<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1995
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: 0-17458
MBf USA, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1326131
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Park Boulevard, Suite 1260
Itasca, IL 60143
(Address of principal executive offices) (Zip Code)
(708) 285-9191
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's Common Stock, par value $.01 per
share, and issuer's Series A Convertible Common Stock par value $.01 per share,
outstanding as of September 30, 1995 and October 30, 1995 were 10,947,247 and
12,525,374, respectively and 16,007,951 and 12,525,374, respectively.
<PAGE> 2
MBf USA, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets
September 30, 1995 (unaudited) and December 31, 1994 . . . . . . . . pg. 1
Consolidated Statements of Operations (unaudited) for
the Three Months Ended September 30, 1995 and 1994 . . . . . . . . . pg. 3
Consolidated Statements of Operations (unaudited) for
the Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . pg. 4
Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . pg. 5
Notes to the Interim Consolidated
Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . pg. 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . pg. 11
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . pg. 16
<PAGE> 3
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 20,250 $ 96,096
Accounts receivable - trade, net of allowance for
doubtful accounts of $51,091 in 1995 and
$144,009 in 1994 5,445,361 4,142,297
Note receivable from affiliate - 1,500,000
Inventories 9,174,150 7,377,808
Prepaid expenses 423,457 295,555
Other current assets 184,223 -
---------- ----------
Total current assets 15,247,441 13,411,756
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Building improvements 21,744 21,744
Equipment, furniture and fixtures 463,738 281,830
---------- ----------
Total property, plant and equipment 485,482 303,574
Less - Accumulated depreciation (198,498) (131,478)
---------- ----------
Property, plant and equipment, net 286,984 172,096
---------- ----------
INVESTMENT IN LSAI 1,059,367 1,059,367
---------- ----------
NET ASSETS OF DISCONTINUED SUBSIDIARY - 209,111
---------- ----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$308,491 in 1995 and $236,222 in 1994 1,441,509 1,494,680
Trademarks and license rights, net of accumulated
amortization of $41,477 in 1995 and $36,532
in 1994 311,184 380,242
Due from affiliates/shareholders 1,459,538 1,232,830
Other assets 115,728 533,689
---------- ----------
Total other assets 3,327,959 3,641,441
---------- ----------
$ 19,921,751 $ 18,493,771
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
-1-
<PAGE> 4
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1995 December 31,1994
------------------ ----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Trade notes payable to bank $ 1,369,900 $ 1,201,315
Notes payable and current portion of
long-term obligations 2,703,542 3,300,000
Accounts payable - trade 5,813,134 220,893
Due to affiliates/shareholders 2,490,853 5,848,700
Accrued expenses 1,104,326 946,515
----------- -----------
Total current liabilities 13,481,755 11,517,423
----------- -----------
LONG-TERM OBLIGATIONS 6,463,125 2,300,000
----------- -----------
DUE TO AFFILIATE 775,732 765,232
----------- -----------
SHAREHOLDERS' EQUITY:
Series A common stock, $.01 par value, 12,525,374
shares authorized, 12,525,374 shares issued
and outstanding 125,253 125,253
Common stock, $.01 par value, 40,000,000 shares
authorized, 12,247,427 and 12,242,477 shares
issued in 1995 and 1994, respectively 122,475 122,425
Additional paid-in capital 4,973,195 4,970,294
Retained Earnings (Deficit) (4,696,748) 16,180
Less - Common stock in treasury at cost
1,300,000 shares in 1995 and 1994 (1,323,036) (1,323,036)
----------- -----------
Total shareholders' equity (798,861) 3,911,116
----------- -----------
$ 19,921,751 $ 18,493,771
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
-2-
<PAGE> 5
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
--------------------------
1995 1994
---------- -----------
(Unaudited)
<S> <C> <C>
REVENUES:
Product sales, net $ 12,246,069 $ 9,488,701
Interest 22,429 18,750
Commission income - affiliates - -
Other 70,208 684
---------- -----------
Total revenues 12,338,706 9,508,135
---------- -----------
COSTS AND EXPENSES:
Cost of product sales 11,318,089 7,428,878
Selling, general and administrative 1,079,429 1,533,560
Restructure charge - -
Depreciation and amortization 77,934 54,396
Interest 301,061 94,030
---------- -----------
Total costs and expenses 12,776,513 9,110,864
---------- -----------
Income (loss) from continuing
operations before income
from investment and provision
for income taxes (437,807) 397,271
INCOME FROM INVESTMENT IN LSAI -
---------- -----------
Income (loss) from continuing
operations before provision for
income taxes (437,807) 397,271
PROVISION FOR INCOME TAXES -
---------- -----------
Income (loss) from continuing
operations (437,807) 397,271
DISCONTINUED OPERATIONS OF SUBSIDIARY 20,487 16,550
