-----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, Hga3JLqRd5z3JmNyhvtQrqigItstzzSdDPRmC1aZAcn2z+5r+h/ep/fQ6EYnIjwL h7s+n1AtIEOnRwHkqCGP+g== 0000863111-96-000022.txt : 19961118 0000863111-96-000022.hdr.sgml : 19961118 ACCESSION NUMBER: 0000863111-96-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96664880 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Quarterly Period Ended September 30,1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Transition Period from____________to_________ Commission File Number: 0-18660 M. G. PRODUCTS, INC. (Exact name of registrant as specified in its charter) California 33-0098392 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8154 Bracken Creek San Antonio, Texas 78266 (Address of principal executive offices) (Zip Code) (210) 651-5288 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No on (1); Yes X No on (2). As of November 8, 1996, the number of shares of the registrant's Common Stock outstanding was 14,206,154. M. G. PRODUCTS, INC. QUARTERLY REPORT FORM 10-Q - SEPTEMBER 30, 1996 PART I. Financial Information Page Item 1. Consolidated Balance Sheets - September 30 and December, 1996 31, 1995 1 Consolidated Statement of Operations - Three and and Nine months ended September 30, 1996 and 1995 3 Condensed Consolidated Statement of Cash Flows - Three and Nine months ended September 30, 1996 and 1995 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial 10 Condition and Results of Operations PART II. Other Information Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submissions of Matters to a Vote of Security Holders 13 Item 5. Other information 13 Item 6. Exhibits and Reports on Form 8-K 13 Part I - Financial Information Item 1. Financial Statements M.G. Products, Inc. and Subsidiaries Consolidated Balance Sheets
September 30, December 31, 1996 1995 (unaudited) Assets Current assets: Cash $ 482,403 $ 1,011,755 Accounts receivable: Trade, net of allowance for doubtful accounts of $267,000 and $307,000 in 1996 and 1995, respectively 2,344,704 1,876,400 Related parties 121,167 250,514 Inventories: Raw materials 5,325,989 4,506,842 Work-in-process 146,309 688,391 Finished goods 1,921,880 3,669,301 Total inventories 7,394,178 8,864,534 Prepaid expenses and other current assets 688,970 624,001 Total current assets 11,031,422 12,627,204 Property and equipment at cost: Machinery and equipment 2,834,886 2,729,651 Vehicles 88,570 53,584 Furniture and fixtures 573,797 534,489 Leasehold improvements 1,193,972 1,196,021 Total Property and equipment at cost 4,691,225 4,513,745 Less accumulated depreciation and amortization (2,531,325) (2,093,961) Net property and equipment 2,159,900 2,419,784 Other assets 892,762 1,033,792 Investment in joint venture 765,601 810,869 Total assets $14,849,685 $ 16,891,649 Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ 2,122,604 $ 2,994,152 Due to related parties 1,606,733 1,603,091 Deferred revenue 0 927,241 Accrued expenses and other current liabilites 1,117,859 1,151,943 Restructuring accrual 1,462,945 1,292,403 Notes payable 4,000,000 3,161,844 Current portion of capital lease obligations 65,642 103,838 Pre-petition liabilities 487,037 465,828 Subordinated notes payable to shareholders 0 375,478 Total current liabilities 10,862,820 12,075,818 Capital lease obligations, less current portion 0 38,209 Long term debt 2,119,980 0 Commitments and contingencies Shareholder's equity: Common shares, no par value: Authorized shares D 15,000,000 Issued and outstanding shares -14,206,154 in 1996 and 10,564,078 in 1995 35,015,935 33,012,793 Accumulated deficit (33,149,050) (28,235,171) Total shareholder's equity 1,866,885 4,777,622 Total liabilities and shareholder's equity $14,849,685 $ 16,891,649
Note: The balance sheet at December 31, 1995 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements.
