<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-K
(Mark One)
[ 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 0-17458
-------
MBF USA, INC.
-------------
(Exact name of registrant as specified in its charter)
Maryland 73-1326131
-------- ----------
(State of incorporation) (I.R.S. employer identification no.)
500 Park Boulevard, Suite 1260 60143
Itasca, IL -----
---------- (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 285-9191
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
---------------------
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
Common Stock, par value $0.01 per share None
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 .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, 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 ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the stock as reported on
Nasdaq on March 27, 1997: $5,676,239.
At March 27, 1997, 3,058,333 shares of the Registrant's Common Stock and
1,252,538 shares of Series A Common Stock were outstanding.
<PAGE> 2
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.
REGISTRANT:
MBf USA, INC.
Date: April 10, 1997 By: /s/ Heng Sewn Loi
-------------------------------------------
Heng Sewn Loi, Chief Executive Officer
Date: April 10, 1997 By: /s/ Stephen Tan
---------------------------------------------
Stephen Tan, Chief Financial Officer, Treasurer and
Secretary
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.
<TABLE>
<S> <C>
Date: April 10, 1997 By: /s/ Heng Sewn Loi
--------------------------------------------
Heng Sewn Loi, Chairman of Board of Directors
Date: April 10, 1997 By: /s/ Tan Sri Dato (Dr.) Hean Heong Loy
---------------------------------------
Tan Sri Dato (Dr.) Hean Heong Loy, Director
Date: April 10, 1997 By: /s/ Teik Hok Loy
-----------------------------------------------------
Teik Hok Loy, Director
Date: April 10, 1997 By: /s/ Cheng Soon Teoh
--------------------------------------------------
Cheng Soon Teoh, Director
Date: April 10, 1997 By: /s/ Edward J. Marteka
---------------------------------------------------
Edward J. Marteka, Director
Date: April 10, 1997 By: /s/ George Jeff Mennen
--------------------------------------------------
George Jeff Mennen, Director
Date: April 10, 1997 By: /s/ Don L. Arnwine
----------------------------------------------------
Don L. Arnwine, Director
Date: April 10, 1997 By: /s/ Robert J. Simmons
---------------------------------------------------
Robert J. Simmons, Director
</TABLE>
<PAGE> 3
MBfUSA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1996 AND 1995 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996 F-6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1996
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
</TABLE>
F-1
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of
MBf USA, Inc.:
We have audited the accompanying consolidated balance sheets of MBf USA, INC.(a
Maryland corporation) AND SUBSIDIARIES as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated 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 did not audit the financial statements of PT
MBf Buana Multicorpora as of and for the year ended December 31, 1995, which
statements reflect total assets and total revenues of 22% and .02%,
respectively, of the consolidated 1995 totals. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to the amounts included for that entity, is based solely on the
report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of MBf USA, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 19, 1997
F-2
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders
PT MBf Buana Multicorpora
We have audited the accompanying balance sheet of PT MBf Buana
Multicorpora (the "Company") as of December 31, 1995, and changes in
shareholders' equity, and cash flows for the period from October 17, 1994 (date
of incorporation) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards established by the Indonesian Institute of Accountants, which are
substantially similar to the generally accepted auditing standards in the
United States of America. 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
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PT MBf Buana
Multicorpora as of December 31, 1995 and the results of its operations and its
cash flows for the period then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Drs. Achmad Hidayat
-----------------------
Drs. Achmad Hidayat
Registered Accountant No. D-2460
KPMG Hanadi Sudjendra & Rekan
Jakarta, Indonesia
February 14, 1996
F-3
<PAGE> 6
MBfUSA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
A S S E T S 1996 1995
------ -----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 321,038 $ 706,309
Accounts receivable--trade, net of allowance for doubtful accounts
of $73,000 in 1996 and $56,100 in 1995 4,677,490 4,118,361
Inventories 8,094,649 10,031,663
Prepaid expenses 999,704 448,110
Other current assets 58,893 11,730
Current assets of discontinued operations 264,520 735,544
------------ ------------
Total current assets 14,416,294 16,051,717
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 694,272 698,657
Construction in progress 1,074,092 4,242,199
Equipment, furniture and fixtures 7,183,071 672,637
Building improvements 1,262,248 21,744
Vehicles 105,023 41,487
------------ ------------
Total property, plant and equipment 10,318,706 5,676,724
Less-Accumulated depreciation (736,858) (229,402)
------------ ------------
Property, plant and equipment, net 9,581,848 5,447,322
------------ ------------
INVESTMENT IN LSAI 1,015,117 1,059,367
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $364,305 in 1996 and
$306,527 in 1995 1,385,695 1,443,473
Due from affiliates 550,210 1,791,616
Other assets 297,209 274,736
Assets of discontinued operations 267,251 304,973
------------ ------------
Total other assets 2,500,365 3,814,798
------------ ------------
$ 27,513,624 $ 26,373,204
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<PAGE> 7
MBfUSA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------ -----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable--trade $ 3,291,506 $ 7,136,837
Trade notes payable to banks 7,010,453 2,300,635
Notes payable and current portion of long-term obligations 3,914,914 2,149,166
Due to affiliates 382,358 338,694
Accrued expenses 1,219,914 798,605
Current liabilities of discontinued operations 302,416 412,282
------------ ------------
Total current liabilities 16,121,561 13,136,219
------------ ------------
LONG-TERM OBLIGATIONS 7,098,132 10,342,500
------------ ------------
OTHER LONG-TERM OBLIGATIONS
Due to affiliate -- 1,100,000
Deferred income taxes 200,286 --
Other liabilities 341,047 330,266
------------ ------------
Total other long-term liabilities 541,333 1,430,266
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTEREST IN SUBSIDIARY 221,174 144,558
------------ ------------
SHAREHOLDERS' EQUITY:
Series A common stock, $.01 par value; 1,252,538 shares authorized;
1,252,538 shares issued and outstanding 12,525 12,525
Common stock, $.01 par value; 10,000,000 and 4,000,000 shares
authorized in 1996 and 1995, respectively; 3,188,333 and
1,730,795 shares issued and outstanding in 1996 and 1995,
respectively 31,883 17,308
Additional paid-in capital 10,875,897 7,487,944
Accumulated deficit (6,012,811) (4,848,224)
Cumulative foreign currency translation adjustment (53,034) (26,856)
Less- Common stock in treasury, at cost, 130,000 shares in
1996 and 1995 (1,323,036) (1,323,036)
------------ ------------
Total shareholders' equity 3,531,424 1,319,661
------------ ------------
$ 27,513,624 $ 26,373,204
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-5
<PAGE> 8
MBfUSA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
REVENUES:
<S> <C> <C> <C>
Product sales, net $ 47,589,421 $ 40,950,968 $ 34,301,735
Interest--affiliates -- 72,688 --
Interest 40,737 27,970 43,990
Income from affiliates -- -- 350,000
Investment in LSI -- -- 75,000
Other 81,959 166,317 28,651
------------ ------------ ------------
Total revenues 47,712,117 41,217,943 34,799,376
