<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 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)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (708) 285-9191
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
At August 15, 1995 there were 10,947,427 shares of Common Stock, par value
$0.01 per share, and 12,525,374 shares of Series A Common Stock, par value
$0.01 per share, outstanding.
<PAGE> 2
MBf USA, INC.
PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets
June 30, 1995 and December 31, 1994..............................pg. 1
Consolidated Statements of Operations
for the Three Months Ended June 30, 1995 and 1994................pg. 3
Consolidated Statements of Operations
for the Six Months Ended June 30, 1995 and 1994..................pg. 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994..........................pg. 5
Notes to the Interim Consolidated Financial Statements...........pg. 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................pg. 10
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K................................pg. 15
<PAGE> 3
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 29,890 $ 96,096
Accounts receivable - trade, net of allowance for
doubtful accounts of $75,091 in 1995 and
$40,591 in 1994 4,806,353 4,142,297
Note receivable from affiliate - 1,500,000
Inventories 5,851,526 7,377,808
Prepaid expenses 359,479 295,555
Other current assets 190,000 -
---------------- ---------------
Total current assets 11,237,248 13,411,756
---------------- ---------------
PROPERTY, PLANT AND EQUIPMENT:
Building improvements 21,744 21,744
Equipment, furniture and fixtures 451,516 281,830
---------------- ---------------
Total property, plant and equipment 473,260 303,574
Less - Accumulated depreciation (172,813) (131,478)
---------------- ---------------
Property, plant and equipment,net 300,447 172,096
---------------- ---------------
INVESTMENT IN LABORATORY SPECIALISTS, INC. 1,059,367 1,059,367
---------------- ---------------
NET ASSETS OF DISCONTINUED SUBSIDIARY 64,773 209,111
---------------- ---------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $288,577
in 1995 and $255,320 in 1994 1,461,423 1,494,680
Trademarks and license rights, net of accumulated
amortization of $35,266 in 1995 and $52,077 in 1994 317,395 380,242
Due from affiliates/shareholders 1,289,877 1,232,830
Other assets 118,651 533,689
---------------- ---------------
Total other assets 3,187,346 3,641,441
---------------- ---------------
$ 15,849,181 $ 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>
June 30, 1995 December 31, 1994
------------------ --------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade notes payable to bank $ 120,900 $ 1,201,315
Notes payable and current portion of
long-term obligations 5,175,000 3,300,000
Accounts payable - trade 694,392 220,893
Due to affiliates/shareholders 5,721,346 5,848,700
Accrued expenses 1,718,353 946,515
------------------ --------------------
Total current liabilities 13,429,991 11,517,423
------------------ --------------------
LONG-TERM OBLIGATIONS 2,025,000 2,300,000
------------------ --------------------
DUE TO AFFILIATES 775,732 765,232
------------------ --------------------
SHAREHOLDERS' EQUITY:
Series A common stock, $.01 par value, 20,000,000 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) (4,279,429) 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 (381,542) 3,911,116
------------------ --------------------
$ 15,849,181 $ 18,493,771
================== ====================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
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<PAGE> 5
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
-------------------------------------------
1995 1994
----------------- ------------------
(Unaudited)
<S> <C> <C>
REVENUES:
Product sales, net $ 9,954,172 $ 8,967,533
Interest 7,847 25,235
Commission income - affiliates - 3,312
Other - 33,009
----------------- ------------------
Total revenues 9,962,019 9,029,089
----------------- ------------------
COSTS AND EXPENSES:
Cost of product sales 8,934,032 7,404,029
Selling, general and administrative 2,342,304 1,131,529
Restructure charge 1,954,591 -
Depreciation and amortization 63,723 33,488
Interest 196,379 74,774
----------------- ------------------
Total costs and expenses 13,491,029 8,643,820
----------------- ------------------
Income (loss) from continuing operations before
