1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 For the
Quarterly Period Ended September 30, 1997
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 .
Indicated below is the number of shares outstanding
of the registrant's only class of common stock, as of
November 1, 1997.
Title of Class Number of Shares Outstanding
Common Stock, No Par Value 14,206,154
M. G. PRODUCTS, INC.
QUARTERLY REPORT FORM 10Q - SEPTEMBER 30, 1997
INDEX
Page PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996 . . . . . . . . . .. . . . . .. . 3
Consolidated Statements of Operations - Three
and Nine Month Periods Ended September 30, 1997
and 1996 . . . . . . . . . . .. . . . . . . . . . 5
Consolidated Statements of Cash Flows - Three
and Nine Months Ended September 30, 1997 and
1996 . . . . . . . . . . . . . . . . . . . . . . .6
Notes to Consolidated Financial Statements .. . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 13
PART II.OTHER INFORMATION . . . . . . . . . . . . . . . . . 17
SIGNATURE . . . .. . . . . . . . . . . . . . . . . . . . .18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
M.G. PRODUCTS, INC.
CONSOLIDATED BALANCE
SHEETS
<S> <C> <C>
September 30, December 31,
1996 1997
(unaudited)
Assets
Current assets:
Cash $ 87,450 $ 103,567
Accounts receivable:
Trade, net of allowance for
doubtful accounts of
$25,000 and
$71,000 in 1997 and 1996,
respectively 863,110 2,171,279
Related parties 168,898 379,786
Inventories:
Raw materials 650,298 2,471,307
Work-in-process 115,707 94,354
Finished goods 402,208 1,904,145
Total inventories 1,168,213 4,469,806
Prepaid expenses and other
current assets 409,257 708,006
Total current assets 2,696,928 7,832,444
Property and equipment at cost:
Machinery and equipment 1,051,162 1,325,560
Vehicles 17,497 54,905
Furniture and fixtures 353,638 702,561
Leasehold improvements 480,659 536,270
1,902,956 2,619,296
Less accumulated depreciation,
amortization and impairment
valuation (1,547,477) (1,208,416)
Net property and equipment 355,479 1,410,880
Inventory - 887,179
Other assets 446,016 798,325
Investment in joint venture - 770,789
Total assets $3,498,423 $11,699,617
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $1,428,221 $ 2,594,710
Due to related parties 4,225,153 2,078,831
Accrued expenses and other
current liabilities 559,212 703,133
Reserve for restructuring and
other charges 10,236 613,083
Notes payable 3,928,507 4,064,683
Current portion of capital
lease obligations - 38,209
Pre-petition liabilities 257,324 317,231
Total current liabilities 10,408,653 10,409,880
Revolving credit agreement 812,987 2,028,211
Shareholders' deficit:
Common shares, no par value:
Authorized shares -
50,000,000 at
September 30, 1997 and
15,000,000 at December 31,
1996 Issued and outstanding
shares - 14,206,154 35,015,935 35,015,935
Accumulated deficit (42,739,152) (35,754,409)
Total shareholders' deficit (7,723,217) (738,474)
Total liabilities and
shareholders' deficit $3,498,423 $11,699,617
<FN>
Note: The balance sheet at December 31, 1996 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>
<TABLE>
<CAPTION>
M.G. PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Sales $1,544,391 $5,713,161 $9,185,209 $15,818,005
Cost of sales 1,860,934 5,693,240 9,578,291 15,979,264
Gross profit (loss) (316,543) 19,921 (393,082) (161,259)
Costs and expenses:
Sales and marketing 91,389 133,873 777,497 1,318,476
General and
administrative 622,534 640,208 2,621,237 2,353,988
Restructuring &
other charges - - 2,772,247 795,000
713,923 774,081 6,170,981 4,467,464
Loss from
operations (1,030,466) (754,160) (6,564,063) (4,628,723)
Other income (expense)
Interest
expense, net (173,292) (241,324) (512,975) (542,250)
Equity in
earnings of
subsidiary (36,284) 140,312 92,295 257,094
Net Loss $(1,240,582) (855,172) (6,984,743) (4,913,879)
Net Loss per share $ (0.09) $ (0.08) $ (0.49) $ (0.46)
Number of shares
used in
computing per
share amounts 14,206,154 10,604,546 14,206,154 10,577,567
<FN>
See notes to consolidated financial statements.
