<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---------- -------------
Commission File Number: 0-17458
----------
MBf USA, Inc.
(Exact name of registrant as specified in its charter)
Maryland 73-1326131
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Park Boulevard, Suite 1260
Itasca, IL 60143
-------------------------------------
(Address of principal executive office)
(630) 285-9191
--------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's Common Stock, par value $.01 per
share, and issuer's Series A Convertible Common Stock, par value $.01 per share,
outstanding as of May 11, 1998 was 5,588,491 and 1,252,538, respectively.
<PAGE> 2
MBf USA, Inc.
-------------
INDEX
-----
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Item 1.
Consolidated Balance Sheets
<S> <C>
March 31, 1998 (unaudited) and December 31, 1997 (audited) ................ pg. 1
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 1998 and 1997 ................................ pg. 3
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1998 and 1997 ................................ pg. 4
Notes to the Interim Consolidated Financial Statements (unaudited) pg. 5
Item 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................... pg. 10
PART II - OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K .......................................... pg. 15
</TABLE>
<PAGE> 3
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------ ------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 7,429,690 $ 161,981
Accounts receivable - trade, net of allowance for
doubtful accounts of $196,732 in 1998 and
$195,000 in 1997 5,922,478 5,410,843
Inventories 8,476,817 8,203,861
Prepaid expenses 1,104,168 1,055,788
Investment in LSAI -- 1,076,496
Deferred income taxes 219,951 219,951
Current assets of discontinued operations 7,384 44,113
------------ ------------
Total current assets 23,160,488 16,173,033
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 736,535
Construction in progress 391,678 2,105,263
Equipment, furniture and fixtures 11,065,572 8,780,857
Building improvements 1,489,423 1,488,485
Vehicles 108,127 108,127
------------ ------------
Total property, plant and equipment 13,791,335 13,219,267
Less - Accumulated depreciation (1,812,177) (1,495,868)
------------ ------------
Property, plant and equipment, net 11,979,158 11,723,399
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $422,171
in 1998 and $405,363 in 1997 1,327,829 1,344,637
Due from affiliates 211,274 206,885
Other assets 82,376 83,291
------------ ------------
Total other assets 1,621,479 1,634,813
------------ ------------
$ 36,761,125 $ 29,531,245
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
1
<PAGE> 4
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable - trade $ 2,954,104 $ 2,622,541
Trade notes payable to banks 5,503,888 5,449,181
Notes payable and current portion of
long-term obligations 5,257,102 6,711,659
Due to affiliates 275,650 342,873
Accrued expenses 3,124,224 2,366,984
Current liabilities of discontinued operations 248,407 258,407
------------ ------------
Total current liabilities 17,363,375 17,751,645
------------ ------------
LONG-TERM OBLIGATIONS 5,549,983 5,647,867
------------ ------------
OTHER LONG-TERM LIABILITIES:
Deferred income taxes 67,117 67,117
Other liabilities 542,045 622,045
------------ ------------
Total other long-term liabilites 609,162 689,162
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY 1,317,808 1,130,051
------------ ------------
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; 5,698,491 and 3,191,667 shares issued and
outstanding in 1998 and 1997, respectively 56,985 31,917
Additional paid-in capital 23,794,922 10,876,224
Accumulated deficit (10,620,599) (5,547,089)
Net unrealized gain on LSAI common stock -- 261,979
Less - Common stock in treasury, at cost,
130,000 shares in 1998 and 1997 (1,323,036) (1,323,036)
------------ ------------
Total shareholders' equity 11,920,797 4,312,520
------------ ------------
$ 36,761,125 $ 29,531,245
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
2
<PAGE> 5
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------
1998 1997
------------ ----------
(Unaudited)
REVENUES:
<S> <C> <C>
Product sales, net $ 15,213,338 $ 11,406,633
Interest income 18,989 6,547
Rental income 32,864 38,126
Gain on sales of LSAI common stock 168,375 --
Other income 3,124 17,141
------------ -----------
Total revenues 15,436,690 11,468,447
------------ -----------
