal  guaranty of
   the former sole  shareholder and matures in November 1999. This note was paid
   in full during Calendar 1999.

   A $10,000  personal  line of  credit  payable  to a bank with an  outstanding
   balance of  approximately  $9,495 at December 31,  1998.  This line of credit
   bears at the Bank's base rate plus 3.0% (11.00% at December 31,  1998).  This
   line of credit requires monthly payments of 1.8% of the outstanding principal
   balance plus all accrued, but unpaid,  interest and fees. This line of credit
   is subject to the  collateralization  discussed above and this line of credit
   matures in November 1999. This note was paid in full during Calendar 1999.

A recap of notes payable consist of the following:
                                                       1999         1998
                                                    ----------   ----------
         Accounts receivable line of credit         $1,724,915   $  698,486
         Inventory line of credit                      999,090      800,000
         $60,000 corporate line of credit                    -       56,734
         $10,000 personal line of credit                     -        9,495
                                                    ----------   ----------
         Total notes payable                        $2,724,005   $1,564,715
                                                    ==========   ==========


NOTE J - LONG-TERM DEBT TO RELATED PARTIES

Long-term debt consists of the following:
                                                            1999        1998
                                                          ---------   ---------
$225,000 note payable to the Company's President
   and Chief Executive Officer.  Interest at 8.0%.
   Accrued interest payable monthly.  Principal and
   accrued, but unpaid, interest is due on demand.
   The loan is unsecured                                  $ 212,055   $       -

$50,000 note payable to the former sole shareholder
   of Straight Line.  Interest at 6.0%.  Principal and
   all accrued, but unpaid, interest is due at maturity
   in March 1999.  Secured by the Company's
   interest in the issued and outstanding stock
   of Straight Line Manufacturing, Inc.                           -      50,000





                                                                            F-17

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE J - LONG-TERM DEBT TO RELATED PARTIES - Continued

                                                              1999       1998
                                                             --------   --------
$73,875 note payable to the former sole  shareholder
  of Straight Line.  Interest at 6.0%.  Principal only
  payment of $15,000  payable by January  31,  1999.
  Remaining principal and all accrued, but unpaid,
  interest is payable subject to the  settlement of
  a product liability lawsuit against Straight Line
  Manufacturing,  Inc. incurred prior to the Company's
  acquisition of Straight Line.  If the lawsuit is settled
  prior to March  31,  1999;  50.0% of the principal and
  all accrued,  but unpaid,  interest  will be due on
  October 1, 1999 and the  balance  will be due and  payable
  on March  31,  2000.  If the lawsuit is settled  between
  March 31, 1999 and March 31, 2000,  all principal
  and accrued, but unpaid,  interest will be due and
  payable 210 days after the lawsuit settlement date
  or March 31,  2000,  which ever is earlier.  If the
  lawsuit is settled after March 31, 2000, all principal
  and  accrued,  but unpaid, interest is due and payable
  30 days after the lawsuit settlement date                    17,340     73,875
                                                             --------   --------

    Total related party long-term debt                       $229,395   $123,875
                                                             ========   ========


NOTE K - LONG TERM DEBT TO BANKS AND OTHERS

Long-term  debt payable to banks and others consist of the following at December
31, 1999 and 1998:

                                                              1999       1998
                                                             --------   --------
$22,678 capital lease payable to a finance company
   Interest at 7.86%.  Payable in monthly installments
   of approximately $2,144, including accrued interest
   Collateralized by equipment owned by Karts
   International Incorporated                                $  6,792   $   --

$20,770 installment note payable to a bank.  Interest
   at 7.75%.  Payable in monthly installments of
   approximately $419, including accrued interest
   Final maturity in May 2002.  Collateralized by
   a vehicle owned by Brister's Thunder Karts, Inc.            11,071     15,075

$23,122 installment note payable to a bank.  Interest
   at 8.25%.  Payable in monthly installments of
   approximately $726, including accrued interest
   Final maturity in March 2001.  Collateralized by
   a vehicle owned by Brister's Thunder Karts, Inc.            10,324     17,849




                                                                            F-18

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - LONG TERM DEBT TO BANKS AND OTHERS - Continued

                                                                        1999      1998
                                                                       --------  --------
<S>                                                                    <C>       <C>
$17,829 installment note payable to a bank.  Interest at 8.25%.
   Payable in monthly installments of approximately $561,
   including accrued interest.  Final maturity in January 2002
   Collateralized by a vehicle owned by Brister's Thunder Karts, Inc.    14,077      --

$20,000 installment note payable to a bank.  Interest at 8.0%
   Payable in monthly installments of approximately $406,
   including accrued interest.  Final maturity in June 2004
   Collateralized by a vehicle owned by Brister's Thunder Karts, Inc.    18,322      --

