<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 of incorporation) (I.R.S. employer identification no.)
500 PARK BOULEVARD, SUITE 1260 60143
ITASCA, IL -----
---------- (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 285-9191
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ---------------------
Common Stock, par value $0.01 per share None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or
i
<PAGE> 2
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
<PAGE> 3
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
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................... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.................................................... 24
ITEM 11. EXECUTIVE COMPENSATION........................................ 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON
FORM 8-K..................................................... 35
</TABLE>
<PAGE> 5
PART I
ITEM I. BUSINESS (1)
GENERAL
MBf USA, Inc. (the "Company"), formerly known as American Drug Screens,
Inc. ("ADS"), was organized February 24, 1988, under Oklahoma law as SHL, Inc.
The Company was reorganized on June 28, 1988, whereby ADS was merged with and
into the Company, with the Company being the surviving corporation and assuming
control of the ownership and operation of ADS. On May 21, 1993, the Company's
shareholders approved the Company's proposal to amend the Company's Certificate
of Incorporation, thereby changing the name of the Company to MBf USA, Inc.
On February 27, 1992, the Company acquired American Health Products
Corporation ("AHPC") from MBf International Limited, a Hong Kong corporation
("MBf International"), which is a subsidiary of MBf Holdings Sdn. Bhd. ("MBf
Holdings"), a Malaysian publicly traded company listed on the Kuala Lumpur
Stock Exchange. AHPC is a leading marketer of medical examination gloves in the
U.S. As a result of such acquisition, MBf International acquired control of
the Company by virtue of the issuance of 1,252,538 shares or 100% of the Series
A Common Stock, which elects a majority of the Board of Directors.
In June 1995, the Board of Directors directed the Company to exit the
nutritional products business, where sales were negligible and entry costs were
very high, contributing to significant losses. Furthermore, the use of AHPC's
cash flow for the nutritional products start-up was limiting AHPC's ability to
purchase glove inventory. The restructuring resulted in a one-time change of
$1,808,757 which included costs associated with resignation of its
Chairman/CEO, President/CEO and CFO, provisions for personnel severance and
work force reductions associated with the closing of the New Jersey executive
office, the write down of intangible and other assets, costs associated
- -----------------------
(1) Some of the statements included in Item 1, Business, may be
considered to be "forward looking statements" since such statements relate to
matters which have not yet occurred. For example, phrases such as "the Company
anticipates," "believes" or "expects" indicate that it is possible that the
event anticipated, believed or expected may not occur. Should such event not
occur, then the result which the Company expected also may not occur or occur
in a different manner, which may be more or less favorable to the Company. The
Company does not undertake any obligations to publicly release the result of
any revisions to these forward looking statements that may be made to reflect
any future events or circumstance.
Readers should carefully review the items included under the subsection Risks
Affecting Forward Looking Statements and Stock Prices set forth under Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations as they relate to forward looking statement as actual results could
differ materially from those projected in the forward looking statements.
1
<PAGE> 6
with the removal of the nutritional vitamin product lines, and other costs
associated with the execution of the restructure.
On October 31, 1995, the Company acquired a 70% interest in an Indonesian
powdered latex examination glove manufacturing plant, PT MBf Buana Multicorpora
("PT Buana"), which was in the start-up phase of operations at that time. The
Company purchased PT Buana from MBf International. PT Buana began shipping
powdered latex examination gloves to AHPC in May 1996 after operations
commenced in April 1996.
On December 11, 1995, the Company's shareholders approved the
reincorporation of the Company by merger of the Company into a newly formed,
wholly owned subsidiary of the Company incorporated in Maryland. In connection
with the reincorporation, the Board of Directors 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 was entitled to and received one share of
Series A Common Stock or Common Stock of the Maryland corporation subsequent to
the merger for every 10 shares of Series A Common Stock or Common Stock,
respectively, then held by such shareholder.
In May 1997, the Company announced that its parent and majority
shareholder, MBf International, had entered into two separate agreements with
its latex powder free exam glove supplier, Wembley Rubber Products (M) Sdn.
Bhd. ("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
as a result of the non-fulfillment of certain conditions precedent to closing.
In June 1997, the Company ended the sales of Playboy(R) condoms after it
had reached an amicable agreement with Playboy Enterprises, Inc. to terminate
the license agreement under which the Company distributed condoms in 15
countries.
As of March 18, 1998, the shares of Series A Convertible Common Stock
issued to MBf International are 29.03% of the total issued and outstanding
shares of Series A Common Stock and Common Stock. Upon conversion, such shares
(when coupled with the shares of Common Stock acquired by MBf International as
tabled below) will represent a total ownership of the Company to MBf
International of 68.03% of the then outstanding shares of Common Stock,
excluding shares subject to issuance pursuant to outstanding warrants and stock
options.
2
<PAGE> 7
The shares of the Company's Common Stock owned and acquired by MBf
International since December 31, 1994 are as follows.
<TABLE>
<CAPTION>
Series A
Common Stock Common Stock Total
------------ ------------ ---------
<S> <C> <C> <C>
Balance, December 31, 1994 1,252,538 15,000 1,267,538
October 30, 1995 -
$1.2 million cash injection - 250,981 250,981
Acquisition of PT Buana - 255,072 255,072
June 17, 1996 -
$1,402,806 cash injection - 488,953 488,953
August 20, 1996 -
$1.0 million cash injection - 672,269 672,269
________ ________ ________
Balance, December 31, 1997 1,252,538 1,682,275 2,934,813
========= ========= =========
</TABLE>
All share and per share information noted gives retroactive effect of the
10-for-1 reverse stock split which was effective on December 18, 1995.
LATEX GLOVE PRODUCTS
Through its wholly owned subsidiary, AHPC, the Company markets
non-sterile, ambidextrous latex and vinyl examination gloves used primarily in
the medical, dental and food services industries. Gloves marketed by AHPC are
manufactured primarily by PT Buana and other third parties. Gloves are marketed
by AHPC under the brand names "Glovetex(R)" and "DermaSafe(R)" to
medical/surgical distributors, dental distributors, nursing homes and food
service distributors. AHPC also sells gloves to other companies, which market
the gloves under their own brand names or "private labels." A case of gloves,
which comprises 10 or 20 boxes of 100 gloves per box, is sold by AHPC to
medical/surgical dealers.
In addition to the standard latex powdered examination gloves, AHPC
distributes other product lines which include powder free exam gloves, vinyl
exam gloves, and synthetic exam gloves. Expansion of the product line into
other latex-based products is planned, and AHPC has identified for possible
introduction in the future such products as industrial gloves, surgical gloves
and other products related to infection control. For the year ended December
31, 1997, AHPC's sales ratios of latex powdered, latex powder free, and
non-latex examination glove sales were 49%, 37%, and 14%, respectively.
3
<PAGE> 8
'
Manufacturing Operations. The production of examination gloves begins
with the tapping of raw latex (natural polysporene) from rubber trees located
on plantations in Malaysia, one of the world's largest producers of rubber, and
Indonesia. Once gathered, the raw latex is sent to a centrifuge, where the
latex is concentrated. PT Buana purchases the latex concentrate and ships it to
its production plant where the latex concentrate is compounded in a patented
formula to enhance glove durability, elasticity and tactility. A controlled
dipping process causes consistency from batch to batch and eliminates air
bubbles which can create pinholes. Glove-making forms, which are in five sizes
and designed for the American hand, are dipped in latex compound. The forms are
cleansed both chemically and mechanically to prevent residue buildup which
could compromise glove integrity.
The PT Buana factory, which is 70% owned by the Company, was in the
start-up phase of operations until product shipments began in May 1996. PT
Buana has the ability to provide AHPC with 750,000,000 powdered latex
examination gloves per year.
Continuous quality control inspections are performed on the production
line by trained supervisors and independent quality control inspectors. Each
glove is visually inspected, and a sample of gloves from each batch is tested
in the laboratory for air capacity and water-tightness.
Gloves are packaged in tamper-proof non-fibrous boxes. The gloves are then
shipped either to a leased warehouse in Des Plaines, Illinois, or to public
warehouses located in Sparks, Nevada, or Atlanta, Georgia, where they are
stored for delivery to medical and surgical dealers.
Powdered Latex Examination Glove Suppliers. PT Buana supplied
approximately 38% of AHPC's powdered latex examination glove inventory in 1997.
The remaining 62% of 1997 purchases of powdered latex examination glove
inventorywas purchased from an unrelated Malaysian supplier. Effective July 12,
1995, the Company entered into a five-year distributor agreement with this
unrelated supplier for powdered latex examination gloves. See Note 3 of the
Consolidated Financial Statements under Distribution Agreement for more
information on this unrelated supplier.
Powder Free Latex Examination Glove Supplier. AHPC purchases 100% of its
latex powder free examination gloves from Wembley, an unrelated Malaysian
factory. The Company's majority shareholder, MBf International, has entered
into an agreement with Wembley which would enable Wembley to obtain majority
interest in the Company and control the Board of Directors. AHPC has entered
into a supply agreement with Wembley for its powder free gloves which will
enable the Company to obtain the necessary inventory levels to meet customer
glove demands. Although the Company is currently able to meet its orders for
latex gloves products, including powder free latex gloves, AHPC's inability to
receive sufficient glove inventories would have a material adverse effect on
the Company.
Non-Latex Examination Glove Suppliers. AHPC purchases its non-latex
examination gloves from two unrelated suppliers in Taiwan and China.
4
<PAGE> 9
Markets and Methods of Distribution. AHPC markets latex gloves through a
network of national, regional and local medical/surgical dealers that sell
primarily to hospitals and nursing homes. AHPC also markets to alternate care
and home health care dealers, dental dealers, food service distributors, and
major retail outlets. The principal methods of marketing are trade shows,
seminars, and sales representatives, as well as advertising and direct mail. In
addition, AHPC employs a sales force of 33 persons comprised of regional sales
managers and representatives, manufacturer sales representatives, and an
in-house sales and customer support staff.
