SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended SEPTEMBER 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 November 19, 1999, approximately 17,197,700 shares of the
Registrant's Common Stock, par value of $0.001, were outstanding.
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INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statements of 4
Operations
Condensed Consolidated Statements of Cash 5
Flows
Notes to Condensed Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 10
Operations
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
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
McHENRY METALS GOLF CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
ASSETS
Current assets
Cash $35,100
Accounts receivable, net 207,200
Inventories 929,100
Deferred costs on unrecognized sales 64,100
Other current assets 233,000
Total current assets 1,468,500
Equipment and leasehold improvements, net 281,300
Other non-current assets 47,700
Total assets $1,797,500
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Line of credit borrowings, due on demand $564,900
Current portion of leases payable 22,900
Accounts payable and accrued liabilities 2,264,300
Accrued compensation 241,900
Deferred revenue 207,200
Total current liabilities 3,301,200
Leases payable, less current portion 17,600
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 17,200
Additional paid-in capital 16,274,100
Unearned compensation 48,700
Accumulated deficit (17,763,900)
Total stockholders' deficit (1,521,300)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,797,500
See accompanying notes to condensed consolidated financial statements.
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MCHENRY METALS GOLF CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Net sales $717,200 $911,100 $2,988,000 $2,227,700
Cost of goods sold 1,013,700 670,300 2,490,700 1,505,700
Gross profit (296,500) 240,800 497,300 722,000
Selling expenses 555,100 1,923,700 3,652,000 5,736,700
General and 151,600 531,900 1,028,700 1,254,800
administrative expenses
Research and 19,400 63,500 90,500 229,500
development costs
Loss from operations (1,022,600) (2,278,300) (4,273,900) (6,499,000)
Interest income (14,800) (11,600) (82,800) 26,500
(expense), net
Other income (expense) (2,300) 2,300 (3,900) 100
Net loss $(1,039,700) $(2,287,600) $(4,360,600) $(6,472,400)
Basic and diluted loss $(0.06) $(0.21) $(0.28) $(0.63)
per share
See accompanying notes to condensed consolidated financial statements.
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MCHENRY METALS GOLF CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1999 1998
Cash flows used in operating activities:
Net loss $(4,360,600) $(6,472,400)
Adjustments to reconcile net loss to
cash used in operating activities:
Stock issued as compensation 126,400 103,300
Warrants issued as compensation 220,600
Amortization of unearned compensation 469,000
Deferred costs on unrecognized sales 234,500 (1,113,000)
Provision for inventory obsolescence 101,400 115,100
Depreciation and amortization 172,700 85,200
Changes in operating assets and liabilities:
Inventories 976,300 (3,470,100)
Other current assets (75,500) (198,100)
Other non-current assets (6,200) (7,400)
Accounts payable and accrued 589,900 3,183,800
liabilities
Accrued compensation 28,300 258,700
Cash used in operating activities (1,523,200) (7,514,900)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (36,900) (173,500)
Cash used in investing activities (36,900) (173,500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit (335,100) 930,000
Borrowings from note payable 120,000
Principal payments on leases payable (20,600) (9,400)
Net proceeds from sale of common stock 1,355,800 5,899,600
Cash provided by financing activities 1,000,100 6,940,200
NET INCREASE (DECREASE) IN CASH (560,000) (748,200)
CASH AT BEGINNING OF PERIOD 595,100 921,100
CASH AT END OF PERIOD $35,100 $172,900
See accompanying notes to condensed consolidated financial statements.
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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 September 30, 1999 and for the three and nine month periods ended
September 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 nine month periods ended
September 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:
SEPTEMBER 30,1999
(unaudited)
Raw materials $120,600
Work-in-progress 238,600
Finished goods 899,900
Finished goods on consignment
Obsolescence reserve (330,000)
$929,100
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.
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MCHENRY METALS GOLF CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table illustrates the computation of basic and diluted loss per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
NUMERATOR:
Net loss available for
common stockholders $(1,039,700)$(2,287,600)$(4,360,600)$(6,472,400)
DENOMINATOR:
Weighted average number of
common shares outstanding
during the period 17,030,300 11,022,500 15,758,800 10,324,400
Basic and diluted $(0.06) $(0.21) $(0.28) $(0.63)
loss per share
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 15.25% at September 30, 1999). The
line of credit is secured by accounts receivable and permits the bank to receive
warrants under certain events of default and is due on September 15, 1999.
Principal repayments had been previously negotiated between the bank and the
Company to be equal to 20% of the Company's daily cash receipts on trade
accounts receivable. In early October 1999, the Company, with consent of the
bank, ceased making these principal payments due to the Company's need for cash
for operating purposes. As of November 19, 1999, the bank has made no formal
demand for payment of the balance due.