COSTS AND EXPENSES:
Cost of product sales 10,753,561 9,312,633
Selling, general and administrative 2,933,820 2,063,450
Interest 410,063 232,297
------------ -----------
Total costs and expenses 14,097,444 11,608,380
------------ -----------
Income (loss) from continuing operations before
minority interest, provision for income taxes,
and loss from discontinued operations 1,339,246 (139,933)
MINORITY INTEREST IN INCOME OF SUBSIDIARY (187,756) 49,784
------------ -----------
Income (loss) from continuing operations before
provision for income taxes and loss from
discontinued operations 1,151,490 (90,149)
PROVISION FOR INCOME TAXES (50,000) --
------------ -----------
Income (loss) from continuing operations
before loss from discontinued operations 1,101,490 (90,149)
LOSS FROM DISCONTINUED OPERATIONS -- (214,236)
------------ -----------
Net income (loss) $ 1,101,490 $ (304,385)
============ ===========
BASIC AND DILUTED NET INCOME (LOSS) PER
COMMON SHARE:
Continuing operations $ 0.25 $ (0.02)
Discontinued operations 0.00 (0.05)
------------ -------------
$ 0.25 $ (0.07)
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE> 6
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------
1998 1997
----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 1,101,490 $ (304,385)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 316,309 182,864
Amortization 16,808 10,264
Provision for doubtful accounts 1,732 13,474
Loss from discontinued operations -- 214,236
Loss on disposal of property, plant and equipment -- 7,584
Gain on sales of LSAI common stock (168,375) (37)
Changes in certain assets and liabilities:
Accounts receivable - trade (513,367) 440,540
Inventories (272,956) (697,898)
Prepaid expenses (48,380) 407,919
Other assets 915 106,527
Accounts payable - trade 331,563 (170,376)
Accrued expenses 757,240 (156,469)
Deferred income taxes -- (3,151)
Amounts due (from) to affiliates (71,612) 38,193
Net assets of condom discontinued operations 26,729 69,928
----------- -----------
Net cash provided by operating activities 1,478,096 159,213
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (572,068) (293,741)
Proceeds on sale of investments in LSAI 982,892 14,787
Minority interest in subsidiary 187,757 (63,939)
----------- -----------
Net cash provided by (used in) investing activities 598,581 (342,893)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock, net of dividend 6,768,766 --
Net borrowings (payments) on trade notes payable to banks 54,707 (100,394)
Net borrowings (payments) from notes payable (1,552,441) 91,695
Payments on loans to minority interest shareholders (80,000) --
----------- -----------
Net cash provided by (used in) financing activities 5,191,032 (8,699)
----------- -----------
IMPACT OF EXCHANGE RATES ON CASH -- (9,175)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,267,709 (201,554)
CASH AND CASH EQUIVALENTS, beginning of period 161,981 321,038
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 7,429,690 $ 119,484
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE> 7
MBf USA, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. DESCRIPTION OF BUSINESS:
MBf USA, Inc. (together with its subsidiaries, the "Company") markets
medical examination gloves in the United States through its wholly owned
subsidiary, American Health Products Corporation ("AHPC") and is a manufacturer
of high quality, disposable, powdered latex examination gloves through its 70%
owned Indonesian subsidiary, PT MBf Buana Multicorpora ("PT Buana"). The Company
sells its examination gloves primarily to the medical, food service, and dental
markets.
2. BASIS OF PRESENTATION:
The unaudited consolidated financial statements have been prepared for
interim periods only and do not include all of the information and note
disclosures required by generally accepted accounting principles. These
consolidated statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997. The accompanying consolidated
financial statements have not been audited by independent accountants in
accordance with generally accepted accounting standards, but in the opinion of
management, such consolidated financial statements include all adjustments
(consisting solely of normal recurring adjustments) necessary to fairly present
the Company's financial position, results of operations and cash flows. The
results of operations for the three month period ended March 31, 1998 may not be
indicative of the results that may be expected for the year ended December 31,
1998.
3. PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, AHPC, MBf America, Inc. (an
inactive company), and its 70% owned subsidiary, PT Buana. Accordingly, PT
Buana's assets, liabilities, equity and minority interest are included in the
consolidated financial statements of the Company. During the first quarter of
1998, PT Buana sold approximately 80% of its production of gloves to AHPC. All
significant intercompany transactions have been eliminated in consolidation.
5
<PAGE> 8
4. MAJORITY SHAREHOLDER TRANSACTION:
On March 31, 1998, Wembley Rubber Products (M) Sdn. Bhd. ("Wembley")
closed the following two agreements, which transferred majority ownership in the
Company to Wembley:
A. MBf International, Ltd. ("MBf International") sold all of the
Company's Series A Common Stock (1,252,538 shares), which was owned by MBf
International to Wembley for $5.00 per share or $6,262,690; and
B. Wembley purchased 2,500,000 shares of the Company's unregistered
Common Stock for $2.70 per share for a total of $6.75 million. The purchase
prices of $2.70 per share reflects a 12% discount from the average stock price
over a seven consecutive day range ended May 9, 1997 as detailed by a fairness
opinion received from an independent valuation firm.
These transactions provided Wembley with a 55% ownership interest in
the Company at March 31, 1998. The Company received cash proceeds of $6.75
million from Wembley on that date.
On the March 31, 1998 closing date, the market price for the Company's
Common Stock was $5.875. The appreciation in the market price of the Company's
Common Stock from $2.70 at the date of subscription by Wembley to $5.875 at the
closing of the Agreement created a discount to Wembley totaling $6,175,000.
The non-cash dividend reflects the 12% discount determined by an independent
valuation firm and has been recorded as an increase to the accumulated deficit
and additional paid-in-capital for the three months ended March 31, 1998.
Subsequent to the closing, MBf International still owns 1,682,275
shares of the Company's Common Stock which represents a 24.7% ownership interest
in the Company as of March 31, 1998. In addition, Wembley entered into an
agreement on March 31, 1998 with MBf International (the "Call and Put Option
Agreement") which provides Wembley with the right to purchase 50% of the
remaining shares owned by MBf International at $6.00 per share during the one
year period beginning March 31, 1999, and provides MBf International with the
right to sell up to 1,682,275 shares to Wembley at $5.00 per share during that
same one year period.
MBf International, a Hong Kong corporation, is a wholly owned
subsidiary of MBf Holdings Sdn. Bhd. ("MBf Holdings") a Malaysian publicly
traded company listed on the Kuala Lumpur Stock Exchange.
Wembley owns one of the largest glove manufacturing plants in Malaysia
and principally manufactures high quality powder free latex exam gloves. AHPC
has been purchasing its powder free latex exam gloves from Wembley for several
years.
5. 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 conversation of the Series A Common Stock.
B. Series A Common Stock entitles its holder (presently Wembley)
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 all other
matters subject to a vote of the shareholders.
6
<PAGE> 9
6. CONDOM DISCONTINUED OPERATIONS:
Effective on November 12, 1996, the Company adopted a plan to
discontinue its Playboy(R) condom business. The Company reached an amicable
settlement with Playboy Enterprises, Inc. to terminate their license agreement
under which the Company distributed Playboy(R) brand condoms in 15 countries.
Under the negotiated agreement, the Company, until June 30, 1997, would continue
to sell Playboy(R) condoms in the countries where it had launched the product.
Subsequent to June 30, 1997, the Company is entitled to receive royalty revenues
on sales, if any, of Playboy(R) condoms in these 15 countries and Japan through
June 30, 2000 and June 30, 1998, respectively. The Company does not anticipate
these royalties will be significant.