M.G. Products, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 1996 1995 1996 1995 Restated Restated (See Note 1) (See Note 1) Net Sales $ 5,713,161 $ 5,538,925 $15,818,005 $22,275,676 Cost of sales 5,693,240 5,437,230 15,979,264 20,072,781 Gross profit (loss) 19,921 101,695 (161,259) (2,202,895) Costs and expenses: Selling 133,873 536,990 1,318,476 2,652,429 General and Administrative 640,208 1,191,839 2,353,988 4,024,625 Restructuring & non-recurring 0 0 795,000 0 774,081 1,728,829 4,467,464 6,677,054 Loss from Operations (754,160) (1,627,134) (4,628,723) (4,474,159) Other income(expense): Interest expense,net (241,324) (252,753) (542,250) (862,657) Equity in earnings of joint venture 140,312 41,038 257,094 351,538 Net loss $ (855,172) $(1,838,849) $(4,913,879) $(4,985,278) Net loss per share $ (0.08) $ (0.19) $ (0.46) $ (0.55) Number of shares used in computing share amounts 10,604,546 9,582,570 10,577,567 9,082,195
See notes to consolidated financial statements.
M.G. Products, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) For the nine months ended September 30,1996 September 30, 1995 Cash used in operations: $(3,535,966) $( 126,151) Investing activities: Purchase of property and equipment (177,480) 3,201 Dividend from investment in joint venture 302,363 0 Cash provided by investing activities 124,883 3,201 Financing activities: Proceeds (payments) on notes payable, net 838,156 (1,466,924) Proceeds from long term debt 2,119,980 0 Payments on pre-petition liabilities 0 ( 79,035) Proceeds from subordinated notes payable to shareholders, net 0 1,878,685 Payments on capital lease obligations ( 76,405) ( 50,365) Cash provided by financing activities 2,881,731 282,361 Net increase (decrease) in cash ( 529,352) 159,411 Cash at beginning of period 1,011,755 10,712 Cash at end of period $ 482,403 $ 170,123
See notes to consolidated financial statements. M.G. Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Summary of Significant Accounting Policies Basis of presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statement information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in M.G. Products, Inc. annual report on Form 10-K for the year ended December 31, 1995. Description of Business M.G. Products, Inc. (the Company) is engaged in a single business segment, the manufacture and wholesale distribution of residential lighting fixtures for retail outlets primarily in the United States. The consolidated financial statements include the accounts of the Company and all wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company owns two manufacturing subsidiaries located in Monterrey and Tijuana, Mexico. Substantially all of the products produced in these two factories are transferred to the Company for sale in the United States. Currently, the Company purchases raw materials from both United States and Mexican vendors. Identifiable assets, primarily raw materials and machinery and equipment of $7,800,000 are located in Mexico. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentration of Credit Risk The Company sells its products primarily to major national building material/home improvement retailers. Credit is extended based on an evaluation of the customer's financial condition, and collateral is generally not required. The former Chief Executive Officer of the Company holds a senior merchandising position with the Company's single largest customer. This customer previously provided advance payments in exchange for prepayment discounts on its purchases. The Company recorded such advance payments as deferred revenue (See Note 2). Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Property and Equipment Property and equipment is stated at cost and depreciated over estimated useful lives of five to ten years using the straight- line method. Maintenance and repairs are charged to expense as incurred. Pre-Petition Liabilities During 1990, the Company was approved for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code. As part of its reorganization plan, the Company is obligated to pay certain adjusted liabilities which are included in the accompanying balance sheet as pre-petition liabilities. Revenue Recognition Product sales revenue is recorded as products are shipped. Stock-Based Compensation The Company granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. Advertising Costs The Company expenses advertising costs as incurred. Net Loss Per Share Net loss per share is computed using the weighted average number of common shares outstanding during the year. Common stock equivalents are not considered in the computation of periods with a loss as their effect is anti-dilutive. Reclassification Certain prior period amounts have been reclassified to conform to the current year presentation. 