income from investment and provision for
income taxes (3,529,010) 385,269
INCOME FROM INVESTMENT IN LSI - -
----------------- ------------------
Income (loss) from continuing operations before
provision for income taxes (3,529,010) 385,269
PROVISION FOR INCOME TAXES - -
----------------- ------------------
Income (loss) from continuing operations (3,529,010) 385,269
DISCONTINUED OPERATIONS OF SUBSIDIARY (79,782) 120,863
----------------- ------------------
Net Income (Loss) $ (3,608,792) $ 506,132
================= ==================
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING 23,472,801 25,451,600
================= ==================
NET INCOME (LOSS) PER COMMON STOCK
AND COMMON STOCK EQUIVALENT $ (0.15) $ 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 Six Months
Ended June 30,
-----------------------------------------
1995 1994
---------------- ----------------
(Unaudited)
<S> <C> <C>
REVENUES:
Product sales, net $ 19,799,680 $ 16,403,148
Interest 64,729 27,393
Commission income - affiliates - 10,872
Other 66,568 40,970
---------------- ----------------
Total revenues 19,930,977 16,482,383
---------------- ----------------
COSTS AND EXPENSES:
Cost of product sales 17,631,654 13,483,771
Selling, general and administrative 4,083,796 2,026,353
Restructure Charge 1,954,591 -
Depreciation and amortization 117,020 66,813
Interest 351,305 146,099
---------------- ----------------
Total costs and expenses 24,138,366 15,723,036
---------------- ----------------
Income (loss) from continuing operations before
income from investment and provision for
income taxes (4,207,389) 759,347
INCOME FROM INVESTMENT IN LSI - 79,374
---------------- ----------------
Income (loss) from continuing operations before
provision for income taxes (4,207,389) 838,721
PROVISION FOR INCOME TAXES - -
---------------- ----------------
Income (loss) from continuing operations (4,207,389) 838,721
DISCONTINUED OPERATIONS OF SUBSIDIARY (88,219) 120,269
---------------- ----------------
Net Income (Loss) $ (4,295,608) $ 958,990
================ ================
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING 23,472,801 25,975,083
================ ================
NET INCOME (LOSS) PER COMMON STOCK
AND COMMON STOCK EQUIVALENT $ (0.18) $ 0.04
================ ================
</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 Six Months
Ended June 30
-------------------------------------------
1995 1994
------------------- -----------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (4,295,608) $ 958,990
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 46,853 23,859
Amortization 70,167 42,954
Provision for doubtful accounts 34,500 33,750
(Gain) Loss from discontinued operations of subsidiary 88,219 (120,269)
Loss on sale of fixed assets (5,519) -
(Income) from investment in LSI - (79,374)
Changes in certain assets and liabilities:
Accounts receivable - trade (698,556) (179,018)
Inventories 1,526,282 (1,893,084)
Prepaid expenses (63,924) (397,559)
Other current assets (190,000) -
Accounts payable - trade 473,499 (412,683)
Accrued expenses 771,838 254,885
--------------- --------------
Net cash provided by (used in) operating activites (2,242,250) (1,767,549)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (169,686) (89,913)
Expenditures for other assets 440,975 127,470
Advances from Laboratory Specialists, Inc. - 958,525
Advances from discontinued subsidiary 56,119 683,915
--------------- --------------
Net cash (used in) provided by investing activities 327,408 1,679,997
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amounts due (from) to affiliates/shareholders 1,326,099 2,648,427
Payments to trade notes payable to bank (1,080,415) (2,555,102)
Proceeds from notes payable 1,875,000 877,100
Net proceeds from warrant/stock exercises 2,951 459,030
Purchase of treasury stock - (1,323,036)
Payments on notes payable (275,000) (125,000)
--------------- --------------
Net cash (used in) provided by financing activities 1,848,635 (18,581)
--------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (66,206) (106,133)
--------------- --------------
CASH AND CASH EQUIVALENTS, beginning of period 96,096 580,191
--------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 29,890 $ 474,058
=============== ==============
</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
June 30, 1995 and 1994
1. Basis of Presentation:
On February 27, 1992, the shareholders of American Drug Screens, Inc.
