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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
--------------------
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
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 November 14, 2000, approximately 23,279,600 shares of the Registrant's Common
Stock, par value of $0.001, were outstanding.
<PAGE>
2
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
SEPTEMBER 30, 2000
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash $ 69,500
Accounts receivable, net 800
Inventories 267,900
Deferred costs on unrecognized sales
Other current assets 255,300
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TOTAL CURRENT ASSETS 593,500
Equipment and leasehold improvements, net 143,300
Other non-current assets 30,700
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TOTAL ASSETS $ 767,500
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Line of credit borrowings, due on demand $ 495,700
Current portion of leases payable 6,100
Accounts payable and accrued liabilities 1,020,000
Accrued compensation 30,500
Deferred revenue 800
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TOTAL CURRENT LIABILITIES 1,553,100
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Convertible Debt $ 591,700
Leases Payable - Net of Current Portion 11,500
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TOTAL LONG TERM LIABILITIES 603,200
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; 23,279,600
issued and outstanding 23,300
Additional paid-in capital 17,400,500
Unearned compensation
Accumulated deficit (18,812,600)
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TOTAL STOCKHOLDERS' DEFICIT (1,388,800)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 767,500
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</TABLE>
3
<PAGE>
MCHENRY METALS GOLF CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales $ 375,500 $ 717,200 $ 1,463,400 $ 2,988,000
Cost of goods sold 286,700 1,013,700 880,500 2,490,700
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Gross profit 88,800 (296,500) 582,900 497,300
Selling expenses 170,300 555,100 601,600 3,652,000
General and administrative expenses 142,800 151,600 340,700 1,028,700
Research and development costs 5,600 19,400 26,000 90,500
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Loss from operations (229,900) (1,022,600) (385,400) (4,273,900)
Interest income (expense), net (16,300) (14,800) (41,200) (82,800)
Other income (expense) (23,700) (2,300) (45,600) (3,900)
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Net profit (loss) $ (269,900) $ (1,039,700) $ (472,200) $ (4,360,600)
=====================================================================================================================
Basic and diluted loss per share $ (0.01) $ (0.06) $ (0.02) $ (0.28)
=====================================================================================================================
</TABLE>
4
<PAGE>
MCHENRY METALS GOLF CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30,
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2000 1999
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CASH FLOWS USED IN OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (472,200) $ (4,360,600)
Adjustments to reconcile net loss to
cash used in operating activities:
Stock issued as compensation 11,700 126,400
Warrants issued as compensation 220,600
Amortization of Unearned Compensation 469,000
Deferred costs on unrecognized sales 41,700 234,500
Provision for inventory obsolescence 101,400
Depreciation and amortization 84,800 172,700
Non Cash Interest Expense 5,000
Changes in operating assets and liabilities:
Inventories 281,900 976,300
Other current assets 159,700 (75,500)
Other non-current assets (4,800) (6,200)
Accounts payable and accrued liabilities (404,900) 589,900
Accrued compensation 8,700 28,300
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Cash used in operating activities (288,400) (1,523,200)
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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:
Convertible Debt - Convertible to Equity 245,000 0
Net borrowings (payments) under line of credit (46,000) (335,100)
Borrowings (principal payments) on leases payable (18,700) (20,600)
Net proceeds from sale of common stock 160,000 1,355,800
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Cash provided by financing activities 340,300 1,000,100
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NET INCREASE (DECREASE) IN CASH 48,900 (560,000)
CASH AT BEGINNING OF PERIOD 20,600 595,100
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CASH AT END OF PERIOD $ 69,500 $ 35,100
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</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
September 30, 2000 and for the three and nine month periods ended September 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 nine month periods
ended September 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: SEPTEMBER 30, 2000
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(unaudited)
<S> <C>
Raw materials............................................ $ 123,900
Work-in-progress.........................................
Finished goods........................................... 144,000
Finished goods on consignment............................
Obsolescence reserve.....................................