Due to the exit of the condom business, the Company ceased selling
Playboy(R) condoms on June 30, 1997. For the three months ended March 31, 1998
and 1997, the loss from discontinued operations of the condom business amounted
to $0 and $214,236, respectively. These amounts include revenues from Playboy(R)
condom sales which were $0 and $174,488 for the three months ended March 31,
1998 and 1997, respectively.
7. FOREIGN CURRENCY TRANSACTIONS:
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 changed PT Buana's
functional currency from the Indonesia Rupiah to the United States dollar. Gains
and losses from foreign currency transactions are included in net income (loss)
in the period in which they occur. For the quarters ended March 31, 1998 and
1997, the foreign exchange loss included in the determination of net income
(loss) was ($244,255) and ($131,964), respectively.
8. 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.
7
<PAGE> 10
9. INVESTMENT IN LSAI:
At March 31, 1998, the Company had disposed of its entire investment in
Laboratory Specialists of America, Inc. ("LSAI"). During the quarter ending
March 31, 1998, the Company sold 156,405 shares of LSAI and discounted its note
receivable from LSAI for $315,000 which combined resulted in a gain on sales of
its investment in LSAI of $168,375 for the quarter ended March 31, 1998.
10. 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 at March 31 are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Basic weighted-average number of
common shares outstanding 4,346,760 4,310,871
Dilutive effect of common share
equivalents 99,387 --
--------- ---------
Diluted weighted-average number of
common shares outstanding 4,446,147 4,310,871
========= =========
</TABLE>
8
<PAGE> 11
11. ACCOUNTING FOR INCOME TAXES:
The Company records income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"). SFAS 109 utilizes the
liability method and deferred taxes are determined based on the estimated future
tax effects of differences between the financial statement and tax basis of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions and benefits are based on the changes in the deferred tax asset
or tax liability from period to period.
The Company had net operating loss carry forwards ("NOLs") 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 NOLs is subject to limitations in future
years if certain ownership changes occur. Such ownership changes occurred with
the transactions described in Note 4. Because of this factor, the utilization of
the NOLs generated prior to December 31, 1997 may be significantly limited.
12. CONTINGENCIES:
Over the last several years, numerous product liability lawsuits have
been filed against suppliers and manufacturers of latex gloves alleging, among
other things, adverse allergic reactions. AHPC is one of numerous defendants
that have been named in such lawsuits. At March 31, 1998, there were nine
lawsuits outstanding against AHPC, two of which were filed in the first quarter
of 1998. 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. However, the actual outcome of these lawsuits is not subject to
certainty, and there can be no assurances that the Company's reserves or
insurance coverage will be adequate to cover all of the resultant impact of
these lawsuits, or that the Company will be able to renew insurance coverage
should these outcomes be adverse. Generally, any award of compensatory damages
would be an obligation of the Company's insurance carrier to the limits of
available insurance coverage, while any punitive damages would be borne by the
Company.
13. RECLASSIFICATION:
During the first quarter of 1998, the Company began recording rebates
as a net product sales item. Prior to 1998, the Company had been recording
rebates expense as a selling expense. The consolidated statement of operations
for the three months ended March 31, 1997 has been restated to reclassify
rebates to conform with the 1998 presentation.
14. SUPPLEMENTAL CASH FLOW INFORMATION:
On March 31, 1998, the Company recorded a noncash dividend of
$6,175,000 on the issuance of 2,500,000 shares to Wembley at a price below
discounted market value. This dividend had no effect either on the net
shareholders' equity or net income of the Company.
9
<PAGE> 12
15. BANK COVENANT VIOLATION:
The Company was in violation of one of its negative covenant ratios at
March 31, 1998. The Company's leverage ratio exceeded the covenant as required
by the bank which provides the Company with a $7.9 million letter of credit and
line of credit facility. The bank has agreed to waive the covenant deficiency
through June 30, 1998, the next covenant calculation date.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.(1)
The Company's wholly owned subsidiary, American Health Products
Corporation ("AHPC") is engaged in the marketing and distribution of high
quality, medical examination gloves in the United States and has been in the
glove business since its incorporation in January 1989. The Company continued to
achieve record glove product sales in the first quarter of 1998, with a 33.4%
increase over the previous year.