FDA Regulation of Latex Glove Products. The quality control procedures
for the manufacture of examination gloves marketed in the United States are
regulated by the U.S. Food and Drug Administration ("FDA"). Included within
such procedures are minimum testing requirements, as well as FDA current Good
Manufacturing Practices.
Competition. The market for latex examination gloves is highly
competitive. With the discovery of the Acquired Immune Deficiency Syndrome/HIV
virus ("AIDS") in the 1980's, and the perception of the latex glove as being a
barrier to infection from AIDS and other communicable diseases, several
companies entered the latex glove industry, many of which failed or were
acquired by other companies. Further consolidation of companies in the industry
may be expected to occur in the future. The primary means of competition are
price, product quality, service, and the size and reliability of the
manufacturer.
Customers. During calendar 1997, two of AHPC's customers, Owens & Minor,
Inc. and Sysco Co., accounted for 37.6% and 31.0%, of net sales, respectively.
The loss of either of such customers would have a materially adverse effect on
the Company.
Patents and Trademarks. AHPC owns the trademarks "Glovetex" and
"Dermasafe," which are trademarks registered in the United States.
LATEX CONDOM PRODUCTS
Through June 30, 1997, the Company sold condoms in packaging bearing the
Playboy(R) name and rabbit-head logo. Under the termination agreement, the
Company, until June 30, 1997, continued to sell Playboy(R) condoms in the 15
countries where it has launched the product. Subsequent to June 30, 1997, the
Company is entitled to receive royalty revenues on sales of Playboy(R) condoms
in these countries and Japan through June 30, 2000 and 1998, respectively. See
Note 3 of the Consolidated Financial Statements for more information concerning
the net assets and liabilities of discontinued operations of the Playboy(R)
condom business at December 31, 1997 and 1996.
EMPLOYEES
As of March 18, 1998, the Company's U.S. operations employed a total of 45
full-time and 12 part-time employees. AHPC also uses the non-exclusive services
of seven manufacturer sales representatives
5
<PAGE> 10
and which are paid on a commission basis. The Company's 70% owned Indonesian
subsidiary, PT Buana, employed 933 full-time workers in its factory and
administrative staff as of that date. None of the Company's employees are
represented by a collective bargaining agreement. The Company considers
relations with its employees to be good.
INVESTMENT IN LSAI
Pursuant to the terms of a stock exchange agreement dated as of July 12,
1994 ("LSAI Agreement"), the Company exchanged 706,244 shares of the preferred
stock of a former wholly owned subsidiary, Laboratory Specialists, Inc.,
("LSI") (valued at $706,244) for 239,405 shares of common stock of a newly
formed corporation, Laboratory Specialists of America, Inc. ("LSAI") contingent
upon LSAI successfully completing its initial public offering ("IPO"). In
September 1994, LSAI successfully completed its IPO and currently trades under
the symbol "LABZ" on the Nasdaq SmallCap Stock Market. These shares of common
stock now are eligible for sale under Rule 144 of the Securities Act of 1933,
as amended, without LSAI's approval. During 1997, the Company sold 68,000
shares of LSAI. See Note 3 of the Notes to Consolidated Financial Statements
for additional information concerning the Company's investment in LSAI.
4
<PAGE> 11
ITEM 2. PROPERTIES
The Company's principal executive and administrative office is located in
Itasca, Illinois. The lease term for this location is for a period of five
years and commenced on March 1, 1995. The yearly lease cost is approximately
$153,200 per year, with annual increases of approximately 3% per year.
Prior to Itasca, Illinois, the Company's executive office was located in
Fort Lee, New Jersey. On December 1, 1994, the Company entered into a five-year
lease for this office with an annual lease cost of approximately $77,000 per
year. During June 1995, the Company closed the New Jersey office as part of the
restructuring which took place in the second quarter of 1995. Effective July 1,
1995, the Company entered into a sublease agreement for the New Jersey office
space for the remaining lease term at the identical terms as stated in the
December 1, 1994 New Jersey lease agreement.
Previous to Fort Lee, New Jersey, the Company's executive office was
located in Boca Raton, Florida. The Company entered into a five-year lease
agreement effective February 1994, for approximately 4,000 square feet of space
in Boca Raton, Florida. The annual rental expense for this lease is
approximately $79,500 per year. Effective December 1, 1996, the Company
entered into a sublease agreement for the Boca Raton office space for the
remaining lease term at the identical terms as stated in the February 1994
Florida lease agreement.
AHPC's warehouse operations are housed in a 22,000 square-foot facility in
Des Plaines, Illinois. The lease term for this location expires on March 31,
1998 and commenced April 1, 1993. The yearly cost of the lease is approximately
$123,200 per year. The Company is planning to renew the lease for the existing
Des Plaines, Illinois warehouse for a one-year period at a yearly lease cost of
approximately $126,600. In addition, AHPC uses public warehouse facilities in
Sparks, Nevada and Atlanta, Georgia, as needed. Public warehouse charges are
dependent upon the volume of products stored and the frequency of shipping or
receiving products.
Management considers all existing space sufficient, but may search for a
larger warehouse facility in the Midwest to reduce its warehousing costs and
provide additional space should the need arise.
7
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1997, AHPC had seven latex related product liability
claims pending against it throughout the United States. All the claims involve
plaintiffs that have worked in the medical/health industry, and who allege
damages associated with continued use and/or exposure to latex glove products.
Each of the seven claims is in a different stage of legal proceeding, and it is
not currently possible to determine a favorable or unfavorable outcome for
AHPC. In each claim, AHPC is one of several glove distributors named in the
suits.
Subsequent to December 31, 1997, AHPC was named in one additional lawsuit,
in which the plaintiff alleges damages associated with the use of latex gloves.
AHPC is one of several defendants named in the suit.
AHPC possesses product liability insurance coverage, which the Company
believes, but can provide no assurances, will be adequate to cover the
legal costs and compensatory damage rewards associated with product liability
claims against AHPC and the indemnity of AHPC's customers, to the limits of the
policies.
In November 1997, AHPC settled thirteen latex related product liability
claims for a nominal sum. AHPC will vigorously contest any latex claim
initiated against it, but will enter into a settlement agreement, where, after
careful consideration, the Company's management determines that the best
interests of the Company will be served by settling the matter for a nominal
monetary sum.
From time to time, the Company is involved in other litigation relating to
claims arising out of its operations in the normal course of business. As of
the date hereof, the Company is not a party to any other legal proceedings, the
adverse outcome of which, in management's opinion, individually or in
aggregate, would have a material adverse effect on the Company's financial
condition.
8
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on December
3, 1997. The purpose of the Annual Meeting was to consider the vote on the
following matters:
1. To elect seven Class A directors and two Class B directors to hold office
until the next annual meeting of Shareholders or otherwise as provided in
the Company's By-Laws.
Nominees
--------
Tan Sri Dato Loy
Teik Hok Loy
Heng Sewn Loi
Edward J. Marteka
George Jeff Mennen
Richard C. M. Wong
Lew Kwong Ann
Robert J. Simmons
Don L. Arnwine
Each of the nominees for director received the following number of votes:
For 3,938,257
Against 5,177
Non-votes 370,771
2. To concur in the selection of Arthur Andersen LLP independent auditor for
the fiscal year ending December 31, 1997. The vote of the Shareholders was
as follows:
For 3,940,166
Against 2,235
Abstentions 1,033
Non-votes 370,771
All of the above matters were approved by the Shareholders. There were no
other matters voted on at the meeting.
9
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") SmallCap Stock Market
under the symbol "MBFA." The range of high and low sale prices as reported by
Nasdaq for the Common Stock is shown below.
COMMON STOCK
FISCAL YEAR ENDED:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 HIGH LOW
----------------- ----- -----
<S> <C> <C>
First quarter 4-3/8 3-3/8
Second quarter 5-3/4 2-3/4
Third quarter 3-7/8 2-3/4
Fourth quarter 6 1-3/4
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- -------------------
<S> <C> <C>
First quarter 5-1/4 3-7/8
Second quarter 4-1/8 3-1/4
Third quarter 2-3/8 1-3/4
Fourth quarter 1-7/8 1-1/4
</TABLE>
There were approximately 350 record holders of Common Stock as of March
18, 1998. The Company believes that there are approximately an additional 2,000
holders whose stock is held in "street name."
The Company has not paid a dividend with respect to the Common Stock. The
Company expects to reinvest its earnings for expansion of its operations and
does not intend to pay a dividend in the foreseeable future.
10
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five
calendar years ended December 31, 1997 should be read in conjunction with the
Consolidated Financial Statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
MBF USA, INC.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product sales $53,810,060 $47,589,421 $40,950,968 $34,301,735 $31,241,073
Cost of goods sold 40,760,146 38,358,756 36,177,651 27,387,357 26,543,652
Gross profit 13,049,914 9,230,665 4,773,317 6,914,378 4,697,421
Operating expenses 12,115,781 9,580,126 7,322,140 6,397,607 5,915,411
Restructure charge - - 1,808,757 - -
Minority interest in income
of subsidiary (300,145) (77,732) (2,174) - -
Net income (loss) from continuing
operations 1,249,392 (247,608) (4,092,779) 1,093,786 (1,056,570)
Loss from discontinued operations (783,670) (916,979) (771,625) (93,256) (354,259)
Net income (loss) $465,722 $(1,164,587) $(4,864,404) $1,000,530 $(1,410,829)
PER SHARE DATA:
Basic and Diluted Net income (loss) per share $.11 $(.32) $(2.00) $.41 $(.59)
BALANCE SHEET DATA (END OF PERIOD):
Total assets $29,531,245 $27,513,624 $26,373,204 $18,493,771 $17,600,575
Long-term obligations $5,647,867 $7,098,132 $10,342,500 $3,065,232 $1,108,330
Total shareholders' equity $4,312,520 $3,531,424 $1,319,661 $3,911,116 $3,742,141
</TABLE>
11
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (2)
The Company's wholly owned subsidiary, AHPC, is engaged in the marketing
and distribution of high quality medical grade examination gloves in the United
States and has been in the glove business since its incorporation in January
1989. The Company recorded record glove product sales in 1997 with an increase
of 13.1%.