2. Going Concern During the three years ended December 31, 1995, the Company incurred substantial losses which negatively impacted cash flow and caused liquidity shortages. Additionally, a significant portion of the Company's trade payables are outside their stated terms which has caused the intermittent interruption in the receipt of certain raw materials, having a negative effect on the Company's ability to meet customer's demands for certain products. As a result of the inability to meet the demands of certain customers, the Company has lost some of its customer base, causing a decline in sales. Some of the Company's product lines are customer specific, and as a result of the loss of these customers, certain raw materials are not currently being consumed in the manufacturing process and new markets have not been established for much of the Company's finished inventory. During 1995, in an effort to improve its cashflow the Company negotiated with its largest customer to receive advance payments in exchange for prepayment discounts on orders. During the second quarter of 1996, the Company discontinued its advance payment policy and obtained a one-year working capital loan from Morgan Guaranty Trust. The Company continues to develop programs to reduce its inventory, while increasing its borrowing base by obtaining additional financing with an asset-based lender. There is substantial doubt about the Company's ability to continue if cash shortages continue to exist. While the Company has been successful in obtaining new financing, the Company must also continue to find new markets for much of its inventory, while improving efficiencies in its Mexican-based manufacturing facilities. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 3. Restructuring and Relocation Operating results for the nine-months ended September 30, 1996 include a restructuring and non-recurring charge totaling $795,000 for the elimination of the Company's in-store service group, closing of the Memphis warehouse with the related movement of the Company's finished goods inventory from Memphis, Tennessee to San Antonio, Texas, and the settlement of a lawsuit with a former employee (see Note 6). This charge represents current and future expenses related to employee terminations, lease commitments, write-off of leasehold improvements, lawsuit settlement, employee severance, and other costs. In May 1995, the Company relocated its corporate offices from Chula Vista, California to San Antonio, Texas pursuant to its restructuring plan begun in December 1994. During 1995 the landlord alleged a breach by the Company under its lease agreement covering the Chula Vista, California facility. The Company is a defendant in a lawsuit filed in December 1995 with respect to this alleged breach of contract. The Company maintains what it believes is an adequate reserve for future losses on the lease. No assurances can be given, however, that the Company can satisfactorily defend this lawsuit and not incur additional liability in the near term beyond the Company's accrued amount. (See note 6) Concurrent with the corporate move to San Antonio, the Company entered into an agreement to share certain employees and certain administrative, selling and marketing expenses with Rooster Products International, Inc. ("Rooster Products"), the United States marketing and distribution subsidiary of Exportadora Cabrera S.A. de C. V. ("Exportadora"), a Mexican corporation owned by the family of Juan Pablo Cabrera, the Company's Chairman of the Board and Chief Executive Officer. C&F Alliance, LLC (the Alliance) was created by the Company and Rooster Products to share management and certain sales and marketing and general and administrative expenses. The Company and Rooster Products each own 50% of the Alliance, and all expenses incurred by the Alliance are billed to the owners based on services provided. The following table presents summary financial information for the Alliance for the three- and nine-month period ended September 30, 1996:
Three months ended Nine months ended September 30, 1996 September 30, 1996 Sales and marketing expenses $ 647,000 $1,909,000 General and administrative expenses 1,270,000 3,616,000 Less: amounts billed to M.G. Products,Inc. (965,000) (2,740,000) amounts billed to Rooster Products International Inc. (952,000) (2,785,000) $ 0 $ 0
4. Notes Payable In April 1995, the Company received a $2.0 million loan from a Mexican bank for its subsidiary in Monterrey, Mexico. The current renewal of this loan, which is funded through an agency of the Mexican government to support Mexican exports, bears interest at an annual rate of 11.82%, and is due February 4, 1997. Upon application by the Company, the bank, at its discretion, may approve a renewal of the loan for further additional periods. Payment of principal and interest on the loan is jointly and severally guaranteed by Alejandro Cabrera Robles, a director of the Company and Chairman of Exportadora, and Patrick Farrah, the Company's former Chairman. Until July 1996, the Company had a credit facility from Heller Financial, Inc. ("Heller Financial") pursuant to which Heller Financial agreed to advance up to $3.0 million to the Company under an accounts receivable factoring arrangement based on an 80% advance rate for domestic receivables and 75% for certain foreign receivables. The agreement contained restrictions related to indebtedness, net worth, income and the payment of cash dividends. This obligation was paid-off, and the facility terminated in July 1996. In July 1996, the Company finalized a new long-term credit agreement with The CIT Group (CIT) under which CIT agreed to advance up to $4.5 million to the Company based on an 80% advance rate for eligible accounts receivable, and 50% for eligible inventory. Advances are collateralized by all of the Company's accounts receivable and inventory, as well as by its equipment. Advances bear interest at an annual rate of prime plus 1.5% (total of 9.75% at September 30, 1996). The agreement does not contain any financial covenants. At September 30, 1996, the balance owed under this agreement was approximately $2,120,000. The Company's obligations under the CIT agreement are guaranteed by Rooster Products and the Alliance. 