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of product sales 38,358,756 36,177,651 27,387,357
Selling, general and administrative 8,462,426 6,707,634 6,125,645
Restructure charge -- 1,808,757 --
Interest 1,117,700 614,506 271,962
------------ ------------ ------------
Total costs and expenses 47,938,882 45,308,548 33,784,964
------------ ------------ ------------
Income (loss) from continuing operations before income from
investment, minority interest in subsidiary, benefit from
income taxes, and loss from discontinued operations
(226,765) (4,090,605) 1,014,412
INCOME FROM INVESTMENT IN LSI -- -- 79,374
MINORITY INTEREST IN INCOME OF SUBSIDIARY (77,732) (2,174) --
------------ ------------ ------------
Income (loss) from continuing operations before benefit
from income taxes and loss from discontinued operations (304,497) (4,092,779) 1,093,786
BENEFIT FROM INCOME TAXES (56,889) -- --
------------ ------------ ------------
Income (loss) from continuing operations before loss from
discontinued operations (247,608) (4,092,779) 1,093,786
LOSS FROM DISCONTINUED OPERATIONS (840,792) (703,893) (184,375)
INCOME (LOSS) FROM DISPOSAL OF DISCONTINUED OPERATIONS
(76,187) (67,732) 91,119
------------ ------------ ------------
Net income (loss) $ (1,164,587) $ (4,864,404) $ 1,000,530
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARE
AND COMMON SHARE EQUIVALENTS OUTSTANDING 3,661,052 2,432,462 2,458,473
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Continuing operations $ (0.07) $ (1.68) $ 0.44
Discontinued operations (0.25) (0.32) (0.03)
------------ ------------ ------------
$ (0.32) $ (2.00) $ 0.41
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-6
<PAGE> 9
MBfUSA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(Retroactively restated to reflect the
10-for-1 reverse stock split, see Note 9)
----------------------------------------
Series A
Common Stock Common Stock Additional
------------------- ------------------- Paid-in
Shares Amount Shares Amount Capital
------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 1,252,538 $12,525 1,179,791 $11,798 $4,702,168
Issuance of common stock upon exercise
of warrants - - 44,457 444 491,037
Repurchase of treasury shares - - - - -
Net income - - - - -
--------- ------- --------- ------- ----------
BALANCE, December 31, 1994 1,252,538 12,525 1,224,248 12,242 5,193,205
Issuance of common stock upon exercise
of stock options - - 495 5 2,945
Issuance of common stock for loan
conversion - - 250,980 2,510 1,197,490
Issuance of common stock for 70%
interest in PT Buana - - 255,072 2,551 1,094,304
Net loss - - - - -
Foreign currency translation adjustment
- - - - -
--------- ------- --------- ------- ----------
BALANCE, December 31, 1995 1,252,538 12,525 1,730,795 17,308 7,487,944
Issuance of common stock to MBf
International for $1,402,528 - - 488,973 4,889 1,397,639
Issuance of common stock to PIE
Healthcare for $1,000,000 - - 296,296 2,963 997,037
Issuance of common stock to MBf
International for $1,000,000 - - 672,269 6,723 993,277
Net loss - - - - -
Foreign currency translation adjustment
- - - - -
--------- ------- --------- ------- ----------
BALANCE, December 31, 1996 1,252,538 $12,525 3,188,333 $31,883 $10,875,897
========= ======= ========= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Foreign
Retained Currency
Earnings Translation Treasury Shareholders'
(Deficit) Adjustment Stock Equity
---------- ----------- ------- -------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 $ (984,350) $ - $ - $3,742,141
Issuance of common stock upon exercise
of warrants - - - 491,481
Repurchase of treasury shares - - (1,323,036) (1,323,036)
Net income 1,000,530 - - 1,000,530
----------- ----------- ----------- ----------
BALANCE, December 31, 1994 16,180 - (1,323,036) 3,911,116
Issuance of common stock upon exercise
of stock options - - - 2,950
Issuance of common stock for loan
conversion - - - 1,200,000
Issuance of common stock for 70%
interest in PT Buana - - - 1,096,855
Net loss (4,864,404) - - (4,864,404)
Foreign currency translation adjustment
- (26,856) - (26,856)
----------- ----------- ----------- ----------
BALANCE, December 31, 1995 (4,848,224) (26,856) (1,323,036) 1,319,661
Issuance of common stock to MBf
International for $1,402,528 - - - 1,402,528
Issuance of common stock to PIE - - -
Healthcare for $1,000,000 1,000,000
Issuance of common stock to MBf -
International for $1,000,000 - - 1,000,000
Net loss (1,164,587) - - (1,164,587)
Foreign currency translation adjustment
- (26,178) - (26,178)
----------- ----------- ----------- ----------
BALANCE, December 31, 1996 $(6,012,811) $ (53,034) $(1,323,036) $3,531,424
=========== =========== =========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-7
<PAGE> 10
MBfUSA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net income (loss) $(1,164,587) $(4,864,404) $ 1,000,530
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 532,148 101,990 79,088
Amortization 57,778 51,207 88,564
Provision for doubtful accounts 16,900 15,500 17,586
Loss from discontinued operations 840,792 703,893 184,375
(Income) loss from disposal of discontinued operations 76,187 67,732 (91,119)
Loss on disposal of property, plant and equipment 8,883 53,405 3,281
Gain on sale of LSAI common stock (998) -- --
Write-off of trademarks -- 50,425 --
Income from investment in LSI -- -- (79,374)
Changes in certain assets and liabilities:
Accounts receivable--trade (576,029) (701,300) (408,223)
Inventories 1,937,014 (3,108,000) (1,411,019)
Prepaid expenses (551,594) (218,966) (176,944)
Other assets (69,636) (9,929) (819,180)
Accounts payable--trade (3,845,331) 2,267,348 (411,100)
Accrued expenses 432,090 27,702 180,535
Deferred income taxes 200,286 -- --
Net assets of discontinued subsidiary - DGI -- 141,379 693,285
Net assets of condom discontinued operations (518,099) (79,887) 94,456
Amounts due (from) to affiliates 1,285,070 (2,144,010) 2,816,208
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,339,126) (7,645,915) 1,760,949
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,675,556) (873,636) (88,689)
Loan to affiliate -- -- (1,500,000)
Proceeds on sales of LSAI comon stock 45,248 -- --
Expenditures for other assets -- -- (37,612)
Minority interest in subsidiary 76,616 30,497 --
----------- ----------- -----------
Net cash used in investing activities (4,553,692) (843,139) (1,626,301)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt to affiliate (1,100,000) -- (650,000)
Net borrowings (payments) on trade notes payable to banks 4,709,818 3,722,426 (4,476,726)
Net borrowings from notes payable 2,533,046 4,384,081 5,750,500
Net proceeds from stock option exercises -- 2,950 491,481
Proceeds from issuance of stock 3,402,528 -- --
Proceeds from issuance of note payable to Parent -- 1,200,000 --
Payments on notes payable (4,011,666) (183,334) (1,733,998)
----------- ----------- -----------
Net cash provided by (used in) financing activities 5,533,726 9,126,123 (618,743)
----------- ----------- -----------
IMPACT OF EXCHANGE RATES ON CASH (26,179) (26,856) --
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (385,271) 610,213 (484,095)
CASH AND CASH EQUIVALENTS, beginning of year 706,309 96,096 580,191
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 321,038 $ 706,309 $ 96,096
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-8
<PAGE> 11
MBf USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
MBf USA, Inc. and subsidiaries ("the Company") markets medical examination
gloves in the United States. In November 1996, the Company adopted a plan to
discontinue the Playboy (R) condom operations and has reflected it as such in
the accompanying consolidated financial statements. The Company will continue to
distribute Playboy(R) condom through June 30, 1997, see Note 3 for more
information on the discontinued operations of the condom business. The Company's
factory in Indonesia, which manufactures medical examination gloves, was in the
start-up phase of operations as of December 31, 1995, began production in April,
1996 and began shipping product in May, 1996.