$20,000 installment note payable to a bank.  Interest at 8.0%
   Payable in monthly installments of approximately $406, including
   accrued interest.  Final maturity in July 2004.  Collateralized
   by a vehicle owned by Brister's Thunder Karts, Inc.                   18,587      --

$22,650 installment note payable to a bank.  Interest at 8.5%
   Payable in monthly installments of approximately $466, including
   accrued interest.  Final maturity in October 2004.  Collateralized
   by a vehicle owned by Brister's Thunder Karts, Inc.                   21,706      --

$240,020 mortgage note payable to a bank.  Interest
   at the Bank's Commercial Base Rate (9.25% at
   December 31, 1998).  Payable in monthly installments
   of approximately $2,626, including accrued interest
   Final maturity in August 2010.  Collateralized by
   land and a building owned by USA Industries, Inc.                    205,598   217,371

$9,348 installment note payable to a bank.  Interest
   at 10.0%.  Payable in monthly installments of
   approximately $303, including accrued interest
   Final maturity in April 1999.  Collateralized by
   transportation equipment owned by USA
   Industries, Inc.                                                        --       1,411

$18,198 installment note payable to a bank.  Interest
   at 8.25%.  Payable in monthly installments of
   approximately $572, including accrued interest
   Final maturity in March 2001.  Collateralized by
   transportation equipment owned by USA
   Industries, Inc.                                                       8,110    14,042


</TABLE>


                                                                            F-19

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - LONG TERM DEBT TO BANKS AND OTHERS - Continued

                                                       1999         1998
                                                     ---------    ---------
$14,000 installment note payable to an equipment
finance company. Payable in monthly installments
of approximately $345, including accrued interest
Final maturity in May 2002.  Collateralized by
equipment owned by USA Industries, Inc.                  8,995       11,947
                                                     ---------    ---------

  Total long-term debt to banks and individuals        323,582      277,695

  Less current maturities                              (57,482)     (35,289)
                                                     ---------    ---------

  Long-term portion                                  $ 266,100    $ 242,406
                                                     =========    =========

Future maturities of long-term debt are as follows:
                                                   Year ending
                                             December 31,  Amount

                                                 2000              $ 57,483
                                                 2001                43,094
                                                 2002                32,302
                                                 2003                29,283
                                                 2004                26,002
                                              2005 - 2009           115,238
                                              2010 - 2014            20,180
                                                                   --------

                                                Totals             $323,582
                                                                   ========

NOTE L - DEBENTURE PAYABLE

On June 3,  1999,  the  Company  issued  a  $1,500,000  debenture  payable  to a
foundation  who is also a shareholder in the Company.  The debenture  matures on
May 31,  2004 and  bears  interest  at 12.0%.  The  debenture  requires  monthly
payments of interest  only.  The debenture may be converted into common stock of
the Company at an exchange rate of $0.375 per share at any time at the option of
the debenture holder and the Company may require conversion if the closing price
of the Company's common stock is in excess of $4.00 per share for 25 consecutive
trading  days.  The debenture may be prepaid in total or in part on or after the
2nd  anniversary  date of the  debenture  upon 30 days notice being given by the
Company  and the  payment  of a 12.0%  liquidation  charge of the  amount  being
prepaid.  The  debenture is  collateralized  by all cash,  accounts  receivable,
inventory and equipment owned by the Company and its  subsidiaries,  subordinate
to the  Company's  line of  credit  facility  with a  non-financial  institution
lender.

All parties to the debenture  agreement  have agreed to defer the effective date
of any  conversion  feature until such time that the  conversion  provisions are
approved at the next annual shareholders'  meeting, which was held on August 31,
1999. The conversion measure was approved at the Company's annual  shareholder's
meeting.


                                                                            F-20

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE M - INCOME TAXES

The components of income tax (benefit)  expense for the years ended December 31,
1999 and 1998, respectively, are as follows:
                                                   1999           1998
                                                  --------       --------
       Federal:
         Current                                  $(10,000)      $ (3,388)
         Deferred                                        -              -
                                                  --------       --------
                                                   (10,000)        (3,388)
                                                  --------       --------
       State:
         Current                                    (7,144)       (11,372)
         Deferred                                        -              -
                                                  --------       --------
                                                    (7,144)       (11,372)
                                                  --------       --------

         Total                                    $(17,144)      $(14,760)
                                                  ========       ========

As of December 31, 1999,  the Company has a net operating loss  carryforward  of
approximately  $5,000,000 to offset future  taxable  income.  Subject to current
regulations, this carryforward will begin to expire in 2012.