(and Oklahoma corporation, "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: (a) the authorization of an additional 20,000,000
shares of common stock and the authorization of 12,525,374 shares of Series A
Common Stock, $0.01 par value ("Series A Common Stock"), (b) the acquisition by
a wholly owned subsidiary of the Company, MBf America, Inc. (an Oklahoma
corporation) of all the issued and outstanding shares of common stock of AHPC,
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 of the
Company by AHPC as of February 27, 1992, and AHPC's shareholders' equity has
been restated to reflect the Series A Common Stock received in the Share
Exchange Agreement.
On May 21, 1993, the Company's shareholders approved the Company's
proposal to amend the Company's Certificate of Incorporation thereby changing
the name of the Company to MBf USA, Inc. ("the Company").
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
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 June 30, 1995 may
not be indicative of the results that may be expected for the year ended
December 31, 1995.
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<PAGE> 9
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. Net assets of the discontinued
subsidiary at June 30, 1995 were $64,773, which consisted primarily of
receivables and inventory.
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 American Drug Screens 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 set at 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 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").
-7-
<PAGE> 10
In September, 1994, LSAI successfully completed its IPO of 1,200,000
shares of common stock and currently trades under the symbol ("LABZ") on the
NASDAQ Small Cap Market System. The Company has agreed not to sell its 239,405
shares of 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 June 30, 1995, the Company's common stock investment in LSAI had a
market value of $748,141. The increase in the investment and shareholders'
equity has not been recorded as of June 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 be in 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 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 June 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% $(1,460,507) $ 326,057
Goodwill amortization 33,257 8,000
Increase in deferred tax asset
valuation allowance 1,427,250 -
Utilization of Net Operating
Loss Carryforwards - (334,057)
----------- ---------
Provision for income taxes $ -0- $ -0-
=========== =========
</TABLE>
-8-
<PAGE> 11
The Company had net operating loss carryforwards ("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 $4,000,000 in the
first six months of 1995.
4. Restructure Charge:
In June 1995, the Company announced a restructuring plan which included
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 product business, where sales were negligible, and the entry costs
were very high and contributed to significant losses.
Key components of the restructure charge were costs related to the exit
of the nutritional product businesses, executive management personnel
severance, and the closing of the executive office in New Jersey. The charge
includes provisions for work force reductions, relocation and related costs,
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 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, the Company's risk of exposure is limited because the Company
carries sufficient product liability insurance ($2,000,000 of coverage) to pay
indemnity settlement and judgments. However, it is not feasible to predict the
ultimate outcome of litigation.
-9-
<PAGE> 12
6. Subsequent Events:
On August 16, 1995, MBf International, Ltd., the parent of the Company
and a wholly owned subsidiary of MBf Holdings, announced that it had executed
an agreement with Perusahaam Intan Emas Sdn Bhd ("PIE") for the sale of its
subsidiary, 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. 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, modern latex glove plant located in Indonesia to be
operational by the fourth quarter 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 any impact on its operations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Total revenues for the quarter ended June 30, 1995 were $9,962,019
compared to $9,029,089 for the same period in 1994, an increase of 10.13%.
Total revenues for the six months ended June 30, 1995 were $19,930,977 compared
to $16,482,383 for the same period in 1994, an increase of 20.9%
For the three months ended June 30, 1995, revenues consisted of
$9,217,437 from the Company's latex glove product line sold by AHPC and
$736,737 from the Playboy condom product line. Sales of gloves and Playboy
condoms for the comparable period in 1994 were $8,941,587 and
$25,946, respectively.
The increased sales volume on a comparable basis at AHPC is
attributable to more developed customer relationships and larger than normal
orders placed by major customers in anticipation of an industry wide price
increase due to the rising price of latex raw materials. Improvement plans were
made in the second quarter of 1995 to increase utilization of AHPC's cash flow
for inventory purchases. Additionally, on May 19, 1995, the Company signed an
agreement with an unaffiliated supplier to supply powder-free examination
gloves.
The prices charged by MBf Health, the Company's principal glove
supplier, to AHPC during the first and second quarter of 1995 which were
approximately 19% higher than the effective net prices charged to AHPC during
the comparable periods in 1994 which were caused by the rising price of latex
raw materials which nearly doubled over the prior year. This has caused an
erosion of gross profit margin on glove sales due to the slow time lag in
passing the price increase on to customers.
