<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K A-2
(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, 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
WRP CORPORATION, FORMERLY KNOWN AS
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 .
----- -----
<PAGE> 2
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 the
Nasdaq SmallCap Market on March 18, 1998: $5,345,144.
At March 18, 1998, 3,061,667 shares of the Registrant's Common Stock and
1,252,538 shares of Series A Common Stock were outstanding.
ii
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DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
iii
<PAGE> 4
MBf USA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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<TABLE>
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PAGE
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PART I
<S> <C> <C>
ITEM I. BUSINESS................................................. 1
ITEM 2. PROPERTIES............................................... 7
ITEM 3. LEGAL PROCEEDINGS........................................ 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................... 10
ITEM 6. SELECTED FINANCIAL DATA.................................. 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............. 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... 22
ITEM 11. EXECUTIVE COMPENSATION................................... 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................... 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........... 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K... 33
</TABLE>
<PAGE> 5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A list of financial statements and financial statement schedules for the
Registrant is contained in "Index to Financial Statements and Financial
Statement Schedules of MBf USA, Inc." on page F-1.
None.
24
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8K
(a)(1) and (2) Financial Statements. A list of financial statements for the
Registrant is contained in "Index to Financial Statements of
MBf USA, Inc." on page F-1.
(a)(3) Exhibits. The following exhibits are included with this report:
EXHIBIT NO. NAME OF EXHIBIT
- ----------- ---------------
3.1 Certificate of Incorporation of the Company, incorporated herein by
reference to Exhibit No. 3.1 to the Company's Form S-1 Registration
Statement (Registration No. 33-36206).
3.2 Certificate of Amendment to Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit No. 3.2 to the Company's
Form S-1 Registration Statement (Registration No. 33-36206).
3.3 Certificate of Amendment to Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.3 to the Company's
Form 10-K Annual Report for the fiscal year ended December 31, 1991
(File No. 0-17458).
3.4 Bylaws of the Company, incorporated herein by reference to Exhibit No.
3.3 to the Company's Form S-18 Registration Statement (Registration No.
33-23164-FW).
3.5 Amendment to Bylaws of the Company, incorporation herein by reference to
Exhibit 3.5 to the Company's Form 10-K Annual Report for the fiscal year
ended December 31, 1991 (File No. 0-17458).
4.1 Common Stock Certificate, incorporated herein by reference to Exhibit
No. 4.1 to the Company's Form S-18 Registration Statement (Registration
No. 33-23164-FW).
4.2 Warrant Agreement with The Liberty National Bank & Trust Company,
incorporated by reference to Exhibit No. 4.2 to the Company's Form S-1
Registration Statement (Registration No. 33-36206).
4.3 Warrant, incorporated by reference to Exhibit No. 4.3 to the Company's
Form S-1 Registration Statement (Registration No. 33-36206).
10.1 Articles of Merger of Labspecs, Inc. and Laboratory Specialists, Inc.,
incorporated herein by reference to Exhibit No. 2 to the Company's Form
10-K Annual Report for the fiscal year ended December 31, 1988 (File No.
0-17458).
38
<PAGE> 7
10.2 Plan of Reorganization and Agreement of Merger between the Company and
Laboratory Specialists, Inc., incorporated herein by reference to
Exhibit No. 10.1 to the Company's Form 8 Amendment to Form 10-K, filed
with the Securities and Exchange Commission on June 16, 1989 (File No.
0-17458).
10.3 Plan of Reorganization and Agreement of Merger by and among the Company,
Laboratory Specialists, Inc. of California, and Abused Drugs Laboratory,
Inc., incorporated herein by reference to Exhibit No. 10.1 to the
Company's Form 8-K Current Report filed with the Securities and Exchange
Commission on September 26, 1989 File No. 0-17458).
10.4 Financial Public Relations Contract with The Wall Street Group,
incorporated herein by reference to Exhibit No. 10 to the Company's Form
10-K Annual Report for the fiscal year ended December 31, 1988 (File No.
0-17458).
10.5 Promissory Note from the Company to Arthur R. Peterson, Jr.,
incorporated herein by reference to Exhibit No. 10.2 to the Company's
Form 8 Amendment to Form 10-K, filed with the Commission on June 16,
1989 (File No. 0-17458).
10.6 Asset Purchase Agreement between the Company and DataChem, Inc., dated
December 22, 1989, incorporated herein by reference to Exhibit No. 10.5
to the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1989 (File No. 0-17458).
10.7 Lease of office space, Oklahoma City, Oklahoma, incorporated herein by
reference to Exhibit No. 10.6 to the Company's Form 10-K Annual Report
for the fiscal year ended December 31, 1989 (File No. 0-17458).
10.8 Asset Purchase Agreement dated September 30, 1991, between LSI of
California and Medtox Laboratories, Inc., incorporated herein by
reference to Exhibit No. 10.1 to the Company's Form 8-K Current Report
dated September 30, 1991 (File No. 0-17458).
10.9 Distributorship Agreement dated February 27, 1992, by and among AHPC,
ARPI and Multi-Com., incorporated herein by reference to Exhibit 10.9 to
the Company's Form 10-K Annual Report for the fiscal year ended December
31, 1991 (File No. 0-17458).
10.10 Employment Agreement with John Simonelli dated February 27, 1992,
incorporated herein by reference to Exhibit 10.10 to the Company's Form
10-K Annual Report for the fiscal year ended December 31, 1991 (File No.
0-17458).
10.11 Employment Agreement with Larry E. Howell dated February 27, 1992,
incorporated herein by reference to Exhibit No. 10.11 to the Company's
Form 10-K Annual Report for the fiscal year ended December 31, 1991
(File No. 0-17458).
39
<PAGE> 8
10.12 Employment Agreement with Arthur R. Peterson, Jr. dated February 27,
1992, incorporated herein by reference to Exhibit No. 10.12 to the
Company's Form 10-K Annual Report for the fiscal year ended December 31,
1991 (File No. 0-17458).
10.13 Omnibus Equity Compensation Plan approved by the Company's shareholders
on February 27, 1992, incorporated herein by reference to Exhibit No.
10.13 to the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1991 (File No. 0-17458).
10.14 Share Exchange Agreement by and among the Company, MBf America, Inc.
and MBf International Limited, incorporated herein by reference to
Exhibit No. 7.2 to the Company's Form 8-K Current Report filed with the
Commission March 5, 1992 (File No. 0-17458).
10.15 Employment Agreement with William A. Forster dated October 15, 1992,
incorporated herein by reference to Exhibit No. 10.15 to the Company's
Form 10-K Annual Report for the fiscal year ended December 31, 1992
(File No. 0-17458).