</TABLE>
[CAPTION]
M.G. PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30, 1997 September 30, 1996
[S] [C] [C]
Cash provided by (used in)
operations: $ 596,074 $ (3,535,966)
Investing activities:
Net purchase of property and
equipment 6,629 (177,480)
Dividend from investment in joint
venture 770,789 302,363
Cash provided by investing
activities 777,418 124,883
Financing activities:
Proceeds (payments) from long term
debt (1,215,224) 2,119,980
Payments on capital lease
obligations (38,209) (76,405)
Proceeds (payments) on notes
payable, net (136,176) 838,156
Cash provided by (used in)
financing activities (1,389,609) 2,881,731
Net decrease in cash (16,117) (529,352)
Cash at beginning of period 103,567 1,011,755
Cash at end of period $ 87,450 $ 482,403
[FN]
See notes to consolidated financial statements.
[/TABLE]
M.G. PRODUCTS, INC.
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, 1997, are not
necessarily indicative of the results that may be
expected for the year ending December 31, 1997. 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, 1996.
Description of Business
The Company is engaged in a single business segment, the
manufacture and wholesale distribution of lighting fixtures for
retail outlets primarily in the United States. The accompanying
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 has three wholly owned subsidiaries, two of which
operated manufacturing facilities in Mexico. Productos M.G. S.A.
de C.V. (Productos M.G.) is located in Tijuana, Mexico and Comercial
Electrica del Norte S.A. de C.V. (Comercial Electrica) is located
in Monterrey, Mexico. In December 1996, the Company ceased
production in its Tijuana manufacturing facility and in October
1997, the Company closed the Monterrey manufacturing facility.
The Power And Light Company (Palco) was created for the
distribution of the Company's new low voltage product and is
located in San Antonio, Texas.
The Company has purchased raw materials from both American and
Mexican vendors. As of September 30, 1997, identifiable assets,
primarily raw materials and machinery and equipment, net of
valuation and restructuring reserves are approximately $1,800,000,
and are located in Monterrey, 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 had previously sold its products to major national
building material/home improvement retailers. Credit was
extended based on an evaluation of the customer's
financial condition, and collateral was generally not required.
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.
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
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123 Accounting for Stock Based
Compensation and elected to continue to use the intrinsic value
method in accounting for its stock option plans. The pro forma
effects of fair value accounting for compensation costs related
to options is not considered significant.
Advertising Costs
The Company expenses advertising costs as incurred. In 1997, Co-op
advertising expense paid to the Company's customers and
charged to sales and marketing approximated $7,000.
Net Loss Per Share
Net loss per share is computed using the weighted average number
of common shares outstanding during the period. Common stock
equivalents are not considered in the computation as their effect
is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be
adopted on December 31, 1997. At this time, the Company will be
required to change the method currently used to compute earnings
per share and to restate all prior periods. The impact of
Statement 128 on the calculation of the Company's earnings per
share for these quarters is not expected to be material.
Reclassification
Certain prior period amounts have been reclassified to conform to
the current year presentation.
2. Going Concern
During the four years ended December 31, 1996, the
Company incurred substantial losses which negatively
impacted cash flow and caused liquidity shortages. The
Company has had difficulty obtaining sufficient long-
term financing. As a result, the Company lost the
remainder of its exsisting customer and product base.
Any sales during the third quarter of 1997 were a direct
result of inventory liquidations.
In an effort to improve cash flow, the Company,in July
1996, obtained a new revolving credit facility with a
commercial finance company. Under the revolving credit
agreement, advances are calculated as a specified
percentage of the Company's accounts receivable and
inventory.
The Company also has obtained additional bank
borrowings to support its cash flow shortages, including
a $2,000,000 note to a U.S. bank which is presently
guaranteed by certain interested parties, and a
$2,079,000 (including capitalized interest)
note to a Mexican bank. In May 1997, the Company signed
an agreement with the U.S. bank allowing for the
payment of principal and interest over a period of
thirty months. Certain payments have been made to that
bank, reducing the principal outstanding to
$1,850,000 at September 30, 1997.
