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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, 1995
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
Itasca, IL 60143
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (708) 285-9191
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
Common Stock, par value $0.01 per share None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the stock as reported on
NASDAQ on March 27, 1996: $14,266,660.
At March 27, 1996, 1,600,795 shares of the Registrant's Common Stock and
1,252,537 shares of Series A Common Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
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MBf USA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
PAGE
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PART I
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 11
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . 13
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . 22
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 32
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PART I
ITEM 1. BUSINESS
General
MBf USA, Inc. (the "Company"), formerly American Drug Screens, Inc.
("ADS"), was organized February 24, 1988, under Oklahoma law as SHL, Inc. The
Company was reorganized upon the acquisition of ADS 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. The
name of the surviving corporation was changed to ADS on the effective date of
the merger. 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 markets latex examination gloves, which had been
manufactured by MBf Health Products Sdn. Bhd. ("MBf Health"), which was owned
by MBf Holdings. In connection with the acquisition, MBf International
acquired from the Company a class of securities conferring upon MBf
International control of the Company.
On August 17, 1995, MBf International executed an agreement with Perusahaan
Intan Emas Sdn. Bhd. ("PIE"), for the sale of MBf Health, with an option to
repurchase MBf Health. In October, 1995, PIE changed the name of the company
to P.I.E. Healthcare Sdn. Bhd. ("PIE Healthcare"). The Company has a long-term
supply agreement with PIE Healthcare.
In June, 1995, the Company incurred a restructuring charge resulting, in
part, from the costs associated with the resignation of its Chairman/CEO,
President/COO, and CFO. The Board of Directors directed the Company to focus
on its core businesses and 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.
Key components of the restructuring were costs related to the Company's
exit from the nutritional product business and executive management changes.
The restructuring included 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 with the removal of
the nutritional vitamin product lines, and other costs associated with the
execution of the restructure. The restructuring resulted in a one-time charge
of $1,808,757 in the second quarter of 1995.
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Due to the restructuring and operating losses incurred through the second
quarter of 1995, a deficiency in the Company's capital and surplus of
approximately $1,380,000 was created. The Nasdaq Stock Market, Inc. notified
the Company of the deficiency in August 1995. To enable the Company to cure
the deficiency, the following transactions were effected in October 1995:
1. MBf International loaned $1,200,000 to the Company to pay for AHPC 7%
Cumulative Preferred Stock having a value of $1,200,000 which the Company
had previously purchased effective as of 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, which transaction was effective as of October 30, 1995. As
a result, the Company's shareholders' equity increased by $1,200,000 from
this transaction.
2. The Company entered into and closed a Stock Acquisition Agreement with
MBf International dated as of October 31, 1995, whereby MBf
International exchanged its beneficial interest in 1,365 shares of common
stock (par value equivalent to $1,000 US Dollars each) of PT MBf Buana
Multicorpora ("PT Buana"), which represents a 70% majority interest in the
outstanding common stock of PT Buana, and a non-interest bearing demand
note in the principal amount of $737,769 ("Note") for 255,072 shares of the
Company's Common Stock having an aggregate value of $1,219,563. The Note
is guaranteed by MBf Holdings. Because of this transaction, the Company's
shareholders' equity increased by $1,096,855, and the Company is a majority
shareholder of PT Buana, an Indonesian latex glove manufacturer which will
provide powdered gloves to AHPC in 1996 when operations commence.
On December 11, 1995, the Company's shareholders approved the
reincorporation of the Company as a Maryland corporation 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 is
entitled to receive one share of Series A Common Stock or Common Stock of the
Company's successor, a Maryland corporation, subsequent to the merger, for every
10 shares of Series A Common Stock or Common Stock, respectively, currently
held by such shareholder.
All shares and per share information noted gives retroactive effect to the
10-for-1 reverse stock split which occurred on December 18, 1995. At December
31, 1995, MBf International owned approximately 62% of the Company.
LATEX GLOVE PRODUCTS
Through its subsidiary, AHPC, the Company markets non-sterile, ambidextrous
latex and vinyl examination gloves used primarily in the health care industry.
Gloves marketed by AHPC are manufactured primarily by PIE Healthcare and other
third parties. Gloves are marketed by AHPC under the brand names "Glovetex(R)"
and "DermaSafe(R)" to medical/surgical distributors,
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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 ten or 20 boxes of
100 gloves per box, is sold by AHPC to medical/surgical dealers.
In addition to the standard examination gloves, AHPC distributes other
product lines which include hypoallergenic gloves, powder-free gloves, and
vinyl examination gloves. In 1991, MBf Health, now known as PIE Healthcare,
obtained United States Food and Drug Administration ("FDA") approval of its
510(k) application which entitled it to label its DermaSafe(R) gloves as
"hypoallergenic." AHPC began selling the hypoallergenic DermaSafe(R) gloves in
the United States in January 1992. The hypoallergenic gloves are also
available to private label customers. 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 and other
products related to infection-control.
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. Once
gathered, the raw latex is sent to a centrifuge, where the latex is
concentrated. PIE Healthcare, which has entered into an exclusive
distributorship agreement with AHPC for the marketing and sale of powdered
latex gloves produced at its facilities, 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 ensures consistency from batch to batch and
eliminates air bubbles which can cause pinholes. The entire manufacturing
process is controlled through the application of the FDA's current Good
Manufacturing Practices.
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.
Hypoallergenic gloves are formulated to remove certain chemical irritants
and are "leached" or rinsed in a manner which removes impurities from the
latex. For a glove to be labeled "hypoallergenic," it must pass the FDA's
modified "Draize Test" which involves placing the latex product in contact with
the skin of both humans and certain laboratory animals and measuring the
reactions of the participants. In January 1991, the FDA approved the labeling
of "DermaSafe(R)" gloves as being hypoallergenic.
The plant operated by PIE Healthcare in Malaysia has the capacity to
produce approximately 940,000,000 gloves per year. The PIE Healthcare plant is
among the four largest plants in Malaysia. AHPC entered into a five year
distribution agreement with PIE Healthcare, effective July 12, 1995, through
July 11, 2000. This distribution agreement provides that AHPC will have
exclusive marketing rights in North America and South America for latex gloves
manufactured and supplied by PIE Healthcare. Pursuant to the agreement, PIE
Healthcare must supply to
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AHPC such quantity of gloves as will meet AHPC's reasonable requirements, which
gloves are to be sold at prices stated in PIE Healthcare's published price
list. Such prices can be adjusted by PIE Healthcare upon 30 days' prior
written notice to the Company.
The PT Buana factory had not begun production as of December 31, 1995, and
is in the start-up phase of operations. Accordingly, the factory has
capitalized certain start-up costs incurred and will begin amortizing these
costs over a one year period when operations commence. PT Buana is designed to
provide AHPC with a capacity of 600,000,000 gloves per year and increase as
demand requires. The PT Buana factory is scheduled to begin production in
April 1996 and is presently expanding its capacity to produce over 750,000,000
gloves per year by the end of 1996.
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 warehouse in Des Plaines, Illinois, or to public warehouses
located in Sparks, Nevada, Atlanta, Georgia, and Franklin, Massachusetts, where
they are stored ready for delivery to medical surgical dealers.
Suppliers. PIE Healthcare supplied approximately 70% of AHPC's latex
glove inventory in 1995. In prior years, AHPC was also supplied by another
Malaysian factory, MBf Rubber Products Sdn. Bhd. ("MBf Rubber"), which is a
subsidiary of MBf Holdings. During February 1995, MBf Rubber ceased operations
in Malaysia and is now a discontinued operation. AHPC purchases its powder-free
gloves from an unrelated Malaysian factory. AHPC has entered into a supply
agreement which will enable the Company to obtain the necessary inventory levels
to meet customer demands for these gloves. Although the Company is currently
able to meet its orders for latex gloves products, including powder-free latex
gloves, the inability to supply AHPC would have a material adverse effect on the
Company since there is limited manufacturing capacity from which to obtain latex
gloves from other sources.
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 44 manufacturer sales representatives, a national
sales manager, 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 FDA. Included within such procedures are minimum testing
requirements, as well as current Good Manufacturing Practices required by the
FDA. In order to be labeled "hypoallergenic," latex examination gloves must
meet more stringent FDA testing requirements.
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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 1995, two of AHPC's customers accounted for
53.6% of net sales. The loss of either of such customers of AHPC would have a
materially adverse effect on the Company.
Patents and Trademarks. MBf Rubber licensed to AHPC, pursuant to the
terms of a distributorship agreement described in "Share Exchange Agreement"
below, the trademarks "Glovetex" and "Dermasafe," which are trademarks
registered in the United States.
Price of Latex. For the period January 1, 1995 through April 1, 1995, the
price of raw latex in the world market increased by 25 to 30%. This increase
had a direct impact on the price that the Company's subsidiary, AHPC, paid for
its purchases of latex gloves from its suppliers by reducing AHPC's gross
margins. As a result, the Company worked toward and increased its prices charged
to customers during the second half of 1995. The price of raw latex has
subsided in the later half of 1995 but remains at a level higher than in 1994.
Management is unable to predict whether raw latex prices will stay at these
levels. Higher raw latex prices could have a materially adverse effect on the
Company, should the Company be unable to continue to pass on higher prices to
its customers.
LATEX CONDOM PRODUCTS
Acquisition of Playboy(R) Condom License Rights. On December 30, 1993, the
Company purchased the rights to the condom license agreement ("License
Agreement") dated December 31, 1992 between Playboy Enterprises, Inc. ("PEI")
and MACC Trading Limited, an affiliate of MBf Holdings (the "Purchase
Agreement").
The License Agreement as amended grants to the Company the right to sell
condoms in packaging bearing the Playboy(R) name and rabbit-head logo
throughout the world, excluding the United States, China and most of Western
Europe, for a period of 15 years. As consideration for awarding these rights,
PEI received a signing fee of $300,000 payable in 12 quarterly installments
commencing on September 30, 1993, and royalties during the first three
license years only, of 0% on the first $1,000,000 and 10% thereafter of net
sales, with minimum guaranteed royalties of $200,000, $250,000 and $450,000 in
years one, two, and three, respectively, of the agreement. The signing fee and
royalty payments have been guaranteed for the first three license years by
MBf Holdings. The License Agreement requires the Company to meet certain
minimum net sales per country, and failing to do so, PEI may revoke the right
to sell in such country or grant additional licenses to sell in such country.
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The Company agreed to pay MACC Trading Limited $1,750,000 and assume
royalty and signing fee obligations to PEI amounting to $375,000 for the rights
to this License Agreement and for approximately $261,000 in condom inventory.
On February 18, 1994, the Company made the $600,000 down payment to MACC
Trading Limited in accordance with the Purchase Agreement. A balance of
$1,100,000 remains on this obligation at December 31, 1995. The balance is
payable in 60 equal monthly installments of approximately $19,000, with
interest on the unpaid balance at the prime rate commencing May 1, 1994. By
mutual agreement, MACC Trading Limited agreed to defer the commencement of the
monthly installments and the related interest thereon. In December 1994, the
Company made a short term loan to MACC Trading Limited in the principal amount
of $1,500,000 with interest payable at 4% over the prime rate; this
loan was effectively repaid in May 1995.
Condoms bearing the Playboy(R) brand name and rabbit-head design are sold by
the Company throughout the world, excluding the United States, China and most of
Western Europe, to authorized distributors of the Company who, in turn, sell and
distribute the condoms at the retail level. The Company hopes to expand the
sale and distribution of Playboy(R) condoms into the rest of Western Europe by
the end of 1996. The Company sells the condoms to its authorized distributors
in twelve packs, nine packs, six packs and three packs in "gross," consisting of
144 individual condoms. Prices may vary due to volume pricing, payment
conditions, shipping location and other factors.
Currently, the Company sells six styles of Playboy(R) brand condoms:
assorted colors; lubricated; spermicidally lubricated; studded; ribbed; and
ultra sensitive.
Manufacturing Operations. MBf Personal Care Sdn Bhd. ("MBf Personal Care")
currently provides the Company with all of its condom manufacturing needs. MBf
Personal Care is a subsidiary of MBf Capital Berhad, a publicly traded company
on the Kuala Lumpur Stock Exchange approximately 32% owned by MBf Holdings. The
production of latex condoms begins with the tapping of raw latex (natural
polysporene) from rubber trees located on plantations in Malaysia. Once
gathered, the new latex is sent to a centrifuge, where the latex is
concentrated. MBf Personal Care purchases the latex concentrate and has it
shipped in tank trucks to its manufacturing site in Senai. There the latex
concentrate is compounded using a formula designed for use on MBf Personal
Care's equipment. A controlled dipping process ensures consistency from batch
to batch and eliminates air bubbles which can cause pinholes. After the
completion of the dipping process, each condom is then tested electronically for
pinholes, leaks, thickness and durability. On a periodic basis, certain batches
of condoms are additionally tested by means of air inflation and water
inflation. The condoms which pass these tests are then packaged and prepared
for shipment. The entire manufacturing process is controlled through the
application of practices consistent with the FDA's current Good Manufacturing
Practices which includes continuous quality control inspections of the
production lines by trained technicians. The MBf Personal Care facility has
been awarded by the Standard Industrial Research Institute of Malaysia the ISO
9002 - Model for Quality Assurance in Production and Installation. The ISO 9002
is a recognized world standard for manufacturing and quality control.
