U. S. Securities and Exchange Commission
Washington, D. C. 20549
AMENDMENT NO. 2 TO FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
BAD TOYS, INC.
(Name of Small Business Issuer in its charter)
SEC FILE NO. 0-29836
Nevada 33-0677545
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2344 Woodridge Avenue, Kingsport, TN 37664
--------------------------------------------
(Address of principal executive offices)
423-247-9560
---------------------------
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.01 par value
-------------------------------
(Title of Class)
<PAGE>
TABLE OF CONTENTS
Page
Preliminary Statement .................................................... 1
Description of Business................................................... 1
Business Development ............................................ 1
Business of the Company ......................................... 1
The Manufacture for Sale of Motorcycles
from Component Parts .......................... 1
The Customizing and Motorcycle Servicing
Operation ..................................... 3
Special Orders of Premium Accessories, Parts,
Customizing Items and Apparel Related
to Harley-Davidson Motorcycles ................ 3
Rebuilding Used Harleys for Resale ..................... 3
Distribution Methods ................................... 4
Advertising ............................................ 4
Competition ............................................ 5
Supplies ............................................... 6
Dependence on Major Customers .......................... 6
Patents, Trademarks and Licenses ....................... 6
Government Approval and Regulations .................... 6
Year 2000 Computer Problems ............................ 6
Research and Development ............................... 7
Cost of Compliance with Environmental Laws ............. 7
Employees .............................................. 7
Management's Plan of Operation ........................................... 7
Operations and Financing of the Company Since
Inception in 1995 ...................................... 7
Plans for the Next Twelve Months ....................... 8
Going Concern Issue .................................... 9
Loans by Barrick Properties ............................ 9
Costs of Filing Periodic Reports ....................... 10
Properties ............................................................... 10
Security Ownership of Certain Beneficial Owners and
Management ...................................................... 11
Changes in Control .............................................. 12
Directors, Executive Officers and Control Persons ........................ 12
Executive Compensation ................................................... 13
Certain Relationships and Related Transactions ........................... 14
Description of Securities ................................................ 14
Common Stock .................................................... 14
Voting Rights .......................................... 14
ii
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Dividend Rights ........................................ 14
Liquidation Rights ..................................... 14
Preemptive Rights ...................................... 15
Registrar and Transfer Agents .......................... 15
Dissenters' Rights ..................................... 15
Market for Common Stock and Related Stockholder Matters .................. 15
Holders ......................................................... 15
Dividends ....................................................... 15
Legal Proceedings ........................................................ 16
Recent Sales of Unregistered Securities .................................. 16
Indemnification of Directors and Officers ................................ 17
Financial Statements ..................................................... 19
iii
<PAGE>
PRELIMINARY STATEMENT
Bad Toys, Inc. (the "Company") is filing this registration statement on a
voluntary basis under Section 12(g) of the Securities Exchange Act of 1934. It
is seeking approval by NASD Regulation, Inc. of an application filed by a market
maker to commence making a market in the Company's Common Stock on the OTC
Bulletin Board. A recent rule change requires that all companies who seek such
approval must file periodic financial reports with governmental authorities such
as the Securities and Exchange Commission. The effectiveness of this
registration statement on April 23, 1999 subjects the Company to the periodic
reporting requirements imposed by Section 13(a) of the Securities Exchange Act.
DESCRIPTION OF BUSINESS
Business Development
Bad Toys, Inc. (the "Company") was incorporated on April 21, 1995 in the
State of Nevada. Our initial operations were conducted in southern California
but were moved to Kingsport, Tennessee in 1996. We first had revenues from
operations in March, 1998.
Business of the Company
The Company
o manufactures for sale Harley-Davidson-type motorcycles
from component parts,
o maintains a customizing and motorcycle servicing
operation,
o special orders premium accessories, parts, customizing
items and apparel related to Harley-Davidson
motorcycles, and
o proposes to rebuild used Harleys for resale.
The Manufacture for Sale of Motorcycles from Component Parts.
-------------------------------------------------------------
We devoted the majority of our efforts from the Company's inception in
April 1995 until early 1999 to the design and development of a distinctive
Harley-Davidson-type motorcycle. The motorcycle is named the "Phoenix" model. We
build it from component parts available from motorcycle parts suppliers. We have
three "Phoenix" models on hand for display and for selling purposes.
1
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In motorcycle circles, the Phoenix is known as a custom-manufactured,
V-Twin, HD-type motorcycle. It is said to be a "V-Twin," because it has a
two-cylinder, four-stroke motorcycle engine with the cylinders set at a
45-degree angle to each other. It is said to be an "HD-type" because of its
resemblance to the motorcycles manufactured by Harley-Davidson. It is custom
manufactured, because Bad Toys, Inc. will build many features of it to a
customer's order.
The "Phoenix" was first shown to the public on our Internet home page -
www.badtoysinc.com - in early 1999. In April 1999 we showed the "Phoenix" to
motorcycle dealers and enthusiasts at a motorcycle show in Laughlin, Nevada.
Five dealers at the show indicated their interest in establishing dealerships
for the "Phoenix" motorcycle. Our directors are now determining what
requirements we will impose on our dealers, and negotiations with these five
firms will occur soon. Some 70 individuals at the show indicated their interest
in purchasing a Phoenix motorcycle. We are in the process of following up on
these indications of interest in an effort to consummate sales.
We offer to manufacture, to customers' orders, V-Twin, HD-type motorcycles
from component parts in five basic styles:
o Traditional-classic, the full fenders model Harley-
Davidson made famous,
o Pro Street, a lowered frame with wide tires, short
fender and a low back fender,
o Outlaw Low Riders, with narrow forks and stubby
fenders,
o Tour Glide package, with foot rests rather than foot
pegs, saddlebags with windshield option, and
o Street Custom conversion, with wide tires and short
fenders.
