-----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, Sf5n3mXZODaVAkPkEqURPn+fYIK/VW3PfPmLtyCSkFJyElZ8WZvLyV5JgVQ45wS5 mXkyWLmmVlqHvuDD8JQrZg== 0000863111-97-000002.txt : 19970401 0000863111-97-000002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000863111-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18660 FILM NUMBER: 97571463 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-K 1 [ARTICLE] 5 [PERIOD-TYPE] YEAR [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-END] DEC-31-1996 [CASH] 103,567 [SECURITIES] 0 [RECEIVABLES] 2,622,065 [ALLOWANCES] 71,000 [INVENTORY] 5,356,985 [CURRENT-ASSETS] 708,006 [PP&E] 2,619,296 [DEPRECIATION] 1,208,416 [TOTAL-ASSETS] 11,699,617 [CURRENT-LIABILITIES] 10,409,880 [BONDS] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 35,015,935 [OTHER-SE] 0 [TOTAL-LIABILITY-AND-EQUITY] 11,699,617 [SALES] 21,327,178 [TOTAL-REVENUES] 21,327,178 [CGS] 21,672,654 [TOTAL-COSTS] 26,713,480 [OTHER-EXPENSES] 1,667,306 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 727,912 [INCOME-PRETAX] (7,519,238) [INCOME-TAX] 0 [INCOME-CONTINUING] 0 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] (7,519,238) [EPS-PRIMARY] (.65) [EPS-DILUTED] (.65)
EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 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 Identification No.) incorporation or organization) 8154 Bracken Creek San Antonio, Texas 78266 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code: (210) 651-5288 Securities registered pursuant to Section 12(b) of the Act: Title of each class None Name of each exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of class) 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). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] On March 20, 1997, the number of shares of the registrant's Common Stock outstanding was 14,206,154. The aggregate market value of the Common Stock held by nonaffiliates of the registrant as of March 20, 1997 was approximately $1,642,000 based on the closing price of $0.50 for the Common stock as reported on the OTC Bulletin Board Service of the National Association of Securities Dealers, Inc. on such date. For purposes of the foregoing computation, all executive officers, directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be an admission that such executive officers, directors or 5 percent beneficial owners are, in fact, affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE: None M. G. PRODUCTS, INC. ANNUAL REPORT FORM 10-K -December 31,1996 PART I Item 1. Business 2 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4.Submission of Matters to a Vote of Security Holders 8 PART II Item 5.Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 5 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 PART III Item 10.Directors and Executive Officers of Registrant 16 Item 11. Executive Compensation 20 Item 12.Security Ownership of Certain Beneficial Owners and Management 23 Item 13.Certain Relationships and Related Transactions 24 PART IV Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25 PART I Item 1. Business. Introduction M.G. Products, Inc., a California corporation, was incorporated on March 18,1983. M.G. Products, Inc. has two wholly owned subsidiaries which operate manufacturing facilities in Mexico. The term "MG" and "the Company" as used herein means M.G. Products, Inc. and its two manufacturing subsidiaries. The Company's executive offices are at 8154 Bracken Creek, San Antonio, Texas 78266. Productos (Productos) is located in Tijuana, Mexico and Comercial (Comercial) is located in Monterrey, Mexico. The Company has undergone many changes throughout it's fourteen year history. Of these changes, several have led to corporate expansion outside the United States. Through acquisition and establishment, MG has gained ownership in manufacturing facilities in Tijuana, Mexico and Monterrey, Mexico, interest in a Taiwanese corporation, and use of distribution facilities in California, Tennessee, and Texas. During 1995, the Company formed C&F Alliance LLC (the Alliance) with Rooster Products International Inc. (Rooster Products). 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 Alliance, and all expenses incurred by Alliance are billed to the owners based on services provided. Products MG is primarily engaged in the manufacture and wholesale distribution of residential lighting products. It is also engaged in the importation and distribution of track lighting and ceiling fans. The following table sets forth the approximate percentage of net sales for each of the Company's principal product categories during the periods shown:
Years ended December 31, 1996 1995 1994 Decorative Lighting 55.4% 47.7% 50.0% Fluorescent Lighting 23.8 21.9 20.6 Track Lighting 2.3 12.3 13.4 Recessed Lighting 7.3 5.9 8.5 Beveled Products 4.8 3.7 4.1 Other 6.4 8.5 3.4 100.0% 100.0% 100.0% The Company produces numerous fixtures in a variety of styles, sizes, and finishes. The Company's largest product category is Decorative Lighting which incorporates hanging and surface mounted lighting fixtures and table lamps fashioned primarily in beveled glass, brass, antique brass, oak trim and tiffany glass. The Company also produces beveled products for various customers based on their specifications. The glass plate inserts of various styles and sizes were used in conjunction with customers unfinished products. During 1994, the Company developed a family approach to its lighting fixtures that combined related fixtures into groups or families that included ceiling mounted, hanging and table lamps. The product families helped to introduce the Company's new line of table lamps that are fashioned to complement other existing styles. The majority of its decorative and fluorescent products are sold under the ENCORE label, or private label to major retailers. The Company also manufactures recessed fixtures which are installed in ceilings. Recessed fixtures are generally used as down lighting, however, with a variety of accessory trims they can be used for wall washing and spot-lighting. The Company imports track lighting and ceiling fans from China and Taiwan, respectively. The track lighting is currently sold only under the LUMIN label. The Company sells recessed lighting fixtures under both the COMMERCIAL ELECTRIC and LUMIN labels. The Company claims a trademark in all words appearing in boldface herein. In the opinion of management,the Company's registered trademark position is adequately protected in all markets in which it does business. All of the lighting products sold by the Company in the United States are listed by Underwriters Laboratories, Inc. ("UL"). The Company's customers typically require that the electrical products they purchase display the UL listing mark. The Company does not anticipate any difficulty in maintaining the right to use the UL listing mark, however, the inability of the Company to comply with UL standards and to use the UL listing mark could have a material adverse effect on the operations of the Company. Sales, Marketing, and Distribution Activities The Company sells its products primarily to major national retailers. The majority of the Company's sales are made through the direct efforts of its Chief Executive Officer and its shared in-house sales and service staff. During 1996, approximately 2% of the Company's sales were from track lighting products imported from the Far East. This percentage is lower than 1995 and consistent with MG's desire to eliminate track lighting from its core lighting program. MG anticipates the reduction of its remaining track lighting inventory throughout 1997. The Company also sells to its customers through independent nonexclusive sales representatives who are compensated on a commission basis. During 1996, MG sales representatives accounted for approximately 13% of the Company's total sales compared with approximately 11% and 15% in 1995 and 1994, respectively. MG seeks to decrease its reliance on outside sales representatives. MG relies primarily on its reputation for quality, innovative design, competitive pricing and service to obtain sales. The Company uses extensive "point of sale" advertising materials, including lithographed product boxes with color pictures showing product features which allow retailers to use available floor and shelf space effectively. In 1996, the Company's single largest customer, Home Depot, accounted for approximately 74% of total revenues, compared to 47% in 1995. The dependence upon Home Depot as the Company's primary source of revenue leads to the possibility that the loss of this customer would have a material adverse effect on the Company's operations as a whole. In 1996, Lowes, accounted for 8% of total revenues, compared to 21% in 1995. Although the Company derived a significant portion of revenue from Lowes during 1995, the Company does not believe that the loss of Lowes as a customer would have an adverse effect on the operations as a whole. During 1996 the Company entered into a new marketing arrangement with its largest customer, to which it sells under the private label, Hampton Bay which is owned by that customer. This agreement was pursuant to a plan by this customer to provide its own in-store service function, and to no longer purchase the in-store service embedded in the price of the fixtures sold by the Company. As a result, the Company terminated the in-store service group previously operated by the Alliance, and established a direct shipment program from the factory in Mexico directly to the customer for these Hampton Bay fixtures. The Company intends to pursue other direct shipment programs in 1997. During the first quarter of 1996, the Company entered into a joint venture agreement with another lighting manufacturer to commercialize a new innovative low voltage halogen recessed lighting product for the Electrical Distributor and Home Center marketplaces. The test of the original unit was initially scheduled for the summer of 1996 and was postponed one year. 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 nonperformance. The joint venture partner has not yet responded to this notice. There can be no assurance that this matter will be resolved in the Company's favor.The Company has continued to refine the product, which is currently undergoing UL testing. MG anticipates the redesigned product will be test marketed in the summer of 1997, and, if successful, will be introduced in the fall of 1997. During 1996, the Company distributed products to customers from its warehouses in San Antonio, Texas, and Memphis, Tennessee, and directly from its factories in Mexico. All domestic warehouse and distribution activities were consolidated to the San Antonio warehouse during the second quarter of 1996 while shipments made directly from the factory continue. Certain inventory remains at the Memphis location and is transferred to San Antonio as it is sold. For further discussion of the Memphis warehouse closure see Item 2. "Properties". The Company's manufacturing and distribution activities may be affected by seasonal changes in demand which may lead to a backlog of orders. For MG, the term "backlog" refers to customer orders that have not yet been filled and shipped. As product is produced, the order is processed and the order shipped. On March 20, 1997, the Company's backlogs amounted to $817,300 compared to $783,000 on the same date in 1996. Manufacturing and Suppliers Throughout 1996, the Company manufactured the majority of its products in its manufacturing facilities in Tijuana and Monterrey. In December 1996, however, the Company ceased production in its Tijuana manufacturing facility. Much of the production from the Tijuana facility has been transferred to the Company's Monterrey facility. The Company also purchases finished goods built to the Company's specification, from a facility in Guadalajara owned by the Company's majority shareholder, Exportadora Cabrera S.A. de C.V. ("Exportadora"). Substantially all of the Company's products are manufactured based on its own design specifications. MG's finished products are packaged and labeled under the brand names ENCORE, COMMERCIAL ELECTRIC, and LUMIN or under a customer's private label. All of the Company's track lighting and certain other lighting products are imported from one supplier in the Far East. While MG's relationship with this supplier remains strong, the Company experienced some interruptions in the supply of track lighting products during 1995 and 1996 due to MG's inability to consistently meet agreed upon payment terms with the supplier. Further, as the Company continues to align itself to return to profitability, management discontinued the track lighting program in late 1995. Minimal sales of track lighting will continue into 1997 as the remaining inventory is sold. The Company has no long-term contracts with any of its suppliers. The Company follows the practice generally of having at least two sources for all component parts or raw materials and no single supplier provides in excess of 25% of MG's component parts or raw materials. During 1996, the Company experienced frequent interruptions in the supply of component parts and raw materials due to MG's inability to consistently meet agreed upon payment terms with various vendors. In addition, several key vendors have modified MG's payment terms to require either advance payment or cash on delivery. The interruption in the supply of parts during 1996 has contributed significantly to the Company's operating losses during the year. The