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. During the quarter ended June 30, 1996 the Company obtained a one-year $2.0 million working capital loan from Morgan Guaranty Trust. The interest rate on this loan is prime (8.25% at September 30, 1996). The loan is guaranteed by non-affiliated third parties. 5. Certain Related Party Transactions In the second quarter of 1995, the Company moved its corporate offices to San Antonio, Texas and formed the Alliance with Rooster Products. The Company contributed certain office furniture and equipment with a net book value of approximately $477,000 to the Alliance. Through the Alliance, the Company and Rooster Products share management and certain sales and marketing and general and administrative expenses. The Company and Rooster Products each own 50% of the Alliance, and all expenses incurred by the Alliance are billed to the owners based on services provided. For the nine-months ended September 30, 1996, the Company's share of the expenses incurred by the Alliance was $2,740,000 of which $965,000 has been included in sales and marketing and $1,775,000 has been included in general and administrative expenses in the consolidated statement of operations. At September 30, 1996, the Company owed the Alliance $880,000 for unreimbursed expenses. This related entity has been a significant source of the Company's working capital needs. The Company also purchased goods and services from Exportadora and several of its subsidiaries totaling approximately $1,392,000 during 1996. The balance owed to these subsidiaries at September 30, 1996, is approximately $343,000. In July 1996, the Company agreed to acquire certain raw material inventory and certain fixed assets of SAF Products, Inc. (SAF) for approximately $60,000. The owner of SAF is the daughter of the Company's former chairman and chief executive officer, and the sister of one of the Company's officers and directors. 6. Debt-to-Equity Conversion On September 30 1996, the Company and Exportadora executed a Purchase Agreement, pursuant to which Exportadora exchanged $2,003,142 of the Company's indebtedness to Exportadora for 3,642,076 shares of the Company's common stock. This indebtedness included accounts payable to Exportadora and certain of its subsidiaries, and notes payable and accrued interest to Exportadora. After consummation of this transaction, Exportadora owns approximately 51% of the Company's outstanding common stock. 7. Depreciation of Equipment During 1996, the Company completed a review of the useful lives of its equipment. Based on this review, the Company extended the estimated useful lives of certain categories of plant equipment used for depreciation purposes, effective July 1, 1996. The effect of this change in estimate reduced depreciation expense for the quarter ended September 30, 1996 by $100,000 and decreased the net loss by $100,000, or less than $0.01 per share. 8. Commitments and Contingencies During the fourth quarter of 1995, the Company's landlord alleged a breach of its lease agreement by the Company on the Chula Vista facility (see Note 3) by failing to make certain lease payments. As a result of this alleged breach, the Company is a defendant in a lawsuit. The plaintiff is seeking to recover compensatory damages, interest, attorney's fees, reconditioning expenses, utility charges, improvements which may be made for a new tenant, and miscellaneous other costs of re-leasing the property. The Company denies the allegations and believes the plaintiff may not recover due to the plaintiff's failure to mitigate its damages as required by California law. The remaining unpaid lease obligation under the terms of the lease is approximately $4,000,000. The Company maintains what it believes is an adequate allowance for future losses on this matter. The ultimate resolution of the matter, is expected to occur within one year. There can be no assurance that the Company will be successful in defending this lawsuit, or that a loss greater than the amount provided for will not be incurred. During 1995, a former employee filed suit against the Company seeking compensatory and punitive damages for breach of contract and discrimination, among other allegations. In July 1996 the Company settled this suit for a sum of less than 10% of the Company's current assets. The full effect of this settlement has been recognized in the accompanying financial statements. In connection with the Company's Tijuana facility lease, the Company ceased payments in 1995 and the lessor of the facility has filed suit in Mexican courts for non-payment of the rent. The Company has filed a countersuit alleging impropriety of the dollar-based contract based on Mexican law. The ultimate resolution of the matter, which is expected to occur within one year, is not expected to result in a loss in excess of the amount accrued by the Company. There can be no assurance that the Company will be successful in defending this lawsuit, or that a loss greater than the amount accrued will not be incurred. In the normal course of business, the Company is named in various legal actions. The Company is a defendant in various lawsuits generally incidental to its business. The amounts sought by the plaintiffs in such cases are not material and are less than the stated limits of the Company's insurance policies. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table sets forth certain items expressed as a percentage of net sales.
