UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or
15(d) of The Securities Exchange Act of 1934 For
the Quarterly Period Ended September 30,1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934 For the
Transition Period from____________to_________
Commission File Number: 0-18660
M. G. PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
California 33-0098392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8154 Bracken Creek
San Antonio, Texas 78266
(Address of principal executive offices) (Zip Code)
(210) 651-5288
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period
that the 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
(1); Yes X No on (2).
As of November 8, 1996, the number of shares of the
registrant's Common Stock outstanding was 14,206,154.
M. G. PRODUCTS, INC.
QUARTERLY REPORT FORM 10-Q - SEPTEMBER 30, 1996
PART I. Financial Information Page
Item 1. Consolidated Balance Sheets - September 30 and
December, 1996 31, 1995 1
Consolidated Statement of Operations - Three and
and Nine months ended September 30, 1996 and 1995 3
Condensed Consolidated Statement of Cash Flows -
Three and Nine months ended September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submissions of Matters to a Vote of Security Holders 13
Item 5. Other information 13
Item 6. Exhibits and Reports on Form 8-K 13
Part I - Financial Information
Item 1. Financial Statements
M.G. Products, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(unaudited)
<S>
Assets
Current assets: <C> <C>
Cash $ 482,403 $ 1,011,755
Accounts receivable:
Trade, net of allowance for
doubtful accounts of $267,000 and
$307,000 in 1996 and 1995, respectively 2,344,704 1,876,400
Related parties 121,167 250,514
Inventories:
Raw materials 5,325,989 4,506,842
Work-in-process 146,309 688,391
Finished goods 1,921,880 3,669,301
Total inventories 7,394,178 8,864,534
Prepaid expenses and other current
assets 688,970 624,001
Total current assets 11,031,422 12,627,204
Property and equipment at cost:
Machinery and equipment 2,834,886 2,729,651
Vehicles 88,570 53,584
Furniture and fixtures 573,797 534,489
Leasehold improvements 1,193,972 1,196,021
Total Property and equipment at cost 4,691,225 4,513,745
Less accumulated depreciation and
amortization (2,531,325) (2,093,961)
Net property and equipment 2,159,900 2,419,784
Other assets 892,762 1,033,792
Investment in joint venture 765,601 810,869
Total assets $14,849,685 $ 16,891,649
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 2,122,604 $ 2,994,152
Due to related parties 1,606,733 1,603,091
Deferred revenue 0 927,241
Accrued expenses and other current
liabilites 1,117,859 1,151,943
Restructuring accrual 1,462,945 1,292,403
Notes payable 4,000,000 3,161,844
Current portion of capital lease
obligations 65,642 103,838
Pre-petition liabilities 487,037 465,828
Subordinated notes payable to
shareholders 0 375,478
Total current liabilities 10,862,820 12,075,818
Capital lease obligations, less
current portion 0 38,209
Long term debt 2,119,980 0
Commitments and contingencies
Shareholder's equity:
Common shares, no par value:
Authorized shares D 15,000,000 Issued and
outstanding shares -14,206,154 in 1996
and 10,564,078 in 1995 35,015,935 33,012,793
Accumulated deficit (33,149,050) (28,235,171)
Total shareholder's equity 1,866,885 4,777,622
Total liabilities and shareholder's
equity $14,849,685 $ 16,891,649
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived
from the audited financial statements at that date but does not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. See notes to consolidated financial statements.