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 nine 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. However, the
Company is involved in agreements with two suppliers which may have a
significant negative impact on the financial position, cash flows or overall
trends in the results of operations of the Company.
The Company entered into an agreement with a company, whose President was 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
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MCHENRY METALS GOLF CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 an agreement which extended
the due date for the Company to pay the remaining balance owing of $731,250 to
September 1, 1999. The Company is currently in default of the terms of the
extension of the agreement. While the related party currently has the ability
to either sell the merchandise as components, or 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, he has chosen to
defer that decision until December 15, 1999.
During the period between January 30, 1999 and March 15, 1999, the Company
placed purchase orders for new models of product with a new supplier, of which
the purchase was supported by additional sales orders. The purchase of the
new merchandise was to be financed through management's efforts to raise
additional funds not provided by its planned operations through additional
sales of its equity securities to new investors. The Company was unable,
during this period to raise the necessary financing to purchase the
merchandise. The total value of the open purchase orders is $ 415,430. Since
this supplier is critical to the Company as a going concern, the Company
entered into an agreement on July 29,1999 to extend the period of the purchase
orders and to provide a payment schedule for past due debt. The Company is
currently in default of the terms of the agreement. While the supplier
currently has the ability to either sell the merchandise as components, or
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, he has chosen to defer that decision until December 1, 1999.
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 September 30, 1999, the Company has an accumulated
deficit of $17,763,900 and a working capital deficiency of $1,832,700. 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. The Company
has suppliers with a significant quantity of its golf club heads which these
suppliers currently have the ability to sell in the open market, thereby
reducing the value of the Company's inventory and its ability to maintain its
current market pricing in the future. These factors raise questions about the
ability of the Company to continue as a going concern. In this regard,
management is proposing to meet the Company's financial obligations through a
merger with, or acquisition by, another golf equipment company or through
additional sales of its equity securities to new investors. However, there is
no assurance that the Company will be successful in negotiating a merger
agreement or 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 negotiate a
merger agreement or 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
<PAGE>
MCHENRY METALS GOLF CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 7 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
Cash paid for interest during the nine months ended September 30, 1999 and
1998 was approximately $125,000 and $18,000, respectively. Cash paid for
income taxes was $800 for both the nine month periods ended September 30, 1999
and 1998. During the nine months ended September 30, 1999, the Company
converted $1,028,500 of vendor invoices for shares of common stock. During
the nine months ended September 30, 1998, the Company financed the acquisition
of $26,800 in property and equipment through capital leases.
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.
<PAGE>
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 nine
months of 1999, the Company's sales in the Unites States increased 34%
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 TourPureregistered trademark 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 16.6% for the nine
months ended September 30, 1999, which was significantly less than the 32.4%
margin for the nine months ended September 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.
<PAGE>
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 September 30, 1999, were $717,200 as
compared to net sales of $911,100 for the third quarter of 1998. The 21.3%
decrease in net revenues is attributable to reduced collections on trade
receivables during the third quarter of 1999 as compared to 1998 (see Note 1
to Consolidated Financial Statements). This reduced collection rate is
attributable to the Company shipping fewer golf clubs during the first and
second quarters of 1999 as compared to 1998. Net sales for the nine months
ended September 30, 1999, were $2,988,000 as compared to net sales of
$2,227,700 for the first nine months of 1998. The 34.1% increase in net
revenues is attributable to a greater collections on trade receivables during
the first nine months of 1999 than during the same period in 1998. Again,
this greater collection rate is directly linked to a greater number of clubs
being shipped during the quarter as well as the quarter directly preceding
(since the Company typically sells on terms of 60 to 90 days).
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 (see Note 1 to Consolidated Financial
Statements). 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.
Although the Company has reported net sales for the third quarter of 1999,
returns of the Company's product exceeding shipments during that same time
period. The large number of returns of the Company's products during the
third quarter of 1999 will significantly reduce the Company's ability to
collect cash in the fourth quarter of 1999, which will, in turn, reduce net
sales to be reported. Based on the significant effort put forth by the
Company during the third quarter of 1999 to collect as much of the outstanding
receivables as possible in order to meet the Company's cash flow needs, the
Company anticipates a significant reduction in revenues during the fourth
quarter of 1999 as compared with the same period of 1998 as well as the
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MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
preceding three quarters of 1999. Cash collections on trade receivables
during the fist half of the fourth quarter of 1999 are approximately $250,000.
Sales of the Company's products during the second and third quarters did not
meet expectations primarily due to the lack of 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, as well as a lack
of capital which severely curtailed the Company's marketing efforts during the
second quarter of 1999. The Company has not been able to effectively
advertise or market its products since May, 1999.
Another factor which affected sales of the Company's products in 1999 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.
It is unlikely, however, that the Company will be able to take advantage of
this opportunity without a significant amount of new capital infusion in the
short term (see Note 6 to Consolidated Financial Statements).