The Company's income tax expense for the years ended December 31, 1999 and 1998,
respectively, differed from the statutory federal rate of 34 percent as follows:

                                                                    1999           1998
                                                                -----------    -----------
<S>                                                             <C>            <C>
Statutory rate applied to earnings (loss) before income taxes   $  (798,560)   $(3,412,796)
Increase (decrease) in income taxes resulting from:
     State income taxes                                              (7,144)       (11,372)
     Non-deductibility of adjustment for common
       stock issued at less than "fair value"                          --          140,560
     Difference caused by use of statutory amortization
       Periods for deduction of goodwill                               --        1,969,683
     Other, including reserve for deferred tax asset                788,560      1,310,537
                                                                -----------    -----------

       Income tax expense                                       $   (17,144)   $    (3,388)
                                                                ===========    ===========

</TABLE>

NOTE N - RELATED PARTY TRANSACTIONS

The Company leases its  manufacturing  facilities  under an operating lease with
the former owner of  Brister's,  who is also the  Company's  President and Chief
Operating  Officer,  in addition to being a Company  shareholder  and  director.
Concurrent with the closing of the acquisition of Brister's, the Company and the
former owner executed a new lease agreement for a primary two-year term expiring
in 1998 and an additional  two-year  renewal  option.  The monthly lease payment
will remain at $6,025 per month with annual adjustments for increases based upon
the Consumer Price Index. Total payments under this agreement were approximately
$74,700  and $72,300  for each of the years  ended  December  31, 1999 and 1998,
respectively.


                                                                            F-21

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE N - RELATED PARTY TRANSACTIONS - Continued

Concurrent with the  acquisition of Brister's,  the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal Agreement.
This agreement  provides that the Company may, at its sole option,  purchase the
real property and improvements in Roseland,  Louisiana currently utilized by the
Company or its  subsidiary  for an aggregate  purchase  price of  $550,000.  The
option may be  exercised  commencing  on January 1, 1998 and expires on December
31, 2000.


NOTE O - CONVERTIBLE PREFERRED STOCK

Through May 31, 1999, the Company sold $1,550,000 in Convertible Preferred Stock
(Preferred Stock) subject to a Private Placement Memorandum. The Preferred Stock
bears a dividend of 9.0%,  payable  semi-annually in either cash or common stock
of the Company.  The Preferred Stock is convertible  into shares of common stock
at a conversion  rate of $0.25 per share at the option of the holder at any time
between issuance and June 30, 2003. The Preferred Stock mandatorily  converts to
common stock on June 30, 2003. The Preferred  Stock is redeemable by the Company
on or after March 31, 2000,  in whole or part, at the option of the Company at a
redemption price of 109%, plus accrued  dividends,  if any. The dividend payable
at  December  31, 1999 was paid in  February  2000 with the  issuance of 225,022
shares of restricted, unregistered common stock.


NOTE P - COMMON STOCK TRANSACTIONS

The terms of a March 31, 1996 private placement  memorandum required the Company
and/or a company  owned by a current  officer and  director to issue  additional
shares to the original  investors  in the private  placement  memorandum  in the
event  that the  Company's  securities,  as listed on a  published  exchange  or
electronic  bulletin board,  does not equal $3.00 per share ($4.50 per share, as
adjusted  by the March 24,  1997  reverse  stock  split) on March 31,  1998 (the
second  anniversary  date of the  closing of the  private  placement  memorandum
offering).  The  issuance  of  additional  shares,  if any is  required,  to the
original investors will be done without additional  compensation to the Company.
To  facilitate   this   contingency,   the  Company  sold  350,000   restricted,
unregistered  post-reorganization  shares  (233,333  post-March 24, 1997 reverse
split  shares) of common  stock to an entity owned by an officer and director of
the Company for cash of  approximately  $350.  These  shares were placed into an
escrow account for the benefit of the original  investors.  In the event that no
additional  shares are  required  to be issued to the  original  investors,  the
shares held in escrow will be returned to the company owned by a current officer
and director of the Company.

At the close of business on March 31,  1998,  the  Company's  common  stock,  as
quoted on the NASDAQ Small-Cap Market, closed below the required strike price of
$4.50 per share. Accordingly, during the second quarter of 1998, effective April
1, 1998,  the entity  owned by an officer and  director of the Company  released
approximately  95,624  of the  233,333  shares  being  held  in  escrow  for the
settlement of the  contingency  related to the March 31, 1996 private  placement
memorandum.  The  remaining  approximate  137,709  shares were released from the
escrow  agreement and returned to the entity owned by an officer and director of
the Company.