<TABLE>
<CAPTION>
M.G. Products, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
Restated Restated
(See Note 1) (See Note 1)
<S> <C> <C> <C> <C>
Net Sales $ 5,713,161 $ 5,538,925 $15,818,005 $22,275,676
Cost of sales 5,693,240 5,437,230 15,979,264 20,072,781
Gross profit (loss) 19,921 101,695 (161,259) (2,202,895)
Costs and expenses:
Selling 133,873 536,990 1,318,476 2,652,429
General and
Administrative 640,208 1,191,839 2,353,988 4,024,625
Restructuring &
non-recurring 0 0 795,000 0
774,081 1,728,829 4,467,464 6,677,054
Loss from Operations (754,160) (1,627,134) (4,628,723) (4,474,159)
Other income(expense):
Interest expense,net (241,324) (252,753) (542,250) (862,657)
Equity in earnings
of joint venture 140,312 41,038 257,094 351,538
Net loss $ (855,172) $(1,838,849) $(4,913,879) $(4,985,278)
Net loss per share $ (0.08) $ (0.19) $ (0.46) $ (0.55)
Number of shares
used in computing
share amounts 10,604,546 9,582,570 10,577,567 9,082,195
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
M.G. Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended
September 30,1996 September 30, 1995
<S> <C> <C>
Cash used in operations: $(3,535,966) $( 126,151)
Investing activities:
Purchase of property and equipment (177,480) 3,201
Dividend from investment in joint
venture 302,363 0
Cash provided by investing
activities 124,883 3,201
Financing activities:
Proceeds (payments) on notes
payable, net 838,156 (1,466,924)
Proceeds from long term debt 2,119,980 0
Payments on pre-petition
liabilities 0 ( 79,035)
Proceeds from subordinated notes
payable to shareholders, net 0 1,878,685
Payments on capital lease
obligations ( 76,405) ( 50,365)
Cash provided by financing
activities 2,881,731 282,361
Net increase (decrease) in cash ( 529,352) 159,411
Cash at beginning of period 1,011,755 10,712
Cash at end of period $ 482,403 $ 170,123
</TABLE>
See notes to consolidated financial statements.
M.G. Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial statement information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three- and nine-month periods ended
September 30, 1996, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For
further information, refer to the consolidated financial
statements and footnotes thereto included in M.G. Products, Inc.
annual report on Form 10-K for the year ended December 31, 1995.
Description of Business
M.G. Products, Inc. (the Company) is engaged in a single business
segment, the manufacture and wholesale distribution of
residential lighting fixtures for retail outlets primarily in the
United States. The consolidated financial statements include the
accounts of the Company and all wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
The Company owns two manufacturing subsidiaries located in
Monterrey and Tijuana, Mexico. Substantially all of the products
produced in these two factories are transferred to the Company
for sale in the United States. Currently, the Company purchases
raw materials from both United States and Mexican vendors.
Identifiable assets, primarily raw materials and machinery and
equipment of $7,800,000 are located in Mexico.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Concentration of Credit Risk
The Company sells its products primarily to major national
building material/home improvement retailers. Credit is extended
based on an evaluation of the customer's financial condition, and
collateral is generally not required.
The former Chief Executive Officer of the Company holds a senior
merchandising position with the Company's single largest
customer. This customer previously provided advance payments in
exchange for prepayment discounts on its purchases. The Company
recorded such advance payments as deferred revenue (See Note 2).
Inventories
Inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment
Property and equipment is stated at cost and depreciated over
estimated useful lives of five to ten years using the straight-
line method. Maintenance and repairs are charged to expense as
incurred.
Pre-Petition Liabilities
During 1990, the Company was approved for reorganization pursuant
to Chapter 11 of the United States Bankruptcy Code. As part of
its reorganization plan, the Company is obligated to pay certain
adjusted liabilities which are included in the accompanying
balance sheet as pre-petition liabilities.
Revenue Recognition
Product sales revenue is recorded as products are shipped.
Stock-Based Compensation
The Company granted stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants.
Advertising Costs
The Company expenses advertising costs as incurred.
Net Loss Per Share
Net loss per share is computed using the weighted average number
of common shares outstanding during the year. Common stock
equivalents are not considered in the computation of periods with
a loss as their effect is anti-dilutive.
Reclassification
Certain prior period amounts have been reclassified to conform to
the current year presentation.
2. Going Concern
During the three years ended December 31, 1995, the Company
incurred substantial losses which negatively impacted cash flow
and caused liquidity shortages. Additionally, a significant
portion of the Company's trade payables are outside their stated
terms which has caused the intermittent interruption in the
receipt of certain raw materials, having a negative effect on the
Company's ability to meet customer's demands for certain
products. As a result of the inability to meet the demands of
certain customers, the Company has lost some of its customer
base, causing a decline in sales. Some of the Company's product
lines are customer specific, and as a result of the loss of these
customers, certain raw materials are not currently being consumed
in the manufacturing process and new markets have not been
established for much of the Company's finished inventory.
