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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 JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period from _________ to _________.
Commission file number 0-17458
WRP CORPORATION
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(Exact name of registrant as specified in its charter)
MARYLAND 73-1326131
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(State of incorporation) (I.R.S. Employer Identification No.)
500 PARK BOULEVARD, SUITE 1260
ITASCA, IL 60143
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(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 285-9191
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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
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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 October 15, 2002: $1,817,031
At October 15, 2002, 5,803,692 shares of the Registrant's Common Stock
and 1,252,538 shares of Series A Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
WRP CORPORATION
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I PAGE
- ------ ----
ITEM 1. BUSINESS.................................................................................1
ITEM 2. PROPERTIES...............................................................................6
ITEM 3. LEGAL PROCEEDINGS........................................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................8
PART II
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ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................................................9
ITEM 6. SELECTED FINANCIAL DATA..................................................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..............................................................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................................................31
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................34
ITEM 11. EXECUTIVE COMPENSATION...................................................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...........................................................................39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................40
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS OF FORM 8-K...................................41
PART I
This Form 10-K contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-K that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing words such as "may," "will," "expect," "believe," "anticipate,"
"estimate," or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending upon
a variety of factors, including those set forth in the section below entitled
"Risk Factors."
ITEM I. BUSINESS
GENERAL
WRP Corporation is a leading marketer of foodservice and medical
examination gloves in the United States through our wholly owned subsidiary,
American Health Products Corporation ("AHPC"). We are also a manufacturer of
disposable latex examination and food service gloves through our 70% owned
Indonesian manufacturing facility, PT WRP Buana Multicorpora ("PT Buana"). We
were reincorporated in Maryland in December 1995 and have been involved in
several business operations. Since July 1, 1997, we have been solely focused on
the glove business and all other business activities ceased. In June 1997, we
discontinued our sales of Playboy condoms after we reached an agreement with
Playboy Enterprises, Inc. to terminate its license agreement under which we
distributed condoms in 15 countries.
On March 1, 2002, we announced that our subsidiary, American Health
Products Corp, had entered into a Transition Services Agreement with Maxxim
Medical, Inc., ("MAXXIM"), whereby MAXXIM would service certain of our
acute-care medical customers. As a result of this transition, we have
substantially reduced our personnel in our medical division and have
transitioned our business with respect to most of our customers in the medical
division to MAXXIM. We have incurred severance costs of approximately $256,000
associated with the reduction in personnel. We are in the process of selling our
remaining inventory related to the acute-care medical business, during the
transition period.
In October 1995, we acquired a 70% interest in an Indonesian latex
examination glove manufacturing plant, PT Buana, which was in the start-up phase
of operations at that time. We purchased PT Buana from MBf International
Limited. PT Buana began shipping powdered latex examination gloves to AHPC in
May 1996 after operations commenced in April 1996. During 1999, PT Buana
purchased machinery and equipment, which enabled the factory to manufacture
powder-free latex exam gloves.
On February 27, 1992, we acquired AHPC from MBf International Limited
("MBf International"), a Hong Kong corporation, which was a subsidiary of MBf
Holdings Bhd. ("MBf Holdings"), a Malaysian publicly traded company, which was
listed on the Kuala Lumpur Stock Exchange. As a result of such acquisition, MBf
International acquired control of us by virtue of the issuance of 1,252,538
shares or 100% of the Series A Common Stock, which controls the election of a
majority of our Board of Directors.
1
The Series A Common Stock is substantially the same as our Common Stock
except that each share of Series A Common Stock is convertible into one share of
our Common Stock and the Series A Common Stock entitles the holder to elect all
Class A directors, which represent a majority of our Board of Directors.
At December 31, 1997, MBf International owned all 1,252,538 shares of
our Series A Common Stock and 1,682,275 shares of our Common Stock. On March 31,
1998, we announced that our majority shareholder, MBf International, had
consummated the closing of two separate agreements (entered into in May 1997)
with WRP Asia Pacific Sdn. Bhd. ("WRP Asia"), formerly known as Wembley Rubber
Products (M) Sdn. Bhd., our supplier of latex powder-free exam gloves. These
agreements transferred majority ownership in us to WRP Asia and were as follows:
1. MBf International sold all of our Series A Common Stock
(1,252,538 shares) to WRP Asia for $5.00 per share or
$6,262,690; and
2. WRP Asia purchased 2,500,000 shares of our unregistered Common
Stock for $2.70 per share for a total of $6,750,000. The
purchase price of $2.70 per share reflected a 12% discount
from the average stock price over a seven consecutive business
day range ended May 9, 1997, as detailed by a fairness opinion
received from an independent valuation firm.
These transactions provided WRP Asia with a 55.0% ownership interest in
us at March 31, 1998. At June 30, 2002, WRP Asia had a 53.2% ownership interest
in us.
WRP Asia is one of the world's leading manufacturers of high quality
disposable gloves, primarily for use by healthcare professionals in the acute
care, alternative care and foodservice markets, and for critical environments in
the electronics industries, scientific laboratories, pharmaceutical industries
and other related industries. AHPC has been purchasing the majority of its
powder-free latex exam gloves from WRP Asia for several years and continues to
do so.
At December 31, 1998, MBf International owned 1,682,275 shares of our
Common Stock, which represented a 24.4% ownership interest in us at that time.
In January 1999, MBf International sold its 1,682,275 shares to several U.S.
institutional investors, thus eliminating any ownership interest in us.
As of June 30, 2002, the shares of Series A Common Stock issued to WRP
Asia constituted 17.8% of the total combined issued and outstanding shares of
Series A Common Stock and Common Stock. Upon conversion, such shares (when
coupled with the 2,500,000 shares of Common Stock acquired by WRP Asia) will
represent a total ownership in us by WRP Asia of 53.2% of the then outstanding
shares of Common Stock, excluding shares subject to issuance pursuant to
outstanding warrants and stock options.
GLOVE PRODUCTS
Through our wholly owned subsidiary, AHPC, we market a full product
line of disposable gloves including latex, vinyl, synthetic and nitrile
examination and surgical gloves
2
used primarily in the foodservice, non-acute medical, dental and retail
industries. PT Buana, WRP Asia and other third parties manufacture gloves
marketed by AHPC. Gloves are marketed by AHPC under the brand names
"DermaSafe(R)," "Glovetex(R)," "ProFeel(R)" and "SafePrep(TM)" to foodservice
distributors, medical distributors, dental distributors and nursing homes. AHPC
also sells gloves to other companies, which market the gloves under their own
brand names or "private labels." The gloves are sold in cases that are generally
comprised of ten boxes with 100 gloves per box.
For the year ended June 30, 2002, AHPC's sales ratios of latex
powdered, latex powder-free and non-latex glove sales were approximately 31%,
42% and 27%, respectively. We anticipate that our sales ratio of latex powdered
exam gloves will continue to decline and be replaced with powder-free and
synthetic gloves, which is consistent with market trends.
Manufacturing Operations. The production of latex gloves begins with
the tapping of raw latex (natural polysporene) from rubber trees located on
plantations in Malaysia and Indonesia. Once gathered, the raw latex is sent to a
centrifuge where the latex is concentrated. PT Buana purchases the latex
concentrate and ships it to its production plant where the latex concentrate is
compounded in a proprietary formula to enhance glove durability, elasticity and
tactility. A controlled dipping process causes consistency from batch to batch
and eliminates air bubbles that can create pinholes. Glove-making formers, which
are in five sizes and designed for the American hand, are dipped in the latex
compound. The formers are cleansed both chemically and mechanically to prevent
residue buildup which could compromise glove integrity.