---------- -----------
Net Income (Loss) $ (417,320) $ 413,821
========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING 23,472,801 26,046,846
========== ===========
NET INCOME (LOSS) PER COMMON STOCK
AND COMMON STOCK EQUIVALENT $ (0.02) $ 0.02
</TABLE> ========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-3-
<PAGE> 6
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
--------------------------
1995 1994
---------- -------------
(Unaudited)
<S> <C> <C>
REVENUES:
Product sales, net $ 32,045,749 $ 25,891,849
Interest 87,158 46,143
Commission income - affiliates - 10,872
Other 136,776 41,654
---------- -------------
Total revenues 32,269,683 25,990,518
---------- -------------
COSTS AND EXPENSES:
Cost of product sales 28,949,743 20,912,649
Selling, general and administrative 5,163,225 3,559,913
Restructure Charge 1,954,591 -
Depreciation and amortization 194,954 121,209
Interest 652,366 240,129
---------- -------------
Total costs and expenses 36,914,879 24,833,900
---------- -------------
Income (loss) from continuing
operations before income from
investment and provision for
income taxes (4,645,196) 1,156,618
INCOME FROM INVESTMENT IN LSAI - 79,374
---------- -------------
Income (loss) from continuing
operations before provision for
income taxes (4,645,196) 1,235,992
PROVISION FOR INCOME TAXES - -
---------- -------------
Income (loss) from continuing
operations (4,645,196) 1,235,992
DISCONTINUED OPERATIONS OF SUBSIDIARY (67,732) 136,819
---------- -------------
Net Income (Loss) $ (4,712,928) $ 1,372,811
========== =============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING 23,472,801 26,218,566
========== =============
NET INCOME (LOSS) PER COMMON STOCK
AND COMMON STOCK EQUIVALENT $ (0.20) $ 0.05
</TABLE> ========== =============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-4-
<PAGE> 7
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
------------------------
1995 1994
---------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (4,712,928) $ 1,372,811
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation 72,539 38,358
Amortization 122,417 67,151
Provision for doubtful accounts 10,500 63,670
(Gain) loss from discontinued operations
of subsidiary 67,732 (136,819)
(Gain) loss on sale of fixed assets (5,519) -
(Income) from investment in LSAI - (79,374)
Changes in certain assets and liabilities:
Accounts receivable - trade (1,313,564) (283,431)
Inventories (1,796,342) (1,158,523)
Prepaid expenses (127,902) (311,294)
Other current assets (184,223) -
Accounts payable - trade 5,592,241 (297,508)
Accrued expenses 157,811 307,922
Other assets 417,773 -
---------- ---------
Net cash provided by (used in) operating
activities (1,699,465) (417,037)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (181,908) (88,443)
Expenditures for other assets - (239,672)
Advances from Laboratory Specialists, Inc. - 958,525
Investment In Subsidiary - -
Advances from discontinued subsidiary 141,379 704,267
---------- ---------
Net cash (used in) provided by investing
activities (40,529) 1,334,677
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amounts due (from) to affiliates / shareholders (2,074,055) 2,921,198
Net borrowings (payments) on trade notes
payable to bank 168,585 (4,490,661)
Proceeds from notes payable 3,650,000 1,184,600
Net proceeds from warrant / stock exercises 2,951 461,980
Purchase of treasury stock - (1,323,036)
Payments on notes payable (83,333) (150,000)
Net cash (used in) provided by financing ---------- ---------
activities 1,664,148 (1,395,919)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (75,846) (478,279)
---------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 96,096 580,191
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 20,250 $ 101,912
========== =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-5-
<PAGE> 8
MBf USA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
1. Basis of Presentation:
On February 27, 1992, the shareholders of American Drug Screens, Inc. (an
Oklahoma corporation which changed its name on May 21, 1993 to MBf USA, Inc.,
"the Company") approved a transaction (the "Share Exchange") whereby the
shareholder of American Health Products Corporation (a Texas corporation,
"AHPC") acquired control of the Company through a series of integrated
transactions, including (a) the increase in authorization of the Company's
Common Stock, par value $.01 per share ("Common Stock") from 20,000,000 to
40,000,000, and the authorization of 12,525,374 shares of a new Series A
Convertible Common Stock, par value $0.01 per share ("Series A Common Stock"),
(b) the acquisition through a wholly=owned subsidiary of the Company of all the
issued and outstanding shares of common stock of AHPC from MBf International,
Ltd., a Hong Kong corporation and the majority shareholder of the Company ("MBf
International"), in exchange for 12,525,374 shares of Series A Common Stock;
and (c) the restructuring of the Board of Directors by creating two classes of
Directors. Accordingly, the transaction has been accounted for as a purchase.