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The plant operated by MBf Personal Care in Malaysia has the capacity to
produce approximately 120,000,000 condoms per year.
Suppliers. Condoms bearing the Playboy(R) brand name and rabbit-head
design marketed by the Company are manufactured by third parties, primarily MBf
Personal Care, which accounts for 95% of the Company's products. The inability
of MBf Personal Care to supply the Company would have a material adverse effect
on the Company since the Company's gross margins would be significantly reduced
if the Company had to obtain the condoms from alternative sources. However,
unlike the limited capacity for the manufacture of latex gloves, there is
available capacity for outsourcing latex condoms.
Markets and Methods of Distribution. Condoms are marketed by the Company
through a network of international distributors. To date, the Company has
entered into distribution agreements for the sale and distribution of the
condom products in 20 countries. These countries include Brazil, Chile,
Colombia, Costa Rica, Ecuador, Hong Kong, Israel, Malaysia, Mexico, Pakistan,
Panama, Paraguay, Peru, Portugal, Russia, Singapore, Spain, Taiwan, Uruguay and
Venezuela. At December 31, 1995, the Company has not yet recorded sales to
nine of these countries. The Company is currently negotiating distribution
agreements for additional countries and intends to continue to expand its
distribution network.
Each authorized distributor sells and distributes the condom products
throughout an identified country to consumers through normal retail channels of
distribution for such country. Typically, these channels include pharmacies,
supermarkets, chain stores and hypermarkets.
Regulation of Latex Condom Products. The Company works closely with each
distributor in each country to obtain governmental approval, if necessary,
indicating that the Playboy(R) brand condom meets the quality control
procedures for the manufacture of latex condoms and quality specification
standards for condoms as determined by each such country. To date, the Company
has obtained or is in the process of obtaining the necessary approvals and has
met the specification standards for latex condom products in each country
wherein the Playboy(R) brand condom is distributed.
Competition. The market for latex condoms in international markets is
highly competitive. With the discovery of AIDS in the 1980's coupled with the
lack of sufficient distribution of quality condom products in many countries,
and the perception of the latex condom as being a barrier to infection from
AIDS and other communicable diseases, the market is expanding and the number of
manufacturers of condoms is increasing. Competitive differences are based on
price, product quality, and brand positioning.
Customers. During fiscal 1995, there were no significant customers of the
latex condom products, the loss of which would have a material adverse effect
on the Company.
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Trademarks. The Company's ability to distribute and sell condoms bearing
the Playboy(R) trademark and rabbit-head logo in each country throughout the
world, excluding the United States, China and most of Western Europe, requires
that PEI first obtain the right to those trademarks in such countries.
Although the Company cannot enter certain markets until these rights have been
secured and obtained by PEI, the Company is confident that it will be able to
distribute and sell the condoms in most of the countries included in its
territory.
NUTRITIONAL SUPPLEMENT PRODUCTS
During the third quarter of 1994, the Company began developing a new
product line consisting of nutritional supplements to be sold in the United
States. In the second quarter of 1995, the Company exited the nutritional
product business where sales were negligible, and entry costs were very high,
which contributed to significant losses. The exit of this business was part of
a $1,800,000 restructure charge incurred in June 1995.
EMPLOYEES
As of March 25, 1995, the Company employed seven full-time employees,
including two executive officers, and AHPC employed 22 full-time employees.
AHPC also uses the services of 44 manufacturer sales representatives which do
not work exclusively with AHPC and which are paid on a commission basis.
Neither the Company's nor AHPC's employees are represented by a collective
bargaining unit. The Company considers relations with its employees to be
good.
LABORATORY SPECIALISTS, INC.
Pursuant to the terms of a stock exchange agreement dated as of
February 23, 1994 ("LSI Agreement"), the Company completed the sale of 80% of
its wholly owned subsidiary, Laboratory Specialists, Inc. ("LSI"), to its
president for approximately $1,500,000 million, comprised of cash, notes and
130,000 shares of the Company's Common Stock. LSI is in the business of
providing drug testing services. In addition, the Company transferred to LSI
all of the Company's rights to the AWARE home drug testing kit ("AWARE") which
received limited "in medical offices only" prescription approval by the FDA in
January 1994. The Company will receive royalties on any AWARE product sales
for a period of five years, and through December 31, 1995. No royalties have
been earned by the Company. As a result of this transaction, the Company is no
longer in the drug testing business.
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 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 sells under
the symbol ("LABZ") on the Nasdaq SmallCap Market. The Company has agreed not
to sell any of its shares of LSAI stock prior to July 8, 1996 without the prior
consent of
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LSAI and certain of its officers and directors. Thereafter, these shares of
common stock will be eligible for sale under Rule 144 of the Securities Act of
1933, as amended. As a result of this transaction, the Company is no longer a
shareholder of LSI.
See Note 2 of the Notes to Consolidated Financial Statements for additional
information concerning LSI.
DISCONTINUED SUBSIDIARY
During 1995, the Company eliminated its investment in the net assets of a
discontinued subsidiary, Disposable Garments Inc. ("DGI"), as a result of sales
of inventory and the collection of outstanding trade receivables of such
discontinued subsidiary. As a result, the Company's investment in the
subsidiary was reduced from $209,111 at December 31, 1994 to $0 at December 31,
1995 and the Company recorded a loss of approximately $67,700 at December 31,
1995 on the sale of these assets.
SHARE EXCHANGE AGREEMENT
On February 27, 1992, the Company consummated the transactions contemplated
by the amended share exchange agreement (the "Share Exchange Agreement") with
MBf International. The Share Exchange Agreement provided for the following
series of integrated transactions: (a) the acquisition by MBf America, Inc.,
an Oklahoma corporation and a wholly owned subsidiary of the Company, and all of
the issued and outstanding shares of common stock of AHPC, in exchange for
1,252,537 shares of the Company's Series A Common Stock, $.01 par value
("Series A Common Stock"); (b) the authorization of an additional 2,000,000
shares of the Company's Common Stock, par value $.01 ("Common Stock"), and the
authorization of 1,252,537 shares of Series A Common Stock; (c) the
restructuring of the Board of Directors by creating two classes of directors,
both of which are elected annually and one of which has special voting and
other rights in certain circumstances, as provided in the Share Exchange
Agreement; and (d) the execution of certain employment agreements. As a result
of such acquisition, MBf International acquired control of the Company by
virtue of the issuance of 1,252,537 shares of the Series A Common Stock.
As of March 26, 1996, the shares of Series A Convertible Common Stock
issued to MBf International were approximately 44% of the total issued and
outstanding shares of Series A Common Stock and Common Stock. Such shares upon
conversion (when coupled with the shares of Common Stock already owned by MBf
International), will represent a total ownership of the Company to MBf
International of approximately 62% of the then outstanding shares of Common
Stock, excluding shares subject to issuance pursuant to outstanding warrants
and stock options.
As an integral component of the Share Exchange Agreement, AHPC, MBf Health
(now known as PIE Healthcare), and MBf Rubber, now a discontinued operation,
entered into a non-assignable distributorship agreement (the "Distributorship
Agreement"). The Distributorship Agreement provided that AHPC will have
exclusive marketing rights in North America and South America for latex gloves
manufactured and supplied by MBf Health.
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The Company entered into a new five year Distribution Agreement with MBf
Health, effective July 12, 1995, through July 11, 2000, which supersedes the
Distribution Agreement dated February 27, 1992.
ITEM 2. PROPERTIES
On April 1, 1995, the Company's executive offices were re-located to One
Parker Plaza, Fort Lee, New Jersey. On April 1, 1995, the Company entered into
a new five year lease for this location with an annual lease cost of
approximately $75,000 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. The Company entered into a sublease agreement for the New
Jersey office space for the remaining lease term at the identical cost as the
April 1, 1995 lease agreement.
On March 11, 1995, AHPC moved its administrative and corporate offices from
the Des Plaines, Illinois facility to a 7,630 foot facility in Itasca,
Illinois. The lease for this location is for a period of five years and
commenced on March 1, 1995. The yearly lease cost is approximately $139,300 in
year one, with annual increases of approximately 3% for years two through five.
This corporate office in Illinois became the Company's executive office
effective June 1995.
Under the Company's lease agreement dated February 1993, for
approximately 4,000 square feet of space at 5100 Town Center Circle, Boca
Raton, Florida, the Company is obligated for a five year term at an approximate
annual rental of $70,000 per year. Accordingly, in connection with the
relocation of the Company's executive offices from Boca Raton, Florida, to Fort
Lee, New Jersey, on March 1, 1994, the Company entered into a two year sublease
on that space for approximately $62,000 per year with a three-year renewal
option at $70,000 per year. The Company was notified in accordance with the
sublease agreement that the sublease tenant will not be renewing their option
and will vacate on March 31, 1996. Based on the quality of the location and
the extent of activity in Boca Raton, the Company believes it can re-sublet the
location in 1996.
AHPC's warehouse operations are housed in a 22,000 square-foot facility in
Des Plaines, Illinois. The lease for this location is for a period of
five years and commenced April 1, 1993. The yearly cost of the lease is
approximately $116,500 in year one, with annual increases of approximately 3%
for years two through five. In addition, AHPC uses public warehouse facilities
in Sparks, Nevada, Atlanta, Georgia, and Franklin, Massachusetts, as needed.
Public warehouse charges are dependent upon the volume of products stored and
the frequency of shipping or receiving products.
The Company 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.
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ITEM 3. LEGAL PROCEEDINGS
AHPC was named as a defendant in October 1993, but has not yet been served,
in an action commenced in the Superior Court of the State of California, County
of Sacramento, by Kathleen Kennedy and Sharon Tryon, Plaintiffs, against
several manufacturers and distributors of latex products. The complaint
alleges damages associated with the use of latex protective gloves. AHPC
received notice of the claim from one of its customers which tendered the
defense and indemnity of the action of AHPC pursuant to the terms of a
Purchasing Agreement and Trademark Licensing Agreement. AHPC referred this
matter to its insurance carrier in 1993.
During 1995, AHPC was named in two additional class action lawsuits. In
March 1995, AHPC was named as a defendant in an action commenced in the Circuit
Court of Milwaukee County, Milwaukee, Wisconsin by Linda Green et al.
Plaintiffs, against several manufacturers and distributors of latex examination
gloves. In April 1995, AHPC was named as a defendant in an action filed in the
Court of Common Pleas, Philadelphia County, Philadelphia, PA, by Garth Borel et
al, Plaintiff, against several distributors of latex examination gloves. Both
these cases have unspecified amounts claimed and have been referred to AHPC's
insurance carrier.
In January 1996, AHPC settled a lawsuit which was filed in 1995, for a
nominal amount. In February 1996, AHPC was notified of a lawsuit which was
filed in the Superior Court of the State of California, County of Riverside by
Kelly Morson, individual Plaintiff, against several manufacturers and
distributors of latex examination gloves. The amount of damage claimed is
unspecified and AHPC has referred this matter to its insurance carrier.
In any event, because the Company carries product liability insurance of
$2,000,000 of coverage for the payment of any indemnity or judgments, the
Company believes that its risk of exposure is limited. However, it is not
feasible to predict the ultimate outcome of litigation, and should ultimate
resolution of such litigation result in judgments or settlements in excess of
the Company's product liability coverage, or should the Company's insurers deny
coverage or otherwise fail to cover such claims, the impact of such an outcome
could have a material, adverse impact against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on December
11, 1995. The purpose of the Annual Meeting was to consider the vote on the
following matters:
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15
1. To elect six 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
Cheng Soon Teoh
Robert J. Simmons
Daniel Arnwine
Each of the nominees for director received the following number of
votes:
For 1,978,543
Against 10,975
Non-votes 863,814
2. To consider and vote on a proposal to reincorporate the Company as a
Maryland corporation by merger of the Company into a newly formed
wholly owned subsidiary of the Company incorporated in Maryland.
The vote of the Shareholders was as follows:
For 1,978,543
Against 3,070
Abstentions 5,200
Non-votes 863,814
3. To concur in the selection of Arthur Andersen LLP independent auditor
for the fiscal year ending December 31, 1995.
The vote of the Shareholders was as follows:
For 1,971,731
Against 13,273
Abstentions 4,514
Non-votes 863,814
All of the above matters were approved by the Shareholders. There were no
other matters voted on at the meeting.
12
16
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 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:
DECEMBER 31, 1994 HIGH LOW
----------------- ---- ---
First quarter . . . . . . . . . 13-1/8 8-3/4
Second quarter . . . . . . . . 17-13/16 10-15/16
Third quarter . . . . . . . . . 16-7/8 13-1/8
Fourth quarter . . . . . . . . 23-1/8 14-11/16
DECEMBER 31, 1995
-----------------
First quarter . . . . . . . . . 17-1/2 11-7/8
Second quarter . . . . . . . . 11-7/8 8-1/8
Third quarter . . . . . . . . . 9-3/8 7-1/2
Fourth quarter . . . . . . . . 7-13/16 2-5/8
There were 399 record holders of Common Stock as of April 12, 1996. The
Company believes that there are an additional approximately 2,200 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.