We are quite able and equipped to build custom-manufactured motorcycles in
our shop in Kingsport, Tennessee. The frames and most of the parts are in
inventory to build four motorcycles. We will require up-front, partial payments
from customers to finance our purchase of custom parts not in inventory.
Our choice of sparsely populated Kingsport, Tennessee for our first
location was beneficial only in providing us a two-year, low-overhead
environment for completing the design and development of the Phoenix motorcycle.
We face the material risk that, unless we can open a second location in a major
metropolitan area, our product will be too highly priced for the majority of
motorcycle buyers in the area where we now operate.
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The Customizing and Motorcycle Servicing Operation.
--------------------------------------------------
Most motorcycle owners "customize" their bikes to a certain extent. We
cater to this market by stocking bolt-on upgrades such as billet grips, foot
pegs, mirrors, chrome bolts and "custom" seats. We provide immediate
installation of the bolt-on conversions.
We commenced servicing motorcycles in 1998. As soon as this facet of our
business should increase, we will attempt to revolutionize the motorcycle
service business by providing a quick turnaround in an industry known for its
"leave it today, pick it up next month" approach to motorcycle repair. Subject
to the availability of repair business, we will operate our service department
seven days a week, twenty-four hours a day.
Special Orders of Premium Accessories, Parts, Customizing Items and Apparel
---------------------------------------------------------------------------
Related to Harley-Davidson Motorcycles.
- --------------------------------------
We commenced taking special orders in 1998.
The fixed displays in our showroom premiere the high markup, bolt-on,
premium custom items in bullet aluminum or chrome. The product lines we maintain
as an authorized dealer include Pro One, Bay Area Custom, Arlen Ness and
Performance Machine, and others.
We believe we have the only customer self-service station that includes all
available catalogs and parts books. We plan to soon add a user-friendly computer
terminal and screen through which our customers can easily locate a desired part
and print a purchase order.
Rebuilding Used Harleys for Resale.
----------------------------------
We have not yet commenced this part of our business plan the purchase of
used motorcycles and rebuilding them for resale. Subject to the availability of
funds - the source of which we are not aware - we propose to acquire and
recondition used Harley-Davidson motorcycles for resale. All resale bikes would
be placed into a like-new condition. This would include
o new tires, paint and chrome,
o polished aluminum and,
o excellent running condition.
We expect this activity will commence in 2000. It will require a constant
advertising campaign for used motorcycles conducted in trade magazines and in
high-circulation magazines for Harley-Davidson riders. We do not now have funds
available
3
<PAGE>
to allocate to the purchase of used bikes; the opening of a second shop and
store in Phoenix, Arizona is our primary focus and is more critical to our
business turning profitable than buying used bikes and reconditioning them for
resale.
The reconditioning of used bikes is financially consistent, however, with
our desire to provide around-the-clock repair service. Mechanics not repairing
customers' motorcycles on same-day service can be reconditioning used
motorcycles on no time schedule - and still be available for the drop-in
customer with a repair job to be done. We forecast that the planned second
facility in Phoenix, Arizona will provide the volume of repair business to
justify the inauguration of buying and reconditioning used Harley-Davidson
motorcycles.
Distribution Methods
--------------------
We have commenced marketing our custom manufactured, V-Twin, HD-type
motorcycles on a national basis. Our Phoenix bikes are featured now on our
Internet home page (badtoysinc.com). We presently sell premium accessories,
parts, customizing items and apparel through our Kingsport, Tennessee, retail
outlet. We project revenue increases to come from expansion to locations in
additional cities and from sales through catalogs we propose to distribute
nationally commencing the Fall of 1999. Our Phoenix-model motorcycle is now
featured in the Atlas Pro Magnum catalog. Subject to the availability of
capital, we propose to open nine additional stores during the next 60 months.
Advertising. We propose to develop an advertising program consisting of:
-----------
1. Newsletters: monthly or quarterly
2. Direct mail - motorcycle listings
3. Cycle magazines
4. Nontraditional magazines
5. Internet home page
The newsletter will highlight new product introductions, repair or
maintenance subjects, after-market product evaluations, local and major national
events and periodic Company-advertised specials. We will commence this low-cost
program in late 1999.
Direct mail advertising will initially consist of an annual mailing of a
high-quality brochure. The brochure will market our custom-built motorcycle
program, our mail order catalog program and the availability of refurbished or
new motorcycles for sale. By specific request we will add an addressee to our
newsletter mailing list. Subject to the availability of funds, this program will
be launched in late 1999.
4
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Subject to the availability of funds, our monthly advertising program will
be advertisements in high-circulation magazines for Harley-Davidson riders,
magazines such as American Iron, Hot Bike, etc. We plan one-half to full-page,
two-color ads for custom manufacture and catalog sales.
Subject to the availability of funds, Bad Toys plans to commence a
non-traditional advertising program in magazines such as Newsweek, Time, Sports
Illustrated, and the New Yorker. The demographics for Harley-Davidson riders now
span every social economic group from truck drivers to company presidents,
doctors, lawyers and accountants. Upper-middle class to the wealthy now comprise
the largest group of Harley riders.
The Internet home page is already a reality.
Competition
-----------
Licensed Harley-Davidson dealerships generally offer for sale only new,
manufactured HD motorcycles. Dealerships generally do not maintain significant
inventories of used or custom-built motorcycles for resale to the riding public.
Individuals account for the majority of used motorcycle sales with the remainder
being provided by small, under-capitalized, sole-proprietor motorcycle shops.
Titan has commenced to use some of these shops as a distribution network for its
motorcycles, but Titan does not compete at Harley-Davidson prices.
The provision of special construction, custom-built motorcycles, HD type,
as we propose to do, is an emerging market. Arlen Ness, Ultra, CMC and Titan
earlier entered this market, have name recognition and dominate this market
today. This market segment has long been treated as an ancillary business and
not as a primary focus. There are currently few companies that are manufacturing
custom-built motorcycles for inventory for sale. Bad Toys proposes to maintain a
ten to fifteen, custom-built-motorcycle inventory at each location in addition
to our ground-up, custom-built, customer-selected program.