PT Buana was incorporated in Indonesia on October 17, 1994, and commenced
operations in April 1996. PT Buana began manufacturing and shipping powdered
latex examination gloves to AHPC in May 1996 and sold approximately 82% of its
production to AHPC in 1997. PT Buana had total powdered latex exam glove sales
of $9.27 million for the year ended December 31, 1997. All significant
intercompany transactions have been eliminated in consolidation.
Through its Playboy license rights and condom distribution agreement, the
Company distributed Playboy(R) brand condoms only through June 30, 1997 in
accordance with the negotiated termination agreement with Playboy Enterprises,
Inc. 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. See Note 3 of the Notes to Consolidated Financial
Statements for more information on the discontinuance of the Playboy(R) condom
business.
This analysis of the results of operations and financial condition of the
Company should be viewed in conjunction with the financial statements and other
information concerning the Company included throughout this Annual Report. The
consolidated financial statements for the years ended December 31, 1997 and
1996 include the results of operations and statements of cash flows of the
Company, AHPC and PT Buana.
RESULTS OF OPERATIONS
Fiscal 1997 compared to Fiscal 1996. The results of operations for 1997
and 1996 include only the revenue and expenses of the glove business. The
discontinued operations of the Playboy(R) condom business are reflected in the
losses from discontinued operations as separate line items in the consolidated
statements of operations.
- ---------------------
(2) Forward looking statements in this Item 7, 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,
including the factors set forth below under the heading "Risks Affecting
Forward Looking Statements and Stock Prices." The Company cautions investors
that its business is subject to significant risks and uncertainties.
12
<PAGE> 17
Total revenues are comprised of glove sales from AHPC's examination glove
product line. Product sales totaled $53,810,060 and $47,589,421 for the years
ended December 31, 1997 and 1996, respectively. This increase represents a
13.1% increase in glove sales in 1997 over 1996. This increase is attributable
to AHPC's more developed customer relationships and a move in the sales mix
toward higher priced products, particularly latex powder free exam gloves.
Cost of goods sold for fiscal 1997 as a percentage of product sales was
75.7% compared to 80.6% in 1996. This reduction in the cost of sales and
continued improvement in gross margin is attributed to: (i) more favorable
glove purchase prices obtained in 1997 due to manufacturing efficiencies at its
Indonesian plant, PT Buana, and a continued reduction in raw material latex
prices; (ii) an increase in sales of higher profit margin glove products,
particularly latex powder free examination gloves; (iii) further reductions in
the ocean freight import rates; (iv) the U.S. government again lowering the
duty importation fees associated with examination gloves effective January 1,
1997; and (v) the sustained duty free status of importing Indonesia
manufactured glove products into the U.S. The Company currently expects its
gross margin to continue to be affected by changes in product mix, competition
and other factors.
The market for exam gloves is converting from latex powdered to latex
powder free gloves and to non-latex gloves. This move is a result of lawsuits
being associated with the use of latex powdered gloves. The chlorination
process used to make powder free gloves reduces the sensitivity to latex and
reduces the powder levels which emit latex particles in the air. Being
customer driven, the Company is providing and selling more latex powder free
exam gloves. The Company's sales of latex powder free exam gloves was
approximately 37% of net product sales in 1997 versus 30% in 1996 and expects
that this trend will continue during 1998.
In August 1997, the Company was notified by its sole latex powder free
exam glove manufacturer/supplier that the FDA had placed an FDA Import Alert on
its factory. This temporarily stopped the supplier from shipping product into
the U.S. marketplace and to AHPC. Because of this, AHPC had difficulty
meeting its customers' demands for power free gloves. To successfully satisfy
customers' demands, AHPC temporarily purchased powder free gloves from other
Malaysian manufacturers at much higher costs until the FDA Import Alert was
lifted in December 1997 when the supply of powder free gloves resumed. The
Company's sourcing of product from others during that short period resulted in
a significantly lower gross profit in the fourth quarter of 1997.
Selling, general and administrative ("SG&A") expenses increased from
$8,462,426 in 1996 to $10,634,314 in 1997, a 25.7% increase. The increase is
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 the Company's sales
and support forces; (iv) an increase in September 1996 in rebates provided to
certain customers; (v) increased reserves for lawsuit claims and other
purposes; and (vi) cost incurred in 1997 for the research, study, and
recommendation to purchase, install and implement a new enterprise wide
computer system. As a percentage of 1997 net product sales, SG&A expenses
increased to 19.8%, compared with 17.8% in 1996 and 16.4% in 1995. The Company
currently expects to make additional investments
13
<PAGE> 18
in sales and marketing 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.
Prior to July 1, 1997, the financial statements and transactions of the
Company's Indonesian subsidiary, PT Buana, were maintained in the functional
currency, Indonesian Rupiahs, and translated into U.S. dollars. Due to the
Company's business and operating facility in Indonesia, the Company experienced
transaction and translation gains and losses because of currency fluctuations.
Assets and liabilities were translated at the current exchange rate in effect
at the balance sheet date and shareholders' equity was translated at historical
exchange rates. Revenues and expenses were translated at the average exchange
rate for each period. Prior to July 1, 1997, translation adjustments, which
resulted from the process of translating Indonesian Rupiahs into U.S. dollars,
were accumulated in a separate component of shareholders' equity in accordance
with Statement No. 52. Such adjustments were unrealized.
Effective July 1, 1997, in accordance with Statement of Financial
Accounting Standards No. 52, PT Buana changed its functional currency for
financial statements reporting purposes from the Indonesian Rupiah to the U.S.
dollar. The net effect of this change in functional currency resulted in a
positive $277,035 foreign currency translation adjustment by PT Buana which is
recorded for the year ended December 31, 1997.
Interest expense increased from $1,117,700 in 1996 to $1,481,467 in 1997.
This increase is attributable to the inclusion of PT Buana's interest expense
which increased from $389,428 in 1996 to over $1.0 million in 1997 and
additional borrowings to fund the growth and expansion of PT Buana and the
glove business.
At December 31, 1997, the Company had a net operating loss carry-forward
("NOL") of approximately $4.3 million which will be available to reduce federal
taxable income in future periods. In accordance with federal tax regulations,
usage of the NOL is subject to limitations due to certain ownership change
which occurred.
Revenues from the Playboy(R) condom business were $376,422 and $1,380,435
for the years ended December 31, 1997 and 1996, respectively. These revenues
are included in the losses from discontinued operations in the consolidated
statements of operations and declined due to the Company's exit of the condom
business pursuant to agreement with Playboy in November 1996. Under the exit
plan, the Company sold Playboy(R) condoms until June 30, 1997. The Company may
receive royalty income for up to three years after that date from sales in 15
countries in which the Company had launched the Playboy(R) condoms and for one
year for Japan. The Company earned and recorded royalty income of $27,815 in
1997 and does not anticipate that future royalties will be significant.
The Company continued to have losses from the disposal of the condom
operations which amounted to $(783,670) in 1997. During the fourth quarter of
1997, the Company revised its
14
<PAGE> 19
estimate of possible condom returns and related costs associated with the
cessation of the condom business. The Company reduced its loss from disposal
by $590,128 compared to the loss from disposal as reported. The Company's exit
of the condom business is part of the strategy to return theCompany to
profitability.
For the year ended December 31, 1997, the net income for the Company was
$465,722, compared to a net loss of $(1,164,587) in 1996. The overall basic and
diluted net income (loss) per share was $.11 in 1997 compared to a basic and
diluted loss per share of $.(32) in 1996.
Fiscal 1996 compared to Fiscal 1995. The results of operations for 1996
exclude the revenues and expenses of the discontinued operations of the
Playboy(R) condom business. Accordingly, all condom business activity is
reflected in the losses from discontinued operations as separate line items in
the consolidated statements of operations.
Total revenues are comprised primarily of glove sales from AHPC's
examination glove product line. Product sales totaled $47,589,421 and
$40,950,968 for the years ended December 31, 1996 and 1995, respectively. This
increase represents a 16.2% increase in glove sales in 1996 over 1995. This
increase is attributable to AHPC's more developed customer relationships, sales
price increases, and an increase in the sales mix of higher priced products.
Revenues from the Playboy(R) condom business were $1,380,435 and
$2,078,096 for the years ended December 31, 1996 and 1995, respectively. These
revenues are included in the losses from discontinued operations in the
consolidated statements of operations and declined due to the Company's exit of
the condom business pursuant to agreement with Playboy(R) in November 1996.
Under the exit plan, the Company will continue to sell Playboy(R) condoms until
June 30, 1997 and will receive royalty income for up to three years after that
date from sales in 15 countries in which the Company had launched the
Playboy(R) condoms.
Cost of goods sold for fiscal 1996 as a percentage of product sales was
80.6% compared to 88.3% in 1995. This reduction in the cost of sales and
improvement in gross margin is attributed to: (i) more favorable glove purchase
prices obtained in 1996 due to a lower raw material latex price; (ii) increased
glove sale prices in 1996 over 1995; (iii) an increase in sales of higher
profit margin glove products, particularly powder free examination gloves; (iv)
successfully negotiating reductions in the ocean freight import rates; (v) the
U.S. government lowering the duty importation fees associated with examination
gloves; (vi) the duty free status of importing Indonesia manufactured glove
products into the U.S.; and (vii) the inclusion of PT Buana's manufacturing
gross margins in 1996, which increased the overall margin for internally
manufactured gloves versus third party manufactured gloves. The Company
currently expects its gross margin to continue to be affected by changes in
product mix, competition and other factors.
