13
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 June 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
August 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 - JUNE 30, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations - Three
and Six Month Periods Ended
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . .5
Consolidated Statements of Cash Flows - Six
Month Periods Ended
June 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 . . . . . . . . . . . .12
PART II.OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURE . . . . . . . . . . . . . . . . . . .. . . . . . . . . . .17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
M.G. PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
June 30, December 31,
1997 1996
(unaudited)
Assets
Current assets:
Cash $ 13,600 $ 103,567
Accounts receivable:
Trade, net of allowance for
doubtful accounts of $21,000
and $71,000 661,374 2,171,279
in 1997 and 1996, respectively
Related parties 232,253 379,786
Inventories:
Raw materials 823,193 2,471,307
Work-in-process 43,361 94,354
Finished goods 1,003,744 1,904,145
Total inventories 1,870,298 4,469,806
Prepaid expenses and other
current assets 495,255 708,006
Total current assets 3,272,780 7,832,444
Property and equipment at cost:
Machinery and equipment 1,051,162 1,325,560
Vehicles 59,659 54,905
Furniture and fixtures 353,638 702,561
Leasehold improvements 480,659 536,270
1,945,118 2,619,296
Less accumulated depreciation,
amortization and impairment
valuation (1,718,070) (1,208,416)
Net property and equipment 227,048 1,410,880
Inventory - 887,179
Other assets 457,412 798,325
Investment in joint venture 899,909 770,789
Total assets $4,857,149 $11,699,617
Liabilities and Shareholders Deficit
Current liabilities:
Accounts payable $1,951,549 $2,594,710
Due to related parties 3,657,207 2,078,831
Accrued expenses and other
current liabilities 802,045 703,133
Reserve for restructuring and
other charges 60,000 613,083
Notes payable 3,848,327 4,064,683
Current portion of capital
lease obligations - 38,209
Pre-petition liabilities 299,622 317,231
Total current liabilities 10,618,750 10,409,880
Revolving credit agreement 721,034 2,028,211
Commitments and contingencies
Shareholders deficit:
Common shares, no par value:
Authorized shares-50,000,000
at June 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 (41,498,570) (35,754,409)
Total shareholders deficit (6,482,635) (738,474)
Total liabilities and
shareholders deficit $4,857,149 $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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Sales $2,689,978 $4,439,286 $7,640,818 $10,104,844
Cost of sales 3,464,523 5,369,527 7,717,357 10,286,024
Gross profit (loss) (774,545) (930,241) (76,539) (181,180)
Costs and expenses:
Sales and Marketing 471,424 682,721 686,108 1,184,603
General and
administrative 1,163,774 709,992 1,998,703 1,713,780
Restructuring &
other charges 2,772,247 795,000 2,772,247 795,000
4,407,445 2,187,713 5,457,058 3,693,383
Loss from operations (5,181,990) (3,117,954) (5,533,597) (3,874,563)
Other income (expense)
Interest expense,
net (148,955) (149,157) (339,683) (300,926)
Equity in earnings
of subsidiary 42,014 135,573 129,119 116,782
Net Loss $(5,288,931) $(3,131,538) $(5,744,161) $(4,058,707)
Net Loss per share $ (0.37) $ (0.30) $ (0.40) $ (0.38)
Number of shares
used in computing
per share amounts 14,206,154 10,564,078 14,206,154 10,564,078
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
M.G. PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30, June 30,
1997 1996
<S> <C> <C>
Cash provided by (used in)
operations: $1,501,439 $(2,925,925)
Investing activities:
Net purchase of property and
equipment (29,664) (87,900)
Dividend from investment in joint
venture - 302,363
Cash provided by (used in)
investing activities (29,664) 214,463
Financing activities:
Payments on revolving credit
facility, net (1,307,177) (148,818)
Payments on capital lease
obligations (38,209) (49,979)
Proceeds (payments) on notes
payable, net (216,356) 2,000,000
Cash provided by (used in)
financing activities (1,561,742) 1,801,203
Net decrease in cash (89,967) (910,259)
Cash at beginning of period 103,567 1,011,755
Cash at end of period $13,600 $101,496
<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 six month periods ended June
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 two wholly owned subsidiaries, one of which
operates a manufacturing facility 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. Much of
the production from the Tijuana facility was transferred at that
time to the Company's Monterrey facility. As further described
in Note 3, during July 1997, the Company announced the expected
closure of the Monterrey facility during the third quarter.