The Company's note payable to a Mexican bank was due on
October 29, 1997, along with accrued interest. No
principal and interest payments have been made and the
note has not been renewed, causing the Company to be
in default under the agreement. The note has previously
been renewed on a 90 day basis at the discretion of
the lender. The Company, through its majority
shareholder Exportadora Cabrera S.A. de C.V.
(Exportadora), is in the process of renegotiating the
payment terms of the principal and the related accrued
interest(see note 7).
The Company has relied on advances from its majority
shareholder and parties related to that shareholder to
provide for financing and working capital. The Company
is continuing to pursue alternative means of financing,
development of new products and alternative markets for
certain inventory and, as described in Note 3, is
restructuring its operations to eliminate the
manufacturing function.
There is a substantial doubt about the Company's ability to
continue if cash shortages continue to exist. The Company must
continue to renegotiate its current borrowing arrangements and
find new sources of financing, must find markets for its
remaining inventory, must successfully negotiate the
termination of certain leases, and must successfully roll out
its new product. 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. However, provisions for estimated losses have been
recorded. The carrying value of inventory has been reduced to
reflect the obsolescence of certain inventories and a restructuring
charge has been recorded to reflect the reduction in realizable
value of leasehold improvements, equipment and certain other
assets that will occur as part of the closing of the Monterrey
facility (see Note 3). This charge has been recorded as an
impairment valuation in Net Property & Equipment.
3. Plant Closures
In July 1997, the Company announced the expected closure
of the Monterrey manufacturing facility. The plant closed
October 31, 1997 because the Company had been unsuccessful in
reducing plant overhead to an acceptable level, and because of
reduced sales volumes. This facility was operated by the
Company's wholly owned subsidiary, Commercial Electrica S.A.
de C.V. In closing this facility, the Company recorded a
restructuring charge in the second quarter of $2,646,000, which
recognized the impairment in value of certain raw material
inventory, leasehold improvements, and machinery and
equipment. All workers were laid off in a manner
consistent with Mexican law. Any potential legal
proceeding in Mexico related to the closing of the
Monterrey facility and the ultimate disposition of its
assets and liabilities are not yet known. Their can be no
assurances that future claims will not be made against the
Company or Comercial Electrica.
4. Certain Related Party Transactions
C&F Alliance LLC
In the second quarter of 1995, the Company moved its corporate
offices to San Antonio, Texas and formed C&F Alliance LLC
("the Alliance") with Rooster Products International Inc.
("Rooster Products"), the United States marketing
and distribution subsidiary of Exportadora which, in
December 1994, became a shareholder of the Company.
The Company contributed certain office furniture,
fixtures, 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. At September 30, 1997, the Company owed the Alliance
$1,520,000 for unreimbursed expenses.
<TABLE>
<CAPTION>
The following table presents summary financial information for
the Alliance for the three and nine month periods ended
September 30, 1997:
Three months ended Nine months ended
September 30, 1997 September 30, 1997
<S> <C> <C>
Sales and marketing expenses $ 302,000 $1,191,000
General and administrative
expenses 1,082,000 3,649,000
Less: amounts billed
to M.G. Products, Inc. (567,000) (2,096,000)
amounts billed
to Rooster Products
Int'l, Inc. (817,000) (2,744,000)
$ - $ -
</TABLE>
Exportadora and subsidiaries
The Company also purchased goods and services from Exportadora
and several of its subsidiaries totaling approximately $595,000
during the third quarter of 1997. The balance owed to
Exportadora and these subsidiaries at September 30, 1997, is
approximately $1,723,000. See Note 7 for cash advances made by
Exportadora to the Company.
5. Company Investments
The Power And Light Company
During the third quarter of 1997, the Company created The Power
And Light Company (Palco). This new wholly owned subsidiary will
be responsible for the distribution of the new low voltage
product currently undergoing development.