10.16 Amendment to Employment Agreement with John Simonelli dated September
19, 1992, incorporated herein by reference to Exhibit No. 10.16 to the
Company's Form 10-K Annual Report for the fiscal year ended December 31,
1992 (File No. 0-17458).
10.17 Amended Employment Agreement with Larry Howell dated September 19, 1992,
incorporated herein by reference to Exhibit No. 10.17 to the Company's
Form 10-K Annual Report for the fiscal year ended December 31, 1992
(File No. 0-17458).
10.18 Option Agreement, dated November 24, 1992, among Frederick P. Heisler
and Regina Heisler, Donald E. Bennett and Peggy Bennett, Disposable
Medical Products, Inc., D.P.I. de Mexico, S.A. de C.V. and American Drug
Screens, Inc., incorporated herein by reference to Exhibit No. 10.18 to
the Company's Form 10-K Annual Report for the fiscal year ended December
31, 1992 (File No. 0-17458).
10.19 Supply and Requirements Agreement, dated November 24, 1992, among
Disposable Medical Products, Inc., D.P.I. de Mexico, S.A. de C.V. and
American Health Products Corporation, incorporated herein by reference
to Exhibit No. 10.19 to the Company's Form 10-K Annual Report for the
fiscal year ended December 31, 1992 (File No. 0-17458).
10.20 Asset Purchase Agreement, dated November 25, 1992, among the Company,
Premier Latex, Inc. and Premier Laboratories, Inc., incorporated herein
by reference to Exhibit No. 10.20 to the Company's Form 10-K Annual
Report for the fiscal year ended December 31, 1992 (File No. 0-17458).
10.21 Revolving Credit Loan Agreement between Bank Bumiputra Malaysia Berhad
(New York Branch) and American Health Products Corporation dated as of
September 23, 1992,
40
<PAGE> 9
incorporated herein by reference to Exhibit No. 10.21 to the Company's
Form 10-K Annual Report for the fiscal year ended December 31, 1992
(File No. 0-17458).
10.22 Lease, dated December 1, 1992, of office space, Boca Raton, Florida,
incorporated herein by reference to Exhibit No. 10.22 to the Company's
Form 10-K Annual Report for the fiscal year ended December 31, 1992
(File No. 0-17458).
10.23 Sublease dated as of February 18, 1994 between the Company and National
Telecom, U.S.A., Inc. incorporated herein by reference to Exhibit No.
10.23 to the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1993 (File No. 0-17458).
10.24 Lease Agreement dated April 1, 1993 between Water Saver Faucet Co. and
American Health Products Corporation incorporated herein by reference to
Exhibit No. 10.24 to the Company's Form 10-K Annual Report for the
fiscal year ended December 31, 1994 (File No. 0-17458).
10.25 Employment Termination Agreement dated November 1993 between the Company
and John Simonelli incorporated herein by reference to Exhibit No. 10.25
to the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1994 (File No. 0-17458).
10.26 Employment Termination Agreement dated November 1993 between the Company
and Larry E. Howell incorporated herein by reference to Exhibit No.
10.26 to the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1994 (File No. 0-17458).
10.27 Termination and Settlement Agreement dated December 29, 1993 by and
among the Company, Samuel E. Dlugatch, Premier Laboratories, Inc., and
Premier Latex, Inc. incorporated herein by reference to Exhibit No.
10.27 to the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1994 (File No. 0-17458).
10.28 Amended and Restated Revolving Credit Loan Agreement dated as of January
10, 1994 between Bank Bumiputra Malaysia Berhad (New York Branch) and
American Health Products Corporation incorporated herein by reference to
Exhibit No. 10.28 to the Company's Form 10-K Annual Report for the
fiscal year ended December 31, 1994 (File No. 0-17458).
10.29 Stock Exchange Agreement dated as of February 23, 1994 by and among the
Company, Laboratory Specialists, Inc. and Arthur R. Peterson, Jr., and
related agreements and documents incorporated herein by reference to
Exhibit No. 10.29 to the Company's Form 10-K Annual Report for the
fiscal year ended December 31, 1994 (File No. 0-17458).
10.30 Letter of cancellation dated January 7, 1994 for Disposable Medical
Products Option Agreement incorporated herein by reference to Exhibit
No. 10.30 to the Company's Form 10-K Annual Report for the fiscal year
ended December 31, 1994 (File No. 0-17458).
41
<PAGE> 10
10.31 Agreement dated as of December 30, 1993 by and between MACC Trading
Limited and MBf USA, Inc. incorporated herein by reference to Exhibit
No. 10.31 to the Company's Form 10-K Annual Report for the fiscal year
ended December 31, 1994 (File No. 0-17458).
10.32 Employment Agreement dated April 7, 1994, between William C. Willis, Jr.
and MBf USA, Inc. incorporated herein by reference to Exhibit No. 1 to
the Company's Form 10-Q Quarterly Report for the quarter ended March 31,
1994 (File No. 0-17458).
10.33 Consulting Agreement dated March 24, 1994, between Dr. C. Everett Koop
and MBf USA, Inc. incorporated herein by reference to Exhibit No. 1 to
the Company's Form 10-Q Quarterly Report for the quarter ended June 30,
1994 (File No. 0-17458).
10.34 Warrant Purchase Agreement dated March 24, 1994, between Sy Weintraub
and MBf USA, Inc. incorporated herein by reference to Exhibit No. 2 to
the Company's Form 10-Q Quarterly Report for the quarter ended June 30,
1994 (File No. 0-17458).
10.35 Stock Exchange Agreement dated as of June 30, 1994 by and among the
Company, Laboratory Specialists of America, Inc. and Arthur R. Peterson,
Jr., incorporated herein by reference to Exhibit No. 1 to the Company's
Form 10-Q Quarterly Report for the quarter ended September 30, 1994
(File No. 0-17458).
10.36 Second Amended and Restated Revolving Credit Loan Agreement dated as
of March 29, 1995 between Bank Bumiputra Malaysia Berhad (New York
Branch) and American Health Products Corporation incorporated herein by
reference to Exhibit 10.36 included in the Company's Form 10K Annual
Report for the fiscal year ended December 21, 1994 (File No. 0-17458).
10.37 Debenture and Warrant Purchase Agreement dated October 12, 1994 between
the Company and Wilmington Trust Company and George Jeff Mennen as
Co-Trustees U/A dated 11/25/70 with George S. Mennen for Christina M.
Andrea incorporated herein by reference to Exhibit 10.37 included in
the Company's Form 10K Annual Report for the fiscal year ended
December 31, 1994 (File No. 0-17458).
10.38 Debenture and Warrant Purchase Agreement dated October 12, 1994 between
the Company and Wilmington Trust Company and George Jeff Mennen as
Co-Trustees U/A dated 11/25/70 with George S. Mennen for John Henry
Mennen Andrea incorporated herein by reference to Exhibit 10.38 included
in the Company's Form 10K Annual Report for the fiscal year ended
December 31, 1994 (File No. 0-17458).