During 1995, in an effort to improve its cashflow the Company
negotiated with its largest customer to receive advance payments
in exchange for prepayment discounts on orders. During the
second quarter of 1996, the Company discontinued its advance
payment policy and obtained a one-year working capital loan from
Morgan Guaranty Trust. The Company continues to develop programs
to reduce its inventory, while increasing its borrowing base by
obtaining additional financing with an asset-based lender.
There is substantial doubt about the Company's ability to
continue if cash shortages continue to exist. While the Company
has been successful in obtaining new financing, the Company must
also continue to find new markets for much of its inventory,
while improving efficiencies in its Mexican-based manufacturing
facilities. The financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of
this uncertainty.
3. Restructuring and Relocation
Operating results for the nine-months ended September 30, 1996
include a restructuring and non-recurring charge totaling
$795,000 for the elimination of the Company's in-store service
group, closing of the Memphis warehouse with the related
movement of the Company's finished goods inventory from Memphis,
Tennessee to San Antonio, Texas, and the settlement of a lawsuit
with a former employee (see Note 6). This charge represents
current and future expenses related to employee terminations,
lease commitments, write-off of leasehold improvements, lawsuit
settlement, employee severance, and other costs.
In May 1995, the Company relocated its corporate offices from
Chula Vista, California to San Antonio, Texas pursuant to its
restructuring plan begun in December 1994. During 1995 the
landlord alleged a breach by the Company under its lease
agreement covering the Chula Vista, California facility. The
Company is a defendant in a lawsuit filed in December 1995 with
respect to this alleged breach of contract. The Company
maintains what it believes is an adequate reserve for future
losses on the lease. No assurances can be given, however, that
the Company can satisfactorily defend this lawsuit and not incur
additional liability in the near term beyond the Company's
accrued amount. (See note 6)
Concurrent with the corporate move to San Antonio, the Company entered
into an agreement to share certain employees and certain
administrative, selling and marketing expenses with Rooster
Products International, Inc. ("Rooster Products"), the United
States marketing and distribution subsidiary of Exportadora
Cabrera S.A. de C. V. ("Exportadora"), a Mexican corporation
owned by the family of Juan Pablo Cabrera, the Company's
Chairman of the Board and Chief Executive Officer. C&F Alliance,
LLC (the Alliance) was created by the Company and Rooster
Products to share management and certain sales and marketing and
general and administrative expenses. The Company and Rooster
Products each own 50% of the Alliance, and all expenses incurred
by the Alliance are billed to the owners based on services
provided.
The following table presents summary financial information for
the Alliance for the three- and nine-month period ended
September 30, 1996:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1996 September 30, 1996
<S> <C> <C>
Sales and marketing expenses $ 647,000 $1,909,000
General and administrative expenses 1,270,000 3,616,000
Less: amounts billed to M.G. Products,Inc. (965,000) (2,740,000)
amounts billed to Rooster Products
International Inc. (952,000) (2,785,000)
$ 0 $ 0
</TABLE>
4. Notes Payable
In April 1995, the Company received a $2.0 million loan from a
Mexican bank for its subsidiary in Monterrey, Mexico. The
current renewal of this loan, which is funded through an agency
of the Mexican government to support Mexican exports, bears
interest at an annual rate of 11.82%, and is due February 4,
1997. Upon application by the Company, the bank, at its
discretion, may approve a renewal of the loan for further
additional periods. Payment of principal and interest on the
loan is jointly and severally guaranteed by Alejandro Cabrera
Robles, a director of the Company and Chairman of Exportadora,
and Patrick Farrah, the Company's former Chairman.
Until July 1996, the Company had a credit facility from Heller
Financial, Inc. ("Heller Financial") pursuant to which Heller
Financial agreed to advance up to $3.0 million to the Company
under an accounts receivable factoring arrangement based on an
80% advance rate for domestic receivables and 75% for certain
foreign receivables. The agreement contained restrictions
related to indebtedness, net worth, income and the payment of
cash dividends. This obligation was paid-off, and the facility
terminated in July 1996.
In July 1996, the Company finalized a new long-term credit
agreement with The CIT Group (CIT) under which CIT agreed to
advance up to $4.5 million to the Company based on an 80% advance
rate for eligible accounts receivable, and 50% for eligible
inventory. Advances are collateralized by all of the Company's
accounts receivable and inventory, as well as by its equipment.