Repair service is the most neglected segment in the motorcycle business.
Dealers provide the most significant competition in this arena, as they are
adequately capitalized, maintain a significant number of service bays, and have
large inventories of parts. Dealerships typically have the negative attributes
of limited hours for access - 8 am to 5 pm, closed Sundays - and no concept of
quick service turnaround. In essence, the traditional queuing system is the
foundation for all repair service; i.e., if the customer needs a three-hour seal
replacement, he can leave the bike for a month. Small shops exhibit the same
characteristics as the large dealerships, but
5
<PAGE>
service turnaround is further exaggerated by limited inventories and no capital.
In many instances the small shop has to collect the money from the customer in
advance to purchase the necessary replacement parts; this, of course, extends
the service turnaround time.
Supplies
--------
We obtain our supplies from after-market Harley-Davidson suppliers and
other manufacturers of motorcycle parts, such as Pro One, Bay Area Custom, J.
Brake, Arlen Ness and Performance Machine. These supplies are readily available.
Although we are authorized dealers of all the above-named suppliers and many
others, we are still required to pay cash for most large motorcycle parts.
Dependence on Major Customers
-----------------------------
We are not dependent on any major customers.
Patents, Trademarks and Licenses
--------------------------------
We have filed applications in the U.S. to register "Bad Toys," "Phoenix,"
and BT(and) Design as trademarks and service marks. We are not a licensed Harley
Davidson dealer, as we do not sell new Harley-Davidson motorcycles.
Government Approval and Regulations
-----------------------------------
We need no U.S. Department of Transportation approval to build special
construction motorcycles that are custom-made to a customer's order, to rebuild
motorcycles or to assemble a motorcycle from component parts that are available
in the open market. Our business is subject to no government regulations other
than those of OSHA, regulating safety in the workplace, and those of EPA,
regulating the disposal of oil, grease, tires, batteries and the prevention of
pollution. We are able to comply with all OSHA and EPA regulations without
onerous financial or other burdens. All motorcycles are built by hand, rather
than in a moving assembly line. Safety goggles are used when required, and fire
extinguishers are readily available. We dispose of pollutants by periodically
taking them to authorized disposal sites.
Year 2000 Computer Problems.
---------------------------
We have determined that we do not face material costs, problems or
uncertainties about the year 2000 computer problem. This problem affects many
companies and organizations and stems from the fact that many existing computer
programs use only two digits to identify a year in the date field and do not
consider the impact of the year 2000. We are newly organized, presently use
off-the-shelf and easily replaceable software programs, and have yet to devise
our own software programs.
We have been advised by our parts suppliers that they are Year 2000
compliant. Should they not be and should difficulties arise in ordering parts
from suppliers, we should still be able
6
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to obtain all needed parts from other, larger motorcycle dealers who would have
the parts in inventory.
Research and Development
------------------------
We have expended no funds during the last two years on research and
development.
Cost of Compliance with Environmental Laws
------------------------------------------
The expense of complying with environmental regulations is of minimal
consequence. The compliance consists of the proper disposal of oil, tires and
batteries. We put all used oil in 55- gallon drums and transport them by truck
to a Johnson City, Tennessee firm that cleans the oil for reuse. We take used
tires to a nearby landfill. Old batteries are disposed of by the suppliers of
new batteries. We are in compliance with all environmental laws and regulations.
Employees
---------
We employ five persons, four persons full time and one person part time.
MANAGEMENT'S PLAN OF OPERATION
Operations and Financing of the Company Since Inception in 1995.
- ---------------------------------------------------------------
From the inception of the Company in California in April 1995 until its
move to Tennessee in December 1996, we concentrated our efforts on developing a
prototype motorcycle and seeking business partners. These activities were
financed by cash contributions for equity made by Larry N. Lunan, our president
and a director of the Company, by personal services for equity performed by
various friends of Mr. Lunan, and by a $5,000 loan provided by Barrick
Properties, LLC of Phoenix, Arizona, a company under the control of David W.
Barrick, who recently became a director of the Company.
During 1997 we continued work on developing a prototype motorcycle,
obtained a rental facility, renovated the rental facility, and became dealers
for several suppliers of motorcycle parts. We had no sales or employees during
1997. All work on the prototype motorcycle, on renovating the rental facility,
and on administrative matters was performed by independent contractors, Mr.
Lunan and his wife, Susan H. Lunan. The needed cash was provided by loans to the
Company made by Mr. and Mrs. Lunan and by Barrick Properties, LLC.
In 1998 we hired our first two employees, opened our supplies and parts
retail outlet at our facility in Kingsport, Tennessee, and continued almost to
completion the development of our prototype "Phoenix" motorcycle. We financed
our activities
7
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in 1998 through additional loans to the Company made by Mr. and Mrs. Lunan
(approximately $138,000), Barrick Properties, LLC ($30,000), and friends of the
Lunans (approximately $24,500), by bank loans secured by vehicles ($11,000) and
by the sale of common stock of the Company (approximately $85,500) in a public
offering exempt from registration with the Securities and Exchange Commission
pursuant to Regulation D, Rule 504 of the Commission.
During the first quarter of 1999 we completed work on our Phoenix
motorcycle and showed it to motorcycle enthusiasts at a motorcycle show in
Laughlin, Nevada. We have three Phoenix motorcycles for sale and four frames in
inventory on which custom models can be built. Additional capital of
approximately $50,000 will be needed to complete these seven custom-built
motorcycles. We propose to finance such additional costs through front-end
partial payments by customers and through bank loans, secured by contracts
receivable and, if necessary, additional loans to the Company by the Lunans and
by Barrick Properties, LLC.
Plans for the Next Twelve Months.
--------------------------------
The Company's plan of operation for the next twelve months is, first, to
realize positive cash flow at our Kingsport, Tennessee facility. We believe this
will be realized during June 1999. We also 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.