The unaudited consolidated financial statements have been prepared for
interim periods only and do not include all of the information and note
disclosures required by generally accepted accounting principles. These
consolidated statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1994. The accompanying
consolidated financial statements have not been examined by independent
accountants in accordance with generally accepted accounting standards, but in
the opinion of management, such consolidated financial statements include all
adjustments necessary to fairly present the Company's financial position,
results of operations and cash flows. The results of operations for the three
month period ended September 30, 1995 may not be indicative of the results that
may be expected for the year ended December 31, 1995.
2. Description of Business:
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries AHPC and Premier Latex, Inc., which is
currently inactive. All significant intercompany transactions have been
eliminated. The Company and its subsidiaries market medical examination gloves
in the U.S., and Playboy brand condoms internationally.
Effective December 31, 1993, the Company adopted a plan to discontinue
operations and liquidate its wholly-owned subsidiary, Disposable Garments, Inc.
("DGI"). DGI, through its supply and requirements agreement with Disposable
Medical Products, Inc. ("DMP"), distributed disposable medical garments to
unaffiliated customers.
Accordingly, DGI is reported as a discontinued operation in the
accompanying consolidated financial statements. There were no assets of the
discontinued subsidiary at September 30, 1995.
-6-
<PAGE> 9
Laboratory Specialists, Inc. ("LSI") is an independent drug testing
laboratory which provides analysis for detection of illegal drug use by
employees and prospective employees. All of the outstanding common stock of
LSI was acquired by the Company in 1989.
On April 18, 1994, the Company consummated an agreement to transfer its
common stock investment in LSI to its President and former owner in exchange
for the return of the Company's 1,300,000 shares of Common Stock held by him.
Just prior to the consummation of the sale, LSI declared a cash dividend of
$75,000, a non-cash dividend forgiving amounts due from the Company of
approximately $545,000 and a dividend of 706,244 shares of cumulative,
redeemable, convertible preferred stock of LSI with an interest rate equal to
the prime rate. Additionally, the Company transferred its rights and all
related assets in its drug testing kit to LSI in exchange for a note payable to
the Company in the principal amount of $353,123 and an obligation to pay
royalties on related product sales for a period of five years. The return of
the Company's Common Stock has been accounted for as the acquisition of
treasury stock and, therefore, no gain or loss was recognized.
In August 1994, the Company agreed to exchange its 706,244 shares of
preferred stock in LSI valued at $706,244 for 239,405 shares of common stock of
a newly formed corporation, Laboratory Specialists of America, Inc. ("LSAI"),
contingent upon LSAI successfully completing an initial public offering
("IPO").
The investment in LSAI on the balance sheet at September 30, 1995 is
composed of the note receivable from LSAI of $353,123 and the common stock
investment in LSAI, at cost, of $706,244.
In September, 1994, LSAI successfully completed its IPO of 1,200,000
shares of common stock, which stock currently trades under the symbol ("LABZ")
on the NASDAQ SmallCap Market. The Company has agreed not to sell its 239,405
shares of LSAI common stock prior to July 8, 1996 without the prior consent of
LSAI and certain of its officers and directors. Thereafter, such shares of
common stock will be eligible for sale under Rule 144.
The Company's investment in the publicly traded stock of LSAI is accounted
for as "available for sale" securities in compliance with the provisions of the
Statement of Financial Accounting Standards No. 115 (SFAS 115). On September
30, 1995, the Company's common stock investment in LSAI had a market value of
$778,066. The increase in the investment and shareholders' equity has not been
recorded as of September 30, 1995 due to certain restrictions on the sale of
the stock and since the increase is not materially greater than the cost of the
investment.
