<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
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 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 office)
(630) 285-9191
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's Common Stock, par value $.01 per
share, and issuer's Series A Convertible Common Stock, par value $.01 per
share, outstanding as of August 8, 1997 was 3,058,333 and 1,252,538,
respectively.
<PAGE> 2
MBf USA, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets
June 30, 1997 (unaudited) and December 31, 1996 (audited)...........pg. 1
Consolidated Statements of Operations (unaudited) for the
Three Months Ended June 30, 1997 and 1996...........................pg. 3
Consolidated Statements of Operations (unaudited) for the
Six Months Ended June 30, 1997 and 1996.............................pg. 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 1997 and 1996.............................pg. 5
Notes to the Interim Consolidated Financial Statements (unaudited)..pg. 6
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................pg. 10
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K....................................pg. 14
<PAGE> 3
MBf USA. INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 422,652 $ 321,038
Accounts receivable - trade, net of allowance for
doubtful accounts of $102,000 in 1997 and
$73,000 in 1996 4,350,022 4,677,490
Inventories 8,896,259 8,094,649
Prepaid expenses 757,369 999,704
Other current assets 57,251 58,893
Current assets of discontinued operations 219,493 264,520
------------ ------------
Total current assets 14,703,046 14,416,294
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 674,915 694,272
Construction in progress 1,474,707 1,074,092
Equipment, furniture and fixtures 8,381,460 7,183,071
Building improvements 1,251,046 1,262,248
Vehicles 87,016 105,023
------------ ------------
Total property, plant and equipment 11,869,144 10,318,706
Less - Accumulated depreciation (1,111,232) (736,858)
------------ ------------
Property, plant and equipment, net 10,757,912 9,581,848
------------ ------------
INVESTMENT IN LSAI 970,200 1,015,117
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $384,834
in 1997 and $364,305 in 1996 1,365,166 1,385,695
Due from affiliates 764,605 550,210
Other assets 85,327 297,209
Assets of discontinued operations - 267,251
------------ ------------
Total other assets 2,215,098 2,500,365
------------ ------------
$ 28,646,256 $ 27,513,624
============ ============
</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
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
--------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 3,912,556 $ 3,291,506
Trade notes payable to banks 5,403,760 7,010,453
Notes payable and current portion of
long-term obligations 5,254,914 3,914,914
Due to affiliates 329,982 382,358
Accrued expenses 2,129,127 1,219,914
Current liabilities of discontinued operations 1,069,785 302,416
--------------- ---------------
Total current liabilities 18,100,124 16,121,561
--------------- ---------------
LONG-TERM OBLIGATIONS
7,092,079 7,098,132
--------------- ---------------
OTHER LONG-TERM LIABILITIES:
Deferred income taxes 194,702 200,286
Other liabilities 613,231 341,047
--------------- ---------------
Total other long-term liabilites 807,933 541,333
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY 641,571 221,174
--------------- ---------------
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 shares
authorized; 3,188,333 shares issued and outstanding 31,883 31,883
Additional paid-in capital 10,875,897 10,875,897
Accumulated deficit (7,382,487) (6,012,811)
Cumulative foreign currency translation adjustment (180,066) (53,034)
Net unrealized loss on marketable equity securities (30,167) -
Less - Common stock in treasury, at cost,
130,000 shares in 1997 and 1996 (1,323,036) (1,323,036)
--------------- ---------------
Total shareholders' equity 2,004,549 3,531,424
--------------- ---------------
$ 28,646,256 $ 27,513,624
=============== ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
2
<PAGE> 5
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
------------------------------------
1997 1996
--------------- ---------------
REVENUES: (Unaudited)
<S> <C> <C>
Product sales, net $ 12,976,144 $ 11,105,522
Interest income 7,984 9,604
Rental income 38,040 15,947
Other income (loss) 5,324 5,208
--------------- ---------------
Total revenues 13,016,844 11,136,281
--------------- ---------------
COSTS AND EXPENSES:
Cost of product sales 9,983,234 9,102,782
Selling, general and administrative 2,712,115 1,901,634
Interest 292,378 282,737
--------------- ---------------
Total costs and expenses 12,987,727 11,287,153
--------------- ---------------
Income (loss) from continuing operations before
minority interest in subsidiary, and provision
for income taxes 29,117 (150,872)
INCOME (LOSS) FROM MINORITY INTEREST IN SUBSIDIARY 65,154 (28,282)
--------------- ---------------
Income (loss) from continuing operations before
provision for income taxes 94,271 (179,154)
PROVISION FOR INCOME TAXES - -
--------------- ---------------
Income (loss) from continuing operations 94,271 (179,154)
