U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Bad Toys, Inc.
(Exact name of registrant as specified in its charter)
Nevada 0-29836 33-0677545
- -------------- ------------------------ --------------
(state of (Commission File Number) (IRS Employer
incorporation) I.D. Number)
2344 Woodridge Avenue
Kingsport, TN 37664
423-247-9560
------------------------------------------------------------
(Address and telephone number of registrant's principal
executive offices and principal place of business)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of June 30, 1999, there were 5,793,200 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
2
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Balance Sheets
June 30, 1999 & December 31, 1998
<TABLE>
<CAPTION>
6/30/99 12/31/98
Assets Unaudited Audited
- ------ --------- ---------
<S> <C> <C>
Cash & Cash Equivalents $ 6,314 $ 1,757
Accounts Receivable 2,044 1,097
Inventory (Note B) 258,660 180,160
Prepaid Expenses 22,483 23,543
------- -------
Total Current Assets 289,501 206,557
------- -------
Property, Plant & Equipment,
net of accumulated depreciation (Note C) 75,298 70,954
Organization Costs, net of accumulated amortization 24,398 27,146
Syndication Costs 0 14,400
Utility Deposits 280 280
------- -------
Total Assets 389,477 319,337
======= =======
Liabilities & Shareholders' Equity
- ----------------------------------
Accounts Payable & Accrued Liabilities 100,396 57,499
Current Portion of Long Term Debt 6,472 8,459
------- -------
Total Current Liabilities 106,868 65,958
------- -------
Notes Payable - Long Term 23,175 26,994
Notes Payable - Shareholders (Note F) 328,748 216,176
------- -------
Total Liabilities 458,791 309,128
Common Stock, par value $.01; 10,000,000 shares 57,932 53,550
authorized, 5,793,200 & 5,355,000
shares issued and outstanding respectively
Additional Paid In Capital 436,150 249,332
Deficit Accumulated During the Development Stage (563,396) (292,673)
------- -------
Total Liabilities & Shareholders' Equity $ 389,477 $ 319,337
======= =======
</TABLE>
See notes to financial statements
3
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30 June 30
1999 1998 1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Sales $ 14,545 $ 27,294 $ 24,251 $ 30,022
Cost of Sales 23,832 26,717 43,864 29,975
------- -------
Gross Profit (9,287) 577 (19,613) 47
------- ------- ------- -------
General & Administrative
Expenses 179,356 26,635 234,969 39,642
------- ------- ------- -------
Income (Loss) from operations
before interest expense (188,643) (26,058) (254,582) (39,595)
------- ------- ------- -------
Interest Expense 8,719 4,675 16,141 8,217
------- ------- ------- -------
Net Earnings (Loss) $(197,362) (30,733) $(270,723) (47,812)
======= ======= ======= =======
Net Earnings (Loss)
Per Share $(0.035235) (0.005834) $(0.048568) (0.009076)
-------- -------- -------- --------
Weighted Average Shares 5,601,350 5,268,000 5,574,100 5,268,000
--------- --------- --------- ---------
</TABLE>
See notes to financial statements
4
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statements of Cash Flows
For the Six Months Ended
June 30, 1999 & June 30, 1998
<TABLE>
<CAPTION>
6/30/99 6/30/98
------- -------
<S> <C> <C>
Cash flow from operating activities:
Cash received from customers $ 22,207 $ 29,676
Cash paid to suppliers and employees (215,907) (102,201)
Other operating disbursements (111,225) (52,649)
Depreciation & Amortization 11,516 11,516
------- -------
Net cash provided (used) by operating activities (293,409) (113,658)
Cash flows from investing activities:
Cash payments for the purchase of property 0 0
------- -------
Net cash provided (used) by investing activities 0 0
------- -------
Cash flow from financing activities:
New borrowings
Proceeds from equipment and other loans 0 28,827
Debt reduction:
Long-Term (3,819) 0
Short-Term (1,987) 0
Proceeds from additional paid in capital 186,818 26,460
Proceeds from shareholder debt 112,572 58,756
Proceeds from issuance of common stock 4,382 540
------- -------
Net cash provided (used) by financing activities 297,966 114,583
------- -------
Net increase (decrease) in cash & equivalents
Cash & Equivalents, beginning of period 1,757 476
------- -------
Cash & Equivalents, end of period 6,314 1,401
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense 16,141 8,217
</TABLE>
See notes to financial statements
5
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statements of Cash Flows
For the Six Months Ended
June 30, 1999 & June 30, 1998
<TABLE>
<CAPTION>
6/30/99 6/30/98
------- -------
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities
Net Income/(Loss) $(270,723) (47,812)
------- -------
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 11,516 11,516
(Increase) decrease in other assets 8,904 0
(Increase) decrease in accounts receivable (947) (346)
(Increase) decrease in prepaid expense 1,060 3,419
(Increase) decrease in inventories (78,500) (51,148)
(Increase) decrease in fixed assets (7,616) (40,949)
Increase (decrease) in accounts payable 15,081 12,121
Increase (decrease) in accrued liabilities 24,514 (894)
Increase (decrease) in interest payable 3,302 435
------- -------
Total adjustments (22,686) (65,846)
------- -------
Net cash provided (used) by investing activities (293,409) (113,658)
</TABLE>
See notes to financial statements
6
<PAGE>
Bad Toys, Inc.