As the Company's operations will no longer include the drug testing
business, the accompanying consolidated financial statements present the
Company's investment in, and results of operations from, LSI for 1994 on an
unconsolidated basis.
3. Accounting for Income Taxes:
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No.109("SFAS 109"). SFAS 109 utilizes the liability
method and deferred taxes are determined based on the estimated future tax
effects of differences between the financial
-7-
<PAGE> 10
statement and tax basis of assets and liabilities given the provisions of
enacted tax laws. Deferred income tax provisions and benefits are based on the
changes in the deferred tax asset or tax liability from period to period.
The effective income tax rates differ from the statutory federal income
tax rate of 34% at September 30, 1995 and 1994. The sources and tax effects of
the differences are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Tax expense (benefit) at
statutory rate of 34% $(1,602,395) $326,057
Goodwill amortization 72,269 8,000
Increase in deferred tax asset
valuation allowance 1,530,126 -
Utilization of Net Operating
Loss Carry forwards - (334,057)
------------ ---------
Provision for income taxes $ -0- $ -0-
============ =========
</TABLE>
The Company had net operating loss carry forwards ("NOLs") at December 31,
1994 of approximately $1,300,000, which were available to reduce Federal
taxable income in future periods and will begin expiring in 2003. In
accordance with Federal tax regulations, usage of NOLs is subject to
limitations in future years if certain ownership changes occur. Such ownership
changes occurred with the transactions described in Note 1. Because of these
factors, the utilization of the NOLs generated prior to December 31, 1994 may
be significantly limited. The Company has generated additional NOLs of
approximately $4.7 million in the first nine months of 1995.
4. Restructure Charge:
In the second quarter of 1995, the Company incurred a restructuring charge
which included the resignation of and severance payments to the Chairman/CEO,
President/COO, and CFO. The Board of Directors directed the Company to focus
on its core businesses and to exit the nutritional product business, where
sales were negligible, and the entry costs were very high which contributed to
significant losses.
Key components of the restructure charge were costs related to the exit of
the nutritional product business, executive management personnel severance, and
the closing of the executive office in New Jersey. The charge includes
provisions for work force reductions, the write down of intangible and other
assets, costs associated with the removal of the nutritional vitamin product
lines, and other costs associated with the execution of the restructure. The
restructuring charge resulted in a one-time charge of $1,954,591 in the second
quarter of 1995.
5. Contingencies:
Over the last several years, numerous product liability lawsuits have been
filed against suppliers and manufacturers of powdered latex gloves alleging,
among other things, adverse allergic reactions. AHPC is one of numerous
defendants that have been named in such lawsuits
-8-
<PAGE> 11
and to date has been named and served in five (5) actions. While the damages
claimed are substantial, the Company believes its exposure in these lawsuits is
mitigated by (i) the fact that it does not manufacture any of the products that
are the subject of the lawsuits; and (ii) warnings which accompany such
products. In any event, because the Company carries product liability
insurance with $2,000,000 of coverage for the payment of any indemnity or
judgments, the Company believes that its risk of exposure is limited. However,
it is not feasible to predict the ultimate outcome of litigation.
6. Subsequent Events:
On August 16, 1995, MBf International, Ltd., the majority shareholder of
the Company and a wholly owned subsidiary of MBf Holdings Sdn. Bhd. ("MBf
Holdings"), announced that it had executed an agreement with Perusahaam Intan
Emas Sdn Bhd ("PIE") for the sale of its subsidiary, MBf Health Sdn. Bhd. ("MBf
Health") for MR$3,000,000 or approximately US$1,250,000 to be paid in three
equal yearly installments, subject to MBf Holdings' option to repurchase the
issued shares. In connection with the sale, an agreement has been executed
between MBf Health and AHPC calling for the purchase of product by AHPC
according to a predetermined formula.
The Company purchases the majority of its powdered latex examination
gloves from the MBf Health factory. MBf International and its parent, MBf
Holdings, have indicated that they expect a new, Indonesian latex glove plant,
PT MBf Buana Multicorpora, an Indonesian company ("MBf Rubber"), to be
operational in December of 1995. The Company intends to continue to purchase
its powdered latex examination gloves from MBf Health and to purchase
non-powdered gloves from other sources. The Company does not expect the sale
of MBf Health to have an impact on its operations. Since the MBf Health
factory is not considered to be a related party subsequent to August 16, 1995,
the liability to MBf Health was reclassified from due to affiliates to the
trade payable liability at September 30, 1995.