PT Buana was incorporated in Indonesia on October 17, 1994, and
commenced operations in April 1996. PT Buana began manufacturing and shipping
high quality, powdered latex examination gloves to AHPC in May 1996 and sold
approximately 80% of its production to AHPC during the quarter ending March 31,
1998. PT Buana had total powdered latex exam glove sales of $3.75 million for
the quarter ended March 31, 1998. All significant intercompany transactions and
sales have been eliminated in consolidation. At present, PT Buana only
manufactures powdered latex exam gloves.
Through its Playboy(R) 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. 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 results of operations for the three months ended March 31, 1998 and
1997 exclude the revenues and expenses from the discontinued operations of the
Playboy(R) condom business. Accordingly, all condom business activity is
reflected in the loss from discontinued operations as a separate line item in
the consolidated statements of operations for the quarter ended March 31, 1997.
- -------------------------
(1) Forward looking statements in the Notes to the Company's financial statement
and in this Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations, including statements regarding new products and
markets, gross margins, selling, general and administrative expenses, liquidity
and cash needs, and the Company's plans and strategies, are all based on current
expectations and the Company assumes no obligation to update this information.
Numerous factors could cause actual results to differ from those described in
the forward looking statements. The Company cautions investors that its business
is subject to significant risks and uncertainties. See the risk factors as
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 under the heading "Risks Affecting Forward Looking Statements
and Stock Prices."
10
<PAGE> 13
RESULTS OF OPERATIONS:
Total revenues are comprised primarily of glove sales from AHPC's
examination glove product line. Net glove product sales totaled $15,213,338 and
$11,406,633 for the three months ended March 31, 1998 and 1997, respectively.
This increase represents a 33.4% increase in glove sales in the first quarter of
1998 over the comparable period in 1997. This increase of $3,806,705 is
attributable to AHPC's more developed customer relationships, the fulfillment of
customer back orders outstanding at December 31, 1997 in the amount of
approximately $1.7 million, the inclusion of PT Buana glove sales of $769,604 to
nonaffiliates, and an increase in the sales mix to higher priced products,
particularly powder free latex examination gloves. The Company is continuing to
strive to increase powder free and non-latex glove sales as the exam glove
market moves toward these products and away from powdered latex exam gloves.
During the first three months of 1998, two of AHPC's customers accounted for
approximately 75.8% of glove sales. The loss of either customer would have a
materially adverse effect on the Company.
Cost of goods sold as a percentage of net product sales for the three
month period ended March 31, 1998 was 70.7% compared to 81.6% for the comparable
period in 1997. This percentage reduction in the cost of sales and improvement
in gross margin is attributed to: (i) more favorable glove purchase prices
obtained in 1998 due to a reduction in the raw material latex price; (ii) an
increase in sales of higher profit margin glove products, particularly powder
free latex examination gloves; (iii) reduced ocean freight import rates; and
(iv) the U.S. government lowering the duty importation fees associated with
examination gloves, effective January 1, 1998. The Company currently expects its
gross margins to continue to be affected by changes in product mix, competition
and other factors.
The domestic 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
greater user receptivity to powder free 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 41% of net
product sales in the first quarter of 1998 versus 34% in the first quarter of
1997. The Company expects that this trend will continue in 1998.
Selling, general and administrative ("SG&A") expenses increased from
$2,063,450 in the three months ended March 31, 1997 to $2,933,820 in the same
period of 1998, a 42% increase. This increase of $870,370 is attributable to (i)
an increase in selling expenses at AHPC of $529,384 commensurate with its sales
growth; (ii) the expansion of the Company's sales and support forces of
$221,237; (iii) the inclusion of $244,255 of foreign currency losses in the
first quarter of 1998 versus a loss of $131,964 in the comparable period in
1997; (iv) an increase over the prior year quarter in depreciation expense of
$195,220 from PT Buana's operations; and (v) increased reserves of $93,584 for
lawsuit claims over the first quarter of 1997. As a percentage of total
revenues, SG&A expenses increased to 19% for the three months ended March 31,
1998, compared with 18% in the comparable period in 1997. The Company currently
expects to make
11
<PAGE> 14
additional investments in sales and marketing personnel to further develop
established markets and to introduce new products to the marketplace.