Notes to Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Bad Toys, Inc. (the Company)
is presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management
who is responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles and have been
consistently applied in the preparation of the financial statements.
Nature of Operations
- --------------------
The Company was organized and incorporated on April 21, 1995 and began business
on April 1, 1998. The company operates a custom motorcycle manufacturing and
service facility in Kingsport, TN. The Company offers retail parts and product
sales as well as motorcycle service to its customers seven days a week. Although
principally located in Kingsport, TN, the Company's customers are located
primarily throughout the United States.
Inventories
- -----------
The Company's inventories are stated at the lower of standard cost (which
approximates average cost) or market.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. For financial statement and federal
income tax purposes, depreciation is computed using the modified accelerated
cost recovery system. Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are capitalized. Expenditures
for maintenance and repairs are charged to expense as incurred. Depreciation of
property and equipment is provided using rates based on the following useful
lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Machinery and equipment 3 - 10
Furniture and fixtures 3 - 10
Leasehold Improvements 20 - 30
</TABLE>
Depreciation expense for the six months ended June 30, 1999 is $ 3,272.
Organization Costs
- ------------------
Costs of organizing the Company are recorded as organization costs and amortized
over five years on a straight-line basis.
Concentrations of Credit Risk
- -----------------------------
The Company is engaged in the manufacture and service of highly customized
motorcycles. The sales revenues are primarily derived from an area encompassing
a two hundred mile radius of Kingsport, Tennessee. The Company performs credit
evaluations of customers in the rare case where credit is granted, and generally
requires no collateral from its customers.
7
<PAGE>
Bad Toys, Inc.
Notes to Financial Statements
NOTE B - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
Jun. 30, 1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Work in Process $ 101,025 $ 82,862
Finished goods 157,635 97,298
------- -------
$ 258,660 $ 180,160
======= =======
</TABLE>
Inventories are stated at the lower of standard cost (which approximates average
cost) or market. The Company's current inventory levels are an accumulation of
motorcycle parts surrounding the production models. Inventory obsolescence and
pilferage is adjusted to cost of sales in the period incurred. Work in process
consists of partially manufactured motorcycle models. Finished goods consist of
completed motorcycle models and saleable motorcycle parts, suitable for a
variety of Harley-Davidson-type motorcycles. Parts within finished goods are
either directly saleable to the public or used in the manufacturing of the
Company's production units.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment are summarized by major classifications as follows:
<TABLE>
<CAPTION>
Jun. 30, 1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Vehicles $ 20,328 $ 20,328
Equipment 17,018 10,042
Furniture and Fixtures 2,163 2,082
Leasehold Improvements 45,045 45,045
-------- ---------
84,554 77,497
Less accumulated depreciation (9,256) (6,543)
-------- ---------
$ 75,298 $ 70,954
======== =========
</TABLE>
8
<PAGE>
Bad Toys, Inc.
Notes to Financial Statements
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Jun. 30, 1999 Dec. 31,1998
--------------- -------------
<S> <C> <C>
Bank note payable $629.04 per month plus
Interest accrued at 9.75%, secured by vehicle. $ 2,524 5,425
Bank note payable $285.60 per month plus
Interest accrued at 9.5%, secured by vehicle. 3,948 5,503
Notes payable to individuals, corporations,
And limited liability companies, with interest
At 10-10.5%, due at renewal cycle, or at payoff
Dates ranging from 6-18 months, secured by
Equity securities. 23,175 24,525
Notes payable to stockholders due Sept. 30,
2000 with interest at 10.5%, unsecured. 328,748 216,176
-------- --------
358,395 251,629
Less current portion (6,472) ( 8,459)
-------- --------
Long-term Debt $ 351,923 $ 243,170
======== ========
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------- ------
<S> <C>
1999 $ 6,472
2000 351,923
-------
$ 358,395
=======
</TABLE>
9
<PAGE>
Bad Toys, Inc.