Advances bear interest at an annual rate of prime plus 1.5%
(total of 9.75% at September 30, 1996). The agreement does not
contain any financial covenants. At September 30, 1996, the
balance owed under this agreement was approximately $2,120,000.
The Company's obligations under the CIT agreement are guaranteed
by Rooster Products and the Alliance. In July 1996 CIT also
finalized a long-term $10 million credit agreement with Rooster
Products which is guaranteed by Exportadora and the Alliance.
Both credit agreements with CIT contain cross default provisions.
Exportadora, Rooster Products, and the Alliance have subordinated
their claims on the Company to CIT's claims.
During the quarter ended June 30, 1996 the Company obtained a
one-year $2.0 million working capital loan from Morgan Guaranty
Trust. The interest rate on this loan is prime (8.25% at
September 30, 1996). The loan is guaranteed by non-affiliated
third parties.
5. Certain Related Party Transactions
In the second quarter of 1995, the Company moved its corporate
offices to San Antonio, Texas and formed the Alliance with
Rooster Products. The Company contributed certain office
furniture and equipment with a net book value of approximately
$477,000 to the Alliance. Through the Alliance, the Company and
Rooster Products share management and certain sales and marketing
and general and administrative expenses. The Company and Rooster
Products each own 50% of the Alliance, and all expenses incurred
by the Alliance are billed to the owners based on services
provided. For the nine-months ended September 30, 1996, the
Company's share of the expenses incurred by the Alliance was
$2,740,000 of which $965,000 has been included in sales and
marketing and $1,775,000 has been included in general and
administrative expenses in the consolidated statement of
operations. At September 30, 1996, the Company owed the Alliance
$880,000 for unreimbursed expenses. This related entity has been
a significant source of the Company's working capital needs.
The Company also purchased goods and services from Exportadora
and several of its subsidiaries totaling approximately $1,392,000
during 1996. The balance owed to these subsidiaries at September
30, 1996, is approximately $343,000.
In July 1996, the Company agreed to acquire certain raw material
inventory and certain fixed assets of SAF Products, Inc. (SAF)
for approximately $60,000. The owner of SAF is the daughter of
the Company's former chairman and chief executive officer, and
the sister of one of the Company's officers and directors.
6. Debt-to-Equity Conversion
On September 30 1996, the Company and Exportadora executed a
Purchase Agreement, pursuant to which Exportadora exchanged
$2,003,142 of the Company's indebtedness to Exportadora for
3,642,076 shares of the Company's common stock. This
indebtedness included accounts payable to Exportadora and
certain of its subsidiaries, and notes payable and accrued
interest to Exportadora. After consummation of this transaction,
Exportadora owns approximately 51% of the Company's outstanding
common stock.
7. Depreciation of Equipment
During 1996, the Company completed a review of the useful lives
of its equipment. Based on this review, the Company extended the
estimated useful lives of certain categories of plant equipment
used for depreciation purposes, effective July 1, 1996. The
effect of this change in estimate reduced depreciation expense
for the quarter ended September 30, 1996 by $100,000 and
decreased the net loss by $100,000, or less than $0.01 per share.
8. Commitments and Contingencies
During the fourth quarter of 1995, the Company's landlord alleged
a breach of its lease agreement by the Company on the Chula Vista
facility (see Note 3) by failing to make certain lease payments.
As a result of this alleged breach, the Company is a defendant in
a lawsuit. The plaintiff is seeking to recover compensatory
damages, interest, attorney's fees, reconditioning expenses,
utility charges, improvements which may be made for a new tenant,
and miscellaneous other costs of re-leasing the property. The
Company denies the allegations and believes the plaintiff may not
recover due to the plaintiff's failure to mitigate its damages as
required by California law. The remaining unpaid lease
obligation under the terms of the lease is approximately
$4,000,000. The Company maintains what it believes is an
adequate allowance for future losses on this matter. The
ultimate resolution of the matter, is expected to occur within
one year. There can be no assurance that the Company will be
successful in defending this lawsuit, or that a loss greater than
the amount provided for will not be incurred.
