SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 333-53757
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MCHENRY METALS GOLF CORP.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 87-0429261
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1945 CAMINO VIDA ROBLE, SUITE J, CARLSBAD, CA 92008
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(Address of Principal Executive Offices)
(760) 929-0015
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(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
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On August 14, 2000, approximately 21,523,051 shares of the Registrant's Common
Stock, par value of $0.001, were outstanding.
<PAGE>
INDEX PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheet .................................. 3
Condensed Statements of Operations ....................... 4
Condensed Statements of Cash Flows ....................... 5
Notes to Condensed Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 11
PART II OTHER INFORMATION
Item 3. Defaults upon Senior Securities ........................... 16
Item 6. Exhibits and Reports on Form 8-K .......................... 16
SIGNATURES ........................................................... 17
EXHIBIT INDEX ........................................................ 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCHENRY METALS GOLF CORP.
CONDENSED BALANCE SHEET
JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
<S>
ASSETS
<C>
Current Assets
Cash $ 53,600
Accounts receivable, net 112,500
Inventories 322,700
Deferred costs on unrecognized sales 87,300
Other current assets 284,700
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TOTAL CURRENT ASSETS 860,800
Equipment and leasehold improvements, net 166,900
Other non-current assets 30,400
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TOTAL ASSETS $ 1,058,100
============================================================================= ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Line of credit borrowings, due on demand $ 511,900
Current portion of leases payable 8,900
Accounts payable and accrued liabilities 1,052,200
Accrued compensation 25,400
Deferred revenue 112,500
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TOTAL CURRENT LIABILITIES 1,710,900
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Long Term Notes payable - Convertible to Equity $ 826,700
Leases Payable - Net of Current Portion 11,500
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TOTAL LONG TERM LIABILITIES 838,200
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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; 21,523,100
issued and outstanding 21,500
Additional paid-in capital 17,030,200
Unearned compensation
Accumulated deficit (18,542,700)
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TOTAL STOCKHOLDERS' DEFICIT (1,491,000)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,058,100
============================================================================= ===============
</TABLE>
3
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MCHENRY METALS GOLF CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales $ 353,400 $ 1,078,900 $ 1,087,900 $ 2,270,800
Cost of goods sold 66,300 837,400 593,800 1,477,000
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Gross profit 287,100 241,500 494,100 793,800
Selling expenses 280,200 1,172,400 431,300 3,096,900
General and administrative expenses 72,800 383,200 197,900 877,100
Research and development costs (800) 31,700 20,400 71,100
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Loss from operations (65,100) (1,345,800) (155,500) (3,251,300)
Interest income (expense), net (6,100) (37,200) (24,900) (68,000)
Other income (expense) 18,000 1,800 (21,900) (1,600)
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Net profit (loss) $ (53,200) $ (1,381,200) $ (202,300) $ (3,320,900)
=====================================================================================================================
Basic and diluted loss per share $ (0.00) $ (0.08) $ (0.01) $ (0.22)
=====================================================================================================================
</TABLE>
4
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MCHENRY METALS GOLF CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
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2000 1999
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<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (202,300) $ (3,320,900)
Adjustments to reconcile net loss to
cash used in operating activities:
Stock issued as compensation 2,100 126,400
Warrants issued as compensation 158,500
Amortization of Unearned Compensation 155,000
Deferred costs on unrecognized sales (45,700) (183,600)
Provision for inventory obsolescence 101,400
Depreciation and amortization 60,900 114,500
Changes in operating assets and liabilities:
Inventories 227,100 955,600
Other current assets 60,400 (45,000)
Other non-current assets (4,200) (6,200)
Accounts payable and accrued liabilities (375,400) 340,800
Accrued compensation 3,600 17,900
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Cash used in operating activities (273,500) (1,585,600)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (3,000) (36,900)
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Cash used in investing activities (3,000) (36,900)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Long Term Notes-Payable - Convertible to Equity 245,000 0
Net borrowings (payments) under line of credit (29,700) (141,400)
Borrowings (principal payments) on leases payable (15,800) (11,300)
Net proceeds from sale of common stock 110,000 1,259,900
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Cash provided by financing activities 309,500 1,107,200
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NET INCREASE (DECREASE) IN CASH 33,000 (515,300)
CASH AT BEGINNING OF PERIOD 20,600 595,100
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CASH AT END OF PERIOD $ 53,600 $ 79,800
=========================================================================================================
</TABLE>
5
<PAGE>
MCHENRY METALS GOLF CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - QUARTERLY FINANCIAL STATEMENTS
The accompanying condensed financial statements and related notes as of June 30,
2000 and for the three and six month periods ended June 30, 2000 and 1999 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,
2000 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, 1999 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: JUNE 30, 2000
-------------------
(unaudited)
<S> <C>
Raw materials.................................. $ 153,900
Work-in-progress...............................