10.39 Lease Agreement dated October 4, 1994 between California Public
Employee's Retirement System and the Company Andrea incorporated herein
by reference to Exhibit 10.39 included in the Company's Form 10K Annual
Report for the fiscal year ended December 31, 1994 (File No. 0-17458).
42
<PAGE> 11
10.40 Lease Agreement dated November 19, 1994 between 400 Kelby Associates and
the Company Andrea incorporated herein by reference to Exhibit 10.40
included in the Company's Form 10K Annual Report for the fiscal year
ended December 31, 1994 (File No.0-17458).
10.41 Stock Acquisition Agreement dated October 31, 1995 between the Company
and MBf Holdings for the Company to exchange 255,072 shares of the
Company's Common Stock for a 70% ownership of PT Buana, an Indonesian
business entity, incorporated herein by reference to Exhibit 10.41
included in the Company's Form 10-K Annual Report for the fiscal year
ended December 31, 1995 (File No. 0-17458).
10.42 Articles of Amendment to Certificate of Incorporation incorporated
herein by reference to Exhibit 10.42 to the Company's Form 10-K Annual
Report for the fiscal year ended December 31, 1996 (File No. 0-17458).
10.43 Amended and Restated Omnibus Equity Compensation Plan incorporated by
reference to Exhibit 10.43 to the Company's Form 10-K Annual Report for
the fiscal year ended December 31, 1996 (File No. 0-17458).
10.44 Employment Agreement dated April 1, 1994 between Edward J. Marteka and
American Health Products Corporation.
10.45 Amendment to Employment Agreement between MBf USA, Inc. and Edward J.
Marteka dated as of June 1, 1995.
10.46 Amendment to Employment Agreement between MBf USA, Inc. and Edward J.
Marteka dated as of July 22, 1996.
21 Subsidiaries of the Company (1)
23.1 Consent of Arthur Andersen LLP (2)
23.2 Consent of KPMG Hanadi Sudjendra & Rekan (1)
(b) During the last quarter of 1997, the Company filed the following
reports on Form 8-K
(i) Form 8-K dated October 24, 1997 wherein the Company reported information
under Item 9.
(c) Financial Statement Schedules
27.1 Schedule II -- valuation and qualifying accounts schedules not listed
above have been omitted because they are inapplicable or the information
required to be set forth there in provided in the consolidated financial
statements of the Company or notes thereto.
(1) Previously filed
(2) Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to its Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
43
<PAGE> 12
REGISTRANT:
MBf USA, INC.
Date: November 12, 1998 By: /s/ Edward J. Marteka
---------------------
Edward J. Marteka
Date: November 12, 1998 By: /s/ Lew Kwong Ann
---------------------
Lew Kwong Ann
44
<PAGE> 13
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 14
MBf USA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
PAGE
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1996 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995 F-6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
</TABLE>
F-1
<PAGE> 15
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 27, 1998
F-2
<PAGE> 16
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 audits 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 MBf PT 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
This report is a copy of a report originally issued by KPMG Hanadi Sudjendra and
Rekan ("HS&R"). WRP Corporation has been informed that HS&R was dissolved and
liquidated during 1998 and has discontinued providing audit and accounting
services.
F-3
<PAGE> 17
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 161,981 $ 321,038
Accounts receivable-trade, net of allowance for doubtful accounts
of $195,000 in 1997 and $73,000 in 1996 5,410,843 4,677,490
Inventories 8,203,861 8,094,649
Prepaid expenses 1,055,788 999,704
Investment in LSAI 1,076,496 --
Deferred income taxes 219,951 58,893
Current assets of discontinued operations 44,113 264,520
------------ ------------
Total current assets 16,173,033 14,416,294
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 694,272
Construction in progress 2,105,263 1,074,092
Equipment, furniture and fixtures 8,780,857 7,183,071
Building improvements 1,488,485 1,262,248
Vehicles 108,127 105,023
------------ ------------
Total property, plant and equipment 13,219,267 10,318,706
Less-Accumulated depreciation (1,495,868) (736,858)
------------ ------------
Property, plant and equipment, net 11,723,399 9,581,848
------------ ------------
INVESTMENT IN LSAI -- 1,015,117
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $405,363 in 1997 and
$364,305 in 1996 1,344,637 1,385,695
Due from affiliates 206,885 550,210
Other assets 83,291 297,209
Assets of discontinued operations -- 267,251
------------ ------------
Total other assets 1,634,813 2,500,365
------------ ------------
$ 29,531,245 $ 27,513,624
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<PAGE> 18
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable--trade $ 2,622,541 $ 3,291,506
Trade notes payable to banks 5,449,181 7,010,453
Notes payable and current portion of long-term obligations 6,711,659 3,914,914
Due to affiliates 342,873 382,358
Accrued expenses 2,366,984 1,219,914
Current liabilities of discontinued operations 258,407 302,416
------------ ------------
Total current liabilities 17,751,645 16,121,561
------------ ------------
LONG-TERM OBLIGATIONS 5,647,867 7,098,132
------------ ------------
OTHER LONG-TERM OBLIGATIONS:
Deferred income taxes 67,117 200,286
Other liabilities 622,045 341,047
------------ ------------
Total other long-term liabilities 689,162 541,333
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTEREST IN SUBSIDIARY 1,130,051 221,174
------------ ------------
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; 3,191,667 and
3,188,333 shares issued and outstanding in 1997 and 1996, respectively 31,917 31,883
Additional paid-in capital 10,876,224 10,875,897
Accumulated deficit (5,547,089) (6,012,811)
Net unrealized gain on LSAI common stock 261,979 --
Cumulative foreign currency translation adjustment -- (53,034)
Less-Common stock in treasury, at cost, 130,000 shares in 1997 and 1996 (1,323,036) (1,323,036)
------------ ------------
Total shareholders' equity 4,312,520 3,531,424
------------ ------------
$ 29,531,245 $ 27,513,624
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-5
<PAGE> 19
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Product sales, net $ 53,810,060 $ 47,589,421 $ 40,950,968
Interest-affiliates -- -- 72,688
Interest 37,310 40,737 27,970
Rental income 158,517 -- --
Gain on sales of LSAI common stock 79,483 -- --
Other 18,052 81,959 166,317
------------ ------------ ------------
Total revenues 54,103,422 47,712,117 41,217,943
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of product sales 40,760,146 38,358,756 36,177,651
Selling, general and administrative 10,634,314 8,462,426 6,707,634
Restructure charge -- -- 1,808,757
Interest 1,481,467 1,117,700 614,506
------------ ------------ ------------
Total costs and expenses 52,875,927 47,938,882 45,308,548
------------ ------------ ------------
Income (loss) from continuing operations before minority
interest, benefit from income taxes and loss from discontinued
operations 1,227,495 (226,765) (4,090,605)
MINORITY INTEREST IN INCOME OF SUBSIDIARY (300,145) (77,732) (2,174)
------------ ------------ ------------
Income (loss) from continuing operations before benefit from
income taxes and loss from
discontinued operations 927,350 (304,497) (4,092,779)
