-----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, F3Q+E1kF3TUe9EU621B1+DoENjWYmaK/ktPdBJOzYOhzQmK64soV+jMAlIYlmRHE 6M3jr4aDI16Qig16NhbEyQ== 0000863111-97-000016.txt : 19971117 0000863111-97-000016.hdr.sgml : 19971117 ACCESSION NUMBER: 0000863111-97-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18660 FILM NUMBER: 97721704 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 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
M.G. PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS 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 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 Nine Months Ended September 30 September 30 1997 1996 1997 1996 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 See notes to consolidated financial statements.
[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.
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 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) $ - $ -
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 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 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%)
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) EX-27 2
5 9-MOS DEC-31-1997 SEP-30-1997 87,450 0 888,110 25,000 1,168,213 409,257 1,902,956 1,547,477 3,498,423 10,408,653 0 0 0 35,015,935 0 3,498,423 9,185,209 9,185,209 9,578,291 9,578,291 6,170,981 0 512,975 0 0 0 0 0 0 (6,984,743) (0.49) 0
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