MBf Holdings, the ultimate parent company, assisted to strengthen the financial
position of the Company during 1996.
The Company has incurred operating losses in each of the two years ended
December 31, 1996, has consolidated negative working capital of approximately
$1.7 million and cash used in operating activities of approximately $1.3
million. Management's plan to strengthen its financial position is as follows:
(1) the Company will concentrate on its core business of distributing and
manufacturing medical examination gloves; (2) MBf Holdings Berhad, the ultimate
parent company is committed to provide the necessary level of support where
needed; and (3) the unprofitable condom business which contributed to the
Company's operating losses in each of the two years ended December 31, 1996 has
been discontinued.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, American Health Products Corporation ("AHPC"), MBf
America, Inc. (a nonactive holding company), Premier Latex, Inc., which was
inactive, and Disposable Garments, Inc. ("DGI"), which was a discontinued
operation effective December 31, 1993. Premier Latex, Inc. and DGI were
liquidated and dissolved on December 2, 1996. Effective October 31, 1995, the
Company acquired a 70% interest in an Indonesian glove manufacturing factory, PT
MBf Buana Multicorpora ("PT Buana"). Accordingly, PT Buana's assets,
liabilities, equity and minority interest is included in the consolidated
financial statements of the Company. All significant intercompany transactions
have been eliminated.
F-9
<PAGE> 12
MBf International, which holds the Series A Common Stock of the Company and is
the majority shareholder of the Company, is a wholly-owned subsidiary of MBf
Holdings, a publicly traded company on the Kuala Lumpur Stock Exchange.
Cash and Cash Equivalents
The Company considers cash in banks and highly liquid debt instruments with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of average cost or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided by
both the straight-line and accelerated methods over lives ranging from 3 to 20
years. Through the acquisition of PT Buana, the Company has recorded land rights
and land improvements of $694,272 and $698,657 in 1996 and 1995, respectively,
as well as construction in progress of $1,074,092 and $4,242,199 in 1996 and
1995, respectively, as well as other depreciable assets. No depreciation was
taken on these assets during 1995 due to the start-up nature of the factory.
Distribution Agreement
The Company and MBf Health Products Sdn. Bhd. ("MBf Health") and MBf Rubber
Products Sdn. Bhd. ("MBf Rubber") were parties to a distributor agreement. The
agreement provided that the Company would have exclusive marketing rights in
North and South America for latex gloves manufactured and supplied by MBf Health
and MBf Rubber through February, 1997. MBf Rubber ceased operations in 1995 and
the distributor agreement was terminated. Effective July 12, 1995, the Company
entered into a new five year distributor agreement with MBf Health (which is now
known as PIE Healthcare). The distributor agreement requires the Company to
purchase a certain quantity of gloves each year. Revenues from product sales
include sales of latex examination gloves sold primarily under the terms of this
agreement.
Revenues
Revenues from product sales are recognized at the time the product is shipped
from the Company's warehouse, or upon the customer's receipt of the goods,
depending upon the terms of the sale.
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
F-10
<PAGE> 13
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.
Net Income (Loss) Per Share
Net income per common share and common share equivalents in 1994 were computed
by dividing net income by the weighted average number of common and common stock
equivalent shares outstanding during the periods, after adding the dilutive
effect of the conversion of stock options and warrants.
The 1996 and 1995 net loss per common share and common share equivalents does
not consider the impact of common share equivalents as their effect is
antidilutive.
All share and per share information in the accompanying financial statements
give retroactive effect of the 10-for-1 reverse stock split which occurred
December 18, 1995.
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.
The restructuring resulted in a one-time charge totaling $1,808,757, which
primarily related to executive severance pay of approximately $570,000,
inventory write-offs of approximately $440,000, other assets and intangible
asset write-offs of approximately $200,000 and other costs of approximately
$599,000. Substantially all such costs had been paid by December 31, 1995.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
(1) Current assets and current liabilities: The carrying amount
approximates fair value due to the short maturity of these items;
F-11
<PAGE> 14
(2) Long-term debt: The fair value of the Company's long-term debt is
based on secondary market indictors. Since the Company's debt is not
quoted, estimates are based on each obligation's characteristics,
including maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates
fair value; and
(3) Amounts due to/due from affiliates and shareholders: Amounts due
to/due from affiliates and shareholders are non-interest bearing and do
not specify maturity dates and, therefore, it is not practicable to
estimate the fair value of these financial instruments.
Reclassifications
Certain prior year items have been reclassified to conform with current year
presentations.
2. COMMON STOCK:
The terms of the Series A Common Stock are substantially the same as the
Company's Common Stock except:
a. Each share of Series A Common Stock is convertible into one
share of the Company's Common Stock, $.01 par value. The
conversion rate could have been reduced up to 33-1/3% per year
if AHPC's pretax earnings, as defined, fell below $1,300,000 in
1992 and 1993 and $1,400,000 in 1994, or if additional capital
was not contributed. During 1992, 1993 and 1994, AHPC's pretax
earnings, after purchase credits discussed in Note 4, were
$1,300,000, $1,300,000 and $1,400,000, respectively.
Accordingly, as of December 31, 1994, the conversion rate was
one. The Company has reserved 1,252,538 shares of Common Stock
for issuance upon conversion of the Series A Common Stock.
b. Series A Common Stock entitles MBf International, the majority
shareholder of the Company, to elect all Class A directors,
which represent a majority of the Company's Board of Directors
and to vote with the holders of Common Stock as a single class
with respect to any matters subject to a vote of the
shareholders.