Percentage of Net Sales Three months ended Nine months ended September 30, September 30, 1996 1995 1996 1995 Net Sales 100.00% 100.00% 100.00% 100.00% Cost of sales 99.65% 98.16% 101.02% 90.11% Gross profit (loss) 0.35% 1.84% (1.02%) 9.89% Costs and expenses: Selling 2.34% 9.69% 8.34% 11.91% General and Administrative 11.21% 21.52% 14.88% 18.07% Restructuring and unusual 0.00% 0.00% 5.03% 0.00% 13.55% 31.21% 28.25% 29.98% Loss from operations (13.20%) (29.37%) (29.27%) (20.09%) Interest expense, net (4.22%) (4.56%) (3.43%) (3.87%) Equity in earnings of joint venture 2.46% .74% 1.63% 1.58% Net Loss (14.96%) (33.19%) (31.07%) (22.38%)
Three and Nine months ended September 30, 1996 compared to September 30, 1995 Results of Operations Net sales for the three- and nine-months ended September 30, 1996 were approximately $5.7 million and $15.8 million, respectively. This represents an increase of $174,200 and a decrease of $6.46 million, or 3% and (29%), respectively, from the comparable periods in 1995. The Company has experienced cash flow shortages that resulted in the Company's inability to meet production schedules due to the interruption in the availability of certain raw materials. This lack of production resulted in the Company's failure to ship certain orders at acceptable fill rates on a timely basis and the reduction of purchases by some or all of the Company's products by certain customers resulting in declining sales in 1995. In the nine- months of 1996 the Company has increased its fill rates to an average in excess of 90% and has regained placement of certain of its products with certain of its customers. The Company has also been successful in implementing a new program to ship product from the Company's manufacturing facilities directly to customers, thus reducing the future costs of carrying inventory in the Company's distribution center. Cost of sales for the three- and nine-month periods ended September 30, 1996, were $5.7 million and $16.0 million, respectively, resulting in gross profit margins of 0.4% and negative (1.0%) compared to the gross profit margin percentages of 1.8% and 9.9%, respectively for the comparable periods in 1995. The low gross margin for the three-months ended September 30, 1996 was primarily caused by manufacturing variances generated in the Company's Mexican based manufacturing facilities. These negative variances were primarily caused by inefficiencies caused by cash flow shortages which interrupted the availability of certain raw materials. Cash shortages have negatively impacted the Company's ability to purchase needed raw materials in sufficient quantity to maximize volume and purchase discounts. The Company's new working capital loan (obtained in May 1996) and new asset based loan (obtained in July 1996), both of which are discussed further in the Liquidity and Capital Resources section below, have improved the Company's ability to re- establish its volume and purchase discounts with many raw material suppliers and improve the availability of raw materials in the manufacturing facilities. During the quarter ended September 30, 1996, the Company has made changes in products, is updating bills-of-material, made management changes in the manufacturing facilities, and is making other changes to overhead and distribution activities to eliminate inefficiencies in the production process. The Company has sold excess inventory items at or below its cost in order to improve sales and generate needed cash. The Company does provide an inventory allowance account to currently recognize future losses on these sales. There can be no assurance however, that the Company's ability to improve sales and improve upon its inventory turnover will be sufficient and an additional charge to cost of sales may be required. The Company's selling expenses decreased by $403,000 and $1,334,000, respectively, for the three- and nine-month periods ended September 30, 1996, compared to the respective 1995 periods. Selling expense as a percentage of net sales decreased to 2.3% from 9.7% for the three-month period ended September 30, 1996 and decreased to 8.3% from 11.9% for the nine-month period ended September 30, 1996, from the comparable periods in 1995. This decrease is attributable to the elimination of the Company's in-store service group referred to below and to the cost sharing arrangement the Company entered into with Rooster Products during 1995, more fully described in Notes 3 and 5 to the financial statements. General and administrative expenses, decreased by $551,000 and $1,671,000, respectively for