BENEFIT FROM INCOME TAXES 322,042 56,889 --
------------ ------------ ------------
Income (loss) from continuing operations before loss
from discontinued operations 1,249,392 (247,608) (4,092,779)
LOSS FROM DISCONTINUED OPERATION:
Operations -- (840,792) (703,893)
Disposal (783,670) (76,187) (67,732)
------------ ------------ ------------
Net income (loss) $ 465,722 $ (1,164,587) $ (4,864,404)
============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ 0.29 $ (0.07) $ (1.68)
Discontinued operations (0.18) (0.25) (0.32)
------------ ------------ ------------
$ 0.11 $ (0.32) $ (2.00)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE> 20
MBF USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(RETROACTIVELY RESTATED TO REFLECT THE 10-FOR-1 REVERSE STOCK SPLIT, SEE NOTE 9)
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
------------------------ ------------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 1,252,538 $ 12,525 1,224,248 $ 12,242
Issuance of common stock upon exercise of stock options
-- -- 495 5
Issuance of common stock for loan conversion -- -- 250,980 2,510
Issuance of common stock for 70% interest in PT Buana
-- -- 255,072 2,551
Net loss -- -- -- --
Foreign currency translation adjustment -- -- -- --
--------- ------------ --------- ------------
BALANCE, December 31, 1995 1,252,538 12,525 1,730,795 17,308
Issuance of common stock to MBf International for $1,402,528
-- -- 488,973 4,889
Issuance of common stock to PIE Healthcare for $1,000,000
-- -- 296,296 2,963
Issuance of common stock to MBf International for $1,000,000
-- -- 672,269 6,723
Net loss -- -- -- --
Foreign currency translation adjustments -- -- -- --
--------- ------------ --------- ------------
BALANCE, December 31, 1996 1,252,538 12,525 3,188,333 31,883
Issuance of common stock upon exercise of stock options
-- -- 3,334 34
Net income -- -- -- --
Foreign currency translation adjustment -- -- -- --
Indonesian paid-in capital adjustment -- -- -- --
Unrealized gain on LSAI common stock -- -- -- --
--------- ------------ --------- ------------
BALANCE, December 31, 1997 1,252,538 $ 12,525 3,191,667 $ 31,917
========= ============ ========= ============
<CAPTION>
CUMULATIVE UNREALIZED
FOREIGN GAIN ON
ADDITIONAL RETAINED CURRENCY LSAI
PAID-IN EARNINGS TRANSLATION COMMON
CAPITAL (DEFICIT) ADJUSTMENT STOCK
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ 5,193,205 $ 16,180 $ -- $ --
Issuance of common stock upon exercise of stock options
2,945 -- -- --
Issuance of common stock for loan conversion 1,197,490 -- -- --
Issuance of common stock for 70% interest in PT Buana
1,094,304 -- -- --
Net loss -- (4,864,404) -- --
Foreign currency translation adjustment -- -- (26,856) --
------------ ------------ ------------ ------------
BALANCE, December 31, 1995 7,487,944 (4,848,224) (26,856) --
Issuance of common stock to MBf International for $1,402,528
1,397,639 -- -- --
Issuance of common stock to PIE Healthcare for $1,000,000
997,037 -- -- --
Issuance of common stock to MBf International for $1,000,000
993,277 -- -- --
Net loss -- (1,164,587) -- --
Foreign currency translation adjustments -- -- (26,178) --
------------ ------------ ------------ ------------
BALANCE, December 31, 1996 10,875,897 (6,012,811) (53,034) --
Issuance of common stock upon exercise of stock options
9,135 -- -- --
Net income -- 465,722 -- --
Foreign currency translation adjustment -- -- 53,034 --
Indonesian paid-in capital adjustment (8,808) -- -- --
Unrealized gain on LSAI common stock -- -- -- 261,979
------------ ------------ ------------ ------------
BALANCE, December 31, 1997 $ 10,876,224 $ (5,547,089) $ -- $ 261,979
============ ============ ============ ============
<CAPTION>
TREASURY SHAREHOLDERS'
STOCK EQUITY
------------ ------------
<S> <C> <C>
BALANCE, December 31, 1994 $ (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)
Foreign currency translation adjustment -- (26,856)
------------ ------------
BALANCE, December 31, 1995 (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)
Foreign currency translation adjustments -- (26,178)
------------ ------------
BALANCE, December 31, 1996 (1,323,036) 3,531,424
Issuance of common stock upon exercise of stock options
-- 9,169
Net income -- 465,722
Foreign currency translation adjustment -- 53,034
Indonesian paid-in capital adjustment -- (8,808)
Unrealized gain on LSAI common stock -- 261,979
------------ ------------
BALANCE, December 31, 1997 $ (1,323,036) $ 4,312,520
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE> 21
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 465,722 $(1,164,587) $(4,864,404)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities-
Depreciation 898,831 532,148 101,990
Amortization 41,058 57,778 51,207
Provision for doubtful accounts 122,000 16,900 15,500
Loss from discontinued operations -- 840,792 703,893
Loss from disposal of discontinued operations 783,670 76,187 67,732
Loss on disposal of property, plant and equipment 15,606 8,883 53,405
Gain on sales of LSAI common stock (79,483) (998) --
Write-off of trademarks -- -- 50,425
Changes in certain assets and liabilities-
Accounts receivable--trade (855,353) (576,029) (701,300)
Inventories (109,212) 1,937,014 (3,108,000)
Prepaid expenses (56,084) (551,594) (218,966)
Other assets 52,860 (69,636) (9,929)
Accounts payable--trade (668,965) (3,845,331) 2,267,348
Accrued expenses 1,147,070 432,090 27,702
Deferred income taxes (133,169) 200,286 --
Net assets of discontinued subsidiary -- -- 141,379
Net assets of condom discontinued operations (340,021) (518,099) (79,887)
Amounts due (from) to affiliates 303,840 1,285,070 (2,144,010)
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,588,370 (1,339,126) (7,645,915)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,063,735) (4,675,556) (873,636)
Proceeds on sales of LSAI common stock 280,083 45,248 --
Proceeds on sales of property, plant and equipment 7,747 -- --
Minority interest in subsidiary 900,070 76,616 30,497
----------- ----------- -----------
Net cash used in investing activities (1,875,835) (4,553,692) (843,139)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on trade notes payable to banks (1,561,272) 4,709,818 3,722,426
Net borrowings from notes payable 2,846,480 2,533,046 4,384,081
Net proceeds from stock option exercises 9,168 -- 2,950
Proceeds from issuance of stock -- 3,402,528 --
Proceeds from issuance of note payable to Parent -- -- 1,200,000
Net advances from Indonesian minority interest shareholders 280,998 -- --
Payments on notes payable (1,500,000) (4,011,666) (183,334)
Payments on debt to affiliate -- (1,100,000) --
----------- ----------- -----------
Net cash provided by financing activities 75,374 5,533,726 9,126,123
----------- ----------- -----------
IMPACT OF EXCHANGE RATES ON CASH 53,034 (26,179) (26,856)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (159,057) (385,271) 610,213
CASH AND CASH EQUIVALENTS, beginning of year 321,038 706,309 96,096
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 161,981 $ 321,038 $ 706,309
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-8
<PAGE> 22
MBf USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MBf USA, Inc. and Subsidiaries (the "Company") is a manufacturer of high
quality, disposable latex medical examination gloves and markets medical
examination gloves in the United States. The Company sells its gloves
primarily to the medical, dental and food service markets.