A shareholder, David Barrick of Phoenix, Arizona (Barrick Properties, LLC),
has advanced funds to the Company for working capital and offers to continue to
advance working capital funds, as needed, during 1999.
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
8
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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 past 1999, and the
ability of the Lunans to provide additional capital - other than the
contribution of their personal services - is quite limited.
Loans by Barrick Properties.
---------------------------
Loans to the Company by Barrick Properties are made from time to time, as
needed for working capital. The loans are usually short-term loans for periods
of several months to a year. Loans of $8,000 made in 1996 and 1997, however, are
not due until September 30, 2000. Interest rates on the loans vary from ten
percent to 10.5 percent. Barrick Properties has the right to convert the
principal amounts of the loans to common stock of the Company at a conversion
price equal to the lower of $1.25 or one-half the lowest offering price of the
Common Stock should the Company conduct a private placement or public offering
of its Common Stock before the loans are repaid. Because of a public offering
conducted by the Company at $1.00 a share, Barrick Properties can convert its
loans to Common Stock of the Company at a price of $0.50 a share. Presently
outstanding indebtedness to Barrick Properties is approximately $60,000. Barrick
Properties, which is under the control of a director of the Company, Mr. David
W. Barrick, has indicated that it will continue to provide funds on these terms
for working capital as needed during 1999. There is no stated limit on the
amount of funds that Barrick Properties indicates it will provide for working
capital during 1999.
Costs of Filing Periodic Reports.
--------------------------------
The filing of this Form 10-SB registration statement subjects the Company
to certain requirements of the Exchange Act of 1934. These requirements include
the filing of an annual
9
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report on the Company's business, which must include audited financial
statements; quarterly reports, which must include unaudited interim financial
statements; and periodic reports of certain material events of which investors
should be made aware. Legal and accounting expertise are required to prepare
these reports. The Company's president was a certified public accountant and
prepares unaudited financial statements for the Company. The Company's attorney,
Thomas J. Kenan of Oklahoma City, Oklahoma, has agreed to perform future legal
work for the Company for stock in the Company should cash funds not be available
to pay for his legal services. The annual auditor's services must be paid for in
cash. Should cash not be available to pay for these auditor's services, the
Company will have to borrow these needed funds from the Lunans, Barrick
Property, or other sources not yet identified or needed.
PROPERTIES
The Company leases a retail and manufacturing operation at a single
facility in a specially designed 3,000-square-foot retail and service building.
The retail facility is at 2046 West Stone Drive, Kingsport, Tennessee 37660.
The facility is in a high traffic area with approximately 15,000 vehicles
passing by a day. The facility is easily accessible by freeway and should draw
customers from a 150-mile radius with a population of 3,000,000 people. The
property has ample parking and an outside area for weekend events and motorcycle
display.
The forward area of the showroom is for the display of company custom-built
and rebuilt Harleys for sale.
The facility showroom, when stocked with inventory, will emphasize
permanently affixed displays of products with secured inventory storage
compartments. This should provide an efficient use of display space, increased
security, efficient showroom stocking maintenance and enhanced inventory
control.
The showroom will be organized to allow for variation in location of
displays to accommodate customer traffic flow within the store and to heighten
interest.
The warehouse area of the facility has adequate space to stock and store
quantities of all items on display in the showroom in addition to numerous other
mechanical parts and items not displayed which are in daily demand.
The service and assembly area is large enough to house a staff of mechanics
and service personnel and is capable of accommodating the custom building and
rebuilding of motorcycles.
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The lease on the facility expires in September 2002.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of December 31, 1998, the number of shares
of Common Stock of the Company beneficially owned by each officer and director
of the Company, individually and as a group, and by each person known to the
Company to be the beneficial owner of more than five percent of the Common
Stock.
<TABLE>
<CAPTION>
Number of
Shares of
Name and Address Common Stock Percent
----------------- ------------- -------
<S> <C> <C>
Larry N. Lunan 4,221,350(1) 79.6
2344 Woodridge Avenue
Kingsport, TN 37664
Susan H. Lunan 3,435,125(2) 63.6
2344 Woodridge Avenue
Kingsport, TN 37664
Roger A. Warren 40,000 0.8
17130 Redhill Avenue
Irvine, CA 92714
David W. Barrick(3) 287,500 5.4
4336 East Beck Lane
Phoenix, AZ 85032
Monte W. Barrick(3) 287,500 5.4
1518 East Rosemont Drive
Phoenix, AZ 85024
Officers and Directors 4,548,850 85.8
as a group (3 persons)
-------------------------
</TABLE>
(1) Includes 3,435,125 shares owned of record by Susan H. Lunan,
Mr. Lunan's spouse.
(2) These shares are also attributed to Mrs. Lunan's spouse, Larry
N. Lunan, but Mr. Lunan disavows any beneficial interest in
the shares.
(3) David W. Barrick and his son, Monte W. Barrick, are each
attributed the shares held of record by Barrick Properties,
LLC, a company affiliated with them.
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<PAGE>
Changes in Control
There are no arrangements which may result in a change in control of
the Company.