All share and per share data information contained in this Annual Report
gives retroactive effect for the 10-for-1 reverse stock split which occurred on
December 18, 1995.
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17
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the calendar
years ended December 31, 1995, 1994, and 1993 have been derived from the
Company's consolidated financial statements, which were audited by Arthur
Andersen LLP, independent public accountants. The date should be read in
conjunction with the Consolidated Financial Statements, related notes and other
financial information included herein.
MBF USA, INC.
FOR THE YEAR ENDED
Statement of Operations Data: Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
------------- ------------- -------------
Product Sales . . . . . . . . . . . . . . . $42,991,150 $35,060,421 $31,241,073
Cost of Goods Sold . . . . . . . . . . . . 37,307,061 27,797,798 26,543,652
Gross Profit . . . . . . . . . . . . . . . 5,684,089 7,262,623 4,697,421
Operating Expenses . . . . . . . . . . . . 8,936,805 7,380,227 5,915,411
Restructure Charge . . . . . . . . . . . . 1,808,757 - -
Other Income . . . . . . . . . . . . . . . 266,975 88,153
947,641
Income from Investment in Subsidiary . . .
- 79,374 73,267
Loss from Minority Interest in Subsidiary .
(2,174) - -
Income (Loss) from Discontinued Operations (67,732) 91,119 (354,259)
Net Income (Loss) . . . . . . . . . . . . (4,864,404) 1,000,530 (1,410,829)
Per Share Data:
Net Income (Loss) Per Share . . . . . . . . (2.00) .41 (.59)
Balance Sheet Data (End of Period):
Total Assets . . . . . . . . . . . . . . . 26,373,204 18,493,771 17,600,575
Long-term Liabilities . . . . . . . . . . . 11,442,500 3,065,232 1,108,330
Total Shareholders' Equity . . . . . . . . 1,319,661 3,911,116 3,742,141
14
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is engaged in the international marketing and distribution of
Playboy(R) brand latex, condoms after acquiring the Playboy license rights on
December 30, 1993. The sales of condoms is a small portion of total product
sales due to the short period the Company has been in this business, which
commenced in 1994. The Company's subsidiary, AHPC, is engaged in the marketing
and distribution of latex examination gloves in the United States. AHPC's
gloves sales make up the vast majority of product sales and AHPC has been in
business since its incorporation in January 1989. The Company and AHPC both
recorded record product sales in 1995 with increases of 174% and 19.3%,
respectively.
PT Buana was incorporated in Indonesia on October 17, 1994, and has not yet
begun operations at December 31, 1995. Since the Company acquired a 70%
interest in PT Buana on October 31, 1995, and due to the start-up nature of the
factory, certain start-up costs have been capitalized until operations begin
and will be amortized over a one year period. The Company anticipates that PT
Buana's production of latex examination gloves will begin in April 1996.
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 twelve months ended December 31, 1995
and December 31, 1994 include the results of operations and statements of cash
flows of MBf USA, Inc., AHPC, Premier Latex Inc. (currently inactive), PT Buana
(currently in the start-up phase of operation) and the discontinued operation
of DGI.
RESULTS OF OPERATIONS
Fiscal 1995 compared to Fiscal 1994. Results of operations do not include
shipments made by MBf Health, now known as PIE Healthcare, and MBf Rubber, now
a discontinued operation, directly to customers in the United States. Direct
sales for fiscal 1995 and 1994 were $0 and $774,360, respectively. AHPC derived
commission income on such sales of $10,872 in fiscal 1994, and did not receive
any commission income in 1995. On May 1, 1994, the MBf glove factories
discontinued direct glove shipments. The results of operations for 1995 and
1994 exclude the revenues and expenses of the discontinued operations of DGI
and the investment in LSAI, which are reflected as separate line items in the
consolidated statements of operations.
Total revenues for the year ended December 31, 1995 were $43,258,125
compared to $36,008,062 in 1994, an increase of 20.1%. 1995 revenues consisted
of product sales of $40,913,054 from the Company's latex gloves product line
sold by the Company's subsidiary, AHPC, representing a 19.3% glove sales
increase over the prior year, and $2,078,096 from the Playboy(R) condom product
line, representing a 174% increase in condom sales over the prior year.
Revenues in 1994 for examination glove sales were $34,301,736, of which
$758,685 was provided the Playboy(R) condoms product lines which were newly
introduced in 1994. The PT Buana factory had no product sales in 1995 due to
its start-up nature.
15
19
In 1994, the Company received $350,000 in consulting income from MACC
Trading Limited and $450,000 in initial signing fees from MBf Personal Care for
the production rights for the Playboy(R) condoms. The Company did not receive
any income of this nature in 1995.
Cost of goods sold for fiscal 1995 as a percentage of total product sales
was 86.8% compared to 79.3% in 1994. This increase is attributable to (i) an
increase in the cost of sales at AHPC from 80.0% in 1994 to 88.3% in 1995 and
to a lesser extent (ii) the inclusion of $2,078,096 in Playboy(R) condom sales
with a corresponding cost of sales of 56.4% in 1995 compared to 54.1% in 1994.
The increase in the cost of goods sold at AHPC from 1995 to 1994 is
attributable to (i) a 30% increase in the price of raw material latex in 1995
and (ii) the elimination in 1994 of any purchase allowance credits from MBf
Health, which were significant in 1994. During the first quarter of 1995,
there was a significant increase in the price of latex, the main component of
latex gloves sold by AHPC. The increased price of raw material latex had a
direct effect on the increase in cost of goods sold and corresponding lower
profit margins. The Company implemented latex examination glove price
increases to its customers in 1995 due to the higher purchase prices incurred
throughout 1995. In 1995, AHPC no longer received any purchase allowance
credits which were given in 1994 in accordance with the earnings requirement as
stipulated in the Share Exchange Agreement.
In addition, the Company intends to expand its distribution of Playboy(R)
condoms. During 1995, the Company began to market Playboy(R) condoms in the
countries of Malaysia, Mexico, Pakistan, Peru, Portugal, Russia, and Venezuela.
In 1996, the Company is working toward and plans to expand Playboy(R) condom
sales into Australia, Bolivia, Cambodia, Fiji, Greece, India, Japan, Thailand,
Vietnam, and other European Economic Community countries. The Company believes,
but can provide no assurances, that the Playboy(R) condom segment will be
profitable (see Item 1. Business-Latex Condom Products).
Selling, general and administrative expense increased from $6,890,147 in
1994 to $7,898,929 in 1995. The increase in overhead is attributable to (i)
higher overhead levels at AHPC associated with the increase in sales, (ii)
higher costs related to the introduction, launching, and advertising associated
with the Playboy(R) condoms, and (iii) the start-up expenses incurred in the
first quarter of 1995 associated with the development of a line of nutritional
products. The Company exited the nutritional products business in June 1995
and the Premier(TM) condoms business was stalled in June 1995 as the Company
began focusing on the sale of Playboy(R) brand condoms.
The Company incurred a restructure charge in the second quarter of 1995
which amounted to $1,808,757. The key components of the restructure charge were
costs related to the exit of the Company from the nutritional product business,
executive management personnel severance, and the closing of the executive
office in New Jersey. The charge includes provisions for work force reductions,
relocation and related costs, the write down of intangible and other assets,
costs associated with the removal of the nutritional vitamin product lines, and
other costs associated with the execution of the restructure.
16
20
Interest expense increased from $305,295 in 1994 to $822,844 in 1995. The
increase is attributable to higher levels of borrowing to increase the glove
and condom businesses, fund expenses associated with the restructure charge,
the start-up costs of the nutritional products business, and to a lesser
degree, an increase in the prime rate in 1995.
On January 1, 1993 the Company adopted the Statement of Financial
Accounting Standards 109 "Accounting for Income Taxes" ("SFAS") which replaced
earlier standards and changed the criteria for measuring the provision for
income taxes and recognizing deferred tax assets and liabilities on the balance
sheet. At December 31, 1995, the Company had a net operating loss
carry-forward ("NOL") of approximately $4,900,000. In accordance with federal
tax regulation, usage of the NOL is subject to limitation in future years if
certain ownership changes occur.
For the year ended December 31, 1995, the Company incurred a net loss of
($4,864,404) compared to net income of $1,000,530 for the year ended December
31, 1994. This decrease in income is attributable to the (i) increased cost of
goods sold from the purchase of latex gloves, (ii) the elimination of
consulting income and fees from affiliates, (iii) the loss from discontinued
operations, (iv) the advertising and royalty expenses associated with the
introduction, launching and marketing of the Playboy(R) condom line in several
countries, and (v) the restructure charge which occurred in the second quarter
of 1995.
Fiscal 1994 compared to Fiscal 1993. Results of operations do not include
shipments made by MBf Health (now known as PIE Healthcare) and MBf Rubber (now
a discontinued operation) directly to customers in the United States. Direct
sales for fiscal 1994 and 1993 were $774,360 and $5,006,005, respectively. AHPC
derived commission income on such sales of $10,872 in fiscal 1994, compared to
$64,617 for the same period in 1993. On May 1, 1994, the MBf glove factories
discontinued direct glove shipments due to declining profitability. The
results of operations for 1994 and 1993 exclude the revenues and expenses of
the discontinued operations of DGI and the investment in LSI (now known as
LSAI).
Total revenues for the fiscal year ended December 31, 1994 were $36,008,062
compared to $31,329,226 in 1993. 1994 revenues consisted of $34,301,736 from
the Company's latex gloves product line sold by the Company's subsidiary, AHPC,
and $758,685 from the newly introduced Playboy(R) condom product line.
Revenues in 1993 for latex gloves were $31,241,073. Because the Playboy(R)
condoms product line was introduced in fiscal 1994, there were no revenues in
1993.
In 1994, the Company received $350,000 in consulting income from MACC
Trading Limited and $450,000 in initial signing fees from MBf Personal Care
related to the grant of manufacturing rights to the Playboy(R) condom line.
This type of income was not earned in 1993.
Cost of goods sold for fiscal 1994 as a percentage of total revenues,
excluding commissions, interest and other income, was 79.3% compared to 84.9%
in 1993. This decrease is attributable to (i) a reduction in the cost of sales
at AHPC from 84.9% in 1993 to 80.0% in 1994 and (ii) the inclusion of $758,685
in Playboy(R) condom sales with a corresponding cost of sales of 54.1% in 1994
compared to no cost of sales in 1993.
17
21
The decrease in the cost of sales at AHPC from 1994 to 1993 is attributable
to purchase allowance credits from MBf Health which were significantly higher
than historical levels. After December 31, 1994, AHPC no longer received a
purchase allowance. During the first quarter of 1995, there was a significant
increase in the price of latex, the main component of latex gloves sold by
AHPC. The Company was negotiating with the MBf glove factories for a lower
purchase price, seeking alternative suppliers for a portion of its inventory
due to production problems at MBf Rubber, and worked toward implementing price
increases to its customers. This strategy was intended to enable AHPC to
continue its growth while maintaining gross margin percentages at historic
levels.
In addition, the Company intended to expand its distribution of Playboy(R)
condoms. Since December 31, 1994, the Company has begun marketing Playboy(R)
condoms in the countries of Brazil, Hong Kong, Pakistan, Peru, and Russia.
Selling, general and administrative expense increased from $5,291,023 in
1993 to $6,890,147 in 1994. The increase in overhead is attributable to (i)
higher overhead levels at AHPC associated with increased sales, (ii) start-up
expenses associated with the Playboy(R) condom division, (iii) start-up
expenses associated with the development of a line of nutritional products, and
(iv) start-up expenses associated with the launch of the Premier(TM) condoms
and the line of retail latex glove products.
Interest expense decreased from $377,522 in 1993 to $305,295 in 1994. The
decrease is attributable to reduced interest from affiliates offset by higher
levels of borrowing and decreases in the prime rate in 1994 compared to 1993.
On January 1, 1993 the Company adopted the Statement of Financial
Accounting Standards 109 "Accounting for Income Taxes" ("SFAS") which replaced
earlier standards and changed the criteria for measuring the provision for
income taxes and recognizing deferred tax assets and liabilities on the balance
sheet. At December 31, 1994, the Company had a net operating loss
carry-forward ("NOL") of approximately $1,300,000. In accordance with federal
tax regulation, usage of the NOL is subject to limitation in future years if
certain ownership changes occur.
For the fiscal year ended December 31, 1994, the net income of the Company
was $1,000,530 compared to a loss of ($1,410,829) for the period ended December
31, 1993. This increase is attributable to increased revenues from the sale of
latex gloves, consulting income and fees from affiliates, income from
discontinued operations offset by start-up expenses associated with the
introduction of the Playboy(R) condom line.
SEGMENT INFORMATION
1995. At December 31, 1995, the Company was engaged solely in the latex
infection control industry segment consisting of latex examination gloves sales
and latex condom sales. Due to the Company's majority interest in the
Indonesian glove factory, PT Buana, the Company will also be in the
manufacturing of latex examination gloves business. PT Buana will supply
product to AHPC and, at December 31, 1995, was in the start-up phase of
operations, with plans to begin
18
22
shipping product in April 1996. The Company had entered the start-up of a
nutritional vitamin business and subsequently exited 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.