With regards to the new low voltage product, the Company entered
into a joint venture agreement with another lighting manufacturer
to commercialize a new low voltage halogen recessed lighting
product for the Electrical Distributor and Home Center
marketplaces. During the fourth quarter of 1996 the Company
notified the joint venture partner of the Company's intention to
terminate the joint venture arrangement due to non performance.
The Company and this former joint venture partner have not
reached a dissolution agreement, but have agreed to proceed with
arbitration. The arbitration will proceed before an appointed
arbitrator working with the American Arbitration Association.
It is anticipated that the arbitration will take place in December
1997 and/or January 1998, or shortly thereafter. The issues the
Company has sought to be resolved at the arbitration relate to the
termination of the joint venture agreement, alleged misappropriation
of trade secrets, and alleged deceptive trade practices.
There can be no assurance that this matter will be
resolved in the Company's favor. An adverse result could require
the Company to share sales of the product in U.S. markets with
this former joint venture partner. However, the Company believes
that it has a strong position regarding ownership rights of this
product. The Company has continued to refine the product, which
is currently undergoing UL testing. In a shift in business
strategy, the Company will subcontract the manufacture of this
product's components, as well as its final assembly. Assuming
sufficient cash flow to fund development is generated as
described below, management anticipates the redesigned product
will be test marketed by Palco's first customer in late 1997,
and, if successful, will be fully introduced by this customer in
the spring of 1998. Palco has had some preliminarysuccess
negotiating sales contracts with several additional customers.
Although the Company has received no purchase orders from these
customers, each has expressed a strong interest in carrying this
new product line.
Crest Fan Industries Taiwan Ltd.
During the third quarter of 1997, the Company sold its ownership
interest in Crest Fan Industries Taiwan Ltd., (Crest Fan Taiwan).
The cash proceeds from these sales were used to reduce the
working capital deficit and fund development of the low voltage
halogen recessed lighting. The sale of this investment is in-
line with management's intent to phase out the Company's previous
operations while focusing its remaining efforts on the new low
voltage product that will be sold through Palco.
6. Commitments & Contingencies
The legal proceeding in Mexico related to the closing of the
Tijuana plant and the ultimate disposition of its assets and
liabilities has not yet been resolved, and may not be resolved in
the near term. Therefore, uncertainty exists as to whether the
plant and equipment and inventory in the possession of the union
will fully satisfy the payroll related liabilities to the workers
and the union. Their can be no assurances that future claims
will not be made against the Company or Productos M.G., or that
the Mexican courts may not reinstate certain payroll related
liabilities or require additional payments to the workers.
Any potential legal proceeding in Mexico related to the closing
of the Monterrey facility and the ultimate disposition of its assets
and liabilities have yet to be known. Their can be no assurances
that future claims will not be made against the Company or
Commercial Electrica.
In June 1997, the Company reached an agreement with the lessor of
its Memphis warehouse to terminate the Company's lease. The
settlement, which was finalized in the third quarter of 1997, did
not have an impact on the Company's income statement because the
previously recorded accrual was sufficient.
In the normal course of business, the Company is named in various
legal actions. The Company does not believe these actions will
have a material adverse effect on the Company's financial
position or results of operations.
7. Notes Payable
Payable to a Mexican Bank
The Company's $2,079,000 note payable to a Mexican bank
was due on October 29, 1997, along with accrued interest.
No principal and interest payments have been made and the note has
not been renewed, causing the Company to be in default under the
agreement. The Company, through its majority shareholder
Exportadora, is in the process of renegotiating the payment terms
of the principal and related accrued interest. Payment of
principal and interest on the loan is guaranteed by Alejandro
Cabrera Robles, a director of the Company and Chairman of
Exportadora.
Payable to a U.S. Bank
In May 1996, the Company obtained a $2.0 million working capital
loan from Morgan Guaranty Trust. Upon expiration, in May 1997,
the Company signed an agreement with this bank calling for an
immediate principal payment of $100,000, twenty eight monthly
principal payments of $50,000, a final payment of $500,000, and
interest due monthly. The initial payment of $100,000, and one
monthly payment of $50,000, and monthly payments of interest have
been made. The Company is in arrears $100,000 and is currently in
default of the note terms.