The restructuring expense in the second quarter ended June 30, 1995
created a deficiency in the Company's capital and surplus of approximately
$1.38 million. Nasdaq Stock Market, Inc. notified the Company of the default
in August 1995, but subsequently in October 1995, granted an exception from
delisting after certain submissions and oral representations were provided.
The temporary exception granted by Nasdaq is conditioned on the Company
taking the steps set forth below to enable the Company to comply with the
minimum capital and surplus requirements in the future.
MBf International loaned $1,200,000 to the Company to pay for AHPC 7%
Cumulative Preferred Stock having a value of $1,200,000 which the Company had
previously purchased effective as of September 29, 1995. MBf International
agreed to accept shares of the Company's Common Stock having a value of
$1,200,000 in satisfaction of the Company's indebtedness to MBf International,
which transaction was effective as of October 30, 1995.
The Company also entered into a Stock Acquisition Agreement with MBf
International dated as of October 30, 1995 whereby MBf International exchanged
its beneficial interest in 1,365 shares of common stock (par value equivalent
to $1,000 US Dollars each) of MBf Rubber which shares were held in trust by MBf
Holdings for the benefit of MBf International
-9-
<PAGE> 12
(representing seventy percent (70%) of the outstanding common stock of MBf
Rubber) and a non-interest bearing demand note in the principal amount of
$737,769 (the "Note") which Note is expected to be outstanding for three years
and is guaranteed by MBf Holdings for 2,550,720 shares of the Company's Common
Stock having an aggregate value of $1,219,563. The transaction closed on
October 30, 1995.
The Company has filed a proxy statement with the Securities and Exchange
Commission in which it has recommended to its Shareholders that the Company
reincorporate in Maryland in part to benefit from franchise tax and corporate
governance provisions of the Maryland Statutes and in part to effect a
conversion of the Company from an Oklahoma corporation to a Maryland
corporation. In connection with the reincorporation, if approved, the Company
would effect a ten for one reverse stock split of its Series A Common Stock and
Common Stock. As a result, each Shareholder will receive one share of common
stock of the Company successor, a Maryland corporation subsequent to the
merger, for every ten shares of Series A Common Stock or Common Stock currently
held by such Shareholder. Additionally, the Common Stock underlying all of the
Company's outstanding warrants and options will be adjusted to reflect the ten
for one reverse stock split.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Total revenues for the quarter ended September 30, 1995 were $12,338,706
compared to $9,508,135 for the same period in 1994, an increase of 29.8%.
Total revenues for the nine months ended September 30, 1995 were $32,269,683
compared to $25,990,518 for the same period in 1994, an increase of 24.2%.
For the three months ended September 30, 1995, total revenues include
sales of $11,574,649 from the Company's latex exam glove product line sold by
AHPC and $671,420 from the Playboy condom product line. Sales of exam gloves
and Playboy condoms for the comparable period in 1994 were $9,409,051 and
$79,650, respectively.
For the nine months ended September 30, 1995, total revenues include glove
sales of $30,337,370 and condom sales of $1,708,379. Sales of gloves and
condoms for the comparable period in 1994 were $25,358,531 and $533,318,
respectively.
The increased sales volume at AHPC in both the three and nine month
periods is attributable to more developed customer relationships and the
fulfillment of customers' quantity requirements. The Company has increased its
glove inventory levels which has allowed glove sales to increase by 23% in the
third quarter of 1995 as compared to the same period in 1994.
The increase in sales of Playboy condoms in both the three and nine month
periods is attributable to the expansion of the Playboy condom distribution
channels. Currently, the Company has signed distribution agreements in 18
countries compared to two agreements which were signed at September 30, 1994.
-10-
<PAGE> 13
The Company is currently in negotiation to establish Playboy condom
distribution channels in Spain and Portugal and other countries in Asia and
Latin America. However, there can be no assurances as to the opening or timing
of these markets.