Finished goods................................. 168,800
Finished goods on consignment..................
Obsolescence reserve...........................
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$ 322,700
===================
</TABLE>
NOTE 3 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------
(unaudited)
<S> <C>
Accounts Receivable............................ $ 662,800
Accounts Receivable Reserve.................... (550,300)
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Net Accounts Receivable........................ $ 112,500
</TABLE>
===================
On July 19, 2000, the Company filed a lawsuit against a major retailer in an
attempt to collect upon an unpaid accounts receivable balance in the amount of
$90,000.
6
<PAGE>
NOTE 4 - NET LOSS PER SHARE
Profit (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 June 30, Six Months Ended June 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
NUMERATOR:
Net profit (loss) available for
common stockholders $ (53,200) $ (1,381,200) $ (202,300) $ (3,320,900)
===================================== =====================================
DENOMINATOR:
Weighted average number of common
shares outstanding during the
period 19,516,600 16,658,300 18,873,800 15,044,000
===================================== =====================================
Basic and diluted profit per share $ 0.00 $ (0.08) $ (0.01) $ (0.22)
===================================== =====================================
</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 5 - LINE OF CREDIT
As of August 14, 2000, the Company has a $504,300 line of credit agreement with
a bank bearing interest at the bank's prime rate plus 7% (total of 13.50% as of
July 31, 2000). The line of credit is secured by accounts receivable and was due
on September 15, 1999. On May 4, 2000, the Company and the bank signed a
forbearance agreement. The Company paid all past due interest at a fixed rate of
12.5% from September 15, 1999 to May 4, 2000, and will pay interest monthly at a
rate of 4% over prime during the forbearance period. The forbearance agreement
extends the loan until August 31, 2000, and, if the loan balance is $300,000 or
less at that time, the agreement extends until October 31, 2000. If, at that
time, the loan balance is $200,000 or less, the agreement extends until December
31, 2000. As of May 4, 2000, the Company implemented a daily principal paydown
program equivalent to 20% of its net accounts receivable and cash collections.
On August 17, 2000 the Company agreed to increase its daily principal paydown
percentage to 50% for a period of approximately three weeks until September 7,
2000. This agreement was made to accelerate principal balance reductions in lieu
of a $90,000 principal reduction previously pledged for payment by the Company
by June 30, 2000 from the sale of refurbished product that has been set-aside
for that purpose. Though the sale has completed, the customer, as of August 17,
2000 yet to pay its obligation to the Company. On July 19, 2000, the Company
7
<PAGE>
filed a legal action to collect all sums due and payable by the customer. The
Company plans to maintain its commitment to pledge the proceeds toward principal
reduction of the line of credit upon collection. In order to protect its
interest in collateral pledged by the Company under the original line of credit
agreement, the bank has chosen to file its own legal proceeding as an
alternative for principal repayment, and under their rights pursuant to the
technical default of the forbearance agreement which occurred when the $90,000
June 30, 2000 principal reduction payment was not made. A summons for such
proceeding was served on August 15, 2000. In conjunction with the forbearance
agreement, the Company granted to the bank a warrant to purchase 120,000 shares
of restricted common stock at a price of $.66. The warrant must be exercised on
or before August 23, 2002. The Company required the bank to return warrants that
were issued in 1998 and 1999, representing 59,213 shares of restricted common
stock.
