<PAGE> 1
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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 MARCH 31, 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 May 19, 1999, 15,291,300 shares of the Registrant's Common Stock, par value
of $0.001, were outstanding.
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<PAGE> 2
<TABLE>
<CAPTION>
INDEX 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 ......... 8
PART II OTHER INFORMATION
Item 3. Defaults upon Senior Securities ............................ 11
Item 6. Exhibits and Reports on Form 8-K ........................... 11
SIGNATURES ............................................................ 12
EXHIBIT INDEX ......................................................... 13
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCHENRY METALS GOLF CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash $ 77,500
Accounts receivable, net 1,927,200
Inventories 1,022,100
Deferred costs on unrecognized sales 1,036,400
Other current assets 177,100
------------
TOTAL CURRENT ASSETS 4,240,300
Equipment and leasehold improvements, net 427,600
Other non-current assets 51,800
------------
TOTAL ASSETS $ 4,719,700
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Line of credit borrowings, due on demand $ 794,300
Current portion of leases payable 24,400
Accounts payable and accrued liabilities 2,323,100
Accrued compensation 245,600
Deferred revenue 1,927,200
------------
TOTAL CURRENT LIABILITIES 5,314,600
------------
Leases payable, less current portion 31,200
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; 15,291,300
issued and outstanding 15,300
Additional paid-in capital 15,152,900
Unearned compensation (451,300)
Accumulated deficit (15,343,000)
------------
TOTAL STOCKHOLDERS' DEFICIT (626,100)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,719,700
============
</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 March 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 1,191,900 $ 23,300
Cost of goods sold 639,600 85,800
----------- -----------
Gross profit 552,300 (62,500)
Selling expenses 1,924,500 1,351,600
General and administrative expenses 493,900 353,300
Research and development costs 39,400 110,500
----------- -----------
Loss from operations (1,905,500) (1,877,900)
Interest income (expense), net (30,800) 7,200
Other expense (3,400) 1,600
----------- -----------
Net loss $(1,939,700) $(1,872,300)
=========== ===========
Basic and diluted loss per share $ (0.13) $ (0.20)
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MCHENRY METALS GOLF CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(1,939,700) $(1,872,300)
Adjustments to reconcile net loss to
cash used in operating activities:
Stock issued as compensation 663,400 --
Warrants issued as compensation 11,900 --
Amortization of unearned compensation 171,000 --
Deferred costs on unrecognized sales (737,800) (528,300)
Provision for inventory obsolescence 4,600 --
Depreciation and amortization 18,400 38,900
Changes in operating assets and liabilities:
Inventories 885,400 (1,224,000)
Other current assets (19,600) (89,300)
Other non-current assets (6,200) (4,400)
Accounts payable and accrued liabilities (283,400) 2,081,800
Accrued compensation 32,000 102,300
----------- -----------
Cash used in operating activities (1,200,000) (1,495,300)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (33,000) (90,200)
----------- -----------
Cash used in investing activities (33,000) (90,200)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit (105,700) --
Principal payments on leases payable (5,500) (4,300)
Net proceeds from sale of common stock 826,600 5,881,400
----------- -----------
Cash provided by financing activities 715,400 5,877,100
----------- -----------
NET INCREASE (DECREASE) IN CASH (517,600) 4,291,600
CASH AT BEGINNING OF PERIOD 595,100 921,100
----------- -----------
CASH AT END OF PERIOD $ 77,500 $ 5,212,700
=========== ===========
</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 March 31, 1999 and for the three month periods ended March 31, 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. Certain prior year amounts have been reclassified to conform to
the current year presentation. The results of operations for the three month
period ended March 31, 1999 is 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
<TABLE>
<CAPTION>
Inventories consist of: MARCH 31,
1999
------------
(unaudited)
<S> <C>
Raw materials .................... $ 54,500
Work-in-progress ................. 344,000
Finished goods ................... 839,900
Finished goods on consignment..... 12,300
Obsolescence reserve ............. (228,600)
-----------
$ 1,022,100
===========
</TABLE>
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.
The following table illustrates the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1999 1998
--------------- -----------
<S> <C> <C>
NUMERATOR:
Net loss available for common stockholders $ (1,939,700) $(1,872,300)
=============== ===========
DENOMINATOR:
Weighted average number of common shares outstanding during
the period 14,450,600 9,399,700
=============== ===========
Basic and diluted loss per share $ (0.13) $ (0.20)
=============== ===========
</TABLE>
6
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MCHENRY METALS GOLF CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $870,000 line of credit agreement with a bank bearing interest
at the bank's prime rate plus 7% (total of 14.75% at March 31, 1999). The line
of credit is secured by accounts receivable and was due on May 11, 1999.
As of March 31, 1999, the Company was not in compliance with most of its loan
covenants of the line of credit agreement. The Company is currently in the
process of negotiating an extension of the due date of the loan 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 May 19, 1999,
the bank has not made a formal demand for payment of the balance due.
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.
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 March 31, 1999, the Company has an accumulated deficit of
$15,343,000 and a working capital deficiency of $1,074,300. 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 loans and/or through additional sales of its
equity securities pursuant to the exercise of outstanding warrants or otherwise.
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.
NOTE 7 - 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.