LOSS FROM DISCONTINUED OPERATIONS (1,159,562) (309,883)
--------------- ---------------
Net loss $ (1,065,291) $ (489,037)
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARE AND
COMMON SHARE EQUIVALENTS OUTSTANDING 4,310,871 2,913,736
=============== ===============
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS:
Continuing operations $ 0.02 $ (0.06)
Discontinued operations (0.27) (0.11)
--------------- ---------------
$ (0.25) $ (0.17)
=============== ===============
</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,
------------------------------------
1997 1996
--------------- ---------------
REVENUES: (Unaudited)
<S> <C> <C>
Product sales, net $ 24,891,870 $ 22,277,779
Interest income 14,531 16,003
Rental income 76,166 50,694
Other income 11,817 5,208
--------------- ---------------
Total revenues 24,994,384 22,349,684
COSTS AND EXPENSES: --------------- ---------------
Cost of product sales 19,295,867 18,403,988
Selling, general and administrative 5,284,658 3,592,192
Interest 524,675 492,039
--------------- ---------------
Total costs and expenses 25,105,200 22,488,219
--------------- ---------------
Income (loss) from continuing operations before
minority interest in subsidiary, and provision
for income taxes (110,816) (138,535)
INCOME (LOSS) FROM MINORITY INTEREST IN SUBSIDIARY 114,938 (30,202)
--------------- ---------------
Income (loss) from continuing operations before
provision for income taxes 4,122 (168,737)
- -
PROVISION FOR INCOME TAXES --------------- ---------------
Income (loss) from continuing operations 4,122 (168,737)
LOSS FROM DISCONTINUED OPERATIONS (1,373,798) (561,253)
--------------- ---------------
Net loss $ (1,369,676) $ (729,990)
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARE AND
COMMON SHARE EQUIVALENTS OUTSTANDING 4,310,871 2,913,736
=============== ===============
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS:
Continuing operations $ 0.00 $ (0.06)
Discontinued operations (0.32) (0.19)
--------------- ---------------
$ (0.32) (0.25)
=============== ===============
</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,
-----------------------------------
1997 1996
--------------- ---------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,369,676) $ (729,990)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 390,269 129,869
Amortization 20,529 28,890
Provision for doubtful accounts 102,000 18,000
Loss from discontinued operations 1,373,798 561,253
Loss on disposal of property, plant and equipment 7,584 -
Gain on sale of LSAI common stock (37) -
Changes in certain assets and liabilities:
Accounts receivable - trade 225,468 (13,798)
Inventories (801,610) 1,362,657
Prepaid expenses 242,335 (31,752)
Other assets 213,525 (260,733)
Accounts payable - trade 621,050 (3,443,403)
Accrued expenses 909,213 (66,789)
Deferred income taxes (5,584) -
Amounts due (from) to affiliates (266,771) (33,262)
Net assets of condom discontinued operations (294,151) 257,518
--------------- ---------------
Net cash provided by (used in) operating activities 1,367,942 (2,221,540)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,573,917) (3,979,725)
Proceeds on sale of LSAI common stock 14,787 -
Minority interest in subsidiary 692,581 44,172
--------------- ---------------
Net cash used in investing activities (866,549) (3,935,553)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on trade notes payable to banks (1,606,693) 1,441,119
Proceeds from issuance of stock - 2,402,806
Net borrowings (payments) from notes payable 2,015,000 2,538,002
Payments on notes payable (681,053) (826,666)
--------------- ---------------
Net cash provided by (used in) financing activities (272,746) 5,555,261
--------------- ---------------
IMPACT OF EXCHANGE RATES ON CASH (127,033) (23,094)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 101,614 (624,926)
321,038 706,309
CASH AND CASH EQUIVALENTS, beginning of period --------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 422,652 $ 81,383
=============== ===============
</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, 1997
1. Basis of Presentation:
On February 27, 1992 the shareholders of American Drug Screens, Inc. (a
Maryland corporation which changed its name on May 21, 1993 to MBf USA, Inc.,
the "Company") approved a transaction (the "Share Exchange") whereby the
shareholder of American Health Products Corporation (a Texas corporation,
"AHPC") acquired control of the Company through a series of integrated
transactions, including (a) the increase in authorization of the Company's
Common Stock, par value $.01 per share ("Common Stock") from 2,000,000 to
4,000,000 shares, and the authorization of 1,252,538 shares of a new Series A
Convertible Common Stock, par value $0.01 per share ("Series A Common Stock"),
(b) the acquisition by a wholly owned subsidiary of the Company of all the
issued and outstanding shares of common stock of AHPC from MBf International,
Ltd., a Hong Kong corporation and the majority shareholder of the Company ("MBf
International"), in exchange for 1,252,538 shares of Series A Common Stock; and
(c) the restructuring of the Board of Directors by creating two classes of
directors. Accordingly, the transaction was accounted for as a purchase.