1994. During the fiscal year 1994, as a result of agreements made during
1993, the Company discontinued operations in the disposable garment and drug
testing services segments. In 1993 and 1992, the Company was engaged in three
industry segments: latex infection control products, disposable garments and
drug testing services. As a result, the financial statements presented for the
year ended December 31, 1994 reflect revenues and expenses derived solely from
the latex infection control segment of the Company and AHPC.
1993. During fiscal 1993, the Company was engaged in three industry
segments: latex infection control products; disposable garments; and drug
testing services. In December 1993, the Company discontinued operations in the
disposable garments segment of its business by adopting a plan to liquidate its
wholly-owned subsidiary Disposable Garments Inc., and discontinued operation of
its drug testing segment by signing a definitive agreement in February 1994 to
sell Laboratory Specialists Inc. As a result, the financial statements
presented for the year ended December 31, 1993 were restated to reflect only
the revenues and expenses of the latex infection control segment of AHPC and
Premier.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had a working capital surplus of
$2,585,232 compared to a working capital surplus of $1,894,333 at December 31,
1994. The increase is primarily attributable to the restructuring of the bank
debt as discussed below, increases in inventories and accounts receivables, and
an increase in bank letters of credits utilized, offset by a net loss of
($4,864,404).
On March 29, 1995, Bank Bumiputra Malaysia Berhad ("BBMB") modified and
extended AHPC's credit lines until October 31, 1997. The credit facility of
$13,000,000 was comprised of a revolving line of credit of $6,000,000, a letter
of credit facility for $2,000,000, and a $5,000,000 term loan. This term loan
availability expired in the second quarter of 1995 as it was limited to use in
connection with the acquisition of the MBf Health manufacturing facility.
Due to losses incurred at AHPC for the quarter ended March 31, 1995, AHPC
was in violation of its minimum net worth covenant of the BBMB loan at March
31, 1995. At June 30, 1995, AHPC was in violation of additional BBMB financial
covenants including its minimum net worth, interest coverage ratio, leverage
ratio, and fixed charge leverage ratio. Due to these financial covenant
violations, BBMB suspended additional borrowing and letter of credit financing
with AHPC during June 1995.
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23
On August 16, 1995, the Company amended its credit facility loan agreement
with BBMB which allowed for AHPC to begin utilization of an amended BBMB credit
facility. The amended credit facility waives certain of the financial covenant
requirements until December 31, 1996. The amended BBMB agreement (i) decreased
the revolving line of credit from $6,000,000 to $1,600,000, (ii) decreased the
letter of credit commitment from $1,800,000 to $1,400,000, (iii) decreased the
standby letter of credit commitment from $200,000 to $100,000, and (iv) deleted
the term loan commitment. It transferred $4,825,000 of the outstanding
revolving line of credit balance into a new non-revolving Converted R.C.
Commitment, which along with the amounts described above, are evidenced by a
single credit note in the aggregate amount of $7,925,000. The Converted R.C.
Commitment portion of the amended credit note requires quarterly principal
payments totaling $482,500 in 1996 and $723,750 in 1997 and, therefore, the
majority of the Committed R.C. Loan was reclassified to long-term debt at
December 31, 1995. The Company may increase the revolving line of credit or
letter of credit facility by up to $2,000,000 as principal payments are made on
the Converted R.C. Commitment.
The Company was obligated to make a capital contribution to AHPC in an
amount sufficient to cause its net worth to be a minimum of $3,000,000, which
it achieved by issuance of AHPC preferred shares to the Company in the amount
of $1,200,000.
The line of credit bears interest at 3% over prime. The entire facility,
which is guaranteed by MBf Holdings, is secured by accounts receivable and
inventory and is governed by specific financial covenants and ratios. At
December 31, 1995, $1,500,000 of the credit line and $993,500 of the letter of
credit facility had been utilized.
In June 1995, AHPC entered into a letter of credit banking facility
agreement with MBf Bank of Tonga, a subsidiary of MBf Holdings, in the amount
of Tonga dollars T$1,000,000 or approximately US$800,000 at June 30, 1995.
This unsecured facility is guaranteed by MBf Holdings, the principal
shareholder of the Company. On August 24, 1995, the MBf Bank of Tonga approved
an additional T$2,000,000 letter of credit facility bringing the total facility
to T$3,000,000 or approximately US$2,000,000. At December 31, 1995,
US$1,307,135 of the letter of credit facility had been utilized.
In October 1994, pursuant to two debenture and warrant purchase agreements
between the Company and two trusts established by George S. Mennen, 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 $22.50 per share. At December 31,
1995, long-term debt of $2,000,000 was outstanding as a result of this
transaction.
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Proceeds from these debentures were used to fund the Playboy condom
inventory, nutritional products costs and start-up expenses associated with
both products. For the year ended December 31, 1995, the Company incurred
interest expense of approximately $230,000 on this indebtedness.
In December 1994, the Company loaned to an affiliate, MACC Trading Limited,
on a short term basis, the principal amount of $1,500,000. This loan was
secured by the Company's obligation to MACC Trading Limited under the parties'
December 30, 1993 purchase agreement for the acquisition by the Company of the
Playboy condom license rights from the MACC Trading Limited. This loan bore
interest at the rate of 4% over prime. On May 5, 1995, the Company and MBf
Holdings (the parent company of MACC Trading) entered into an agreement
allowing the Company's subsidiary, AHPC, to offset the MACC Trading receivable
along with the accrued interest thereon ($1,572,688) against the trade payable
balance owed by AHPC to MBf Health. Therefore, the $1,500,000 receivable from
MACC Trading was considered as effectively paid on May 5, 1995.
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.
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.
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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 36 Chairman and
Chief Executive Officer
Edward J. Marteka 58 President
Stephen Tan 40 Chief Financial Officer,
Treasurer and Secretary
Robert C. Carter 34 Assistant Secretary
Biographies for Messrs. Loi, Marteka, Tan and Carter are included below.
The directors of the Company consisting of eight Class A Directors and
two Class B Directors are as follows:
Class A Directors
Director
Name Age Since
- ---- --- --------
Tan Sri Dato (Dr.) Hean Heong Loy 60 1992
Teik Hok Loy 31 1993
Heng Sewn Loi 36 1993
Edward J. Marteka 58 1995
George Jeff Mennen 54 1994
Cheng Soon Teoh 51 1995
Class B Directors
- -----------------
Name
- ----
Robert J. Simmons 52 1995
Donald Arnwine 63 1995
The following sets forth brief statements of the principal occupations and
other biographical information of each of the directors and executive officers.
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Tan Sri Dato (Dr.) Hean Heong Loy, a former Chairman of the Board of
Directors, was elected to the Board of Directors on February 27, 1992. On
December 17, 1993, he resigned as Chairman of the Board but continues to serve
as a director of the Company. He has served in various capacities with MBf
Holdings Berhad ("MBf Holdings") since 1963 and currently is the President and
Chief Executive Officer of MBf Holdings. He has served as Chairman of the
Board of Directors of MBf International Limited since May 1991. Tan Sri Dato
Loy also serves 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 Alternate to the President and Chief Executive
Officer of MBf Holdings. He also serves as a director of MBf Holdings. Teik
Hok Loy is the son of 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 MBf USA, Inc., and is currently based in the United
States to undertake this role.
Edward J. Marteka has been the President and Director of the Company's
subsidiary, American Health Products Corporation ("AHPC") since its
incorporation in 1989. In May 1995, Mr. Marteka was appointed to the Board of
Directors and President of MBf USA, Inc. Mr. Marteka is responsible for the
overall operations of AHPC and MBf USA, Inc. Mr. Marteka had held various
positions with Baxter Healthcare Corporation, and served as Vice President of
its International Division.
Cheng Soon Teoh was elected to the Board of Directors in 1995. He
currently serves as the Senior Vice President, Mergers and Acquisitions of MBf
Holdings. Prior to this, Mr. Teoh was employed with the Central Bank of
Malaysia for 17 years and held directorships with several other companies.
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.
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Donald 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.
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 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 a certified public
accountant with Clifton, Gunderson & Co., certified public accountants, the
10th largest firm of certified public accountants in the U.S.
In connection with the restructuring of the Company which occurred in the
second quarter of 1995, the Chairman of the Board of Directors, Robert H. Book,
and the President and Chief Operating Officer, William C. Willis, Jr., resigned
from the Company and Board of Directors on May 31, 1995. One Class A Director,
Leslie G. Merszei, and two Class B Directors, Mark L. Saginor, M.D. and W.
Daniel Johnson, resigned at that time. All positions were filled subsequently
in 1995 as discussed above. In June 1995, the Chief Financial Officer (CFO) of
the Company, David Natan, resigned and was replaced by Stephen Tan in September
1995.
BOARD MEETINGS AND COMMITTEES
During the 1995 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
Compensation Committee consists of three Class A Directors, Teik Hok Loy, Cheng
Soon Teoh, and George Jeff Mennen. During fiscal 1995, all action of the
Compensation Committee was taken by the Committee by unanimous written consent
without a meeting. The Board has not delegated its functions to any other
standing committees, and thus has not created audit, executive, nominating or
other similar committees.
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COMPENSATION OF DIRECTORS
Directors are compensated for serving on the Board of Directors in the
amount of $1,000 for attending in person and $500 by telephone meeting, and
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. The Company's prior practice was to grant
to each director upon his election options under the Plan to purchase .3% of
the outstanding shares of Common Stock. In conjunction with his election to
the Board of Directors in 1993, Tan Sri Dato (Dr.) Hean Heong Loy was granted
options for 6,824 shares at an exercise price of $14.40 per share. In
conjunction with their respective elections to the Board of Directors, Heng
Sewn Loi and Teik Hok Loy were each granted options in December 1993 for 1,000
shares at an exercise price of $13.70 and in April 1994 for 9,000 shares at an
exercise price of $13.125. The Company's newly-elected Class B and Class A
Directors received options to purchase 1,000 shares at an exercise price of
$2.63 and $16.80, respectively, under the Plan as a result of their election to
the Company's Board of Directors. George Jeff Mennen received an option in
October, 1994 to purchase 1,000 shares of the Common Stock of the Company at an
exercise price of $17.50 under the Plan as a result of his election to the
Company's Board of Directors. 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.
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 (the
"Exchange Act"), 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.
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ITEM 11. 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:
Annual Compensation Long-Term Compensation
--------------------------------------------------- ----------------------
Name & Principal Fiscal Salary Bonus Other Annual Stock All Other
Position Year ------ ----- Compensation Options Compensation
-------- ------ ------------ ------- ------------
Heng Sewn Loi, 1995 - - $20,000 40,000 -
Chairman and Chief
Executive Officer
1994 - - 9,000 -
1993 - - 1,000 -
Edward J. Marteka, 1995 $150,000 $29,166 $7,200 15,000 -
President
1994 $137,500 $75,000 $7,200 35,000 -
1993 $130,000 $35,577 $7,200 - -
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 of $140,000 per
year; (iii) non-qualified stock options to purchase 40,000 shares of Common
Stock under the Plan, 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 Stock
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.
residency status, Mr. Loi's salary from September 1, 1995 through December 31,
1995 was incurred by MBf Holdings. Mr. Loi's residence status in the U.S. was
approved in January 1996 and his salary will be borne by the Company in 1996.
It is anticipated that Mr. Loi's total employment compensation package will
amount to approximately $260,000 per year inclusive of salary, taxes, and
benefits.
On April 1, 1994, the Company entered into an employment agreement with
Edward J. Marteka (the "Marteka Agreement"). The Marteka Agreement, as amended
on January 1, 1995 and as of May 31, 1995, provides for: (i) Mr. Marteka to
serve as President of the Company (since May 31, 1995) and American Health
Products Corporation; (ii) a base salary of $150,000 per year ($137,500 prior
to January 1, 1995); (iii) non-qualified stock options to purchase 35,000
shares of Common Stock under the Plan, 5,000 shares exercisable commencing
April 1, 1994,
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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 Stock 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, 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 Stock Market on the day the options were
granted by the 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 April 7, 1994, the Company entered into an employment agreement with
William C. Willis, Jr. (the "Willis Agreement"). Under this agreement, Willis
served as President and Chief Operating Officer of the Company. The Willis
Agreement was terminated effective May 31, 1995, upon the resignation of Mr.
Willis as a Director and Executive Officer of the Company. In 1995, the
Company paid Mr. Willis $220,000 in accordance with the Willis Agreement at his
departure from the Company. All stock options issued to Mr. Willis were
terminated effective May 31, 1995.
Robert H. Book, the former Chairman of the Board of Directors, resigned
effective May 31, 1995. Mr. Book was paid $300,000 in accordance with his
agreement with the Company at his departure from the Company. All stock
options issued to Mr. Book were terminated effective May 31, 1995.