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 continued to distribute
Playboy(R) condoms through June 30, 1997 (Note 3).
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.
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 holding 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.
MBf International Ltd., a Hong Kong corporation ("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
Sdn. Bhd. ("MBf Holdings"), a publicly traded company listed on the Kuala
Lumpur Stock Exchange.
MBf Holdings is committed and believes that it has the resources to
provide the necessary level of financial support to the Company to enable
it to pay its debts as they become due through December 31, 1998, or until
the date when Wembley Rubber Products (M) Sdn. Bhd. ("Wembley") (Note 13)
becomes the major shareholder of the Company, whichever is earlier.
Wembley has agreed to assume the MBf Holdings corporate guarantees (see
Notes 6 and 7).
F-9
<PAGE> 23
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. PT Buana's construction in progress is stated
at cost. The accumulated costs are reclassified to the appropriate
property, plant, and equipment account when construction is completed.
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, "Accounting for Income Taxes" ("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.
NET INCOME (LOSS) PER SHARE
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share (EPS)" ("SFAS 128"),
which requires dual presentation of basic and diluted earnings per common
share for all periods presented. Basic EPS amounts are based on the
weighted-average number of shares of common stock outstanding during each
year while diluted EPS amounts are based on the weighted-average number of
shares of common stock outstanding during the year and the effect of
dilutive stock options and warrants. The weighted-average number of common
shares and common share equivalents outstanding for each year are as
follows:
F-10
<PAGE> 24
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted-average number of common
shares outstanding 4,312,132 3,661,052 2,432,462
Dilutive effect of common share
equivalents 49,077 -- --
--------- --------- ---------
Diluted weighted-average number of
common shares outstanding 4,361,209 3,661,052 2,432,462
========= ========= =========
</TABLE>
F-11
<PAGE> 25
Also, the Company had additional stock options and warrants of 229,324,
291,824 and 422,948 at December 31, 1997, 1996 and 1995, respectively,
which were not included in the computation of diluted earnings per share
because the exercise price was greater than the average market price of
the common shares.
All share and per share information in the accompanying financial
statements give retroactive effect of the 10-for-1 reverse stock split
which occurred on December 18, 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:
a. CURRENT ASSETS AND CURRENT LIABILITIES--The carrying amount
approximates fair value due to the short maturity of these items;
b. LONG-TERM DEBT--The fair value of the Company's long-term debt is
based on secondary market indicators. 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
c. 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.
FOREIGN CURRENCY TRANSLATION
PT Buana's financial statements have been prepared from the records
maintained in the Republic of Indonesia, the country in which PT Buana was
established and operates. On July 1, 1997, the Company determined and
changed its functional currency from the Indonesia rupiah to the United
States dollar. This change in functional currency is primarily the result
of the PT Buana operations becoming more dependent on US dollar
denominated transactions and economic trends. In accordance with Statement
of Financial
F-12
<PAGE> 26
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52"),
the Company recorded a gain of $277,035 during 1997 as a result of the
remeasuring the foreign currency of record (rupiah) into the functional
currency (US dollar).
Gains and losses from foreign currency transactions are included in net
income (loss) in the period in which they occur. For the years ended
December 31, 1997, 1996 and 1995, the foreign exchange gain (loss)
included in the determination of net income (loss) is $205,457, $(69,294)
and $0, respectively.
The Company did not use any derivative or financial instruments to manage
its foreign-exchange exposures during 1995, 1996 and 1997. The Company is
subject to foreign currency fluctuation risk in the regular course of
business on sales, raw materials and fixed asset purchase transactions
denominated in a foreign currency.
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 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.
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
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 America 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 (now known as PIE
Healthcare), which was a subsidiary of MBf International. On August 16,
1995, MBf International sold MBf Health to Perusahaan Intan Emas Sdn. Bhd.
("PIE"), with the option to repurchase the
F-13
<PAGE> 27
company. During October, 1995, PIE changed the name from MBf Health to PIE
Healthcare Products Sdn. Bhd. ("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 under the terms of this agreement.
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 a supply and requirements agreement, 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 reached an amicable settlement with Playboy
Enterprises, Inc. to terminate their license agreement under which MBf
USA, Inc. distributed Playboy(R) brand condoms in 15 countries. Under the
negotiated agreement, MBf USA, Inc., until June 30, 1997, continued to
sell Playboy(R) condoms in the countries where it had launched the
product. Subsequent to June 30, 1997, MBf USA, Inc., is entitled to
receive royalty revenues on sales of Playboy(R) condoms in these countries
through June 30, 2000, and through June 30, 1998, for Playboy(R) condom
sales in Japan. The Company does not anticipate that these royalties will
be significant.
In accordance with the termination agreement with Playboy Enterprises,
Inc., the Company's Playboy(R) condom operations ceased June 30, 1997. As
such, the Company has accounted for the Playboy(R) condom business as a
discontinued operation effective December 31, 1996, and the disposal
period through June 30, 1997.
The loss from discontinued operations and loss from disposal of
discontinued operations of DGI and the Playboy(R) condom business for the
years ended December 31, 1997, 1996 and 1995, are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Loss from discontinued operations-
Playboy(R)Condoms $ -- $(840,792) $(703,893)
========= ========= =========
Loss from disposal of discontinued operations-
DGI $ -- $ -- $ (67,732)
Playboy(R)Condoms (783,670) (76,187) --
--------- --------- ---------
$(783,670) $ (76,187) $ (67,732)
========= ========= =========
</TABLE>
F-14
<PAGE> 28
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>
1997 1996
--------- --------
<S> <C> <C>
Assets-
Current assets-
Prepaid expenses $ 11,752 $ --
Trade accounts receivable, net 32,361 262,551
Inventories -- 1,969
-------- --------
44,113 264,520
Other assets-
Trademarks and license rights -- 267,251
-------- --------
Total assets $ 44,113 $531,771
======== ========
Liabilities-
Current liabilities-
Accounts payable $ 73,273 $302,416
Accrued returns 185,134 --
-------- --------
Total liabilities $258,407 $302,416
======== ========
</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 were amortized
through June 30, 1997. Amortization expense of trademarks and license
rights was $267,251 in 1997 and $37,722 in 1996.