                                                                            F-22

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE P - COMMON STOCK TRANSACTIONS - Continued

The April 1, 1998 transactions were recorded by the Company based on the imputed
"fair value" of the securities released from escrow upon the ultimate settlement
of the March 31, 1996 contingent  issuance as required by Statement of Financial
Accounting  Standards No. 123,  "Accounting for Stock-Based  Compensation".  The
imputed  "fair  value" of the 95,624  shares  was  calculated  as  approximately
$227,904  based upon the Company's  closing stock price on March 31, 1998.  This
imputed  charge  was offset  against  the  imputed  additional  paid-in  capital
generated as a result of this  accounting  transaction  as a cost of raising the
initial  capital in the original March 31, 1996  transaction.  The imputed "fair
value" of the residual 137,709 shares was calculated as approximately  $413,412,
net of the initial cash paid of $350,  based upon the  Company's  closing  stock
price on March 31, 1998. This difference  between the imputed fair value and the
actual cash paid was recorded as a component of compensation  expense related to
common  stock   issuances   at  less  than  "fair  value"  for   reorganization,
restructuring  and  consulting   expenses  in  the  accompanying   statement  of
operations.

In December 1998, the Company issued an aggregate 90,090 shares of unregistered,
restricted common stock, valued at approximately  $100,000, to acquire an option
to acquire  100.0% of the issued and  outstanding  stock of an unrelated  entity
engaged in the manufacture of concession karts.

In December 1998, the Company issued 337,838 shares of unregistered,  restricted
common stock valued at approximately  $375,000 to acquire a note receivable from
the  unrelated  entity  discussed  above with a face amount of $375,000  from an
unrelated individual.

On  December  14,  1998,  the Company  issued  109,589  shares of  unregistered,
restricted  common  stock valued at  approximately  $50,000 in  settlement  of a
contract  for  consulting  services of equal value  related to various  business
acquisition  activities.  The  $50,000  has been  charged to  operations  in the
accompanying financial statements.


NOTE Q - COMMON STOCK WARRANTS

In  September  1997,  the Company  sold  155,000  Underwriter's  Warrants for an
aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2.
Each  warrant  allows the  Underwriter  to purchase  one share of the  Company's
common  stock at $6.00 per share and one (1) 1997  Warrant at a price of $0.1875
per share.  The 1997  warrants are  described  in detail in the next  paragraph.
These warrants expire on September 9, 2002 if not exercised by the Underwriter.

In September and November  1997,  the Company sold,  pursuant to a  Registration
Statement  on Form SB-2,  an aggregate  1,782,500  warrants  (1997  Warrants) at
$0.125 each for gross proceeds of $222,813.  Each warrant entitles the holder to
purchase  one (1) share of the  Company's  common  stock at a price of $4.00 per
share  during the four year  period  commencing  on  September  9,  1998.  These
warrants  are  redeemable  by the  Company  at a  redemption  price of $0.01 per
warrant,  at any time after  September  9, 1998 upon  thirty  (30) days  written
notice to the  respective  warrant  holders if the average  closing price of the
Company's  common stock equals or exceeds $8.00 per share for the 20 consecutive
trading days ending three (3) days prior to the notice of redemption.



                                                                            F-23

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE Q - COMMON STOCK WARRANTS - Continued

                               Warrants         Warrants
                              originally     outstanding at
                                issued     September 30, 1999   Exercise price
                              ----------   ------------------   ---------------
1996 Warrants                    500,018          500,018       $4.50 per share
Underwriter's Warrants           155,000          155,000       $4.00 per share
1997 Warrants                  1,782,500        1,782,500       $4.00 per share
                               ---------        ---------

Totals at September 30, 1999   2,504,185        2,437,518
                               =========        =========

On March 9, 1999, the Company,  as  compensation  for waiving  certain events of
default and the amendment to the Company's loan  agreement with a  non-financial
institution  lender,  granted  the lender a stock  warrant to  purchase  100,000
shares of the  Company's  restricted,  unregistered  common  stock at a price of
$0.54 per share. If the Company fully repays the outstanding indebtedness to the
lender within ninety (90) days of the warrant date, the number of shares subject
to the warrant reduces to 50,000. If and only if there is no total retirement of
the  indebtedness  to the  lender,  the number of shares  subject to the warrant
reduces based upon the Company's net income  achieved  during Calendar 1999. The
number of shares  subject to the warrant  based upon the Company's net income in
the event of a non-retirement of the indebtedness is as follows:

                          Net income          # of shares
                          ----------          -----------
                           $975,000              50,000
                           $877,500              60,000
                           $780,000              75,000

This warrant is  exercisable at any time after its issuance and expires four (4)
years from its issuance.


NOTE R - STOCK OPTIONS

The Company's  Board of Directors has allocated an aggregate  125,377  shares of
the Company's common stock for unqualified stock option plans for the benefit of
employees of the Company and its subsidiaries.