NOTE 6 - LONG TERM NOTES PAYABLE.- CONVERTIBLE TO EQUITY.
At the end of the second quarter of 2000, the company had a total of $826,700 in
long-term notes payable, convertible to stock. This reflects a concerted effort
on the part of the Company to convert a significant portion of current
liabilities to long term liabilities, with the longer-term objective of
conversion to equity. A combination of professional golfers, suppliers and new
investors have agreed to the long-term notes payable with the conversion to
equity option. As of 8/14/00, $254,000 of the long-term note payable has been
converted to equity. Notes in the amount of $581,700 are redeemable at any time
prior to April 2002, with the remaining note of $245,000 not redeemable prior to
May 1, 2001. Management believes that the balance of $572,700 will be converted
to equity with in 90 days.
Long Term Notes Payable at 06/30/00 $826,700.00
Converted to Equity $254,000.00
Additions to Notes Payable $19,000.00
LONG TERM NOTES PAYABLE AT 08/14/00 $591,700.00
NOTE 7 - 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.
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 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% markup
over cost. The total purchase price of the golf club heads is approximately
$1,410,000 and was to have been purchased by the Company by June 30, 1999. The
Company is currently in default of the terms of the agreement. As of August 14,
2000, the remaining balance is approximately $ 515,000.00. While the related
party has the ability to either sell the merchandise as components, or complete
the golf club heads into finished golf clubs, and to sell them to the general
8
<PAGE>
public, which could reduce the value of the Company's remaining inventory, that
decision has been deferred. The Company continues to purchase inventory from the
related party.
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. As of August 14,
2000, the open purchase order balance is approximately $ 195,500.00. 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. 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 the 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. The Company continues to
purchase inventory from this supplier.
During the second quarter of 2000, the Company entered into endorsement
agreements with another three professional golfers for them to play the
Company's product and display the Company's logo prominently on their headwear.
In conjunction with these agreements, the Company has provided base compensation
totaling 190,000 shares of restricted common stock. Also, during the second
quarter of 2000, the company issued 280,000 shares to employees for future
compensation and 1,125,000 shares to outsiders for future financial and business
services to be provided of which 1,000,000 shares where subsequently canceled.
NOTE 8 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. On May 4, 2000, the Company was
successful in negotiating a forbearance agreement with its primary lender. A
number of factors, including the Company's history of significant losses,
negative working capital, and its accumulated deficit raise substantial doubts
about the Company's ability to continue as a going concern. As of June 30, 2000,
the Company has an accumulated deficit of $18,542,700 and a working capital
deficiency of $850,100. 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 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 financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
9
<PAGE>
MCHENRY METALS GOLF CORP.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NOTE 9 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
Cash paid for interest during the six months ended June 30, 2000 totaled
$24,900. No interest was paid during the six months ended June 30, 1999. Cash
paid for income taxes was $800 for both the six-month periods ended June 30,
2000 and 1999. During the six months ended June 30, 2000, the Company converted
$176,100 of vendor invoices for shares of common stock.
As of August 14,2000, the company had filed a Registration Statement for the
issuance of 1,000,000 shares of common stock for Financial and Business Services
to be provided.
Services will include, but not limited to:
1. Due diligence studies, reorganization and divestitures.
2. Capital structures, banking methods and systems.
3. Periodic reporting as to developments concerning the General Financial
Markets and Public Securities Market and Industry.
4. Guidance and assistance in available alternatives for accounts
receivable financing and other asset financing.
NOTE 10 - FORWARD-LOOKING STATEMENTS
These condensed 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.