Revenues from the Playboy(R) condom business were $376,422, $1,380,435 and
$2,078,096, for the years ended December 31, 1997, 1996 and 1995,
respectively.
During 1997, the Company changed its estimate of costs to dispose of its
condom operations. This change resulted in the Company recording
additional costs of $783,670 ($0.18) basic and diluted loss per share for
the year ended December 31, 1997.
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.
F-15
<PAGE> 29
INVESTMENT IN LSAI
At December 31, 1997, the Company's investment in LSAI includes LSAI
common stock, valued at its market value of $723,373 and a note receivable
from LSAI of $353,123 for a total investment of $1,076,496. The Company
believes the note receivable, which is carried at cost, approximates fair
value. The Company has been subject to an agreement not to dispose of its
shares of LSAI stock prior to July 8, 1997. Subsequent to that date, such
shares of common stock are eligible for sale under Rule 144. During 1997,
the Company sold 68,000 shares of LSAI which resulted in a gain of
$79,483.
The Company has adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"), 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 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, 1997, the LSAI common stock had a
market value of $723,373, which is $261,979 over its cost basis of
$461,394. The unrealized gain of $261,979 is recorded as a separate
component of shareholders' equity at December 31, 1997. At December 31,
1996, there was not a material difference between the cost and market
value of the Company's investment in LSAI common stock.
INVESTMENT IN PT 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).
During June, 1997, the Company and the minority shareholders of PT Buana
approved the increase in the capital stock of PT Buana from $500,000 to
$2,500,000. To achieve this objective, PT Buana converted debt to equity
which was owed to the Company and minority shareholders of $737,769 (the
Note) and $316,187, respectively. Also, the Company and minority
shareholders contributed cash to PT Buana in their proportionate share to
bring the capital stock of PT Buana to $2,500,000.
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.
F-16
<PAGE> 30
At December 31, 1997 and 1996, the Company has recorded a minority
interest in the PT Buana subsidiary of $1,130,051 and $221,174,
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 two Indonesian banks financing its
construction and operations.
4. RELATED-PARTY TRANSACTIONS
At December 31, 1997 and 1996, amounts due from/to affiliates consist of
the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Due from affiliates-
Long term-
MBf International $ 200,000 $ 200,000
MACC Partners -- 348,707
MBf Education 2,286 1,503
MBf Unit Trust 4,599 --
--------- ---------
Total long term $ 206,885 $ 550,210
========= =========
Due to affiliates-
Current-
MBf Rubber $ (8,008) $ (10,145)
MBf International (170,198) (57,916)
MBf Holdings -- (4,432)
MBf Insurans -- (66)
MBf Management (50,666) (39,984)
MBf Finance -- (120)
MBf Media -- (1,566)
MBf Personal Care (55,297) (119,146)
MBf Printing (58,019) (148,765)
MBf Academy -- (218)
MBf Leasing (685) --
--------- ---------
Total current $(342,873) $(382,358)
========= =========
</TABLE>
Amounts due to MBf Personal Care Sdn. Bhd. ("MBf Personal Care") represent
the liabilities owed for Playboy condom inventory purchases. 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. MBf Personal Care was granted the exclusive rights to
manufacture Playboy(R) brand condoms for the Company.
The amounts due from MBf International represent costs associated with the
acquisition of AHPC in February, 1992. As the timing of repayment of the
due from affiliate amounts is uncertain, the receivables from affiliates
have been classified as long-term.
F-17
<PAGE> 31
The amounts due to MBf Printing, an MBf Holdings' affiliate, represent the
cost of packaging materials and printing costs incurred for the condom and
glove businesses.
The Company has entered into a management contract with MBf Management, an
affiliate of MBf Holdings. MBf Management charged the Company $10,682,
$3,977 and $0 in 1997, 1996 and 1995, respectively, for their secretarial
and other services.
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 $35,516, $45,056 and $18,915 in 1997, 1996 and 1995,
respectively.
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 was reduced to $348,707 at December 31, 1996, due to
incidental expenses incurred by MBf USA, Inc. and the balance was fully
settled during 1997.
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).
In January, 1997, the Company entered into a consulting and services
agreement with Healthcare Alliance, Inc. ("Alliance"), a company owned by
a director of the Company. The agreement engaged Alliance to assist the
Company in marketing its products with the expressed purpose of
negotiating and executing a purchase agreement with various healthcare
group purchasing organizations. The Company paid Alliance $48,000 in 1997
for its services.
5. GOODWILL
The excess purchase price over the value of the net assets of AHPC
acquired in February, 1992, 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 $5,449,181 and $7,010,453 at
December 31, 1997 and 1996, 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 nonaffiliated bank at December 31,
1997 and 1996, totaled $3,087,547 and $3,849,826, respectively. The
letter-of-credit liabilities due to MBf Bank of Tonga totaled $2,361,634
and $3,160,627 at December 31, 1997 and 1996, 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 of Tonga, in the amount of Tonga dollars
T$1,000,000 or approximately U.S. $800,000. On August 24, 1996, MBf Bank
of Tonga approved an additional T$2 million letter-of-credit facility,
bringing the total facility to T$3 million or approximately U.S. $2.4
million. During 1996, the facility was increased to T$5.75 million or
approximately U.S. $4.6 million. This facility is unsecured and guaranteed
by MBf Holdings.
F-18
<PAGE> 32
As of December 31, 1997 and 1996, the Company was contingently liable for
outstanding letters of credit totaling $2,182,726 and $1,725,414,
respectively.