The prices charged by MBf Health, the Company's principal glove supplier,
to AHPC during the first and second quarter of 1995 were approximately 19%
higher than the effective net prices charged to AHPC during the comparable
periods in 1994 due to the increased prices of latex raw materials. Effective
September 1, 1995, the price of latex stabilized and the Company obtained a 6%
reduced purchase price from MBf Health. The new purchase price is
approximately 12% higher than the comparable period in 1994. This has caused
an erosion of gross profit margin on glove sales. The Company has increased its
glove sales price to customers and is contemplating further sales price
increases.
The Company has increased glove inventory levels to enable the Company to
meet its customer quantity requirements. During the first nine months of 1995,
two of AHPC's customers accounted for approximately 49% of glove sales. The
loss of either of such customers of AHPC would have an adverse material effect
on the Company.
Cost of goods sold as a percentage of sales for the three and nine month
periods ended September 30, 1995 were 92.4% and 90.3%, respectively, compared
to 78.3% and 80.8% respectively, for the comparable period in 1994. The
increase in cost of sales as a percentage of sales is attributable to the
higher purchase price charged by MBf Health to AHPC for latex materials coupled
with the inability of AHPC due to competitive market conditions to pass on to
its customers the entire price increase.
Selling, general and administrative expenses increased from $3,559,913 for
the nine months ended September 30, 1994 to $5,163,225 for the same period in
1995. The increase is attributable to higher costs associated with the
introduction and launch of Playboy condoms in new and established countries,
an increase in selling expenses at AHPC commensurate with its growth, and
expenses associated with the Company's start up of nutritional product and
vitamin lines in 1995.
The selling, general and administrative costs decreased to $1,079,429 for
the three months ended September 30, 1995 from $1,583,560 for the same period
in 1994. This reduction is due to staffing cuts, the closing of the New Jersey
office, and the elimination of costs associated with the nutritional business.
In June 1995, the Company incurred a restructuring charge resulting in
part from the resignation of the Chairman/CEO, President/COO, and CFO. The
Board of Directors directed the Company to focus on its core businesses and to
exit the nutritional products business, where sales were negligible and the
entry costs were very high contributing to significant losses. Furthermore,
the use of AHPC's cash flow for the nutritional products start up was limiting
AHPC's ability to purchase glove inventory.
Key components of the restructure charge were costs related to the exit of
the nutritional product business and executive management changes. The charge
included provisions for personnel severance and work force reductions, the
write down of intangible and other assets, costs associated with the removal of
the nutritional vitamin product lines, and other costs
-11-
<PAGE> 14
associated with the execution of the restructure. The restructuring resulted
in a one-time charge of $1,954,591 in the second quarter of 1995.
Interest expense increased from $240,129 for the nine months ended
September 30, 1994 to $652,366 for the same period in 1995. The increase is
attributable to (i) higher levels of borrowing and debt in 1995 compared to
1994, in large part to fund expenses associated with terminated operations,
(ii) to a lesser extent, increases in the prime rate, and (iii) a $75,000
guarantee fee charged by MBf Holdings in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had a working capital surplus of
$1,765,686 compared to a $1,894,333 surplus at December 31, 1994. The decrease
in working capital is primarily attributable to the restructure charge incurred
in the second quarter of 1995, offset by an increase in inventory levels and
account receivables, and the reclassification of debt from current to long-term
in accordance with the August 16, 1995 amended bank loan agreement as discussed
below.
On March 29, 1995, Bank Bumiputra Malaysia Berhad ("BBMB") modified and
extended AHPC's credit lines until October 31, 1997. The credit facility of
$13,000,000 was comprised of a revolving line of credit of $6,000,000, a letter
of credit facility for $2,000,000, and a $5,000,000 term loan. This term loan
availability expired in the second quarter 1995 as it was limited to use in
connection with the acquisition of the MBf Health manufacturing facility.
Due to losses incurred at AHPC for the period ended March 31,1995, the
Company was in violation of its minimum net worth covenant of its BBMB loan for
its AHPC subsidiary at March 31,1995.
At June 30, 1995, AHPC was in violation of additional BBMB financial
covenants including its minimum net worth, interest coverage ratio, leverage
ratio, and fixed charge leverage ratio. Due to these financial covenant
violations, BBMB suspended additional borrowing and letter of credit financing
with AHPC during June 1995.