Company is subject to certain Federal (including Mexican), state and local environmental laws and regulations. The Company believes that it complies in all material respects with all such laws and regulations. Compliance with environmental protection laws has not had a material adverse impact on MG's financial condition or results of operations in the past and is not expected to have a material adverse impact in the foreseeable future. The Company enjoys good working relations in Mexico. However, the Company's financial condition and results of operations would be adversely effected if MG's manufacturing facility in Monterrey, Mexico experienced a disruption in production or delivery due to political instability or otherwise. The Company uses the services of shared in house administrative personnel, independent customs agents and a subsidiary of Exportadora to comply with U.S. and Mexican customs laws in connection with its facility and operations in Monterrey. Competition MG competes with other manufacturers and importers of similar products. Competition from products imported from China has greatly intensified in recent years. The Company's ability to compete successfully depends on its ability to supply its customers with high quality products and service at competitive prices. The Company believes that its knowledge of the building material/home improvement retail industry, combined with its Mexican manufacturing operations and distribution, and customer service capabilities allows it to compete effectively. The Company may need to adjust its operations periodically and, in some cases, significantly, in response to rapidly changing market conditions prevalent in the industry. Such adjustments could prove costly and adversely affect the Company's profitability. There also can be no assurance that advances in competing products which improve performance or lower product cost or both and other discoveries or developments will not render certain of the Company's products or product lines obsolete. Product Liability Due to the nature of Company's products, the Company has exposure to possible claims for damages resulting from the failure of such products. While no material claims have been made against the Company during 1996 and the Company maintains $2.0 million in product liability insurance, there can be no assurance that claims will not arise in the future, that the proceeds of the product liability policy will be sufficient to pay such claims or that the Company will be able to maintain the current level of insurance. Any losses the Company may suffer from future product liability claims, and the effect that such litigation may have upon the reputation and marketability of the Company's products, may have a material adverse effect on the Company's financial condition. Employees The Company is dependent upon certain key management and technical personnel, and its future success will depend partially upon its ability to retain these persons. The Company must compete with other companies and organizations to attract and retain highly qualified personnel. There can be no assurance that the Company will be able to retain or attract such highly qualified personnel. The Company does not directly employ any full time administrative employees. Under the cost sharing arrangement with Rooster Products, the Company shares certain administrative, selling and marketing employees. As of March 20, 1997, the Company shared in its San Antonio corporate offices 106 full- time employees and 4 temporary employees. Also as of March 20, 1997, the Company shared an additional 2 employees in its retail sales and service organization located in various geographical areas around the US. The Company's manufacturing operations in Monterrey employed as of March 20, 1997, approximately 575 employees. Of these, actual direct labor production employees were approximately 462 while the remainder are supervisory and administrative. The Company's employees in Monterrey are represented by a Mexican union. The Company has never experienced a work stoppage and considers labor relations to be good. Restructuring and Mergers On March 7, 1990, the Company filed a petition under the provisions of Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Central District of California as Case No. SB 90-01995DN. Mr. Patrick Farrah, a co-founder of The Home Depot, Inc., led a group of investors to acquire all MG's equity securities, and restructured and refinanced MG with needed working capital. During the period following confirmation of the Company's Plan of Reorganization on September 28, 1990 and through June 21, 1993, Mr. Farrah and his group of investors infused $4,567,000 of new equity funds into the Company. In addition, they revamped and revitalized MG's management and moved the Company's manufacturing facility from Colton, California to Tijuana. On March 25, 1993, the Company anand Crest Industries, Inc. ("Crest") executed an Agreement and Plan of Merger (the "Plan"). The Plan called for the merger of Crest with and into MG. On April 2, 1993 Crest filed a petition under the provisions of Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court, Southern District of Florida, as Case #93 1135-BKC SMW. Crest concurrently filed its Plan of Reorganization, a Disclosure Statement and related documents. On June 21, 1993, following a Confirmation Hearing on June 18, 1993, the Merger was effected. Crest was involved in the manufacture, importation and distribution of track and recessed lighting, and ceiling fans as well as other home improvement products. In connection with the Crest acquisition, the Company acquired a 49.5% interest in Crest Fan Industries Taiwan, Ltd., a Taiwanese corporation which manufactures ceiling fans. In December 1996, production at the Company's manufacturing plant in Tijuana ceased, concurrent with a strike of the workers union at this location. This facility was operated by the Company's wholly owned subsidiary, Productos M.G. The decision was made to close the Productos M.G. plant since the Company had been unsuccessful in reducing plant overhead to an acceptable level, and because of reduced sales volumes which reduced the economic viability of maintaining two separate production facilities. The machinery and equipment and remaining inventory of Productos M.G. are in the possession of the union, and legal action has been taken by the union to recover amounts owed to the plant workers and the union through the sale of the equipment and inventory. The Company's Mexican counsel has advised the Company that they should surrender the assets to satisfy the amounts owed to the workers and the union. Accordingly, the Company has written off the remaining inventory and fixed assets of Productos M.G., as well as all liabilities to the workers and the union, and related payroll taxes. This resulted in a loss of approximately $1,652,000, included in Restructuring and Other Charges. The Company and its counsel believe the remaining liabilities of Productos M.G. must be repaid, accordingly accruals remain for the other liabilities of Productos M.G., primarily lease obligations guaranteed by the Company, and amounts payable to raw material vendors in Mexico and the United States. 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 nonpayment of rent. The Company has filed a countersuit alleging impropriety of the dollar based contract under Mexican law. The Company has recorded a reserve of $436,000 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 the amount accrued will not be incurred. Transactions During 1994, the Company issued $3,900,000 in subordinated notes payable to Exportadora. These notes were converted at $2.65 per share into 1,471,000 shares of the CompanyOs Common Stock in December 1994. Concurrent with the conversion of the debt, the CompanyOs then Chief Executive Officer sold Exportadora 1,000,000 shares of the CompanyOs Common Stock at $0.10 each, which were owned by the Chief Executive Officer, for $100,000. During 1995, the Company issued 600,000 common shares at $1.25 each to its former Chief Executive Officer in exchange for $750,000 of subordinated notes payable. Also, in 1995 the Company issued 1,132,068 additional common shares to Exportadora at $1.25 each in exchange for $1,415,085 of subordinated notes payable. On September 30, 1996, the Company and Exportadora Cabrera S.A. de C.V. (Exportadora), the Company's majority shareholder, executed an exchange 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 at $0.55 a share. This indebtedness included $1,326,000 of accounts payable to Exportadora and certain of its subsidiaries. It also included $371,000 of notes payable and $306,000 of interest accrued in 1995 and 1996 on advances made by Exportadora during 1995 that is due to Exportadora. Item 2. Properties. In June 1993, the Company established a manufactururing facility in Monterrey. The Monterrey facility occupies approximately 206,000 square feet and is leased under a 5 year agreement at a total annual cost of approximately $552,000. The Company will have the option to renew this lease at the end of its term, and will evaluate its position at that time. Machinery and equipment with a net carrying value of $1,005,000 is currently located at Monterrey, and is adequate to meet current production levels. In June 1994, the Company had entered into a lease for a warehouse and distribution facility in Memphis, Tennessee. The Memphis lease provided for 120,000 square feet from June 1, 1995 through the remainder of the lease term which runs through May 2001, at a base monthly rental rate of approximately $0.19 per square foot representing an additional rental contingency of $922,500. During 1996, rental expense for this facility was approximately $270,000. In June 1996 the Company ceased using its Memphis facility for distribution. The Company continues to pay rent as inventory is sold and transferred to San Antonio for distribution. The Company is in negotiations with the lessor and a leasing agent to sublease the warehouse.The ultimate resolution of this matter, which is expected to occur within one year, is not expected to result in a loss in excess of the Company's accrual of $176,000. However, there can be no assurance that the Company will be successful in obtaining a sub-lease, or that a loss greater than the current accrual will not be incurred. During 1995 , the Company's corporate office was relocated from Chula Vista, California to San Antonio. During 1995 the landlord alleged a breach by the Company under its lease agreement covering the Chula Vista, California facility. The Company was a defendant in a lawsuit filed in December 1995 with respect to this alleged breach of contract. In December 1996, the Company reached a settlement of this lawsuit for $315,000. See Item 3 herein for further discussion regarding legal proceedings. As a result of the Company's decision to move its operations to San Antonio, the Company obtained the use of office space and a warehouse/distribution facility through its cost sharing agreement with Rooster Products. During 1996 this provided the Company with approximately 20,000 square feet of shared office space.The warehouse/distribution facility provided 35,000 square feet at an annual direct cost of $98,400. The Company's current need for furniture and office equipment are adequately met through the cost sharing agreement with Rooster Products. The warehouse/distribution facility contains $71,000 in machinery and equipment. The machinery and equipment is adequate for the warehouse and distribution levels of the Company. In December 1996, the Company announced the closure of its Tijuana manufacturing facility, which the Company had used since 1994. During 1994, the Company leased 108,000 and 20,000 square feet of space in two manufacturing facilities in Tijuana, at an aggregate annual cost of approximately $427,000 under leases which expire in April 1997, and November 1998, respectively. In December 1994, the 20,000 square foot facility was closed and the beveled glass manufacturing operations being conducted there were consolidated into the Company's existing 108,000 square foot facility in Tijuana. Under a 6-month buy out agreement with the landlord, which cost the Company approximately $38,000, the lease for the 20,000 square foot facility was terminated. The Company's remaining lease in Tijuana provides for an annual cost of living adjustment not to exceed 5%. During 1996, annual rental expense for this facility was approximately $307,000. See Item 3 herein for further discussion regarding a lawsuit filed by the landlord alleging a breach of the lease agreement. Item 3. Legal Proceedings. An action was filed on April 19, 1995 against the Company by a former employee in the Superior Court for the County of San Diego, California Case No SB003757. This action sought compensatory and punitive damages for breach of contract and sex, racial and national origin discrimination, among other allegations. In July 1996, the Company was successful in settling this suit for a sum of less than 5% of the Company's current assets at June 30, 1996. The full effect of this settlement is recorded in the Company's financial statements. During 1995, the Company relocated its corporate offices from Chula Vista to San Antonio 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 facility. The Company was a defendant in a lawsuit filed in December 1995 with respect to this alleged breach of contract. In December 1996, the Company settled the lawsuit with its former landlord for $315,000. As of December 31, 1996, the Company has accrued rental obligations totaling $436,000 on its lease for the Tijuana facility. The landlord of the facility filed suit in the Mexican courts for non-payment of certain rental obligations during 1995. The Company has countersued the landlord alleging the impropriety of a dollar based contract pursuant to the laws of Baja California, Mexico. The Mexican courts are expected to reach a decision on the case during 1997. No assurance can be given, however, that the Company can satisfactorily defend its lawsuit and not incur additional liability in the near term beyond the Company's accrued amount. 