<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended JUNE 30, 1999
---------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from to
--------------------- ------------------
Commission file number: 333-53757
MCHENRY METALS GOLF CORP.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 87-0429261
- ------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1945 CAMINO VIDA ROBLE, SUITE J, CARLSBAD, CA 92008
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(760) 929-0015
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
On August 19, 1999, approximately 17,197,700 shares of the Registrant's Common
Stock, par value of $0.001, were outstanding.
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet .................................. 3
Condensed Consolidated Statements of Operations ....................... 4
Condensed Consolidated Statements of Cash Flows ....................... 5
Notes to Condensed Consolidated Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................... 10
PART II OTHER INFORMATION
Item 3. Defaults upon Senior Securities ....................................... 15
Item 6. Exhibits and Reports on Form 8-K ...................................... 15
SIGNATURES ..................................................................... 16
EXHIBIT INDEX .................................................................. 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCHENRY METALS GOLF CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 79,800
Accounts receivable, net 875,900
Inventories 949,800
Deferred costs on unrecognized sales 482,200
Other current assets 202,500
------------
TOTAL CURRENT ASSETS 2,590,200
Equipment and leasehold improvements, net 337,900
Other non-current assets 49,300
------------
TOTAL ASSETS $ 2,977,400
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Line of credit borrowings, due on demand $ 758,600
Current portion of leases payable 25,300
Accounts payable and accrued liabilities 2,015,200
Accrued compensation 231,500
Deferred revenue 875,900
------------
TOTAL CURRENT LIABILITIES 3,906,500
------------
Leases payable, less current portion 24,500
Commitments and Contingencies
Shareholders' Deficit
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 16,997,700 issued and outstanding 17,000
Additional paid-in capital 16,116,300
Unearned compensation (362,700)
Accumulated deficit (16,724,200)
------------
TOTAL STOCKHOLDERS' DEFICIT (953,600)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,977,400
============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
MCHENRY METALS GOLF CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,078,900 $ 1,293,300 $ 2,270,800 $ 1,316,600
Cost of goods sold 837,400 749,600 1,477,000 835,400
----------- ----------- ----------- -----------
Gross profit 241,500 543,700 793,800 481,200
Selling expenses 1,172,400 2,461,400 3,096,900 3,813,000
General and administrative expenses 383,200 369,600 877,100 722,900
Research and development costs 31,700 55,500 71,100 166,000
----------- ----------- ----------- -----------
Loss from operations (1,345,800) (2,342,800) (3,251,300) (4,220,700)
Interest income (expense), net (37,200) 30,900 (68,000) 38,100
Other income (expense) 1,800 (600) (1,600) (2,200)
----------- ----------- ----------- -----------
Net loss $(1,381,200) $(2,312,500) $(3,320,900) $(4,184,800)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.08) $ (0.21) $ (0.22) $ (0.42)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MCHENRY METALS GOLF CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(3,320,900) $(4,184,800)
Adjustments to reconcile net loss to
cash used in operating activities:
Stock issued as compensation 126,400 103,300
Warrants issued as compensation 158,500 --
Amortization of unearned compensation 155,000 --
Deferred costs on unrecognized sales (183,600) (1,015,400)
Provision for inventory obsolescence 101,400 115,100
Depreciation and amortization 114,500 62,800
Changes in operating assets and liabilities:
Inventories 955,600 (3,494,200)
Other current assets (45,000) (314,700)
Other non-current assets (6,200) (4,700)
Accounts payable and accrued liabilities 340,800 3,225,300
Accrued compensation 17,900 (69,000)
----------- -----------
Cash used in operating activities (1,585,600) (5,576,300)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (36,900) (151,700)
----------- -----------
Cash used in investing activities (36,900) (151,700)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit (141,400) --
Borrowings (principal payments) on leases payable (11,300) 22,400
Net proceeds from sale of common stock 1,259,900 5,837,900
----------- -----------
Cash provided by financing activities 1,107,200 5,860,300
----------- -----------
NET INCREASE (DECREASE) IN CASH (515,300) 132,300
CASH AT BEGINNING OF PERIOD 595,100 921,100
----------- -----------
CASH AT END OF PERIOD $ 79,800 $ 1,053,400
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
MCHENRY METALS GOLF CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - QUARTERLY FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements and related notes
as of June 30, 1999 and for the three and six month periods ended June 30, 1999
and 1998 are unaudited but include all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of financial position and results of operations of the Company
for the interim periods. Due to the Company's limited operating history and
uncertainty with respect to the market acceptance of the Company's products,
management has elected to defer recognition of revenue on product sales until
the related accounts receivable have been collected. This basis of revenue
recognition is expected to continue until, in the opinion of management, there
exists sufficient history of customer payments and returns to provide a
reasonable basis to conclude that revenue is earned at the point of shipment.