Payables to Exportadora
Exportadora subsidiaries have made cash advances to the Company
for working capital purposes. These advances total $45,000 in
the third quarter and $575,000 year-to-date. These advances bear
interest at 12%, with principal and accrued interest due December
31, 1997. Rooster Products has also made cash advances to the
Company. These advances total $358,000 in the third quarter.
These advances have been included in the balance sheet in Due to
Related Parties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
During the third quarter of 1997, the Company sold its
ownership interest in Crest Fan Industries Taiwan Ltd., (Crest Fan
Taiwan). Management is also in the process of negotiating the
sale of remaining finished goods inventory to various customers.
Cash proceeds from these sales will be used to reduce the
working capital deficit and fund development of the low-voltage
halogen recessed lighting as noted below.
The Company has incurred substantial losses in the past four
years, including a loss of $1,240,000 for the quarter ended
September 30, 1997. In the second quarter of 1997, the
Company announced that several customers, including its
principal customer, would terminate their orders of the Company's
product under the ongoing sales programs that had
previously been established. As a result of the decrease
in sales revenue, management has restructured the operations
of its corporate headquarters in San Antonio, Texas, by reducing staff,
and by closing the manufacturing facility located in Monterrey.
These significant changes reflect management's efforts to wind
down the current manufacturing, distribution, and marketing efforts
of the company, and focus on developing its innovative new
product described below.
During the first quarter of 1996, the Company entered into a
joint venture agreement with another lighting manufacturer to
commercialize a new low voltage halogen recessed lighting product
for the Electrical Distributor and Home Center marketplaces.
During the fourth quarter of 1996 the Company notified the joint
venture partner of the Company's intention to terminate the joint
venture arrangement due to non-performance. The Company and this
former joint venture partner have not reached a dissolution
agreement, but have agreed to proceed with arbitration.
The arbitration will proceed before an appointed arbitrator
working with the American Arbitrator Association. It is anticipated
that the arbitration will take place in December 1997 and/or
January 1998, or shortly thereafter. The issues the Company
has sought to be resolved at the arbitration relate to the termination
of the joint venture agreement, alleged misappropriation of trade
secrets, and alleged deceptive trade practices. There
can be no assurance that this matter will be resolved in the
Company's favor. An adverse result could require the Company to
share sales of the product in U.S. markets with this former joint
venture partner. However, the Company believes that it has a
strong position regarding ownership rights of this product. The
Company has continued to refine the product, which is currently
undergoing UL testing. In a shift in business strategy, the
Company will subcontract the manufacture of this product's
components, as well as its final assembly. Assuming sufficient
cash flow to fund development is generated as described below,
management anticipates the redesigned product will be test
marketed by Palco's first customer in late 1997, and, if
successful, will be fully introduced by this customer in the
spring of 1998. Palco has had some preliminary success
negotiating sales contracts with several additional customers.
Although the Company has received no purchase orders from these
customers, each has expressed a strong interest in carrying this
new product line.
Results of Operations
<TABLE>
The following are the Company's financial and operating
highlights for the three and nine month periods ended
September 30, 1997 and 1996. The 1996 amounts of operating revenues
and operating income (loss) have been restated to conform to
the 1997 presentation. The items in the table are expressed as a
percentage of net sales.
Percentage of Net Sales
Three months Nine months
ended ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 120.50% 99.65% 104.28% 101.02%
Gross profit (loss) (20.50%) 0.35% (4.28%) (1.02%)
Costs and expenses:
Selling 5.92% 2.34% 8.46% 8.34%
General and administrative 40.31% 11.21% 28.54% 14.88%
Restructuring and unusual 0.00% 0.00% 30.18% 5.03%
46.23% 13.55% 67.18% 28.25%
Loss from operations (66.73%)(13.20%) (71.46%) (29.27%)
Interest expense, net (11.22%) (4.22%) (5.58%) (3.43%)
Equity in earnings of
subsidiary (2.38%) 2.46% 1.00% 1.63%
Net Loss (80.33%)(14.96%) (76.04%) (31.07%)
</TABLE>
Three and nine months ended September 30, 1997 compared to
September 30, 1996
Net sales for the three and nine months ended September 30, 1997
were approximately $1.5 million and $9.1 million respectively.