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 work in process inventory claimed in the possession of the union will fully satisfy the liabilities to the workers and the union, and the related taxes. Additionally, their can be no assurances that future claims will not be made against the Company or Productos M.G. Item 4. Submission of Matters to a Vote of Securities Holders. None. PART II Item 5. Market for Registrant's Common Equity andRelated Stockholder Matters. The Company's Common Stock traded on the NASDAQ National Market System until July 1996 when it became listed on the NASDAQ Small Cap Market until October 1996. It then was included in the OTC Bulletin Board Service of the National Association of Securities Dealers, Inc. In each case the listing symbol was MGPR. The following table sets forth the high and low sales prices for MG's Common Stock during the periods shown. High Low 1995 First Quarter . 3 5/8 1 1/4 Second Quarter . 2 1/4 1 1/8 Third Quarter. . 1 3/4 1 1/8 Fourth Quarter. 1 3/8 0 1/4 . . 1996 First Quarter 1 1/4 0 1/4 Second Quarter . 5 3/4 0 1/2 Third Quarter. . 2 3/8 0 7/8 Fourth Quarter. 1 0/0 0 3/16 . . On March 20, 1997, the closing price of the Company's Common stock, as quoted on the OTC Bulletin Board Service was $0.50. As of March 20, 1997 there were approximately 139 holders of record and in excess of 900 beneficial owners of the Company's Common Stock. The prices shown above reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions. The Company has not paid and does not presently intend to pay cash dividends on its Common Stock. The Company's agreements with its lenders also prohibit the payment of cash dividends. Dividends on the Common Stock will depend on business and financial conditions, earnings and other factors and are subject to declaration by the Company's Board of Directors at its discretion. The transfer agent and registrar for the Company's Common Stock is ChaseMellon Shareholder Services, 400 South Hope Street - 4th Floor, Los Angeles, California 90071. Sale of Unregistered Securities in 1996 On September 30, 1996, the Company sold 3,642,076 shares of Common Stock at $0.55 each to Exportadora, its parent, in cancellation of $2,003,142 of indebtedness owed to Exportadora. See "Transactions" under Item 1. Exportadora purchased those shares for an investment. The shares were not registered under the Securities Act of 1933 in reliance on the exemption from registration contained in Section 4(2) of such Act. Item 6. Selected Financial Data. The selected financial data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the fiscal years in the five-year period ended December 31, 1996, are derived from the audited financial statements of MG Products, Inc. The selected financial data should be read in conjunction with the Company's financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Year ended December 31, 1996 1995 1994 1993 1992 (Dollars in thousands, except per share amounts) STATEMENT OF OPERATIONS DATA: Net sales $21,327 $28,291 $48,727 $37,332 $19,438 Net income (loss) $(7,519) $(7,370) $(16,243) $(3,386) $ (820) Net income (loss) per common share $(0.65) $(0.78) $(2.29) $(1.06) $0.26 Weighted average number of outstanding shares of common stock and common stock equivalents 11,484,714 9,447,856 7,102,361 3,197,691 3,178,236 BALANCE SHEET DATA: Total assets $11,700 $16,892 $25,608 $29,336 $6,982 Working capital (deficit) $(2,577) $ 551 $ 6,266 $14,163 $2,021 Long term debt, less current maturities $2,028 $ 38 $ 448 $ 1,064 $ 823 Total stockholders' equity (deficit) $ (738) $ 4,778 $ 9,982 $19,383 $1,728 Item 7. Management's Discussion and Analysis ofFinancial Condition and Results of Operations Overview The Company is primarily engaged in the manufacture and wholesale distribution of decorative, fluorescent and recessed lighting as well as beveled glass products. It is also engaged in the importation and distribution of track lighting and ceiling fans. The track and recessed lines were added in June 1993, through the merger with Crest. In late 1995, the Company discontinued its track lighting lines due to competitive pricing pressures. As the last of the track lighting inventory is sold, MG plans to concentrate its production and distribution efforts on its other product lines. In an effort to increase efficiencies, improve order fill rates, and implement sound marketing programs, the Company has been involved in various cost cutting activities. In the second quarter of 1995, the Company's corporate office and warehouse/distribution facility in Chula Vista was closed. The Company's corporate office was relocated to San Antonio under a cost sharing arrangement with Rooster Products, in an effort to reduce the Company's overhead. As a part of this plan, the Company and Rooster Products agreed to share certain employees and administrative, selling and marketing expenses. In an effort to further reduce overhead, MG moved its distribution function from Memphis to San Antonio in the second quarter of 1996, and closed its production facility in Tijuana during the fourth quarter of 1996, consolidating production in the Monterrey facility. The Company has incurred substantial losses in the past four years, including a loss of $7,519,000 for the year ended December 31, 1996. 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. Results of Operations The following table sets forth certain items expressed as a percentage of net sales. Percentage of Net Sales 1996 1995 1994 Net Sales 100.0% 100.0% 100.0% Cost of sales 101.6% 91.3% 98.0% Gross profit(loss) (1.6)% 8.7% 2.0% Operating expenses: Sales and Marketing 6.9% 12.5% 16.9% General and administrative 16.8% 19.7% 14.7% Restructuring charges 7.8% 0.0% 3.1% Total operating expenses 31.5% 32.2% 34.7% Loss from operations (33.1)% (23.5)% (32.7)% Fiscal 1996 Compared with Fiscal 1995 Net sales in 1996 decreased 25% to $21.3 million from $28.3 million in 1995. The decrease in 1996 sales is attributable primarily to a reduction in the size of the Company's customer base both in terms of number of customers and a decline in the number of the Company's products placed with remaining customers. This resulted in decreases in unit volumes of all product categories sold by the Company. In addition, sales decreases in 1996 resulted from certain of the Company's customers reducing purchases of some or all of the Company's products due to the Company's inability to ship orders at acceptable fill rates on a timely basis as a result of continued cash flow and liquidity shortages. Cost of sales for the period ended December 31, 1996, were $21.7 million, resulting in a negative gross margin of (1.6%) compared to the gross profit margin percentage of 8.7% for the comparable period in 1995. The negative gross margin for 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. These cash shortages negatively impacted the Company's ability to purchase needed raw materials insufficient quantity to maximize volume and purchase discounts. Consequently cost of sales includes a charge of approximately $1.4 million to reflect approximately $690,000 of excess production and overhead costs incurred in the Company's manufacturing plants, and approximately $700,000 of inventory writedown. 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. As described in Item 1 "Restructuring and Mergers", as a cost reduction measure, the Company also ceased production in the Tijuana manufacturing facility. Sales and marketing expenses decreased 58.6% to $1.5 million, or 6.9% of sales during 1996, from $3.6 million, or 12.5% of sales in 1995. This decrease is attributable primarily to the cost sharing arrangement the Company entered into with Rooster Products during 1995. Under the terms of this arrangement, the Company and Rooster Products share certain sales and marketing expenses. General and administrative expenses decreased 35.8% to $3.6 million, or 16.8% of sales during 1996, from $5.6 million, or 19.7% of sales in 1995. This decrease is attributable primarily to the cost sharing arrangement the Company entered into with Rooster Products during 1995. Under the terms of this arrangement, the Company and Rooster Products share certain administrative expenses. Restructuring and Other Charges of $1.7 million in 1996 represent an accrual for management's estimate of expenses related to the restructuring plan of closing the Tijuana facility, and future expenses related to employee termination's, lease commitments, write-off of leasehold improvements, and employee severance and other costs. There can be no assurance that the estimated accrual will be adequate to cover actual future costs. Interest expense decreased 30.5% to $728,000 during 1996, from $1,046,000 in 1995 as a result of lower average loan balances outstanding and lower interest rates during the year. As a percentage of sales, interest expense, net in 1996 was 3.4% compared to 3.7% in 1995. Income from equity in earnings of joint venture of $262,000 in 1996 relates to the Company's share of the estimated 1996 earnings of Crest Fan Industries Taiwan, Ltd., in which the Company acquired a 49.5% interest in 1993. As a result of the foregoing operational results, the Company's net loss increased to $7.3 million, or $(0.65) per weighted average share during 1996 from $7.4 million, or $(0.78) per weighted average share in 1995. Fiscal 1995 Compared with Fiscal 1994 Net sales in 1995 decreased to $28.3 million from $48.7 million in 1994. The decrease in 1995 sales is attributable primarily to a decline in the Company's customer base both in terms of number of customers and a decline of placement of the Company's products with remaining customers. This resulted in decreases in unit volumes of all product categories sold by the Company. In addition, sales decreases in 1995 resulted from certain of the Company's customers reducing purchases of some or all of the Company's products due to the Company's inability to ship orders at acceptable fill rates on a timely basis as a result of continued cash flow and liquidity shortages. Cost of sales during 1995 decreased 46% to $25.8 million (or 91.3% of sales)from $47.7 million (or 98.0% of sales)during 1994. As a result of the decreased cost of sales, gross profit margin as a percent of sales increased during 1995 to 8.7%, from 2.0% in 1994. The decrease in cost of sales and related increase in gross profit margin in 1995 is partially due to the improvement in the Company's efforts to generate favorable manufacturing variances in its Mexican based manufacturing facilities. For the year ended December 31, 1995, the Company's manufacturing facilities generated unfavorable manufacturing variances which totaled approximately $1.8 million compared to approximately $6.1 million at December 31, 1994 caused by excess manufacturing capacity and inefficiencies in manufacturing operations. The unfavorable manufacturing variances generated during 1995 were primarily attributable to periodic raw material parts shortages caused by the Company's cash flow problems. In an effort to improve these cash flow problems and maintain reasonable production, the Company aggressively reduced its total inventory by approximately $5.1 million by focusing on and selling those products which were able to be produced with existing inventory. Many of the sales were at reduced sales prices and in some instances below the Company's inventory carrying cost. In late 1995, the Company discontinued its track lighting program due to competitive pricing pressures on this category that produced low gross margins. The Company continues to address labor and overhead cost reduction and productivity improvement issues, as well as raw material cost reductions. Sales and marketing expenses decreased 57% to $3.6 million, or 12.5% of sales during 1995, from $8.2 million, or 16.9% of sales in 1994. This decrease is attributable primarily to the cost sharing arrangement the Company entered into with Rooster Products during 1995. Under the terms of this arrangement, the Company and Rooster Products share certain sales and marketing expenses. Included in the 1994 sales and marketing expense is a nonrecurring charge totaling $1.1 million for the write off of previously capitalized assets related to the Sears home delivery program discontinued in September, 1994. General and administrative expenses decreased 22% to $5.6 million, or 19.7% of sales during 1995, from $7.2 million, or 14.7% of sales in 1994. This decrease is attributable primarily to the cost sharing arrangement the Company entered into with Rooster Products during 1995. Under the terms of this arrangement, the Company and Rooster Products share certain administrative expenses. Interest expense increased 41% to $1,046,000 during 1995, from $740,000 in 1994 as a result of higher average loan balances outstanding and higher interest rates during the year. As a percentage of sales, interest expense, net in 1995 was 3.7% compared to 1.5% in 1994. Income from equity in earnings of joint venture of $332,000 in 1995 relates to the Company's share of the estimated 1995 earnings of Crest Fan Industries Taiwan, Ltd., in which the Company acquired a 49.5% interest in 1993. As a result of the foregoing operational results, the Company's net loss decreased to $7.4 million, or $(.78) per weighted average share during 1995 from $16.2 million, or $(2.29) per weighted average share in 1994. 