Certain prior year amounts have been reclassified to conform to the current year
presentation. The results of operations for the three and six month periods
ended June 30, 1999 are not necessarily indicative of the operating results to
be expected for the full fiscal year. The information included in this report
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto and the other information, including risk factors,
set forth for the year ended December 31, 1998 in the Company's Annual Report on
Form 10-KSB. Readers of this Quarterly Report on Form 10-QSB are strongly
encouraged to review the Company's Annual Report on Form 10-KSB. Copies are
available from the Company's investor relations department at 1945 Camino Vida
Roble, Suite J, Carlsbad, California 92008-6529.
NOTE 2 - INVENTORIES
Inventories consist of: JUNE 30, 1999
-------------
(unaudited)
Raw materials................................... $ 138,400
Work-in-progress................................ 238,600
Finished goods.................................. 861,100
Finished goods on consignment................... 41,700
Obsolescence reserve............................ (330,000)
---------
$ 949,800
=========
NOTE 3 - NET LOSS PER SHARE
Loss per share is calculated pursuant to the Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic loss per share
includes no dilution and is computed by dividing loss available to common
shareholders by the weighted average number of shares outstanding during the
period. Diluted loss per share reflects the potential dilution of securities
that could share in the earnings of the Company.
6
<PAGE> 7
MCHENRY METALS GOLF CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table illustrates the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss available for
common stockholders $(1,381,200) $(2,312,500) $(3,320,900) $(4,184,800)
=========== =========== =========== ===========
DENOMINATOR:
Weighted average number of common
shares outstanding during
the period 16,658,300 11,022,300 15,044,000 9,981,300
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.08) $ (0.21) $ (0.22) $ (0.42)
=========== =========== =========== ===========
</TABLE>
The computation of diluted loss per share excludes the effect of incremental
common shares attributable to the exercise of outstanding common stock options
and warrants because their effect would be antidilutive due to losses incurred
by the Company during periods presented.
NOTE 4 - LINE OF CREDIT
The Company has a $665,000 line of credit agreement with a bank bearing interest
at the bank's prime rate plus 7% (total of 14.75% at June 30, 1999). The line of
credit is secured by accounts receivable, requires principal repayments in the
amount of 20% of daily collections on trade accounts receivable, permits the
bank to receive warrants under certain events of default and is due on September
15, 1999.
As of June 30, 1999, the Company was not in compliance with most of its loan
covenants of the line of credit agreement. On July 23, 1999 the Company received
a letter of intent from another bank to grant the Company a revolving credit
facility up to $3,000,000 for a period of three years at an interest rate of
prime plus 3% and an annual commitment fee of 1% of the credit facility. This
credit facility will be secured by qualified receivables and inventories and
will be used to replace the current line of credit. The execution of this credit
facility is contingent on the Company's ability to raise an additional $3.5
million in equity or convertible subordinated debt. The Company is currently in
negotiations with a prospective investor. As of August 19, 1999, no formal
agreement has been reached with this prospective investor.
The Company has a $125,000 revolving credit agreement with a financial
institution which has an effective interest rate of 28.6% when purchases are
repaid over the maximum repayment period of six months. The line of credit is
unsecured and is used to finance purchases of inventory.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims arising in the ordinary course of
business; none of these claims, in the opinion of management, is expected to
have a material adverse impact on the financial position, cash flows or overall
trends in the results of operations of the Company.