the three- and nine-month periods ended September 30, 1996, compared to the respective 1995 periods. This decrease is attributable primarily to (1) the elimination of occupancy costs for the warehouse located in Memphis, Tennessee, referred to below, (2) cost reductions in the Company's expenses, and (3) the cost sharing arrangement the Company entered into with Rooster Products during 1995, more fully described in Notes 3 and 5 to the financial statements. General and administrative expense as a percentage of net sales decreased to 11.2% and 14.9% for the three- and nine- month periods ended September 30, 1996, respectively, from 21.5% and 18.1% for the comparable periods in 1995. Operating results for the nine-months ended September 30, 1996 include a restructuring and non-recurring charge totaling $795,000 in June 1996 for the elimination of the Company's in- store service group, closing of the Memphis warehouse with the related movement of the Company's finished goods inventory from Memphis to San Antonio, Texas, and the settlement of a lawsuit with a former employee. This charge represents current and future expenses related to employee terminations, lease commitments, write-off of leasehold improvements, lawsuit settlement, and employee severance and other costs. Interest expense decreased by $11,400 and $320,400, respectively for the three- and nine-month periods ended September 30, 1996, compared to the respective 1995 periods. This decrease is attributable to the repayment in the third quarter of 1995 of certain short term promissory note agreements with Exportadora, and the issuance of 1,732,068 shares in the third quarter of 1995 of the Company's common stock in exchange for approximately $2.2 million of shareholder notes payable. Liquidity and Capital resources The opinion of the Company's independent auditors which accompanies the Company's financial statements for the year ended December 31, 1995 contains a "going concern" uncertainty emphasis paragraph due to the Company's continued losses, negative cash flow and uncertainties related to the status of its working capital credit line. The Company has implemented a restructuring plan designed to improve operating results and cash flow from operations. During 1995, management began to actively seek customer deposits on new orders. Pursuant to this policy, the Company was successful in receiving significant advances from its principal customer. The final customer deposit advance was received by the Company in April 1996. The Company does not expect to receive any significant customer deposit advances in the future. To replace this liquidity, the Company finalized a new $2,000,000 one-year term loan agreement with Morgan Guaranty Trust in May 1996. The Company will incur interest charges at an annual interest rate of prime (8.25% at September 30, 1996). The loan is guaranteed by non-affiliated third parties. Proceeds of the new credit were used for working capital purposes. During the quarter ended September 30, 1996, the Company's operating results were negatively impacted by cash flow and liquidity shortages. At September 30, 1996, the Company had working capital of $200,000, a decrease of $400,000 from December 31, 1995. At September 30, 1996, the Company's current and quick ratios were approximately 1.02 to 1 and 0.27 to 1, respectively, compared to 1.05 to 1 and 0.26 to 1, respectively, at December 31, 1995. The Company's working capital, current ratio, and quick ratio have decreased during 1996 primarily as a result of continued operating losses. On September 30, 1996, the Company and Exportadora executed a Purchase Agreement, pursuant to which Exportadora exchanged $2,003,142 of the Company's indebtedness to Exportadora for 3,642,076 shares of the Company's common stock. This indebtedness included accounts payable to Exportadora and certain of its subsidiaries, and notes payable and accrued interest to Exportadora. After consummation of that transaction, Exportadora owns approximately 51% of the Company's outstanding common stock. Concurrent with the execution of the Purchase Agreement, the Company, Exportadora, Michael Farrah, Shannon Farrah, and the trusts of which they are the sole beneficiaries (Participants) entered into a Shareholders' Agreement also dated September 30, 1996. Major provisions of this agreement include restrictions against the transfer of shares of the Company's stock by the Participants and for voting purposes the shares of the Participants will be pooled and then equally divided between two groups (the Farrah Group and the