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 June 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 August 9, 1996, the number of shares of the
registrant's Common Stock outstanding was 10,564,078.
M. G. PRODUCTS, INC.
QUARTERLY REPORT FORM 10-Q - JUNE 30, 1996
PART I. Financial Information Page
Item 1. Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995 1
Consolidated Statement of Operations - Three and Six
months ended 3
June 30, 1996 and 1995
Condensed Consolidated Statement of Cash Flows -
Three and Six months
ended June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
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
<TABLE>
<CAPTION>
Part I - Financial Information
Item 1. Financial Statements
M.G. Products, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
1996 1995
<S> (unaudited)
Assets
Current assets: <C> <C>
Cash $ 101,496 $1,011,755
Accounts receivable:
Trade, net of allowance for
doubtful
accounts of $466,000 and $307,000
in 1996 and 1995, respectively 2,140,902 1,876,400
Related parties 257,549 250,514
Inventories:
Raw materials 5,010,645 4,506,842
Work-in-process 88,827 688,391
Finished goods 2,698,588 3,669,301
Total inventories 7,798,060 8,864,534
Prepaid expenses and other current 719,024 624,001
assets
Total current assets 11,017,031 12,627,204
Property and equipment at cost:
Machinery and equipment 2,755,010 2,729,651
Vehicles 72,154 53,584
Furniture and fixtures 543,795 534,489
Leasehold improvements 1,193,183 1,196,021
4,564,142 4,513,745
Less accumulated depreciation and (2,456,128) (2,093,961)
amortization
Net property and equipment 2,108,014 2,419,784
Other assets 961,706 1,033,792
Investment in joint venture 625,289 810,869
Total assets $14,712,040 $16,891,649
</TABLE>
<TABLE>
<CAPTION>
M.G. Products, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
1996 1995
<S> (unaudited)
Liabilities and Shareholders'
Equity
Current liabilities: <C> <C>
Accounts payable $2,273,610 $2,994,152
Due to related parties 2,607,631 1,603,091
Deferred revenue - 927,241
Accrued expenses and other current
liabilities 1,431,219 1,151,943
Restructuring accrual 1,717,403 1,292,403
Notes payable 5,013,026 3,161,844
Current portion of capital lease
obligations 92,068 103,838
Pre-petition liabilities 487,037 465,828
Subordinated notes payable to
shareholders 371,131 375,478
Total current liabilities 13,993,125 12,075,818
Capital lease obligations, less
current portion - 38,209
Commitments and contingencies
Shareholders' equity:
Common shares, no par value:
Authorized shares - 15,000,000
Issued and outstanding shares -
10,564,078 33,012,793 33,012,793
Accumulated deficit (32,293,878) (28,235,171)
Total shareholders' equity 718,915 4,777,622
Total liabilities and shareholders'
equity $14,712,040 $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 Six Months Ended
June 30 June 30
1996 1995 1996 1995
Restated Restated
(See Note 1) (See Note 1)
<S> <C> <C> <C> <C>
Net Sales $ 4,439,286 $ 6,756,367 $10,104,844 $16,736,751
Cost of sales 5,369,527 5,978,665 10,286,024 14,635,551
Gross profit (loss) (930,241) 777,702 (181,180) 2,101,200
Costs and expenses:
Selling 682,721 725,295 1,184,603 2,115,439
General and
administrative 709,992 1,196,255 1,713,780 2,832,786
Restructuring & -
non-recurring 795,000 - 795,000 -
2,187,713 1,921,550 3,693,383 4,948,225
Loss from
operations (3,117,954) (1,143,848) (3,874,563) (2,847,025)
Other income(expense)
Interest expense, (149,157) (343,933) (300,926) (609,904)
net
Equity in earnings
of joint venture 135,573 85,500 116,782 310,500
Net Loss $(3,131,538) $(1,402,281) $(4,058,429) $(3,146,429)
Net Loss per share $ (0.30) $ (0.16) $ (0.38) $ (0.36)
Number of shares
used in computing
share amounts 10,564,078 8,832,010 10,564,078 8,832,010
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
M.G. Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended
June 30, 1996 June 30,1995
<S> <C> <C>
Cash used in operations: $(2,925,925) $(949,431)
Investing activities:
Purchase of property and equipment (87,900) (13,650)
Dividend from investment in joint
venture 302,363 -
Cash provided by (used in)
investing activities 214,463 (13,650)
Financing activities:
Payments on revolving credit (148,818)
agreements (148,818) (4,516,910)
Payments on pre-petition
liabilities - (72,254)
Proceeds from subordinated notes - 1,690,676
payable to shareholders, net
Proceeds from short term debt 2,000,000 4,063,703
Payments on capital lease
obligations (49,979) (49,858)
Cash provided by (used in)
financing activities 1,801,203 1,115,357
Net increase (decrease) in cash (910,259) 152,276
Cash at beginning of period 1,011,755 10,712
Cash at end of period $ 101,496 $ 162,988
See notes to consolidated financial statements.