In connection with the acquisition, MBf International acquired from the
Company a class of securities conferring upon MBf International control of the
Company. MBf International is a subsidiary of MBf Holdings Berhad ("MBf
Holdings"), a Malaysian publicly traded company and the ultimate parent of the
Company.
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.
The unaudited consolidated financial statements have been prepared for
interim periods only and do not include all of the information and note
disclosures required by generally accepted accounting principles. These
consolidated statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. The accompanying
consolidated financial statements have not been audited by independent
accountants in accordance with generally accepted accounting standards, but in
the opinion of management, such consolidated financial statements include all
adjustments (consisting solely of normal recurring adjustments) necessary to
fairly present the Company's financial position, results of operations and cash
flows. The results of operations for the six month period ended June 30, 1997
may not be indicative of the results that may be expected for the year ended
December 31, 1997.
2. Description of Business:
MBf USA, Inc. and subsidiaries market medical examination gloves in the
United States. The Company's 70% owned subsidiary in Indonesia is a
manufacturer of medical examination gloves and began production in April 1996.
In November 1996, the Company adopted a plan to
6
<PAGE> 9
discontinue the business of distributing Playboy(R) condoms and has reflected
it as such in the accompanying consolidated financial statements. In
accordance with the plan, the Company continued to distribute Playboy(R)
condoms only through June 30, 1997.
3. Condom Discontinued Operations:
Effective on November 12, 1996, the Company adopted a plan to discontinue
its Playboy(R) condom business. The Company reached an amicable settlement
with Playboy Enterprises, Inc. to terminate their license agreement under which
the Company distributed Playboy(R) brand condoms in 15 countries. Under the
negotiated agreement, the Company, until June 30, 1997, would continue to sell
Playboy(R) condoms in the countries where it had launched the product.
Subsequent to June 30, 1997, the Company will be entitled to receive royalty
revenues on sales of Playboy(R) condoms in these 15 countries, if any, and
Japan through June 30, 2000 and June 30, 1998, respectively. Amounts under the
royalty agreement will be recognized when received and are not anticipated to
be significant.
For the three months ended June 30, 1997 and 1996, the loss from
discontinued operations of the condom business amounted to $1,159,562 and
$309,883, respectively. These losses include revenues from Playboy(R) condom
sales which were $210,973 and $265,833 for the three months ended June 30, 1997
and 1996, respectively. The loss from discontinued operations for the quarter
ended June 30, 1997 is the result of a change in management's estimate of the
expected loss on disposal of the condom business. The change in Management's
estimate includes reserves for potential condom product returns and related
charges which are stipulated in its distribution agreements.
4. Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, American Health Products
Corporation ("AHPC") and MBf America, Inc. (an inactive company), as well as
its 70% owned Indonesian glove manufacturing subsidiary, PT MBf Buana
Multicorpora ("PT Buana"). Accordingly, PT Buana's assets, liabilities, equity
and minority interest are included in the consolidated financial statements of
the Company. All significant intercompany transactions have been eliminated in
consolidation.
5. Foreign Exchange:
Due to the Company's business and operating facility in Indonesia, the
Company may experience transaction and translation gains and losses because of
currency fluctuations.