Accordingly, the Company currently expects that its SG&A expense will continue
to increase in absolute dollars, but may decline as a percentage of total
revenues in the future.
Interest expense increased from $232,297 for the quarter ended March
31, 1997 to $410,063 for the same period in 1998. The increase of $177,766 is
attributable to the inclusion of PT Buana's interest expense, which increased
from $144,944 in the first quarter of 1997 to $274,723 in the same period in
1998 due to increased borrowings to fund the growth and expansion of the
Indonesian factory.
The Company recorded foreign currency transaction losses of $244,255
and $131,964 in the first quarter ended March 31, 1998 and 1997, respectively,
from its Indonesian factory operations at PT Buana. These expenses are reported
as a component of the SG&A expenses category in the consolidated statement of
operations. Indonesia is currently experiencing economic instability which is
characterized with volatile foreign currency exchanges, illiquidity in its
banking sector, volatile interest rates and stock markets, and inflation. PT
Buana's debt facility is a U.S. Dollar based facility and the majority of its
foreign exchange loss in 1997 was due to the transaction losses associated with
its U.S. Dollar based debt facility transactions. PT Buana continues to incur
foreign currency transaction losses as the Indonesian Rupiah weakens. This trend
is expected to continue until the Indonesian Rupiah regains strength against the
U.S. Dollar.
Resolution of the economic crisis is dependent, in part, on the
measures that will be taken by the government of Indonesia, actions which are
beyond the Company's control, to achieve economic recoverability. It is not
possible to determine the future effect a continuation of the economic crisis
may have on the Company's liquidity and earnings, including the effect on
transactions with the Company's affiliates, customers and suppliers. The
ultimate outcome of this matter cannot presently be determined. The financial
statements do not include any adjustment that might result from these
uncertainties. The related effects will be reported in the financial statements
as they become known and estimable.
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
changes, which occurred in the first quarter of 1998. The Company has recorded a
$50,000 income tax provision in the first quarter of 1998 to provide for federal
alternative minimum tax.
Revenues from the Playboy(R) condom business were $0 and $174,488 for
the quarters ended March 31, 1998 and 1997, 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 an agreement signed in November 1996. Under the exit plan,
the Company sold Playboy(R) condoms until June 30, 1997.
12
<PAGE> 15
For the quarter ended March 31, 1998, the net income for the Company
was $1,101,490 compared to a net loss of ($304,385) in the comparable quarter in
1997. The basic and diluted earnings per share was $.25 in the first quarter of
1998 compared to a basic and diluted loss per share of ($.07) in the same
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at March 31, 1998 was $7,429,690 and
increased $7,267,709 from $161,981 at December 31, 1997. The Company experienced
an increase in cash flows in the three month period primarily from the sale and
issuance of 2,500,000 shares of Common Stock to Wembley, Wembley's significant
cash infusion of $6,750,000 provided the Company with a strengthened balance
sheet with a working capital surplus of $5,797,113 at March 31, 1998 compared to
a deficit of $1,578,613 at December 31, 1997.
The Company experienced positive cash flow from operations of
$1,478,096 during the first quarter ended March 31, 1998 as a result of net
income of $1,101,490 plus noncash depreciation of $316,309 and an increase in
accrued expense and trade accounts payable, which were offset by an increase in
accounts receivable and inventories.
The Company provided cash from investing activities of $598,581
primarily from the disposal and sale of its investments in LSAI which generated
proceeds of $982,982 in the first quarter of 1998, offset by capital
expenditures of $572,068 for property, plant and equipment at the PT Buana
Indonesian manufacturing facility. The factory is continuing to expand its
operations by completing its construction in progress accordingly. The disposal
of the Company's investments in LSAI resulted in a gain on sales of $168,375 in
the quarter ended March 31, 1998.
