[ARTICLE] 5
<TABLE>
<S> <C>
[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)
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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:
<CAPTION>
Years ended December 31,
1996 1995 1994
<S> <C> <C> <C>
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.
<CAPTION>
High Low
<S> <C> <C>
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".
<CAPTION>
Year ended December 31, 1996 1995 1994 1993 1992
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
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.
<CAPTION>
Percentage of Net Sales
1996 1995 1994
<S> <C> <C> <C>
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.
<CAPTION>
Director Shares of
Name Age Since Common Stock
Owned Percentage
<S> <C> <S> <C> <C>
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%
<FN>
* 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 $100,000 during such period.
<CAPTION>
SUMMARY COMPENSATION TABLE
Long- Term Compensation
Annual Compensation Awards Payouts
Other Restricted Securities All
Name and Annual Stock Underlying LTIP Other
Principal Salary Bonus Comp. Award(s) Options/ Payouts Comp
Position Year ($) ($) ($) ($) SAR's (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.
<CAPTION>
Total Shareholder Returns
Base Period December 31,
June 22, 1993 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
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.
<CAPTION>
Common Stock Beneficially
Name and Address Owned(1)(2)
of Beneficial Owner (2) Shares Percent
<S> <C> <C>
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
<FN>
(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:
<CAPTION>
Document filed by M.G. Products, Exhibit
Note Inc. or its Predecessor to Designation
Reference which Cross reference is Made in such document
<S> <S> <S>
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
<CAPTION>
M.G. Products, Inc. Consolidated Balance Sheets
December 31, 1996 1995
<S> <C> <C>
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
<FN>
See accompanying notes.
<CAPTION>
M.G. Products, Inc. Consolidated
Statements of Operations
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
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
<FN>
See accompanying notes.
<CAPTION>
M.G. Products, Inc. Consolidated
Statements of Shareholders' Equity (Deficit)
Common Shares Accumulated
Shares Amount Deficit Total
<S> <C> <C> <C> <C>
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)
<FN>
See accompanying notes.
<CAPTION>
M.G. Products, Inc. Consolidated Statements of Cash Flows
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
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
<FN>
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:
<CAPTION>
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
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
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
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:
<CAPTION>
1996 1995
<S> <C> <C>
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
<CAPTION>
Operating Capital
Leases Leases
<S> <C> <C>
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:
<CAPTION>
Average Number of
Price Per Options
Share
<S> <C> <C>
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.
<CAPTION>
1996 1995
<S> <C> <C>
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
<CAPTION>
Balance Charged Charged to Balance at
Beginning Costs and Other Deduc- end of
of Period Expenses Accounts tions Period
<S> <C> <C> <C> <C> <C>
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
<FN>
(1) Uncollectible accounts written off, net of recoveries
(2) Inventory sales below cost on items previously reserved
(3) Deductions taken at time of payment
</TABLE>