Cost of Goods Sold
Cost of goods sold for the three months ended September 30, 1999 was
$1,013,700 (141.3% of net sales) as compared to $670,300 (73.6% of net sales)
for the third quarter of 1998. Cost of goods sold for the nine months ended
September 30, 1999 was $2,490,700 (83.4% of net sales) as compared to
$1,505,700 (67.6% of net sales) for the nine months ended September 30, 1998.
Cost of goods sold for the three and nine month periods ended September 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.
<PAGE>
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross Profit
Gross loss for the third quarter of 1999 was $296,500 (-41.3% of net sales) as
compared to a gross profit of $240,800 (26.4% of net sales) for the third
quarter of 1998. Gross profit for the nine months ended September 30, 1999
was $497,300 (16.6% of net sales) as compared to $722.000 (32.4% of net sales)
for the nine months ended September 30, 1998. The decrease in the gross
profit is attributable to cost increases inherent with irregular production
schedules.
Selling Expenses
Selling expenses were $555,100 for the quarter ended September 30, 1999
as compared to $1,923,700 for the third quarter of 1998,
representing a decrease of $1,368,600 or 71.7%. For the nine months ended
September 30, 1999, selling expenses were $3,652,000 as compared to $5,736,700
for the nine months ended September 30, 1998 representing a decrease of
$2,084,700 or 36.3%. The Company has had to significantly reduce its selling
expenses, particularly advertising expenses, during the second and third
quarters of 1999 due to a lack of operating capital. The Company has made
further reductions in the Company's sales staff as of October 31, 1999.
General and Administrative Expenses
General and administrative expenses were $151,600 for the quarter ended
September 30, 1999 as compared to $531,900 for the third quarter of 1998,
representing a decrease of $380,300 or 71.5%. For the nine months ended
September 30, 1999, general and administrative expenses were $1,028,700 as
compared to $1,254,800 for the nine months ended September 30, 1998,
representing a decrease of $266,100 or 18.0%.
The Company has had to significantly reduce its general and administrative
expenses, particularly salaries and wages, during the second and third
quarters of 1999 due to a lack of operating capital. The Company has made
further reductions in the Company's administrative staff as of October 31,
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 nine month
periods ended September 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
September 30, 1999 through conversion of accounts receivable and inventories
to cash, as compared to the sale of common stock for the third quarter of
1998. During the nine months ended September 30, 1999, operating activities
used $1,523,200, investing activities, consisting of purchases of equipment
and leasehold improvements, used $36,900, and financing activities provided
$1,000,100. At September 30, 1999, the Company had a working capital
deficiency of $1,832,700, an accumulated deficit of $17,763,900 and had
$551,800 outstanding under a bank line of credit, which was in default. The
Company also had an outstanding balance of $13,100 under a $125,000 revolving
credit agreement with a financial institution for the purchase of inventory.
<PAGE>
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As of September 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 bank line of credit. The
Company has made presentations to a number of parties that may be interested
in merging with or making investments in the Company.
During the nine months ended September 30, 1998, operating activities used
$7,514,900, investing activities, consisting principally of purchases of
equipment and leasehold improvements, used $173,500, and financing activities
provided $6,940,200.
FUTURE OPERATIONS
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 (see Note 6 to Consolidated Financial Statements).
In this regard, management is proposing to raise any necessary additional
funds not provided by its planned operations through loans, additional sales
of its equity securities or through a merger with, or acquisition by, another
golf equipment manufacturer. During the nine months ended September 30, 1999
the Company received $1,461,100 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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 1999, the Company was not in compliance with most of its
loan covenants of the line of credit agreement. The Company had 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
November 18, 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
September 30, 1999.
The Exhibits filed as part of this report are listed below.
Exhibit No. Description
27.1 Financial Data Schedule
<PAGE>
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: November 19, 1999 By: /s/Theodore Aroney
Theodore Aroney
Vice Chairman of the Board of Directors,
Vice President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF SEPTEMBER 30, 1999, THE STATEMENTS OF OPERATIONS AND
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 35,100
<SECURITIES> 0
<RECEIVABLES> 207,200
<ALLOWANCES> 0
<INVENTORY> 929,100
<CURRENT-ASSETS> 1,468,500
<PP&E> 669,900
<DEPRECIATION> 388,600
<TOTAL-ASSETS> 1,797,500
<CURRENT-LIABILITIES> 3,301,200
<BONDS> 17,600
0
0
<COMMON> 17,200
<OTHER-SE> (48,700)
<TOTAL-LIABILITY-AND-EQUITY> 1,797,500
<SALES> 2,270,800
<TOTAL-REVENUES> 2,988,000
<CGS> 2,490,700
<TOTAL-COSTS> 2,490,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,800
<INCOME-PRETAX> (4,360,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,360,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,360,600)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