During 1995, a former employee filed suit against the Company
seeking compensatory and punitive damages for breach of contract
and discrimination, among other allegations. In July 1996 the
Company settled this suit for a sum of less than 10% of the
Company's current assets. The full effect of this settlement has
been recognized in the accompanying financial statements.
In connection with the Company's Tijuana facility lease, the
Company ceased payments in 1995 and the lessor of the facility
has filed suit in Mexican courts for non-payment of the rent.
The Company has filed a countersuit alleging impropriety of the
dollar-based contract based on Mexican law. The ultimate
resolution of the matter, which is expected to occur within one
year, is not expected to result in a loss in excess of the amount
accrued by the Company. There can be no assurance that the
Company will be successful in defending this lawsuit, or that a
loss greater than the amount accrued will not be incurred.
In the normal course of business, the Company is named in various
legal actions. The Company is a defendant in various lawsuits
generally incidental to its business. The amounts sought by the
plaintiffs in such cases are not material and are less than the
stated limits of the Company's insurance policies.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following table sets forth certain items expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Percentage of Net Sales
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 99.65% 98.16% 101.02% 90.11%
Gross profit (loss) 0.35% 1.84% (1.02%) 9.89%
Costs and expenses:
Selling 2.34% 9.69% 8.34% 11.91%
General and Administrative 11.21% 21.52% 14.88% 18.07%
Restructuring and unusual 0.00% 0.00% 5.03% 0.00%
13.55% 31.21% 28.25% 29.98%
Loss from operations (13.20%) (29.37%) (29.27%) (20.09%)
Interest expense, net (4.22%) (4.56%) (3.43%) (3.87%)
Equity in earnings of
joint venture 2.46% .74% 1.63% 1.58%
Net Loss (14.96%) (33.19%) (31.07%) (22.38%)
</TABLE>
Three and Nine months ended September 30, 1996 compared to September 30, 1995
Results of Operations
Net sales for the three- and nine-months ended September 30,
1996 were approximately $5.7 million and $15.8 million,
respectively. This represents an increase of $174,200 and a
decrease of $6.46 million, or 3% and (29%), respectively, from
the comparable periods in 1995. The Company has experienced
cash flow shortages that resulted in the Company's inability to
meet production schedules due to the interruption in the
availability of certain raw materials. This lack of production
resulted in the Company's failure to ship certain orders at
acceptable fill rates on a timely basis and the reduction of
purchases by some or all of the Company's products by certain
customers resulting in declining sales in 1995. In the nine-
months of 1996 the Company has increased its fill rates to an
average in excess of 90% and has regained placement of certain
of its products with certain of its customers. The Company has
also been successful in implementing a new program to ship
product from the Company's manufacturing facilities directly to
customers, thus reducing the future costs of carrying inventory
in the Company's distribution center.
Cost of sales for the three- and nine-month periods ended
September 30, 1996, were $5.7 million and $16.0 million,
respectively, resulting in gross profit margins of 0.4% and
negative (1.0%) compared to the gross profit margin percentages
of 1.8% and 9.9%, respectively for the comparable periods in
1995. The low gross margin for the three-months ended September
30, 1996 was primarily caused by manufacturing variances
generated in the Company's Mexican based manufacturing
facilities. These negative variances were primarily caused by
inefficiencies caused by cash flow shortages which interrupted
the availability of certain raw materials. Cash shortages have
negatively impacted the Company's ability to purchase needed raw
materials in sufficient quantity to maximize volume and purchase
discounts.
The Company's new working capital loan (obtained in May 1996)
and new asset based loan (obtained in July 1996), both of which
are discussed further in the Liquidity and Capital Resources
section below, have improved the Company's ability to re-
establish its volume and purchase discounts with many raw
material suppliers and improve the availability of raw materials
in the manufacturing facilities. During the quarter ended
September 30, 1996, the Company has made changes in products, is
updating bills-of-material, made management changes in the
manufacturing facilities, and is making other changes to
overhead and distribution activities to eliminate inefficiencies
in the production process.
The Company has sold excess inventory items at or below its cost
in order to improve sales and generate needed cash. The Company
does provide an inventory allowance account to currently
recognize future losses on these sales. There can be no
assurance however, that the Company's ability to improve sales
and improve upon its inventory turnover will be sufficient and
an additional charge to cost of sales may be required.