7
<PAGE> 8
The Company entered into an agreement with a company, whose Executive Vice
President is a Director of the Company, to purchase golf club heads that were
on open purchase orders and completed by the supplier. Pursuant to the
agreement, the Company purchases golf club heads on a COD basis, as-needed,
from the related party. In exchange for financing the purchase of these golf
club heads, the Company pays a 20% mark-up over cost. The total purchase price
of these golf club heads is approximately $1,410,000 and was to have been paid
by June 30, 1999. On August 19, 1999, the Company negotiated in agreement which
extends due date for the Company to pay the remaining balance owing of $731,250
to September 1, 1999. If the Company fails to pay the balance by the extended
due date, the related party has the ability to complete these golf club heads
into finished golf clubs and to sell them to the general public, which could
reduce the value of the Company's remaining inventory. The Company is currently
in negotiations with a prospective investor which, if successful, would permit
the Company to purchase the remaining golf club heads held by the related party.
However, no assurance can be given that such negotiations will be successful, or
concluded by the extended due date.
NOTE 6 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. A number of factors, including the
Company's history of significant losses, negative working capital, its
accumulated deficit and the need to restructure debt which is currently in
default raise substantial doubts about the Company's ability to continue as a
going concern. As of June 30, 1999, the Company has an accumulated deficit of
$16,724,200 and a working capital deficiency of $1,316,300. The Company is
currently in default under the terms of its revolving line of credit with a
bank. The Company does not possess sufficient cash resources to repay this
obligation and the Company would be unable to repay this loan in the event that
such demand was made by the Company's creditor. These factors raise questions
about the ability of the Company to continue as a going concern. In this regard,
management is proposing to raise any necessary additional funds not provided by
its planned operations through additional sales of its equity securities to new
investors. However, there is no assurance that the Company will be successful in
raising this additional capital or achieving profitable operations. The
accompanying condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Should the
Company be unsuccessful in its efforts to raise additional equity, the Company
may need to be reorganized under Chapter 11 of Title 11 of the United States
Code or liquidated under Chapter 7 of Title 11 of the United States Code. There
can be no assurance that if the Company decides to reorganize under the
applicable laws of the United States that such reorganizational efforts would be
successful or that shareholders would receive any distribution on account of
their ownership of shares of the Company's stock. Similarly, there can be no
assurances that if the Company decides to liquidate under the applicable laws of
the United States that such liquidation would result in the shareholders
receiving any distribution on account of their ownership of shares of the
Company's stock. In fact, if the Company were to be reorganized or liquidated
under the applicable laws of the United States, the bankruptcy laws would
require (with limited exceptions) that the creditors of the Company be paid
before any distribution is made to the shareholders.
8
<PAGE> 9
NOTE 7 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
Cash paid for interest during the six months ended June 30, 1999 totaled
$76,300. No interest was paid during the six months ended June 30, 1998.
Cash paid for income taxes was $800 for both the six month periods ended
June 30, 1999 and 1998. During the six months ended June 30, 1999, the Company
converted $1,028,500 of vendor invoices for shares of common stock.
NOTE 8 - FORWARD-LOOKING STATEMENTS
These condensed consolidated financial statements and the notes thereto contain
forward-looking statements which involve substantial risks and uncertainties.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including the
effects of debt restructuring.
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, which involve substantial risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section and elsewhere in this
Quarterly Report on Form 10-QSB.
RESULTS OF OPERATIONS
Summary
The Company believes that the premium golf equipment market has been declining
in certain major markets, including Japan, the United States and Europe, and may
continue to decline during the foreseeable future. During the first half of
1999, the Company's sales in the Unites States increased 73% compared to the
same period in 1998. The Company believes that this increase was primarily due
to an increase in sales attributable to the Company's infomercial as well as a
general increase in sales, considering the Company only began shipments at the
end of the first quarter of 1998. The Company has not had sufficient funding to
continue airing the infomercial since May 1999. While sales of the Company's
TourPure(R) drivers have generally increased from 1998 to 1999, no assurances
can be given that the demand for the Company's products will permit the Company
to experience growth in sales in the future.
Although the Company has had relatively little sales to markets outside of the
United Sates, a softness in the Japanese golf market has caused other golf
manufacturers to re-focus their efforts domestically, thereby increasing
competition in the United States golf market.