The PT Buana factory, which is 70% owned by us, has a production
capacity of approximately 840,000,000 latex gloves per year. The factory can be
expanded with additional manufacturing equipment to double its production
capacity. Prior to 1999, PT Buana manufactured only powdered latex exam gloves.
During the second quarter of 1999, PT Buana began purchasing and installing
chlorination equipment that enables the factory to produce powder-free latex
gloves. PT Buana has the capability to produce powder-free latex gloves equal to
approximately 50% of its total production capacity. The benefit to manufacturing
powder-free exam gloves is increased profit margins over powdered gloves and
alignment with market trends toward powder-free gloves, which we believe to have
caused fewer hypoallergenic reactions to users than powdered gloves.
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 leakage and visual defects.
Gloves are packaged in non-fibrous cases and then shipped either to a
leased warehouse in Itasca, Illinois, or to public warehouses located in Nevada,
California, Pennsylvania or Wisconsin, where they are warehoused for delivery to
foodservice, medical, dental and nursing home distributors.
Powdered Latex Examination and Foodservice Glove Suppliers. PT Buana
and an unrelated Malaysian glove manufacturer supplied AHPC with its powdered
latex gloves inventory during the year ended June 30, 2002. On July 12, 1995,
AHPC entered into a five-year
3
distribution agreement with this unrelated factory to purchase a minimum
quantity of powdered latex examination gloves each year. During 1999, AHPC
negotiated with this factory to reduce the minimum monthly quantity of gloves to
be purchased and extended the distribution agreement through July 2001. This
agreement has subsequently expired and has not been renewed. The production of
our powdered latex gloves is primarily supplied by PT Buana.
Powder-Free Latex Examination and Foodservice, Nitrile and Surgical
Glove Supplier. AHPC continues to purchase the majority of its latex powder-free
gloves from WRP Asia. In addition, WRP Asia supplies AHPC with its nitrile
gloves. AHPC also purchases latex powder-free gloves from PT Buana.
Non-Latex Examination and Foodservice Glove Suppliers. AHPC purchases
its non-latex gloves from two unrelated suppliers in Taiwan and China.
Non-Latex Surgical Glove Supplier. AHPC entered into an agreement to
purchase its non-latex surgical gloves from an unrelated supplier in Canada.
This agreement has expired and has not been renewed. We now source these
products from two unrelated suppliers in Taiwan and China.
NEW PRODUCTS
The foodservice, industrial and retail industries view our current line
of product offerings as one of a bundle of safety products used by their
customers. Developing a profitable line of additional products will be important
to the future success of our business. During 2003, we will be diversifying our
product offering with additional synergistic product lines that address the
current safety requirements of our markets. These additional product offerings
include polygloves, heavy-duty gloves, headwear, aprons and bibs, food storage
bags and educational services. These products will be offered under our SafePrep
brand and under private label.
Polygloves. These soft, comfortable, single-use gloves are made with a
polyethylene material and feature an embossed textured surface. They are
primarily used by the foodservice industry for light-food preparation and
money-handling applications.
Heavy-Duty Gloves. The heavy-duty gloves are primarily used for
cleaning, janitorial, housekeeping and food processing applications. We will
offer a chemical-resistant, cut-resistant and heat-resistant glove.
Aprons and Bibs. Our apron and bib products are made of a polyethylene
material and are available in a wide variety of thicknesses and lengths.
Food Storage Bags. Our food storage bag product lines are made of
high-density polyethylene film. These bags are microwaveable, tear-resistant and
have a variety of applications, including food storage, preparation and
transportation.
Educational Services. We believe that our strategy of providing an
expanded line of safety products provides us with an opportunity to market an
integrated safety solution. This year, we have joined forces with the National
Restaurant Association Education Foundation
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(NRAEF) through a sponsorship to market services that promote a safety solution.
The NRAEF features the ServSafe training program that is the most widely
accepted national training program by state and county health officials.
The educational products that we feature include our own Scrub'n Glove
program. The ServSafe training program and additional materials provided are by
the NRAEF.
Markets and Methods of Distribution. AHPC markets its gloves through a
network of national, regional and local foodservice, retail and medical
distributors that sell primarily to restaurant, hotels, hospitals and nursing
homes. AHPC also markets to alternate care and home health care dealers, dental
dealers and major retail outlets. The principal methods of marketing are trade
shows, advertising, seminars, direct mail, brokers, as well as sales
representatives. AHPC employs a sales force comprised of regional sales managers
and representatives, manufacturer sales representatives and an in-house sales
and marketing staff to cover the U.S.
FDA Regulation of Examination Glove Products. The quality control
procedures for the manufacture of examination gloves marketed in the United
States are regulated by the U.S. Food and Drug Administration ("FDA"). Included
within such procedures are minimum testing requirements, as well as FDA current
Quality Systems Regulations and American Society for Testing and Materials
("ASTM") standards.
Competition. The market for 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, certain companies entered
the 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, product availability and the reliability of the manufacturer.
Customers. Our customers include leading foodservice distributors and
healthcare product suppliers. During the year ended June 30, 2002, three of
AHPC's national customers, SYSCO Corporation, Owens & Minor, Inc. and Maxxim
Medical, Inc., accounted for 45.5%, 10.3% and 8.7% of net sales, respectively.
The loss of any of these customers would have a materially adverse effect on us.
Our customers tend to limit the number of qualified vendors they purchase from,
to gain efficiencies across their product line. We, therefore, expend
substantial efforts to maintain and grow our relationships with our existing
major customers. However, our products are ultimately distributed by these three
diversified distribution companies, through their combined networks of over 100
operating companies, to thousands of foodservice organizations and medical
facilities throughout the United States. The ultimate end-user of our products
are the foodservice organizations and medical facilities, healthcare
professionals and individuals who use our gloves. During the year ended, June
30, 2002, we entered into a transition service agreement with Maxxim, whereby
Maxxim will service certain medical customers. This agreement is expected to
reduce sales to Maxxim.
Patents and Trademarks. AHPC owns the trademarks "SafePrep,"
"Dermasafe" and "Glovetex," which are registered in the United States. AHPC is
currently in the process of
5
registering the trademark name "ScrubNGlove". AHPC's surgical glove line
utilizes the trademark name "ProFeel," which is a registered name owned by WRP
Asia.
Segment Financial Information. The segment information of WRP
Corporation, for the year ended June 30, 2002, is included in Note M to our
Consolidated Financial Statements.
Inventory. Since the majority of our products are imported from
Southeast Asia, it is our practice to maintain a certain level of inventory as
safety stock.
EMPLOYEES
As of June 30, 2002, our U.S. operations employed a total of 36
full-time employees. AHPC also uses the services of one manufacturer sales
representative organization and 24 broker representative organizations that do
not work exclusively for AHPC and are paid on a commission basis. Our 70% owned
Indonesian subsidiary, PT Buana, employed 1,002 full-time and part-time workers
in its factory and administrative staff as of that date. None of our employees
are represented by a collective bargaining agreement. We consider relations with
our employees to be good.
ITEM 2. PROPERTIES
Our principal executive and administrative office is located in Itasca,
Illinois. The lease for this location was renewed on April 9, 2001, for a term
of five years. For the year ended June 30, 2002, our lease expense was $216,600.
In May 1999, we entered into a five-year lease agreement for a 55,000
square-foot warehouse facility located in Itasca, Illinois. The lease term for
this location commenced on August 1, 1999 and expires in July 2004. The annual
rental expense for this lease is approximately $316,700 per year.