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The Company's directors, officers and significant employees occupying
executive officer positions, their ages as of January 10, 1999, the directors'
terms of office and the period each director has served are set forth in the
following table:
<TABLE>
<CAPTION>
Director's
Director Term
Person Positions and Offices Since Expires
- --------------------- ---------------------- -------- ----------
<S> <C> <C> <C>
Larry N. Lunan, 58 President, CEO and 1998 1999
Chairman of the Board
of Directors
Roger A. Warren, 34 Vice President, CFO, 1995 1999
Secretary and Director
David W. Barrick, 52 Director 1999 1999
</TABLE>
LARRY N. LUNAN. Mr. Lunan founded Bad Toys, Inc. in April 1995 but has
devoted his full-time efforts to Bad Toys since mid-1994. Mr. Lunan has been an
active motorcycle hobbyist since the mid-1950s. Mr. Lunan received a certified
public accountant certificate in 1968 and was an accountant with Haskins & Sells
from 1967 to 1971. From 1971 to 1975 Mr. Lunan was a controller and vice
president of finance for Itel Leasing Corporation. From 1975 until 1982 he was
vice president of finance for Arcata Book Group, a subsidiary of Arcata
Corporation. From 1982 until July 1994 he was employed as president of Fors
Capital Corporation, a wholly-owned business consulting firm. In this capacity
he was active in development-stage companies and capital formation. The most
successful of these enterprises was Callaway Golf, which is currently traded on
the New York Stock Exchange. From July 1989 until February 1995 Mr. Lunan also
served as president, CEO and chairman of the board of a Nevada corporation
mining company, Seahawk, Inc. Seahawk filed a voluntary chapter 11 petition in
January 1995. Within a month the case was converted to a chapter 7 case and a
trustee was appointed. Seahawk was subsequently liquidated.
ROGER A. WARREN. Mr. Warren is a C.P.A. for Stafford & Warren, a C.P.A.
firm specializing in small, start-up, and development-stage companies. Client
industries served include manufacturing enterprises, real estate, professional
service corporations, mining operations, and environmental clean-up. Mr. Warren
was an accountant with Arthur Young & Co. from 1986 to 1990 and received a
certified public accounting certificate in 1990. He then practiced accountancy
as a sole proprietor from
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1990 until 1998, when he combined his practice with Stafford & Associates to
form Stafford and Warren.
DAVID W. BARRICK. Mr. Barrick is currently CEO and vice president of
Barrick Properties, LLC and Barrick Properties, Inc., respectively. The
companies are based in Phoenix, Arizona, and are closely held (family owned)
investment holding companies. Mr. Barrick has operated the Barrick Properties
companies since 1976. The companies either have been and/or are currently
involved in banking and financial, mining, ranching, cattle and feedlot
operations, real estate (commercial and residential), equine (breeding and
racing), retail (western clothier and tack), manufacturing (aluminum trailers),
distribution (farm implement), automotive services, retail food and gas outlets,
auto dealerships, oil and gas (drilling, production and leasing), hotel casino
properties (operations and real estate), food and liquor service, and wholesale
distribution (food and drug).
EXECUTIVE COMPENSATION
Set forth below is the aggregate compensation during fiscal years 1996,
1997 and 1998 of the chief executive officer of the Company. During the period,
no executive officer of the Company received compensation that exceeded
$100,000.
<TABLE>
<CAPTION>
Fiscal Annual Compensation
Name Year Salary Bonus
--------------- ------ -------- ------------
<S> <C> <C> <C>
Larry N. Lunan, 1998 $50,000 $35,000
President
1997 $27,000 -
1996 $27,000 -
</TABLE>
During the last three fiscal years, no executive officer of the Company has
been granted stock options or stock appreciation rights and no executive
officer, other than its president, Larry N. Lunan, has been granted stock in
exchange for services. The Company has no long-term incentive plan intended to
serve as incentive for performance to occur over a period longer than one fiscal
year.
Directors of the Company receive no compensation for their services as
directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions during the last two fiscal years, and there are
no proposed transactions, that involve amounts in excess of $60,000 to which the
Company was or is to be a party in which any director, executive officer,
beneficial owner of more than five percent of the Company's Common Stock, or
members of
13
<PAGE>
their immediate families had, or is to have, a direct or indirect material
interest, other than the following:
David W. Barrick of Phoenix, Arizona is a director of the Company. During
the last two years, a company under his control, Barrick Properties, LLC, has
loaned an aggregate of $38,094 to the Company, for working capital, at an annual
interest rate of 10.5 percent. The loans are convertible into common Stock of
the Company at a conversion price of $.50. Interest payments on the notes were
paid in the amount of $551 on December 30, 1997 and $1,525 on December 1, 1998.
Barrick Properties has made a continuing offer to advance needed working
capital to the Company during 1999 on the same terms.
DESCRIPTION OF SECURITIES
The Company is authorized to issue ten million shares of Common Stock
($0.01 par value). The presently outstanding shares of Common Stock are fully
paid and nonassessable.
Common Stock
Voting Rights. Holders of shares of Common Stock have one vote a share on
all matters submitted to a vote of the shareholders. Shares of Common Stock do
not have cumulative voting rights, which means that the holders of a majority of
the shareholder votes eligible to vote and voting for the election of the board
of directors can elect all members of the board of directors.
Dividend Rights. Holders of record of shares of Common Stock receive
dividends when and if declared by the board of directors out of funds of the
Company legally available therefor.
Liquidation Rights. Upon any liquidation, dissolution or winding up of the
Company, holders of shares of Common Stock receive pro rata all of the assets of
the Company available for distribution to shareholders after distributions are
made to the holders of the Company's Preferred Stock.
Preemptive Rights. Holders of Common Stock do not have any preemptive
rights to subscribe for or to purchase any stock, obligations or other
securities of the Company.
Registrar and Transfer Agent. The Company's registrar and transfer agent is
Nevada Agency and Trust Company, 50 West Liberty Street, Suite 880, Reno, Nevada
87501.
Dissenters' Rights. Under current Nevada law, a shareholder is afforded
dissenters' rights which, if properly exercised, may
14
<PAGE>
require the Company to purchase his shares. Dissenters' rights commonly arise in
extraordinary transactions such as mergers, consolidations, reorganizations,
substantial asset sales, liquidating distributions, and certain amendments to
the Company's Certificate of Incorporation.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the Company's Common Stock. We have
applied for OTC Bulletin Board quotation rights, and we expect our Common Stock
to be quoted by April 1999.
On December 31, 1998 there were 5,3550,000 shares of Common Stock
outstanding. An additional 1,107,520 shares of Common Stock are subject to
outstanding options to purchase, or securities convertible into, such shares of
stock.