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$ 267,900
===================
</TABLE>
NOTE 3 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
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(unaudited)
<S> <C>
Accounts Receivable...................................... $ 371,100
Accounts Receivable Reserve.............................. (370,300)
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Net Accounts Receivable............................... $ 800
===================
</TABLE>
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 Sept 30, Nine Months Ended Sept 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net profit (loss) available for
common stockholders $ (269,900) $ (1,039,700) $ (472,200) $ (4,360,600)
===================================== =====================================
DENOMINATOR:
Weighted average number of common
shares outstanding during the
period 22,235,900 17,030,300 20,002,700 15,758,800
===================================== =====================================
Basic and diluted profit per share $ (0.01) $ (0.06) $ (0.02) $ (0.28)
===================================== =====================================
</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 November 14, 2000, the Company has a $495,700 line of credit agreement
with a bank bearing interest at the bank's prime rate plus 7%. The line of
credit is secured by accounts receivable and inventory and was due on September
15, 1999. On May 4, 2000, the Company and the bank signed a forbearance
agreement. At that time, the Company paid all past due interest at a fixed rate
of 12.5% from September 15, 1999 to May 4, 2000 and agreed to pay interest
monthly at a rate of 4% over prime during the forbearance period. The
forbearance agreement extended the loan until August 31, 2000, and, if the loan
balance was $300,000 or less at that time, the agreement would have further
extended until October 31, 2000. The Company did not achieve a loan balance
reduction to $300,000 by August 31, 2000. In the May 4th forbearance agreement,
the Company agreed to and implemented a daily principal paydown program of 20%
of its net accounts receivable and cash collections. However, to accelerate
principal reductions, on August 17, 2000 the Company implemented an increase of
its paydown percentage to 50% for a period of approximately three weeks until
7
<PAGE>
September 7, 2000. In anticipation of an August 31st termination of the loan
forbearance agreement, and in order to further protect its interest in
collateral pledged pursuant to terms within the original loan agreement, the
bank chose to file a legal proceeding granting rights for possession of
inventory collateral should it desire to execute on such rights. During
additional forbearance discussions and until such a forbearance is agreed to,
the Company agreed to a stipulated order to maintain its ordinary course of
business and not to otherwise remove or impair the value of the bank's
collateral. Additionally, the Company agreed to continue loan principal
reductions as percentage of accounts receivable and cash collections. As of
November 14, 2000, the Company and the bank have agreed to terms for an
additional period of forbearance extending to the earlier date of February 15,
2001 or completion of any merger transaction, from which a payoff would ensue
upon the transaction's completion. Throughout the foregoing periods, and to
date, the Company has remained current on all interest payable.
NOTE 6 - CONVERTIBLE DEBT - CONVERTIBLE TO EQUITY.
At the end of the third quarter of 2000, the company had a balance of $591,700
in convertible debt securities, convertible to stock. This reflects a concerted
effort on the part of the Company to convert a significant portion of current
liabilities to convertible debt, 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 November 14, 2000, $254,000 of an original amount of $826,700 of the
convertible debt had been converted to equity. Notes in the amount of $341,700
are redeemable at any time prior to April 2002, with the remaining note of
$250,000 not redeemable prior to May 1, 2001. Management believes that the
balance of $591,700 will be converted to equity by the end of the year.
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CONVERTIBLE DEBT AT 11/14/00 $591,700.00
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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 continues its obligations to 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 markup over cost. The total purchase price commitment of the golf
club heads is approximately $1,308,600. As of November 14, 2000, the Company has
purchased $806,339 of golf club heads pursuant to its obligations under the
agreement leaving a remaining balance of approximately $502,300. The related
party has the ability, pursuant to terms of the agreement which are designed to
mitigate risks involved with supplying the cash to purchase the position of the
original supplier, 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. Such an action by the related party, which to date has not occurred,
could reduce the value of the Company's remaining inventory.
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. As of November 14, 2000,
the open purchase order balance is approximately $ 195,500.00.
8
<PAGE>
During the third quarter of 2000, the Company issued 1,160,000 shares of common
stock to outsiders for future financial and business services to be provided.
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. As of
November 14, 2000, the Company and the bank have agreed to terms for an
additional period of forbearance extending to the earlier date of February 15,
2001 or completion of any merger transaction, from which a payoff would ensue
upon the transaction's completion.