The Company has purchased raw materials from both American and
Mexican vendors. As of June 30, 1997, identifiable assets,
primarily raw materials and machinery and equipment, net of
valuation and restructuring reserves are approximately
$1,100,000, 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 sells its products primarily to major national
building material/home improvement retailers. Credit is extended
based on an evaluation of the customerOs financial condition, and
collateral is 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 ChapterE11 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. For the
second quarter ending June 30, 1997, co-op advertising expense
paid to the Company's customers and charged to sales and
marketing approximated $2,000.
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
In July 1997, the Company announced that its principal customer
would terminate its orders of the Company's product under the
ongoing sales program that had previously been established.
However, this customer has indicated that in the third quarter of
1997 it will make several purchases of existing inventory from
the Company. Management believes the loss of this customer will
further reduce 1997 sales revenue and may undermine the Company's
efforts to return to profitability.
During the four years ended December 31, 1996, 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 past due which caused
intermittent interruption in the receipt of certain raw
materials, having a negative effect on the Company's ability to
meet customers demands for certain products. As a result of the
inability to meet the demands of certain customers, the Company
has lost most of its customer base, causing a large 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 goods inventory.
Due to its cash flow shortages, the Company continues to have
difficulty obtaining long-term financing. In July 1996 the
Company 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 $2,000,000 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.
The Company's note payable to a Mexican bank was due on June 30,
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
the related accrued interest (see note 6).
The Company has relied on advances from its majority shareholder
and parties related to such 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 new markets for much of
its inventory, must successfully negotiate the termination of
certain leases, and must achieve manufacturing and distribution
efficiencies. 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 during the third quarter,
because the Company has been unsuccessful in reducing plant
overhead to an acceptable level, and because of reduced sales
volumes. It is expected that all workers will be laid off in a
manner consistent with Mexican law. This facility is operated by
the Company's wholly owned subsidiary, Commercial Electrica S.A.
de C.V. In closing this facility, the Company has recorded a
restructuring charge of $2,646,000. The purpose of this charge
is to recognize the impairment in value of certain raw
material inventory, leasehold improvements, and machinery and
equipment.
In December 1996, production at the Company's manufacturing plant
in Tijuana ceased, concurrent with a strike of the workers union
at this location. The workers were then laid off in a manner
consistent with Mexican law. This facility was operated by the
Company's wholly owned subsidiary, Productos M.G.
Productos M.G. had previously ceased making payments on the lease
for the production facility in 1995 and the lessor of the
facility has filed suit in Mexican courts for non-payment of
rent. The Company has filed a countersuit alleging impropriety
of the dollar-based contract under Mexican law. The Company has
accrued rent totaling $437,000 recorded in accounts payable
related to this matter, and does not expect to have to pay an
amount in excess of the accrual. However, 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.
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 Cabrera S.A. de C.V. ("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
June 30, 1997, the Company owed the Alliance $1,471,000 for
unreimbursed expenses.
<TABLE>
<CAPTION>
The following table presents summary financial information for
the Alliance for the three and six month periods ended June 30,
1997:
Three months Six months ended
ended ended
June 30, June 30,
1997 1997
<S> <C> <C>
Sales and marketing expenses $442,000 $889,000
General and administrative expenses 1,295,000 2,567,000
Less: amounts billed to M.G. Products,
Inc. (784,000) (1,529,000)
amounts billed to Rooster
Products International, Inc. (953,000) (1,927,000)
$ - $ -
</TABLE>
Exportadora and subsidiaries
The Company also purchased goods and services from Exportadora
and several of its subsidiaries totaling approximately $2,209,000
during 1997. The balance owed to Exportadora and these
subsidiaries at June 30, 1997, is approximately $2,066,000.
5. 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.
The Company ceased distribution from its Memphis warehouse and
had been in negotiations with the lessor and a leasing agent to
sub-lease the warehouse. In June 1997, the Company reached an
agreement with the lessor to terminate the Company's lease for an
amount approximating the original accrual. The settlement was
finalized in July 1997.
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 CompanyOs financial
position or results of operations.
6. Notes Payable
Payable to a Mexican Bank
The Company's $2.0 million note payable to a Mexican bank was due
on June 30, 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. Management expects to reach an agreement with this
lending institution in the third quarter.
Payable to a U.S. Bank
In May 1997, the Company signed an agreement with the U.S. bank
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.
Payable to Exportadora
In January 1997, Exportadora advanced the Company $315,000 for
working capital purposes. Additional advances by Exportadora
totalling $582,000 were made in the second quarter. These
advances bear interest at 12%, with principal and accrued
interest due December 31, 1997. 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
The Company has incurred substantial losses in the past four
years, including a loss of $5,289,000 for the quarter ended June
30, 1997. Management is attempting to raise additional capital
to fund its ongoing operations. While management believes it
will be successful, 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.