On August 16, 1995, the Company amended its credit facility loan
agreement with BBMB which allowed for AHPC to begin utilization of an amended
BBMB credit facility. The amended credit facility waives certain of the
financial covenant requirements until December 31, 1996. The amended BBMB
agreement (i) decreases the revolving line of credit from $6,000,000 to
$1,600,000, (ii) decreases the letter of credit commitment from $1,800,000 to
$1,400,000, (iii) decreases the standby letter of credit commitment from
$200,000 to $100,000 and deletes the term loan commitment. It transfers
$4,825,000 of the outstanding revolving line of credit balance into a new
non-revolving Converted R.C. Commitment, which along with the amounts described
above, are evidenced by a single credit note in the aggregate amount of
$7,925,000. The Converted R.C. Commitment portion of the amended credit note
requires quarterly principal payments totaling $482,500 in 1996 and $723,750 in
1997 and therefore, the majority of the Committed R.C. Loan was reclassified to
long-term debt at September 30, 1995. The Company may increase the revolving
line of credit up to $2,000,000 as principal payments are made on the Converted
R.C. Commitment. The Company was obligated to make a capital contribution to
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<PAGE> 15
AHPC in an amount sufficient to cause its net worth to be $3,000,000 which it
has achieved by issuance of AHPC preferred shares to the Company in the amount
of $1.2 million.
The line of credit bears interest at three percent (3%) over prime. The
entire facility, which is guaranteed by MBf Holdings, is secured by accounts
receivable and inventory and is governed by specific financial covenants and
ratios. At December 31, 1994, $3,175,000 of the credit line and $1,201,315 of
the letter of credit facility had been utilized. At September 30, 1995,
$900,000 of the credit line and $1,369,900 of the letter of credit facility had
been utilized.
In June 1995, AHPC entered into a letter of credit banking facility
agreement with MBf Bank, Tonga in the amount of Tonga dollars T$1,000,000 or
approximately US$800,000 at June 30, 1995. This facility is guaranteed by MBf
Holdings, the principal shareholder of the Company. At September 30, 1995,
$741,730 of the letter of credit facility has been utilized. This liability is
reflected in the due to affiliate liability at September 30, 1995 since a
related party relationship exists.
On August 24, 1995, the MBf Bank of Tonga approved an additional T$2
million letter of credit facility bringing the total facility to T$3 million
or approximately US$2.4 million.
In October 1994, pursuant to two debenture and warrant purchase agreements
between the Company and two trusts established by George S. Mennen, the
Company issued, and each trust purchased, a convertible subordinated debenture
in the amount of $1,000,000 payable in seven years with interest at one and
one-half percent (1.5%) over the prime rate. Each debenture is convertible
into Common Stock of the Company at a conversion price of $2.50 per share. In
addition, each trust received a warrant exercisable over 5 years to purchase
75,000 shares of the Common Stock of the Company at an exercise price of $2.25
per share. At, September 30, 1995, long-term debt of $2 million is recorded
from this transaction.
Proceeds from these debentures were used to fund the Playboy condom
inventory, nutritional products costs and start-up expenses associated with
both products. For the nine months ended September 30, 1995, the Company
incurred interest expense of approximately $190,000 on this indebtedness.
In December 1994, the Company loaned to an affiliate, MACC Trading
Limited, on a short term basis the principal amount of $1,500,000. This loan
was secured by the Company's obligation to MACC Trading Limited under the
party's December 30, 1993 purchase agreement for the acquisition by the Company
of the Playboy condom license rights from MACC Trading Limited. This loan
bore interest at the rate of four percent (4%) over prime. On May 5, 1995, the
Company and MBf Holdings (the parent company of MACC Trading) entered into an
agreement allowing the Company's subsidiary AHPC to offset the MACC Trading
receivable along with the accrued interest thereon ($1,572,688) against the
trade payable balance owed by AHPC to MBf Health. Therefore the $1,500,000
receivable from MACC Trading was considered as effectively paid on May 5, 1995.
The Company is continuing to seek and identify additional sources of
funding to provide capital in the event its credit facilities do not provide
sufficient liquidity to fund the Company's ongoing operations.
-13-
<PAGE> 16
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated September 29, 1995 was filed by
the Company under Item 5 "Other Events."
-14-
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MBf USA, INC.
an Oklahoma Corporation
Date: November 14, 1995 By: /s/Steven Tan
Steven Tan
Chief Financial Officer
171388
-15-
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