Notes to Financial Statements
NOTE E - INCOME TAXES
Operating Loss Carryforwards
The Company has loss carryforwards totaling $144,154 as of the tax year ended
December 31, 1998 that may be offset against future taxable income. If not used,
the carryforwards will expire as follows:
<TABLE>
<CAPTION>
Operating
Losses
-------
<S> <C>
Year 11 $ 849
Year 12 15,001
Year 13 43,093
Year 14 85,211
-------
$ 144,154
=======
</TABLE>
NOTE F - RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and affiliated entities:
1. Notes payable to related parties as June 30, 1999 and December 31, 1998,
consisted of the following:
<TABLE>
<CAPTION>
Jun. 30, 1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Notes payable to Larry & Susan Lunan due
Sept. 30, 2000 with interest at 10.5%. $ 249,298 $ 178,082
Notes payable to Barrick Properties, LLC,
with interest at 10-10.5%, with annual
renewal options. 79,450 38,094
-------- --------
$ 328,748 $ 217,176
======== ========
</TABLE>
2. The Company leases its facilities from a minority stockholder as described in
Note G below.
NOTE G - LEASING ARRANGEMENTS
The Company conducts its operations from facilities that are leased under a
five-year noncancelable operating lease expiring in September, 2002. There is no
option to renew the lease. The lessor of the facility is a stockholder of the
Company. Lessor has received shares of stock as prepaid rent for the term of the
lease. Monthly rent is $1,420, which includes monthly-prepaid rent expensed of
$520.
10
<PAGE>
Bad Toys, Inc.
Notes to Financial Statements
NOTE G - LEASING ARRANGEMENTS (continued)
The following is a schedule of future minimum rental payments required under the
above operating lease (excluding prepaid rent expensed) as of June 30, 1999:
<TABLE>
<CAPTION>
Year Ending
Dec. 31, Amount
---------- -------
<S> <C>
1999 $ 5,400
2000 10,800
2001 10,800
2002 8,100
-------
$ 35,100
=======
</TABLE>
Rental expense for the six months ended June 30, 1999 and the twelve months
ended December 31, 1998 were $ 5,010 and $ 20,040, respectively.
NOTE H - OPERATING AND CASH FLOW DEFICITS
The Company has experienced significant adversity during the development stage
of its existence. As a result, the Company has a cumulative operating deficit of
$563,396, and current payables, including the current portion of long term debt,
exceeds cash and current receivables by $98,510 at June 30, 1999. Management is
anticipating a large capital inflow from private placement of equity in the fall
of 1999. While the proposed capital injection as well as potential conversions
of long term debt to common stock, do project to improve the Company's working
capital position, there can be no assurance that the Company will be successful
in accomplishing its objectives.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the financial statements and the accompanying notes thereto and is qualified in
its entirety by the foregoing and by more detailed financial information
appearing elsewhere. See "Item 1. Financial Statements."
Results of Operations - Second Quarter of 1999 Compared to Second Quarter
---------------------------------------------------------------------------
of 1998
- -------
Bad Toys' sales decreased from $27,294 in Q2 1998 to $14,545 in Q2 1999.
The decrease is due to the closing of the Kingsport, Tennessee retail outlet
during April and May (1) to enable management to attend the Laughlin, Nevada
River Run motorcycle show and (2) to enable the staff to complete three
prototype models for permanent display in the Kingsport, Tennessee, Phoenix,
Arizona, and Los Angeles, California areas. All sales represented parts and
services. We have not yet sold our first custom-made motorcycle.
The cost of sales in Q2 1999 exceeded sales by $9,287, as compared to a
gross profit of $577 in Q2 1998. The increase is due to manufacturing charges
from the production of three prototypes of the Phoenix model.
The significant operational item was general and administrative expenses -
only $26,635 in Q2 1998 but increasing to $179,356 in Q2 1999. This produced a
net loss from operations of $197,362 in Q2 1999, or $0.035 a share, as compared
to a net loss of $30,733 in Q2 1998, or $0.006 a share.