F-12
<PAGE> 15
On December 5, 1996, the shareholders approved an increase in the authorized
Common Stock from 4,000,000 to 10,000,000 shares to allow the Company to have
sufficient shares for issuance in connection with employees stock options,
business acquisitions, the conversion of Series A Common Stock for Common Stock,
public offerings, as well as other purposes.
3. CORPORATE DEVELOPMENT:
Discontinued Operations
Effective December 31, 1993, the Company adopted a plan to discontinue
operations of 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. At December 31, 1995, there were
no assets of DGI, and it was subsequently dissolved on December 2, 1996.
In November 1996, the Company had reached an amicable settlement with Playboy
Enterprises, Inc. to terminate their license agreement under which MBf USA, Inc.
distributed Playboy(R) brand condoms in fifteen (15) countries. Under the
negotiated agreement, MBf USA, Inc. will, until June 30, 1997, continue to sell
Playboy(R) condoms in the countries where it has launched the product.
Subsequent to June 30, 1997, MBf USA, Inc. will be entitled to receive royalty
revenues on sales of Playboy(R) condoms in these countries and Japan through
June 30, 2000 and 1998, respectively. Amounts under the royalty agreement will
be recognized as income when received.
The loss from discontinued operations and income (loss) from disposal of
discontinued operations of DGI and the Playboy(R) condom business for the years
ended December 31, 1996, 1995 and 1994 are summarized below.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Loss from discontinued operations:
DGI $ - $ - $ -
Playboy(R) Condoms (840,792) (703,893) (184,375)
--------- --------- ---------
$(840,792) $(703,893) $(184,375)
========= ========= =========
Income (loss) from disposal of discontinued
operations:
DGI $ - $ (67,732) $ 91,119
Playboy(R) Condoms (76,187) - -
--------- --------- ---------
$ (76,187) $ (67,732) $ 91,119
========= ========= =========
</TABLE>
F-13
<PAGE> 16
Effective on November 12, 1996, the Company adopted a plan to discontinue its
Playboy(R) condom business. The accompanying financial statements include assets
and liabilities of the discontinued condom operations which is detailed below.
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------ -------- ----------
<S> <C> <C>
Current assets:
Due from Playboy $ - $ 70,000
Prepaid expenses - 38,310
Trade accounts receivable 262,551 539,255
Inventories 1,969 87,979
-------- ----------
$264,520 $ 735,544
Other Assets:
Trademarks & license rights $267,251 $ 304,973
-------- ----------
Total Assets $531,771 $1,040,517
======== ==========
LIABILITIES
Current liabilities:
Due to Playboy $ - $ 75,000
Trade accounts payable 302,416 337,282
-------- ----------
$302,416 $ 412,282
======== ==========
</TABLE>
In 1995, trademarks and license rights were amortized on a straight-line basis
over the period of the underlying agreement. Due to the exit of the condom
business in 1996, the trademarks and license rights will be amortized through
June 30, 1997. Amortization expense of trademarks and license rights was $37,722
in 1996 and $24,844 in 1995.
Revenues from the Playboy(R) condom business were $1,380,435, $2,078,096 and
$758,685, for the years ended December 31, 1996, 1995, and 1994, respectively.
Investment in Laboratory Specialists, Inc.
On April 18, 1994, the Company consummated an agreement to transfer its common
stock investment in Laboratory Specialists, Inc. ("LSI"), an independent drug
testing laboratory, to its President and former owner in exchange for the return
of the Company's 130,000 shares (reflects the 10-for-1 reverse stock split) of
Common Stock held by him. The repurchase of the Company's Common Stock has been
accounted for as a non-pro rata nonreciprocal transfer of nonmonetary assets.
The repurchase of the Company's Common Stock has been recorded as treasury stock
totaling $1,323,036. In addition, as part of the transfer of the Company's
Common Stock investment in LSI, the Company received 706,244 shares of
cumulative, redeemable, convertible preferred stock of LSI, with an interest
rate set at the prime rate, which was valued at $706,244. The transfer of
nonmonetary assets described above were recorded at amounts that were not
materially different from the approximated fair market value of the assets as of
April 18, 1994. Effective July 8, 1994, LSAI acquired all of the capital stock
of LSI and LSI became a wholly-owned subsidiary of LSAI. The Company also
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 by LSI to pay royalties on related product sales of LSAI for a period
of five years. The LSI note payable and the LSI
F-14
<PAGE> 17
convertible preferred stock has been recorded as an investment in LSAI totaling
$1,059,367 as of December 31, 1994.
Prior to the consummation of the sale, LSI declared a cash dividend of $75,000
and a noncash dividend forgiving amounts due from the Company of approximately
$545,000. These dividends have been eliminated in the accompanying financial
statements.
Because the Company's investment in the preferred stock of LSI represented less
than a 10% interest in that company and was accounted for under the cost method
in future periods, and since the Company was no longer in the drug testing
business, the accompanying consolidated financial statements present LSI on an
unconsolidated basis. A summary of LSI's results of operations is as follows:
<TABLE>
<CAPTION>
For the Period January 1, 1994 to April 18, 1994
- ------------------------------------------------
<S> <C>
Statement of operations
Revenues $ 1,294,775
Cost of laboratory services (635,653)
Operating expenses (545,493)
Other (34,255)
-----------
Net income $ 79,374
===========
</TABLE>
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"), with LSI
as its 100% operating subsidiary. No gain or loss was recognized on this
exchange.
In September, 1994, LSAI successfully completed its IPO of 1,200,000 shares of
common stock and, currently trade under the symbol ("LABZ") on the NASDAQ Small
Cap Market System. The Company agreed not to sell its 239,405 shares of common
stock of LSAI 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. During the second half of 1996, 15,000
shares of LSAI were sold resulting in a gain of $998.
Investment in LSAI
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The adoption of SFAS No. 115
requires that equity securities that have readily determinable fair values shall
be classified as "available for sale" if not held for the objective of
generating profits on short-term differences in price. Accordingly, the
Company's common stock investment in LSAI is classified and treated as available
for sale.
SFAS No. 115 further requires that unrealized holding gains and losses related
to available-for-sale securities shall be excluded from earnings and reported as
a net amount in a separate component of shareholders' equity until realized. At
December 31, 1996 and 1995, there was not a material
F-15
<PAGE> 18
difference between cost and market value of the Company's investment in LSAI
common stock; therefore, no adjustment was made to shareholders' equity.
At December 31, 1996 and 1995, the Company's investment in LSAI includes LSAI
common stock, valued at cost of $661,994 and $706,244 respectively, and a note
receivable from LSAI of $353,123 for a total investment of $1,015,117 and
$1,059,367, respectively. The reduction in value is due to the sale of 15,000
shares during the second half of 1996. The Company believes the note receivable,
which is carried at cost, approximates fair value.