Selling, general and administrative ("SG&A") expenses increased from
$6,707,634 in 1995 to $8,462,426 in 1996, a 26.2% increase. The increase is
attributable to: (i) an increase in selling
15
<PAGE> 20
expenses at AHPC commensurate with its sales growth; (ii) the increase in SG&A
expenses from PT Buana's operations, which began in May 1996; and (iii) the
expansion of the Company's sales and support forces. As a percentage of net
product sales, SG&A expenses increased to 17.8%, compared with 16.4% in 1995
and 17.9% in 1994. The Company currently expects to make additional investments
in sales and marketing 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 $614,506 in 1995 to $1,117,700 in 1996.
This increase is attributable to the inclusion of PT Buana's interest expense
in 1996 of $389,428 and additional borrowings to fund the growth and expansion
of the glove business.
At December 31, 1996, the Company had a net operating loss carry-forward
("NOL") of approximately $5,300,000 which will be available to reduce federal
taxable income in future periods. In accordance with federal tax regulations,
usage of the NOL is subject to limitations in future years if certain ownership
changes occur.
The Company continued to have losses from discontinued operations
primarily from the condom business. These losses were 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 condom
business is highly competitive and was creating losses for the Company. The
Company's exit of the condom business is part of the strategy to return the
Company to profitability.
For the year ended December 31, 1996, the net loss for the Company was
$1,164,587, compared to a net loss of $4,864,404 in 1995. The overall loss per
share was $.32 in 1996 compared to a loss per share of $2.00 in 1995.
SEGMENT INFORMATION
1997. At December 31, 1997, the Company was engaged solely in the business
of manufacturing and distributing examination gloves to the medical, dental,
and food service industries in the United States. The Company distributed
Playboy(R) condoms only through June 30, 1997 in accordance with the
termination agreement with Playboy(R) Enterprises Inc. As such, the Playboy(R)
condom business is reported as a discontinued operation of the Company.
1996. At December 31, 1996, the Company was engaged in the business of
manufacturing (through its 70% owned Indonesian subsidiary, PT Buana) and
distributing examination gloves primarily in the United States. PT Buana began
manufacturing powdered latex examination gloves in April 1996 and shipping
product to AHPC in May 1996. The Company continued to sell Playboy(R) condoms
in 1996 and will continue only through June 30, 1997 in accordance with its
November 1996 plan to discontinue all condom operations by such later date. The
Company may receive royalty revenues from any Playboy(R) condom sales made in
the 15 countries where it
16
<PAGE> 21
launched the condom products for up to three years ending June 30, 2000 and in
Japan until June 30, 1998. Royalty revenue earned by the Company in 1996 was
not significant. There can be no guarantee that any future royalties will be
earned by the Company in all or any of the countries.
During 1996, the Company dissolved its wholly owned subsidiaries, DGI and
Premier Latex, Inc., which were a discontinued operation and an inactive
entity, respectively.
1995. At December 31, 1995, the Company was engaged in the infection
control industry segment consisting of examination gloves sales and latex
condom sales. However, due to the exit of the condom business in 1996, all 1995
condom business has been reclassified and is included in the loss from
discontinued operations.
The Company acquired PT Buana, a powdered latex exam glove manufacturing
plant in Indonesia. However, PT Buana was in the start-up phase of operations
during 1995 and did not commence operation until April 1996. The Company had
entered the start-up of a nutritional vitamin business and subsequently exited
the vitamin business in June 1995, with the cost of such exit comprising a part
of the restructuring charge which was incurred at that time. In 1995, the
Company liquidated the remaining assets of its wholly owned subsidiary,
Disposable Garments Inc. ("DGI"), a discontinued operation, which had
discontinued operations in December 1993.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of December 31, 1997 decreased $159,057 from
December 31, 1996 levels. The Company experienced this decline in cash flow in
1997 due to the funding of capital expenditures for additional PT Buana
manufacturing equipment and due to a net paydown in letter of credit
obligations. Cash increased from additional bank borrowing made in 1997 due to
positive cash provided by operating activities.
The Company experienced positive cash flow from operations of $1,588,370
during 1997 as a result of net income of $465,722 plus noncash depreciation of
$898,831 and an increase in accrued expenses, which were offset by an increase
in account receivables. The Company used $3,063,735 for investing in the
purchase of fixed assets for expanding the operations of the PT Buana
manufacturing facility in Indonesia. The Company experienced positive cash
flow of $75,374 from financing activities during 1997. This included increased
cash from additional borrowings of $2,846,480, offset by debt payments of
$1,500,000 and a decrease in letter of credit obligations of $1,561,272.
At December 31, 1997, the Company's principal sources of liquidity
included: $161,981 of cash and cash equivalents; $7,900,000 available under a
secured bank line of credit and letter of credit facility, expiring in December
31, 1998; $4,600,000 available under a bank unsecured letter of credit
facility; and $5,075,000 available under a secured Indonesian bank loan
facility with a banking syndicate. At December 31, 1997, $5,537,547 was
outstanding under the $7,900,000 facility, $2,361,634 was outstanding under the
$4,600,000 letter of credit facility, and all $5,075,000
17
<PAGE> 22
was outstanding under the Indonesian bank facility. Also, the Company owns a
marketable equity security and note receivable from LSAI valued at $1,076,496
at December 31, 1997 which will provide the Company with additional liquidity
in 1998.
Inventories at December 31, 1997 increased to $8,203,861 compared with
$8,094,649 at December 31, 1996. Net trade accounts receivable at December 31,
1997 increased to $5,410,843 from $4,677,490 at December 31, 1996. This
increase was consistent with higher revenues during 1997.
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 the Common Stock of the
Company at an exercise price of $22.20 per share. At December 31, 1997 and
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. During the years ended December 31, 1997 and 1996, the Company
incurred interest expense of approximately $200,000 per year on this
indebtedness. This expense was reclassified and included in the loss on
discontinued operations through June 30, 1997, and in 1996 and 1995.
The Company currently expects to have cash needs during 1998 in addition
to funding the 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 hiring of an additional full time sales
force; (iii) the hiring of additional support staff; (iv) the continuing
completion and expansion of the manufacturing facility in Indonesia and
possible upgrading to produce powder free gloves; (v) the completion of a new
enterprise wide computer system; 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.
RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES
In addition to those matters already set forth in Item 1, Business, and
this Item 7, the following may result in the Company not achieving certain
results included in any statement that may be considered a forward looking
statement. The Company cautions the reader that the following risks may not be
exhaustive.
18
<PAGE> 23
Impact of the Year 2000 Issue. The year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company has assessed its systems and has a plan to upgrade its systems
to be year 2000 compliant. In addition, the Company has received assurance
from its major software consultant that the upgraded systems products which may
be implemented by the Company are year 2000 compliant and will function
adequately. If the systems of other companies on whose services the Company
depends or with whom the Company's systems interface are not year 2000
compliant, it could have a material adverse effect on the Company.
The Company will continue its year 2000 issue assessment and, if it comes
to the attention of the Company's management that any of its systems, or the
systems of those on whom the Company relies, are not year 2000 compliant, the
Company intends to develop an action plan, and assess the resources it would be
required to devote, to address such problem. There can be no assurance that
devoting further resources of the Company to the year 2000 issue, if one were
to occur, would not have a material adverse effect on the Company.
Variations in Quarterly Results. The Company's quarterly operating results
are subject to various risks and uncertainties, including risks and
uncertainties related to: local and international economic conditions;
competitive pressures; the composition, timing and size of orders from and
shipments to major customers; variations in product mix and the size mix
between sales; variations in product cost; infrastructure costs; obsolescence
of inventory; and other factors as discussed below. Accordingly, the Company's
operating results may vary materially from quarter to quarter.
The Company operates with little backlog and, as a result, net product
sales in any quarter are substantially dependent on the orders booked and
shipped in that quarter. Because the Company's operating expenses are based on
anticipated revenue levels and because a high percentage of the Company's
expenses are relatively fixed, if anticipated shipments in any quarter do not
occur as expected, the Company's operating results may be adversely affected
and fall significantly short of expectations. Any other unanticipated decline
in the growth rate of the Company's net revenues, without a corresponding and
timely reduction in the growth of operating expenses, could also have an
adverse effect on the Company and its future operating results.
The Company aims to prudently control its operating expenses. However,
there is no assurance that, in the event of any revenue, gross margin or other
shortfall in a quarter, the Company will be able to control expenses
sufficiently to meet profitability objectives for the quarter.
Financing. The Company's current credit facility expires December 31,
1998, with an option to renew for another two years. There can be no
assurances that it will be renewed, extended or
19
<PAGE> 24
sufficient to finance continued growth of the Company. The facility is
guaranteed by MBF Holdings, which has significantly greater resources than the
Company. Should such guarantee not continue to be made available to the
Company, there can be no assurances that the Company will be able to obtain the
same level of, or interest rate for, bank financing. Should the proposed
change of control to Wembley occur, the Company will most like not be willing
to continue to guarantee the credit facility and there can be no assurance that
the Company on its own or in conjunction with guarantees from Wembley, will be
able to continue such credit facility or replace it with a comparable
substitute facility.
Working Capital Deficit. The Company's balance sheet for the year ended
December 31, 1997 shows current assets of $16,173,033 and current liabilities
of $17,751,645, resulting in a working capital deficit of $1,578,612. For the
year ended December 31, 1996, the Company had a working capital deficit of
$1,705,267. Although the Company is aggressively working toward eliminating
this deficit, the Company is unable to guarantee that it will be successful in
its efforts.