The Company's selling expenses decreased by $403,000 and
$1,334,000, respectively, for the three- and nine-month periods
ended September 30, 1996, compared to the respective 1995
periods. Selling expense as a percentage of net sales decreased
to 2.3% from 9.7% for the three-month period ended September
30, 1996 and decreased to 8.3% from 11.9% for the nine-month
period ended September 30, 1996, from the comparable periods in
1995. This decrease is attributable to the elimination of the
Company's in-store service group referred to below and to the
cost sharing arrangement the Company entered into with Rooster
Products during 1995, more fully described in Notes 3 and 5 to
the financial statements.
General and administrative expenses, decreased by $551,000 and
$1,671,000, respectively for the three- and nine-month periods
ended September 30, 1996, compared to the respective 1995
periods. This decrease is attributable primarily to (1) the
elimination of occupancy costs for the warehouse located in
Memphis, Tennessee, referred to below, (2) cost reductions in
the Company's expenses, and (3) the cost sharing arrangement the
Company entered into with Rooster Products during 1995, more
fully described in Notes 3 and 5 to the financial statements.
General and administrative expense as a percentage of net sales
decreased to 11.2% and 14.9% for the three- and nine- month
periods ended September 30, 1996, respectively, from 21.5% and
18.1% for the comparable periods in 1995.
Operating results for the nine-months ended September 30, 1996
include a restructuring and non-recurring charge totaling
$795,000 in June 1996 for the elimination of the Company's in-
store service group, closing of the Memphis warehouse with the
related movement of the Company's finished goods inventory from
Memphis to San Antonio, Texas, and the settlement of a lawsuit
with a former employee. This charge represents current and
future expenses related to employee terminations, lease
commitments, write-off of leasehold improvements, lawsuit
settlement, and employee severance and other costs.
Interest expense decreased by $11,400 and $320,400, respectively
for the three- and nine-month periods ended September 30, 1996,
compared to the respective 1995 periods. This decrease is
attributable to the repayment in the third quarter of 1995 of
certain short term promissory note agreements with Exportadora,
and the issuance of 1,732,068 shares in the third quarter of
1995 of the Company's common stock in exchange for approximately
$2.2 million of shareholder notes payable.
Liquidity and Capital resources
The opinion of the Company's independent auditors which
accompanies the Company's financial statements for the year ended
December 31, 1995 contains a "going concern" uncertainty emphasis
paragraph due to the Company's continued losses, negative cash
flow and uncertainties related to the status of its working
capital credit line. The Company has implemented a restructuring
plan designed to improve operating results and cash flow from
operations. During 1995, management began to actively seek
customer deposits on new orders. Pursuant to this policy, the
Company was successful in receiving significant advances from
its principal customer. The final customer deposit advance was
received by the Company in April 1996. The Company does not
expect to receive any significant customer deposit advances in
the future. To replace this liquidity, the Company finalized a
new $2,000,000 one-year term loan agreement with Morgan Guaranty
Trust in May 1996. The Company will incur interest charges at
an annual interest rate of prime (8.25% at September 30, 1996).
The loan is guaranteed by non-affiliated third parties. Proceeds
of the new credit were used for working capital purposes.
During the quarter ended September 30, 1996, the Company's
operating results were negatively impacted by cash flow and
liquidity shortages. At September 30, 1996, the Company had
working capital of $200,000, a decrease of $400,000 from
December 31, 1995. At September 30, 1996, the Company's current
and quick ratios were approximately 1.02 to 1 and 0.27 to 1,
respectively, compared to 1.05 to 1 and 0.26 to 1, respectively,
at December 31, 1995. The Company's working capital, current
ratio, and quick ratio have decreased during 1996 primarily as a
result of continued operating losses.