AHPC also uses public warehouse facilities, as needed, to store its
inventory in Reno, Nevada; Union City, California; Fond Du Lac, Wisconsin and
Hanover, Pennsylvania. Public warehouse charges are dependent upon the volume of
products stored and the frequency of shipping or receiving products.
In February 1999, AHPC entered into a three-year lease agreement for
1,877 square feet of office space located in San Diego, California to service
our TeleSales operations office. The lease term for this office space commenced
on June 1, 1999 and expired in May 2002. In June 2001, we closed our Telesales
operations office. As of June 30, 2002, AHPC is no longer leasing this facility.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 2002, we, and AHPC (jointly the "WRP Defendants"), had a
total of 65 latex glove product liability suits pending against us throughout
the United States. We were an active defendant in one claim, and AHPC in 35
claims. Additionally, through a series of Private Label Supply and Trademark
Licensing Agreements with VHA, Inc. ("VHA"), AHPC agreed to defend
6
and indemnify VHA in 12 suits; AHPC was joined as a third party defendant in 7
claims by distributors of AHPC latex gloves (collectively the "Vendors") and in
three claims by other suppliers of gloves.
All of the claims involve plaintiffs that have worked in the medical
and health industries and who allege injuries associated with the continued use
and/or exposure to latex gloves products. In each of the claims, the WRP
Defendants are one of several glove distributors and manufacturers named in the
suits. Each of the claims alleges damages of an unspecified amount and is in a
different stage of discovery or other pre-trial proceeding.
It is not currently possible to determine a favorable or unfavorable
outcome for the WRP Defendants in any of the claims.
In each of these claims the plaintiff alleged damages associated with
the use of or exposure to latex gloves. AHPC is one of several defendants named
in each of the suits.
AHPC possesses product liability insurance coverage, which covers the
defense costs, and certain damage awards associated with the product liability
claims against AHPC and the indemnity of AHPC's customers to the limits of the
policies. However, there is no assurance that AHPC's insurance will be
sufficient to meet all damages for which AHPC may be held liable. Likewise,
there is no assurance that the outcome of these suits will not adversely affect
our operations or financial condition.
AHPC will vigorously contest any latex claim initiated against it, but
will enter into a settlement agreement, where, after careful consideration, our
management determines that our best interests will be served by settling the
matter. During the year ended June 30, 2002, AHPC and the Vendors were dismissed
from twelve latex gloves product liability claims.
From time to time we are involved in other litigation relating to
claims arising out of our operations in the normal course of business. At
October 15, 2002, we were not party to any other legal proceedings, the adverse
outcome of which, in management's opinion, individually or in the aggregate,
would have a material adverse effect on our financial condition. Management
believes all legal claims are adequately provided for and if not provided for,
are without merit or involve such amounts that would not materially adversely
affect us.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of the Shareholders of was held on June 24, 2002.
The purpose of the Annual Meeting was to consider the vote on the following
matters:
1. To elect five Class A directors and two Class B directors to hold
office until the next Annual Meeting of Shareholders or otherwise as
provided in our by-laws.
Class A Director Nominees
Eirik Bonde Aslaksrud
Robert Woon
Lew Kwong Ann
George Jeff Mennen
Richard J. Swanson
Class B Director Nominees
Robert J. Simmons
Don L. Arnwine
The nominees for Class A directors received all 1,252,538 votes for
their election.
Each of the nominees for Class B directors received the following
number of votes:
R.J. Simmons D.L. Arnwine
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For 5,114,187 5,109,187
Against 0 0
Abstain 58,875 63,875
Non-votes 630,630 630,630
The above matter was approved by the Shareholders. There were no other
matters voted on at the meeting.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") SmallCap Stock Market under the
symbol "WRPC". The range of high and low sale prices as reported by Nasdaq for
the Common Stock is shown below.
COMMON STOCK PRICES
PERIOD ENDED:
LOW HIGH
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JUNE 30, 2002
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4th quarter $ .48 $ .86
3rd quarter $ .65 $ 1.00
2nd quarter $ .68 $ 1.80
1st quarter $ .48 $ 1.15
JUNE 30, 2001
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4th quarter $ .44 $ .98
3rd quarter $ .59 $ 1.06
2nd quarter $ 1.06 $ 1.63
1st quarter $ 1.09 $ 2.00
JUNE 30, 2000
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2nd quarter $ 1.13 $ 2.00
1st quarter $ 1.75 $ 2.38
DECEMBER 31, 1999
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4th quarter $ 2.00 $ 3.75
3rd quarter $ 3.50 $ 5.88
2nd quarter $ 5.25 $ 7.19
1st quarter $ 4.88 $ 7.88
There were approximately 320 shareholders of record of our Common Stock
as of June 30, 2002. We believe that there are approximately an additional 2,000
holders whose stock is held in "street name."
We have not paid a dividend with respect to the Common Stock. We expect
to reinvest our earnings for expansion of our operations and do not intend to
pay a dividend in the foreseeable future.
9
In March 2000, we announced that our Board of Directors had authorized
a program to repurchase up to 10% of our public Common Stock. These purchases
may be made in the open market and in block transactions over a two-year period.
The program is subject to market conditions and its impact on share price as
well as other investment options that we may consider to enhance shareholder
value. During the year ended June 30, 2002, we purchased 44,800 shares of our
Common Stock under this program. Subsequent to June 30, 2002 through September
20, 2002, we purchased 10,000 shares of our Common Stock. As of the year ended
June 30, 2002, there were up to an additional 311,561 shares available for
repurchase.
The trading of our common stock on the Nasdaq SmallCap Market is
conditioned upon meeting certain asset, capital and surplus, earnings and stock
price tests. To maintain eligibility on the Nasdaq SmallCap Market, we must,
among other things, maintain an average bid price of our Common Stock of at
least $1.00 per share.
Nasdaq notified us on May 3, 2001, that the average bid price of our
Common Stock has been below $1.00 per share for 30 consecutive days, and that
our Common Stock would be delisted as of the opening of business on May 11,
2001. However, we requested an appeal of Nasdaq's determination; this appeal
stayed the delisting of our Common Stock pending the decision of the Nasdaq
Listing Qualification Panel. On June 14, 2001, we presented our request for
continued inclusion on the Nasdaq SmallCap Market pursuant to an exception to
the bid price requirement via an oral hearing before the Nasdaq Listing
Qualifications Panel (the "Panel").
The Panel was of the opinion that we presented a definitive plan that
would enable it to evidence compliance with all requirements for continued
listing on The Nasdaq SmallCap Market within a reasonable period of time and to
sustain compliance with those requirements over the long term. Specifically, the
Panel acknowledged our willingness to effect a reverse stock split in an effort
to evidence compliance with the minimum bid price requirement within the near
term. Accordingly, the Panel determined to continue the following exceptions to
avoid delisting. On or before July 30, 2001, we were required to file proxy
materials with the SEC and Nasdaq, evidencing our intent to seek shareholder
approval for a reverse stock split. In addition, on or before August 30, 2001,
we were required to evidence a closing bid price of at least $1.00 per share.
Immediately thereafter, we were required to demonstrate a closing bid price of
at least $1.00 per share for a minimum of ten consecutive trading days and
demonstrate compliance with all other requirements for continued listing on The
Nasdaq SmallCap Market.
On July 22, 2001, we filed a Proxy Statement, notifying shareholders of
a special meeting scheduled to take place on August 27, 2001. The purpose of the
meeting was to vote on a proposed reverse stock split intended to bring the
minimum bid price of our stock over $1.00. Prior to the holding of the meeting,
our stock price began trading at or about $1.00 per share. On August 16, 2001,
we were notified by the Panel that its stock had evidenced the required closing
bid price of at least $1.00 per share for a minimum of ten consecutive trading
days, and that the delisting proceedings were terminated. Accordingly, we
canceled the Special Meeting of Shareholders scheduled for August 27, 2001, and
are no longer considering a reverse stock split.