10
<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
NET SALES
Net sales for the three months ended June 30, 2000, were $353,400 as compared to
net sales of $1,078,900 for the second quarter of 1999. The Company experienced
lower sales volume during the second quarter of 2000 due to a lower advertising
budget available for consumer demand creation as compared to the same time
period of 1999. Net sales for the six months ended June 30,2000, were $1,087,900
as compared to net sales of $2,270,800 for the first six months of 1999. This
again reflects a reduction in consumer direct advertising as compared to the
same time period of 1999.
As a result of the business strategy shift, the Company no longer employs sales
management personnel and sales staff to call on golf retailers in an attempt to
generate orders for the Company's product line, and the Company does not offer
payment terms to most golf retailers. These decisions were made based on the
Company's experience that many golf retailers treated the Company's product as
consignment inventory, that many golf retailers did not comply with the
Company's stated payment terms, and that many golf retailers represented
significant credit risk.
These strategic decisions are intended to shift the sales emphasis to
direct-to-consumer sales, while eliminating overhead costs associated with sales
management, sales staff, and credit risk, and improving the Company's overall
efficiency in generating revenue.
With its new approach, the Company intends for its previous and current
advertising efforts to generate consumer demand and orders through retailers and
also direct-to-consumer channels such as direct response advertising and the
Internet. The Company intends to launch an aggressive nationwide Demo Day
program in the third quarter of 2000 to supplement the advertising campaign, and
increase sales opportunities. The Company's 30-minute television infomercial,
the cornerstone of its direct response advertising efforts, began airing on
April 8, 2000, in conjunction with The Masters tournament weekend. This weekend
has been historically viewed as the "kickoff" to the golf season across the
United States. In comparison, the Company did run its 30-minute television
infomercial during the first quarter of 1999.
With the changes in the Company's business strategy mentioned above, the bulk of
the Company's sales volume during the first quarter of 2000 represented sales of
refurbished and demo product inventory that had been accumulated during 1999.
This inventory was sold to generate cash flow during the off-season winter
months while the Company prepared to implement its new sales and marketing
approach in the second quarter. Sales during the second quarter were
predominantly consumer direct sales, thus generating higher selling prices and
gross margins.
11
<PAGE>
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
Due to the Company's limited operating history, 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.
COST OF GOODS SOLD
Cost of goods sold was $66,300 (18.8% of net sales) for the three months ended
June 30, 2000, as compared to $837,400 (77.6% of net sales) for the first
quarter of 1999. The cost of goods sold for the six months-ended June 30,2000
was $593,800 (54.6 % of net sales) as compared to $1,477,000 (65.0% of net
sales) for the six months ended June 30, 1999. The cost of goods sold, as a
percentage of sales, was lower in the second quarter of 2000 reflecting both a
reduction in cost of product as well as the impact of the sales strategy to
focus more on a direct to consumer selling effort, resulting in higher selling
prices and greater gross margins. A reduction in the over accrued warranty
expense and the elimination of an Inventory reserve for demo quality merchandise
were factors in the lower cost of goods sold for the second quarter of 2000.
The Company expects cost of goods sold for the remainder of 2000, as a
percentage of sales, to continue to show significant improvement.
GROSS PROFIT
Gross profit was $287,100 (81.2% of net sales) for the second quarter of 2000 as
compared to $241,500(22.4% of net sales) for the second quarter of 1999. Gross
profit for the six months-ended June 30,2000 was $494,100 (45.4% of net sales)
as compared to $793,800 (35.0% of net sales) for the six months ended June 30,
1999. The gross profit was lower in the first half of 2000 due to a lower
advertising budget available for consumer demand creation as compared to the
same time period of 1999. The gross profit was higher in the first half of 2000
as a percentage of sales again due to the change in sales strategy, selling more
to direct consumers, reflecting a higher selling price and greater gross
margins, along with a reduction of cost of product.
The Company expects gross profit for the remainder of 2000, as a percentage of
sales, to continue show significant improvement.