On September 30, 1996, the Company and Exportadora executed a
Purchase Agreement, pursuant to which Exportadora exchanged
$2,003,142 of the Company's indebtedness to Exportadora for
3,642,076 shares of the Company's common stock. This
indebtedness included accounts payable to Exportadora and
certain of its subsidiaries, and notes payable and accrued
interest to Exportadora. After consummation of that
transaction, Exportadora owns approximately 51% of the Company's
outstanding common stock. Concurrent with the execution of the
Purchase Agreement, the Company, Exportadora, Michael Farrah,
Shannon Farrah, and the trusts of which they are the sole
beneficiaries (Participants) entered into a Shareholders'
Agreement also dated September 30, 1996. Major provisions of
this agreement include restrictions against the transfer of
shares of the Company's stock by the Participants and for voting
purposes the shares of the Participants will be pooled and then
equally divided between two groups (the Farrah Group and the
Exportadora Group) so as to achieve equal voting power between
the two groups despite that fact that one group owns a greater
number of shares than the other.
In July 1996, the Company finalized a new long-term credit
agreement with The CIT Group (CIT). Pursuant to the terms of
this new credit agreement, CIT will advance funds, up to a
maximum of $4.5 million to the Company under an asset based
lending arrangement based on an 80% advance rate for
eligible accounts receivable, and 50% for eligible inventory.
The credit agreement bears an annual interest rate of prime plus
1.5% (9.75% at September 30, 1996). Initial proceeds under the
new credit agreement were utilized to pay-off the outstanding
balance due Heller Financial. Additional proceeds received by
the Company were used for working capital purposes. In July
1996, CIT also finalized a long-term $10 million credit agreement
with Rooster Products which is guaranteed by Exportadora and the
Alliance. Both credit agreements with CIT contain cross default
provisions. Exportadora, Rooster Products, and the Alliance have
subordinated their claims on the Company to CIT's claims.
In October 1996 the Company renewed a $2.0 million loan from a
Mexican bank for its subsidiary in Monterrey, Mexico. The loan,
which is funded through an agency of the Mexican government to
support Mexican exports, bears interest at an annual rate of
11.82% and is due February 4, 1997. Upon application by the
Company, the bank, at its discretion, may approve a renewal of
the loan for further additional periods. Initial proceeds from
the loan were primarily used to manufacture finished goods for
export to the United States. Payment of principal and interest
on the loan is jointly and severally guaranteed by Alejandro
Cabrera Robles, a director of the Company and Chairman of
Exportadora, and Patrick Farrah, the Company's former Chairman.
As part of the sharing of expenses more fully described in the
discussion of selling, general and administrative expenses and in
Note 3 to the financial statements, the Company owes
approximately $880,000 to the Alliance under the cost sharing
arrangement with Rooster Products. This related entity has been
a significant source of the Company's working capital needs.
The Company also purchased goods and services from several
subsidiaries of Exportadora totaling approximately $1,392,000
during the nine-months ended September 30, 1996. The balance
owed to these subsidiaries at September 30 is approximately
$343,000.
Part II - Other Information
Item 1: Legal Proceedings.
None, except as reported in the Company's 1995 10-K. As
indicated in the Company's 1995 10-K, during 1995, a former
employee filed suit against the Company seeking compensatory and
punitive damages for breach of contract and discrimination,
among other allegations. In July 1996, the Company was
successful in settling this suit for a sum of less than 10% of
the Company's current assets at September 30, 1996. The full
effect of this settlement is recorded in the Company's financial
statements.
Item 2: Changes In Securities.
(a) None.
(b) None.
Item 3: Default Upon Senior Securities.
(a) None.
(b) None.
Item 4: Submission of Matters to a Vote of Securities Holders.
None
Item 5: Other Information.
Effective September 30, 1996, the Company's common stock
was no longer included in the Nasdaq Small Cap market
but instead became quoted on the OTC Bulletin Board
Service of the National Association of Securities
Dealers, Inc. The Company's symbol remains MGPR.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
An 8-K was filed October 8, 1996. The content of the
report documented the change in control of the Company
subsequent to the issuance of 3,642,076 shares of
previously authorized but unissued M.G. Products, Inc.
common stock in exchange for cancellation of $2,003,142
of indebtedness owed by the Company to Exportadora. No
financial statements were filed with the report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
M.G. PRODUCTS, INC.
Date: November 14, 1996 By: /s/ Juan Pablo Cabrera
Juan Pablo Cabrera
Chairman of the Board and
Chief Executive Officer
Date: November 14, 1996 By: /s/ Ishmael D. Garcia
Ishmael D. Garcia
Chief Financial Officer
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