The reasons for the dramatic increase in general and administrative
expenses in Q2 1999 were:
o advertising costs related to the Laughlin, Nevada River Run
motorycle show,
o fees to the company's spokesman for his attendance and
representation of the company at the River Run motorcycle show,
o promotional fees paid with regard to our Phoenix-model
motorcycle being featured in a planned television airing on the
Discovery or Learning Channels, and
o consulting fees paid with regard to our planned expansion.
We financed this loss by common stock sales of $186,815 and loans of
$112,572 from shareholders.
Results of Operations - First Half of 1999 Compared to First Half of 1998
-------------------------------------------------------------------------
It is evident that we are still in the development stage. From sales of
$30,022 during the first half of 1998, we were able to manage sales of
12
<PAGE>
only $24,251 during the first half of 1999 - a decrease of almost twenty
percent.
General and administrative expenses ballooned from $39,642 during the first
half of 1998 to $234,989 during the first half of 1999 - an increase of 493
percent. These increased expenses reflect the costs described above that were
incurred during Q2 1999 as well as the costs of pursuing corporation acquisition
opportunities which have not resulted in any agreements.
Plans for the Rest of 1999; Liquidity; Sources of Liquidity
-----------------------------------------------------------
We plan to expand our operations in Kingsport, Tennessee and to open a
second facility from which to conduct our business in Phoenix, Arizona. To
execute this plan of expansion we will require additional capital of at least
$250,000 but, preferably, as much as $500,000. We have not identified a source
of this capital but propose to conduct additional private placements with
friends and, if feasible, a public offering later in the year.
The lessor of our Kingsport facility has agreed to add an additional 3,000
square feet to the facility during 1999. The lessor will bear all the costs of
this expansion but will charge additional rent once the expanded space is in
use.
As for our expansion plans, we first plan, subject to the availability of
capital, to add approximately $50,000 in inventory to the present approximately
$140,000 in inventory we have in our Kingsport facility in order to offer a
complete line of equipment, helmets and soft goods. We plan next to add
approximately $30,000 in plant equipment (benches, lifts, a milling machine and
a drill press) in order to eliminate the present practice of subcontracting all
our machine work.
We then plan to open a second facility in Phoenix, Arizona, subject to the
availability of additional capital. We plan for the facility $50,000 in shop
equipment and, depending upon available capital, between $50,000 and $300,000 in
inventory.
We believe that the planned Phoenix facility, if built, will cash flow
positively within 90 days after opening for business.
Should all the above plans be realized, we would add approximately fifteen
employees to our payroll.
Going Concern Issue
-------------------
Until we are able to raise capital for expansion, we will continue business
in our single facility in Tennessee. Should our present Tennessee facility not
commence to cash flow positively, the Company will remain dependent upon loans
to be provided by Barrick Properties, LLC or Barrick Properties, Inc. and the
Lunans. The independent auditor has identified a substantial doubt about our
ability to continue as a going concern. A failure to achieve positive cash flow
by the end of 1999 could be fatal to the Company. We have no expectation that
Barrick Properties will continue to provide working capital, and the ability of
the Lunans to provide
13
<PAGE>
additional capital - other than the contribution of their personal services - is
quite limited.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Forms 8-K
None
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Date: August 23, 1999 Bad Toys, Inc.
By/s/Larry N. Lunan
-----------------------------
Larry N. Lunan, President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,314
<SECURITIES> 0
<RECEIVABLES> 2,044
<ALLOWANCES> 0
<INVENTORY> 258,660
<CURRENT-ASSETS> 289,501
<PP&E> 84,555
<DEPRECIATION> (9,256)
<TOTAL-ASSETS> 389,477
<CURRENT-LIABILITIES> 106,868
<BONDS> 0
0
0
<COMMON> 57,932
<OTHER-SE> (127,246)
<TOTAL-LIABILITY-AND-EQUITY> 389,477
<SALES> 24,251
<TOTAL-REVENUES> 24,251
<CGS> 43,864
<TOTAL-COSTS> 43,864
<OTHER-EXPENSES> 234,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,141
<INCOME-PRETAX> (270,723)
<INCOME-TAX> 0
<INCOME-CONTINUING> (270,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (270,723)
<EPS-BASIC> (0.050)
<EPS-DILUTED> 0.000
</TABLE>