During the quarter ended March 31, 1998, cash was provided by financing
activities of $5,191,032. The Company received cash of $6,750,000 from Wembley
from the issuance of 2,500,000 shares of Common Stock, which was offset by net
payments on notes payable of $1,552,441. The Company paid down the $2,000,000 PT
Buana bridge loan by $1,375,000 during the quarter ended March 31, 1998, due to
its very high cost of capital.
At March 31, 1998, the Company's principal sources of liquidity
included: $7,429,690 of cash and cash equivalents; $7,900,000 available under a
secured bank line of credit and letter of credit facility, expiring on 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 March 31, 1998, $4,708,108 was outstanding under the
$7,900,000 facility, $3,100,780 was outstanding under the $4,600,000 letter of
credit facility, and all $5,075,000 was outstanding under the Indonesian
syndicated bank facility.
13
<PAGE> 16
MBf Holdings, the prior ultimate parent company, had provided corporate
guarantees on all bank financing arrangements of the Company. Since Wembley
acquired the majority interest in the Company from MBf Holdings on March 31,
1998, Wembley is obligated to provide a corporate guarantee to replace those of
MBf Holdings. According to the Sale and Purchase Agreement between MBf Holdings
and Wembley, Wembley is required to procure within three months from closing an
unconditional release without liability of all guarantees given by MBf Holdings.
The Company and Wembley are working toward meeting this objective by June 30,
1998.
Inventories at March 31, 1998 increased to $8,476,817 compared with
$8,203,861 at December 31, 1997. This increase was primarily due to managed
inventory levels in anticipation of future increased sales volume. Net trade
accounts receivable at March 31, 1998 increased to $5,922,478 from $5,410,843 at
December 31, 1997. The increase in trade receivables is due to the higher sales
volume in the first quarter of 1998.
In October 1994, pursuant to two debenture and warrant purchase
agreements between the Company and two affiliated trusts, the Company issued,
and each trust purchased, a convertible subordinated debenture in the amount of
$1,000,000 payable in seven years with interest at 1.5% over the prime rate.
Each debenture is convertible into Common Stock of the Company at a conversion
price of $25.00 per share. In addition, each trust received a warrant
exercisable over five years to purchase 7,500 shares of Common Stock of the
Company at an exercise price of $22.20 per share. At March 31, 1998 and December
31, 1997, long-term debt of $2,000,000 was outstanding as a result of this
transaction.
Proceeds from these debentures were primarily used to fund the
Playboy(R) condom business. For the three months ended March 31, 1998 and 1997,
the Company incurred interest expense of approximately $50,000 on this
indebtedness. This expense had been included in the loss from discontinued
condom operations in the accompanying financial statements and is included in
interest expense subsequent to June 30, 1997.
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) paying off debt obligations, particularly the PT Buana
bridge loan; (iii) the continued hiring of an additional full time sales force
and sales personnel; (iv) the hiring of additional support staff; (v) the
continuing expansion of the manufacturing facility in Indonesia and possible
upgrading to produce powder free gloves; (vi) upgrading its information
technology via a new enterprise wide computer system; and (vii) for other
operating expenses.
The transaction with Wembley substantially increased liquidity and
working capital to the Company. The Company is continuing to seek and identify
additional sources of funding to provide capital in the event its cash and
credit facilities do not provide sufficient liquidity to fund the Company's
ongoing operations.
14
<PAGE> 17
ITEM 6.
EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
1) Form 8-K dated January 2, 1998 wherein information was
reported in Item 9.
2) Form 8-K dated March 9, 1998 wherein information was
reported in Item 9.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MBf USA, Inc.
(Registrant)
Date: May 15, 1998 By: /s/ Kwong Ann Lew
-----------------
Name: Kwong Ann Lew
Title: Chief Financial
Officer
20
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