During  1996,  the  Company  granted  options to purchase  59,355  shares of the
Company's   common  stock  to  employees  of  the  Company  and  its   operating
subsidiaries  at an exercise  price of $5.63 per share.  These options expire at
various times during 2001.

On January 30,  1997,  the Board of  Directors  of the  Company  adopted a stock
option plan  providing for the  reservation  of an  additional  66,667 shares of
common stock for options to be granted to  employees of the Company.  Concurrent
with this action,  the Company  granted  options to purchase 6,667 shares of the
Company's  common  stock at a price of $4.875 per shares to the  Company's  then
Chief  Financial  Officer and the  Company's  Vice  President of  Marketing  (VP
Options).  These  options are  exercisable  after January 30, 1998 and expire on
January 30, 2002. The options  granted to the Company's  former Chief  Financial
Officer expired concurrent with his termination in the first quarter of 1998.

                                                                            F-24

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE R - STOCK OPTIONS - Continued

Further,  on January  30,  1997,  the  Company  granted  options to  purchase an
aggregate  52,670  shares of the  Company's  common  stock to  employees  of the
Company  and its  operating  subsidiaries  at an  exercise  price of $4.875  per
post-split  share.  These  options are  exercisable  after  January 30, 1998 and
expire on January 30, 2002.

During 1998,  the Company  granted an aggregate  265,000  options to purchase an
equivalent number of shares of restricted, unregistered common stock to officers
and employees in conjunction with the employment of such officers and employees.
These options are  exercisable  at prices  ranging from $1.06 per share to $3.50
per share. Concurrent with the termination of a Company officer,  210,000 of the
granted 1998 options  terminated.  The remaining options are exercisable between
March 1999 and December 1999 and expire between March 2003 and December 2003.

In January 1999, as part of the Separation Agreement between the Company and its
then President and Chief Executive  Officer,  the Company issued this individual
options to purchase 15,000 shares of Common Stock at an option exercise price of
$1.06 per share.  This option was granted to replace options to purchase 200,000
shares of common  stock which were  effectively  canceled at  separation.  These
options are vested and expire on January 20, 2004.

During the fourth quarter of 1999, the Company granted options to its President,
Vice  President of Operations  and various  employees.  These options  vested in
various  amounts  over a period  from grant  through  three years from the grant
date.  These  options,  if not  exercised,  expire  between the fourth and fifth
anniversary date of the option grant. These options are summarized as follows:

                                           Options granted    Exercise price
                                           ---------------    ----------------
  President options                            400,000        $0.375 per share
  Vice President of Operations options         225,000        $0.375 per share
  Employee options                               3,000        $0.375 per share
  Employee options                             117,000        $0.31  per share

There were no exercise of any options  during the years ended  December 31, 1999
and 1998.  The  following  table  summarizes  all options  granted  from 1996 to
December 31, 1999.

                     Options   Options     Options     Options    Exercise price
                     granted  exercised  terminated  outstanding     per share
                    --------- ---------  ----------  -----------  --------------
  1996 options         59,335         -           -       59,335          $5.63
  1997 VP options      13,334         -       6,667        6,667          $4.875
  1997 options         52,670         -           -       52,670          $4.875
  1998 options        265,000         -     210,000       55,000  $1.06 - $3.50
  1999 options        810,000         -           -      810,000  $0.31 - $1.06
                    --------- ---------  ----------  -----------  --------------

  Totals            1,200,339         -     216,667      983,672
                    ========= =========  ==========  ===========

The weighted  average  exercise price of all issued and  outstanding  options at
December 31, 1999 and 1998, respectively, was $1.07 and $3.32.

Had  compensation  cost for options  granted been  determined  based on the fair
values at the grant dates, as prescribed by SFAS 123, the Company's net loss and
net loss per share  would  not have  changed  due to the fact that the  exercise
price of the options was substantially higher than the market price at the grant
date.

                                                                            F-25

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE R - STOCK OPTIONS - Continued

The  calculations  to estimate the fair value of the options were made using the
Black-Scholes pricing model which required making significant assumptions. These
assumptions include the expected life of the options, which was determined to be
one year, the expected volatility,  which was based on fluctuations of the stock
price over a 12 month  period,  the expected  dividends,  determined  to be zero
based on past performance,  and the risk free interest rate, which was estimated
using  the  bond  equivalent  yield  of 6.0% at  December  31,  1999  and  1998,
respectively.

1998 Compensation Plan
----------------------

On May 27,  1998,  the  stockholders  of the  Company  approved  the 1998  Stock
Compensation Plan of Karts  International  Incorporated (1998 Plan) and reserved
1,000,000  shares of Common  Stock for  issuance  under the plan.  The 1998 Plan
terminates  on  April 1,  2008  unless  previously  terminated  by the  Board of
Directors.   The  1998  Plan  is  administered  by  the  Compensation  Committee
(Committee)  or the entire  Board of  Directors  as  determined  by the Board of
Directors.