7
<PAGE> 8
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
Net Sales
Net sales for the three months ended March 31, 1999, were $1,191,900 as compared
to net sales of $23,300 for the first quarter of 1998. The Company first began
shipments of its products during the first quarter of 1998, while the Company
has experienced a significant demand for its products during the first 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 expects to have sufficient history of customer payments and
returns to recognize revenue at the point of shipment at some point during 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.
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 was $639,600 (53.7% of net sales) for the three months ended
March 31, 1999, as compared to $85,800 (368.2% of net sales) for the first
quarter of 1998. 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.
8
<PAGE> 9
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company manufactures an innovative, high quality product with
state-of-the-art materials, which results in a golf club that is expensive to
produce. Since 1998 was the Company's first year of sales, it was difficult to
anticipate, with any degree of certainty, the demand for the Company's products.
Sales forecasting was further frustrated by the first significant reduction in
golf equipment purchases in more than ten years. The result was an ever-changing
production schedule for the Company, its suppliers and subcontractors, which
resulted in the Company incurring additional costs to produce the finished
product. In addition, due to the reduced demand for the Company's product,
cost-effective production levels were not achieved.
Gross Profit
Gross profit was $552,300 (46.3% of net sales) for the first quarter of 1999 as
compared to a loss of $62,500 for the first quarter of 1998. The increase in the
gross profit is attributable to the increase in sales discussed above, as well
as cost reductions that are beginning to take effect as a result of the Company
having taking advantage of some cost reduction opportunities.
Selling Expenses
Selling expenses were $1,924,500 for the three months ended March 31, 1999,
representing an increase of $572,900 or 42.4% from the first quarter of 1998.
The increase in selling expenses from 1998 to 1999 primarily arose as a result
of the Company's use of direct marketing (an "infomercial") to increase sales
volume. The Company spent over $700,000 for airtime during the first quarter of
1999. The Company anticipates that selling expenses will continue to increase in
1999 and beyond since, as with any new product, the Company must expend a
greater percentage of its revenues on the development of a market presence for
its products.
General and Administrative Expenses
General and administrative expenses were $493,900 for the three months ended
March 31, 1999 as compared to $353,300 for the first quarter of 1998,
representing an increase of $140,600 or 39.8% from the first quarter of 1998.
The increase in general and administrative expenses from 1998 to 1999 primarily
arose as a result of the Company's planned growth. The Company anticipates that
general and administrative expenses will be reduced somewhat throughout the
remainder of 1999. 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.
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 month period ended March 31,
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.
9
<PAGE> 10
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company primarily financed its operations during the three months ended
March 31, 1999 and 1998 through the sale of common stock. During the first
quarter of 1999, operating activities used $1,200,000, investing activities,
consisting of purchases of equipment and leasehold improvements, used $33,000,
and financing activities provided $715,400. At March 31, 1999, the Company had a
working capital deficiency of $1,074,300, an accumulated deficit of $15,343,000
and had $665,000 outstanding under a bank line of credit, which was in default.
During the first quarter of 1998, operating activities used $1,495,300,
investing activities, consisting principally of purchases of property plant and
equipment, used $90,200, and financing activities provided $5,877,100.
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 pursuant to the exercise of warrants or otherwise.
During the three months ended March 31, 1999 the Company received $1,077,000 in
cash in exchange for the sale of its restricted common stock and liquidated
approximately $497,000 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.
10
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 1999, the Company was not in compliance with most of its loan
covenants of the line of credit agreement. The Company is currently in the
process of negotiating an extension of the due date of the loan 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 May 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
The following reports on Form 8-K were filed during the three months ended March
31, 1999:
- - On January 15, 1999, the Company filed a Current Report on Form 8-K to
submit a copy of the letter of agreement with Form 8-K filed with the
Commission on December 30, 1998 from Clumeck, Stern, Phillips &
Schenkelberg and received by McHenry Metals Golf Corp. on January 13,
1999.
- - On February 4, 1999, the Company filed a Current Report on Form 8-K
reporting that, effective February 2, 1999, the Company appointed BDO
Seidman, LLP as the Company's independent accounting firm.
The Exhibits filed as part of this report are listed below.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
11
<PAGE> 12
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: May 20, 1999 By: /s/ Douglas A. Willford
------------ --------------------------------------
Douglas A. Willford
Chief Financial Officer
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1999, THE STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 AND FOOTNOTES THERETO AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES
THERETO.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 77,500 0
<SECURITIES> 0 0
<RECEIVABLES> 1,927,200 0
<ALLOWANCES> 0 0
<INVENTORY> 1,022,100 0
<CURRENT-ASSETS> 4,240,300 0
<PP&E> 427,600 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 4,719,700 0
<CURRENT-LIABILITIES> 5,314,600 0
<BONDS> 31,200 0
0 0
0 0
<COMMON> 15,300 0
<OTHER-SE> (641,400) 0
<TOTAL-LIABILITY-AND-EQUITY> (626,100) 0
<SALES> 1,191,900 23,300
<TOTAL-REVENUES> 1,191,900 23,300
<CGS> 639,600 85,800
<TOTAL-COSTS> 639,600 85,800
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30,800 (7,200)
<INCOME-PRETAX> (1,939,700) (1,872,300)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,939,700) (1,872,300)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,939,700) (1,872,300)
<EPS-PRIMARY> (0.13) (0.20)
<EPS-DILUTED> (0.13) (0.20)
</TABLE>
