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
March 31, 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 March 31, 1999, there were 5,400,430 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
March 31, 1999 & March 31, 1998
<TABLE>
<CAPTION>
3/31/99 3/31/98
------- -------
<S> <C> <C>
Assets
- ------
Cash & Cash Equivalents $ 4,405 $ 596
Accounts Receivable 2,044 0
Inventory (Note B) 214,374 98,050
Prepaid Expenses 22,091 28,204
------- -------
Total Current Assets 242,914 126,850
------- -------
Property, Plant & Equipment,
net of accumulated depreciation (Note C) 71,049 49,652
Organization Costs, net of accumulated amortization 24,398 39,512
Syndication Costs 14,400 13,300
Utility Deposits 280 280
------- -------
Total Assets 353,041 229,594
======= =======
Liabilities & Shareholders' Equity
Accounts Payable & Accrued Liabilities 76,322 21,035
Current Portion of Long Term Debt 8,093 0
------- -------
Total Current Liabilities 84,415 21,035
------- -------
Notes Payable - Long Term 24,525 7,500
Notes Payable - Shareholders (Note F) 252,753 111,547
------- -------
Total Liabilities 361,693 140,082
Common Stock 54,095 52,360
Additional Paid In Capital 303,287 164,840
Deficit Accumulated During the Development Stage (366,034) (127,688)
------- -------
Total Liabilities & Shareholders' Equity $ 353,041 $ 229,594
======= =======
</TABLE>
See notes to financial statements
3
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statements of Income & Retained Earnings
For the Three Months Ended
March 31, 1999 & March 31, 1998
<TABLE>
<CAPTION>
3/31/99 3/31/98
------- -------
<S> <C> <C>
Sales $ 9,706 $ 2,728
Cost of Sales 20,032 3,258
------- -------
Gross Profit (10,326) (530)
------- -------
General & Administrative Expenses 55,613 13,007
------- -------
Income (Loss) from operations before interest expense (65,939) (13,537)
-------
Interest Expense 7,422 3,542
------- -------
Net Loss (73,361) (17,079)
------- -------
Beginning Retained Earnings\(Accumulated Deficit) (292,673) (110,609)
------- -------
Ending Retained Earnings\(Accumulated Deficit) (366,034) (127,688)
======= =======
</TABLE>
See notes to financial statements
4
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statements of Cash Flows
For the Three Months Ended
March 31, 1999 & March 31, 1998
<TABLE>
<CAPTION>
3/31/99 3/31/98
------- -------
<S> <C> <C>
Cash flow from operating activities:
Cash received from customers $ 8,759 $ 2,728
Cash paid to suppliers and employees (67,978) (32,650)
Other operating disbursements (33,541) (16,550)
Depreciation & Amortization 7,166 5,758
------- -------
Net cash provided (used) by operating activities (85,594) (40,714)
------- -------
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 loans 0 7,500
Debt reduction:
Long-Term (2,469) 0
Short-Term (366) 0
Proceeds from additional paid in capital 53,955 0
Proceeds from shareholder debt 36,577 33,334
Proceeds from issuance of common stock 545 0
------- -------
Net cash provided (used) by financing activities 88,242 40,834
------- -------
Net increase (decrease) in cash & equivalents
Cash & Equivalents, beginning of period 1,757 476
------- -------
Cash & Equivalents, end of period 4,405 596
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense 6,172 7,056
</TABLE>
See notes to financial statements
5
<PAGE>
Bad Toys, Inc.
(A Development Stage Company)
Statements of Cash Flows
For the Three Months Ended
March 31, 1999 & March 31, 1998
<TABLE>
<CAPTION>
3/31/99 3/31/98
------- -------
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities
Net Income/(Loss) $ (73,361) (17,079)
------- -------
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 7,166 5,758
(Increase) decrease in accounts receivable (947) 0
(Increase) decrease in prepaid expense 1,452 1,646
(Increase) decrease in inventories (34,214) (18,100)
(Increase) decrease in fixed assets (4,513) (24,330)
Increase (decrease) in accounts payable 12,881 1,800
Increase (decrease) in accrued liabilities 4,692 9,224
Increase (decrease) in interest payable 1,250 367
------- -------
Total adjustments (12,233) (23,635)
------- -------
Net cash provided (used) by investing activities (85,594) (40,714)
====== ======
</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 three months ended March 31, 1999 is $ 3,044.