The financial statements and transactions of the Company's Indonesian
subsidiary, PT Buana, are maintained in their functional currency (Indonesian
Rupiah dollars) and translated into U.S. dollars in accordance with Statement
of Financial Accounting Standards No. 52. Assets and liabilities are
translated at the current exchange rate in effect at the balance sheet date and
shareholders' equity is translated at historical exchange rates. Revenues and
expenses are translated at the average exchange rate for each period.
Translation adjustments, which result from the process of translating
Indonesian Rupiah dollars into U.S. dollars, are accumulated in a separate
component of shareholders' equity in accordance with Statement No. 52. Such
adjustments are unrealized. The Company incurred a foreign currency exchange
loss of $146,226 from foreign currency exchange transactions in the first half
of 1997.
7
<PAGE> 10
6. Investment in LSAI:
At June 30, 1997, the Company's investment in Laboratory Specialists of
America, Inc. ("LSAI") of $970,200 includes LSAI common stock, valued at
$617,077 (cost of $647,244) and a note receivable from LSAI of $353,123.
The Company adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities" which 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 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 June 30, 1997, a net unrealized loss of $30,167 on the common stock
investment in LSAI has been reflected in shareholders equity, which represents
the reduction of the investment value below cost.
7. PT Buana:
The Company entered into a Stock Acquisition Agreement with MBf
International dated October 31, 1995, whereby MBf International exchanged its
70% beneficial interest in 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 were under common control, the
assets and liabilities acquired were recorded at PT Buana's historical cost.
During June 1997, the Company converted the Note into equity of PT Buana. The
minority shareholders contributed their proportionate share of debt into equity
as well to bring PT Buana's total common stock outstanding to $2.5 million.
The factory began production in April, 1996, and was in the start-up phase
of operation up to that time. Accordingly, the factory had capitalized certain
start-up costs incurred and amortized these costs over a one-year period upon
commencement of operations in April 1996; these start-up costs were fully
amortized by May 1997.
At June 30, 1997, the Company has recorded a minority interest liability
in the PT Buana subsidiary of $641,571 representing the non-owned 30% interest
in the subsidiary. The minority interest of PT Buana is owned by two
Indonesian corporations.
8. 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.
8
<PAGE> 11
The Company had net operating loss carry forwards ("NOLs") at December 31,
1996 of approximately $5,300,000 which were available to reduce Federal taxable
income in future periods and will begin expiring in 2004. 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, and additional changes in ownership are
anticipated to occur on closing of the transactions contemplated in Note 12,
which would further lesson the ability of the Company to utilize such loss
carryforwards. Because of these factors, the utilization of the NOLs generated
prior to December 31, 1996 may be significantly limited.
9. Contingencies:
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-three actions, one of which was settled in January 1996 for a nominal
amount, two cases which have been dismissed, and one which was recently served
in April 1997. 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.
10. Reclassifications:
Certain reclassifications have been made to the consolidated statements of
operations for the three and six months ended June 30, 1996 as well as to the
consolidated statement of cash flows for the six months ended June 30, 1996.
These reclassifications have been made for comparison purposes only and have no
effect on the net loss for those periods.
11. Supplemental Cash Flow Information:
Other noncash investing activities for the six months ended June 30, 1997
include $30,167 of unrealized loss on the common stock investment in LSAI.
The Company's 70% owned subsidiary PT Buana converted debt obligations
owed to its minority shareholders to equity in the amount of $327,816.
12. Subsequent Events:
A. In May 1997, the Company announced that its majority shareholder, MBf
International Ltd. ("MBfI") had entered into two separate agreements with its
powder-free supplier, Wembley Rubber Products (M) Sdn. Bhd. ("Wembley") which
called for the following:
i) MBfI selling all of the Company's Series A Common Stock (1,252,538
shares) to Wembley for approximately $6.27 million; and
ii) the purchase of 2,500,000 shares of the Company's unregistered
Common Stock by Wembley at a price of $2.70 per share.
9
<PAGE> 12
The agreements were scheduled to close simultaneously on August 8, 1997.
However, the date of closure has been extended to September 8, 1997 pending
receipt of Government approval in Indonesia, and may be extended for an
additional thirty days if such approvals have not been obtained by such date.