SELLING EXPENSES
Selling expenses were $280,200 for the three months ended June 30, 2000 as
compared to $1,172,400 for the second quarter of 1999, representing a decrease
of $892,200 from the first quarter of 1999. For the six months ended June
30,2000 was $431,300 as compared to $3,096,900 for the six months ended June 30,
1999 representing a decrease of $2,665,600.
The Company's new business strategy provided a significant decrease in costs
associated with sales management personnel, sales staff, and credit management.
In addition, the Company's television infomercial did not begin airing until the
second quarter in conjunction with The Masters tournament weekend, historically
viewed as the "kickoff" of the golf season across the United States.
12
<PAGE>
MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $72,800 for the three months ended June
30, 2000 as compared to $383,200 for the second quarter of 1999, representing a
decrease of $310,400 from the second quarter of 1999. For the six months ended
June 30,2000 was $197,900 as compared to $877,100 for the six months ended June
30, 1999 representing a decrease of $679,200. The Company has experienced lower
payroll costs and consolidated its operations into one facility at the end of
1999 and beginning of the year 2000 and continues to experience a low overhead.
One additional factor for the decrease in General and administrative expenses
during the second quarter of 2000 was a reduction in the bad debts reserve,
which resulted in a reduction in bad debt expense.
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 June 30,
2000.
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.
13
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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 six months ended June
30, 2000 and 1999 through the sale of common stock. During the second quarter of
2000, the operating activities used $472,600, the purchase of equipment used
$3,000 and financing activities provided $317,700. Also, during the second
quarter of 2000, the Company converted $72,487 of accounts payable to common
stock and secured agreements with certain individuals (Senior PGA Tour Players)
to compensate for services provided for the fiscal year of 2000 through common
stock in the amount of an additional $22,800. As of June 30, 2000, the Company
had converted $187,500 of accrued compensation to equity. At June 30, 2000, the
Company had a working capital deficiency of $850,100, an accumulated deficit of
$18,542,700 and had $511,900 outstanding under a bank line of credit, which was
in default. On May 4, 2000, the Company and the bank signed a forbearance
agreement. The Company paid all past due interest at a fixed rate of 12.5% from
September 15, 1999 to May 4, 2000, and will pay interest monthly at a rate of 4%
over prime during the forbearance period. The forbearance agreement extends the
loan until August 31, 2000, and, if the loan balance is $300,000 or less at that
time, the agreement extends until October 31, 2000. If, at that time, the loan
balance is $200,000 or less, the agreement extends until December 31, 2000. As
of May 4, 2000, the Company implemented a daily principal paydown program
equivalent to 20% of its net accounts receivable and cash collections. On August
17, 2000 the Company agreed to increase its daily principal paydown percentage
to 50% for a period of approximately three weeks until September 7, 2000. This
agreement was made to accelerate principal balance reductions in lieu of a
$90,000 principal reduction previously pledged for payment by the Company by
June 30, 2000 from the sale of refurbished product that has been set-aside for
that purpose. Though the sale has completed, the customer, as of August 17, 2000
yet to pay its obligation to the Company. On July 19, 2000 the Company filed a
legal action to collect all sums due and payable by the customer. The Company
plans to maintain its commitment to pledge the proceeds toward principal
reduction of the line of credit upon collection. In order to protect its
interest in collateral pledged by the Company under the original line of credit
agreement, the bank has chosen to file its own legal proceeding as an
alternative for principal repayment, and under their rights pursuant to the
technical default of the forbearance agreement which occurred when the $90,000
June 30, 2000 principal reduction payment was not made. A summons for such
proceeding was served on August 15, 2000. In conjunction with the forbearance
agreement, the Company granted to the bank a warrant to purchase 120,000 shares
of restricted common stock at a price of $.66. The warrant must be exercised on
or before August 23, 2002. The Company required the bank to return warrants that
were issued in 1998 and 1999, representing 59,213 shares of restricted common
stock.
Management believes that the balance of long term notes payable of $572,700 will
be converted to equity within 90 days. The Company also believes that
approximately $600,000 of the total of $1,052,200 in accounts payable can be
converted to equity.