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>
Mar. 31, 1999 Mar. 31, 1998
------------- -------------
<S> <C> <C>
Work in Process $ 90,488 $ 64,645
Finished goods 123,886 33,405
------- ------
$ 214,374 $ 98,050
======= ======
</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>
Mar. 31, 1999 Mar. 31, 1998
------------- -------------
<S> <C> <C>
Vehicles $ 20,328 $ 7,500
Equipment 13,101 2,183
Furniture and Fixtures 2,163 1,509
Leasehold Improvements 45,045 40,096
------ ------
80,637 51,288
Less accumulated depreciation (9,588) (1,636)
------ ------
$ 71,049 $ 49,652
====== ======
</TABLE>
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Mar. 31, 1999 Mar. 31, 1998
------------- -------------
<S> <C> <C>
Bank note payable $629.04 per
Month plus interest accrued at
9.75%, secured by vehicle. $ 3,071 $ -
Bank note payable $285.60 per
Month plus Interest accrued at
9.5%, secured by vehicle. 4,774 7,500
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. 24,525 -
Notes payable to stockholders due
Sept. 30, 2000 with interest at
10.5%, unsecured. 253,001 111,547
------- -------
285,371 119,047
Less current portion (8,093) ( - )
------- -------
Long-term Debt $ 277,278 $ 119,047
======= =======
</TABLE>
8
<PAGE>
Bad Toys, Inc.
Notes to Financial Statements
NOTE D - LONG-TERM DEBT (continued)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1999 $ 63,114
2000 161,839
-------
$224,953
=======
</TABLE>
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 March 31, 1999 and March 31, 1998,
consisted of the following:
Mar. 31, 1999 Mar. 31, 1998
------------- -------------
Notes payable to Larry & Susan
Lunan due Sept. 30, 2000 with
interest at 10.5%. $ 159,367 $ 101,547
Notes payable to Barrick Properties,
LLC, with interest at 10-10.5%,
with annual renewal options. 24,579 10,000
------ ------
$ 183,946 $ 111,547
======= =======
Interest expense related to these notes for the three months ended March 31,
1999 and March 31, 1998, were $ 5,942 and $7,056, respectively.
2. The Company leases its facilities from a minority stockholder as described in
Note G below.
9
<PAGE>
Bad Toys, Inc.
Notes to Financial Statements
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.
The following is a schedule of future minimum rental payments required under the
above operating lease (excluding prepaid rent expensed) as of March 31, 1999:
<TABLE>
<CAPTION>
Year Ending
Dec. 31, Amount
----------- ------
<S> <C>
1999 $ 8,100
2000 10,800
2001 10,800
2002 8,100
------
$ 37,800
======
</TABLE>
Rental expense for the three months ended March 31, 1999 and March 31, 1998 were
$ 5,010 and $ 5,010, 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
$362,990, and current receivables, including the current portion of long term
debt, exceeds cash and current receivables by $77,966 at March 31, 1999.
Management is anticipating a large capital inflow from a planned initial public
offering scheduled for June 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.
10
<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."
Sales
-----
We had sales of $9,706 in the first quarter of fiscal year 1999, as
compared with sales of $2,728 in the first quarter of 1998. All sales
represented sales of spare parts and repairs to motorcycles of other persons. No
sales have been made yet of the Company's custom-made motorcycles.
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, who are shareholders and have previously made loans
to the Company.
General and Administrative Expenses
-----------------------------------
General and administrative expenses increased from $13,007 in the first
quarter of 1998 to $55,613 in the first quarter of 1999. This increase reflects
the addition of two employees in 1998, the opening in 1998 of our supplies and
parts retail outlet at our facility in Kingsport, Tennessee, and the cost of
showing our Phoenix motorcycle at a motorcycle show in Laughlin, Nevada during
the first quarter of 1999.
Net Loss
--------
Our net loss for the first quarter of 1999 was $73,361, an increase from a
net loss of $17,079 in the first quarter of 1998. We will continue to experience
losses until our Kingsport, Tennessee facility begins to cash flow. We expect
this to occur this month - June 1999.
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.
11
<PAGE>
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 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Forms 8-K
None
12
<PAGE>
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: June 3, 1999 Bad Toys, Inc.
By/s/Larry N. Lunan
-----------------------------
Larry N. Lunan, President and
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,044
<SECURITIES> 0
<RECEIVABLES> 2,044
<ALLOWANCES> 0
<INVENTORY> 214,374
<CURRENT-ASSETS> 242,914
<PP&E> 80,637
<DEPRECIATION> (9,588)
<TOTAL-ASSETS> 353,041
<CURRENT-LIABILITIES> 84,414
<BONDS> 0
0
0
<COMMON> 54,095
<OTHER-SE> (62,747)
<TOTAL-LIABILITY-AND-EQUITY> 353,041
<SALES> 9,706
<TOTAL-REVENUES> 9,706
<CGS> 20,032
<TOTAL-COSTS> 20,032
<OTHER-EXPENSES> 55,613
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,172
<INCOME-PRETAX> (73,361)
<INCOME-TAX> 0
<INCOME-CONTINUING> (73,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,361)
<EPS-BASIC> (0.010)
<EPS-DILUTED> 0.000
</TABLE>