Acquisition of P.T. Buana
The Company entered into a Stock Acquisition Agreement with MBf International
dated October 31, 1995, whereby MBf International exchanged its beneficial
interest in common stock representing 70% of the outstanding common stock of PT
Buana and a non-interest-bearing demand note in the principal amount of $737,769
("Note"), for 255,072 shares of the Company's Common Stock having an aggregate
value of $1,219,563. Because the Company and PT Buana are under common control,
the assets and liabilities acquired were recorded at PT Buana's historical cost
(see Note 12). The Note is guaranteed by MBf Holdings Berhad ("MBf Holdings"),
the parent company of MBf International.
The factory had not begun production as of December 31, 1995, and was in the
start-up phase of operation at that time. Accordingly, the factory had
capitalized certain start-up costs incurred and began amortizing these costs
over a one-year period upon commencement of operations in April, 1996.
At December 31, 1996 and 1995, the Company has recorded a minority interest in
the PT Buana subsidiary of $221,174 and $144,558, respectively, as reflected in
the consolidated balance sheets, representing the non-owned 30% interest in the
factory. The minority interest of PT Buana is owned by Indonesian banks
financing its construction and operations.
4. RELATED-PARTY TRANSACTIONS:
At December 31, 1996 and 1995, amounts due from/to affiliates consist of the
following:
<TABLE>
<CAPTION>
Due from affiliates: 1996 1995
-------- ----------
<S> <C> <C>
Long term-
MBf Holdings $ - $ 6,718
MBf Personal Care - 1,127,970
MBf International 200,000 200,273
MBf Marketing - 8,207
MACC Partners 348,707 350,000
MBf Rubber - 98,448
MBf Education 1,503 -
-------- ----------
Total long term $550,210 $1,791,616
======== ==========
</TABLE>
F-16
<PAGE> 19
<TABLE>
<CAPTION>
Due to affiliates: 1996 1995
--------- -----------
<S> <C> <C>
Current-
MBf Rubber $ (10,145) $ -
MBf International (57,916) -
MBf Holdings (4,432) (85,195)
MBf Insurans (66) (21,360)
MBf Management (39,984) (13,226)
MBf Finance (120) -
MBf Media (1,566) -
MBf Personal Care (119,146) -
MBf Printing (148,765) (218,913)
MBf Academy (218) -
--------- -----------
Total current $(382,358) $ (338,694)
========= ===========
Long term - MACC Trading $ - $(1,100,000)
========= ===========
</TABLE>
During 1996, 1995, and 1994, the Company purchased a substantial amount of its
inventories from MBf Health, an affiliate of the Company until August 1995, and
MBf Rubber, an affiliate of the Company. During 1994, prices charged by these
affiliates, before the application of certain credits discussed below, were not
the same as prices which would be charged by unrelated parties. During 1994,
credits against purchases, which enabled the Company to meet the pre-tax
earnings requirements of the Share Exchange Agreement (the "Agreement") were
$3,106,372. This Agreement expired during 1994. These credits against purchases
during 1994 resulted in a net cost that approximated that which could have been
obtained from unrelated parties. Amounts due from/to MBf Health and MBf Rubber
primarily arose from purchases of inventories and credits received under the
Agreement. During 1995, MBf Rubber ceased operations in Malaysia and is a
discontinued operation.
On August 16, 1995, MBf International announced that it had executed an
agreement with Perusahaam Intan Emas Sdn. Bhd. ("PIE") for the sale of its
subsidiary, MBf Health, with the option to repurchase the company. In connection
with the sale, a distributor agreement was executed between MBf Health and the
Company, calling for the purchase of product by the Company according to a
predetermined formula. During October, 1995, PIE changed the name MBf Health
Products Sdn. Bhd. to PIE Healthcare Products Sdn. Bhd. ("PIE Healthcare"). See
Note 1 for more information on this distributor agreement.
During 1996 and 1995, the Company purchased a majority of its powdered latex
examination gloves from PIE Healthcare. The Company intends to continue to
purchase its powdered latex examination gloves from PIE Healthcare and to
purchase non-powdered gloves from other sources. Since PIE Healthcare 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 December 31, 1996 and 1995.
F-17
<PAGE> 20
Some inventory purchase orders to PIE Healthcare were factored through MBf
Factors, an affiliate of MBf Holdings. Amounts due to MBf Factors amounted to
$306,785 and $876,785 at December 31, 1996 and 1995, respectively. These
obligations are considered liabilities to PIE Healthcare and are included in the
trade accounts payable liability at December 31, 1996 and 1995.
Amounts due from MBf Personal Care Sdn. Bhd. ("MBf Personal Care"), includes
$200,000 of credits taken by the Company in 1994 against purchases made from MBf
Personal Care due to defects in the inventories purchased. MBf Personal Care is
a subsidiary of MBf Capital Berhad, a publicly traded company on the Kuala
Lumpur Stock Exchange, and owned approximately 32% by MBf Holdings.
Additionally, effective December 31, 1994, the Company entered into an agreement
with MBf Personal Care whereby MBf Personal Care was granted the exclusive
rights to manufacture Playboy (R) brand condoms for the Company. MBf Personal
Care agreed to pay $450,000 for this arrangement and the amount is included in
the loss from discontinued operations in 1994.
The amounts due from MBf International represent costs associated with the Share
Exchange Agreement (see Note 2). As the timing of repayment of the due from
affiliate amounts is uncertain, the receivables from affiliates have been
classified as long term.
The amounts due to MBf Insurans, an MBf Holdings' affiliate, represent the cost
of insuring inventories in transit. Amounts paid to MBf Insurans for this
coverage were $45,056, $18,915 and $36,696 in 1996, 1995 and 1994, respectively.
On December 30, 1993, the Company entered into an agreement with a subsidiary of
MBf Holdings, MACC Trading Ltd., to purchase license rights and a condom
distribution agreement for $1,488,830, assumption of a signing bonus, and
assumption of all liabilities for future minimum royalties. On February 18,
1994, the Company made a $600,000 down payment to MACC Trading in accordance
with the agreement. A balance of $1,100,000 remained on this obligation to MACC
Trading at December 31, 1995. This balance was payable in 60 equal monthly
installments of $19,167 with interest on the unpaid balance at the prime rate
commencing May 1, 1994. By mutual agreement MACC Trading agreed to defer the
commencement of monthly installments and the related interest thereon. In
December, 1996, the Company, MACC Trading and MBf Personal Care agreed to offset
the MACC Trading long term payable balance of $1,100,000 against the receivable
balance owed to the Company by MBf Personal Care. This offset resulted in a net
balance owed by the Company to MBf Personal Care of $119,146 and eliminated the
obligation to MACC Trading at December 31, 1996.