The Company's gross margin as a percentage of net sales was 35.0% for the six
months ended June 30, 1999, which was slightly less than the margin of 36.5% for
the six months ended June 30, 1998. The Company's plan includes gross margins
exceeding 40%, which can only be reached with sufficient funding to permit the
Company to achieve predictable production schedules. Consumer acceptance of
current products, the sale and disposal of "factory refurbished" clubs used for
demonstration purposes at reduced sales prices and continuing pricing pressure
from competitive market conditions may have an adverse effect on the Company's
future sales and gross margin. In the golf equipment industry, sales to
retailers are generally seasonal due to lower demand in the retail market in the
cold weather months covered by the fourth and first quarters. The Company
expects that it will follow this industry-wide trend in the future. Unusual or
severe weather conditions such as the "El Nino" weather patterns may compound
these seasonal effects.
During 1999, the Company has been unable to fully-execute its business plan due
to the lack of capital resources to fund the growth of the Company. Capital
needs at this stage of an organization's growth are typically quite demanding,
with the principal needs being the funding of marketing (the cost for which can
be significant, considering the need to purchase large amounts of air time in
order to be "noticed" by consumers), the purchase of inventories and the
financing of accounts receivable. While some of these capital needs can be met
through the use of revolving debt, the Company's failure to achieve profitable
operations to date as well as insufficient capitalization to fund the negative
cash flow which is to be expected while the Company develops a market presence
for its products has limited the availability of credit facilities to the
Company.
10
<PAGE> 11
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Competition
The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names, as well as new companies with popular products. New
product introductions and/or price reductions by competitors continue to
generate increased market competition. While the Company believes that its
products and its marketing efforts continue to be competitive, there can be no
assurance that successful marketing activities by competitors will not
negatively impact the Company's future sales. A manufacturer's ability to
compete is in part dependent upon its ability to satisfy the various subjective
requirements of golfers, including the golf club's look and "feel," and the
level of acceptance that the golf club has among professional and other golfers.
The subjective preferences of golf club purchasers may be subject to rapid and
unanticipated changes. There can be no assurance that the Company's golf clubs
will achieve market acceptance.
Net Sales
Net sales for the three months ended June 30, 1999, were $1,078,900 as compared
to net sales of $1,293,300 for the second quarter of 1998. The 16.6% decrease in
net revenues is attributable to a fewer number of golf clubs sold during the
second quarter of 1999. Net sales for the six months ended June 30, 1999, were
$2,270,800 as compared to net sales of $1,316,600 for the first six months of
1998. The 72.5% increase in net revenues is attributable to a greater number of
clubs sold during the first six months of 1999 than during the same period in
1998.
While the number of golf clubs sold and revenues are up for the six month period
ended June 30, 1999, a majority of those sales occurred during the first quarter
of 1999, sales during the second quarter could have been stronger if the Company
would have had the availability of additional equity or inventory financing to
allow the Company to fulfill a backlog of approximately $1.8 million which
existed at March 31, 1999. The reduced sales levels for the second quarter of
1999 is can also be attributed to the Company's not having fully-achieved market
acceptance of its products combined with insufficient capitalization to permit
the Company to continue its infomercial advertising program during most of the
second quarter of 1999.
Due to the Company's limited operating history and uncertainty with respect to
the market acceptance of the Company's products, management has elected to defer
recognition of revenue on product sales until the related accounts receivable
have been collected. This basis of revenue recognition is expected to continue
until, in the opinion of management, there exists sufficient history of customer
payments and returns to provide a reasonable basis to conclude that revenue is
earned at the point of shipment. As a result of this policy, net sales do not
include the sales value of shipments for which the Company has not yet been
paid. The Company will likely continue to report revenues on this basis
throughout the remainder of 1999.
Several factors affected sales of the Company's products in 1999, the most
significant of which was a general decline in the golf equipment industry, which
began during the second quarter of 1998. This decline was marked by two of the
major golf equipment manufacturers announcing price reductions at the wholesale
level as well as the fact that they were carrying a significant amount of excess
inventory. As a result, other manufacturers of premium golf equipment, including
the Company, were forced to reduce their selling prices in order to remain
competitive.
11
<PAGE> 12
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company believes that, to a certain degree, this reduction in demand by
consumers and excess inventory may signal a saturation of the market by two of
the major golf equipment manufacturers. Thus, an opportunity exists for a
company with an innovative design that out-performs the larger, established
products with an opportunity to penetrate the premium golf equipment market.
There can, however, be no assurance that the Company's products will achieve
significant market penetration or generate increased revenues in future years.