This represents a decrease of $4.2 million and $6.6 million, or
(73.0%) and (41.9%) respectively, from the comparable periods in
1996. Sales revenue in the third quarter of 1997 consisted
primarily of liquidation of remaining inventory which negatively
impacted the gross margins described below.
Cost of sales for the three and nine month periods ended
September 30, 1997 were $1.9 million and $9.6 million
respectively, resulting in gross loss margins of (20.5%) and
(4.3%) compared to the gross profit (loss) margin percentages of
0.4% and (1.0%) respectively for the comparable periods in 1996.
The Company's selling expense decreased by $42,000 and $541,000,
respectively, for the three and nine month periods ended
September 30, 1997, compared to the respective 1996 periods.
Selling expense as a percentage of net sales increased to 5.9%
from 2.3% for the three month period ended September 30, 1997 and
increased to 8.5% from 8.3% for the nine month period ended
September 30, 1997, from the comparable periods in 1996. This
change is primarily a result of decreased sales and service
commissions.
General and administrative expenses decreased by $18,000 for the
three month period ended September 30, 1997 and increased by
$267,000 for the nine month period ended September 30, 1997,
compared to the respective 1996 periods. As a percentage of net
sales, general and administrative expenses increased to 40.3%
from 11.2% for the three month period ended September 30, 1997
and increased to 28.5% from 14.9% for the nine month period ended
September 30, 1997, from the comparable periods in 1996.
Interest expense decreased by $68,000 to $173,000 for the three
month period ending September 30, 1997 and decreased by $29,000
to $513,000 for the nine month period ended September 30, 1997,
compared to $241,000 and $542,000 in the comparable periods in
1996.
Income (Loss) from equity in earnings of subsidiary of ($37,000)
and $92,000 for the three and nine month periods ended September
30, 1997 relates to the Company's share of the estimated 1997
earnings of Crest Fan Taiwan, in which the Company acquired a
49.6% interest in 1993. The loss during the third quarter of
1997 reflects elimination of an over-accrual of estimated
earnings recorded during the first half of 1997.
As a result of the foregoing operational results, the Company's
net loss increased to $1,241,000, or $(0.09) per weighted average
share during the three months ended September 30, 1997 compared
to a net loss of $855,000, or $(0.08) per weighted average share
during the three months ended September 30, 1996.
Liquidity and Capital resources
The opinion of the Company's independent auditors which
accompanies the Company's consolidated financial statements for
the period ended December 31, 1996 contains a "going concern"
uncertainty emphasis paragraph due to the Company's continued
losses and concerns for the ability of the Company to generate
sufficient cash to provide for its operation in both the
near and long-term.
During the quarter ended September 30, 1997, the
Company's operating results were negatively impacted by
cash flow and liquidity shortages. At September 30,
1997, the Company had a working capital deficit of
$7.7 million compared to working capital deficit of
$2.6 million at December 31, 1996. The primary cause
for the decrease in working capital was the
combined reduction in accounts receivable and current
inventory balances of approximately $4.6 million,
caused by negative product margins, and the
restructuring reserve recorded in the second quarter.
The Company's current ratio and quick ratio at September
30, 1997 were 0.26:1 and 0.11:1, respectively, compared
to 1.02:1 and 0.27:1, respectively, at September 30,
1996. The decreases in the Company's working capital
and working capital ratios during 1997 resulted primarily
from continued operating losses incurred during the year.
A portion of its trade payables were outside their stated
terms. This situation has caused an interruption in the
shipment of certain raw materials and has had a
negative effect on the Company's results of operations.
Exportadora subsidiaries have made cash advances to the
Company for working capital purposes. These advances
total $45,000 in the third quarter and $575,000 year-to-
date. These advances bear interest at 12%, with principal
and accrued interest due December 31, 1997. Rooster
Products has also made cash advances to the Company.
These advances total $358,000 in the third quarter.
These advances have been included in the balance sheet in
Due to Related Parties. As part of the cost sharing
arrangement with Rooster Products more fully described in
Note 4 to the financial statements, the Company owes the
Alliance approximately $1,520,000 at September 30, 1997.