Eligible  participants in the 1998 Plan include full time  employees,  directors
and advisors of the Company and its subsidiaries. Options granted under the 1998
Plan are  intended  to qualify as  "incentive  stock  options"  pursuant  to the
provisions  of Section  422 of the  Internal  Revenue  Code of 1986,  as amended
(Code), or options which do not constitute incentive stock options (nonqualified
options) as determined by the Committee.

Under  the 1998 Plan the  Company  may also  grant  "Restricted  Stock"  awards.
"Restricted  Stock"  represents  shares  of  Common  Stock  issued  to  eligible
participants under the 1998 Plan subject to the satisfaction by the recipient of
certain  conditions  and  enumerated  in the  specific  Restricted  Stock grant.
Conditions  which may be imposed  include,  but are not  limited  to,  specified
periods of  employment,  attainment  of personal  performance  standards  or the
overall performance of the Company.  The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1998 Plan to promote
the development of the Company,  and may be used by the Company as another means
of attracting and retaining  qualified  individuals to serve as employees of the
Company or its subsidiaries.

Incentive  stock  options may be granted  only to  employees of the Company or a
subsidiary  who,  in the  judgment of the  Committee,  are  responsible  for the
management or success of the Company or a subsidiary and who, at the time of the
granting of the incentive stock option, are either an employee of the Company or
a  subsidiary.  No incentive  stock option may be granted under the 1998 Plan to
any individual who would,  immediately  before the grant of such incentive stock
option,  directly or  indirectly,  own more than ten percent  (10%) of the total
combined  voting  power of all classes of stock of the  Company  unless (i) such
incentive  stock  option is granted at an option price not less than one hundred
ten  percent  (110%)  of the fair  market  value of the  shares  on the date the
incentive  stock option is granted and (ii) such incentive  stock option expires
on a date not later than five years from the date the incentive  stock option is
granted.


                                                                            F-26

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE R - STOCK OPTIONS - Continued

1998 Compensation Plan - continued
----------------------

The purchase price of the shares of the Common Stock offered under the 1998 Plan
must be one hundred  percent (100%) of the fair market value of the Common Stock
at the time the  option  is  granted  or such  higher  purchase  price as may be
determined  by the  Committee  at the time of grant;  provided,  however,  if an
incentive stock option is granted to an individual who would, immediately before
the grant,  directly or indirectly  own more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company, the purchase price
of the shares of the Common Stock covered by such incentive stock option may not
be less than one  hundred ten  percent  (110%) of the fair market  value of such
shares on the day the incentive stock option is granted.  If the Common Stock is
listed upon an established stock exchange or exchanges, the fair market value of
the Common Stock shall be the highest  closing  price of the Common Stock on the
day the  option  is  granted  or, if no sale of the  Common  Stock is made on an
established stock exchange on such day, on the next preceding day on which there
was a sale of such stock. If there is no market price for the Common Stock, then
the Board of Directors and the Committee  may,  after taking all relevant  facts
into consideration, determine the fair market value of the Common Stock.

Options are  exercisable  in whole or in part as provided under the terms of the
grant,  but in no event shall an option be  exercisable  after the expiration of
ten years  from the date of grant.  Except in case of  disability  or death,  no
option shall be  exercisable  after an optionee  ceases to be an employee of the
Company, provided that the Committee shall have the right to extend the right to
exercise  for a period  not  longer  than  three  months  following  the date of
termination  of  an  optionee's  employment.  If  an  optionee's  employment  is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year  following the date of termination of the
optionee's  employment.  If an optionee  dies while in the employ of the Company
and shall not have fully exercised his options,  the options may be exercised in
whole or in part at any time within one year after the  optionee's  death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.

Under the 1998 Plan, an individual may be granted one or more options,  provided
that the  aggregate  fair  market  value  (determined  at the time the option is
granted) of the shares covered by incentive options which may be exercisable for
the first  time  during any  calendar  year  shall not  exceed  $100,000.  There
presently are  outstanding  options to purchase 35,000 shares of Common Stock at
prices ranging from $1.06 to $2.98 per share.


NOTE S - COMMITMENTS AND CONTINGENCIES

Litigation
----------

The Company and/or it's operating  subsidiaries  are as  defendant(s) in several
product liability  lawsuits related to its "fun karts".  The Company has had and
continues to have commercial  liability coverage to cover these exposures with a
$25,000 per claim self-insurance  clause as of December 31, 1999. The Company is
vigorously  contesting each lawsuit and has accrued  management's  estimation of
the Company's exposure in each situation.  Additionally, the Company maintains a
reserve for future  litigation  equal to the "per claim"  self-insurance  amount
times the four-year  rolling  average of lawsuits  filed naming the Company as a
defendant.