In December, 1994, the Company made a short-term loan to MACC Trading in the
principal amount of $1,500,000 with interest payable at four (4%) percent over
prime. On May 5, 1995, the Company and MBf Holdings (the parent of MACC Trading)
entered into an agreement pursuant to which the Company offset the MACC Trading
receivable and accrued interest ($1,572,688) against the trade payable balance
owed by the Company to MBf Health, which was an indirect subsidiary of MBf
Holdings, resulting in effective repayment of the loan.
F-18
<PAGE> 21
During 1994, the Company provided consulting services to MACC Partners, a
subsidiary of MBf Holdings, for which MACC Partners agreed to pay $350,000; this
amount has been recorded as due from affiliates--long-term and other
income--income from affiliates in the accompanying financial statements. The
amount due was reduced to $348,707 at December 31, 1996 due to some expenses
incurred by MBf USA, Inc.
In October, 1995, the Company received a $1,200,000 loan from MBf International,
which was subsequently converted into 250,980 shares of the Company's Common
Stock (see Note 9).
5. GOODWILL:
The excess purchase price over the value of the net assets of AHPC acquired in
February, 1992, in accordance with the Share Exchange Agreement, was recorded as
goodwill in the accompanying consolidated balance sheets and is being amortized
using the straight-line method over 40 years.
6. TRADE NOTES PAYABLE TO BANKS:
Trade notes payable to banks consists of amounts financed through
letter-of-credit arrangements which totaled $7,010,453 and $2,300,635 at
December 31, 1996 and 1995, respectively. The Company's subsidiary, AHPC, has
two bank letter-of-credit facilities available, one of these banks is an
affiliated entity, MBf Bank of Tonga, a subsidiary of MBf Holdings. The
letter-of-credit liabilities due to the non-affiliated bank respectively at
December 31, 1996 and 1995, totaled $3,849,826 and $993,500, respectively. The
letter-of-credit liabilities due to the affiliated bank totaled $3,160,627 and
$1,307,135 at December 31, 1996 and 1995, respectively. All letter-of-credit
liabilities are guaranteed by MBf Holdings. The unaffiliated bank facility is
secured by inventory and accounts receivable of AHPC.
In June, 1995, the Company entered into the 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. 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. During 1996, the facility was
increased to Tonga dollars, T$5.75 million or approximately US$4.6 million. This
facility is unsecured and guaranteed by MBf Holdings.
As of December 31, 1996 and 1995, the Company was contingently liable for
outstanding letters of credit totaling $1,725,414 and $1,043,647, respectively.
7. NOTES PAYABLE:
Notes payable and long-term obligations as of December 31, 1996 and 1995,
consist of the following:
F-19
<PAGE> 22
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Borrowings under a bank revolving line-of-credit agreement with
available borrowings up to $2,500,000 and $1,600,000 at December
31, 1996 and 1995, respectively, bearing interest at the prime
rate plus 3% (11.25% at December 31, 1996), secured by
inventories and accounts receivable,
guaranteed by MBf Holdings $2,405,000 $1,500,000
Bank converted credit loan, bears interest at the prime rate
plus 3% (11.25% at December 31, 1996), secured by inventories
and accounts receivable, guaranteed by MBf Holdings - 4,825,000
PT Buana debt, bearing interest at the Indonesian prime rate
(approximately 11.5% at December 31, 1996) secured by land,
machinery and equipment, accounts receivable and the common
stock equity of PT Buana, guaranteed by MBf Holdings and the
minority shareholders of PT Buana, payable in eight semiannual
installments, due November, 2000 6,500,000 4,000,000
Subordinated debentures convertible into warrants to purchase
92,500 shares of Common Stock at $20.00 to $25.00 per share,
interest payable quarterly at up to prime plus 1.5% to 2.0%, due
through November, 2001 2,075,000 2,166,666
Automobile installment bank loan, bearing interest at 8.25%, secured by an
automobile, final installment due in May, 2000 33,046 -
---------- -----------
11,013,046 12,491,666
Less-current portion (3,914,914) (2,149,166)
---------- -----------
Long-term obligations $7,098,132 $10,342,500
========== ===========
</TABLE>
The bank revolving line-of-credit agreement noted above contains covenants which
require, among other things, maintenance of financial ratios, limitation on
additional borrowings, investments and capital expenditures. At December 31,
1996, the Company was not in compliance with two financial ratio covenants but
was granted a waiver by the bank through June, 1997.
On November 18, 1996, the Company amended the bank facility (Third Amendment)
which (a) increased the revolving line-of-credit from $1,600,000 to $2,500,000,
(b) increased the letter-of-credit commitment from $1,400,000 to $5,300,000, (c)
maintained the standby letter-of-credit commitment at $100,000 and (d)
eliminated the $4,825,000 non-revolving converted credit loan, which is
evidenced by a single credit note in the aggregate amount of $7,900,000. The
Company may increase its letter-of-credit facilities by an additional $2,500,000
as line-of-credit principal payments are made.
The PT Buana debt consisted of a syndicated loan facility with three Indonesian
banks amounting to a total credit facility of $6.5 million. As of December 31,
1996 and 1995, $6.5 million and $4.0 million
F-20
<PAGE> 23
respectively, had been borrowed against the facility which was used for the
purchase of assets, construction and start-up operation of the Indonesian
factory.
The principal portion of long-term debt becomes due as follows:
<TABLE>
<CAPTION>
Fiscal year ending
<S> <C>
1998 $1,709,914
1999 1,809,914
2000 1,578,304
2001 2,000,000
----------
$7,098,132
==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Litigation
Over the last several years, numerous product liability lawsuits have been filed
against suppliers and manufacturers of latex gloves alleging, among other
things, adverse allergic reactions. The Company is one of numerous defendants
that have been named in such lawsuits and, to date, has been named and served in
twenty-two actions, one of which was settled in January, 1996 for a nominal
amount and two cases which have been dismissed. Management believes all such
matters are adequately provided for, and if not provided for are without merit,
or involve such amounts that would not materially adversely affect the Company's
results of operations or financial condition.
Royalty Commitments
In connection with the Company's purchase of license rights from MACC Trading,
the Company assumed responsibility for the payment of royalties to an
unaffiliated company on sales of products covered by the agreement. Royalties
are 10% of cumulative sales over $1,000,000 through June, 1996, and 10% of sales
thereafter. In accordance with the Company's exit from the condom business, the
Company has future royalty commitments of 10% of Playboy(R) condom sales from
January 1, 1997 to June 30, 1997.