Cost of Goods Sold
Cost of goods sold for the three months ended June 30, 1999 was $837,400 (77.6%
of net sales) as compared to $749,600 (58.0% of net sales) for the second
quarter of 1998. Cost of goods sold for the six months ended June 30, 1999 was
$1,477,000 (65.0% of net sales) as compared to $835,400 (63.5% of net sales) for
the six months ended June 30, 1998.
Cost of goods sold for the three and six month periods ended June 30, 1999 have
been negatively affected by the Company's reduced estimates of realizability of
the "Deferred costs on unrecognized sales," the reserves for which are charged
to cost of goods sold. Due to the lack of market acceptance of the Company's
products and the lack of funds to adequately advertise, the Company has
increased its reserves to compensate for the likelihood that many of its golf
clubs that have been sold, but not yet paid for, may not be returned in a
saleable condition, or may not be returned due to financial difficulties
experienced by the Company's customers (in effect a "bad debt reserve"). Should
the Company receive additional equity funding which would permit a much greater
market penetration and acceptance of its products, some or all of these reserves
may not be necessary.
New production processes, innovative designs, use of high-tech materials and the
Company's initial year of operations all combined to generate costs in excess of
that which would otherwise be expected for 1998. The Company expects cost of
goods sold for 1999, as a percent of net sales, to continue to be lower than
1998 levels, but will remain above industry averages until the Company is able
to significantly increase its production levels.
Gross Profit
Gross profit for the second quarter of 1999 was $241,500 (22.4% of net sales) as
compared to $543,700 (42.0% of net sales) for the second quarter of 1998. Gross
profit for the six months ended June 30, 1999 was $793,800 (35.0% of net sales)
as compared to $481,200 (36.5% of net sales) for the six months ended June 30,
1998. The decrease in the gross profit is attributable to cost increases
inherent with irregular production schedules.
Selling Expenses
Selling expenses were $1,172,400 for the quarter ended June 30, 1999 as compared
to $2,461,400 for the second quarter of 1998, representing a decrease of
$1,289,000 or 52.4%. For the six months ended June 30, 1999, selling expenses
were $3,096,900 as compared to $3,813,000 for the six months ended June 30, 1998
representing a decrease of $716,100 or 18.8%.
12
<PAGE> 13
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
From 1998 to 1999, overall selling expenses have been reduced as well as
re-focused. On an annualized basis, the Company has reduced selling expenses by
approximately $3.5 million in the following areas: sales commissions, sales
programs, promotional product, event sponsorships, production costs for the
infomercial, print advertising and PGA endorsement fees. Expenses to air the
infomercial increased approximately $2.8 million on an annualized basis from the
first six months of 1998 to the first six months of 1999. Due to a shortage of
funds, the Company has been unable to air its infomercial since May 1, 1999,
thus generating a greater reduction in selling and marketing expenses during the
second quarter of 1999.
General and Administrative Expenses
General and administrative expenses were $383,200 for the quarter ended June 30,
1999 as compared to $369,600 for the second quarter of 1998, representing an
increase of $13,600 or 3.7%. For the six months ended June 30, 1999, general and
administrative expenses were $877,100 as compared to $722,900 for the six months
ended June 30, 1998, representing an increase of $154,200 or 21.3%. The increase
in general and administrative expenses for both periods is the result of having
two additional positions during the first six months of 1999 which were not
filled during the first six months of 1998, as well as increases in salaries
paid. During the second quarter of 1999, the Company began implementing a
cost-reduction program in order to reduce the Company's expenses to a level
appropriate for the Company's sales volume. This cost reduction program included
reductions in personnel with annual salaries and wages totaling approximately $1
million plus a 10% salary reduction for senior management. The Company
anticipates further reductions in the third quarter of 1999.
Effects of Income Taxes
The Company believes that it has sufficient losses to offset any taxable income
that will be generated in the current year. As a result, the Company has not
recorded a provision for income taxes for the three and six month periods ended
June 30, 1999.
The Company believes that it may have incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company believes
that its ability to utilize net operating loss and credit carryforwards in
subsequent periods may be subject to annual limitations.
LIQUIDITY AND CAPITAL RESOURCES
The Company primarily financed its operations during the three months ended June
30, 1999 and 1998 through the sale of common stock. During the six months ended
June 30, 1999, operating activities used $1,585,600, investing activities,
consisting of purchases of equipment and leasehold improvements, used $36,900,
and financing activities provided $1,107,200. At June 30, 1999, the Company had
a working capital deficiency of $1,316,300, an accumulated deficit of
$16,724,200 and had $665,000 outstanding under a bank line of credit, which was
in default. The Company also has a $125,000 revolving credit agreement with a
financial institution for the purchase of inventory.