On February 14, 2002, we were again notified that the average bid price
on our Common Stock has been below $1.00 per share for 30 consecutive trading
days and that we were provided 180 calendar days, or until August 13, 2002, to
regain compliance with this rule. On August 14,
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2002, Nasdaq notified us that we had not regained compliance with the minimum
bid requirement, but that we do meet initial listing requirements for the Nasdaq
SmallCap Market. Specifically, we qualify with the $5,000,000 stockholders
equity requirement. Therefore, we were provided an additional 180 days, or until
February 10, 2003, to regain compliance.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of WRP Corporation presented
below for the year ended June 30, 2002 and 2001, the six months ended June 30,
2000 and for the three calendar years ended December 31, 1999, 1998 and 1997
should be read in conjunction with the Consolidated Financial Statements,
related notes and other financial information included herein.
SIX MONTHS
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YEAR ENDED ENDED JUNE
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JUNE 30, 30, FOR THE YEAR ENDED DECEMBER 31,
-------- --- -------------------------------
(In thousands except per share amounts) 2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales* $ 47,357 $ 51,889 $ 31,737 $ 65,280 $ 64,968 $ 51,403
Gross profit 11,580 14,698 9,040 16,635 18,111 10,643
Selling, general & administrative expenses* 17,640 13,784 6,997 12,295 9,955 8,227
Minority interest in loss (income)
of subsidiary, net of tax 202 (185) (207) 97 (594) (300)
Income (loss) from continuing operations
Before loss from discontinued operations (4,293) 529 1,420 2,453 5,879 1,249
Loss from discontinued operations -- -- -- -- -- (784)
Net (loss) income ($ 4,293) $ 529 $ 1,420 $ 2,453 $ 5,879 $ 466
PER SHARE DATA:
Diluted (loss) earnings per share $ (0.65) $ 0.08 $ 0.21 $ 0.35 $ 0.93 $ 0.11
BALANCE SHEET DATA (END OF PERIOD):
Total assets $ 32,947 $ 36,072 $ 35,854 $ 40,194 $ 35,800 $ 29,531
Long-term debt $ 19 $ 13 $ 750 $ 1,100 $ 1,669 $ 5,648
Total shareholders' equity $ 16,836 $ 21,176 $ 20,827 $ 19,475 $ 16,941 $ 4,313
* The 1997 figures have been restated to reflect rebates as a reduction of net
sales to conform to the 2000, 1999 and 1998 presentation for comparability
purposes.
(1) In 2000, we elected to change its reporting period from a calendar year
ending December 31 to a fiscal year ending June 30. As a result, 2000 represents
a six-month transition period.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements in this Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, including statements
regarding new products and markets, gross margins, selling, general and
administrative expenses, liquidity and cash needs and our plans and strategies,
are all based on current expectations, and we assume no obligation to update
this information. Numerous factors could cause actual results to differ from
those described in the forward-looking statements, including the factors set
forth below under the heading "Risks Affecting Forward-Looking Statements and
Stock Prices." We caution investors that our business is subject to significant
risks and uncertainties.
In February 2000, we changed our fiscal year to June 30, effective June
30, 2000, resulting in a six-month transition period ended June 30, 2000. Our
year ended June 30, 2001, reflects our first full year of activity under this
fiscal year-end.
Our wholly owned subsidiary, American Health Products Corporation
("AHPC"), is engaged in the marketing and distribution of high quality medical
grade examination and surgical gloves and foodservice gloves in the United
States. We have been in the glove business since our incorporation in January
1989. For the year ended June 30, 2002, we recorded net glove sales of $39.0
million.
Our 70% owned subsidiary, PT WRP Buana Multicorpora ("PT Buana"), owns
an Indonesian glove manufacturing plant, which commenced operations in April
1996. PT Buana manufactures high quality, disposable powdered and powder-free
latex examination gloves.
PT Buana sold approximately 39.6% of its production to AHPC during the
year ended June 30, 2002. PT Buana recorded glove sales totaling $13.8 million
and $13.2 million during the years ended June 30, 2002 and June 30, 2001,
respectively. PT Buana's remaining production was sold primarily to WRP Asia.
All significant intercompany transactions and sales have been eliminated in
consolidation.
This analysis of our results of operations and financial condition
should be viewed in conjunction with the financial statements and other
information concerning us included throughout this Annual Report. The
consolidated financial statements for the year ended June 30, 2002 and 2001 and
the six-month period ended June 30, 1999 and 2000 and for the year ended
December 31, 1999; include our results of operations and statements of cash
flows, as well as for AHPC and PT Buana.
During the year ended June 30, 2002, several significant events
transpired.
On March 1, 2002, we announced that our subsidiary, American Health
Products Corp, had entered into a Transition Services Agreement with Maxxim
Medical, Inc., ("MAXXIM"), whereby MAXXIM would service certain of our
acute-care medical customers. As a result of this transition, we have
substantially reduced our personnel in our medical division and have
transitioned our business with respect to most of our customers in the medical
division to MAXXIM. We have incurred severance costs of approximately $256,000
associated with the reduction in personnel. We are in the process of selling off
our remaining inventory related to the acute-care medical business, during the
transition period.
12
In February 2002, we announced the appointment of Robert Woon as a
Class A Director.
In June 2001, we announced that Mr. Neil M. Kosterman would transition
from his position as President to a consulting capacity. At that time, we
established an Executive Committee comprised of four directors: Lew Kwong Ann
(Chairman), Eirik Bonde Aslaksrud, Jeff Mennen and Robert Simmons.
In April 2001, we announced the resignation of Richard C.M. Wong as
Chief Executive Officer and Chairman of the Board of Directors and Kamaruddin
Taib as a Class A Director.
At that time, Mr. Lew Kwong Ann was appointed Chief Executive Officer
and Chairman of the Board of Directors, and Mr. Eirik Bonde Aslaksrud was
appointed as one of our Class A Director. Also in April 2001, Mr. Kenneth A.
Ling resigned as Chief Financial Officer, and Mr. Alan E. Zeffer was appointed
Chief Financial Officer/Vice President of Finance & Operations.
In March 2000, we announced that our Board of Directors had authorized
a program to repurchase up to 10% of our publicly traded Common Stock. These
purchases may be made in the open market and in block transactions over a
two-year period. The program is subject to market conditions as well as other
investment options that we may consider to enhance shareholder value. During the
year ended June 30, 2002, we repurchased 44,800 shares of our Common Stock under
this program.
13
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net
sales for the periods indicated.
FOR THE FOR THE SIX MONTHS FOR THE YEAR ENDED
YEAR ENDED YEAR ENDED ENDED DECEMBER 31,
JUNE 30, JUNE 30, JUNE 30,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 75.5 71.7 71.5 74.5 72.1
--------------------------------------------------------------
Gross profit 24.5 28.3 28.5 25.5 27.9
Selling, general & administrative expenses 37.2 26.6 22.1 18.8 15.3
--------------------------------------------------------------
(Loss) income from operations (12.8) 1.7 6.4 6.7 12.6
Interest (expense) / other income, net (0.6) (0.9) (0.9) (1.0) (1.2)
Provision for (benefit from) income taxes (3.9) (0.5) 0.3 2.1 1.5
Minority interest in loss (income) of subsidiary 0.4 (0.3) (0.7) 0.2 (0.9)
Net loss from discontinued operations - - - -
--------------------------------------------------------------
Net income (9.1%) 1.0% 4.5% 3.8% 9.0%
===== ===== ===== ===== =====
YEAR ENDED JUNE 30, 2002 COMPARED TO THE YEAR ENDED JUNE 30, 2001.