B. In August 1997, the Company was notified by Wembley that the Food and Drug
Administration ("FDA") has placed an FDA Import Alert on their factory. This
FDA Import Alert prohibits Wembley from distributing product into the United
States marketplace. Currently, Wembley provides the Company with all of its
latex powder-free exam gloves. The Import Alert does not affect powdered
gloves shipped from AHPC's manufacturing subsidiary in Indonesia. The Company
is assisting Wembley and working with the FDA to quickly release the FDA Import
Alert. A detailed response to the issues raised by the FDA has been submitted,
and the Company and Wembley are awaiting the determination of the FDA. The
Company is also working towards sourcing latex powder-free exam gloves from
other suppliers, allowing the fulfillment of customers' orders. In the event
that Wembley and/or the Company is unsuccessful, this will have an adverse
effect on the financial condition of the Company.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.1
The Company's subsidiary, AHPC, is engaged in the marketing and
distribution of medical examination gloves in the United States and has been in
the glove business since its incorporation in January 1989. The Company
continued to achieve record glove sales in the second quarter of 1997.
PT Buana began shipping powdered latex examination gloves to AHPC in May
1996 and sold virtually all of its production, amounting to $3,888,116, to AHPC
in the first six months of 1997. All significant intercompany transactions
have been eliminated in consolidation. At present, PT Buana only produces
powdered latex exam gloves.
The results of operations for the three months ended and six months ended
June 30, 1997 and 1996 exclude the revenues and expenses from the discontinued
operations of the Playboy(R) condom business. Accordingly, all condom business
activity is reflected in the loss from discontinued operations as a separate
line item in the consolidated statements of operations. At June 30, 1997, the
Company believes it has recorded all costs associated with the condom business.
- ---------------------
1) Forward looking statements in this Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, including statements
regarding new products and markets, gross margins, selling, general and
administrative expenses, liquidity and cash needs, and the Company's plans and
strategies, are all based on current expectations and the Company assumes no
obligation to update this information. Numerous factors could cause actual
results to differ from those described in the forward looking statements. The
Company cautions investors that its business is subject to significant risks
and uncertainties. See the risk factors as disclosed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 under the heading
"Risks Affecting Forward Looking Statements and Stock Prices."
10
<PAGE> 13
Total revenues are comprised primarily of glove sales from AHPC's
examination glove product line. Glove product sales totaled $12,976,144 and
$11,105,522 for the three months ended June 30, 1997 and 1996, respectively.
This increase represents a 16.8% increase in glove sales in the second quarter
of 1997 over the comparable period in 1996. Glove product sales for the six
months ended June 30, 1997 were $24,891,870 compared to $22,277,779 for the
same period in 1996, an increase of over 11.7%. These increases are
attributable to AHPC's more developed customer relationships, sales price
increases over 1996, and an increase in the sales mix to higher priced
products, particularly latex powder free examination gloves. The Company is
continuing to strive to increase powder free and non-latex glove sales as the
exam glove market moves towards these products and away from powdered latex
gloves. During the first six months of 1997, two of AHPC customers accounted
for approximately 69% of glove sales. The loss of either customer would have a
materially adverse effect on the Company. See Note 12 to the Company's
financial statements.
Revenues from Playboy(R) condom sales were $210,973 and $265,833 for the
three months ended June 1997 and 1996, respectively. Total condom sales during
the six months ended June 30, 1997 were $385,461 compared to $1,027,711 during
the same period in 1996. These revenues are included in the loss from
discontinued operations in the consolidated statements of operations and
declined due to the Company's exit of the condom business pursuant to the
agreement with Playboy in November 1996. Under the exit plan, the Company
agreed to continue to sell Playboy(R) condoms until June 30, 1997 and will
receive royalty income, if any, for up to three years after that date from
sales in up to 15 countries in which the Company had launched the Playboy(R)
condoms. The Company will also receive royalty revenues on Playboy(R) condom
sales, if any, in Japan through June 30, 1998. There can be no assurance that
any royalty revenues will be earned by the Company in any or all of the 15
countries or Japan, which is dependent upon Playboy Enterprises Inc. ("PEI")
being able to locate a replacement licensee and utilizing the current
distributors in those countries.