Significant Contracts
In March, 1994, the Company entered into a contract with an individual to serve
as a spokesman for the Company which required annual payments totaling
approximately $250,000 through April, 1998. As of December 31, 1996, the Company
had paid $456,250 of the $1,000,000 total contracted amount, and had accrued for
$206,250 of past due amounts owed to the spokesman in anticipation of a
settlement agreement with such spokesman. In February 1997, the Company reached
an agreement with this individual to pay $200,000 as final settlement and
termination of all future contractual obligations.
F-21
<PAGE> 24
Significant Customers
During 1996, two of the Company's customers accounted for approximately 34.1%
and 29.2% of net sales, respectively. These customers together accounted for
63.3% of accounts receivable at December 31, 1996.
During 1995, two of the Company's customers accounted for 28.8% and 24.8% of net
sales, respectively. These customers together accounted for 38.6% of accounts
receivable at December 31, 1995.
Operating Leases
The Company conducts all of its operations in leased facilities. Total rent
expense included in the accompanying statements of income for 1996 and 1995 was
$348,227 and $385,477, respectively. The following summary presents future
minimum rental payments required under the terms of present operating leases:
<TABLE>
<CAPTION>
Fiscal year-
<S> <C>
1997 $303,308
1998 194,860
1999 158,016
2000 66,477
--------
$722,661
========
</TABLE>
9. SHAREHOLDERS' EQUITY:
In December, 1995, the Board of Directors approved 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, the Board approved and the
Company effected a 10-for-1 reverse stock split of its Series A Common Stock and
Common Stock. As a result, each shareholder received one share of Series A
Common Stock or Common Stock of the Company successor, a Maryland corporation,
subsequent to the merger, for every 10 shares of Series A Common Stock or Common
Stock held by such shareholder. Additionally, the Common Stock underlying all of
the Company's outstanding warrants and options were adjusted to reflect the 10-
for-1 reverse stock split.
All share and per share information in the accompanying financial statements
give retroactive effect of the 10-for-1 reverse stock split which occurred
December 18, 1995.
In October, 1995, the Company issued 250,980 shares of Common Stock to MBf
International in exchange for $1,200,000. MBf International loaned the Company
$1,200,000 to pay for AHPC's 7% Cumulative Preferred Stock having a value of
$1,200,000 which the Company had purchased on 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.
F-22
<PAGE> 25
In October, 1995, the Company issued 255,072 shares of Common Stock in exchange
for a 70% equity interest in PT Buana, an Indonesian glove manufacturing
factory, and a note receivable in the amount of $737,769.
On June 17, 1996, the Company issued (a) 488,973 shares of Common Stock to MBf
International, Ltd. for cash consideration of Malaysian Ringgit 3,500,000 which
approximates US$1.4 million; and (b) 296,296 shares of Common Stock in
satisfaction of trade payables of $1,000,000 due to PIE Healthcare.
On August 20, 1996, the Company issued an additional 672,269 shares of Common
Stock to MBf International Ltd. for a cash consideration of US$1 million.
As of December 31, 1993, there were warrants outstanding to purchase 2,300
"units" at $30.00 (the "$30.00 Units") per unit through October, 1995. Each unit
consisted of four shares of Common Stock and, until January 5, 1993, each unit
included two warrants, with each warrant exercisable to purchase one share of
Common Stock at $15.00. All of these unexercised warrants expired in 1995.
As of December 31, 1993, there were also warrants outstanding to purchase 1,771
"units" at $107.00 (the "$107.00 Units") per unit though October, 1993; each
unit consisted of 10 shares of Common Stock and, until January 15, 1993, each
unit included two warrants, with each warrant exercisable to purchase one share
of Common Stock at $15.00. During 1993, the exercise date of the $107.00 units
was extended to April 30, 1994. All of these warrants were exercised by the end
of 1994.
In November, 1994, warrants were issued to purchase 7,500 shares of the
Company's Common Stock at an exercise price of $22.50. These warrants are
exercisable through November, 1999.
In 1994, warrants to purchase 185,000 shares of the Company's Common Stock were
issued at an exercise price of $15.00. During 1995, 10,000 of these warrants,
convertible into 10,000 shares of Common Stock, expired. The remaining warrants
are currently exercisable at December 31, 1996 and expire in March, 1999.
A summary of warrant activity since December 31, 1993, is as follows:
<TABLE>
<CAPTION>
$15.00 $30.00 $107.00 $22.50
Warrants Units Units Warrants
-------- ------ ------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 - 2,300 1,771 -
Exercises - - (1,771) -
Additions 185,000 - - 7,500
-------- ------ ------ -----
Balance, December 31, 1994 185,000 2,300 - 7,500
Expirations (10,000) (2,300) - -
-------- ------ ------ -----
Balance, December 31, 1995 and 1996 175,000 - - 7,500
======== ====== ====== =====
</TABLE>
F-23
<PAGE> 26
During 1994, the Company also issued certain debt which is convertible at any
time at the noteholder's option (see Note 7) into warrants to purchase 92,500
shares of Common Stock at $20.00 to $25.00 per share. At December 31, 1996 and
1995, there were no exercises of these debt conversion warrants.
The Company has reserved Common Stock for issuance upon conversion of all
outstanding warrants.
At December 31, 1996 and 1995, a cumulative foreign currency translation
adjustment of $53,034 and $26,856, respectively, was reflected in shareholders'
equity, which represents the loss on conversion of PT Buana's Indonesian Rupiahs
to U.S. dollars.
10. STOCK OPTION PLAN:
On February 12, 1991, the Board of Directors authorized the issuance of
approximately 390,000 shares (computed based on shares outstanding subsequent to
the Share Exchange Agreement) of the Company's Common Stock in the form of stock
options, restricted stock and other equity based awards to employees and
directors. The number of shares of Common Stock reserved for the Plan are the
sum of the following: (a) 100,000 shares of Common Stock, (b) 10% of the Common
Stock outstanding and (c) Common Shares underlying any director options. Each
newly elected non- incumbent director is issued 1,000 director options.
On December 5, 1996, the Board of Directors approved an amendment and
restatement of the Plan which authorized and adjusted the number of shares
issuable to 400,000. Effective on July 23, 1996, the Board of Directors approved
the repricing of all current director and employee options to $2.75, the closing
market price on the date the repriced options were granted.
F-24
<PAGE> 27
A summary of options outstanding under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options Exercise Price Expiration
------------------- -------------- ----------
<S> <C> <C> <C>
Balance, December 31, 1993 217,529 5.90-14.40
Grants 138,550 11.90-25.00 1999-2004
Rescissions (20,000) 11.90 2001
Exercises (26,900) 5.90-11.90 2001
Expirations (20,424) 14.40 2001
-------- -----------
Balance, December 31, 1994 288,755 5.90-25.00
Grants 62,675 2.63-16.80 2005
Rescissions/expirations (200,981) 9.40-22.80 2002-2005
Exercises (500) 5.90 2001
-------- -----------
Balance, December 31, 1995 149,949 2.63-25.00
Grants 35,000 2.75 2006
Rescissions/expirations (3,500) 13.40-22.80 2003-2005
Repricing of options 127,624 2.75 2003-2005
Rescission of repriced options (127,624) 7.80-25.00 2003-2005
-------- -----------
Balance, December 31, 1996 181,449 2.63-14.40
===========
</TABLE>
The exercise price of the stock options granted in 1996, 1995, and 1994 was
established at the market price on the date of the grants. Of the 181,449
options outstanding at December 31, 1996, 157,284 are currently exercisable,
12,083 become exercisable in 1997, and 12,082 become exercisable in 1998. The
Company has reserved Common Stock for issuance upon conversion of these options.