Our net sales are derived from the sales of finished product; net of
allowable rebates, discounts and returns. Net sales include glove sales from
AHPC's glove product line and exam glove sales from PT Buana, exclusive of its
sales to AHPC. Consolidated net sales for the year ended June 30, 2002 were
$47,357,076, which represents an 8.7% decrease over the year ended June 30,
2001, with consolidated net sales of $51,888,852. The decrease in net sales is
attributable to AHPC exiting the acute-care medical market in March 2002, along
with certain customer price decreases, effective February 1, 2002.
Cost of goods sold includes all costs to manufacture and purchase the
finished product plus the related costs associated with ocean freight, customs
duty and warehousing. Cost of goods sold decreased from $37,190,499 for the year
ended June 30, 2001 to $35,777,460 for the year ended June 30, 2002. As a
percentage of net sales, cost of goods sold increased from 71.7% for the year
ended June 30, 2001 to 75.5% for the year ended June 30, 2002; the gross profit
percentage decreased from 28.3% in the 2001 period to 24.5% in the 2002 period.
Our gross profit margin was negatively impacted by increase glove purchase
prices, product mix and lower selling prices. We continue to expect our gross
margins to be affected by the price of latex, changes in product mix,
competition, manufacturing capacity levels and other factors.
Selling expenses include all salaries and payroll related costs for
sales and marketing staff together with other sales related expenses such as
sales commissions, travel costs, trade shows, advertising, promotions and
delivery costs. Selling, general and administrative ("SG&A") expenses increased
from $13,784,354 for the year ended June 30, 2001 to $17,640,474 for the year
ended June 30, 2002. As a percentage of net sales, SG&A expenses increased from
26.6% for the year ended June 30, 2001, to 37.2% for the year ended June 30,
2002. This increase of $3,856,120 in SG&A expenses was solely attributable to
the reduction of our sales force due to
14
AHPC transitioning out of the acute-care medical business and a reserve for the
intercompany receivable balances between PT Buana and WRP Asia assigned to WRPC.
Income from operations decreased by 763.1% from $913,999 for the year
ended June 30, 2001, to $(6,060,858) for the year ended June 30, 2002. This
decrease was primarily attributed to the receivable reserve from WRP Asia.
Operating margins decreased from 1.7% in the 2001 period to (12.8%) in the 2002
period. For the year ended June 30, 2001 and June 30, 2002 EBITDA were
$2,182,211 and $(5,322,547), respectively.
Interest expense decreased during fiscal 2002 to $384,609 compared to
$719,954 in the 2001 period. This 46.6% decrease is attributable to decreased
financing requirements due to lower inventory levels caused by the reduction in
revenue and a decrease in interest rates.
Other income consists of rental, interest and miscellaneous income.
Other income decreased from $249,311 for the 2001 period to $99,448 for the 2002
period. In fiscal 2001, we received $125,000 of commission for EMed Express.
We recorded a foreign currency exchange gain of $42,646 in 2002 versus
a foreign exchange loss of $45,031 in the comparable period in 2001, from our
Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and
depending upon the mix of assets and liabilities in PT Buana's books in
Indonesian Rupiah, an exchange gain or loss will be incurred. Foreign currency
exchange gains and losses are reported as a component of the SG&A expense
category in the consolidated statements of operations. PT Buana continues to be
exposed to foreign currency exchange rate fluctuations and may incur exchange
gains or losses in the future. PT Buana's functional currency is the U.S.
dollar.
Indonesia continues to be exposed to economic and political
instability, which is characterized with fluctuations in its foreign currency
exchange rate, interest rates, stock market and inflation rate. Our financial
statements do not include any adjustment that might result from these
uncertainties and any related effects will be reported in the financial
statements as they become known and estimable.
The benefit from income taxes for the year ended June 30, 2002 and June
30, 2001 was $(1,851,517) and $(271,478), respectively. This decline in income
tax expense of $1,580,039 is primarily due to an increase of deferred tax
benefit generated from reserving for the receivable balance of WRP Asia. At June
30, 2002, we had NOL's of approximately $1.5 million, which will be available to
reduce future U.S. federal taxable income.
For the year ended June 30, 2002, our net loss was $(4,292,981)
compared to net income of $529,397 in the 2001 period. Diluted earnings per
share for the year ended June 30, 2002 and June 30, 2001, were $(0.65) and
$0.08, respectively.
15
YEAR ENDED JUNE 30, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999.
Our net sales are derived from the sales of finished product; net of
allowable rebates, discounts and returns. Net sales include glove sales from
AHPC's glove product line and exam glove sales from PT Buana, exclusive of its
sales to AHPC. Net sales for the year ended June 30, 2001 were $51,888,852,
which represents a 20.5% sales decrease over the year ended December 31, 1999,
with net sales of $65,280,104. The decrease in net sales is attributed to loss
of the Novation contract in April 2000, partially offset by increases in sales
to the AmeriNet group purchasing organization and foodservice product sales.
Cost of goods sold includes all costs to manufacture and purchase the
finished product plus the related costs associated with ocean freight, customs
duty and warehousing. Cost of goods sold decreased from $48,645,076 for the year
ended December 31, 1999 to $37,190,499 for the year ended June 30, 2001. As a
percentage of net sales, cost of goods sold decreased from 74.5% for the year
ended December 31, 1999 to 71.7% for the year ended June 30, 2001; the gross
profit percentage increased from 25.5% in the 1999 period to 28.3% in the 2001
period. Our gross profit margin was favorably impacted by reduced glove purchase
prices, improved manufacturing margins obtained from full capacity operating
efficiencies at PT Buana during the second half of 2001, and a more favorable
product mix, offset by lower selling prices. We continue to expect our gross
margins to be affected by the price of latex, changes in product mix,
competition, manufacturing capacity levels and other factors.
Selling expenses include all salaries and payroll related costs for
sales and marketing staff together with other sales related expenses such as
sales commissions, travel costs, trade shows, advertising, promotions and
delivery costs. Selling, general and administrative ("SG&A") expenses increased
from $12,295,192 for the year ended December 31, 1999 to $13,784,354 for the
year ended June 30, 2001. As a percentage of net sales, SG&A expenses increased
from 18.8% for the year ended December 31, 1999, to 26.6% for the year ended
June 30, 2001. This increase of $1,489,162 in SG&A expenses is primarily
attributable to an increase in selling compensation with the 1999 expansion of
our sales force.
Income from operations decreased by 78.9% from $4,339,836 for the year
ended December 31, 1999 to $913,999 for the year ended June 30, 2001. Operating
margins decreased from 6.7% in the 1999 period to 1.7% in the 2001 period. For
the year ended December 31, 1999 and June 30, 2001 EBITDA were $1,532,818 and
$2,182,211, respectively.
Interest expense decreased during fiscal 2001 to $719,954 compared to
$802,159 in the 1999 period. This 10.2% decrease is attributable to decreased
financing requirements due to lower inventory levels caused by the reduction in
revenue and a decrease in interest rates.
Other income consists of rental income, interest income and
miscellaneous income. Other income increased from $166,155 for the 1999 period
to $249,311 for the 2001 period.
We recorded a foreign currency exchange loss of $45,031 in 2001 versus
a foreign exchange gain of $3,563 in the comparable period in 1999, from our
Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and
depending upon the mix of assets and liabilities in PT Buana's books in
Indonesian Rupiah, an exchange gain or loss will be incurred.