Dependence on Gloves. The Company is exclusively engaged in the
manufacture and sale of disposable gloves. Accordingly, the Company's results
of operations and financial condition are highly dependent on the level of
supply of and demand for disposable gloves. There can be no assurance that the
supply of or demand for disposable gloves will continue at current levels or
that changes in such supply or such demand will not have a material adverse
effect on the Company's results of operations or financial condition. In
addition, the Company currently has a substantial investment in PT Buana, which
exclusively manufacturers powdered gloves, as well as a long term supply
contract with PIE Healthcare for the purchase of powdered gloves. Should the
demand for powdered gloves decline, due to the greater level of allergic
reactions associated with such gloves than powder free latex or synthetic
gloves, then the Company will continue to be subject to the aforesaid
commitments. Conversions of powdered glove manufacturing capacity to powder
free capacity requires substantial time, capital investment and know how, and
there can be no assurance such conversion could be made economically or at all,
in the event of a substantial decline in the demand for powdered gloves. See
"New Glove Products" below.
Dependence on Rubber Harvest and Latex Concentrate. The ability of the
Company to produce and purchase its products profitably is entirely dependent
upon the consistent availability, at competitive prices, of raw rubber
harvested by independent growers in Malaysia and Indonesia and locally
processed by the Company and others into latex concentrate. Any disruption in
the consistent supply of rubber for latex concentrate due to weather or other
natural phenomena, labor or transportation stoppages, shortages or other
factors, could cause significant adverse effects to the Company's results of
operations and financial condition. In addition, rubber is a commodity traded
on world commodities exchanges and is subject to price fluctuations driven by
changing market conditions over which the Company has no control. Increases in
the price of latex concentrate have adversely affected the Company's raw
material costs in the past and could do so again.
Changes in Gross Margins. Certain of the Company's net product sales are
derived from products and markets which typically have lower gross margins
compared to other products and markets, due to higher costs and/or lower prices
associated with the lower gross margin products and markets. The Company
currently expects that its net product sales from powder free gloves will
continue to increase as a percentage of total net product sales. In addition,
the Company is currently experiencing pricing pressures due to a number of
factors, including competitive conditions,
20
<PAGE> 25
consolidation within certain groups of suppliers and changing technologies in
the production of powder free gloves and increasing demand for new glove
products. To the extent that these factors continue, the Company's gross
margins would decline, which would adversely affect the Company and its future
operating results.
Downward pressure on the Company's gross margins may be mitigated by other
factors, such as a reduction in product costs and/or an increased percentage of
new product sales from higher gross margin products, such as powder free
gloves. The Company is aiming to reduce its product costs and to increase its
percentage of net product sales from powder free gloves. However, there is no
assurance that these efforts will be successful.
New Glove Products. The Company is planning to distribute a number of new
glove products, including synthetic and powder free vinyl gloves. There is no
assurance that these development efforts will be successful or that, if
successfully developed, these products will achieve commercial success.
Growth Dependencies. In general, the Company's future growth is dependent
on the Company's ability to successfully and timely enhance existing products,
develop and introduce new products, establish new distribution channels,
develop affiliations with leading market participants and continue to develop
its relationships with its existing customer base. The failure to achieve these
and other objectives could limit future growth and have an adverse effect on
the Company and its future operating results.
On a related note, the pressure to develop and enhance products, and to
establish and expand markets may cause the Company's SG&A expenses to increase
substantially, which could also have an adverse effect on the Company and its
future operating results.
International Operations. The Company's international manufacturing
operation has grown substantially, and, thus, the Company is increasingly
affected by the risks associated with international operations. Such risks
include: managing an organization in Indonesia; fluctuations in currency
exchange rates; the burden of complying with international laws and other
regulatory and product certification requirements; changes in such laws and
requirements; tariffs and other trade barriers; import and export controls;
international staffing and employment issues; and political and economic
stability. The inability to effectively control and manage these and other
risks could adversely affect the Company and its future operating results.
Competition. The various markets in which the Company operates are
becoming increasingly competitive as a number of other companies develop and
sell products that compete with the Company's products in these markets.
Certain of these competitors have significantly more financial and technical
resources than the Company. The Company faces additional competitive factors
besides price, such as product quality, consistency, timeliness of delivery,
service, and the size and reliability of the manufacturer. These competitive
factors may result in, among other things, price
21
<PAGE> 26
discounts by the Company and sales lost by the Company to competitors that may
adversely affect the Company and its future operating results.
Third-Party Distributors. The Company uses various channels to market and
distribute its products primarily by sales to end-users via third-party
distributors. Third-party distributors are a substantial channel for
distribution to medical facilities. Accordingly, the Company's ability to
market and distribute its products depends significantly on its relationship
with third-party distributors, as well as the performance and financial
condition of these distributors. In the event that the Company's relationship
with its distributors deteriorates, or the performance or financial condition
of the distributor becomes unsatisfactory, the Company and its future operating
results could be adversely affected.
Excess or Obsolete Inventory. Managing the Company's inventory of various
size mix and product mix is a complex task. A number of factors, including the
need to maintain a significant inventory of certain sizes or products which are
in short supply or which must be purchased in bulk to obtain favorable pricing,
the general unpredictability of demand for specific products and customer
requests for quick delivery schedules, may result in the Company maintaining
excess inventory. Other factors, including changes in market demand and
technology, may cause inventory to become obsolete. Any excess or obsolete
inventory could result in price reductions and inventory write-downs, which, in
turn, could adversely affect the Company and its operating results.
Hiring and Retention of Employees. The Company's continued growth and
success depend to a significant extent on the continued service of senior
management and other key employees and the hiring of new qualified employees.
Competition for highly skilled business, technical, marketing and other
personnel is intense, particularly in the strong economic cycle currently
prevailing for companies. The loss of one or more key employees or the
Company's inability to attract additional qualified employees or retain other
employees could have an adverse effect on the Company and its future operating
results. In addition, the Company may experience increased compensation costs
in order to compete for skilled employees.
Product Liability Insurance. Participants in the medical supplies business
are potentially subject to lawsuits alleging product liability, many of which
involve significant damage claims and defense costs. A successful claim against
the Company in excess of the Company's insurance coverage could have a material
adverse effect on the Company's results of operations or financial condition.
Claims made against the Company, regardless of their merit, could also have a
material adverse effect on the Company's reputation. There is no assurance that
the coverage limits of the Company's insurance policy will be adequate or that
present levels of coverage will be available at affordable rates in the future.
While the Company has been able to obtain product liability insurance in the
past, such insurance varies in cost, is difficult to obtain and may not be
available in the future on acceptable terms or at all. The Company is subject
to a number of lawsuits filed against it and other manufacturers of latex
gloves alleging injuries relating to allergic reactions caused by the residual
chemicals or latex proteins in gloves. This litigation is still in the early
stages, and there can be no assurance that the Company's insurance will be
sufficient to meet any recovery for which the
22
<PAGE> 27
Company may be found liable, that the outcome of such suits will not materially
adversely affect the Company's results of operations or financial condition or
that the Company's deductible obligation (to fund a portion of the initial cost
of defense and/or liability of each such lawsuit) will not prove burdensome or
that the Company will be able to continue to maintain product liability
insurance at economical levels, or otherwise, in the event that adverse rulings
in the product liability area should occur.
Stock Market Fluctuations. In recent years, the stock market in general,
including the Company's Common Stock, have experienced extreme price
fluctuations. The market price of the Company's Common Stock may be
significantly affected by various factors such as: quarterly variations in the
Company's operating results; changes in revenue growth rates for the Company;
changes in earnings estimates by market analysts; the announcement of new
products or product enhancements by the Company or its competitors; speculation
in the press or analyst community; and general market conditions or market
conditions specific to particular industries. There can be no assurance that
the market price of the Company's Common Stock will not experience significant
fluctuations in the future.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Heng Sewn Loi 38 Chairman and Chief Executive Officer
Edward J. Marteka 60 President
Stephen Tan 42 Chief Financial Officer, Treasurer and Secretary
Robert C. Carter 36 Controller and Assistant Secretary
Biographies for Messrs. Loi, Marteka, Tan and Carter are included below.
At March 18, 1998, the directors of the Company consist of six Class A
Directors and two Class B Directors are as follows:
Class A Directors
Name Age Director Since
- ---- --- --------------
Teik Hok Loy 33 1993
Heng Sewn Loi 38 1993
Edward J. Marteka 60 1995
George Jeff Mennen 56 1994
Richard C. M. Wong 53 1997
Lew Kwong Ann 37 1997
Class B Directors
Name Age Director Since
- ---- --- --------------
Robert J. Simmons 54 1995
Don L. Arnwine 65 1995
The following sets forth brief statements of the principal occupations and
other biographical information of each of the directors and executive officers.
We note with profound sadness the death of Tan Sri Dato (Dr.) Hean Heong
Loy on November 25, 1997 after a long battle with cancer. His incisive and
inspirational leadership will be missed. Tan Sri Loy, a long serving member of
the Board of Directors of the Company, was the Chief Executive Officer and had
served in various capacities with MBf Holdings since 1963. He
24
<PAGE> 29
was the Chairman of the Board of Directors of MBf International since May 1991
and sat on the Board of Directors of MasterCard International. Tan Sri Dato
Loy was made a Justice of the Peace, an honorary title, by the late Sultan of
Perak for his contributions to the nation of Malaysia, and in the same year was
conferred the award of the honorary title "Dato Paduka Mahkota Johor" by the
late Sultan of Johor. On June 6, 1992, the additional title "Tan Sri" was
conferred upon him.
Teik Hok Loy was elected to the Board of Directors on December 17, 1993.
He has served in various capacities with MBf Holdings since 1988 and currently
serves in the position of President and Chief Executive Officer of MBf
Holdings. He also serves as a director of MBf Holdings. Teik Hok Loy is the son
of the late Tan Sri Dato Loy.