On December 31, 1998, some 1,042,625 shares of our outstanding shares of
Common Stock could be sold pursuant to Rule 144 under the Securities Act of
1933.
During the period from September 14, 1998 through the day prior to the
effective date of this Form 10-SB, we offered 1,000,000 shares of our Common
Stock to the public in several states pursuant to the exemption from
registration provided by Regulation D, Rule 504 of the Securities and Exchange
Commission. As of January 31, 1999, 99,930 of these shares had been sold.
Holders
As of January 31, 1999 there were approximately 74 holders of record of our
Common Stock.
Dividends
We have paid no dividends to our stockholders and do not plan to pay
dividends on our Common Stock in the foreseeable future. We currently intend to
retain any earnings to finance future growth.
LEGAL PROCEEDINGS
Neither the Company nor our property is a party to any pending legal
proceeding or any known proceeding that a governmental authority is
contemplating.
RECENT SALES OF UNREGISTERED SECURITIES
During the period from January 1, 1996 through March 13, 1998 the Company
sold 310,400 shares of our Common Stock in an
15
<PAGE>
offering exempt from registration pursuant to the provisions of Regulation D,
Rule 506 of the Securities and Exchange Commission. No underwriters were used to
effect the sales. All sales were made in exchange for services rendered to the
Company, except that one sale was made in exchange for prepaid rent of the
Company's leased facilities. The names of the persons who exchanged their
services or prepaid rent for shares of stock, the dates the shares were
exchanged for services or prepaid rent, the number of shares issued and the
value of the shares on the dates of the exchanges are set forth below:
<TABLE>
<CAPTION>
No. of Nature of
Shares Value of Consideration
Person Date Issued Shares Paid for Shares
----------------------- -------- ------- -------- ---------------
<S> <C> <C> <C> <C>
Barrick Properties, LLC 05-31-96 37,500 $ 7,500 (1)
Wesley Culbertson 05-31-96 10,000 2,000 (2)
Stanley Carlson 12-31-96 1,000 200 (3)
Frank Eckles 12-31-96 1,000 200 (3)
Donald M. Harper 12-31-96 20,000 4,000 (4)
Clinton L. and Sheila K.
Hubbard 12-31-96 4,000 800 (5)
Susan H. Lunan 12-31-96 1,500 300 (6)
Mario W. Mainero, Inc. 12-31-96 10,000 2,000 (5)
Gary C. and Andrea W.
Andes 12-31-97 62,400 31,200 (7)
Susan H. Lunan 12-31-97 90,000 45,000 (6)
Larry Lunan 03-13-98 10,000 5,000 (6)
Steve Snyder 03-13-98 54,000 27,000 (3)
-------------------------
</TABLE>
(1) Business consulting and additional compensation for lending money
to the Company.
(2) Design and development work on the Company's "Phoenix" prototype
motorcycle.
(3) Introductions to people in the motorcycle business as possible
business partners or joint venture partners.
(4) Investigated markets in the north-central U.S. for possible locations
locations of outlets.
(5) Legal work.
(6) Administrative work.
(7) Five years' prepaid rent on the Company's facility in Tennessee.
All of the above persons had a preexisting relationship with the Company
and our president, Larry N. Lunan. Some of the persons are employees of the
Company. Susan H. Lunan is the spouse of Larry N. Lunan. The Andes are the
lessors of our facilities. Barrick Properties, LLC is under the ownership and
16
<PAGE>
control of David Barrick, a director and a longtime friend of Larry N. Lunan and
the lender of some of the working capital of the Company. Mr. Barrick's
outstanding loans to the Company are convertible, at his option, into Common
Stock of the Company at a conversion price of $.50 a share.
All of the above persons are sophisticated investors within the meaning of
the Commission's Rule 506(b)(2)(ii). Only Barrick Properties, LLC and Larry
Lunan, president of the Company, are "accredited investors" within the meaning
of Rule 501 of Regulation D.
During 1997 and 1998 Larry and Susan Lunan loaned $178,082 to the Company
and Barrick Properties, LLC loaned $38,094 to the Company. The Lunan loans
mature on September 30, 2000 and accrue interest at 10.5 percent a year. The
Barrick Properties loans mature at various times during 1999 and 2000, bear
interest at rates from ten percent to 10.5 percent a year and are convertible
into Common Stock of the Company at $0.50 a share.
During the period from September 14, 1998 until the day before the
effective date of this Form 10-SB, the Company conducted a public offering of
shares of its Common Stock at $1.00 a share pursuant to the exemption from
registration provided by Regulation D, Rule 504. Some 105,930 of the offered
shares were sold. The offering was made only in states where no state
registration of the securities was required.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Nevada corporation law, a corporation is authorized to indemnify
officers, directors, employees and agents who are made or threatened to be made
parties to any civil, criminal, administrative or investigative suit or
proceeding by reason of the fact that they are or were a director, officer,
employee or agent of the corporation or are or were acting in the same capacity
for another entity at the request of the corporation. Such indemnification
includes expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such persons if they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation or, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. In the case of any action or suit by or in the right of the
corporation against such persons, the corporation is authorized to provide
similar indemnification, provided that, should any such persons be adjudged to
be liable for negligence or misconduct in the performance of duties to the
corporation, the court conducting the proceeding must determine that such
persons are nevertheless fairly and reasonably entitled to indemnification. To
the extent any such persons are successful on the merits in defense of any such
action, suit or
17
<PAGE>
proceeding, Nevada law provides that they shall be indemnified against
reasonable expenses, including attorney fees. A corporation is authorized to
advance anticipated expenses for such suits or proceedings upon an undertaking
by the person to whom such advance is made to repay such advances if it is
ultimately determined that such person is not entitled to be indemnified by the
corporation. Indemnification and payment of expenses provided by Nevada law are
not deemed exclusive of any other rights by which an officer, director, employee
or agent may seek indemnification or payment of expenses or may be entitled to
under any by-law, agreement, or vote of shareholders or disinterested directors.