The Company accounts for employee stock options under APB Opinion 25, as
permitted under generally accepted accounting principles. Accordingly, no
compensation cost has been recognized in the accompanying financial statements
related to these options. Had compensation costs for these options been
determined consistent with Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), which is an accounting
alternative that is permitted but not required, the Company's net loss and net
loss per share would have been $1,409,603 and $4,871,614 and $.39 and $2.00, for
1996 and 1995, respectively.
Since SFAS 123 does not apply to options granted prior to 1995, the pro forma
disclosure is not likely to be indicative of pro forma results which may be
expected in future years. This primarily relates to the fact that options vest
over several years and pro forma compensation cost is recognized as the options
vest; another factor is that additional awards may also be granted in those
years.
F-25
<PAGE> 28
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model assuming, among other things, a risk-free
interest rate of 7.5% and 5.75% for 1996 and 1995, respectively; a 0.00%
distribution yield; expected volatility of 78% and an expected life of three
years. The options granted to employees in 1995 and 1996 vest ratably over three
years. The Company has estimated the value of these options assuming a single
weighted average expected life of three years for each award granted.
Options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Range of Number Weighted- Number Weighted-
Exercise Outstanding at Average Exercisable at Average
Prices 12/31/96 Remaining Life Exercise Price 12/31/96 Exercise Price
- ------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.63-$2.75 164,625 7.0-10.0 years $2.75 140,460 $2.75
$5.90 10,000 2.5 years $5.90 10,000 $5.90
$14.40 6,824 2.5 years $14.40 6,824 $14.40
------- -------
$2.63-$14.40 181,449 2.5-10.0 years $3.36 157,284 $3.46
======= =======
</TABLE>
11. INCOME TAXES:
The effective income tax rates differ from the statutory federal income tax rate
of 34% for the years ended December 31, 1996, 1995 and 1994. A reconciliation of
the statutory rate with the effective rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ----------- ---------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate of 34% $(104,000) $(1,653,897) $ 340,180
Goodwill amortization 57,778 51,207 23,287
State income taxes - - 63,931
Refundable income taxes (198,282) - -
Increase (decrease) in deferred tax asset valuation
allowance 211,411 1,602,690 (427,398)
Other (23,796) - -
--------- ----------- ---------
Total $ (56,889) $ - $ -
========= =========== =========
</TABLE>
The Company has net operating loss carryforwards at December 31, 1996, of
approximately $5,300,000 which are available to reduce federal taxable income in
future periods and will begin expiring in 2004. In accordance with federal tax
regulations, usage of the net operating loss carryforwards are subject to
limitations in future years if certain ownership changes occur. Such ownership
changes occurred with the transactions described in Note 2. Because of these
factors, the utilization of the net operating loss at December 31, 1996, may be
significantly limited.
F-26
<PAGE> 29
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current:
Accruals not deductible until paid $ 229,701 $ 184,000
Net operating loss carryforwards 2,000,000 1,862,000
Net operating loss carryforwards - PT Buana 105,400 -
Other current liabilities - PT Buana (46,507) -
Other 27,710 -
Valuation allowance $(2,257,411) $(2,046,000)
----------- -----------
Total net current deferred tax assets $ 58,893 $ -
=========== ===========
Non-Current:
Difference between book and tax basis of property,
plant and equipment $ (187,000) $ -
Other non-current liabilities - PT Buana (13,286) -
----------- -----------
Total non-current deferred tax liabilities $ (200,286) $ -
=========== ===========
</TABLE>
In 1996, the Company elected to carry back net operating losses to 1992 which
resulted in income and a tax benefit of $198,282, which was received in January
1997. Previously, the Company elected to carry losses incurred forward for book
and tax purposes and therefore, no benefit from income taxes was previously
reflected in the consolidated statements of operations.
F-27
<PAGE> 30
12. SUPPLEMENTAL CASH FLOW INFORMATION:
The acquisition of PT Buana on October 31, 1995, involved the issuance of the
Company's Common Stock and was accounted for as follows:
<TABLE>
<S> <C>
Assets acquired-
Note receivable $ 737,769
Prepaid expenses and other current assets 43,785
Land, land improvements and construction in progress 4,556,984
Other assets 11,208
Accounts payable and accrued expenses assumed (156,375)
Other current liabilities assumed (2,940,919)
Other non-current liabilities assumed (1,155,597)
-----------
$ 1,096,855
===========
Common Stock issuance allocated to-
Common Stock $ 2,551
Additional paid-in capital 1,094,304
-----------
$ 1,096,855
===========
Other non-cash investing and financing activities are as follows-
Repayment of note receivable (Note 3) $ 1,500,000
Conversion of loan to Common Stock (Note 3) 1,200,000
===========
</TABLE>
Cash paid for interest on debt outstanding for the years ended December 31,
1996, 1995 and 1994, was $1,493,782, $730,405 and $266,247, respectively.
Cash paid for income taxes during the year ended December 31, 1995 was
approximately $75,000. There were no income taxes paid during 1996 or 1994.
13. GEOGRAPHIC SEGMENT INFORMATION (CONSOLIDATED):
The United States is considered the country of origin for all of the Company's
revenues for the three years presented herein, including exports from the U.S.
Identifiable assets at December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
United States Asia Total
------------- ----------- -----------
<S> <C> <C> <C>
Current assets $13,118,338 $ 1,297,956 $14,416,294
Fixed assets 258,859 9,322,989 9,581,848
Other assets 3,339,992 175,490 3,515,482
----------- ----------- -----------
Consolidated total $16,717,189 $10,796,435 $27,513,624
=========== =========== ===========
</TABLE>
F-28
<PAGE> 31
Identifiable assets at December 31, 1995, consist of the following:
<TABLE>
<CAPTION>
United States Asia Total
------------- ---------- -----------
<S> <C> <C> <C>
Current assets $15,649,688 $ 402,029 $16,051,717
Fixed assets 287,712 5,159,610 5,447,322
Other assets 4,718,724 155,441 4,874,165
----------- ---------- -----------
Consolidated total $20,656,124 $5,717,080 $26,373,204
=========== ========== ===========
</TABLE>
F-29