Heng Sewn Loi was elected to the Board of Directors on December 17, 1993.
He has served in various capacities with MBf Holdings since 1988 and previously
served as President of its manufacturing division. On September 1, 1995 he was
appointed as Chairman of the Company. Heng Sewn Loi is the nephew of the late
Tan Sri Data Loy.
Edward J. Marteka was the founder of and has been the President and
Director of the Company's subsidiary, AHPC since its incorporation in 1989. In
May 1995, Mr. Marteka was appointed to the Board of Directors and as President
of the Company. Mr. Marteka is responsible for the overall operations of AHPC
and the Company. Mr. Marteka had held various positions with Baxter Healthcare
Corporation, and served as Vice President of its International Division.
George Jeff Mennen was elected to the Board of Directors on October 12,
1994. Mr. Mennen heads the G.J. Mennen Group, a consulting firm specializing in
family owned businesses. Mr. Mennen had a distinguished career at The Mennen
Company including being the Vice Chairman of that company. The Mennen Company
was founded by Mr. Mennen's great grandfather in 1878 and remained privately
owned until it was sold in 1992 to Colgate-Palmolive.
Robert J. Simmons was elected to the Board of Directors in December 1995.
He is currently President of RJS Healthcare, Inc., a healthcare consulting
company, founded in 1990. He served as Executive Vice President at Baxter
International, Inc., from 1987 until founding RJS in 1990. Mr. Simmons joined
Baxter after serving over 20 years at American Hospital Supply Corporation. His
last position at American Hospital Supply was Vice President of Corporate
Marketing.
Don L. Arnwine was elected to the Board of Directors in December 1995. He
is currently President of Arnwine Associates, a company he founded in 1989 to
provide specialized advisory services to the health care industry. From 1961 to
1972, Mr. Arnwine served as Director of the Hospital at the University of
Colorado Medical Center. From 1972 to 1982, he served as President and CEO of
the Charleston Area Medical Center. In 1982, Mr. Arnwine became President and
CEO of Voluntary Hospitals of America and was named its Chairman and CEO in
1985, in which capacity he served until founding Arnwine Associates.
25
<PAGE> 30
Richard C. M. Wong was elected Class A Director of the Company on May 20,
1997. Mr. Wong is currently the President and Chief Executive Officer of
Wembley Rubber Products Sdn. Bhd. ("Wembley"), a Malaysian glove manufacturer,
which provides powder free exam gloves to AHPC. In addition, he is also a
Deputy Chairman of Nylex Malaysia Bhd., and a director of two other publicly
listed companies in Malaysia. Mr. Wong is the founder of TEC Asia Centre, an
international organization of Chief Executive Officers who share ideas to
manage change and remain competitive.
Kwong Ann Lew was elected Class A Director of the Company on May 20, 1997.
Mr. Lew is an Executive Director and Chief Financial Officer of Wembley. He
is a member of the Malaysian CPA Society and Institute of Taxation and was with
Arthur Andersen LLP from 1988 to 1991 before joining Uniphoenix Bhd. as a
corporate finance manager and a senior consultant.
Mr. Wong and Mr. Lew were elected on May 20, 1997 as Class A Directors in
the place of Mr. Teoh Cheng Soon and Dr. Teo Sen Chong who resigned prior to
their appointment and as a result of the Wembley agreements to buy 55.1% of the
Company as described in Item 13, "Certain Relationships and Related
Transactions."
Stephen Tan was engaged by MBf Holdings as CFO of the Trading Division in
December 1994, and transferred to the U.S. in September 1995 to serve as CFO
and Secretary of the Company. In 1981, after graduating in London as a
Certified Accountant, he worked in England, New Zealand, and Malaysia as
financial accountant, business consultant and auditor with various
organizations for over 15 years.
Robert C. Carter joined the Company in March 1992 and has served as the
Controller of AHPC since that time. He was appointed Assistant Secretary of the
Company in May 1995. Previously, Mr. Carter was employed by Clifton, Gunderson
& Co. and Arthur Andersen LLP, certified public accountants. Mr. Carter holds a
B.S. in Accounting from the University of Denver and became a certified public
accountant in 1988.
BOARD MEETINGS AND COMMITTEES
During the 1997 fiscal year, the Company's Board of Directors held two
meetings, and all other actions by the Board of Directors were taken by
unanimous written consent without a meeting.
The Board of Directors has a Compensation Committee for the purpose of
administering the Company's Omnibus Equity Compensation Plan (the "Plan"). The
Board has not delegated its functions to any other standing committees except
for the Audit Committee which was formed in 1998.
The Audit Committee was formed for the purpose of reviewing with the
Company's independent public accountants the scope and timing of their audit
services and any other services they are asked to perform, the accountants'
report on the Company's financial statements following
26
<PAGE> 31
completion of their audit and the Company's policies and procedures with
respect to internal accounting and financial controls.
COMPENSATION OF DIRECTORS
Mr. George Jeff Mennen and the Class B Directors will receive $1,000 for
each meeting of the Board as well as $500 for each committee meeting attended.
All directors will be reimbursed for expenses incurred in attending meetings of
the Board and committee meetings. Each director is presently entitled to
receive stock options under the Plan to purchase 1,000 shares of the Company's
Common Stock as a result of his initial election to the Board of Directors. At
this time, no stock options have been issued to the new directors, Mr. Wong and
Mr. Lew, whom were newly elected in May 1997.
On January 6, 1997, the Compensation Committee approved and the Company
issued stock options to Mr. Mennen, Mr. Simmons and Mr. Arnwine in the amount
of 4,000 shares each with an exercise price of $3.66 per share. Under the terms
of the Plan, the Compensation Committee of the Board may determine the exercise
price for options granted to Directors for a period of up to six months from
the date of grant. All of the director options are immediately exercisable for
a maximum period of ten years from the date of grant.
Effective July 23, 1996, the Company repriced all director and employee
options outstanding at that time, to $2.75, the closing stock price on that
date. All director options issued to former directors were terminated upon
their departure from the Board.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
certain officers, directors and beneficial owners of more than 10% of the
Company's Common Stock to file reports of ownership and changes in their
ownership of the equity securities of the Company with the Securities and
Exchange Commission and Nasdaq. Based solely on a review of the reports and
representations furnished to the Company during the last fiscal year, the
Company believes that each of these persons is in compliance with all
applicable filing requirements.
27
<PAGE> 32
ITEM II. EXECUTIVE COMPENSATION
The following table discloses the compensation awarded to or earned by the
Chief Executive Officer and the other executive officers whose aggregate annual
salary and bonus exceeded $100,000 during the Company's last three fiscal
years:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Fiscal Other Annual Stock All Other
Name & Principal Position Year Salary Bonus Compensation Options Compensation
- ------------------------- ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Heng Sewn Loi, 1997 $144,800 - $60,348 5,000 -
Chairman and Chief 1996 $140,000 $34,028 $90,705 - -
Executive Officer 1995 - - $20,000 40,000 -
Edward J. Marteka, 1997* $160,000 $26,667 $ 7,200 5,000 -
President 1996 $160,000 $33,333 $ 7,200 - -
1995 $150,000 $29,166 $ 7,200 15,000 -
Stephen Tan 1997 $ 68,208 $11,368 $35,330 - -
Chief Financial Officer
</TABLE>
*Salary of Mr. Marteka and Mr. Tan were due for review during 1997 but
were deferred until the proposed acquisition by Wembley Rubber Products of the
Common Stock and Class A Common Stock of the Company is closed and a new
Compensation Committee is formed. The new salary, upon determination and
approval, is likely to have retroactive effect to their employment anniversary
date and 1997 bonus may also be adjusted accordingly. The Company has made
adequate provision in its records in anticipation of these adjustments.
There is no other long term compensation for the executives listed above in
1995 through 1997.
EMPLOYMENT AGREEMENTS
On September 1, 1995, the Company entered into an employment agreement
with Mr. Heng Sewn Loi (the "Loi Agreement"). The Loi Agreement provides for:
(i) Mr. Loi to serve as Chairman of the Company; (ii) a base salary; (iii)
non-qualified stock options to purchase 40,000 shares of Common Stock under the
Plan, with 20,000 shares exercisable commencing July 21, 1995, and 20,000
shares exercisable commencing July 21, 1996 at an exercise price of $7.80, the
closing price of the Common Stock as reported on the Nasdaq SmallCap Market on
the day the options were granted by the Compensation Committee; and (iv) life
and medical allowance, automobile allowance, living expenses, dependent tuition
allowance, home leave and family travel, provident fund, relocation expenses,
tax equalization settlement, U.S. legal and taxation matters and other
additional customary benefits. Due to Mr. Loi's pending U.S. work permit
status, Mr. Loi's salary from September 1, 1995 through December 31, 1995 was
incurred by MBf Holdings. Mr. Loi's work permit in the U.S. was approved in
January 1996 and since then his salary was paid by the Company.
On April 1, 1994, the Company entered into an employment agreement with
Edward J. Marteka (the "Marteka Agreement"). The Marteka Agreement, as amended
on June 30, 1995 and on July 22, 1996, provides for: (i) Mr. Marteka to serve
as President of the Company (since May 31,
28
<PAGE> 33
1995) and AHPC; (ii) a base salary; (iii) non-qualified stock options to
purchase 35,000 shares of Common Stock under the Plan, with 5,000 shares
exercisable commencing April 1, 1994, 20,000 shares April 1, 1995 and 10,000
shares April 1, 1996 at an exercise price of $11.875, the closing price of the
Common Stock as reported on the Nasdaq SmallCap Market on the day the options
were granted by the Compensation Committee; and (iv) life and medical
insurance, automobile allowance and other additional customary benefits. The
amended Marteka Agreement also granted to Mr. Marteka additional non-qualified
stock options to purchase 14,000 shares of Common Stock, with 7,000 shares
exercisable commencing July 21, 1995 and 7,000 shares July 21, 1996, at an
exercise price of $7.80, the closing price of Common Stock as reported on the
Nasdaq SmallCap Market on the day the options were granted by Compensation
Committee. Mr. Marteka also received options to purchase 1,000 shares of the
Company's Common Stock upon his appointment as Class A Director in 1995.