OPTION GRANTS IN FISCAL 1995
Option / SAR Grants in Last Fiscal Year
- ---------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Individual Assumed Rates of Stock Price
Grants Appreciation for Option Term
- ----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARS
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration
Name Granted (#) Fiscal Year Price Date 5% ($) 10% ($)
----------- ----------- ------------- --------- ---------- ------- -------
Heng Sewn 40,000 39.7% $7.80 7/21/05 - 0 - - 0 -
Loi
Edward J. 15,000 13.9% $7.80 7/21/05 - 0 - - 0 -
Marteka
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In July 1995, the Company entered into a Non-Qualified Stock Option
Agreement ("Option Agreement") with its new Chairman and Chief Executive
Officer, Heng Sewn Loi. Under the Option Agreement for Mr. Loi, the Company
granted to Mr. Loi options under the Plan to purchase 40,000 shares of the
Company's Common Stock at an exercise price of $7.80 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 to purchase 20,000 shares
are exercisable commencing July 12, 1995 and the remaining options to purchase
20,000 shares are exercisable one year from the grant date. The Option
Agreement expires in July 2005 and may be terminated by the Compensation
Committee.
In accordance with the Employment Agreement with Mr. Marteka referred
to above, in July 1995, the Company entered into an Option Agreement with Mr.
Marteka. Under his Option Agreement, the Company granted options to Mr.
Marteka under the Plan to purchase 14,000 shares of the Company's Common Stock
at an exercise price of $7.80 per share, the closing price of the Common Stock
as reported on Nasdaq on the date the options were granted by the Compensation
Committee. The options to purchase 7,000 shares are exercisable commencing
July 12, 1995 and the remaining options to purchase 7,000 shares are
exercisable one year from the grant date. His Option Agreement expires in July
2005, and may be terminated by the Compensation Committee.
AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal
1995 by the executive officers named in the summary compensation table and the
value of such officers unexercised stock options as of December 31, 1995.
Number of Unexercised Value of Unexercised In-the
Options at 12/31/95 Money
------------------- Options at 12/31/95
--------------------------
Shares Acquired Value
Name On Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
Heng Sewn Loi - 0 - - 0 - 30,000 20,000 - 0 - - 0 -
Edward J. Marteka - 0 - - 0 - 33,000 17,000 - 0 - - 0 -
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REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors is comprised of the
following three Directors: Teik Hok Loy, George Jeff Mennen and Cheng Soon
Teoh, each of whom were appointed by the Board of Directors in 1995. Previous
to the new appointments, the Compensation Committee was comprised of Tan Sri
Dato (Dr.) Hean Heong Loy and Leslie G. Merszei, each of whom were appointed by
the Board of Directors in June 1992, and Robert H. Book who was appointed by the
Board in October 1994. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Tan Sri Dato (Dr.) Hean Heong Loy has a substantial ownership interest in
MBf Holdings Berhad, which owns MBf International and MBf Capital Berhad, an
affiliate which owns MBf Factors. MBf Factors provides certain financial
services to AHPC. Teik Hok Loy is the son of Tan Sri Dato (Dr.) Hean Heong Loy
and alternate CEO and Director of MBf Holdings Berhad. Cheng Soon Teoh
currently serves as the Vice President of Mergers and Acquisitions for MBf
Holdings Berhad. Accordingly, these members should not be considered as
independent Directors when serving on the Board of Directors or Compensation
Committee.
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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.
[PERFORMANCE GRAPH]
* $100 invested on December 31, 1990 in stock or Index -- including
reinvestment of dividends. Fiscal year ending December 31.
Cumulative Total Return
------------------------------------------------------------
12/31/9 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
---------- -------- -------- -------- -------- --------
MBf USA, Inc. 100 445 250 175 260 60
NYSE/AMEX/Nasdaq Stock 100 135 148 164 163 223
Peer Group 100 155 163 149 142 237
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 8, 1996, with
respect to the beneficial ownership of the Company's Series A Common Stock and
Common Stock by (i) each shareholder known by the Company to be the beneficial
owner of more than 5% of its Series A Common Stock and Common Stock, (ii) each
director, nominee and certain executive officers, and (iii) all directors and
executive officers, as a group. Unless otherwise indicated, the beneficial
owner has sole voting and investment power with respect to such shares of
Series A Common Stock and Common Stock.
PERCENT
SHARES OF
NAME OF BENEFICIAL OWNER CLASS BENEFICIALLY OWNED CLASS
- ------------------------ ------------ ------------------ -------
MBf International Limited Series A 1,252,537 100%
Room 12-14, First Floor Common Stock
New Henry House
10, Ice House Street Common Stock 521,052 32.55%(2)
Hong Kong
Tan Sri Dato (Dr.) Hean Heong Loy Common Stock 6,824 (1)) *
Teik Hok Loy Common Stock 10,000 (1)) *
Heng Sewn Loi Common Stock 50,000 (1)) 1.75%(2)
Cheng Soon Teoh Common Stock 1,000 (1)) *
Edward J. Marteka Common Stock 50,000 (1)) 1.75%(2)
George J. Mennen Common Stock 1,000 (1)) *
Robert C. Carter Common Stock 3,000 (1)) *
Robert Simmons Common Stock 1,000 (1)) *
Donald Arnwine Common Stock 1,000 (1)) *
Executive Officers and Common Stock 123,824 (1)) 4.34%(2)
Directors as a group
(9 persons)
- -------------------------
* Represents less than 1%
(1) Represents shares issuable upon exercise of options granted under the
Company's Omnibus Equity Compensation Plan.
(2) Percent of class is based upon number of shares of Series A Common Stock
and Common Stock outstanding on March 27, 1996.
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35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, the Company issued 250,980 shares of Common Stock to MBf
International 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 it.
In October 1995, the Company issued 255,072 shares of Common Stock in
exchange for (i) a 70% equity interest in PT Buana, an Indonesian corporation
owning a glove manufacturing factory, and (ii) a note receivable in the amount
of $737,769. See Note 2 (Acquisition of PT Buana) on page F-13 of the Notes to
Consolidated Financial Statements for additional information on the acquisition
of PT Buana.
During 1995, the Company purchased all of its inventory related to its
latex condom products from MBf Personal Care, which is a wholly owned
subsidiary of MBf Capital, an affiliate of MBf International.
See Note 3 of the Notes to Consolidated Financial Statements on page F-13
for additional information on related party transactions and relationships.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules.
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.
(a)(3)Exhibits. The following exhibits are included with this Annual 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).
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36
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).
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).
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37
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).
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).
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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, 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).
35
39
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).
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).
36
40
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).
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. (1)
21 Subsidiaries of the Company (1)
(b) During the last quarter of 1995, the Company filed the following
reports on Form 8-K:
1) Form 8-K dated December 14, 1995 in which the Company reported
information in Item 5.
2) Form 8-K dated December 1, 1995 in which the Company reported
information in Item 5.
3) Form 8-K dated September 29, 1995 in which the Company reported
information in Item 5. Included with the Form 8-K Report was the
proforma balance sheet of MBf USA, Inc. and subsidiaries as of
October 31, 1995.
- ---------------
(1) Filed herewith.
37
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
MBf USA, INC.
Date: April 12, 1996 By: /s/ Heng Sewn Loi
----------------------------------------
Heng Sewn Loi, Chief Executive Officer
Date: April 12, 1996 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: April 12, 1996 By: /s/ Heng Sewn Loi
-----------------------------------------
Heng Sewn Loi
Chairman of Board of Directors
Date: April 12, 1996 By: /s/ Tan Sri Dato (Dr.) Hean Heong Loy
-----------------------------------------
Tan Sri Dato (Dr.) Hean Heong Loy,
Director
Date: April 12, 1996 By: /s/ Cheng Soon Teoh
-----------------------------------------
Cheng Soon Teoh, Director
Date: April 12, 1996 By: /s/ Teik Hok Loy
-----------------------------------------
Teik Hok Loy, Director
Date: April 12, 1996 By: /s/ Edward J. Marteka
-----------------------------------------
Edward J. Marteka, Director
Date: April 12, 1996 By: /s/ George Jeff Mennen
-----------------------------------------
George Jeff Mennen, Director
Date: April 12, 1996 By: /s/ Donald Arnwine
-----------------------------------------
Donald Arnwine, Director
Date: April 12, 1996 By: /s/ Robert J. Simmons
-----------------------------------------
Robert J. Simmons, Director
42
MBF USA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
43
MBf USA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1995 AND 1994 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE
YEARS ENDED DECEMBER 31, 1995 F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR EACH OF
THE THREE YEARS ENDED DECEMBER 31, 1995 F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE
YEARS ENDED DECEMBER 31, 1995 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
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, 1995 and 1994, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
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, which statements reflect total assets and total
revenues of 22% and .02%, respectively, of the consolidated 1995 totals. Those
statements 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 misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes 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 audit 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,
1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 17, 1996
F-2
45
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1995 AND 1994
A S S E T S 1995 1994
- ------------------------------------- ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 706,309 $ 96,096
Accounts receivable--trade, net of allowance for
doubtful accounts of $56,100 in 1995 and
$40,600 in 1994 4,657,616 4,142,297
Note receivable from affiliate - 1,500,000
Inventories 10,119,642 7,377,808
Prepaid expenses 486,420 295,555
Other current assets 81,730 -
----------- -----------
Total current assets 16,051,717 13,411,756
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 698,657 -
Construction in progress 4,242,199 -
Vehicles 41,487 -
Building improvements 21,744 21,744
Equipment, furniture and fixtures 672,637 281,830
----------- -----------
Total property, plant and equipment 5,676,724 303,574
Less- Accumulated depreciation (229,402) (131,478)
----------- -----------
Property, plant and equipment, net 5,447,322 172,096
----------- -----------
INVESTMENT IN LSAI 1,059,367 1,059,367
----------- -----------
NET ASSETS OF DISCONTINUED SUBSIDIARY - 209,111
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$306,527 in 1995 and $255,320 in 1994 1,443,473 1,494,680
Trademarks and license rights, net of
accumulated amortization of $127,346 in 1995
and $52,077 in 1994 304,973 380,242
Due from affiliates/shareholders 1,791,616 1,232,830
Other assets 274,736 533,689
----------- -----------
Total other assets 3,814,798 3,641,441
----------- -----------
$26,373,204 $18,493,771
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
46
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1995 AND 1994
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
- ---------------------------------------------------------- ----------- -----------
CURRENT LIABILITIES:
Accounts payable--trade $ 2,494,527 $ 220,893
Notes payable and current portion of long-term
obligations 2,224,166 3,300,000
Trade notes payable to banks 6,243,917 2,521,491
Due to affiliates/shareholders 1,537,652 4,528,524
Accrued expenses 966,223 946,515
----------- -----------
Total current liabilities 13,466,485 11,517,423
----------- -----------
LONG-TERM OBLIGATIONS 10,342,500 2,300,000
----------- -----------
DUE TO AFFILIATES/SHAREHOLDERS 1,100,000 765,232
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
MINORITY INTEREST IN SUBSIDIARY 144,558 -
----------- -----------
SHAREHOLDERS' EQUITY:
Series A common stock, $.01 par value;
1,252,537 shares authorized; 1,252,537 shares
issued and outstanding 12,525 12,525
Common stock, $.01 par value; 4,000,000 shares
authorized; 1,730,795 and 1,224,248 shares
issued and outstanding in 1995 and 1994,
respectively 17,308 12,242
Additional paid-in capital 7,487,944 5,193,205
Retained earnings (deficit) (4,848,224) 16,180
Cumulative foreign currency translation
adjustment (26,856) -
Less- Common stock in treasury at cost, 130,000
shares in 1995 and 1994 (1,323,036) (1,323,036)
----------- -----------
Total shareholders' equity 1,319,661 3,911,116
----------- -----------
$26,373,204 $18,493,771
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
47
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
------------ ----------- ------------
REVENUES:
Product sales, net $ 42,991,150 $ 35,060,421 $ 31,241,073
Interest--affiliates 72,688 - -
Interest 27,970 43,990 7,897
Other income-
Income from affiliates - 800,000 64,617
Investment in LSI - 75,000 -
Other 166,317 28,651 15,639
------------ ----------- ------------
Total revenues 43,258,125 36,008,062 31,329,226
------------ ----------- ------------
COSTS AND EXPENSES:
Cost of product sales 37,307,061 27,797,798 26,543,652
Selling, general and administrative 7,898,929 6,890,147 5,291,023
Restructure charge 1,808,757 - -
Depreciation and amortization 215,032 184,785 246,866
Interest 822,844 305,295 377,522
------------ ----------- ------------
Total costs and expenses 48,052,623 35,178,025 32,459,063
------------ ----------- ------------
Income (loss) from continuing operations
before income from investment, minority
interest in subsidiary and provision for
income taxes (4,794,498) 830,037 (1,129,837)
INCOME FROM INVESTMENT IN LSAI - 79,374 73,267
LOSS FROM MINORITY INTEREST IN SUBSIDIARY (2,174) - -
------------ ----------- ------------
Income (loss) from continuing operations before
provision for income taxes (4,796,672) 909,411 (1,056,570)
PROVISION FOR INCOME TAXES - - -
------------ ----------- ------------
Income (loss) from continuing operations (4,796,672) 909,411 (1,056,570)
DISCONTINUED OPERATIONS OF SUBSIDIARY (67,732) 91,119 (354,259)
------------ ----------- ------------
Net income (loss) $ (4,864,404) $ 1,000,530 $ (1,410,829)
============ =========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARE
AND COMMON SHARE EQUIVALENTS OUTSTANDING 2,432,462 2,458,473 2,410,199