</TABLE>
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 six-month periods ended June
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 $7,200,000 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.
A major shareholder and former Chief Executive Officer of the
Company holds a senior merchandising position with the Company's
single largest customer. This customer provided advance payments
in exchange for prepayment discounts on its purchases. The
Company has 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 seven years using the straight-
line method.
1. Summary of Significant Accounting Policies (continued)
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, is restructuring its debt, and has
increased its borrowing base by obtaining additional financing
with an asset-based lender.
2. Going Concern (continued)
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 quarter ended June 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 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 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 six-month period ended June 30,
1996:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30,1996 June 30,1996
<S> <C> <C>
Sales and marketing expenses $ 621,000 $1,262,000
General and administrative expenses 1,137,000 2,346,000
Less:
amounts billed to M.G. Products,Inc. (875,000) (1,775,000)
amounts billed to Rooster Products
International Inc. (883,000) (1,883,000)
$ - $ -
</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 12.85%, and is due October 23,
1996. 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. At June 30, 1996, the balance owed under this
agreement was approximately $1,013,000 and the Company was not
in compliance with certain financial covenants. This obligation
was paid-off, and the facility terminated in July 1996.
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 June
30, 1996). The loan is guaranteed by non-affiliated third
parties.
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%. The Company's obligations under the CIT agreement
are guaranteed by Rooster Products and the Alliance. For a
description of the Alliance see Note 3 above. Initial proceeds
under the new credit agreement were utilized to pay-off the
outstanding balance due Heller Financial. Subsequent 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.
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. During 1996, the Company's share of the expenses
incurred by the Alliance was $1,775,000 of which $671,000 has
been included in sales and marketing and $1,104,000 has been
included in general and administrative expenses in the
consolidated statement of operations. At June 30, 1996, the
Company owed the Alliance $975,000 for unreimbursed expenses.
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 $975,000 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.
5. Certain Related Party Transactions (continued)
The Company also purchased goods and services from several
subsidiaries of Exportadora totaling approximately $635,000
during 1996. The balance owed to these subsidiaries at June 30
is approximately $355,000.
In June 1996, the Company and Exportadora negotiated an
agreement, not yet finalized, pursuant to which Exportadora will
exchange $2,003,142 of the Company's indebtedness to Exportadora
for 3,642,076 shares of the Company's common stock. After
consummation of that transaction, Exportadora will own
approximately 51% of the Company's outstanding common stock.
The Company anticipates that a definitive Purchase and Sale
Agreement will shortly be executed with Exportadora, and that
the remaining conditions to the closing will be met, and the
debt-for-equity exchange completed during September, 1996.
Subsequent to the quarter ended June 30, 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. 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 Six months
ended June 30, ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 120.95% 88.49% 101.79% 87.45%
Gross profit (loss) (20.95%) 11.51% (1.79%) 12.55%
Costs and expenses:
Selling 15.38% 10.73% 11.72% 12.64%
General and
administrative 15.99% 17.71% 16.96% 16.93%
Restructuring and
unusual 17.91% 0.00% 7.87% 0.00%
49.28% 28.44% 36.55% 29.57%
Loss from operations (70.23%) (16.93%) (38.34%) (17.02%)
Interest expense, net (3.36%) (5.09%) (2.98%) (3.64%)
Equity in earnings of
joint venture 3.05% 1.27% 1.16% 1.86%
Net Loss (70.54%) (20.75%) (40.16%) (18.80%)
</TABLE>
Three and Six months ended June 30, 1996 compared to June 30,
1995
Results of Operations
Net sales for the three- and six-months ended June 30, 1996 were
approximately $4.4 million and $10.1 million respectively. This
represents a decrease of $2.3 million and $6.6 million, or 34%
and 40% 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 first half 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 six-month periods ended June
30, 1996, were $5.4 million and $10.3 million respectively,
resulting in gross profit (loss) margins of (21.0%) and (1.8%)
compared to the gross profit margin percentages of 11.5% and
12.6% respectively for the comparable periods in 1995. The
negative gross margin for the three-months ended June 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. These cash shortages negatively
impacted the Company's ability to purchase needed raw materials
in sufficient quantity to maximize volume and purchase
discounts. Consequently cost of sales includes a charge of
approximately $1.4 million to reflect approximately $700,000
of excess production and overhead costs incurred during the
period in the Company's manufacturing plants and approximately
$690,000 of inventory write down. Without this charge, cost of
sales for the quarter ended June 30, 1996 would decrease from
$5.4 million, or 121% of sales, to $4.0 million, or 90% of sales,
compared to $6.0 million, or 88% of sales in the prior year quarter.