As of June 30, 1999, the resources available to the Company consist of cash,
receivables, inventories and common and preferred stock. The Company has
fully-utilized its borrowing capacity under its $665,000 bank line of credit and
its $125,000 revolving credit facility for the purchase of inventories. The
Company has made presentations to a number of parties that may be interested in
making investments in the Company. The Company is currently in negotiations with
one prospective investor.
13
<PAGE> 14
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
During the six months ended June 30, 1998, operating activities used $5,576,300,
investing activities, consisting principally of purchases of property plant and
equipment, used $151,700, and financing activities provided $5,860,300.
FUTURE OPERATIONS - STATUS AS A GOING CONCERN
The financial statements of the Company have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company is newly formed, has incurred
losses since its inception and has not yet been successful in establishing
profitable operations. The Company's independent certified public accountants
have included an explanatory paragraph in their audit report with respect to the
Company's 1998 consolidated financial statements related to a substantial doubt
with respect to the Company's ability to continue as a going concern. In this
regard, management is proposing to raise any necessary additional funds not
provided by its planned operations through loans and/or through additional sales
of its equity securities. During the six months ended June 30, 1999 the Company
received $1,259,900 in cash in exchange for the sale of its restricted common
stock and liquidated approximately $1,026,800 of vendor invoices through the
issuance of its restricted common stock. However, there is no assurance that the
Company will be successful in raising additional capital or achieving profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. There can be no assurance that the
Company's future consolidated financial statements will not include another
going concern explanatory paragraph if the Company is unable to raise additional
funds and become profitable. The factors leading to, and the existence of, the
explanatory paragraph will have a material adverse effect on the Company's
ability to obtain additional financing. Should the Company be unsuccessful in
its efforts to raise additional equity, the Company may need to be reorganized
under Chapter 11 of Title 11 of the United States Code or liquidated under
Chapter 7 of Title 11 of the United States Code. There can be no assurance that
if the Company decides to reorganize under the applicable laws of the United
States that such reorganizational efforts would be successful or that
shareholders would receive any distribution on account of their ownership of
shares of the Company's stock. Similarly, there can be no assurances that if the
Company decides to liquidate under the applicable laws of the United States that
such liquidation would result in the shareholders receiving any distribution on
account of their ownership of shares of the Company's stock. In fact, if the
Company were to be reorganized or liquidated under the applicable laws of the
United States, the bankruptcy laws would require (with limited exceptions) that
the creditors of the Company be paid before any distribution is made to the
shareholders.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 1999, the Company was not in compliance with most of its loan
covenants of the line of credit agreement. The Company has negotiated an
extension of the due date of the loan to September 15, 1999 while the Company
pursues additional equity investments. The Company has identified other sources
of lending, but in order to secure new financing, these sources require the
Company to raise additional equity or subordinated debt. As of August 19, 1999,
the bank has not made a formal demand for payment of the balance due.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three month period ended June 30,
1999.
The Exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
15
<PAGE> 16
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MCHENRY METALS GOLF CORP.
------------------------------------
(REGISTRANT)
Date: August 19, 1999 By: /s/ Douglas A. Willford
--------------------------------
Douglas A. Willford
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1999, THE STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 1999 AND FOOTNOTES THERETO AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 79,800
<SECURITIES> 0
<RECEIVABLES> 875,900
<ALLOWANCES> 0
<INVENTORY> 949,800
<CURRENT-ASSETS> 2,590,200
<PP&E> 669,900
<DEPRECIATION> 332,000
<TOTAL-ASSETS> 2,977,400
<CURRENT-LIABILITIES> 3,906,500
<BONDS> 24,500
0
0
<COMMON> 17,000
<OTHER-SE> (362,700)
<TOTAL-LIABILITY-AND-EQUITY> 2,977,400
<SALES> 2,270,800
<TOTAL-REVENUES> 2,270,800
<CGS> 1,477,000
<TOTAL-COSTS> 1,477,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,000
<INCOME-PRETAX> (3,320,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,320,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,320,900)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