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 1999 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
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MCHENRY METALS GOLF CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
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 June 30, 2000, the Company
converted $72,487 of accounts payable to common stock and secured agreements
with certain individuals (PGA Tour Players) to compensate for services provided
for the fiscal year of 2000 through common stock in the amount of an additional
$22,800. As of August 03, 2000, the Company had converted $ 187,500 of accrued
compensation to equity. Subsequent to March 31, 2000, the Company received cash
and commitments totaling in excess of $500,000 from the sale of equity
securities and subordinated debt from existing and new investors. 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 may have a material
adverse effect on the Company's ability to obtain additional financing.
The Company has engaged the services of both a full service investment banking
firm, and a financial advisory firm, which specializes in securing investment
capital, seeking acquisition opportunities and providing market making and
retail brokerage support. Together, the group intends to establish McHenry
Metals Golf Corp. as a platform for the "roll-up" of the $2.7 billion golf
equipment industry. Management believes there is a significant opportunity for
consolidation of the industry, and is targeting major brands, products, and
technology which can be acquired and assimilated into the Company's unique
business model. This business model involves a multi-brand strategy, leveraging
both direct-to-consumer marketing and traditional retail channels of
distribution. With the support of the investment banking firm and the financial
advisory firm: management believes the company will have the ability to make
strategic acquisitions and fund expanded marketing efforts.
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PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of August 14, 2000, the Company has a $504,300 line of credit agreement with
a bank bearing interest at the bank's prime rate plus 7% (total of 13.50% as of
July 31, 2000). The line of credit is secured by accounts receivable and was due
on September 15, 1999. On May 4, 2000, the Company and the bank signed a
forbearance agreement. The Company paid all past due interest at a fixed rate of
12.5% from September 15, 1999 to May 4, 2000, and will pay interest monthly at a
rate of 4% over prime during the forbearance period. The forbearance agreement
extends the loan until August 31, 2000, and, if the loan balance is $300,000 or
less at that time, the agreement extends until October 31, 2000. If, at that
time, the loan balance is $200,000 or less, the agreement extends until December
31, 2000. As of May 4, 2000, the Company implemented a daily principal paydown
program equivalent to 20% of its net accounts receivable and cash collections.
On August 17, 2000 the Company agreed to increase its daily principal paydown
percentage to 50% for a period of approximately three weeks until September 7,
2000. This agreement was made to accelerate principal balance reductions in lieu
of a $90,000 principal reduction previously pledged for payment by the Company
by June 30, 2000 from the sale of refurbished product that has been set-aside
for that purpose. Though the sale has completed, the customer, as of August 17,
2000 yet to pay its obligation to the Company. On July, 2000 the Company filed a
legal action to collect all sums due and payable by the customer. The Company
plans to maintain its commitment to pledge the proceeds toward principal
reduction of the line of credit upon collection. In order to protect its
interest in collateral pledged by the Company under the original line of credit
agreement, the bank has chosen to file its own legal proceeding as an
alternative for principal repayment, and under their rights pursuant to the
technical default of the forbearance agreement which occurred when the $90,000
June 30, 2000 principal reduction payment was not made. A summons for such
proceeding was served on August 15, 2000. In conjunction with the forbearance
agreement, the Company granted to the bank a warrant to purchase 120,000 shares
of restricted common stock at a price of $.66. The warrant must be exercised on
or before August 23, 2002. The Company required the bank to return warrants that
were issued in 1998 and 1999, representing 59,213 shares of restricted common
stock.
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,
2000.
The Exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- ----------------------------------------------------------
27.1 Financial Data Schedule
16
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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 14, 2000 By: /s/ Theodore Aroney
--------------- ----------------------------------
Theodore Aroney
Chairman of the Board of Directors
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EXHIBIT INDEX
Exhibit No. Description
----------- ---------------------------------------------------
27.1 Financial Data Schedule
18