For the six-months ended June 30, 1996 cost of sales would decrease
from $10.3 million, or 102% of sales, to $8.9 million, or 88% of
sales, compared to $14.6 million, or 87% of sales in the prior
year period. The Company's new working capital loan (obtained
late in the second quarter) and new asset based loan (obtained
subsequent to the end of the second quarter), both of which are
discussed further in the Liquidity and Capital Resources
section below, have currently 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. Subsequent to the
end of the second quarter, 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. No additional provision
has been recorded in the financial statements for the three- and
six-months ended June 30, 1996. 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 $43,000 and
$931,000, respectively, for the three- and six-month periods
ended June 30, 1996, compared to the respective 1995 periods.
Selling expense as a percentage of net sales increased to 15.4%
from 10.7% for the three-month period ended June 30, 1996 and
decreased to 11.7% from 12.6% for the six-month period ended
June 30, 1996, from the comparable periods in 1995. This
decrease is attributable primarily to the cost sharing
arrangement the Company entered into with Rooster Products
during 1995, more fully described in Note 3 to the financial
statements.
General and administrative expenses, decreased by $486,000 and
$1,119,000, respectively for the three- and six-month periods
ended June 30, 1996, compared to the respective 1995 periods.
This decrease is attributable primarily to the cost sharing
arrangement the Company entered into with Rooster Products
during 1995, more fully described in Note 5 to the financial
statements. General and administrative expense as a percentage
of net sales decreased to 16.0% from 17.7% for the three-month
period ended June 30, 1996 and increased to 17.0% from 16.9% for
the six-month periods ended June 30, 1996, from the comparable
periods in 1995.
Operating results for the quarter ended June 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 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. Without this charge, total Costs and Expenses for
the quarter ended June 30, 1996 would decrease from $2.2
million, or 49% of sales, to $1.4 million, or 31% of sales,
compared to $1.9 million, or 28% of sales in the prior year
quarter. For the six-months ended June 30, 1996 Costs and
expenses would decrease from $3.7 million, or 37% of sales, to
$2.9 million, or 29% of sales, compared to $4.9 million, or 30%
of sales in the prior year period.
Interest expense decreased by $195,000 and $309,000,
respectively for the three- and six-month periods ended June 30,
1996, compared to expense of $344,000 and $610,000 in the
comparable periods in 1995. 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 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. The Company will incur interest charges at an annual
interest rate of prime (8.25% at June 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 June 30, 1996, the Company's operating
results were negatively impacted by cash flow and liquidity
shortages. At June 30, 1996, the Company's working capital was
a negative ($1.8 million), a decrease of $2.4 million from
December 31, 1995. At June 30, 1996, the Company's current and
quick ratios were approximately 0.86 to 1 and 0.18 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 decreased during the first half of 1996
primarily as a result of continued operating losses during the
quarter.
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%. 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 July 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
12.85% and is due October 23, 1996. 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 $975,000 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 $635,000
during 1996. The balance owed to these subsidiaries at June 30
is approximately $355,000.
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 June 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) At June 30, 1996 the Company was not in compliance
with certain financial covenants of the amended credit
facility with Heller Financial, since repaid. See Note
4 to the financial statements.
(b) None.
Item 4: Submission of Matters to a Vote of Securities Holders.
The Company has solicited proxies pursuant to Regulation
14 of the Securities and Exchange Act (Proxy Statement
dated May 6, 1996) for its Annual Meeting of
Shareholders on June 18, 1996. There was no
solicitation in opposition to management's nominees for
directors listed in the Proxy Statement. All such
nominees were elected by the affirmative vote of
8,666,684 shares.
Item 5: Other Information.
On June 26, 1996, the Company's common stock, which
until that time was quoted on the Nasdaq National Market
System, was moved to the Nasdaq Small Cap System.
Also in June 1996, the Company and Exportadora Cabrera,
S.A. de C.V. (Exportadora) negotiated an agreement, not
yet finalized, pursuant to which Exportadora will
exchange $2,003,142 of the Company's indebtedness to
Exportadora for 3,642,076 shares of the Company's common
stock. After consummation of that transaction,
Exportadora will own approximately 51% of the Company's
outstanding common stock.
The transaction was conditioned, inter alia, on the
satisfaction of a filing and waiting period requirement
under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976. On August 12, 1996, the Federal Trade
Commission notified the Company and Exportadora that
this requirement had been met.
The Company anticipates that a definitive Purchase and
Sale Agreement will shortly be executed with
Exportadora, and that the remaining conditions to the
closing will be met, and the debt-for-equity exchange
completed, by September 12, 1996.
Item 6: Exhibits and Reports on Form 8-K.
(a)Exhibit 10 (w) Loan and Security Agreement between MG
Products, Inc. and The CIT Group/ Credit Finance, Inc.
dated July 16, 1996
(b)None.
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: August 19, 1996 By: /s/ Juan Pablo Cabrera
Juan Pablo Cabrera
Chairman of the Board and
Chief Executive Officer
Date: August 19, 1996 By: /s/
Ishmael D. Garcia
Ishmael D. Garcia
Chief Financial Officer
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