On September 1, 1995, the Company entered into an employment agreement
with Mr. Stephen Tan (the "Tan Agreement"). The Tan Agreement provides for:
(i) Mr., Tan to serve as Chief Financial Officer and Secretary of the Company;
(ii) a base salary; (iii) automobile allowances, living expenses, dependent
tuition allowance, home leave, U.S. taxation on allowance and other customary
benefits. On July 23, 1996, the Company's Compensation Committee granted
non-qualified stock options to purchase 15,000 shares of Common Stock under the
Plan, with 5,000 shares exercisable commencing July 23, 1996, 5000 shares
exercisable commencing July 23, 1997 and 5,000 shares exercisable commencing
July 23, 1998 at a price of $2.75, the closing price of the Common Stock as
reported on the Nasdaq SmallCap Market on the day the options were granted.
Due to pending U.S. work permit status, Mr. Tan's salary from September 1, 1995
through March 15, 1996 was incurred by MBf Holdings. Mr. Tan's work permit was
approved in March 1996, and since then his salary was paid by the Company.
As approved by the Compensation Committee, all of Mr. Loi and Mr.
Marteka's outstanding stock options were repriced effective July 23, 1996 to
$2.75, the closing stock price on that date.
29
<PAGE> 34
OPTION GRANTS IN FISCAL 1997
Option / SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value at
Individual Assumed Rates of Stock Price
Grants Appreciation for Option Term
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/ SARs Employees in of Expiration
Name Granted (#) Fiscal Year Base Price Date 5% ($) 10%
---- ----------- ---------- ---------- ---- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Loi Heng Sewn 5,000 5.4% $3.66 1/6/07 $29,800 $47,450
Edward Marteka 5,000 5.4% $3.66 1/6/07 $29,800 $47,450
</TABLE>
On January 6, 1997, the Company issued options under the Company's Omnibus
Equity Compensation Plan to certain employees and directors to purchase 92,500
shares of the Company's Common Stock at an exercise price of $3.66 per share,
the closing price of the Common Stock as reported on NASDAQ on the date the
options were granted by the Compensation Committee. The options are
exercisable for ten (10) years from January 6, 1997, the date of grant.
Mr. Loi and Mr. Marteka were each granted options to purchase 5,000 shares
of the Company's Common Stock in accordance with the Company's January 6, 1997
stock option offering.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal
1997 by the executive officers named in the summary compensation table and the
value of such officers' unexercised stock options as of December 31, 1997.
<TABLE>
<CAPTION>
Number of Unexercised Value of In-the-Money
Shares Value Options at 12/31/97 Options at 12/31/97
Acquired on Realized ------------------- -------------------
Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
---------- --- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Heng Sewn Loi - 0 - - 0 - 51,666 3,334 $56,600 $717
Edward J. Marteka - 0 - - 0 - 51,666 3,334 $56,600 $717
Stephen Tan -0- -0- 10,000 5,000 $11,250 $5,625
</TABLE>
30
<PAGE> 35
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors is comprised of only
two Class A Directors, Teik Hok Loy and George Jeff Mennen, each of whom were
appointed by the Board of Directors in 1995. Mr. Cheng Soon Teoh resigned from
the Board of Directors and Compensation Committee in early 1997. At this time,
the vacancy on the Compensation Committee has not yet filled.
The Committee oversees administration of the Company's Omnibus Equity
Compensation Plan (the "Plan"). The purpose of the Plan is to attract and
retain capable and experienced officers and employees by compensating them with
equity-based awards whose value is connected to the continued growth and
profitability of the Company. Under the Plan, awards may be made in the form of
stock options or restricted stock. Apart from the Plan, the Company has not
developed any formalized compensation policy or program. In general, the
Company compensates executive officers and senior management through salary,
bonus (where appropriate) and the grant of stock options. Because the Company's
executive officers' employment agreements presently control the compensation
paid to such executive officers, the Compensation Committee did not formulate
policies with respect to the executive officers compensation during 1997.
During fiscal 1997, all action of the Compensation Committee was taken by the
Committee by unanimous written consent without a meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Tan Sri Dato (Dr.) Hean Heong Loy had a substantial ownership interest in
MBf Holdings, which owns MBf International and 31.5% of MBf Capital Berhad, an
affiliate which owned MBf Personal Care. Teik Hok Loy is the son of the late
Tan Sri Dato (Dr.) Hean Heong Loy and CEO and a Director of MBf Holdings. Heng
Sewn Loi is the nephew of the late Tan Sri Dato (Dr.) Hean Heong Loy and
Chairman of the Company. Accordingly, these members should not be considered
as independent Directors when serving on the Board of Directors or the
Compensation Committee.
31
<PAGE> 36
STOCK PERFORMANCE CHART
The following graph compares the yearly percentage change in the
cumulative total shareholder return on the Company's Common Stock for each of
the Company's last five fiscal years with the cumulative total return (assuming
reinvestment of dividends) of (i) the NYSE/AMEX/Nasdaq Stock Market -U.S. Index
and (ii) a peer group selected by the Company, in good faith. The peer group
consists of American Shared Hospital Services, Daxor Corp., DVI, Inc., Hemacare
Corp., Medical Sterilization Inc., National Home Health Care Inc., Prime
Medical Services Inc. and Psicor Inc.
[Graph]
*$100 invested on December 31, 1992 in stock or Index
- including reinvestment of dividends. Fiscal year
ending December 31.
CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C> <C>
MBf USA, Inc. 100 70 104 24 23 25
NYSE/AMEX/Nasdaq Stock 100 111 111 151 183 240
Peer Group 100 92 87 146 166 198
</TABLE>
32
<PAGE> 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 18, 1998, with
respect to the beneficial ownership of the Company's Common Stock and Series A
Common Stock by (i) each shareholder known by the Company to be the beneficial
owner of more than 5% of its Common Stock and Series A Common Stock, (ii) each
director, nominee and certain executive officers, and (iii) all directors and
executive officers, as a group. Unless otherwise indicated, the shareholders
named below have sole voting and investment power with respect to such shares
of Common Stock and Series A Common Stock beneficially owned by them.
<TABLE>
<CAPTION>
Percent of
Amount and Nature of Total Voting
Title of Class Name of Beneficial Owner Beneficial Ownership Stock(2)
- -------------- ------------------------ -------------------- ------
<S> <C> <C> <C> <C>
Series A Common Stock MBf International Ltd.(1) 1,252,538 29.03%
Common Stock MBf International Ltd.(1) 1,682,275 39.00%
Common Stock Teik Hok Loy 10,000(3) *
Common Stock Heng Sewn Loi 55,000(3) *
Common Stock Heng Sewn Loi 6,824 61,824 1.43%
------
Common Stock Edward J. Marteka 55,000(3) *
Common Stock Edward J. Marteka 11,500 66,500 1.54%
------
Common Stock George Jeff Mennen 5,000(3) *
Common Stock Robert J. Simmons 5,000(3) *
Common Stock Stephen K.H. Tan 15,000(3) *
Common Stock Stephen K.H. Tan 9,000 24,000 *
-----
Common Stock Robert C. Carter 10,000(3) *
Common Stock Total Executive Officers & Directors
as a group (8 persons) 151,000(3)
27,324 178,324 4.13%
------
</TABLE>
MBf International Limited is a wholly owned subsidiary of MBf Holdings Sdn.
Bhd., a publicly-traded Malaysian company. The only owner of more than 5% of
the shares of MBf Holdings Sdn. Bhd. is Arab-Malaysian Nominees (Tempatan) Sdn.
Bhd., which own 16.532% of the issued capital. See also Item 13, "Certain
Relationships and Related Transactions" for information concerning the Wembley
agreements.
___________________________________
* Represents less than 1%
(1) MBf International Ltd. is located at 17th floor, One Pacific Place, 88
Queensway, Hong Kong.
(2) Percent of Class is based upon the combined number of shares of Series A
Common Stock and Common Stock outstanding on March 18, 1998.
(3) Represents shares to be issued upon exercisable options granted under the
Company's Omnibus Equity Compensation Plan.
33
<PAGE> 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had entered into arrangements with several entities which
are related to MBf International and/or MBf Holdings. The significance of these
arrangements to the Company's business, financial condition and operations in
the short and long term are discussed below. The Company believes the prices
charged by each related entity are as favorable as those that could be
negotiated with unaffiliated third parties.
In 1995, the Company began purchasing glove packaging materials (inner
boxes and outer cases) from MBf Printing, a Malaysian printing entity and a
subsidiary of MBf Holdings. The packaging materials were purchased from MBf
Printing for shipment directly to nonaffiliated manufacturers for consistency
in packaging materials and to obtain more favorable pricing from those
manufacturers. In 1997 and 1996, the Company purchased approximately $302,000
and $430,000, respectively, of packaging material from MBf Printing and the
prices charged by them were as favorable as to those that could be negotiated
with unaffiliated suppliers.
The Company utilizes MBf Insurans, an affiliate of MBf Holdings, to
insure all of AHPC's inventory purchases while in transit to AHPC's various
U.S. warehouses. In 1997 and 1996, the total cost charged by MBf Insurans to
insure all inventory in transit was $35,516 and $45,056, respectively, which the
Company believes is comparable to unaffiliated third party prices. No
contractual obligations exist between the Company and MBf Insurans but the
Company anticipates continuing to utilize their services during 1998.
