-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q56rnugJ/jj6g8xO+4VOMArG/N6Q/LkVbXNsvvxLP+hjPgj+htg7AzcLoGq+xC1t 6gI2ikgmFOrrhLnLHPJCvQ== 0000863111-97-000012.txt : 19970815 0000863111-97-000012.hdr.sgml : 19970815 ACCESSION NUMBER: 0000863111-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MG PRODUCTS INC CENTRAL INDEX KEY: 0000863111 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 330098392 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18660 FILM NUMBER: 97663495 BUSINESS ADDRESS: STREET 1: 8154 BRACKEN CREEK CITY: SAN ANTONIO STATE: TX ZIP: 78266-2143 BUSINESS PHONE: 2106515288 MAIL ADDRESS: STREET 1: 8154 BRAKEN CREEK CITY: SAN ANTONIO STATE: TX ZIP: 78266-2143 FORMER COMPANY: FORMER CONFORMED NAME: CREST INDUSTRIES INC DATE OF NAME CHANGE: 19930328 10-Q 1 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
M.G. PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS 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 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.
M.G. PRODUCTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 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 See notes to consolidated financial statements.
M.G. PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, June 30, 1997 1996 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 See notes to consolidated financial statements.
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.
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 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) $ - $ -
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 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 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%)
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 EX-27 2
5 6-MOS DEC-31-1997 JUN-30-1997 13,600 0 914,627 (21,000) 1,870,298 3,272,780 2,402,530 (1,718,070) 4,857,149 10,618,750 0 0 0 35,015,935 0 4,857,149 7,640,818 7,640,818 7,717,357 7,717,357 5,457,058 0 (339,683) 0 0 0 0 0 0 (5,744,161) (0.40) 0
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