16
Foreign currency exchange gains and losses are reported as a component of the
SG&A expense category in the consolidated statements of operations. PT Buana
continues to be exposed to foreign currency exchange rate fluctuations and may
incur exchange gains or losses in the future.
Indonesia continues to be exposed to economic and political
instability, which is characterized with fluctuations in its foreign currency
exchange rate, interest rates, stock market and inflation rate. Our financial
statements do not include any adjustment that might result from these
uncertainties and any related effects will be reported in the financial
statements as they become known and estimable.
The (benefit) provision for income taxes for the year ended June 30,
2001 and December 31, 1999 was $(271,478) and $1,348,121, respectively. This
decline in income tax expense of $1,619,599 is primarily due to a reduction of
pre-tax income generated in the U.S. during the fiscal year 2001 compared to
1999. At June 30, 2001, we had NOL's of approximately $1.3 million, which will
be available to reduce future U.S. federal taxable income. During 2001, we
finalized our tax returns for 1999 and the six months ended June 30, 2000. We
will be receiving the benefit of foreign tax credits in the amount of $351,000,
to offset our income tax expenses for the period.
For the year ended June 30, 2001, our net income was $529,397 compared
to net income of $2,452,744 in the 1999 period. Diluted earnings per share for
the year ended June 30, 2001 and December 31, 1999 were $0.08 and $0.35,
respectively.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Our net sales are derived from the sales of finished product; net of
allowable rebates, discounts and returns. Net sales include glove sales from
AHPC's glove product line and exam glove sales from PT Buana, exclusive of its
sales to AHPC. Net sales for the six months ended June 30, 2000 were
$31,737,482, which represents a 2.6% sales growth over the comparable 1999
period with net sales of $30,946,476. The increase in net sales is attributed to
an increase in external sales by PT Buana, our Indonesian manufacturing plant, a
better than expected retention of glove sales from the Novation contract medical
facilities after its expiration in April 2000, as well as an increase in the
AmeriNet group purchasing organization and foodservice product sales, which
commenced in the third quarter of 1999. Additionally, the 1999 six-month period
included a nonrecurring sales reduction of approximately $2.3 million associated
with a change to an inventory consignment arrangement with a major foodservice
customer.
Cost of goods sold includes all costs to manufacture and purchase the
finished product plus the related costs associated with ocean freight, customs
duty and warehousing. Cost of goods sold decreased 0.7% from $22,858,509 for the
six-month period ended June 30, 1999 to $22,697,004 for the six months ended
June 30, 2000. As a percentage of net sales, cost of goods sold decreased from
73.9% for the six months ended June 30, 1999 to 71.5% for the six months ended
June 30, 2000; the gross profit percentage increased from 26.1% in the first
half of 1999 to 28.5% in the same period of 2000. Our gross profit margin was
favorably impacted by reduced glove purchase prices, improved manufacturing
margins obtained from full capacity operating efficiencies at PT Buana during
the first half of 2000, and a more favorable product mix, offset
17
by lower selling prices. We continue to expect our gross margins to be affected
by the price of latex, changes in product mix, competition, manufacturing
capacity levels and other factors.
Selling expenses include all salaries and payroll related costs for
sales and marketing staff together with other sales related expenses such as
sales commissions, travel costs, trade shows, advertising, promotions and
delivery costs. Selling, general and administrative ("SG&A") expenses increased
by 27.6% from $5,484,190 for the six months ended June 30, 1999 to $6,996,574
for the six months ended June 30, 2000. As a percentage of net sales, SG&A
expenses increased from 17.7% for the six months ended June 30, 1999 to 22.1%
for the six months ended June 30, 2000. This increase of $1,512,384 in SG&A
expenses is primarily attributable to an increase in selling compensation
related costs of $968,300 associated with the 1999 expansion of our sales force.
We made an investment in our sales force in 1999 to support our expansion plans.
Because of the loss of the Novation contract, we are strategically planning and
evaluating our manpower needs to maximize sales productivity per sales
representative. We also incurred increased selling expenses from higher levels
of advertising, marketing, promotions and tradeshow costs of $289,300, as well
as travel costs, which increased, by $89,400. There was also an increase in
depreciation expense of $47,300 associated with our computer system placed in
service in 1999.
Income from operations decreased by 21.5% from $2,603,777 for the six
months ended June 30, 1999 to $2,043,904 for the six months ended June 30, 2000.
Operating margins decreased from 8.4% in the 1999 period to 6.4% in the 2000
period. For the six months ended June 30, 2000 and 1999, EBITDA was $3,073,637
and $3,577,201, respectively.
Interest expense decreased in the first half of 2000 to $332,429
compared to $374,692 in the first half of 1999. This 11.3% decrease is due to
lower borrowings under our line of credit.
Other income consists of rental income, interest income and
miscellaneous income. Other income decreased by $103,537 from the first half of
1999 compared to the first half of 2000. This decrease is due to the expiration
in 1999 of all rental leases and subleases associated with previous executive
offices.
We recorded a foreign currency exchange loss of $6,223 in the first
half of 2000 versus a foreign exchange gain of $9,021 in the comparable period
in 1999, from our Indonesian subsidiary, PT Buana. As currency exchange rates
fluctuate and depending upon the mix of assets and liabilities in PT Buana's
books in Indonesian Rupiah, an exchange gain or loss will be incurred. Foreign
currency exchange gains and losses are reported as a component of the SG&A
expense category in the consolidated statements of operations. PT Buana
continues to be exposed to foreign currency exchange rate fluctuations and may
incur exchange gains or losses in the future.
Indonesia continues to be exposed to economic and political
instability, which is characterized with fluctuations in its foreign currency
exchange rate, interest rates, stock market and inflation rate. Our financial
statements do not include any adjustment that might result from these
uncertainties and any related effects will be reported in the financial
statements as they become known and estimable.
18
The provision for income taxes for the six months ended June 30, 2000
and 1999 was $106,770 and $1,159,051, respectively. This decline in income tax
expense of $1,052,281 is primarily due to a reduction of pre-tax income
generated in the U.S. during the first half of 2000 compared to the same period
in 1999. Also, PT Buana recorded deferred tax assets during the first half of
2000 associated with its prior period tax losses and recorded a tax benefit of
$161,979 during the period. In addition, we were able to utilize prior year net
operating loss carry-forwards (NOL's) of approximately $650,000 during the six
months ended June 30, 2000 and 1999. Lastly, PT Buana recorded a significant
income tax expense of $480,051 during the first half of 1999 as a result of the
Indonesian Rupiah strengthening against the U.S. dollar, which created a large
unrealized foreign currency gain on PT Buana's tax reporting Rupiah financial
statements. Due to this additional income tax expense, the effective tax rate in
the first half of 1999 is greater than U.S. statutory corporate income tax
rates. At June 30, 2000, we had NOL's of approximately $1.3 million, which will
be available to reduce future U.S. federal taxable income.
For the six months ended June 30, 2000, net income for us was
$1,420,262 compared to net income of $1,324,270 in the same period of 1999.
Diluted earnings per share for the six months ended June 30, 2000 and 1999 were
$0.21 and $0.19, respectively.