7. NOTES PAYABLE
Notes payable and long-term obligations as of December 31, 1997 and 1996,
consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Borrowings under a bank revolving line-of-credit agreement with available
borrowings up to $2,500,000 at December 31, 1997, and December 31, 1996,
bearing interest at the prime rate plus 3% (11.50% at December 31, 1997),
secured by inventories and accounts receivable, guaranteed by MBf Holdings $ 2,450,000 $ 2,405,000
PT Buana syndicated term loan, bearing interest at the Indonesian prime rate
(approximately 13.4% at December 31, 1997) 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 six semiannual installments, due November, 2000 5,075,000 6,500,000
PT Buana short-term bank loan, bearing interest from 11% to 15%, due November,
1997, plus penalty interest of 2% per month subsequent to due date, secured
by a corporate guarantee of the Company 2,000,000 --
Subordinated debentures convertible into warrants to purchase 80,000 shares of
common stock at $25.00 per share, interest payable quarterly at prime plus
1.5% (10.0% at December 31, 1997) due November, 2001 2,000,000 2,075,000
Automobile installment bank loan, bearing interest at 8.25%, secured by an
automobile, final installment due in May, 2000 25,564 33,046
Insurance premium financing loans, bearing interest at 7% to 8.5%,
payable in monthly installments through October, 1999 808,962 --
------------ ------------
12,359,526 11,013,046
Less-Current portion (6,711,659) (3,914,914)
------------ ------------
Long-term obligations $ 5,647,867 $ 7,098,132
============ ============
</TABLE>
The bank revolving line-of-credit agreement noted above contains covenants
which require, among other things, maintenance of financial ratios,
limitation on additional
F-19
<PAGE> 33
borrowings, investments and capital expenditures. At December 31, 1997,
the Company was in compliance with all debt covenants.
On December 31, 1997, the Company renewed its bank facility for three
years through December 31, 2000, with a yearly commitment renewal option.
The new facility maintains the existing borrowing levels for
letters-of-credit and line of credit borrowings in the aggregate amount of
$7,900,000.
The PT Buana debt consisted of a syndicated loan facility with three
Indonesian banks amounting to a total credit facility of $6.5 million. At
December 31, 1997 and 1996, $5,075,000 and $6,500,000, respectively, was
outstanding on this debt, which was used for the purchase of assets,
construction and start-up operation of the Indonesian factory.
PT Buana obtained a six-month bridging loan in the amount of $2.0 million
in April, 1997. PT Buana was unable to repay the loan when due in
November, 1997, and a penalty interest rate of an additional 2% per month
was instituted.
The principal portion of long-term debt becomes due as follows:
<TABLE>
<S> <C>
Fiscal year ending-
1999 $2,069,029
2000 1,578,838
2001 2,000,000
----------
$5,647,867
==========
</TABLE>
OTHER LIABILITIES
During 1997, PT Buana borrowed funds from its minority shareholders to
make payment on its syndicated term loan. At December 31, 1997 and 1996,
PT Buana owes $608,814 and $322,660, respectively, to its minority
shareholders. These shareholder loans are interest bearing at 13.5% and
are classified as long-term liabilities since a formal repayment plan has
not been scheduled.
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. AHPC is one of numerous
defendants that have been named in such lawsuits. At December 31, 1997,
there were seven lawsuits outstanding against AHPC. During November, 1997,
AHPC fully settled thirteen claims for a nominal sum. The said claimants
alleged adverse reactions to latex glove products allegedly distributed by
AHPC. AHPC carries product liability insurance. Management believes all
legal claims 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.
F-20
<PAGE> 34
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.
SIGNIFICANT CUSTOMERS
During 1997, two of the Company's customers accounted for 37.6% and 31.0%
of net sales, respectively. These customers together accounted for 66.8%
of accounts receivable at December 31, 1997. During 1996, two of the
Company's customers accounted for 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, net of rental income, included in the accompanying
statements of income for 1997, 1996 and 1995 was $296,358, $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>
1998 $353,908
1999 235,015
2000 66,477
--------
$655,400
========
</TABLE>
The Company subleases office space in New Jersey and Florida. Under these
sublease agreements, the Company will receive rental income in an amount
equal to the Company's rental expense. The Company's lease and sublease
agreements on the New Jersey and Florida office space expire in November
1999 and February 1999, respectively. The following summary presents
future rental income under the two sublease agreements:
<TABLE>
<CAPTION>
Fiscal year-
<S> <C>
1998 $159,216
1999 85,838
--------
$245,054
========
</TABLE>
F-21
<PAGE> 35
9. SHAREHOLDERS' EQUITY
In December, 1995, the Board of Directors approved that the Company
re-incorporate in Maryland. In connection with the re-incorporation, 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.
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.
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) 488,953 shares of common stock to
MBf International, Ltd. for cash consideration of Malaysian ringgit
3,500,000 which approximated U.S.$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 U.S.$1
million.
As of December 31, 1994, there were warrants outstanding to purchase 2,300
units at $30.00 (the "$30.00 Units") per unit through October, 1996. 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.
In November, 1994, warrants were issued to purchase 7,500 shares of the
Company's common stock at an exercise price of $22.20. 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 1997 and 1995, 50,000
and 10,000, respectively, of these warrants, convertible into shares of
common stock, expired. The remaining warrants are currently exercisable at
December 31, 1997, and expire in March, 1999.
F-22
<PAGE> 36
A summary of warrant activity since December 31, 1994, is as follows:
<TABLE>
<CAPTION>
$15.00 $30.00 $22.20
WARRANTS UNITS WARRANTS
-------- ------ --------
<S> <C> <C> <C>
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
Expirations (50,000) - -
------- ------ -----
Balance, December 31, 1997 125,000 - 7,500
======= ====== =====
</TABLE>
At December 31, 1997, the Company had outstanding debt which is
convertible at any time at the noteholder's option (see Note 7) into
warrants to purchase 80,000 shares of common stock at $25.00 per share.
These convertible debentures expire in November, 2001.
The Company has reserved common stock for issuance upon conversion of all
outstanding warrants.
10. STOCK OPTION PLAN
On December 5, 1996, the Board of Directors approved an amendment and
restatement of the Company's Omnibus Equity Compensation Plan (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-23
<PAGE> 37
A summary of options outstanding under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE
OPTIONS PRICE EXPIRATION
------------ ------------- ----------
<S> <C> <C> <C>
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
Grants 92,500 3.66 2007
Rescissions/expirations (24,833) 2.75-3.66 2004-2007
Exercises (3,334) 2.75 2006
-------- ------------
Balance, December 31, 1997 245,782 $2.63-$14.40
======== ============
</TABLE>
The exercise price of the stock options granted in 1997, 1996 and 1995 was
established at the market price on the date of the grants. Of the 245,782
options outstanding at December 31, 1997, 195,309 are currently
exercisable, 29,695 become exercisable in 1998, and 20,778 become
exercisable in 1999. 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 income (loss) and net income (loss) per share (basic and
diluted) would have been $397,292 and $(1,409,603) and $.09 and $(.39),
for 1997 and 1996, 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-24
<PAGE> 38
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 6.12% and 7.5% for 1997 and 1996, respectively;
a 0.00% distribution yield; expected volatility of 90% and 78% in 1997 and
1996, respectively, and an expected life of three years. The options
granted to employees in 1997 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, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
PRICES DEC. 31, 1997 LIFE PRICE DEC. 31, 1997 PRICE
-------- ------------- --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$2.63 - $2.75 136,458 6-9 years $2.75 141,040 $2.75
$3.66 92,500 9 years $3.66 37,445 $3.66
$5.90 10,000 1.5 years $5.90 10,000 $5.90
$14.40 6,824 1.5 years $14.40 6,824 $14.40
------------ ---------------- ----------- ------ -------------- --------
$2.63-$14.40 245,782 1.5-9 years $3.54 195,309 $3.49
============ ================ =========== ====== ============== =======
</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, 1997, 1996 and 1995. A
reconciliation of the statutory rate with the effective rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate of 34% $ 48,851 $ (104,000) $(1,653,897)
Goodwill amortization 15,602 57,778 51,207
Refundable income taxes/tax benefit (322,042) (198,282) --
Increase (decrease) in deferred tax asset valuation
allowance 6,702 211,411 1,602,690
Utilization of loss carryforwards (82,890) -- --
Other 11,735 (23,796) --
----------- ----------- -----------
Total $ (322,042) $ (56,889) $ --
=========== =========== ===========
</TABLE>
The Company has net operating loss carryforwards at December 31, 1997, of
approximately $4,300,000 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. Because of these factors, the utilization of the
net operating loss at December 31, 1997, may be significantly limited.