Through October 1996, the Company purchased its inventory related to
its latex condom products from MBf Personal Care, which was a wholly owned
subsidiary of MBf Capital, an affiliate of MBf International. In 1996,
Playboy(R) condom purchases from MBf Personal Care amounted to approximately
$685,000. The Company believes the prices charged by MBf Personal Care were as
favorable as those that could have been negotiated with unaffiliated third
parties. The Company did not make any condom purchases from MBf Personal Care
in 1997.
The Company has entered into a management contract with MBf Management,
an affiliate of MBf Holdings. MBf Management charged the Company $10,682 in
1997 for their secretarial and other services.
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 their services.
See Note 4 of the Notes to Consolidated Financial Statements for
additional information on related party transactions.
34
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FIANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(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).
35
<PAGE> 40
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).
36
<PAGE> 41
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,
37
<PAGE> 42
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).
38
<PAGE> 43
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).
39
<PAGE> 44
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).
21 Subsidiaries of the Company (1)
23.1 Consent of Arthur Andersen LLP (1)
(1) Filed herewith
(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 Report of Independent Public Accountants on Schedule II and Financial
Data Schedule
40
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
MBf USA, INC.
Date: March 30, 1998 By: /s/ Heng Sewn Loi
-----------------
Heng Sewn Loi, Chief Executive Officer
Date: March 30, 1998 By: /s/ Stephen Tan
---------------
Stephen Tan, Chief Financial Officer,
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 30, 1998 By: /s/ Heng Sewn Loi
---------------------
Heng Sewn Loi, Chairman of Board of Directors
Date: March 30, 1998 By: /s/ Teik Hok Loy
-----------------
Teik Hok Loy, Director
Date: March 30, 1998 By: /s/ Richard C. M. Wong
-----------------------
Richard C. M. Wong, Director
Date: March 30, 1998 By: /s/ Lew Kwong Ann
------------------
Lew Kwong Ann, Director
Date: March 30, 1998 By: /s/ Edward J. Marteka
----------------------
Edward J. Marteka, Director
Date: March 30, 1998 By: /s/ George Jeff Mennen
-----------------------
George Jeff Mennen, Director
Date: March 30, 1998 By: /s/ Don L. Arnwine
-------------------
Don L. Arnwine, Director
Date: March 30, 1998 By: /s/ Robert J. Simmons
----------------------
Robert J. Simmons, Director
41
<PAGE> 46
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 47
MBF USA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 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>
<PAGE> 48
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> 49
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 & Reken
Jakarta, Indonesia
February 14, 1996
F-3
<PAGE> 50
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:
</TABLE>
F-4
<PAGE> 51
<TABLE>
<S> <C> <C>
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> 52
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)
</TABLE>
F-5
<PAGE> 53
<TABLE>
<S> <C> <C>
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> 54
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:
</TABLE>
<TABLE>
<S> <C> <C> <C>
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> 55
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 ADDITIONAL RETAINED
COMMON STOCK COMMON STOCK PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 1,252,538 $12,525 1,224,248 $12,242 $5,193,205 $16,180
Issuance of common stock upon exercise of stock options - - 495 5 2,945 -
Issuance of common stock for loan conversion - - 250,980 2,510 1,197,490 -
Issuance of common stock for 70% interest in PT Buana - - 255,072 2,551 1,094,304 -
Net loss - - - - - (4,864,404)
Foreign currency translation adjustment - - - - - -
BALANCE, December 31, 1995 1,252,538 12,525 1,730,795 17,308 7,487,944 (4,848,224)
Issuance of common stock to MBf International for $1,402,528 - - 488,973 4,889 1,397,639 -
Issuance of common stock to PIE Healthcare for $1,000,000 - - 296,296 2,963 997,037 -
Issuance of common stock to MBf International for $1,000,000 - - 672,269 6,723 993,277 -
Net loss - - - - - (1,164,587)
Foreign currency translation adjustments - - - - - -
BALANCE, December 31, 1996 1,252,538 12,525 3,188,333 31,883 10,875,897 (6,012,811)
Issuance of common stock upon exercise of stock options - - 3,334 34 9,135 -
Net income - - - - - 465,722
Foreign currency translation adjustment - - - - - -
<CAPTION>
CUMULATIVE UNREALIZED
FOREIGN GAIN ON
CURRENCY LSAI
TRANSLATION COMMON TREASURY SHAREHOLDERS'
ADJUSTMENT STOCK STOCK EQUITY
<S> <C> <C> <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) - - (26,856)
BALANCE, December 31, 1995 (26,856) - (1,323,036) 1,319,661
Issuance of common stock to MBf International for $1,402,528 - - - 1,402,528
Issuance of common stock to PIE Healthcare for $1,000,000 - - - 1,000,000
Issuance of common stock to MBf International for $1,000,000 - - - 1,000,000
Net loss - - - (1,164,587)
Foreign currency translation adjustments (26,178) - - (26,178)
BALANCE, December 31, 1996 (53,034) - (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 - - 53,034
</TABLE>
F-7
<PAGE> 56
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Indonesian paid-in capital adjustment - - - - (8,808) - -
Unrealized gain on LSAI common stock - - - - - - -
BALANCE, December 31, 1997 1,252,538 $12,525 3,191,667 $31,917 $10,876,224 $(5,547,089) $ -
<S> <C> <C> <C>
Indonesian paid-in capital adjustment - - (8,808)
Unrealized gain on LSAI common stock 261,979 - 261,979
BALANCE, December 31, 1997 $261,979 $(1,323,036) $4,312,520
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE> 57
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 -
</TABLE>
F-8
<PAGE> 58
<TABLE>
<S> <C> <C> <C>
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-9
<PAGE> 59
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. (Note 13) becomes the major
shareholder of the Company, whichever is earlier.
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.
F-10
<PAGE> 60
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:
<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>
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.
F-11
<PAGE> 61
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. In accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation" ("SFAS 52"), the net
effect of the change in functional currency resulted in a gain of $277,035
for the year ended December 31, 1997.
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.
F-12
<PAGE> 62
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 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,
F-13
<PAGE> 63
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 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> 64
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
F-15
<PAGE> 65
costs of approximately $599,000. Substantially all such costs had been
paid by December 31, 1995.
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> 66
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)
</TABLE>
F-17
<PAGE> 67
<TABLE>
<S> <C> <C>
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.
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.
F-18
<PAGE> 68
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.
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 D
ecember 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
</TABLE>
F-19
<PAGE> 69
<TABLE>
<S> <C> <C>
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 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
F-20
<PAGE> 70
rate of an additional 2% per month was instituted.
The principal portion of long-term debt becomes due as follows:
<TABLE>
<CAPTION>
Fiscal year ending-
<S> <C>
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.
SIGNIFICANT CONTRACTS
In March, 1994, the Company entered into a contract with an individual to
serve as a spokesman for the Company which required annual payments
totaling approximately $250,000 through April, 1998. As of December 31,
1996, the Company had paid $456,250 of the $1,000,000 total contracted
amount, and had accrued for $206,250 of past-due amounts owed to the
spokesman in anticipation of a settlement agreement with such spokesman.
In February, 1997, the Company reached an agreement with this individual to
pay $200,000 as final settlement and termination of all future contractual
obligations.
F-21
<PAGE> 71
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 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 $198,760
1999 158,016
2000 66,477
$423,253
</TABLE>
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.
F-22
<PAGE> 72
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.
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.
F-23
<PAGE> 73
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 re-pricing
of all current director and employee options to $2.75, the closing market
price on the date the re-priced options were granted.
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
Re-pricing of options 127,624 2.75 2003-2005
Rescission of re-priced 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
F-24
<PAGE> 74
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.
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)
</TABLE>
F-25
<PAGE> 75
<TABLE>
<S> <C> <C> <C>
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-26
<PAGE> 76
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.
12. SUPPLEMENTAL CASH FLOW INFORMATION
F-27
<PAGE> 77
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-28
<PAGE> 78
<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 Rubber Products (M) Sdn. Bhd. ("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 non-fulfillment 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>
F-29
<PAGE> 79
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 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 share owners and distributions to share owners. 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
share owners. 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-30
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MBf USA, INC.:
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index above
is the responsibility of the Company's management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and , in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 27, 1998
<PAGE> 81
MBf USA, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Deductions
Beginning Profit and Other from Balance at
Description of Year Loss Accounts Reserves End of Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 Allowance for doubtful accounts $73,000 $133,735 $ - $(11,735) $195,000
Discontinued operations-
reserve established for disposal $ 0 $185,134 $ - $ - $185,134
1996 Allowance for doubtful accounts $56,100 $ 76,818 $ - $(59,918) $ 73,000
1995 Allowance for doubtful accounts $40,600 $ 15,500 $ - $ - $ 56,100
</TABLE>
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
NAME UNDER WHICH
NAME STATE OF INCORPORATION SUBSIDIARY DOES BUSINESS
- ---- ---------------------- ------------------------
<S> <C> <C>
American Health Products Corporation Texas American Health Products Corporation
MBf America, Inc. Oklahoma MBf America, Inc.
</TABLE>
<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 into the Company's previously filed
Registration Statements Nos. 333-23630 and 333-28003.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 162
<SECURITIES> 1076
<RECEIVABLES> 5606
<ALLOWANCES> (195)
<INVENTORY> 8204
<CURRENT-ASSETS> 16173
<PP&E> 13219
<DEPRECIATION> (1496)
<TOTAL-ASSETS> 29531
<CURRENT-LIABILITIES> 17752
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 4268
<TOTAL-LIABILITY-AND-EQUITY> 29531
<SALES> 53810
<TOTAL-REVENUES> 54103
<CGS> 40760
<TOTAL-COSTS> 10500
<OTHER-EXPENSES> 300
<LOSS-PROVISION> 134
<INTEREST-EXPENSE> 1482
<INCOME-PRETAX> 927
<INCOME-TAX> 322
<INCOME-CONTINUING> 1249
<DISCONTINUED> (783)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 466
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