SEGMENT INFORMATION
During the year ended June 30, 2002 and 2001, the six-month period
ended June 30, 2000 and during the years ended December 31, 1999 and 1998, we
were engaged solely in the business of manufacturing and distributing disposable
gloves. We have two business segments, manufacturing and distribution. These
segments are managed as separate strategic business units. The manufacturing
segment, which represents the Indonesian operations of PT Buana, manufactures
powdered and powder-free latex gloves and sells them primarily to AHPC and WRP
Asia. The distribution segment involves the procurement and sale of gloves
purchased from the manufacturing segment and other glove manufacturers and then
sold to national and regional healthcare, foodservice, retail and other
distributors within the U.S. Discussion of the operations of each segment are
included throughout the Results of Operations and Liquidity and Capital
Resources sections.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED JUNE 30, 2002
Cash and cash equivalents, at June 30, 2002, were $451,948, an increase
of $328,207 from $123,741 at June 30, 2001. We experienced an increase in cash
flows for the year ended June 30, 2002, primarily from an increase in net cash
used in financing activities. Our operations used cash of $1,845,622 during the
2002 fiscal year as a result of a net loss of $(4,292,981) plus noncash
depreciation and amortization of $1,985,536, as well as a decline in accounts
receivable and a decrease accounts payable trade. Net inventories were
$8,506,652, an increase of $1,319,266 from $7,187,386 at June 30, 2001.
19
Net trade accounts receivable at June 30, 2002, decreased by 1.5% to
$4,846,396 from $4,919,062 at June 30, 2001. This decline of $72,666 is
primarily due to a decrease in revenues and improved collections of past due
amounts.
The outstanding accounts receivable from WRP Asia results
primarily from sales of product to WRP Asia (powder-free exam gloves produced by
PT Buana), cash advances, charges for obtaining FDA approval of the gloves
imported from WRP Asia and other items. AHPC purchased virtually all of its
latex powder-free exam gloves from WRP Asia in 2002, 2001, 2000 and 1999.
Management believes transactions between operating segments are made at
prevailing rates. AHPC purchases its powdered latex gloves from its 70%
subsidiary, PT Buana, as well as from third-party suppliers other than WRP Asia.
As of June 30, 2002, we have outstanding accounts receivable from WRP
Asia of approximately $8,954,000 (which has increased by approximately $690,000
since June 30, 2001). This amount includes amounts due to PT Buana as June 30,
2002 of approximately $5,586,000 and amounts due to WRPC and AHPC of $3,368,000.
Subsequent to June 30, 2002, the amounts due to PT Buana of $5,586,000, were
assigned to WRPC in partial satisfaction of intercompany amounts due from PT
Buana to WRPC.
As of June 30, 2002, we have accounts payable to WRP Asia of
approximately $2,657,000 (which has increased by $203,671 since June 30, 2001),
primarily resulting from the purchase of inventories from WRP Asia.
The net amount due from WRP Asia, before allowance for doubtful
accounts at June 30, 2002 was approximately $6,297,000, against which we have
provided an allowance for doubtful accounts of approximately $5,860,000
(representing all amounts due for the sale of product from PT Buana to WRP Asia
at June 30, 2002) due to the uncertainty of the finalization of their
refinancing plan, which has been ongoing for over 15 months, without completion.
Subsequent to June 30, 2002, we entered into a formal agreement with
WRP Asia to provide for full and complete right of offset of any trade payables
due against amounts they owe to WRPC and AHPC. We continue to purchase gloves
from WRP Asia, and believe that the unreserved amounts due from WRP Asia to WRPC
and AHPC of approximately $711,000 at June 30,2002, are realizable based upon
the agreement granting right of offset and ongoing purchases from WRP Asia. In
management's opinion, while WRP Asia does not currently intend to seek
protection from creditors, should such action take place, we would have to
reevaluate the ability to offset payables to WRP Asia against our receivables
from them.
WRP Asia is continuing its restructuring initiative, the objective of
which is to improve cash flows and profitability and to assure longer-term
financial viability. This initiative includes a restructuring of WRP Asia's debt
facility and additional investments from strategic investors and other outside
sources. Management of WRP Asia has advised us that it believes, but cannot
guarantee, that this initiative will be successfully concluded and will generate
adequate cash flow to meet WRP Asia's needs for its ongoing and future business.
In March 2002, WRP Asia had advised us that it anticipated this initiative would
be completed by July 2002. As of October 15, 2002, this restructuring initiative
has not been completed. WRP Asia believes this initiative will now be completed
in November 2002 and attributes the delays to extensive due diligence being
20
performed by potential strategic investors. While we are hopeful that a portion
of the amount due from WRP Asia will be repaid from the refinancing, we have
established a reserve for the trade receivables due of $5,586,000 in the event
that WRP Asia is ultimately unable to complete its restructuring and financing.
On September 18, 2002, our Board of Directors passed a resolution that
limits the net intercompany amount due from WRP Asia exceeding the balance of
$6,200,000 on a consolidated basis. In the event that WRP Asia desires to
purchase product from PT Buana, and the effect of this sale would be to increase
the net amount due beyond $6,200,000, WPR Asia will be required to support these
purchases by payment of cash in advance or tender of an irrevocable letter of
credit to PT Buana to cover the purchase price of the order to the extent such
amount exceed $6,200,000.
On July 24, 2002, our Board of Directors approved a proposal submitted
by the independent directors to form a Special Evaluation Committee (the
"Committee"). The Committee is comprised of our "B" Directors, Robert Simmons
and Don L. Arnwine as well the independent "A" Directors, G. Jeffery Mennen and
Richard Swanson. The purpose of the Committee is to examine the WRP Asia
restructuring process as well as the options and alternatives available to us.
Interest rates in many Asian-Pacific countries have been heavily
dependent upon international trade and are, accordingly, affected by protective
trade barriers and the economic conditions of their trading partner. The
enactment by the government of principal trading partners of protectionist trade
legislation, reduction of foreign investment or general declines in the
international securities markets could have a significant adverse effect upon
the economies of the Asian-Pacific countries.
Net inventories at June 30, 2002 increased by 18.4% to $8,506,652 from
$7,187,386 at June 30, 2001. This increase of $1,319,266 is due to new inventory
purchases from nonaffiliated parties and increases in safety stock levels.
During the year ended June 30, 2002, we used cash to fund operations,
increases in inventories and reduction in accounts payable. We used cash in
investing activities of $638,142 during the period.
During the year ended June 30, 2002, we used cash in net investing
activities of $638,142. We spent $444,336 for capital expenditures during that
period primarily at PT Buana, our Indonesian manufacturing plant, for capital
improvements. These expenditures included equipment purchases and upgrades to
expand our capacity to manufacture higher-margin products, including powder-free
latex gloves.
During the year ended June 30, 2002, we obtained funds from borrows
under our line of credit and other notes. On December 1, 1998, we obtained a
domestic three-year credit facility from GE Capital, a large commercial credit
company. This asset based lending loan and security agreement included a
$10,000,000 revolving line of credit with a $7,000,000 letter of credit
sub-facility. On March 31, 1999, we amended our Loan and Security Agreement by
increasing the maximum credit loan limit from $10,000,000 to $15,000,000 subject
to availability, based on a
21
formula using accounts receivable and inventory. As part of the amendment, the
letter of credit subfacility was increased from $7,000,000 to $11,000,000. The
line of credit borrowings carry an interest rate of commercial paper plus 4.5%
(1.77% at June 30, 2002). At June 30, 2002, we had outstanding $4,513,996 on the
revolving line of credit and $440,209 of letter of credit liabilities under the
credit facility. As of June 30, 2002, we were not in compliance with certain of
our covenants and have obtained waivers of these covenant violations from the
financial institution.
In conjunction with the waiver of the covenant violations as of June
30, 2002, the existing credit facility agreement was amended to expire on
December 1, 2003.
We utilize the facility of WRP Asia to discount PT Buana's receivables
from AHPC. Amounts available under this arrangement are $2,631,601 (MLR
10,000,000) of which $2,420,205 is outstanding as of June 30, 2002. PT Buana has
guaranteed to WRP Asia's lender the payment of the discounted receivables in the
event that AHPC does not remit payment.