The Company  anticipates no material impact to either the results of operations,
its financial  condition or liquidity  based on the  uncertainty of outcome,  if
any, of existing litigation,  either collectively and/or  individually,  at this
time.

                                                                            F-27

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE S - COMMITMENTS AND CONTINGENCIES - Continued

Consulting and Patent Licensing
-------------------------------

The Company and the former owner  executed a Licensing  Agreement  and a related
Royalty  Agreement.  These  agreements  provide  that the former  owner will (1)
license to the Company all of the Intellectual  Property (as defined)  currently
owned by the former  owner and being used by the  Company or any  subsidiary  at
terms at least as  favorable  as the  former  owner has  received  or could have
received in arms-length  transactions with third parties and (2) for a period of
five years from the  execution of the  Licensing  Agreement  will license to the
Company,  at the Company's sole option,  all Intellectual  Property developed or
owned by the  former  owner at any time  subsequent  to the  Closing  Date.  The
license  referenced  in section (2) above  shall be  exclusive  to the  Company.
Intellectual Property is defined in the Stock Purchase Agreement as all domestic
and foreign letters  patent,  patents,  patent  applications,  patent  licenses,
software licenses and know-how licenses,  trade names,  trademarks,  copyrights,
unpatented inventions,  service marks, trademark registrations and applications,
service mark  registrations  and  applications and copyright  registrations  and
applications  owned or used by the Company or any subsidiary in the operation of
its business.

The Agreements are for a three (3) year term,  which provides for the payment of
a one-time license fee and a "per unit" royalty fee. Upon execution, the Company
was  obligated  to pay an initial  license  fee of  $10,000  and agreed to pay a
royalty  of $1.00  per unit on  which  the  existing  intellectual  property  is
installed. For the second and third years of the Agreement, the Company will pay
the  greater  of  $20,000  per year or $1.00  per  unit on  which  the  existing
intellectual property is installed.  During the year ended December 30, 1999 and
1998,  respectively,  the  Company  paid or accrued  approximately  $15,242  and
$20,000 under this Agreement.

Employment agreements
---------------------

Effective  January 30, 1998,  the Company  entered into an Employment  Agreement
(Agreement)  with an individual  to serve as the  Company's  President and Chief
Executive  Officer  (President).  The Agreement is for a term of three (3) years
and  provides  the  President  with an  annual  base  salary of  $150,000.  Upon
execution of this Agreement,  the President  received  options to purchase up to
200,000  shares of the Company's  common stock at an exercise price of $3.25 per
share.  The options  vest as  follows:  100,000  shares as of January 30,  1999;
50,000 shares as of January 31, 2000;  50,000 shares as of January 31, 2001. All
unvested  options vest  immediately  upon the  termination  of the  Agreement if
termination is for reason other than "for cause",  and all  unexercised  options
expire on January 31, 2003.  The President may also receive  annual  performance
based  stock  options to purchase up to 50,000  shares of the  Company's  common
stock at a price equal to the market value of the Company's  common stock on the
date of issuance,  as  determined by the  Company's  Board of Directors,  and an
annual cash bonus not to exceed 15.0% of the annual base salary.

In January 1999, this individual resigned as President,  Chief Executive Officer
and as a director of the Company and the Company and the individual entered into
a Settlement  Agreement and Full and Final Release of All Claims (Agreement) for
the purpose of satisfying and  discharging all obligations of the Company to the
individual under the Agreement.  This Agreement  provides that the Company shall
forgive up to $19,000 of  non-reimbursable  expenses  incurred by the individual
and pay to for one week of earned vacation.  In consideration for the foregoing,
the   former   President   agreed   to  adhere   to  the   non-competition   and
non-solicitation  covenants set forth in the Employment  Agreement until January
13, 2001. As part of his separation from the Company,  the Company issued to the
individual  options  to  purchase  15,000  shares of  Common  Stock at an option
exercise  price of $1.06 per share which were  granted to replace the options to
purchase  200,000  shares of common  stock  which were  effectively  canceled at
separation. These options are vested and expire on January 20, 2004.


                                                                            F-28

<PAGE>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE S - COMMITMENTS AND CONTINGENCIES - Continued

Employment agreements
---------------------

On  October  27,  1998,  the  Company  entered  into  an  Employment   Agreement
(Agreement) with the former sole shareholder of Straight Line for the individual
to serve  as the  President  of the  Straight  Line  subsidiary  (Straight  Line
President). The Agreement is for a term of three (3) years with an automatic one
year extension unless either the Company or the Straight Line President provides
a thirty (30) day written notice not to continue the  Agreement.  This Agreement
provides the Straight Line President with an annual base salary of $80,000. Upon
execution of this  Agreement,  the Straight Line President  received  options to
purchase up to 10,000 shares of the Company's  common stock at an exercise price
equal to the closing bid price of the  Company's  common  stock as quoted on the
NASDAQ SmallCap market.