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. Management
believes this decrease in sales orders will significantly reduce
1997 sales revenue and may undermine the Company's efforts to
return to profitability. In response to this anticipated
decrease in sales revenue, management is restructuring the
operations of its corporate headquarters in San Antonio, Texas,
primarily by reducing staff, and closing the manufacturing
facility located in Monterrey. Closing this manufacturing
facility will mark the cessation of all manufacturing by the
Company. These are significant changes that reflect management's
intent 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. The Company and the joint venture partner have agreed
to proceed with arbitration. 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 the final
assembly. Assuming sufficient cash flow to fund development is
generated as described below, management anticipates the
redesigned product will be test marketed in late 1997, and, if
successful, will be introduced in the spring of 1998.
Management expects to generate liquidity for the remainder of the
current year by selling its ownership interest in Crest Fan
Industries Taiwan Ltd., (Crest Fan Taiwan), and by selling
existing inventory to the Company's largest customer. The
Company has begun negotiating the sale of its 49.6% interest in
Crest Fan Taiwan to another shareholder in that company. The
Company expects to complete the transaction in the third quarter.
The sales price is expected to approximate the current carrying
value of the investment in the balance sheet. The Company is
also negotiating the sale of inventory to its largest customer.
Management expects that this sale of inventory will include
existing finished goods as well as the conversion of some raw
materials inventory into finished goods. 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 above..
Results of Operations
<TABLE>
The following are the Company's financial and operating
highlights for the three and six month periods ended June 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 Six months
ended ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 128.79% 120.95% 101.00% 101.79%
Gross profit (loss) (28.79%) (20.95%) (1.00%) (1.79%)
Costs and expenses:
Selling 17.53% 15.38% 8.98% 11.72%
General and
administrative 43.26% 15.38% 8.98% 11.72%
Restructuring and
unusual 103.06% 17.91% 36.28% 7.87%
163.85% 49.28% 71.42% 36.55%
Loss from operations (192.64%) (70.23%) (72.42%) (38.34%)
Interest expense, net (5.54%) (3.36%) (4.45%) (2.98%)
Equity in earnings of
subsidiary 1.56% 3.05% 1.69% 1.16%
Net Loss (196.62%) (70.54%) (75.18%) (40.16%)
</TABLE>
Three and six months ended June 30, 1997 compared to June 30,
1996
Net sales for the three and six months ended June 30, 1997 were
approximately $2.7 million and $7.7 million respectively. This
represents a decrease of $1.7 million and $2.5 million, or
(38.6%) and (24.8%) respectively, from the comparable periods in
1996. Sales revenue in the second quarter of 1997 also includes
the sale of approximately $771,000 of slow moving merchandise.
The sale of this merchandise was made at a reduced margin, and
negatively impacted the gross loss margins described below.
Cost of sales for the three and six month periods ended June 30,
1997 were $3.5 million and $7.7 million respectively, resulting
in gross loss margins of (28.00%) and (1.00%) compared to the
gross loss margin percentages of (20.95%) and (1.79%)
respectively for the comparable periods in 1996.
The Company's selling expense decreased by $211,000 and $498,000,
respectively, for the three and six month periods ended June 30,
1997, compared to the respective 1996 periods. Selling expense
as a percentage of net sales increased to 17.53% from 15.38% for
the three month period ended June 30, 1997 and decreased to 8.98%
from 11.72% for the six month period ended June 30, 1997, from
the comparable periods in 1996. This change is primarily a
result of decreased sales and service commissions.
General and administrative expenses, increased by $454,000 and
$285,000, respectively for the three and six month periods ended
June 30, 1997, compared to the respective 1996 periods. As a
percentage of net sales, general and administrative expenses
increased to 43.26% from 15.99% for the three month period ended
June 30, 1997 and increased to 26.16% from 16.96% for the six
month periods ended June 30, 1997, from the comparable periods in
1996. Higher expenses during the quarter ended June 30, 1997,
were a result of both the recognition of additional property taxes from
a previous location and the write-off of goodwill originally capitalized
at the acquisition of Crest Industries in 1993. This write-off
was due to the wind-down of operations associated with that
acquisition and the resulting impairment of value of the related
assets.
Interest expense decreased by $200 to $149,000 for the three
month period ending June 30, 1997 and increased by $39,000 to $
340,000 for the six month period ended June 30, 1997, compared to
$149,000 and $301,000 in the comparable periods in 1996.
Income from equity in earnings of subsidiary of $42,000 and
$129,000 for the three and six month periods ended June 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.