F-25
<PAGE> 39
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current-
Accruals not deductible until paid $ 411,000 $ 229,701
Net operating loss carryforwards 1,650,000 2,000,000
Net operating loss carryforwards--PT Buana 220,000 105,400
Other current liabilities--PT Buana -- (46,507)
Inventory 133,000 --
Allowance for doubtful accounts 81,000 27,710
Valuation allowance (2,275,049) (2,257,411)
----------- -----------
Total net current deferred tax assets $ 219,951 $ 58,893
=========== ===========
Noncurrent-
Difference between book and tax basis of
property, plant and equipment $ (96,864) $ (187,000)
Other noncurrent assets--PT Buana 29,747 --
Other noncurrent liabilities--PT Buana -- (13,286)
----------- -----------
Total noncurrent deferred tax liabilities $ (67,117) $ (200,286)
=========== ===========
</TABLE>
The Company establishes valuation allowances in accordance with the
provisions of SFAS 109. The Company continually reviews the adequacy of
the valuation allowance and is recognizing these benefits only as
reassessment indicates that it is more likely than not that the benefits
will be realized.
F-26
<PAGE> 40
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 noncurrent 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 noncash investing and financing activities are as follows-
Repayment of note receivable $ 1,500,000
Conversion of loan to common stock 1,200,000
===========
</TABLE>
Cash paid for interest on debt outstanding for the years ended December
31, 1997, 1996 and 1995 was $1,488,211, $1,493,782, and $730,405,
respectively.
Cash paid for income taxes during the year ended December 31, 1995, was
approximately $75,000. There were no income taxes paid during 1997 or
1996.
During June, 1997, the Company's 70% owned subsidiary, PT Buana, converted
debt obligations, owed to its minority shareholders, to equity in the
amount of $316,187.
At December 31, 1997, the Company recorded an unrealized gain in
shareholders' equity on the market value of the common stock in LSAI
exceeding its cost in the amount of $261,979.
The following represents significant related-party operating transactions
during the years ended December 31, 1997, 1996 and 1995, which are
included in the consolidated statements of cash flows as amounts due
(from) to affiliates under the cash flows from operating activities.
F-27
<PAGE> 41
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---------- ------------
<S> <C> <C> <C>
Operating cash transactions-
Purchases from affiliates $240,654 $2,938,793 $ 8,696,520
Cash payments (796,317) (1,653,723) (10,840,530)
Cash receipts 859,503 - -
-------- ---------- ------------
Amounts due (from) to affiliates $303,840 $1,285,070 $ (2,144,010)
======== ========== ============
</TABLE>
13. SHAREHOLDER TRANSACTION
In May, 1997, the Company announced that its majority shareholder, MBf
International, had entered into two separate agreements with its latex
powder-free supplier, Wembley, which called for the following:
a. MBf International selling all of the Company's Series A common stock
(1,252,538 shares) to Wembley for approximately $6.27 million; and
b. The purchase of 2,500,000 shares of the Company's unregistered
common stock by Wembley at a price of $2.70 per share.
Currently, the date of closure has been extended to the end of March,
1998, due to the nonfulfillment of certain conditions precedent to
closing.
14. 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, 1997, consist of the
following:
<TABLE>
<CAPTION>
UNITED STATES INDONESIA TOTAL
------------- ----------- -----------
<S> <C> <C> <C>
Current assets $14,771,693 $ 1,401,340 $16,173,033
Fixed assets 177,802 11,545,597 11,723,399
Other assets 1,590,253 44,560 1,634,813
----------- ----------- -----------
Consolidated total $16,539,748 $12,991,497 $29,531,245
=========== =========== ===========
</TABLE>
Identifiable assets at December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
UNITED STATES INDONESIA 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>
15. ASIAN ECONOMIC EVENTS
The Asian Pacific region is currently experiencing an economic situation
that has been characterized by reduced activity, illiquidity in certain
sectors, volatile foreign currency
F-28
<PAGE> 42
exchange, interest rates, and stock markets. The Company will likely be
affected by the region's unstable economy and it is not possible to
determine the effect a continuation of the economic crisis may have. The
ultimate outcome of this matter cannot presently be determined. The
financial statements do not include any adjustment that might result from
these uncertainties. Related effects will be reported in the financial
statements as they become known and estimable.
16. NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
In June, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," which establishes standards for reporting of
comprehensive income. This pronouncement requires that all items
recognized under accounting standards as components of comprehensive
income, as defined in the pronouncement, be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes all changes in equity during a
period except those resulting from investments by shareowners and
distributions to shareowners. The financial statement presentation
required under SFAS No. 130 is effective for all fiscal years beginning
after December 15, 1997. The Company will adopt SFAS No. 130 in 1998. The
impact of adopting this pronouncement has not been determined.
SEGMENT REPORTING
In June, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosure
About Segments of an Enterprise and Related Information," which
establishes standards of reporting by publicly held business enterprises
and disclosure of information about operating segments in annual financial
statements issued to shareowners. Operating segments, as defined in the
pronouncement, are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
Company in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported on the
basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The disclosures required
by SFAS No. 131 are effective for all fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 131 in 1998. This
pronouncement will have an effect on the Company's reporting in the
subsequent periods; however, the impact of adopting this pronouncement has
not been determined.
F-29
<PAGE> 1
EX-23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K A-2 into the Company's previously filed
Registration Statements Nos. 333-23630 and 333-28003.
ARTHUR ANDERSEN LLP
Chicago, Illinois
December 14, 1998