Exportadora Group) so as to achieve equal voting power between the two groups despite that fact that one group owns a greater number of shares than the other. In July 1996, the Company finalized a new long-term credit agreement with The CIT Group (CIT). Pursuant to the terms of this new credit agreement, CIT will advance funds, up to a maximum of $4.5 million to the Company under an asset based lending arrangement based on an 80% advance rate for eligible accounts receivable, and 50% for eligible inventory. The credit agreement bears an annual interest rate of prime plus 1.5% (9.75% at September 30, 1996). Initial proceeds under the new credit agreement were utilized to pay-off the outstanding balance due Heller Financial. Additional proceeds received by the Company were used for working capital purposes. In July 1996, CIT also finalized a long-term $10 million credit agreement with Rooster Products which is guaranteed by Exportadora and the Alliance. Both credit agreements with CIT contain cross default provisions. Exportadora, Rooster Products, and the Alliance have subordinated their claims on the Company to CIT's claims. In October 1996 the Company renewed a $2.0 million loan from a Mexican bank for its subsidiary in Monterrey, Mexico. The loan, which is funded through an agency of the Mexican government to support Mexican exports, bears interest at an annual rate of 11.82% and is due February 4, 1997. Upon application by the Company, the bank, at its discretion, may approve a renewal of the loan for further additional periods. Initial proceeds from the loan were primarily used to manufacture finished goods for export to the United States. Payment of principal and interest on the loan is jointly and severally guaranteed by Alejandro Cabrera Robles, a director of the Company and Chairman of Exportadora, and Patrick Farrah, the Company's former Chairman. As part of the sharing of expenses more fully described in the discussion of selling, general and administrative expenses and in Note 3 to the financial statements, the Company owes approximately $880,000 to the Alliance under the cost sharing arrangement with Rooster Products. This related entity has been a significant source of the Company's working capital needs. The Company also purchased goods and services from several subsidiaries of Exportadora totaling approximately $1,392,000 during the nine-months ended September 30, 1996. The balance owed to these subsidiaries at September 30 is approximately $343,000. Part II - Other Information Item 1: Legal Proceedings. None, except as reported in the Company's 1995 10-K. As indicated in the Company's 1995 10-K, during 1995, a former employee filed suit against the Company seeking compensatory and punitive damages for breach of contract and discrimination, among other allegations. In July 1996, the Company was successful in settling this suit for a sum of less than 10% of the Company's current assets at September 30, 1996. The full effect of this settlement is recorded in the Company's financial statements. Item 2: Changes In Securities. (a) None. (b) None. Item 3: Default Upon Senior Securities. (a) None. (b) None. Item 4: Submission of Matters to a Vote of Securities Holders. None Item 5: Other Information. Effective September 30, 1996, the Company's common stock was no longer included in the Nasdaq Small Cap market but instead became quoted on the OTC Bulletin Board Service of the National Association of Securities Dealers, Inc. The Company's symbol remains MGPR. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits. None (b) Reports on Form 8-K. An 8-K was filed October 8, 1996. The content of the report documented the change in control of the Company subsequent to the issuance of 3,642,076 shares of previously authorized but unissued M.G. Products, Inc. common stock in exchange for cancellation of $2,003,142 of indebtedness owed by the Company to Exportadora. No financial statements were filed with the report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. M.G. PRODUCTS, INC. Date: November 14, 1996 By: /s/ Juan Pablo Cabrera Juan Pablo Cabrera Chairman of the Board and Chief Executive Officer Date: November 14, 1996 By: /s/ Ishmael D. Garcia Ishmael D. Garcia Chief Financial Officer EX-27 2
5 9-MOS DEC-31-1996 SEP-30-1996 482,403 0 2,732,871 267,000 7,394,178 11,031,422 4,691,225 2,531,325 14,849,685 10,862,820 0 0 0 35,015,935 0 14,849,865 15,818,005 15,818,005 15,979,264 3,672,464 795,000 0 (542,250) (4,628,723) 0 (4,628,723) 0 0 0 (4,913,879) (.46) (.46)
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