============ =========== ============
NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE
EQUIVALENT $ (2.00) $ .41 $ (.59)
============ =========== ============
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-5
48
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Retroactively restated to reflect the
10-for-1 reverse stock split, see Note 8)
----------------------------------------
Series A
Common Stock Common Stock Additional Retained
------------------------ ------------------- Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit)
----------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1992 1,252,537 $12,525 1,044,719 $10,447 $4,380,242 $ 426,479
Issuance of common stock upon exercise of
warrants - - 117,072 1,171 1,569,374 -
Issuance of common stock for services - - 18,000 180 241,382 -
Purchase of license rights and distribution
agreement from affiliate (Note 3) - - - - (1,488,830) -
Net loss - - - - - (1,410,829)
----------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1993 1,252,537 12,525 1,179,791 11,798 4,702,168 (984,350)
Issuance of common stock upon exercise of
warrants - - 44,457 444 491,037 -
Repurchase of treasury shares - - - - - -
Net income - - - - - 1,000,530
----------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1994 1,252,537 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 1,252,537 $12,525 1,730,795 $17,308 $7,487,944 $ (4,848,224)
=========== =========== =========== =========== =========== ============
Cumulative
Foreign
Currency
Translation Treasury Stockholders'
Adjustment Stock Equity
----------- ------------ -------------
BALANCE, December 31, 1992 $ - $ - $ 4,829,693
Issuance of common stock upon exercise of
warrants - - 1,570,545
Issuance of common stock for services - - 241,562
Purchase of license rights and distribution
agreement from affiliate (Note 3) - - (1,488,830)
Net loss - - (1,410,829)
----------- ------------ -------------
BALANCE, December 31, 1993 - - 3,742,141
Issuance of common stock upon exercise of
warrants - - 491,481
Repurchase of treasury shares - (1,323,036) (1,323,036)
Net income - - 1,000,530
----------- ------------ -------------
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
=========== ============ =============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
49
MBf USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
------------ ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(4,864,404) $1,000,530 $(1,410,829)
Adjustments to reconcile net income (loss) to net cash used
in operating activities-
Depreciation 101,990 79,088 49,561
Amortization 94,910 105,697 197,305
Provision for doubtful accounts 15,500 17,586 120,888
(Income) loss from discontinued operations of subsidiary 67,732 (91,119) 354,259
Loss on disposal of property, plant and equipment 53,405 3,281 32,818
Write-off of trademarks 50,425 - -
Write-off of deferred noncompete costs - - 494,766
Income from investment in LSAI - (79,374) (73,267)
Changes in certain assets and liabilities-
Accounts receivable--trade (530,819) (408,223) (1,894,761)
Inventories (2,741,834) (1,149,849) (702,187)
Prepaid expenses (128,341) (176,944) (23,032)
Other assets 276,185 (493,652) 141,392
Accounts payable--trade 2,237,348 (411,100) (293,541)
Accrued expenses (100,381) 180,535 440,942
------------ ---------- -----------
Net cash used in operating activities (5,468,284) (1,423,544) (2,565,686)
------------ ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (873,636) (88,689) (160,422)
Advances to LSI - - (21,364)
Additions to note receivable - (1,500,000) -
Payments received on notes receivable - - 403,713
Expenditures for other assets - (37,612) (14,914)
Advances (to) from discontinued subsidiary 141,379 693,285 (949,796)
Minority interest in subsidiary 30,497 - -
------------ ---------- -----------
Net cash used in investing activities (701,760) (933,016) (742,783)
------------ ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amounts due (from) to affiliates/shareholders (2,144,010) 2,166,208 (3,173,228)
Net borrowings (payments) on trade notes payable to banks 3,722,426 (4,476,726) 4,588,884
Net borrowings from notes payable 4,209,081 5,425,500 1,660,400
Net proceeds from warrant/stock exercises 2,950 491,481 1,570,545
Proceeds from issuance of note payable to Parent 1,200,000 - -
Payments on notes payable (183,334) (1,733,998) (932,000)
------------ ---------- -----------
Net cash provided by financing activities 6,807,113 1,872,465 3,714,601
------------ ---------- -----------
IMPACT OF EXCHANGE RATES ON CASH (26,856) - -
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 610,213 (484,095) 406,132
CASH AND CASH EQUIVALENTS, beginning of year 96,096 580,191 174,059
------------ ---------- -----------
CASH AND CASH EQUIVALENTS, end of year $706,309 $96,096 $580,191
============ ========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
50
MBf, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
MBf USA, Inc. and subsidiaries ("the Company") markets medical examination
gloves in the United States and Playboy brand condoms internationally. The
Company's factory is in the start-up phase of operations as of December 31,
1995, and will manufacture medical examination gloves. The Company anticipates
the factory will begin production in April, 1996.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, American Health Products Corporation ("AHPC"),
MBf America, Inc. (a nonactive holding company), Premier Latex, Inc., which is
currently inactive, and Disposable Garments, Inc. ("DGI"), a discontinued
operation. Effective October 31, 1995, the Company acquired a 70% interest in
an Indonesian glove manufacturing factory, PT MBf Buana Multicorpora ("PT
Buana"). Accordingly, PT Buana's assets, liabilities, equity and minority
interest is included in the consolidated financial statements of the Company.
All significant intercompany transactions have been eliminated.
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 consist of various latex products valued at the lower of average
cost or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided
by both the straight-line and accelerated methods over lives ranging from 3 to
19 years. The acquisition of PT Buana has created land and land improvements
of $698,657 and construction in progress of $4,242,199 as well as other
depreciable assets at December 31, 1995, which have not been depreciated in
1995 due to the start-up nature of the factory.
Distribution Agreement
The Company, MBf Health Products Sdn. Bhd. ("MBf Health"), which is now known
as PIE Healthcare, and MBf Rubber Products Sdn. Bhd. ("MBf Rubber") had entered
into
F-8
51
a distributorship agreement. The agreement provided that the Company
would have exclusive marketing rights in North and South America for latex
gloves manufactured and supplied by MBf Health and MBf Rubber through February,
1997. MBf Rubber ceased operations in 1995 and its distributor agreement was
terminated. The Company entered into a new five year distribution agreement
with MBf Health, which is now known as PIE Healthcare, effective July 12, 1995,
through July 11, 2000, which supersedes the previous agreement dated February
27, 1992. The distribution agreement requires the Company to purchase a
certain quantity of gloves each year. Revenues from product sales include
sales of latex examination gloves sold primarily under the terms of its
distributorship agreement.
Revenues
Revenues from product sales are recognized at the time the product is shipped
from the Company's warehouse, or upon the customer's receipt of the goods,
depending upon the terms of the sale.
Income Taxes
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). SFAS 109 utilizes the liability
method and deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on the changes in the deferred tax asset or
tax liability from period to period.
Net Income (Loss) Per Share
Net income per common share and common share equivalents in 1994 was computed
by dividing net income by the weighted average number of common and common
stock equivalent shares outstanding during the periods, after adding the
dilutive effect of the conversion of stock options and warrants.
The 1995 and 1993 net loss per common share and common share equivalents does
not consider the impact of common share equivalents as their effect is
antidilutive.
All share and per share information in the accompanying financial statements
give retroactive effect of the 10-for-1 reverse stock split which occurred
December 18, 1995.
Restructure Charge
In the second quarter of 1995, the Company incurred a restructuring charge
which included the resignation of and severance payments to the Chairman/CEO,
President/COO and CFO. The Board of Directors directed the Company to focus on
its core businesses and to exit the nutritional product business, where sales
were negligible, and the entry costs were very high which contributed to
significant losses.
Key components of the restructure charge were costs related to the exit of the
nutritional product business, executive management personnel severance, and the
closing of the executive office in New Jersey. The charge includes provisions
F-9
52
for work force reductions, the write-down of intangible and other assets, costs
associated with the removal of the nutritional vitamin product lines, and other
costs associated with the execution of the restructure. The restructuring
resulted in a one-time charge of $1,808,757. Substantially all such costs had
been paid by December 31, 1995. This amount differs from the original
restructuring charge of $1,954,591 charged to expense during the second quarter
of 1995 due to a reversal of a buyout accrual relating to a service contract
that management subsequently determined would be fulfilled under the original
terms of the agreement.
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 fair value for
those financial instruments for which it is practicable to do so, (1) the
carrying amount of cash and cash equivalents approximates fair value, (2) see
Note 2 regarding fair value of the investment in LSAI, and (3) the Company
believes its notes payable and long-term obligations approximate fair value
based on its dealings with the banks. It is not practicable to estimate the
fair value of amounts due to/due from affiliates and shareholders.
2. CORPORATE DEVELOPMENT:
On February 27, 1992, the shareholders of American Drug Screens, Inc. (a
Maryland corporation which changed its name on May 21, 1993, to MBf USA, Inc.)
approved a transaction (the "Share Exchange Agreement") whereby MBf
International Ltd., a Hong Kong corporation ("MBf International"), the
shareholder of American Health Products Corporation (a Texas corporation,
"AHPC") acquired control of the Company through a series of integrated
transactions, including (a) the increase in authorization of the Company's
Common Stock, par value $.01 per share ("Common Stock") from 2,000,000 to
4,000,000, and the authorization of 1,252,537 shares of a new Series A
Convertible Common Stock, par value $.01 per share ("Series A Common Stock"),
(b) the acquisition by MBf America, Inc., a wholly owned subsidiary of MBf
International, of all the issued and outstanding shares of common stock of AHPC
from MBf International, in exchange for 1,252,537 shares of Series A Common
Stock, and (c) the restructuring of the Board of Directors by creating two
classes of Directors.
The transaction was accounted for as a purchase of American Drug Screens, Inc.
by AHPC as of February 27, 1992, and AHPC's shareholder's equity at December
31, 1991, was restated to reflect the Series A Common Stock received in the
Share Exchange Agreement.
F-10
53
The terms of the Series A Common Stock are substantially the same as the
Company's Common Stock except:
a. Each share of Series A Common Stock is convertible into
one share of the Company's Common Stock, $.01 par value. The
conversion rate could have been reduced up to 33-1/3% per year
if AHPC's pretax earnings, as defined, fell below $1,300,000 in
1992 and 1993 and $1,400,000 in 1994, or if additional capital
was not contributed. During 1992, 1993 and 1994, AHPC's pretax
earnings, after purchase credits discussed in Note 3, were
$1,300,000, $1,300,000 and $1,400,000, respectively.
Accordingly, as of December 31, 1994, the conversion rate was
one for one. The Company has reserved 1,252,537 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.
Discontinued Operations
Effective December 31, 1993, the Company adopted a plan to discontinue
operations and liquidate its wholly owned subsidiary, Disposable Garments, Inc.
("DGI"). DGI, through its supply and requirements agreement with Disposable
Medical Products, Inc. ("DMP"), distributed disposable medical garments to
unaffiliated customers. Accordingly, DGI is reported as a discontinued
operation in the accompanying consolidated financial statements. Net assets in
the amount of $209,111 of the discontinued subsidiary at 1994 primarily
consisted of inventory and receivables. At December 31, 1995, there were no
assets of DGI.
Investment in Laboratory Specialists, Inc.
Laboratory Specialists, Inc. ("LSI") is an independent drug testing laboratory
located in Louisiana, which provides analysis for detection of illegal drug use
by customers' employees and prospective employees. All of the outstanding
common stock of LSI was acquired by the Company in 1989.
On April 18, 1994, the Company consummated an agreement to transfer its common
stock investment in LSI to its President and former owner in exchange for the
return of the Company's 130,000 shares of Common Stock held by him. Prior to
consummation of the sale, LSI declared a cash dividend of $75,000, a noncash
dividend forgiving amounts due from the Company of approximately $545,000 and a
dividend of 706,244 shares of cumulative, redeemable, convertible preferred
stock of LSI with an interest rate set at the prime rate. Additionally, the
Company transferred its rights and all related assets in its drug testing kit
to LSI in exchange for a note payable to the Company in the amount of $353,123
and an obligation by LSI to pay royalties on related product sales if LSI is
able to successfully sell this for a period of five years. As of December 31,
1995, there were no royalties earned by the Company. The return of the
Company's Common Stock has been accounted for as the acquisition of treasury
stock and, therefore, no gain or loss was recognized.
F-11
54
Because the Company's investment in the preferred stock of LSI represented less
than a 10% interest in that company and was accounted for under the cost method
in future periods, and since the Company was no longer in the drug testing
business, the accompanying consolidated financial statements present LSI on an
unconsolidated basis.
A summary of LSI's results of operations is as follows:
For the
Period
Jan.1,1994, For the
to Year Ended
Apr.18,1994 Dec.31,1993
----------- -----------
Statements of operations-
Revenues $1,294,775 $3,971,950
Cost of laboratory services (635,653) (2,190,462)
Operating expenses (545,493) (1,661,014)
Other (34,255) (47,207)
----------- -----------
Net income $79,374 $73,267
=========== ===========
In August, 1994, the Company agreed to exchange its 706,244 shares of preferred
stock in LSI valued at $706,244, for 239,405 shares of common stock of a newly
formed corporation, Laboratory Specialists of America, Inc. ("LSAI"),
contingent upon LSAI successfully completing an initial public offering
("IPO"), with LSI as its 100% operating subsidiary. No gain or loss was
recognized on this exchange.