In such regard, a Nevada corporation is empowered to, and may, purchase and
maintain liability insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation. As a result of such corporation
law, the Company may, at some future time, be legally obligated to pay judgments
(including amounts paid in settlement) and expenses in regard to civil or
criminal suits or proceedings brought against one or more of its officers,
directors, employees or agents.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
18
<PAGE>
FINANCIAL STATEMENTS
There appears below the following financial statements of the Company:
Independent accountant's report ........................................ 22
Balance Sheets for the Years Ended
December 31, 1998 and December 31, 1997 ....................... 23
Statements of Income and Retained Earnings
for the Years Ended December 31, 1998
and December 31, 1997 ......................................... 24
Statements of Cash Flows for the Years Ended
December 31, 1997 and December 31, 1998 ....................... 25
Statements of Changes in Stockholders' Equity
for the Years Ending in December 31, 1998 and
December 31, 1997 ............................................. 27
Notes to Financial Statements, December 31, 1998
and December 31, 1997 ......................................... 28
19
<PAGE>
Todd Nims
Certified Public Accountant
7900 East Greenway, Suite 102
Scottsdale, Arizona 85260
(602) 922-9293
To the Board of Directors
Bad Toys, Inc.
Kingsport, Tennessee
I have audited the accompanying balance sheets of Bad Toys, Inc., (a development
stage company) as of December 31,1998 and December 31, 1997, and the related
statements of income, retained earnings, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain a reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Bad Toys, Inc. as of December 31,
1998 and December 31, 1997, and the results of operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note H to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note H. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Todd Nims, C.P.A.
February 7, 1999
20
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Balance Sheets
December 31, 1998 & December 31, 1997
<TABLE>
<CAPTION>
Assets 12/31/98 12/31/97
- ------ ---------- ----------
<S> <C> <C>
Cash & Cash Equivalents $ 1,757 476
Accounts Receivable 1,097 0
Inventory (Note B) 180,160 79,950
Prepaid Expenses 23,543 29,850
--------- ----------
Total Current Assets 206,557 110,276
--------- ----------
Property, Plant & Equipment,
net of accumulated
depreciation (Note C) 70,954 26,958
Organization Costs, net of
accumulated amortization 27,146 43,634
Syndication Costs 14,400 13,300
Utility Deposits 280 280
--------- ----------
Total Assets 319,337 194,448
========= ==========
Liabilities & Shareholders' Equity
- ----------------------------------
Accounts Payable & Accrued Liabilities 57,499 9,644
Current Portion of Long Term Debt 8,459 0
--------- ----------
Total Current Liabilities 65,958 9,644
--------- ----------
Notes Payable - Long Term 26,994 0
Notes Payable - Shareholders (Note F) 216,176 78,213
--------- ----------
Total Liabilities 309,128 87,857
--------- ----------
Common Stock 53,550 52,360
Additional Paid in Capital 249,332 164,840
Deficit Accumulated During the
Development Stage (292,673) (110,609)
--------- ----------
Total Liabilities & Shareholders' Equity 319,337 194,448
========= ==========
</TABLE>
See accountant's report and notes to financial statements
21
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statements of Income & Retained Earnings
December 31, 1998 & December 31, 1997
<TABLE>
<CAPTION>
12/31/98 12/31/97
---------- ----------
<S> <C> <C>
Sales 77,451 -
Cost of Sales 80,885 -
---------- ----------
Gross Profit (3,434) -
---------- ----------
General & Administrative Expenses 158,371 42,681
---------- ----------
Income (Loss) from operations before
interest expense (161,805) (42,681)
---------- ----------
Interest Expense 20,259 551
---------- ----------
Net (Loss) (182,064) (43,232)
---------- ----------
Beginning Retained Earnings\
(Accumulated Deficit) (110,609) (67,377)
--------- ----------
Ending Retained Earnings\
(Accumulated Deficit) (292,673) (110,609)
========= ==========
Net Earnings/(Loss) Per Common Share (.03) ( .01)
--------- ----------
</TABLE>
See accountant's report and notes to financial statements
22
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statements of Cash Flows
December 31, 1998 & December 31, 1997
<TABLE>
<CAPTION>
12/31/98 12/31/97
Cash flow from operating activities: ------------ ---------
<S> <C> <C>
Cash received from customers $ 76,354 0
Cash paid to suppliers and employees (220,835) (20,673)
Interest paid (18,851) (551)
Other Operating Disbursements (50,489) 0
Depreciation & Amortization 6,543 0
------------ ---------
Net cash provided (used)
by operating activities (207,278) (20,122)
Cash flow from investing activities:
Cash payments for the purchase
of property (50,539) 0
------------ ---------
Net cash provided (used)
by investing activities (50,539) 0
Cash flow from financing activities:
Proceeds from issuance of
long-term debt 59,886 3,789
Proceeds from equipment loans 17,126 0
Proceeds From Additional Paid
in Capital 84,492 16,700
Proceeds From Shareholder Debt 216,176 0
Proceeds From Issuance of Common Stock 1,190 0
------------ ----------
Net cash provided (used) by financing
activities 259,098 20,489
------------ ----------
Net increase (decrease) in cash
and equivalents 1,281 367
Cash and equivalents, beginning of year 476 109
------------ ----------
Cash and equivalents, end of year $ 1,757 $ 476
============ ==========
Supplemental disclosures of cash
flow information:
Cash paid during year for:
Interest expense 873 0
</TABLE>
See accountant's report and notes to financial statements
23
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statements of Cash Flows
December 31, 1998 & December 31, 1997
<TABLE>
<CAPTION>
12/31/98 12/31/97
---------- ----------
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities
Net Income\(Loss) $(182,065) $ (43,232)
---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 23,032 16,488
(Increase) decrease in accounts
receivable (1,097) 0
(Increase) decrease in subscriptions
receivable 0 41,000
(Increase) decrease in prepaid expenses 6,307 (29,850)
(Increase) decrease in inventories (100,210) (28,987)
(Increase) decrease in fixed assets 0 25,502
(Increase) decrease in syndication costs 0 (800)
Increase (decrease) in accounts payable 27,801 (263)
Increase (decrease) in accrued liabilities 18,646 0
Increase (decrease) in interest payable 1,408 20
(Increase) decrease in other assets (1,100) 0
---------- ----------
Total Adjustments (25,213) 23,110
---------- ----------
Net cash provided (used) by
operating activities $(207,278) $ (20,122)
========== ==========
</TABLE>
See accountant's report and notes to financial statements
24
<PAGE>
Bad Toys, Inc.