Cost of goods sold as a percentage of sales for the three and six months
periods ended June 30, 1997 were 76.9% and 77.5%, respectively, compared to
82.0% and 82.6%, respectively, for the comparable period in 1996. These
percentage reductions in the cost of sales and improvement in gross margin are
attributed to: (i) more favorable glove purchase prices obtained in 1997 due
to a reduction in the raw material latex price; (ii) an increase in sales of
higher profit margin glove products, particularly powder free examination
gloves; (iii) increased glove sale prices in 1997 over 1996; (iv) reduced ocean
freight import rates; (v) the U.S. government lowering the duty importation
fees associated with examination gloves, effective January 1, 1997; (vi) the
duty free status of importing Indonesian manufactured glove products into the
U.S.; and (vii) the inclusion of PT Buana's manufacturing gross margins in
1997, which increased the overall margin from internally manufactured gloves
versus third party manufactured gloves. The Company currently expects its
gross margins to continue to be affected by changes in product mix, competition
and other factors.
Selling, general and administrative ("SG&A") expenses increased from
$1,901,634 in the three months ended June 30, 1996 to $2,712,115 in the same
period as 1997, a 42.6% increase. For the six months ended June 30, 1997, the
SG&A expenses were $5,284,658 as compared to $3,592,192 in the comparable
period in 1996, a 47% increase. These increases are attributable to: (i) the
increase in SG&A expenses from PT Buana's operations, which began in April
1996; (ii) an increase in selling expenses at AHPC commensurate with its sales
growth; (iii) the expansion of
11
<PAGE> 14
the Company's sales and support forces; (iv) an increase in September 1996 in
rebates provided to customers; and (v) the inclusion in 1997 of a realized
foreign currency exchange loss of $146,226 at the Indonesian facility. As a
percentage of net product sales, SG&A expenses increased to 20.9% for the three
months ended June 30, 1997, compared with 17.1% in the comparable period in
1996. The Company currently expects to make additional investments in sales
and marketing personnel to further develop established markets and to introduce
new products to the marketplace. Accordingly, the Company currently expects
that its SG&A expense will continue to increase in absolute dollars but may
decline as a percentage of net revenues in the future.
Interest expense increased from $282,737 for the quarter ended June 30,
1996 to $292,378 for the same period in 1997. This increase is attributable to
the inclusion of PT Buana's debt facility and interest expense in the second
quarter of 1997 which was only partially included in the second quarter of 1996
due to its start up nature at that time. Additionally, PT Buana's debt
outstanding has increased in the second quarter of 1997 thus adding additional
interest expense.
The Company continued to have a loss from discontinued condom operations
of $1,159,562 and $309,883 in the second quarters ended June 30, 1997 and 1996,
respectively. This brings the condom losses for the first half of 1997 and
1996 to $1,373,798 and $561,253, respectively. The 1996 loss was the result of
very high SG&A expenses from the introduction, launch, and advertising costs
associated with running the condom business in numerous foreign countries. The
loss from discontinued operations for the quarter ended June 30, 1997 is the
result of a change in management's estimate of the expected condom business
operating results through June 30, 1997, which now includes condom inventory
returns and related costs which are allowable under certain condom
distributorship agreements in the event of cancellation. At June 30, 1997, the
Company believes it has reserved for all future revenues and costs associated
with the condom business.
For the three months ended June 30, 1997 and 1996, the Company recorded a
net loss of $1,065,291 and $489,037, respectively. The loss in the second
quarter ended June 30, 1997 is created by the condom loss from discontinued
operations. The overall loss per share was $ .25 and $.17 for the second
quarter of 1997 and 1996, respectively. For the six months ended June 30,
1997, the Company incurred a net loss of $1,369,676 and a net loss per share of
$.32. Again, the condom business loss created the large net loss for the six
months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had a working capital deficit of $3,397,078
compared to a deficit of $1,705,267 at December 31, 1996. The decrease in
working capital is primarily attributable to an increase in current debt
obligations, accrued expenses, and current liabilities associated with the
discontinued condom operations, as well as to the net loss of $1,369,676.
Cash and cash equivalents at June 30, 1997 was $422,652 and increased
$101,614 from $321,038 at December 31, 1996. The Company experienced an
increase in cash flows in the first six months of 1997 primarily from cash
provided by operating activities.