As a result of the foregoing operational results, the Company's
net loss increased to $5,289,000, or $(0.37) per weighted average
share during the three months ended June 30, 1997 compared to a
net loss of $3,132,000, or $(0.30) per weighted average share
during the three months ended June 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. The Company initiated a series of restructuring
efforts in 1995 and 1996 which have continued through 1997 with
the intent of improving operating results and cash flow from
operations. There can be no assurance, however, that these
financing arrangements will be sufficient or that the continuing
restructuring efforts will be successful in improving operating
results in the long term, and that the Company can replace the
sales volume losses resulting from the order cancellations of its
principal customer.
During the quarter ended June 30, 1997, the Company's operating
results were negatively impacted by cash flow and liquidity
shortages. At June 30, 1997, the Company had a working capital
deficit of $7.3 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 $7.5 million.
In January 1997, Exportadora advanced the Company $315,000 for
working capital purposes. Additional interest-bearing advances
by Exportadora totaling $582,000 were made in the second quarter.
These advances bear interest at 12%, with principal and accrued
interest due December 31, 1997. These advances have been
included in the balance sheet in Due to Related Parties.
The Company's current ratio and quick ratio at June 30, 1997 were
0.31:1 and 0.09:1, respectively, compared to 0.79:1 and 0.18:1,
respectively, at June 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.
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 June 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.
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. 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 June 30, 1997). The Company's
obligations under this agreement are guaranteed by Rooster
Products and the Alliance. 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. The balance on this
credit facility was $720,000 at June 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.
The Company's $2.0 million note payable to a Mexican bank was due
on June 30, 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. Management expects to reach an agreement with this
lending institution in the third quarter.
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 $1,471,000 at June 30,
1997. This related entity has been a significant source of the
Company's working capital needs.
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.
Item 2: Changes In Securities.
(a) At the Annual Meeting of Shareholders on June 19, 1997,
the Articles of Incorporation were amended to increase
the authorized number of shares of common stock from
15,000,000 to 50,000,000 shares.
(b)None.
Item 3: Default Upon Senior Securities.
(a)The Company's note payable to a Mexican bank was due
on June 30, 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.
(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 12, 1997) for its Annual Meeting of
Shareholders on June 19, 1997. 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 13,776,842 shares. The
Articles of Incorporation were amended to increase the
authorized number of shares from 15,000,000 to
50,000,000. The vote on the resolution was as follows:
For 13,718,406
Against 69,835
Abstained 1,696
Item 5: Other Information.
None.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibit 10(z) Letter agreement between M.G. Products,
Inc. and Morgan Guaranty Trust Company of New York dated
May 22, 1997.
(b) An 8-K was filed on April 28, 1997, to report, in item
5 of the 8-K, the issuance of the registrants April 28, 1997
press release that was filed as exhibit 1 to the form 8-K.
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: August 14, 1997 By: /s/ Juan Pablo Cabrera
Juan Pablo Cabrera
Chairman of the Board and
Chief Executive Officer
Date: August 14, 1997 By: /s/ Eric Williams
Eric Williams
Chief Financial Officer
(Duly Authorized Officer
and Principal
Financial and Accounting
Officer)
EXHIBIT 10(z)
JP Morgan
9 West 57th Street
New York, NY 10019
May 22, 1997
Mr. Ishmael D. Garcia
MG Products, Inc.
8154 Bracken Creek
San Antonio, Texas 78266
Dear Mr. Garcia:
In connection with a $2,000,000 Demand Loan on our
books for MG Products, Inc. it is our understanding
that you have asked for an extension to our repayment
agreement dated May 31, 1996. Effective June 1, 1997,
for thirty months, you are agreeing to make the
following payments: On June 1, 1997 we are to receive
a payment for $100,000. Thereafter monthly for 28
months through October 1, 1999 we will receive monthly
payments for $50,000. A final balloon payment of
$500,000 will be due on November 1, 1999. All payments
described above are going to be applied towards the
reduction of principal. In addition we will continue
to receive monthly payments for interest.
This agreement is an accommodation and does not change
the demand nature of our Note. Further, it is subject
to continuous approval by the guarantors of this loan,
Messrs. Kenneth Langone and Bernard Marcus.
If you agree with the above terms, please sign below
and return this letter to my attention at the above
address together with the most current financial
information available. Should you have any questions,
please feel free to call me at 212/837-3873.
Sincerely,
/s/ Helga Faulenbach
Helga Faulenbach
Associate
We agree to the above repayment terms:
/s/ Juan Pablo Cabrera /s/ Eric Williams
Juan Pablo Cabrera, CEO Eric Williams, CFO
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