The Company expects that these related entities will
continue to be a significant source of the Company's
working capital needs.
The Company's $2,079,000 note payable to a Mexican bank
was due on October 29, 1997, along with accrued interest.
No principal and interest payments have been made and the
note has not been renewed, causing the Company to be
in default under the agreement. The Company,
through its majority shareholder Exportadora, is in the
process of renegotiating the payment terms of the note
and the related accrued interest. Payment of
principal and interest on the loan is guaranteed by
Alejandro Cabrera Robles, a director of the Company
and Chairman of Exportadora.
In May 1996, the Company obtained a $2.0 million working
capital loan from Morgan Guaranty Trust. The interest
rate on this loan is prime (8.50% at September 30,
1997). The loan is guaranteed by interested third
parties. In May 1997, the Company was able to reach an
agreement with Morgan Guaranty Trust calling for an
immediate principal payment of $100,000, 28 monthly
principal payments of $50,000, a final payment of $500,000
and interest due monthly. The initial payment of
$100,000, one monthly payment of $50,000, and monthly
payments of interest have been made. The Company is in
arrears $100,000 and is currently in default of the note
terms.
In July 1996, the Company finalized a new long-term
credit agreement with The CIT Group, a commercial finance
company. The CIT Group 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. During the third quarter of 1997, both the
Company and CIT agreed to reduce the advance limit
to $2.0 million, with no change in the advance rates for
eligible accounts receivable and 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% (10.00% at September 30, 1997). The
Company's obligations under this agreement are
guaranteed by Rooster Products and the Alliance. The
balance on this credit facility was $813,000 at
September 30, 1997. All outstanding amounts under this
facility are due in July 1999.
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.
There are no assurances that sufficient funds will be
available to meet the Company's requirements to fund
operations and scheduled repayments of current debt
through 1997.
Part II - OTHER INFORMATION
Item 1: Legal Proceedings.
None, except as reported in the Company's 1996 10- K and
as relating to the arbitration discussed in Note 5 of
the Consolidated Financial Statements.
Item 2: Changes In Securities.
(a) None.
(b) None.
Item 3: Default Upon Senior Securities.
(a)The Company's note payable to a Mexican bank was due
on October 29, 1997, along with accrued interest. No
principal and interest payments have been made and the
note has not been renewed, causing the Company to be in
default under the agreement. The Company, through its
majority shareholder Exportadora, is in the process of
renegotiating the payment terms of the note and the
related accrued interest.
In May 1996, the Company obtained a $2.0 million working
capital loan from Morgan Guaranty Trust. The interest
rate on this loan is prime (8.50% at September 30, 1997).
The loan is guaranteed by interested third parties. In
May 1997, the Company was able to reach an agreement with
Morgan Guaranty Trust calling for an immediate principal
payment of $100,000, 28 monthly principal payments of
$50,000, a final payment of $500,000 and interest due
monthly. The initial payment of $100,000, one monthly
payment of $50,000, and monthly payments of interest have
been made. The Company is in arrears $100,000 and is
currently in default of the note terms.
(b) None.
Item 4: Submission of Matters to a Vote of Securities Holders.
None.
Item 5: Other Information.
Directors Charles Chapman and Martin Goodman resigned
on August 22, 1997, as a result of which there are now
three vacancies on the Board of Directors. These vacancies
have not been filled.
Item 6: Exhibits and Reports on Form 8-K.
(a) None.
(b) An 8-K was filed on September 16, 1997, to report in
item 4, the change in registrant's certifying
accountant and in item 5, the resignation of Charles Chapman
and Martin Goodman from the Board of Directors.
An 8-K/A was filed on September 17, 1997, to amend items
4,5 and 7 of the 8-K dated September 15, 1997.
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.
(Registrant)
Date: October 14, 1997 By: /s/ Juan Pablo Cabrera
Juan Pablo Cabrera
Chairman of the Board and Chief
Executive Officer
Date: October 14, 1997 By: /s/ Eric Williams
Eric Williams
Chief Financial Officer
(Duly Authorized Officer
and Principal Financial and
Accounting Officer)
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<PERIOD-END> SEP-30-1997
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