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 Company to generate sufficient cash to provide for its operation in both the near and long- term. As discussed below, the Company obtained additional debt financing and finalized a new working capital credit facility during 1996. The Company initiated a series of restructuring efforts during 1995 and 1996 designed to improve operating results and cash flow from operations. During 1995, management began to actively seek prepayment terms in exchange for prepayment discounts from its customers on new orders. Pursuant to this policy, the Company was successful in obtaining significant prepayments from its principal customer. The Company stopped receiving such advances in April 1996. There can be no assurance, however, that the new financing arrangements will be sufficient or that the restructuring plan will be successful in improving operating results in the long term. During 1996, the Company's operating results were negatively impacted by cash flow and liquidity shortages experienced during the year. At December 31, 1996, the Company had a working capital deficit of $2,577,000 compared to working capital of $551,000 at December 31, 1995. The primary cause for the decrease in working capital was the significant reduction of the Company's current inventory balances of approximately $4.4 million while reducing its current liabilities by approximately $1.7 million. The Company's current ratio and quick ratio at December 31, 1996 were 0.75:1 and 0.26:1, respectively, compared to 1.05:1 and 0.26:1, respectively, at December 31, 1995.The decreases in the Company's working capital and working capital ratios during 1996 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 note is due on demand, or if no demand is made, on May 31, 1997. The interest rate on this loan is prime (8.25% at December 31, 1996). The loan is guaranteed by interested third parties. The Company does not expect the guarantees to be renewed and therefore the note is unlikely to be extended on its due date causing a further liquidity shortage. Replacing this financing is critical to the Company's working capital needs. 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% (9.75% at December 31, 1996). 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 $2,028,211 at December 31, 1996. 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. Until July 1996, the Company's revolving note payable had been with Heller Financial and provided for factoring of certain trade receivables. The receivables, upon approval of Heller Financial, were factored without recourse as to credit risk, but with recourse for any claims by the customer for adjustments in the normal course of business relating to pricing errors, shortages, damaged goods, etc. In July 1996, this agreement was terminated and the account settled with proceeds from the new revolving credit facility with CIT Group discussed above. On September 30, 1996, the Company and Exportadora, the Company's majority shareholder, executed an exchange 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 at $0.55 a share. This indebtedness included $1,326,000 of accounts payable to Exportadora and certain of its subsidiaries. It also included $371,000 of notes payable and $306,000 of interest accrued in 1995 and 1996 on advances made by Exportadora during 1995 that is due to Exportadora. During 1996 the Company renewed a $2.0 million loan from a Mexican bank for its subsidiary in Monterrey. The loan, which is funded through an agency of the Mexican government to support Mexican exports, currently bears interest at an annual rate of 11.875% and is due June 30, 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. The Company directly received several short term noninterest bearing working capital advances from Rooster Products aggregating $140,000 in 1996, compared to $60,000 during 1995. No amounts were outstanding at the end of the year for these direct advances in 1996. Further, as part of the cost sharing arrangement with Rooster Products more fully described in Item 1. Introduction and in Note 11 to the financial statements, the Company owes the Alliance approximately $1,126,000 in 1996, compared to $630,000 during 1995. During 1995, the Company issued 600,000 common shares at $1.25 each to its former Chief Executive Officer in exchange for $750,000 of subordinated notes payable. Also, in 1995 the Company issued 1,132,068 additional common shares to Exportadora at $1.25 each in exchange for $1,415,085 of subordinated notes payable. During 1994, the Company issued $3,900,000 in subordinated notes payable to Exportadora. These notes were converted at $2.65 per share into 1,471,000 shares of the CompanyOs Common Stock in December 1994. Concurrent with the conversion of the debt, the Company's then Chief Executive Officer sold Exportadora 1,000,000 shares of the Company's Common Stock at $0.10 each, which were owned by the Chief Executive Officer, for $100,000. The Company is currently in discussion with other potential lenders to provide for its short and long term working capital needs. 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. Income Taxes At December 31, 1996, the Company had available for Federal income tax purposes net operating loss carryforwards of approximately $32,700,000 pursuant to Internal Revenue Code Section 382 of which $11,100,000 is available for utilization without limitation. The Company incurred an ownership change under Section 382 of the Internal Revenue Code of 1986 in November 1994. Accordingly, it is expected that the use of $21,600,000 of net operating loss carryforwards generated prior to December 1994 will be limited to approximately $745,000 per year. Based upon this limitation, the Company will not realize the benefit of all the loss carryforwards as they expire 15 years from the year credited. During 1994, the Company began accounting for income taxes in accordance with Financial Accounting Standards Board Statement No. 109. The adoption of this statement did not have a material impact on the Company's financial position. Since uncertainty exists on the future utilization of operating loss carryforwards, the Company has established a valuation allowance of $13,416,000 which is equal to the deferred tax asset at December 31, 1996. Item 8. Financial Statements and Supplementary Data. The financial statements of M.G. Products, Inc., the notes thereto and the Report of the Independent Auditors thereon required by this item are filed pursuant to Item 14 of this report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. 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 owned approximately 51% of the Company's outstanding common stock. Concurrent with the execution of the Purchase Agreement, the Company, Exportadora, Michael Farrah, then a director, his sister, 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, that, 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 the fact that one group owns a greater number of shares than the other. (See Item 12. "Principal Shareholders" for the number of shares owned by certain participants) On December 30, 1994, the Company, Patrick Farrah, Michael Farrah, the Michael Patrick Farrah Trust, Shannon Farrah, the Shannon Ann Farrah Trust, Juan Pablo Cabrera and Exportadora Cabrera entered into a Shareholders Agreement in connection with the sale by the Company of 1,471,000 shares of common stock and the sale by Mr. Patrick Farrah of 1,000,000 shares of MG common stock to Exportadora Cabrera. The Shareholders Agreement (i) restricts the rights of the parties thereto to sell, assign, gift or in other ways dispose of their shares in the Company, except as set forth in the Shareholders Agreement, (ii) provides for certain rights of first refusal, (iii) grants piggyback registration rights and demand registration rights to Exportadora and (iv) provides that Exportadora may nominate up to four directors, that the Board of Directors of the Company may nominate up to an additional four directors with additional directors appointed upon a mutually agreeable basis. Effective October 1, 1995, Mr. Patrick Farrah resigned his position with the Company and the Company's Board of Directors elected Juan Pablo Cabrera as its new Chairman of the Board and Chief Executive Officer. Michael Farrah was elected to the Board to assume the board seat vacated by his father, Patrick Farrah, on October 1, 1995, and resigned on January 20, 1997. Directors are elected annually and hold office until the next annual meeting of shareholders, or until their respective successor are elected and qualified. At March 20, 1997 there is one vacancy on the Company's Board of Directors and the Board consists of the following six persons of whom the first four were nominated by Exportadora and the next two were nominated by the Company: Juan Pablo Cabrera Alejandro Cabrera Robles Juan Carlos Rodriguez Alejandro Portilla Garceran Charles Chapman Martin Goodman Information concerning the present Directors, who are also the nominees, and concerning the executive officers of the Company at March 20, 1997 is presented on the following page. Director Shares of Name Age Since Common Stock Owned Percentage Juan Pablo Cabrera 33 Jan. 1995(2) 30,770 * Charles J. Chapman(4) 58 June 1993 4,500(6) * Alejandro Cabrera Robles(4) (5) 61 Jan. 1995 7,245,144(3) 51.0% Martin Goodman(5) 58 June 1993 4,500(6) * Juan Carlos Rodriguez(4) 34 Jan. 1995 0 -- Alejandro Portilla Garceran(5) 44 Jan. 1995 0 __ Eric Williams 34 2,500(6)(7) * All directors and executive officers as a group (7persons) 7,287,414 51.2% * Less than 1% 1) Includes shares subject to options that are presently exercisable or become exercisable within 60 days after March 20, 1997. 2) Mr. Juan Pablo Cabrera was previously a director from June 1993 to December 19, 1994. 3) Represents shares owned by Exportadora Cabrera, a Mexican corporation controlled by Mr. Alejandro Cabrera. 4) Member of audit committee. 5) Member of compensation committee. 6) Represents presently exercisable options to purchase shares of common stock but does not include options to purchase shares of common stock which are not presently exercisable. 7) Does not include 1,200 shares owned by Mr. Williams spouse, for which he disclaims beneficial ownership The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Securities and Exchange Commission and accordingly, may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same residence as such individual, as well as other securities as to which the individual has or shares voting or investment power or which the individual has the right to acquire under outstanding stock options or warrants within 60 days after April 28, 1997, the record date for the meeting. INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS Juan Pablo Cabrera Juan Pablo Cabrera was a Director of the Company from June 1993, through December 19, 1994 when he resigned in connection with a then pending transaction with Exportadora Cabrera, disclosed in the last paragraph on page 4. Subsequent to the completion of the transaction, Mr. Cabrera was reappointed as a Director of the Company and was appointed as the Company President and Chief Operating Officer, effective January 4, 1995. Effective October 1, 1995, Mr. Cabrera was appointed Chairman of the Board and Chief Executive Officer. Mr. Cabrera is also an officer of Rooster Products International, Inc., the U.S. marketing and distribution subsidiary of Exportadora Cabrera, based in San Antonio, Texas. Alejandro Cabrera Robles Alejandro Cabrera Robles has served as a Director of the Company since January, 1995. Mr. Alejandro Cabrera is the chairman of Exportadora Cabrera, a holding company based in Guadalajara, Mexico, for several manufacturing and distribution companies. Mr. Alejandro Cabrera has over 36 years of manufacturing, marketing and distribution experience in Mexico, and currently serves on the board of directors of several companies in Mexico. Charles J. Chapman Charles J. Chapman has served as a Director of the Company since June, 1993. Mr. Chapman was Executive Vice President of Tambrands, Inc. from August 1989 to September 1994, and has over 31 years of experience in marketing retail consumer products. Mr. Chapman is currently the Chairman and Director of Powell Plant Farms and is also a director of Welch's Food Company. Martin Goodman Martin Goodman is the retired Chairman of Columbia Manufacturing Corp., a Southern California based manufacturer of screen doors marketed primarily through major home center chains throughout the United States. Mr. Goodman has over 36 years of experience in manufacturing businesses, and is currently a private investor. Alejandro Portilla Garceran Alejandro Portilla Garceran has served as a Director of the Company since January, 1995. Mr. Portilla is a Managing Director of Fomento de Capital, an investment banking firm based in Mexico City, Mexico. Previously Mr. Portilla spent 7 years at Operadora de Bolsa (1984 1991), an investment banking firm in Mexico City, where his last position was Managing Director of Mergers and Acquisitions. Mr. Portilla serves as a director for 8 companies in Mexico. Juan Carlos Rodriguez Juan Carlos Rodriguez has served as a Director of the Company since January, 1995. Mr. Rodriguez has been a director of Exportadora Cabrera since 1989. In that capacity, he oversees all its corporate finance activities and legal affairs. Eric Williams Eric Williams was elected the Company's Chief Financial Officer in January 1997. He has previously served as Chief Financial Officer of Rooster Products International, Inc. and C&F Alliance LLC since May, 1995. His 12 years of financial management experience started in public accounting with Arthur Andersen & Co. Mr. Williams is a certified public accountant. Family Relationships Alejandro Cabrera Robles is the father of Juan Pablo Cabrera. Juan Carlos Rodriguez is the son- in-law of Alejandro Cabrera Robles and the brother-in- law of Juan Pablo Cabrera. Other Significant Employees Richard Crawford Richard (Dick) Crawford (age 49) serves as the Sr. Vice President of Operations for both the Company and Rooster Products under the terms of the cost sharing arrangement entered into during 1995 with Rooster Products. Mr. Crawford is responsible for the U.S. based distribution function, as well as all administrative services. Mr. Crawford has 26 years of manufacturing and operations experience. Mike Barnes Mike Barnes (age 42) serves as the business unit manager for the Company. He is directly responsible for the sales and marketing efforts of the Company. Mr. Barnes has over 20 years experience in the lighting and ceiling fan industries. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers and any persons who own more than ten percent of the Company's Common Stock to file with the Securities and Exchange Commission and the NASD various reports as to ownership of such Common Stock. Such persons are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on its review of the copies of such reports furnished to the Company and written representations to the Company that no other reports were required, all the aforesaid Section 16(a) filing requirements were met on a timely basis during 1995. Item 11. Executive Compensation COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors (the "Committee") has furnished the following report on executive compensation: Compensation Philosophy Under the Committee's supervision, the Company seeks to structure executive compensation consistent with the Company's overall business strategy, philosophy and objectives. As presently in effect, compensation is based on two fundamental concepts: (1) "compensationfor performance" to reward executives for long-term strategic management and (2) "compensation for achieving year-to-year personal and corporate goals". The Company believes these two concepts are essential to attracting, motivating and retaining key executives and are critical to the long- term success of the Company. The first of these two concepts is achieved through direct, regular compensation to the Company's key executives. The second is achieved through a combination of executive bonuses coordinated with year-to year personal and corporate goals and the Company's stock option plans. Compensation Program As described in Item 1. Employees, the Company's Executives are employed by the Alliance, and therefore none are directly compensated by MG. The Company's Chief Executive Officer has, through the end of the Company's 1996 fiscal and calendar year, been compensated based upon oral agreements, terminable at will. Effective October 1, 1995, Juan Pablo Cabrera was appointed by the Company's Board of Directors as the Company's Chairman of the Board and Chief Executive Officer. Mr. Cabrera voluntarily suspended his previously approved $200,000 annual direct compensation in similar fashion as the Company's former Chief Executive Officer due to the Company's poor performance and then current and anticipated cash shortfalls. Effective upon the Company achieving three consecutive months of operating profits, it is anticipated that Mr. Cabrera will receive direct compensation to be shared through the Company's cost sharing arrangement with Rooster Products. Mr. Cabrera's actual direct compensation will be determined at that time. Additional direct compensation in the form of bonus compensation may be granted to Mr. Cabrera for 1997. It is also not anticipated that Mr. Cabrera will participate in the grant of any stock options. Mr. Cabrera will continue to serve in the above referenced capacities without written agreement and continued employment will be terminable at will through 1997. The Company's former Chief Financial Officer, Ishmael D. Garcia has, through the end of the Company's 1996 fiscal and calendar year, been compensated based upon oral agreements, terminable at will. He was hired April 10, 1995, and resigned as Chief Financial Officer on December 31, 1996. His total compensation in 1996 was less than $100,000. Bonuses of $6,250 were earned and paid to Mr. Garcia during 1996. Mr. Garcia also received 30,000 stock option grants under the Company's stock option plans during 1995, 7,500 of which vested in 1996. Mr. Garcia remains a vice-president of the Alliance. As of January 13, 1997, Eric Williams was elected the new Chief Financial Officer of the Company. Mr. Williams is compensated upon oral agreements, terminable at will. The other members of senior management, as shared through the Company's cost sharing arrangement with Rooster Products, are also eligible for incentive compensation. Individual awards are determined by Mr. Juan Pablo Cabrera. The decisions made by Mr. Cabrera are subjective, reflecting his assessment of the individual's performance and relative contribution to the Company's overall performance. Generally, these awards have ranged between 4% and 8% of the base compensation for eligible participants during 1996. The other members of senior management also received stock option awards in 1995 to align their interests with those of the stockholders. The foregoing report has been approved by all members of the Committee. Alejandro Cabrera Robles Martin Goodman Alejandro Portilla Garceran The following table sets forth, for each of the last three fiscal years, the annual and long-term compensation for the Chief Executive Officers of the Company in all capacities in which they served. No other Executive Officer of the Company had salary and bonus in excess of $100,000 during such period. SUMMARY COMPENSATION TABLE Long- Term Compensation Annual Compensation Awards Payouts Other Restricted Securities All Name and Annual Stock Underlying LTIP Other Principal Salary Bonus Comp. Award(s) Options/ Payouts Comp Position Year ($) ($) ($) ($) SAR's (#) ($) ($) CEO,President Juan Pablo Cabrera 1996 0 0 0 0 0 0 0 Juan Pablo Cabrera 1995 0 0 0 0 0 0 0 Patrick Farrah 1994 100K 0 0 0 0 0 0 Options/SAR Grants in Last Fiscal Year There were no options granted to the Officers identified above during the fiscal year ended December 31, 1996. Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values There were no option or SAR exercises by the Officers identified above during the fiscal year ended December 31, 1996 and no options or SARs outstanding at December 31, 1996 to the Officers identified in the preceding table. Long-Term Incentive Plan--Awards in the Last Fiscal Year There were no long-term incentive plan awards to the Officers identified in the preceding table during the fiscal year ended December 31, 1996. COMPARISON OF TOTAL RETURN TO SHAREHOLDER The following chart compares the value of $100 invested in the Company's common stock from June 22, 1993 through December 31, 1996 with a similar investment in the Standard & Poors 500 Stock Index and with the Electrical Equipment sub-index. The Company's index is calculated using the closing price on June 22, 1993; the Standard & Poors 500 Index is calculated using the price on June 22, 1993 and the sub-index is calculated using the closing price on June 23, 1993. The cumulative return model assumes the reinvestment of dividends. Total Shareholder Returns Base Period December 31, June 22, 1993 1996 1995 1994 1993 M G Products, Inc. 100.00 2.90 2.17 14.49 55.07 S&P 500 Index 100.00 181.74 147.80 107.40 106.03 Electrical Equipment 100.00 209.13 152.28 108.51 107.26 Item 12. Security Ownership of Certain Beneficial Owners and Management PRINCIPAL STOCKHOLDERS The following table sets forth as of March 20, 1997 information with respect to the beneficial ownership of the Company's Common Stock by each person known by the Company to beneficially own more than 5% of the outstanding shares. Common Stock Beneficially Name and Address Owned(1)(2) of Beneficial Owner (2) Shares Percent Exportadora Cabrera(3)(5). . . . . . . . . . . 7,275,914 51.2% Paraiso 1750 Col Del Fresno Guadalajara, Jalisco CP 44900 Mexico Michael Farrah(5). . . . . . . . . . . . . . 883,557 6.2% c/o MG Products, Inc. 8154 Bracken Creek San Antonio, Texas 78266-2143 Shannon Ann Farrah Irrevocable Trust(4)(5) . . 879,547 6.2% c/o Edward Kliem, Trustee 21671 Branta Circle Huntington Beach, California 92646 The 1996 Michael P. Farrah Trust(5) .. . . . .. 939,930 6.6% Barry R. Shreiar, trustee 4590 MacArthur Boulevard, Suite 390 Newport Beach, California 92660 The 1996 Shannon Ann Farrah Trust(5). . . .. . 939,931 6.6% Barry R. Shreiar, trustee 4590 MacArthur Boulevard, Suite 390 Newport Beach, California 92660 (1) Unless otherwise indicated in notes (3), (4), and (5),each person has sole voting and investment power with respect to all such shares. (2) The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Securities and Exchange Commission and accordingly, may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same residence as such individual, as well as other securities as to which the individual has or shares voting or investment power or which the individual has the right to acquire under outstanding stock options or warrants within 60 days after March 20, 1997. Beneficial ownership may be disclaimed as to certain of the securities. (3) Includes 30,770 shares owned by Juan Pablo Cabrera, the Company's Chairman of the Board and Chief Executive Officer, as to which Exportadora Cabrera disclaims beneficial ownership. (4) Includes 100,000 shares owned by Shannon Farrah, the adult daughter of Patrick Farrah, as to which the trustee disclaims beneficial ownership. (5) Voting rights and investment power with respect to these shares are restricted pursuant to terms of a Shareholders Agreement discussed in Item 10. Item 13. Certain Relationships and Related Transactions During 1995, Exportadora advanced approximately $674,000 (loans primarily based in pesos approximate value at exchange dates) to the Company and its Mexican subsidiaries, which the Company has repaid in full by converting to shares of the Company's common stock as more fully described in Item 1 "Transactions". Interest expense incurred on these loans in 1996 was $77,188. The interest rate in 1996 for these loans ranged from 14% to 48%. During 1996 the Company provided warehousing, marketing and distribution services for S.A.F. Products ("SAF"), a manufacturer of lighting products owned and operated by Shannon A. Farrah, under a consignment agreement. Ms. Farrah is the sister of Michael Farrah, a former director of the Company, and is the beneficiary of both the Shannon A. Farrah Irrevocable Trust and the 1996 Shannon Ann Farrah Trust, each, shareholder of the Company holding in excess of 5% of its issued and outstanding shares. This agreement was terminated in August of 1996, at which time a subsidiary of the Company purchased substantially all of the assets of SAF for $60,000. During 1996, the Company did not sell any raw material inventory to SAF, compared to $8,300 in 1995. During 1996 and 1995, the Company contracted with SAF to manufacture some of the Company's lighting fixtures at a cost of approximately $58,000 and $529,500, respectively. At December 31, 1996, the Company owed SAF $250,000 in connection with the contract manufacturing work, compared with $396,200 during 1995. In 1996, the Company directly received several short term noninterest-bearing working capital advances from Rooster Products totaling $140,000, compared with $60,000 in 1995. No amounts were outstanding and payable as of December 31, 1996. In addition, the Company sold $909,000 ($1,074,000 in 1995) of its products to Rooster Products for resale to Rooster Products' customers. Rooster Products owes the Company $348,000 ($250,000 in 1995) as of December 31, 1996 pursuant to these sales of product. The Company also purchased goods and services from several subsidiaries of Exportadora totaling approximately $2,140,000 during 1996, compared to $416,000 in 1995. The balance owed to these subsidiaries at December 31, 1996 is approximately $548,000, compared with $177,000 in 1995. The Company believes that the prices and terms for goods and services paid to these related entities are competitive with unrelated suppliers. Under California law, contracts or transactions between a corporation and one or more of its directors or between a corporation and any other entity in which one or more directors are directors or have a financial interest, are not void or voidable because of such interest or because such director is present at a meeting of the Board which authorizes or approves the contract or transaction, provided that certain conditions such as obtaining the required approval and fulfilling the requirements of good faith and full disclosure are met. Under California law either(a) the shareholders or the Board of Directors must approve any such contract or transaction in good faith after full disclosure of the material facts (and, in the case of Board approval other than for a common directorship, California law requires that the contract or transaction must also be "just and reasonable" to the corporation), or (b) the contract or transaction must have been in the case of a common directorship "just and reasonable" as to the corporation at the time it was approved. California law explicitly places the burden of proof of the just and reasonable nature of the contract or transaction on the interested director.Under California law,if Board approval is sought, the contract or transaction must be approved by a majority vote of a quorum of the directors, without counting the vote of any interested directors (except that interested directors may be counted for purposes of establishing a quorum). All of the above mentioned transactions were so approved. PART IV Item 14. Exhibits,Financial Statement Schedules and Reports on Form 8-K. (a) 1. Index to Audited Financial Statements and Schedules: Page Report of Ernst & Young LLP, Independent Auditors F-1 Consolidated Balance Sheets - December 31, 1996 and 1995 F-2 Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994 . . . . . . . . . F-4 Consolidated Statements of Shareholders'Equity (Deficit) - Years ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994.. . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . F-7 All financial statement schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (a)3. Exhibits: Exhibit 2 (a) Order Confirming Third Amended and Restated Plan of Reorganization of Crest Industries, Inc.; and Third Amendedand Restated Plan of Reorganization of Crest Industries, Inc. (1) Exhibit 2 (b)Stock Transfer Agreement dated as of September, 1993 among M.G. Products, Inc., M.G. Capital Corp. and the shareholders of M.G. Capital Corp., including the First Amendment thereto dated September 27, 1993. (2) Exhibit 2 (c)Amended and Restated Revolving Credit Note dated June 18, 1993 between M.G. Capital Corp. and M.G. Products,Inc., First Amendment thereto, also dated June 18, 1993 and Second Amendment thereto dated August 20, 1993.(3) Exhibit 3 (a) (i)Articles of Incorporation. (4) Exhibit 3 (a) (ii) Bylaws. (10) Exhibit 3 (b) (ii)Bylaws marked to show changes at March 5, 1996 Exhibit 4 (a)M.G. Products, Inc. 1993 Stock Option Plan I with Stock Issuance Agreement and Option Agreement attached. (5) Exhibit 4 (b)M.G. Products, Inc. 1993 Stock Option Plan II with Stock Issuance Agreement and Option Agreement attached. (6) Exhibit 4 (c)M.G. Products, Inc. 1993 Stock Option Plan III with Stock Issuance Agreement and Option Agreement attached. (11) Exhibit 10 (a) Standard Industrial Lease, Multi-Tenant, dated September 9, 1992 between Larwin-Rosedale Properties as Lessor and M.G. Products, Inc. as Lessee covering property at 2311 Boswell Road in Chula Vista, California. (7) Exhibit 10 (b) Lease dated June 24, 1993 between Urbanizaciones Gamma, S.A. de C.V. as Lessor and Comercial Electrica del Norte, S.A. de C. V., a wholly-owned subsidiary of the Registrant, as Lessee, covering premises in Monterrey, Nuevo Leon, Mexico. (12) Exhibit 10 (c) Lease dated December 1, 1993 between Promocion Inmobiliaria Agua Caliente, S.A. de C. V., as Lessor and Productos M.G. de Mexico, S.A. de C.V., a wholly-owned subsidiary of the Registrant, as Lessee, covering premises at 109 Borgia Street in Tijuana, Baja California, Mexico. (13) Exhibit 10 (d) Lease agreement between Sergio Zamudio Gonzalez et al. as lessors and Productos MG de Mexico S.A. de C.V. as lessee, and Amendments thereto, covering production facilities in Tijuana, Mexico. (14) Exhibit 10 (e) Loan and Security Agreement dated February 24, 1993 between BA Business Credit, Inc. and M.G. Products, Inc., exclusive of the Exhibits thereto. (8) Exhibit 10 (f) License Agreement dated October 1, 1991 between Vigon Lighting Inc. and VLP, Inc. with Certificate of Ownership on the short form merger of VLP, Inc. into M.G. Products, Inc. (5) Exhibit 10 (g) Loan and Security Agreement dated as of April 12, 1994 between Comerica Bank and M.G. Products, Inc. (15) Exhibit 10 (h) Waiver of Defaults and Amendment of Loan and Security Agreement dated May 31, 1994. (16) Exhibit 10 (i) Letter of Intent between Exportadora Cabrera, S.A. de C.V. and M.G. Products, Inc. dated November 7, 1994. (17) Exhibit 10 (j) Revolving Credit Line Agreement, and Promissory Note, between Exportadora Cabrera, S.A. de C.V. and M.G. Products, Inc. each dated November 9, 1994. (18) Exhibit 10 (k) Promissory Notes to Patrick G. Farrah dated September 19 and October 14, 1994. (19) Exhibit 10 (l) Forbearance Agreement with Comerica Bank dated November 1, 1994. (20) Exhibit 10 (m) Stock Purchase and Exchange Agreement dated as of December 30, 1994 among Patrick G. Farrah, M.G. Products, Inc., Exportadora Cabrera, S.A. de C.V. and two of its wholly owned subsidiaries. (21) Exhibit 10 (n) Shareholders Agreement dated as of December 30, 1994 by and between M.G. Products, Inc. and certain holders of its common stock. (22) Exhibit 10 (o) Restated Promissory Note and Line of Credit dated December 30, 1994. (23) Exhibit 10 (p) List of Subsidiaries. (24) Exhibit 10 (q) Amendment one to Forbearance Agreement with Comerica Bank dated November 29, 1994. (25) Exhibit 10 (r) Amendment two to Forbearance Agreement with Comerica Bank dated March 1, 1995. (26) Exhibit 10 (s) Promissory Note between ComercialElectrica Del Norte S.A. De C.V. and BanCrecer dated April 4, 1995. (27) Exhibit 10 (t) Amendment No. 1 To Collection Date Factoring Agreement with Heller Financial dated February 28, 1996.(28) Exhibit 10 (u) M.G./Alliance Management Services Agreement with C & F Alliance, L.L.C. dated May 1, 1995.(29) Exhibit 10 (v) Joint Venture Agreement with CSL Lighting Manufacturing, Inc. dated March 19, 1996.(30) Exhibit 10 (w) Loan and Security Agreement between MG Products, Inc. and The CIT Group/Credit Finance, Inc. dated July 16, 1996.(31) Exhibit 10 (x) Purchase Agreement dated September 30, 1996.(32) Exhibit 10 (y) Shareholders' Agreement dated September 30, 1996.(33) NOTE: Certain Exhibits listed above are incorporated by reference to other documents previously filed with the Commission as follows: Document filed by M.G. Products, Exhibit Note Inc. or its Predecessor to Designation Reference which Cross reference is Made in such document 1 Form 8-A dated June 21, 1993 filed by Exhibit a Crest Industries, Inc., predecessor to the Registrant (Commission File 018660). 2 Form 8-K dated November 8, 1993. Exhibit 2 3 Form 10-Q for the quarter ended June 30, 1993. Exhibit 7 4 Form 8-A dated June 28, 1993. Exhibit 2(a) 5 Form 10-Q for quarter ended June 30, 1993. Exhibit 3 6 Form 10-Q for quarter ended June 30, 1993. Exhibit 4 7 Form 10-Q for quarter ended June 30, 1993. Exhibit 6 8 Form 10-Q for quarter ended June 30, 1993. Exhibit 8 9 Form 10-Q for quarter ended June 30, 1993. Exhibit 5 10 Form 10-K for year ended December 31, 1993. Exhibit 3(a)(ii) 11 Form 10-K for year ended December 31, 1993. Exhibit 4(c) 12 Form 10-K for year ended December 31, 1993. Exhibit 10(b) 13 Form 10-K for year ended December 31, 1993. Exhibit 10(c) 14 Form 10-K for year ended December 31, 1993. Exhibit 10(d) 15 Form 10-Q for quarter ended March 31, 1994. Exhibit 1(a) 16 Form 10-Q for quarter ended June 30, 1994. Exhibit 6 1(a) 17 Form 10-Q for quarter ended September 30, 1994. Exhibit 6 (a1) 18 Form 10-Q for quarter ended September 30, 1994. Exhibit 6 (a2) 19 Form 10-Q for quarter ended September 30, 1994. Exhibit 6 (a3) 20 Form 10-Q for quarter ended September 30, 1994. Exhibit 6 (a4) 21 Report on Form 8-K dated January 14, 1995. Exhibit 1 22 Report on Form 8-K dated January 14, 1995. Exhibit 2 23 Report on Form 8-K dated January 14, 1995. Exhibit 3 24 Form 10-K for 1993. Exhibit 21 25 Form 10-K for 1994 Exhibit 10(q) 26 Form 10-K for 1994 Exhibit 10(r) 27 Form 10-K for 1994 Exhibit 10(s) 28 Form 10-K for 1995 Exhibit 10(t) 29 Form 10-K for 1995 Exhibit 10(u) 30 Form 10-K for 1995 Exhibit 10(v) 31 Form 10-Q for quarter ended June 30, 1996 Exhibit 10(w) 32 Report on Form 8-K dated September 30, 1996. Exhibit 10(x) 33 Report on Form 8-K dated September 30, 1996. Exhibit 10(y) (b) Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 1997 By: /s/ JuanPablo Cabrera Juan Pablo Cabrera Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Juan Pablo Cabrera Chief Executive Officer Juan Pablo Cabrera and Director (PrincipalExecutive Officer) March 28, 1997 /s/ Eric Williams Chief Financial Officer Eric Williams Principal Financial and Accounting Officer) March 28, 1997 /s/ Alejandro Cabrera Robles Director Alejandro Cabrera Robles March 28, 1997 /s/ Juan Carlos Rodriguez Director Juan Carlos Rodriguez March 28, 1997 /s/ Alejandro Portilla Garceran Director Alejandro Portilla Garceran March 28, 1997 /s/ Charles J. Chapman Director Charles J. Chapman March 28, 1997 /s/ Martin Goodman Director Martin Goodman March 28, 1997 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Shareholders M.G. Products, Inc. We have audited the accompanying consolidated balance sheets of M.G. Products, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of M.G. Products, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that M.G. Products, Inc. will continue as a going concern. As more fully described in Note 2, the Company has experienced recurring operating losses and cash flow shortages, causing the loss of a portion of its customer base and resulting in excess inventory. In addition, the Company must negotiate the refinancing of a portion of its borrowings and may be liable for significant future rental payments for closed facilities. These matters have significantly weakened the Company's financial position and its ability to purchase materials and meet current operating obligations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are more fully described in Note 2. 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. ERNST & YOUNG LLP San Antonio, Texas March 26, 1997 M.G. Products, Inc. Consolidated Balance Sheets December 31, 1996 1995 Assets Current assets: Cash $ 103,567 $1,011,755 Accounts receivable: Trade, net of allowance for doubtful accounts of $71,000 and $307,000 in 1996 and 1995, respectively 2,171,279 1,876,400 Related parties 379,786 250,514 Inventories: Raw materials 2,471,307 4,506,842 Work-in-process 94,354 688,391 Finished goods 1,904,145 3,669,301 Total inventories 4,469,806 8,864,534 Prepaid expenses and other current assets 708,006 624,001 Total current assets 7,832,444 12,627,204 Property and equipment at cost: Machinery and equipment 1,325,560 2,729,651 Vehicles 54,905 53,584 Furniture and fixtures 702,561 534,489 Leasehold improvements 536,270 1,196,021 2,619,296 4,513,745 Less accumulated depreciation and amortization 1,208,416 2,093,961 Net property and equipment 1,410,880 2,419,784 Inventory 887,179 - Other assets 798,325 1,033,792 Investment in joint venture 770,789 810,869 Total assets $11,699,617 $16,891,649 Liabilities and Shareholders'Equity (Deficit) Current liabilities: Accounts payable 2,594,710 2,994,152 Due to related parties 2,078,831 1,603,091 Deferred revenue 0 927,241 Accrued expenses and other current liabilities 703,133 1,151,943 Reserve for restructuring and other charges 613,083 1,292,403 Notes payable 4,064,683 3,161,844 Current portion of capital lease obligations 38,209 103,838 Pre-petition liabilities 317,231 465,828 Subordinated notes payable to shareholders 0 375,478 Total current liabilities 10,409,880 12,075,818 Revolving credit agreement 2,028,211 0 Capital lease obligations,less current portion 0 38,209 Commitments and contingencies Shareholders' equity (deficit): Common shares, no par value: Authorized shares - 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 (35,754,409) (28,235,171) Total shareholders' equity(deficit) (738,474) 4,777,622 Total liabilities and shareholders' equity(deficit) $11,699,617 $16,891,649 See accompanying notes. M.G. Products, Inc. Consolidated Statements of Operations Year Ended December 31, 1996 1995 1994 Net sales $21,327,178 $28,290,819 $48,726,719 Cost of sales 21,672,654 25,835,553 47,732,533 Gross profit (loss) (345,476) 2,455,266 994,186 Costs and expenses: Sales and marketing 1,469,421 3,550,048 8,219,606 General and administrative 3,571,405 5,560,499 7,158,131 Restructuring and other charges 1,667,306 1,500,000 0 6,708,132 9,110,547 16,877,737 Loss from operations (7,053,608) (6,655,281) (15,883,551) Other income (expense): Interest expense, net (727,912) (1,046,606 (739,711) Equity in earnings of joint venture 262,282 332,159 380,000 (465,630) (714,447) (359,711) Net loss $(7,519,238) $(7,369,728) $(16,243,262) Net loss per share $ (.65) $ (.78) $ (2.29) Number of shares used in computing per share amounts 11,484,714 9,447,856 7,102,361 See accompanying notes. M.G. Products, Inc. Consolidated Statements of Shareholders' Equity (Deficit) Common Shares Accumulated Shares Amount Deficit Total Balance at December 31, 1993 6,899,47 $24,004,860 $(4,622,181) $19,382,679 Issuance of common stock to CEO and shareholder for cash at $6.50 per share 461,539 2,990,773 0 2,990,773 Issuance of common stock for cancellation of indebtedness and capital contribution by shareholder 1,471,000 3,852,075 