-10-
<PAGE> 13
The Company is continuing to increase inventory levels to enable the
Company to meet its customer requirements, reduce the pricing from MBf Health
as the price of latex subsides, and pass on price increases to customers.
During the first six months of 1995, two of AHPC's customers accounted for 48%
of gloves sales. The loss of either of such customers of AHPC would have a
materially adverse effect on the Company.
The increase in sales of Playboy condoms on a comparable period basis is
attributable to the expansion of the Playboy Condom distribution channels.
Currently, the Company has signed distribution agreement in 18 countries
compared to two agreements at the same time in 1994. The Company anticipates
that large opening orders will be shipped to markets in Eastern Europe in the
third quarter of 1995.
The Company is currently in negotiation to establish Playboy condom
distribution channels in other countries in Asia, Latin America, and Africa,
however, there can be no assurance as to the opening or timing of these
markets.
Cost of goods sold as a percentage of sales for the three and six month
periods ended June 30, 1995 were 89.8% and 88.3%, respectively, compared to
82.6% and 82.2% respectively, in the comparable period in 1994. The significant
increase in cost of sales as a percentage of sales is attributable to the 19%
price increase charged by MBf Health to AHPC coupled with the inability of AHPC
to pass on all of this price increase to its customers due to competitive
market conditions.
Selling, general and administrative expense increased from $2,026,353
for the six months ended June 30, 1994 to $4,083,796 for the same period in
1995. The increase is attributable to higher selling costs associated with the
introduction and launch of Playboy condoms in new and established countries,
the hiring of additional sales and marketing employees, 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.
In June 1995, the Company announced a restructuring plan which included
the resignation of the Chairman/CEO, President/COO, and CFO. The Board of
Directors filled the vacancies of its executive management team by electing Mr.
Loi Heng Sewn from MBf Holdings as its Chairman. Mr. Loi was formerly the
President of MBf Holdings manufacturing facilities. Mr. Edward J. Marteka was
named President of the Company while retaining his responsibilities as
President of AHPC, which he co-founded since its inception. The Board of
Directors directed the Company to focus on its core businesses and to exit the
nutritional products business, where
-11-
<PAGE> 14
sales were negligible, and the entry costs were very high and contributed to
significant losses. Furthermore, the use of AHPC 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, executive management changes, and the
closing of the executive office in New Jersey. The charge includes provisions
for personnel severance and work force reductions, relocation and related
costs, 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 resulted in a one-time
charge of $1,954,591 in the second quarter of 1995 of which approximately
$775,000 is included in accrued liabilities at June 30, 1995, and is expected
to be paid over the next twelve months.
Interest expense increased from $146,099 for the six months ended June
30, 1994 to $351,305 for the same period in 1995. The increase is attributable
to an increase in the prime rate and higher levels of borrowing in 1995
compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company had a working capital deficit of
$2,192,743 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 1995, the decrease in inventory levels, and increased
bank borrowings.
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 is 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.
The line of credit bears interest at three percent (3%) over prime. The
entire facility, which is guaranteed by MBf Holdings, the principal shareholder
of the Company, 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 June 30, 1995, $4,825,000 of the credit line and $120,900 of the
letter of credit facility had been utilized.
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.
-12-
<PAGE> 15
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.
Subsequent to June 30, 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 totalling $482,500 in 1996 and $723,750
in 1997. 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.
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. Subsequent to June 30,
1995, the Company incurred contingent liabilities to MBf Bank, Tonga in the
amount of US$759,000 for issued and outstanding letter of credit commitments.
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.
Proceeds from these debentures were used to fund the Playboy condom
inventory, nutritional products inventory and start-up expenses associated with
both products. For the period ended June 30, 1995 the Company incurred interest
expense of $103,995 on this indebtedness.
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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 believes that its credit facilities provide sufficient
liquidity to fund the Company's operation for the immediate future.
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<PAGE> 17
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Reporting an event as of May 31, 1995.
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<PAGE> 18
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: August 18, 1995 By: s/Robert C. Carter
---------------------------
Robert C. Carter
Principal Financial Officer
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