In addition to its internal business plans, the Company has adopted a strategic
plan to identify other industry related companies for a possible business
combination, which, if combined, would create accretive opportunities for brand
development, market share and profitability. The Company is currently in various
levels discussion with several companies that might fit within the foregoing
strategy. However, absent such an event, 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 September 30, 2000, the Company has an
accumulated deficit of $18,812,600 and a working capital deficiency of $959,600.
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.
NOTE 9 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
Cash paid for interest during the nine months ended September 30, 2000 and
September 30, 1999 totaled $41,200 and $ 82,800 respectively. Cash paid for
income taxes was $800 for both the nine month periods ended September 30, 2000
and 1999. During the nine months ended September 30, 2000, the Company converted
$176,100 of vendor invoices for shares of common stock.
On August 14, 2000, the company issued 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.
9
<PAGE>
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
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. 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, 2000, were $375,500 as
compared to net sales of $717,200 for the third quarter of 1999. The 47.6%
decrease in net revenues is attributable to a combination of reduced collections
on aged trade receivables during the third quarter of 2000 as compared to 1999
(see Note 1 to Consolidated Financial Statements) and the Company experienced
lower direct to consumer sales volume during the third quarter of 2000 due to
insufficient capital to support a consumer driven advertising campaign. Net
sales for the nine months ended September 30, 2000, were $1,463,400 as compared
to net sales of $2,988,000 for the first nine months of 1999. The 51.0% decrease
again reflects a combination of reduced collections on aged trade receivables as
well as a reduction in consumer direct advertising as compared to the same time
period of 1999.
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. The Company will likely continue to report revenues on this basis
throughout the remainder of 2000.
As a result of a 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.
11
<PAGE>
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.
During 2000, the Company has been unable to fully-execute its business plan due
to a lack of capital resources. Capital needs at this stage of an organization's
growth are typically 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, if selling to trade accounts, the financing of
accounts receivable.
The Company's intent was for its 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'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. The company continued to run the television
infomercial through July 19, 2000.
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. New sales during the second and third quarter
were predominantly consumer direct sales, thus generating higher selling prices
and gross margins.
COST OF GOODS SOLD
Cost of goods sold was $ 286,700 (76.4% of net sales) for the three months ended
September 30, 2000, as compared to $ 1,013,700 (141.3% of net sales) for the
third quarter of 1999. The cost of goods sold for the nine months ended
September 30, 2000 was $ 880,500 (60.2 % of net sales) as compared to $
2,490,700 (83.4 % of net sales) for the nine months ended September 30, 1999.
The cost of goods sold, as a percentage of sales, was lower in the third 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. During the nine
month period ended September 30, 1999, cost of goods were negatively affected by
the Company's reduced estimates of realizability of the "Deferred costs on
unrecognized sales," the reserves for which were charged to cost of sales. A
reduction in over accrued warranty expense and the elimination of an inventory
reserve for demo quality merchandise were also factors in the lower cost of
goods sold for the nine months ended September 30, 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 $88,800 (23.6% of net sales) for the third quarter of 2000 as
compared to $(296,500)(-41.3% of net sales) for the third quarter of 1999. Gross
profit for the nine months-ended September 30,2000 was $582,900 (39.8% of net
sales) as compared to $497,300 (16.6% of net sales) for the nine months ended
September 30, 1999. The gross profit was higher for both the three month and the
nine month period ended September 30, 2000 as a percentage of sales due to the
combination of 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, as well as the additional reserves for the
Company's reduced estimates of "realizability" of the "Deferred costs on
unrecognized sales during the same period of 1999.
12
<PAGE>
The Company expects gross profit for the remainder of 2000, as a percentage of
sales, to continue show improvement.
SELLING EXPENSES
Selling expenses were $170,300 for the three months ended September 30, 2000 as
compared to $555,100 for the third quarter of 1999, representing a decrease of
$384,800 from the third quarter of 1999. For the nine months ended September
30,2000, selling expenses were $601,600 as compared to $3,652,000 for the nine
months ended September 30, 1999 representing a decrease of $3,050,400.