0 3,852,075 Net loss 0 0 (16,243,262) (16,243,262) Balance at December 31, 1994 8,832,010 30,847,708 (20,865,443) 9,982,265 Conversion of related party debt to common stock 1,732,068 2,165,085 0 2,165,085 Net Loss 0 0 (7,369,728) (7,369,728) Balance at December 31, 1995 10,564,078 33,012,793 (28,235,171) 4,777,622 Conversion of related party debt to common stock 3,642,076 2,003,142 0 2,003,142 Net Loss 0 0 (7,519,238) (7,519,238) Balance at December 31, 1996 14,206,154 $35,015,935 $(35,754,409) (738,474) See accompanying notes. M.G. Products, Inc. Consolidated Statements of Cash Flows Year Ended December 31, 1996 1995 1994 Operating Activities Net loss $(7,519,238) $(7,369,728 $(16,243,262) (16,243, Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in earnings of joint venture (262,282) (332,159) (380,000) Gain on sale of building 0 0 (74,726) Depreciation and amortization 244,860 900,148 1,182,655 Restructuring and other charges 1,667,306 0 1,500,000 Changes in operating assets and liabilities: Accounts receivable (472,193) 4,041,683 2,127,854 Inventories 2,185,722 5,064,953 (604,824) Prepaid expenses and other assets 85,437 (160,017) 1,132,977 Accounts payable (226,847) (2,707,592) 1,267,768 Deferred revenue (927,241) 927,241 0 Accrued expenses and other current liabilities 104,765 (1,004,275) (875,306) Due to related parties and other liabilities 1,109,555 1,295,235 (140,472) Net cash provided by (used in) operating activities (4,010,156) 655,489 (11,107,336) Investing Activities Purchases of property and equipment (27,606) (65,074) (1,532,008) Proceeds from sale of building 0 0 1,774,726 Dividends from investment in joint venture 302,362 183,550 140,714 Net cash provided by investing activities 274,756 118,476 383,432 Financing Activities Payments on capital lease obligations (103,838) (89,416) (52,599) Advances (payments) on notes payable, net 902,839 (1,355,066) 3,801,335 Advances on notes payable to shareholders 0 1,671,560 869,003 Advances on revolving credit facility 2,028,211 0 0 Advances on long-term debt 0 0 3,126,104 Issuance of common stock for cash 0 0 2,990,773 Net cash provided by financing activities 2,827,212 227,078 10,734,616 Net change in cash (908,188) 1,001,043 10,712 Cash at beginning of year 1,011,755 10,712 0 Cash at end of year $103,567 $1,011,755 $10,712 Supplemental disclosure of cash flow information: Interest paid $345,626 $765,060 $688,021 Schedule of noncash items: Conversion of related party debt to common stock 2,003,142 2,165,085 3,852,075 Transfer of furniture and fixtures to joint venture 0 477,225 0 Transfer of accrued expenses to joint venture 0 (84,000) 0 See accompanying notes. M.G. Products, Inc. Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 1. Summary of Significant Accounting Policies Description of Business M.G. Products, Inc. has two wholly owned subsidiaries which operate manufacturing facilities in Mexico (collectively referred to as the Company or M.G.). 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. 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. Substantially all of the products manufactured by Productos MG and Comercial Electrica were transferred to the U.S. entity for sale in the United States. As further described in Note 3, in December 1996, the Company ceased production in its Tijuana manufacturing facility. Much of the production from the Tijuana facility has been transferred to the Company's Monterrey facility. Currently, the Company purchases raw materials from both American and Mexican vendors. As of December 31, 1996, identifiable assets, primarily raw materials and machinery and equipment, of approximately $4,800,000 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 customer's financial condition, and collateral is generally not required. The following table summarizes the percentage of gross sales made to individual customers accounting for ten percent or more of the Company's consolidated gross sales: Year Ended December 31 1996 1995 1994 Customer A 74% 47% 39% Customer B 8% 21% 24% 82% 68% 63% 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. This practice ceased in 1996. 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 prepetition liabilities. Revenue Recognition Product sales revenue is recorded as products are shipped. StockBased 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. Accordingly, no compensation cost has been recognized in the financial statements for these 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. Co-op advertising expense paid to the Company's customers and charged to sales and marketing approximated $46,000, $315,000 and $1,700,000 in 1996, 1995 and 1994, respectively. 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 as their effect is anti-dilutive. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation. 2. Going Concern During the three 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 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 goods inventory and the Company may be liable for significant additional rents (see Note 3, 4 and 12). Due to its cash flow shortages, the Company continues to have difficulty obtaining long-term financing. In 1995, the Company entered into a factoring agreement with a financing company, in which all eligible accounts receivable were factored. This agreement was in effect until July 1996, at which time the Company obtained a new revolving credit facility with a different financing company (see Note 6). Under the revolving credit agreement, advances are limited to certain portions of the Company's accounts receivable and inventory. The Company's additional borrowings consist of a $2,000,000 note to a Mexican bank which is renewed on a 90 day basis at the discretion of the lender, and a $2,000,000 note to a U.S. bank which is presently guaranteed by certain interested parties and is due on demand or if no demand is made, on May 31, 1997. Management does not expect the guarantees to be renewed and therefore the note is unlikely to be extended on its due date causing a further liquidity shortage and potentially affecting the Company's relationship with its customers. In addition to the above borrowings, the Company has relied on advances from its major shareholders and parties related to such shareholders 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 excess manufacturing capacity in order to achieve more efficient distribution and manufacturing processes. 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 or find new sources of financing, must find new markets for much of its inventory, must successfully negotiate the termination of certain leases, and 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. 3. Restructuring And Other Charges Tijuana Plant Closing In December 1996, the Company ceased production in the Tijuana manufacturing facility operated by its subsidiary, Productos M.G. The Company closed the facility because it had been unsuccessful in decreasing costs to the level required for profitable operation. At the time of the closure, all employees were laid off in a manner consistent with Mexican labor laws. At December 31, 1996 the assets of Productos M.G. were insufficient to cover the liabilities of that operation, and Mexican officials have taken possession of all assets of the operation. Accordingly, restructuring and other charges have been recorded in the Company's financial statements to reflect the write-off of all assets of Productos M.G. The Company has assumed certain liabilities due its vendors, and these liabilities remain recorded in accrued expenses at December 31, 1996. The net loss related to this closing included in restructuring and other charges approximated $1,667,000. See further discussion in Note 12. Chula Vista Closing During 1995, the Company relocated its corporate offices from Chula Vista, California to San Antonio, Texas pursuant to its restructuring plan begun in December 1994. As a result of the relocation, the operating results for the year ended December 31, 1994 included restructuring and other charges of $1,500,000. This facility was occupied under a lease expiring in 2003, at an annual cost of approximately $600,000. Warehouse and distribution operations previously performed in California were to be relocated to the Company's existing warehouse and distribution facility in Memphis, Tennessee. Also included in the restructuring and other charges were the costs associated with the consolidation of the Company's two manufacturing facilities in Tijuana that occurred in December 1994. The restructuring and other charges were composed of approximately $970,000 for the estimated loss, net of subleasing revenue, of the Chula Vista facility and $140,000 for related broker commissions, $250,000 for the abandonment of the Chula Vista facility's leasehold improvements, and $140,000 for employee severance and other costs. During 1995 the landlord of the Company's Chula Vista facility alleged a breach by the Company under its lease agreement covering that facility. The Company was a defendant in a lawsuit filed in December 1995 with respect to this alleged breach of contract. In December of 1996, the Company settled the lawsuit with its former landlord. As a result of this settlement, the Company recorded a reduction of $930,000 in its reserve for restructuring and other charges. Other Charges During 1996, the Company's restructuring and other charges includes $945,000 for the elimination of the Company's in-store service group, closing of the Memphis warehouse and distribution facility with the related movement of the Company's finished goods inventory from Memphis to San Antonio, and the settlement of a lawsuit with a former employee (see Note 12). This charge represents current and future expenses related to employee termination's, lease commitments, write-off of leasehold improvements, lawsuit settlement, employee severance, and other costs. As of December 31, 1996, the remaining accrual of $178,000 related to these charges is recorded in the reserve for restructuring and other charges. At December 31, 1995 the reserve for restructuring and other charges was $1,292,000. During 1996 charges totaling $945,000 were recorded as described above. Also, actual payments of $694,000 were made by the Company, and an adjustment of $930,000 was recorded for the 1994 accrual for the Chula Vista closing. The balance for the reserve for restructuring and other charges at December 31, 1996 was $613,000. 4. Inventories Based on current sales levels, a significant portion of the Company's inventory at December 31, 1996 is in excess of the Company's current requirements. As discussed in Note 2, the Company has lost certain customers for which the inventory was originally produced. The Company is in the process of developing a program to reduce its inventory to desired levels over the near term and believes such products can be marketed to other purchasers in their current state or with minor modifications. The Company has recorded reserves of $981,000 and $756,000 at December 31, 1996 and 1995, respectively, against such inventory. Should the Company be unsuccessful in finding suitable purchasers for such products, additional losses may be incurred to dispose of the inventory. There can be no assurance that the Company will be successful in its efforts. At December 31, 1996, the Company had classified $887,000 net inventory as non-current based on managements estimate of 1997 sales activity. 5. Investment in Joint Venture The Company owns a 49.5% interest in Crest Fan Industries Taiwan Ltd., a Taiwanese Corporation. The joint venture manufactures ceiling fans and accessories. The Company accounts for this investment under the equity method. For years ending 1996, 1995, and 1994 the Company received cash distributions of approximately $302,000, $184,000 and $141,000, respectively. 6. Notes Payable And Revolving Credit Facility Notes Payable December 31, 1996 1995 Note payable to a Mexican bank, unsecured, guaranteed by certain shareholders, with interest at 11.875%; due June 30, 1997, renewable at the bank's discretion for additional 90-day periods $2,000,000 $2,000,000 Note payable to bank, unsecured, guaranteed by certain interested parties, with interest at prime (8.25% at December 31, 1996); due on demand or if no demand is made, on May 31, 1997. $2,000,000 0 Revolving note payable with a commercial financial company,secured by substantially all of the Company's assets 0 $1,161,844 Other $64,683 0 Total notes payable $4,064,683 $3,161,844 Until July 1996, the Company's revolving note payable had been with Heller Financial and provided for factoring of certain trade receivables. The receivables, upon approval of Heller Financial, were factored without recourse as to credit risk, but with recourse for any claims by the customer for adjustments in the normal course of business relating to pricing errors, shortages, damaged goods, etc. In July 1996, this agreement was terminated and the account settled with proceeds from the new revolving credit facility described below. Revolving Credit Facility 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% (9.75% at December 31, 1996). The Company's obligations under this agreement are guaranteed by Rooster Products International, Inc. (Rooster Products) and C&F Alliance, LLC.