The Company experienced positive cash flow from operations of $1,367,942
during the first half of 1997 as a result of an increase in trade accounts
payable and accrued expenses, offset
12
<PAGE> 15
by an increase in inventories. In the first half of 1997, the Company used
$1,573,917 for investing in the purchase of fixed assets associated with
operating the manufacturing facility in Indonesia. The Company experienced
negative cash flow of $272,746 from financing activities during the six months
ended June 30, 1997 from net reductions of $1,606,693 in letter of credit debt
and a principal payment on PT Buana's syndicated loan debt of $600,000, offset
by additional borrowings of $2,015,000. The additional borrowings are
primarily from PT Buana's bridging loan in the amount of $2,000,000 which was
obtained in April 1997 and due in full in October 1997. This bridging loan
bears interest at 11% per year and can be renewed.
At June 30, 1997, the Company's principal sources of liquidity included:
$422,652 of cash and cash equivalents; $7,900,000 available under a secured
bank line of credit and letter of credit facility, expiring in October 1997;
$4,600,000 available under a bank unsecured letter of credit facility;
$5,900,000 available under a secured Indonesian bank loan facility with a
banking syndicate; and $2,000,000 available under the recently acquired
bridging loan, due in October 1997. At June 30, 1997, approximately $4,900,000
was outstanding under the $7,900,000 facility, approximately $2,940,000 was
outstanding under the $4,600,000 letter of credit facility, all $5,900,000 was
outstanding under the Indonesian syndicated bank facility, and all $2,000,000
was outstanding under the Indonesian bridging loan.
The Company's present credit facilities are supported by the guarantee by
MBf International, and the Company may require the guarantee of Wembley (or of
MBf International if the Wembley transaction is not consummated) upon
expiration of such facilities in connection with the procurement of a new
credit facility. Should the Company be unable to procure a new credit facility
or renew its existing facilities, its operations would be adversely affected.
Inventories at June 30, 1997 increased to approximately $8,900,000
compared with approximately $8,100,000 at December 31, 1996. This increase was
primarily due to managed inventory levels in anticipation of future increased
sales volume.
Net trade accounts receivable at June 30, 1997 decreased to approximately
$4,350,000 from approximately $4,675,000 at December 31, 1996. The reduction
in trade receivables is due to heightened collection efforts.
In October 1994, pursuant to two debenture and warrant purchase agreements
between the Company and two affiliated trusts, 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 1.5% over the prime rate.
Each debenture is convertible into Common Stock of the Company at a conversion
price of $25.00 per share. In addition, each trust received a warrant
exercisable over five years to purchase 7,500 shares of Common Stock of the
Company at an exercise price of $22.50 per share. At June 30, 1997 and
December 31,1996, long-term debt of $2,000,000 was outstanding as a result of
this transaction.
Proceeds from these debentures were primarily used to fund the Playboy(R)
condom business. For the six months ended June 30, 1997 and 1996, the Company
incurred interest expense of approximately $100,000 on this indebtedness. This
expense has been included in the loss from discontinued condom operations in
accompanying financial statements.
13
<PAGE> 16
The Company currently expects to have cash needs during 1997 in addition
to its expected growth in the glove business. These cash needs may arise in
connection with various events such as for: (i) the expansion into new glove
products; (ii) the continued conversion to a full time sales force versus the
utilization of independent manufacturer sales representatives; (iii) the hiring
of additional support staff; (iv) the continuing completion of the
manufacturing facility in Indonesia and possible upgrading to produce powder
free gloves; (v) upgrading its information technology; and (vi) for other
operating expenses.
The Company is continuing to seek and identify additional sources of
funding to provide capital in the event its credit facilities do not provide
sufficient liquidity to fund the Company's ongoing operations. The proposed
transaction with Wembley, if consummated, would result in the issuance of
2,500,000 shares of Common Stock in exchange for $6,750,000, which would
substantially increase liquidity.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K Current Report dated May 20, 1997 which reported information
under Item 5.
Form 8-K Current Report dated June 13, 1997 which reported information
under Item 9.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MBf USA, Inc.
(Registrant)
Date: August 19, 1997 By: /s/ Stephen Tan
-----------------------
Name: Stephen Tan
Title: Chief Financial Officer
15
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