The Company's 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $142,800 for the three months ended
September 30, 2000 as compared to $151,600 for the third quarter of 1999,
representing a decrease of $8,800. For the nine months ended September 30,2000,
General and Administrative Expenses were $340,700 as compared to $1,028,700 for
the nine months ended September 30, 1999 representing a decrease of $688,000.
The Company has experienced lower payroll costs and consolidated its operations
into one facility at the end of 1999 and continues to experience a low overhead.
Additionally, during the nine months ended September 30, 2000, as collections of
aged trade receivables occurred, the bad debts reserve was reduced, resulting in
a further reduction to General and Administrative 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 September
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company primarily financed its operations during the three months ended
September 30, 2000 through conversion of accounts receivable and inventories to
cash, as compared to the sale of common stock for the third quarter of 1999.
During the nine months ended September 30, 2000, operating activities used
$288,400, investing activities, consisting of purchases of equipment and
leasehold improvements, used $3,000, and financing activities provided $340,300.
Also, during the nine months ended September 30, 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 September 30, 2000, the Company had converted $ 187,500 of accrued
13
<PAGE>
compensation to equity. At September 30, 2000, the Company had a working capital
deficiency of $959,600, an accumulated deficit of $18,812,600 and had $495,700
outstanding under a bank line of credit, which was in default. As of September
30, 2000, the resources available to the Company consist of cash, limited
receivables, inventories and common and preferred stock. 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, 1999, operating activities used
$1,523,200, investing activities, consisting principally of purchases of
equipment and leasehold improvements, used $36,900, and financing activities
provided $1,000,100.
Management believes that the balance of convertible debt securities of $591,700
will be converted to equity by the end of the year. The Company also believes
that approximately $600,000 of the total of $1,020,000 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 additional funds not
provided by its planned operations through loans, additional sales of its equity
securities or through a merger with, or acquisition of, another golf equipment
manufacturer. During the nine months ended September 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 The Company has converted $ 187,500 of accrued compensation to equity
and has received cash and commitments totaling $ 405,000 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.
14
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PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of November 14, 2000, the Company has a $495,700 line of credit agreement
with a bank bearing interest at the bank's prime rate plus 7%. The line of
credit is secured by accounts receivable and inventory and was due on September
15, 1999. On May 4, 2000, the Company and the bank signed a forbearance
agreement. At that time, the Company paid all past due interest at a fixed rate
of 12.5% from September 15, 1999 to May 4, 2000 and agreed to pay interest
monthly at a rate of 4% over prime during the forbearance period. The
forbearance agreement extended the loan until August 31, 2000, and, if the loan
balance was $300,000 or less at that time, the agreement would have further
extended until October 31, 2000. The Company did not achieve a loan balance
reduction to $300,000 by August 31, 2000. In the May 4th forbearance agreement,
the Company agreed to and implemented a daily principal paydown program of 20%
of its net accounts receivable and cash collections. However, to accelerate
principal reductions, on August 17, 2000 the Company implemented an increase of
its paydown percentage to 50% for a period of approximately three weeks until
September 7, 2000. In anticipation of an August 31st termination of the loan
forbearance agreement, and in order to further protect its interest in
collateral pledged pursuant to terms within the original loan agreement, the
bank chose to file a legal proceeding granting rights for possession of
inventory collateral should it desire to execute on such rights. During
additional forbearance discussions and until such a forbearance is agreed to,
the Company agreed to a stipulated order to maintain its ordinary course of
business and not to otherwise remove or impair the value of the bank's
collateral. Additionally, the Company agreed to continue loan principal
reductions as percentage of accounts receivable and cash collections. As of
November 14, 2000, the Company and the bank have agreed to terms for an
additional period of forbearance extending to the earlier date of February 15,
2001 or completion of any merger transaction, from which a payoff would ensue
upon the transaction's completion. Throughout the foregoing periods, and to
date, the Company has remained current on all interest payable.
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, 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: NOVEMBER 14, 2000 By: /s/ Theodore Aroney
----------------- ----------------------------------------
Theodore Aroney
Chairman of the Board of Directors
17
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- ---------------------------------------------------
27.1 Financial Data Schedule