(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 $2,028,211 at December 31, 1996. All outstanding amounts under this facility are due in July 1999. In July 1996 CIT also finalized a long-term $10 million credit agreement (of which $9,500,000 is outstanding at December 31, 1996) with Rooster Products which is guaranteed by both Exportadora Cabrera SA de CV (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. All the Company's debt is floating rate or short- term in nature, and therefore carrying value approximates fair value. 7. Income Taxes The Company records income taxes under FASB Statement No.109. Under this method, deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company incurred an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), in November 1994. Accordingly, it is expected that the use of net operating loss carryforwards generated prior to December 1994, $21,600,000 will be limited to approximately $745,000 per year. At December 31, 1996, the Company had, subject to limitations discussed above, approximately $32,700,000 of net operating loss carryforwards for federal tax purposes, of which approximately $11,100,000 is available for utilization without limitation. The Company has approximately $6,400,000 in loss carryforwards for California purposes, of which no more than approximately $4,500,000 may be utilized before expiration due to limitations similar to those under Section 382. The Company has approximately $3,700,000 in loss carryforwards for Tennessee purposes. The loss carryforwards will begin expiring in 2005 and 1996, respectively, for federal and California income tax purposes unless previously utilized. An uncertainty exists on the future utilization of the operating loss carryforwards, the Company has established a valuation allowance of $13,416,000 and $11,012,000, which is equal to the deferred tax assets at December 31, 1996 and 1995, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows: 1996 1995 Deferred tax assets (liabilities): Reserves $2,170,000 $ 781,000 Deferred rent 111,000 109,000 Net operating loss carryforwards 11,124,000 10,196,000 Depreciation and amortization 11,000 (74,000) 13,416,000 11,012,000 Valuation allowance (13,416,000) (11,012,000) Net deferred tax asset $ 0 $ 0 8. Leases The Company leases its office and production facilities and certain equipment under noncancelable operating leases that expire in various years through 2003. The Company also leases certain computer software under a capital lease which expires in 1997. Future minimum payments under capital lease and, noncancelable operating lease agreements are as follows at December 31, 1996 Operating Capital Leases Leases 1997 $353,242 $ 39,691 1998 327,381 0 1999 311,332 0 2000 287,846 0 2001 300,000 0 Thereafter 125,000 0 $1,704,801 39,691 Amounts representing interest (1,482) Present value of net minimum lease payments 38,209 Less current portion (38,209) Long-term capital lease $ 0 Property and equipment includes $284,000 for leases that have been capitalized. Accumulated amortization on these assets is $253,000 and $158,000 at December 31, 1996 and 1995, respectively. Rent expense for the years ended December 31, 1996, 1995 and 1994 was approximately $1,200,000, $1,600,000 and $2,100,000, respectively. 9. Shareholders' Equity On September 30, 1996, the Company and Exportadora, the Company's majority shareholder, executed an exchange 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 at a price of $0.55 per share. This indebtedness included $1,326,000 of accounts payable to Exportadora and certain of its subsidiaries. It also included $371,000 of notes payable and $306,000 of interest accrued in 1995 and 1996 on advances made by Exportadora during 1995 that is due to Exportadora. Net loss per share, calculated on a supplemental basis, as if the debt to equity conversion had occurred as of the beginning of 1996 would have been $(0.52) for the year ended December 31, 1996 During 1995, the Company issued 600,000 shares of common stock at $1.25 each to its former chief executive officer in exchange for $750,000 of subordinated notes payable. Also, in 1995 the Company issued 1,132,068 additional shares of common stock at $1.25 per share to Exportadora in exchange for $1,415,085 of subordinated notes payable. During 1994, the Company issued $3,900,000 in subordinated notes payable to Exportadora. These notes were converted into 1,471,000 shares of the Company's common stock at $2.65 each in December 1994. Concurrent with the conversion of the debt, the Company's then chief executive officer sold Exportadora 1,000,000 shares of the Company's common stock at $0.10 each, which were owned by the chief executive officer, for $100,000. 10. Stock Option Plans The Company is authorized to issue 480,000 common shares of stock to certain key employees under nonqualified stock option plans (the Plans). Options granted under the Plans vest 25% per year. All options expire five years from the date of grant. Options are granted at prices equal to the fair market value of the shares at the date of grant. The Company is also authorized to issue 20,000 common shares to directors under a nonqualified stock option plan (the Plan). Options granted under this Plan vest immediately and are exercisable for five years from the date of grant. Options are granted at a price equal to the fair market value of the shares at the date of grant. The following is a summary of the activity in the stock option plans for the three years ended December 31, 1996: Average Number of Price Per Options Share Balance, December 31, 1993 $4.90 198,000 Granted 0 0 Exercised 0 0 Canceled 4.50 (93,500) Balance, December 31, 1994 4.75 104,500 Granted 2.50 437,000 Exercised 0 0 Balance, December 31, 1995 3.50 541,500 Granted 0 0 Exercised 0 0 Canceled 3.25 (54,000) Balance, December 31, 1996 $3.40 487,500 Options exercisable at December 31, 1996 $4.25 67,750 11. Certain Related Party Transactions Included in net sales for the years ended December 31, 1996, 1995 and 1994 are consigned sales for an entity which is owned by one of the Company's shareholders totaling approximately $14,000, $252,000 and $1,024,000, respectively. In the second quarter of 1995, the Company moved its corporate offices to San Antonio and formed the Alliance with 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. During 1996, the Company's share of the expenses incurred by the Alliance was $3,626,000 of which $1,215,000 has been included in sales and marketing expense and $2,411,000 has been included in general and administrative expenses in the consolidated statement of operations. At December 31, 1996, the Company owed the Alliance $1,126,000 for unreimbursed expenses. The following presents summary financial information of the Alliance for the periods ending December 31. 1996 1995 Current assets $1,181,000 $ 680,000 Equipment, furniture, fixtures and other, net 659,000 795,000 $1,840,000 $1,475,000 Current liabilities $1,018,000 $ 653,000 Equity 822,000 822,000 $1,840,000 $1,475,000 Sales and marketing expenses $2,484,000 $1,918,000 General and administrative expenses 4,790,000 3,001,000 Less: Amounts billed to M.G. Products, Inc. (3,626,000) (2,463,000) Amounts billed to Rooster Products International Inc. (3,648,000) (2,456,000) Net income $ 0 $ 0 Included in current assets on the Alliance's December 31, 1996 balance sheet is a receivable of $1,126,000 due from the Company, compared to $630,000 at December 31, 1995. During 1996 the Company provided warehousing, marketing and distribution services for S.A.F. Products ("SAF"), a manufacturer of lighting products owned and operated by Shannon A. Farrah, under a consignment agreement. Ms. Farrah, is the daughter of Patrick Farrah, the Company's former chief executive officer, and is the beneficiary of the Shannon A. Farrah Irrevocable Trust, a shareholder of the Company holding in excess of 5% of its issued and outstanding shares. This agreement was terminated in August of 1996, at which time a subsidiary of the Company purchased substantially all of the assets of SAF for $60,000. During 1996 and 1995, the Company contracted with SAF to manufacture some of the Company's lighting fixtures at a cost of approximately $58,000 and $530,000, respectively. At December 31, 1996, the Company owed SAF $250,000 in connection with the contract manufacturing work, compared to $396,000 during 1995. In 1996, the Company directly received several short term noninterest-bearing working capital advances from Rooster Products totaling $140,000 compared to $60,000 in 1995. No amounts were outstanding and payable as of December 31, 1996. In addition, the Company sold $909,000 and $1,074,000 in 1996 and 1995, respectively, of its products to Rooster Products for resale to Rooster's customers. Rooster Products owed the Company $348,000 and $250,000 at December 31, 1996 and 1995, respectively, pursuant to these sales of product. The Company also purchased goods and services from several subsidiaries of Exportadora totaling approximately $2,140,000 during 1996 and $416,000 in 1995. The balance owed to these subsidiaries at December 31, 1996 is approximately $548,000, compared to $177,000 in 1995. 12. Contingencies Employee Lawsuit An action was filed as of April 19, 1995 against the Company by a former employee in the Superior Court for the County of San Diego, California. This action sought compensatory and punitive damages for breach of contract and sex, racial and national origin discrimination, among other allegations. In July 1996, the Company was successful in settling this suit for a sum of less than 5% of the Company's current assets at June 30, 1996. The full effect of this settlement is recorded in the Company's financial statements. Tijuana Plant Closing and Related Uncertainties 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. The decision was made to close the Productos M.G. plant since the Company has been unsuccessful in reducing plant overhead to an acceptable level, and because of reduced sales volumes which reduced the economic viability of maintaining two separate production facilities. The machinery and equipment and remaining inventory of Productos M.G. are in the possession of the union, and legal action has been taken by the union to recover amounts owed to the plant workers and the union through the sale of the equipment and inventory. The Company's Mexican counsel has advised the Company that they should surrender the assets to satisfy the amounts owed to the workers and the union. Accordingly, the Company has written off the remaining inventory and fixed assets of Productos M.G. Additionally, the Company wrote off all payroll related liabilities to the workers and the union totaling approximately $419,000. This resulted in a net loss of approximately $1,667,000, included in Restructuring and other charges (see further discussion in Note 3). The Company and its counsel believe the remaining liabilities of Productos M.G. must be repaid, accordingly accruals remain for the other liabilities of Productos M.G., primarily lease obligations guaranteed by the Company, and amounts payable to raw material vendors in Mexico and the United States. 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 nonpayment of rent. The Company has filed a countersuit alleging impropriety of the dollar-based contract under Mexican law. The Company has accrued rent totaling of $436,000 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 the amount accrued will not be incurred. 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. Memphis Closure As described in Note 3, the Company's ceased distribution from its Memphis warehouse and is in negotiations with the lessor and a leasing agent to sub-lease the warehouse. The Company has accrued rent of $176,000 through April 1997; however the lease term extends through May 31, 2001, representing an additional rental contingency of $922,500. The ultimate resolution of this matter, which is expected to occur within one year, is not expected to result in a loss in excess of the Company's accrual which is included in the reserve for restructuring in other charges. However, there can be no assurance that the Company will be successful in obtaining a sub-lease, or that a loss greater than the current accrual will not be incurred. 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. 13. Valuation and Qualifying Accounts Balance Charged Charged to Balance at Beginning Costs and Other Deduc- end of of Period Expenses Accounts tions Period Description Year ended December 31, 1996: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 307,053 $ 22,871 $ 0 $259,177(1) $ 70,747 Inventory Reserve 756,171 224,432 0 0(2) 980,603 Reserve and allowances recorded as a liability: Customer deductions 409,534 1,446,703 0 1,568,361(3) 287,876 Total $1,472,758 $1,694,006 0 $1,827,538 $1,339,226 Year ended December 31, 1995: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 551,223 $ 227,317 $ 0 $ 471,487(1)$ 307,053 Inventory reserve 1,220,040 0 0 463,869(2) 756,171 Reserves and allowances recorded as a liability: Customer deductions 1,016,900 2,532,094 0 3,139,460(3) 409,534 Total $2,788,163 $2,759,411 $ 0 $4,074,816 $1,472,758 Year ended December 31, 1994: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 204,894 $296,466 $49,863 $ 0(1)$ 551,223 Inventory reserve 0 1,543,040 0 323,000(2) 1,220,040 Reserves and allowances recorded as a liability: Customer deductions 893,116 4,935,399 0 4,811,615(3) 1,016,900 Total $1,098,010 $6,774,905 $49,863 $5,134,615 $2,788,163 (1) Uncollectible accounts written off, net of recoveries (2) Inventory sales below cost on items previously reserved (3) Deductions taken at time of payment
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