The Straight Line President may also receive, at the discretion of the Company's
Board of  Directors,  annual  performance  based stock options to purchase up to
10,000 shares of the Company's common stock at a price equal to the market value
of the  Company's  common stock on the date of issuance,  as  determined  by the
Company's  Board of  Directors,  and an annual cash bonus not to exceed 15.0% of
the annual base salary.

On October 19, 1999,  the  Company's  Board of Directors  ratified an Employment
Agreement (Agreement) with an individual to serve as the Company's President and
Chief Executive Officer. The Agreement term was effective as of February 1, 1999
and expires on the third anniversary date of the Agreement with an automatic one
year extension unless either the Company or the President provides a thirty (30)
day written  notice not to continue the Agreement.  This Agreement  provides the
President  with an annual salary of $150,000 per year,  payable in either common
stock of the Company or cash.  At the end of each  calendar  quarter  during the
first  calendar  year of this  Agreement,  the Company shall pay the President a
cash  portion  to  satisfy  the  President's  estimated  federal  and  state tax
liability  and the balance  shall be paid in shares of common  stock  calculated
based on the closing bid price of the  Company's  common  stock as quoted at the
end of each  quarter.  Further,  the President  was granted  450,000  options to
purchase  shares of the Company's  common stock at 100% of the closing bid price
of the Company's common stock on the  ratification  date and the options vest as
follows:  100,000 at the  ratification  date of this  Agreement;  150,000 on the
second anniversary date of this Agreement;  and 200,000 on the third anniversary
date of this Agreement.  Additionally,  the President may be eligible to receive
an annual  bonus  which  shall be in the form of (a)  options to  purchase up to
50,000 shares of the Company's  common stock,  which shall vest immediately upon
grant and expire five years from the grant date and (b) cash,  not to exceed 15%
of the President's base salary.


NOTE T - SIGNIFICANT CUSTOMERS

During  the  year  ended  December  31,  1999,  the  Company  had  one  customer
responsible  for more than 10.0% of total net sales.  Total sales to this entity
totaled  approximately  $1,276,000,  or approximately  10.6% of total net sales.
During 1999, the Company had no other single or related groups of customers that
aggregated more than 10.0% of total net sales.

During the year ended December 31, 1998, the Company was an OEM  manufacturer of
"fun  karts" for one of its  competitors.  Total  sales to this  entity  totaled
approximately $864,000, or approximately 10.51% of total net sales. During 1998,
the Company had no other single or related groups of customers  that  aggregated
more than 10.0% of total net sales.  If this Agreement is terminated as a result
of a Change  in  Control  of the  Company,  as  defined  in the  Agreement,  the
President  will be entitled  to a cash  payment of  $200,000  and the  immediate
vesting of all open stock options.

                                                                            F-29

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE U - SELECTED FINANCIAL DATA (Unaudited)

The following is a summary of the quarterly  results of operations for the years
ended December 31, 1999 and 1998, respectively.

                           Quarter ended  Quarter ended   Quarter ended   Quarter ended     Year ended
                             March 31,       June 30,      September 30,   December 31,    December 31,
                            -----------    ------------    ------------    ------------    ------------
<S>                         <C>            <C>             <C>             <C>             <C>
1999
----
   Net revenues             $ 1,203,359    $  2,462,403    $  3,013,124    $  5,318,899    $ 11,997,785
   Gross profit                (169,160)        189,978         248,865         397,911         667,594
   Net earnings
     from operations           (708,387)       (340,526)       (483,516)       (630,372)     (2,162,801)
   Basic and fully
     diluted earnings
     per share              $     (0.12)   $      (0.07)   $      (0.10)   $      (0.13)   $      (0.42)
   Weighted-average
     number of shares
     issued and outstanding   5,574,298       5,574,298       5,574,298       5,574,298       5,574,298

1998
----
   Revenues                 $   509,205    $  1,222,734    $  1,885,571    $  4,602,136    $  8,219,646
   Gross profit                (201,595)        196,013        (135,053)       (339,969)       (480,604)
   Net earnings
     from operations           (630,132)       (897,450)       (870,615)     (1,586,798)     (3,984,995)
   Basic and fully
     diluted earnings
     per share              $     (0.13)   $      (0.18)   $      (0.18)   $      (1.56)   $      (2.05)
   Weighted-average
     number of shares
     issued and outstanding   4,854,133       4,854,133       4,854,133       5,118,238       4,920,702



</TABLE>

                                                                            F-30