Statement of Changes in Stockholders' Equity
For the Years Ending December 31, 1998 & 1997
<TABLE>
<CAPTION>
Additional
Common Paid In Retained
Stock Capital Earnings
------ --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1996 50,836 90,164 (67,377)
Issuance of 152,400 shares
of Common Stock 1,524 74,676
Net Loss (43,232)
------ ------- ---------
Balance, December 31, 1997 52,360 164,840 (110,609)
Issuance of 119,000 shares
of Common Stock 1,190 84,492
Net Loss (182,064)
------ ------- ---------
Balance, December 31, 1998 53,550 249,332 (292,673)
====== ======= =========
</TABLE>
25
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1998 & December 31, 1997
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:
Years
--------
Machinery and equipment 3 - 10
Furniture and fixtures 3 - 10
Leasehold improvements 20 - 30
Depreciation expense for the year ended December 31, 1998 is $6,544.
26
<PAGE>
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 servicing of highly custom
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 cases where credit is granted, and
generally requires no collateral from its customers.
27
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1998 & December 31, 1997
NOTE B - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
Work in Process $ 82,862 $63,731
Finished goods 97,298 16,219
------ ------
$180,160 $79,950
</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>
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
Vehicles $20,328 $ -
Equipment 10,042 2,140
Furniture and Fixtures 2,082 1,203
Leasehold Improvements 45,045 23,615
77,497 26,958
Less accumulated depreciation ( 6,543) ( - )
------- ------
$70,954 $26,958
</TABLE>
28
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1998 & December 31, 1997
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
Bank note payable $629.04 per month plus
interest accrued at 9.75%, secured by vehicle. $ 5,425 -
Bank note payable $285.60 per month plus
interest accrued at 9.5%, secured by vehicle. 5,503 -
Unsecured 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,
convertible to common stock under varying terms
ranging from $1.25 to 1/2 of the weighted
average issuance price of all shares issued. 24,525 -
Unsecured Notes payable to stockholders
due Sept. 30, 2000 with interest at 10.5%,
convertible to common stock under varying terms
ranging from $1.25 to 1/2 of the weighted
average issuance price of all shares issued. 216,176 78,213
-------- -------
251,629 78,213
Less current portion (8,459) ( - )
-------- -------
Long-term Debt $243,170 $78,213
======== =======
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
<S> <C>
1999 $ 8,459
2000 243,170
--------
$251,629
========
</TABLE>
29
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1998 & December 31, 1997
NOTE E - INCOME TAXES
Operating Loss Carry-forwards
The Company has loss carry-forwards totaling $144,154 that may be offset against
future taxable income. If not used, the carry-forwards 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 of December 31, 1998 and December 31,
1997, consisted of the following:
<TABLE>
<CAPTION>
12-31-98 12-31-97
-------- --------
<S> <C> <C>
Notes payable to Larry and Susan Lunan
due September 30, 2000 with interest
at 10.5%. $178,082 $ 70,213
Notes payable to Barrick Properties, LLC
with interest at 10 to 10.5%, with
annual renewal options. 38,094 8,000
-------- --------
$216,176 $ 78,213
======== ========
</TABLE>
2. The Company leases its facilities from a minority stockholder as described
in Note G below.
30
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31,1998 & December 31, 1997
NOTE G - LEASING ARRANGEMENTS
The Company conducts its operations from facilities that are leased under a
five-year non-cancelable 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.
The following is a schedule of future minimum rental payments required under the
above operating lease (excluding prepaid rent expensed) as of December 31, 1998:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ --------
<S> <C>
1999 $10,800
2000 10,800
2001 10,800
2002 8,100
--------
$40,500
</TABLE>
Rental expense for the nine months ended December 31, 1998 and the year ended
December 31, 1997 were $ 20,040 and $ 8,680, 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
$290,192, and current liabilities, including the current portion of long term
debt, exceeds cash and current receivables by $71,551 at December 31, 1998.
Management is anticipating a large capital inflow from a planned initial public
offering scheduled for April 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.
31
<PAGE>
EXHIBITS
Index to Exhibits
Exhibit No. Description
3 - Articles of Incorporation of Bad Toys,
Inc.*
3.1 - Bylaws of Bad Toys, Inc.*
4 - Convertible promissory note dated January
5, 1999 issued by the Company to Barrick
Properties, LLC, which note is
representative of other convertible
promissory notes issued by the Company.*
10 - Kingsport, Tennessee facility lease
between the Company and Gary C. and
Andrea W. Andes*
10.1 - Stock Option Plan*
*Previously filed with Form 10-SB; incorporated herein.
32
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
BAD TOYS, INC.
Date: May 26, 1999 By /s/ Larry N. Lunan
---------------------------------
Larry N. Lunan, President
Date: May 26, 1999 /s/ Roger A. Warren
-----------------------------------
Roger A. Warren, Chief Financial
Officer, Vice President and Director
Date: May 26, 1999 /s/ Larry N. Lunan
-----------------------------------
Larry N. Lunan, President and Director
Date: May 26, 1999 /s/ David W. Barrick
-----------------------------------
David W. Barrick, Director
33