In September, 1994, LSAI successfully completed its IPO of 1,200,000 shares of
common stock and, currently trades under the symbol ("LABZ") on the Nasdaq
Small Cap Market System. The Company has agreed not to sell its 239,405 shares
of common stock of LSAI prior to July 8, 1996, without the prior consent of
LSAI and certain of its officers and directors. Thereafter, such shares of
common stock will be eligible for sale under Rule 144.
Investment in LSAI
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The adoption of SFAS No.
115 requires that equity securities that have readily determinable fair values
shall be classified as "available for sale" if not held for the objective of
generating profits on short-term differences in price. Accordingly, the
Company's common stock investment in LSAI is classified and treated as
available for sale.
SFAS No. 115 further requires that unrealized holding gains and losses related
to available-for-sale securities shall be excluded from earnings and reported
as a net amount in a separate component of shareholders' equity until realized.
At December 31, 1995 and 1994, there was not a material difference between
cost and market value of the Company's investment in LSAI common stock;
therefore, no adjustment was made to shareholders' equity.
At December 31, 1995 and 1994, the Company's investment in LSAI includes LSAI
common stock valued at cost of $706,244, and a note receivable from LSAI of
F-12
55
$353,123, for a total investment of $1,059,367. The Company believes the note
receivable, which is carried at cost, approximates fair value.
Acquisition of P.T. Buana
The Company entered into a Stock Acquisition Agreement with MBf International
dated October 31, 1995, whereby MBf International exchanged its beneficial
interest in 1,365 shares of common stock of PT Buana (par value equivalent to
$1,000 U.S. each, which shares were held in trust by MBf Holdings for the
benefit of MBf International), 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 11). The Note is guaranteed by MBf Holdings Berhad
("MBf Holdings"), the parent company of MBf International. PT Buana is a latex
examination glove factory, located in Indonesia, which will supply production
for the Company.
The factory has not begun production as of December 31, 1995, and is in the
start-up phase of operation. Accordingly, the factory has capitalized certain
start-up costs incurred and will begin amortizing these costs over a one-year
period upon commencement of operations. As of December 31, 1995, the Company
has recorded a minority interest in the PT Buana subsidiary of $144,558 as
reflected in the consolidated balance sheets, representing the nonowned 30%
interest in the factory. The minority interest of PT Buana is owned by
Indonesian banks financing its construction and operations.
3. RELATED-PARTY TRANSACTIONS:
MBf International, which holds the Series A Common Stock of the Company and is
the majority shareholder of the Company, is a wholly owned subsidiary of MBf
Holdings, a publicly traded company on the Kuala Lumpur Stock Exchange.
At December 31, 1995 and 1994, amounts due from/to affiliates/shareholders
consist of the following:
1995 1994
------------ ------------
Due from affiliates/shareholders-
Current-
MACC Trading $- $1,500,000
============ ============
Long term-
MBf Holdings $6,718 $6,718
MBf Personal Care 1,127,970 650,000
MBf International 200,273 200,273
MBf Marketing 8,207 8,207
MACC Partners 350,000 367,632
MBf Rubber 98,448 -
------------ ------------
Total long term $1,791,616 $1,232,830
============ ============
F-13
56
1995 1994
------------ ------------
Due to affiliates/shareholders-
Current-
MBf Rubber $ - $(1,309,934)
MBf Holdings (85,195) (53,234)
MBf Insurans (21,360) -
MBf Management (13,226) (8,129)
MBf Factors (876,785) (876,785)
MBf Health (now known as PIE Healthcare) - (1,831,790)
MACC Trading - (350,000)
MBf Personal Care - (98,652)
MBf Printing (218,913) -
PT Prakasa Bangun Mandiri (161,409) -
PT Sigmakarya Perdana Multicorpora (160,764) -
----------- -----------
Total current $(1,537,652) $(4,528,524)
=========== ===========
Long term--MACC Trading $(1,100,000) $ (765,232)
=========== ===========
During 1995, 1994 and 1993, the Company purchased a substantial majority of its
inventories from MBf Health and MBf Rubber. MBf Health and MBf Rubber are
latex examination glove manufacturing subsidiaries of MBf International.
Prices charged by these factories are subject to change and, due to the
guaranteed income provisions of the Share Exchange Agreement discussed in Note
2, are not the same as prices which would be charged by unrelated parties in
1994 and 1993. During 1994 and 1993, credits against purchases, which enabled
the Company to meet the pretax earnings requirements of the Share Exchange
Agreement, were $3,106,372 and $1,477,692, respectively. Amounts due from/to
MBf Health and MBf Rubber primarily arose from purchases of inventories and
credits received under the Share Exchange Agreement. During 1995, MBf Rubber
ceased operations in Malaysia and is a discontinued operation.
On August 16, 1995, MBf International announced that it had executed an
agreement with Perusahaam Intan Emas Sdn. Bhd. ("PIE") for the sale of its
subsidiary, MBf Health, with the option to repurchase the company. In
connection with the sale, a distribution agreement was executed between MBf
Health and the Company, calling for the purchase of product by the Company
according to a predetermined formula. During October, 1995, PIE changed the
name MBf Health Products Sdn. Bhd. to PIE Healthcare Products Sdn. Bhd. ("PIE
Healthcare"). See Note 1 for more information on this distribution agreement.
During 1995, the Company purchased a majority of its powdered latex examination
gloves from PIE Healthcare. The Company intends to continue to purchase its
powdered latex examination gloves from PIE Healthcare and to purchase
nonpowdered gloves from other sources. The Company does not expect the sale of
MBf Health to have an impact on its operations. Since PIE Healthcare is not
considered to be a related party subsequent to August 16, 1995, the liability
to MBf Health was reclassified from due to affiliates to the trade payable
liability at December 31, 1995.
F-14
57
Some inventory purchases from affiliates were financed through MBf Factors, an
affiliate of MBf Holdings. Amounts due to MBf Factors of $876,785 at December
31, 1995 and 1994, bear interest at 9% per annum.
Amounts due from MBf Personal Care Sdn. Bhd. ("MBf Personal Care"), includes
$200,000 of credits taken by the Company in 1994 against purchases made from
MBf Personal Care due to defects in the inventories purchased. MBf Personal
Care is a subsidiary of MBf Capital Berhad, a publicly traded company on the
Kuala Lumpur Stock Exchange, and owned approximately 32% by MBf Holdings.
Additionally, effective December 31, 1994, the Company entered into an
agreement with MBf Personal Care whereby MBf Personal Care was granted the
exclusive rights to manufacture Playboy brand condoms for the Company. MBf
Personal Care agreed to pay $450,000 for such rights which have been recorded
as other income--income from affiliates and is included in the due from MBf
Personal Care in the accompanying financial statements.
The amounts due from MBf International represents costs associated with the
Share Exchange Agreement (see Note 2). As the timing of repayment of the due
from affiliate amounts is uncertain, the receivables from affiliates have been
classified as long term.
The amount due to MBf Insurans, an MBf Holdings' affiliate, represents the cost
of insuring inventories in transit. Amounts paid to MBf Insurans for this
coverage were $18,915, $36,696 and $30,643 in 1995, 1994 and 1993,
respectively.
On December 30, 1993, the Company entered into an agreement with a subsidiary
of MBf Holdings, MACC Trading Limited ("MACC Trading"), to purchase license
rights and a condom distribution agreement. MACC Trading had, earlier in 1993,
acquired the license and distribution rights from an unaffiliated party for a
signing bonus of $300,000 and an obligation to pay minimum future royalties on
sales of products covered by the agreement. The Company purchased the rights
and distribution agreement from MACC Trading for $1,488,830, assumption of the
signing bonus and assumption of all liabilities for future minimum royalties.
As part of the agreement, the Company also purchased related inventories from
MACC Trading in the amount of approximately $262,000. Because the purchase
price exceeded MACC Trading's purchase price for the rights from an
unaffiliated party, the Company's excess obligation has been reflected as a
charge against equity, similar to a dividend. MACC Trading's carryover basis
in the agreement of $325,000 was reflected as a 1993 addition to "trademarks
and license rights" in the 1993 consolidated balance sheet.
On February 18, 1994, the Company made the $600,000 down payment to MACC
Trading in accordance with the Agreement. A balance of $1,100,000 remains on
this obligation to MACC Trading. This balance is payable in 60 equal monthly
installments of $19,167 with interest on the unpaid balance at the prime rate
commencing May 1, 1994. By mutual agreement MACC Trading agreed to defer the
commencement of monthly installments and the related interest thereon.
In December, 1994, the Company made a short-term loan to MACC Trading in the
principal amount of $1,500,000 with interest payable at four (4%) percent over
prime. On May 5, 1995, the Company and MBf Holdings (the parent of MACC
Trading) entered into an agreement pursuant to which the Company offset the
MACC Trading receivable and accrued interest ($1,572,688) against the trade
payable balance
F-15
58
owed by the Company to MBf Health, which was an indirect subsidiary of MBf
Holdings, resulting in effective repayment of the loan.
During 1994, the Company provided consulting services to MACC Partners, a
subsidiary of MBf Holdings, for which MACC Partners agreed to pay $350,000;
this amount has been recorded as due from affiliates/shareholders--long-term
and other income--income from affiliates in the accompanying financial
statements.
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 8).
4. OTHER ASSETS:
The excess purchase price over the value of the net assets of AHPC acquired in
February, 1992, in accordance with the Share Exchange Agreement (Note 2), was
recorded as goodwill in the accompanying consolidated balance sheets and is
being amortized using the straight-line method over 40 years.
Trademarks and license rights are amortized on a straight-line basis over the
period of the underlying agreement. Amortization of trademarks and license
rights was $75,269 in 1995 and $41,118 in 1994. See Note 3 for a discussion of
the 1993 addition to "trademarks and license rights."
In 1992, the Company entered into noncompete-agreements with two of its former
officers. The agreements provide for payments totaling $727,000 for the
officers' agreements not to compete with the Company for a period of eight
years. Effective December 31, 1993, the Company entered into settlement
arrangements with the two officers which released them from the
noncompete-obligation. As such, the unamortized balance of the covenants,
which amounted to $494,766, was written off in 1993. Amortization expense
related to these agreements was $110,400 in 1993.
Other assets as of December 31, 1995 and 1994, consist of the following:
1995 1994
-------- --------
Deferred loan costs $ 76,752 $112,712
Deposits, payments and other 197,984 420,977
-------- --------
$274,736 $533,689
======== ========
5. TRADE NOTES PAYABLE TO BANKS:
Trade notes payable to banks consist of amounts related to finance inventory
purchases which are factored or financed through letter-of-credit arrangements.
Factored payable amounts due at December 31, 1995 and 1994, totaled $3,943,282
and $1,320,176, respectively. These factored payable amounts are with
nonaffiliated banks and accrue interest at approximately 9% per annum. Amounts
due under letter-of-credit arrangements totaled $2,300,635 and $1,201,315 at
December 31, 1995 and 1994, respectively. These letter-of-credit liabilities
are non-interest-bearing, secured by certain inventories and receivables and
guaranteed by MBf Holdings.
F-16
59
In June, 1995, the Company entered into a letter-of-credit banking facility
agreement with MBf Bank, Tonga, in the amount of Tonga dollars T$1,000,000 or
approximately U.S. $800,000. On August 24, 1995, the MBf Bank of Tonga
approved an additional T$2 million letter-of-credit facility, bringing the
total facility to T$3 million or approximately U.S. $2.4 million. This
facility is unsecured and guaranteed by MBf Holdings. This outstanding
letter-of-credit liability is reflected in the trade notes payable liability at
December 31, 1995.
6. NOTES PAYABLE:
Notes payable and long-term obligations as of December 31, 1995 and 1994,
consist of the following:
1995 1994
----------- -----------
Borrowings under a bank revolving line-of-credit
agreement with available borrowings up to
$1,600,000 and $4,600,000 at December 31, 1995
and 1994, respectively, bearing interest at the
prime rate plus 3% (11.5% at December 31,
1995), secured by certain inventories and
accounts receivable, guaranteed by MBf Holdings $1,500,000 $3,175,000
Bank converted credit loan, bears interest at the
prime rate plus 3% (11.5% at December 31,
1995), secured by certain inventories and
accounts receivable, guaranteed by MBf Holdings 4,825,000 -
PT Buana debt, bearing interest at the Indonesian
prime rate (approximately 11.5% at December 31,
1995) secured by land, machinery and equipment,
accounts receivable and the common stock equity
of PT Buana, guaranteed by MBf Holdings and the
minority shareholders of PT Buana, payable in
eight semiannual installments, due November,
2000 4,000,000 -
Amounts due to Playboy under license and
distribution agreement (see Note 3) 75,000 175,000
Convertible subordinated debentures to trust
company (option price of $25.00), interest
payable quarterly at prime plus 1.5% (10% at
December 31, 1995), due in November, 2001 2,000,000 2,000,000
Convertible subordinated debenture (option price
of $20.00), interest payable quarterly at prime
plus 2% (10.5% at December 31, 1995), due in
1996 166,666 250,000
----------- -----------
12,566,666 5,600,000
Less- Current portion (2,224,166) (3,300,000)
----------- -----------
Long-term obligations $10,342,500 $2,300,000
=========== ===========
The bank revolving line-of-credit agreement noted above contains covenants
which require, among other things, maintenance of financial ratios, limitation
on
F-17
60
additional borrowings, investments and capital expenditures. As of
year-end, the Company was in compliance with these covenants.
In March, 1995, the bank modified and extended the Company's credit facility
until October 31, 1997. On August 16, 1995, the Company amended its credit
facility with the bank which allowed for the Company to begin utilization of an
amended bank credit facility. The amended credit facility waives certain of
the financial covenant requirements until December 31, 1996. The amended bank
agreement (a) decreased the revolving line of credit from $6,000,000 to
$1,600,000, (b) decreased the letter of credit commitment from $1,800,000 to
$1,400,000, (c) decreased the standby letter of credit commitment from $200,000
to $100,000 and (d) transferred $4,825,000 of the outstanding revolving
line-of-credit balance into a new nonrevolving converted credit loan, which,
along with the amounts described above, are evidenced by a single credit note
in the aggregate amount of $7,925,000. The bank converted credit loan portion
of the amended credit note requires quarterly principal payments totaling
$482,500 in 1996 and $723,750 in 1997. The Company may increase the revolving
line or line of credit by $2,000,000 as principal payments are made on the bank
converted credit loan.
The PT Buana debt consisted of a syndicated loan facility with three Indonesian
banks amounting to a total credit facility of $6.5 million. As of December 31,
1995, $4.0 million had been borrowed against the facility which was used for
the purchase of assets, construction and start-up operation of the Indonesian
factory. Subsequent to December 31, 1995, PT Buana had borrowed the remaining
$2.5 million on the facility.
The principal portion of long-term debt becomes due as follows:
Fiscal year ending-
1997 $ 5,217,500
1998 1,045,000
1999 1,110,000
2000 970,000
2001 2,000,000
-----------
$10,342,500
===========
Upon maturity of the bank long-term debt in 1997, the Company's intent is to
refinance with the associated lender.
7. COMMITMENTS AND CONTINGENCIES:
Litigation
Over the last several years, numerous product liability lawsuits have been
filed against suppliers and manufacturers of powdered latex gloves alleging,
among other things, adverse allergic reactions. The Company is one of numerous
defendants that have been named in such lawsuits and, to date, has been named
and served in five actions, one of which was settled in January, 1996, for a
nominal amount. While the damages claimed are substantial, the Company
believes its exposure in these lawsuits is mitigated by (a) the fact that it
does not manufacture any of the products that are the subject of the lawsuits;
and
F-18
61
(b) warnings which accompany such products. In any event, because the
Company carries product liability insurance of $2,000,000 of coverage for the
payment of any indemnity or judgments, the Company believes that its risk of
exposure is limited. However, it is not feasible to predict the ultimate
outcome of litigation.
Royalty Commitments
In connection with the Company's purchase of license rights from MACC Trading,
the Company assumed responsibility for the payment of royalties to an
unaffiliated company on sales of products covered by the agreement. Royalties
are 10% of cumulative sales over $1,000,000 through June, 1996, and 10% of
sales thereafter. At December 31, 1995, the future minimum commitment is
$225,000 for 1996.
Significant Contracts
The Company has a contract with an individual to serve as a spokesman for the
Company under a contract which requires annual payments totaling approximately
$250,000 through April, 1998.
Significant Customers
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.
During 1994, two of the Company's customers accounted for 23.5% and 21.1% of
net sales, respectively. These customers together accounted for 51.6% of
accounts receivable at December 31, 1994.
Letters of Credit
As of December 31, 1995, the Company was contingently liable for outstanding
letters of credit totaling $1,043,647.
Operating Leases
The Company conducts all of its operations in leased facilities. Total rent
expense included in the accompanying statements of income for 1995 and 1994 was
$385,477 and $167,000, respectively.
The following summary presents future minimum rental payments required under
the terms of present operating leases:
Fiscal year-
1996 $ 409,000
1997 416,000
1998 360,000
1999 231,000
2000 67,000
----------
$1,483,000
==========
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62
8. SHAREHOLDERS' EQUITY:
In December, 1995, the Board of Directors approved that the Company
reincorporate in Maryland in part to benefit from franchise tax and corporate
governance provisions of the Maryland Statutes and, in part, to effect a
conversion of the Company from an Oklahoma corporation to a Maryland
corporation. In connection with the reincorporation, the Board approved and
the Company effected a 10-for-1 reverse stock split of its Series A Common
Stock and Common Stock. As a result, each shareholder received one share of
Series A Common Stock or Common Stock of the Company successor, a Maryland
corporation, subsequent to the merger, for every 10 shares of Series A Common
Stock or Common Stock held by such shareholder. Additionally, the Common Stock
underlying all of the Company's outstanding warrants and options were adjusted
to reflect the 10-for-1 reverse stock split.
All share and per share information in the accompanying financial statements
give retroactive effect of the 10-for-1 reverse stock split which occurred
December 18, 1995.
In October, 1995, the Company issued 250,980 shares of Common Stock to MBf
International in exchange for $1,200,000. MBf International loaned the Company
$1,200,000 to pay for AHPC's 7% Cumulative Preferred Stock having a value of
$1,200,000 which the Company had purchased on September 29, 1995. MBf
International agreed to accept shares of the Company's Common Stock having a
value of $1,200,000 in satisfaction of the Company's indebtedness to MBf
International.
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.
A $26,856 foreign currency translation adjustment was recorded at December 31,
1995, which represents the loss on conversion of PT Buana's Indonesian Rupiahs
to U.S. dollars at December 31, 1995.
The Company issued 18,000 shares in 1993 of its Common Stock valued at $241,562
for advertising and public relation services.
As of December 31, 1992, there were outstanding warrants to purchase 13,413
shares of the Company's Common Stock at an exercise price of $15.00. On
December 4, 1992, the Company gave notice to the holders of such warrants of
its election to redeem all such warrants on January 12, 1993, at $.10 per
warrant. All warrants which were not exercised by January 15, 1993 expired.
As of December 31, 1992, there were warrants outstanding to purchase 3,375
units at $30.00 (the "$30.00 Units") per unit through October 1995. Each unit
consists 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 unexercised warrants expired in 1995.
As of December 31, 1992, there were also warrants outstanding to purchase 2,508
units at $107.00 (the "$107.00 Units") per unit through October, 1993; each
unit consists of 10 shares of Common Stock and, until January 15, 1993, each
unit included two warrants, with each warrant exercisable to purchase one share
of
F-20
63
Common Stock at $15.00. During 1993, the exercise date of the $107.00 units
was extended to April 30, 1994. All of these warrants were exercised by the
end of 1994.
In November, 1994, warrants were issued to purchase 7,500 shares of the
Company's Common Stock at an exercise price of $22.50. The 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. All of these warrants are currently
exercisable at December 31, 1995. During 1995, 10,000 warrants, convertible
into 10,000 shares of Common Stock, expired.
A summary of warrant activity since December 31, 1992, is as follows:
$15.00 $30.00 $107.00 $22.50
Warrants Units Units Warrants
-------- ------- ------- --------
Balance, December 31, 1992 13,413 3,375 2,508 -
Exercises (10,540) (1,075) (737) -
Expirations (2,873) - - -
-------- ------- ------- --------
Balance, December 31, 1993 - 2,300 1,771 -
Exercises - - (1,771) -
Additions 185,000 - - 7,500
-------- ------- ------- --------
Balance, December 31, 1994 185,000 2,300 - 7,500
Expirations (10,000) (2,300) - -
-------- ------- ------- --------
Balance, December 31, 1995 175,000 - - 7,500
======== ======= ======= ========
Additionally, during 1994, the Company also issued certain debt which is
convertible at any time at the noteholder's option (see Note 6) into 92,500
warrants to purchase Common Stock at $20.00 to $25.00 per share. At December
31, 1995, there were no exercises of these debt conversion warrants.
The Company has reserved Common Stock for issuance upon conversion of these
warrants.
9. STOCK OPTION PLAN:
On February 12, 1991, the Board of Directors approved the Company's Omnibus
Equity Compensation Plan (the "Plan") which authorized the issuance of
approximately 390,000 shares (computed based on shares outstanding subsequent
to the Share Exchange Agreement) of the Company's Common Stock in the form of
stock options, restricted stock and other equity based awards to employees and
directors. The number of shares of Common Stock reserved for the Plan are the
sum of the following: (a) 100,000 shares of Common Stock, (b) 10% of the
Common Stock outstanding and (c) Common Shares underlying any director options.
Each newly elected nonincumbent director is issued 1,000 director options.
F-21
64
A summary of options outstanding under the Plan is as follows:
Outstanding Exercise
Options Price Expiration
----------- ------------- ----------
Balance, December 31, 1992 105,121 $5.90-$14.40 2001
Grants 119,232 9.40- 13.40 2001
Rescissions (6,824) 14.40 2001
----------- -------------
Balance, December 31, 1993 217,529 5.90- 14.40
Grants 138,550 11.90- 25.00 1999-2004
Rescissions (20,000) 11.90 2001
Exercises (26,900) 5.90- 11.90 2001
Expirations (20,424) 14.40 2001
----------- -------------
Balance, December 31, 1994 288,755 5.90- 25.00
Grants 62,675 2.63- 16.80 2005
Rescissions/expirations (200,981) 9.40- 22.80 2002-2005
Exercises (500) 5.90 2001
----------- -------------
Balance, December 31, 1995 149,949 $2.63-$25.00
=========== =============
The exercise price of the stock options granted in 1995 and 1994 was
established as the market price at the date of the grant. The exercise price
of stock options granted in 1992 was established in February, 1993, as the
market price at that date. Of the 149,949 options outstanding at December 31,
1995, 110,415 are currently exercisable, 38,267 become exercisable in 1996 and
1,267 become exercisable in 1997.
The Company has reserved Common Stock for issuance upon conversion of these
options.
10. INCOME TAXES:
The effective income tax rates differ from the statutory federal income tax
rate of 34% for the years ended December, 1995 and 1994. A reconciliation of
the statutory rate with the effective rate follows:
1995 1994
------------ ---------
Tax expense (benefit) at statutory rate of 34% $ (1,653,897) $ 340,180
Goodwill amortization 51,207 23,287
State income taxes - 63,931
Reduction in valuation allowance due to
utilization of net operating loss carryforwards - (427,398)
Increase in deferred tax asset valuation allowance 1,602,690 -
------------ ---------
$ - $ -
============ =========
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65
In 1993, the Company incurred a net operating loss for both book and tax
purposes. The Company has elected to carry losses incurred forward for book
and tax purposes. Accordingly, no benefit for income taxes has been reflected
in the accompanying 1993 consolidated statement of operations.
The Company has net operating loss carryforwards at December 31, 1995, of
approximately $4,900,000 which are available to reduce federal taxable income
in future periods and will begin expiring in 2003. In accordance with federal
tax regulations, usage of the net operating loss carryforwards are subject to
limitations in future years if certain ownership changes occur. Such ownership
changes occurred with the transactions described in Note 2. Because of these
factors, the utilization of the net operating loss at December 31, 1995, may be
significantly limited.
Due to the Company's net operating loss position, deferred tax assets in the
amount of approximately $2,046,000 at December 31, 1995, were reserved as
follows:
Accruals not deductible until paid $ 184,000
Net operating loss carryforwards, tax effected 1,862,000
Valuation allowance (2,046,000)
-----------
$ -
===========
11. SUPPLEMENTAL CASH FLOW INFORMATION:
The acquisition of PT Buana on October 31, 1995, involved the issuance of the
Company's Common Stock and was accounted for as follows:
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 (Note 3) $ 1,500,000
Conversion of loan to Common Stock (Note 3) 1,200,000
===========
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66
Cash paid for interest on debt outstanding for the years ended December 31,
1995, 1994 and 1993, was $730,405, $266,247 and $104,100, respectively.
Cash paid for income taxes during the year ended December 31, 1995, was
approximately $75,000. There were no income taxes paid during 1994 or 1993.
12. NEW ACCOUNTING PRONOUNCEMENT:
In March, 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived assets and for Long-Lived Assets
to Be Disposed Of" (SFAS No. 121), was issued. The application of the
statement would require the Company to evaluate facts and circumstances that
indicate that the costs of certain property, plant, equipment and intangible
assets may be impaired. If an evaluation is required, the estimated future net
cash flows (undiscounted and without interest charges) associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required. The
Company, consistent with existing generally accepted accounting principles,
currently states its fixed assets and intangibles at the lower of cost or net
realizable value. The Company is required to adopt SFAS No. 121 effective
January 1, 1996, and could have a material impact on the results of operations
and financial position of the Company during fiscal 1996. As of December 31,
1995, the impact of implementing this standard is undeterminable.
13. GEOGRAPHIC SEGMENT INFORMATION (CONSOLIDATED):
The United States is considered the country of origin for all of the Company's
revenues for the three years presented herein, including exports from the U.S.
Identifiable assets at December 31, 1995, consist of the following:
United
States Asia Total
----------- ---------- -----------
Current assets $15,649,688 $402,029 $16,051,717
Fixed assets 287,712 5,156,610 5,447,322
Other assets 4,718,724 155,441 4,874,165
=========== ========== -----------
Consolidated total $26,373,204
===========
F-24