In October 1994, pursuant to two debenture and warrant purchase
agreements between us and two trusts affiliated with one of our directors, we
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 our Common Stock at a conversion price
of $25.00 per share. In addition, each trust received a warrant exercisable over
five years to purchase 3,750 shares of our Common Stock at an exercise price of
$22.20 per share. At June 30, 2001 the total outstanding debt associated with
these debentures was $550,000. During the year ended June 30, 2002, we repaid
the remaining amount of $550,000 against this debt.
We currently expect to have cash needs in order to continue funding the
growth of the existing glove business. These cash needs may arise in connection
with various events such as for: (i) the expansion into new products; (ii)
paying off debt obligations, particularly the remaining long-term debt; (iii)
the expansion of the manufacturing facility in Indonesia; (iv) purchasing our
Common Stock in connection with our stock repurchase program; and (v) possible
acquisitions. We believe that our cash and cash generated form future operations
plus our credit facility will be sufficient to fund our ongoing operations.
YEAR ENDED JUNE 30, 2001
Cash and cash equivalents, at June 30, 2001, was $123,741, a decrease
of $100,313 from $224,054 at June 30, 2000. We experienced a decrease in cash
flows for the year ended June 30, 2001 primarily from a reduction in cash
provided by operations and an increase in net cash used in investing activities.
Our operations generated cash of $1,639,377 during the 2001 fiscal year
as a result of net income of $529,397 plus noncash depreciation and amortization
of $2,018,535, as well as a decline in inventories and accounts receivable.
22
Net trade accounts receivable at June 30, 2001 decreased by 12.5% to
$4,919,062 from $5,621,417 at December 31, 1999. This decline of $702,355 is
primarily due to a decrease in revenues and improved collections of past due
amounts.
As of June 30, 2001, we have outstanding accounts receivable from WRP
Asia of $8,262,937, resulting primarily from sales of product to WRP Asia
($9,714,384 in 2001), cash advances to WRP Asia, charges for obtaining FDA
approval of the gloves imported from WRP Asia and others items. Of this amount
approximately $5,287,413 is due to PT Buana and $2,975,524, is due to WRP USA
and AHPC. The amount of this receivable has increased by $4,392,622 since June
30, 2000. WRP USA and AHPC have accounts payable to WRP Asia of $2,453,608 at
June 30, 2001, primarily resulting from the purchase of inventories from WRP
Asia. This amount has increased by $840,423 since June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2000
Cash and cash equivalents at June 30, 2000 was $224,054, an increase of
$52,592 from $171,462 at December 31, 1999. We experienced an increase in cash
flows in the first half of 2000 primarily from cash provided by operating
activities, offset by uses of cash in financing and investing activities.
Our operations generated cash of $5,670,575 during the first half of
2000 as a result of net income of $1,420,262 plus non-cash depreciation of
$973,685 and a decline in inventories and accounts receivable, offset by net
reductions in the amount owed to our majority shareholder, WRP Asia.
Net trade accounts receivable at June 30, 2000 decreased by 29% to
$5,621,417 from $7,969,369 at December 31, 1999. This decline of $2,347,952 is
primarily due to a record sales w4w4month in December 1999 as customers were
preparing for the year 2000 rollover and any unknown events associated with it,
as well as to a reduction in May and June 2000 sales caused by the loss of the
Novation contract which expired on April 30, 2000.
Net inventories at June 30, 2000 decreased by 24% to $10,124,411 from
$12,930,569 at December 31, 1999. This decline of $2,806,158 is primarily due to
the reduction in NovaPlus brand inventory levels associated with the loss of the
Novation group purchasing organization supply contract.
During the six months ended June 30, 2000, the cash generated from
operations was used primarily for debt repayments. We used cash of $5,402,813 in
financing activities during the first half of 2000 comprised of net reductions
on notes payable and line of credit debt of $5,258,659 and for repurchasing
47,500 shares of our Common Stock totaling $68,558 under our stock repurchase
program.
During the six months ended June 30, 2000, we used cash in net
investing activities of $215,170. We spent $448,610 for capital expenditures
during the first six months of 2000 primarily at PT Buana, our Indonesian
manufacturing plant, for capital improvements.
23
CRITICAL ACCOUNTING POLICIES
While all of our accounting policies are important in assuring that WRP
Corporation adheres to current accounting standards, certain policies are
particularly important to their impact on our financial statements. These are
described in detail below.
Reserves for Accounts Receivable and Inventory. We review on an ongoing
basis the realizability of our trade and inter company receivables and the need
for establishing reserves. As of June 30, 2002, we have established reserves of
$5,736,271 in relation to trade and inter company receivables.
Goodwill. The excess of purchase price over the fair market value of
the net assets purchased is recorded as goodwill. Prior to SFAS 142, the company
amortized the goodwill using the straight-line method over a period of 25 years.
Beginning with fiscal 2003, the company will implement SFAS 142 and will no
longer amortize the balance of goodwill.
On an ongoing basis, we review goodwill for impairment. During 2002, we
evaluated the realizability of the goodwill through the use of an independent
appraisal firm, which utilized the present value of expected future cash flows.
The valuation indicated adequate value to support the recorded goodwill as of
June 30, 2002.
Sales Incentives. Certain customers are granted discounts, rebates or
other allowances which are intended to assist in the promotion of our products.
We record these discounts and rebates as our customers earn them or when they
are paid, depending on the nature of the item. All discounts, rebates and
allowances are shown as a deduction from gross sales to arrive at Net Sales in
the consolidated statements of income.
Deferred Tax Asset. Deferred taxes result from the effect of
transactions that are recognized in different periods for financial and tax
reporting purposes. A valuation allowance is established when it is more likely
than not that any portion of the deferred tax assets will not be realized. The
valuation allowance is adjusted if the realization of deferred tax assets
becomes more likely than not. Should our income projections result in the
conclusion that realization of deferred tax assets is more likely than not,
further adjustments to the valuation are made. The recorded valuation allowance
on deferred tax assets reflects the questionable realizability of certain net
operating loss carryforwards which are limited due to changes in control within
the shareholder group.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
TOTAL LESS THAN 1-3 YEARS 4-5 YEARS AFTER 5
1 YEAR YEARS
Operating Leases $1,484,372 $577,025 $907,347
24
NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142. This pronouncement provides
guidance on financial accounting and reporting for acquired goodwill and other
intangible assets. This statement supercedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 will require that goodwill and certain intangibles no
longer be amortized, but instead tested for impairment at least annually. The
provisions of this statement are required to be applied for fiscal years
beginning after December 15, 2001, with early application permitted in certain
circumstances. We anticipate that future earnings will increase without
amortization expense; however, we will assess its existing goodwill for
impairment.
In June 2001, the FASB No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The statement amends FASB statement No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies." The
provisions in this statement are effective for financial statements issued for
fiscal years beginning after June 15, 2002. Although early adoption is
encouraged, it is not required. We will adopt the provisions in this statement
for all tangible long-lived assets retirements initiated after June 30, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of ling-lived assets.
This statement supersedes FASB statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operation - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This statement also amends ARB No. 51, "Consolidated Financial
Statements," to eliminate the exception of consolidation for a subsidiary for
which control is likely to be temporary. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. Although early
adoption is encouraged, it is not required. We will adopt the provisions in this
statement for fiscal years beginning after June 30, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Disposal Activity (including Certain Costs Incurred in a Restructuring)."
The provisions of this statement are effective for exit and disposal activities
that are initiated after December 31, 2002, with early adoption encouraged. We
plan to adopt the provision set forth in this statement for all exit and
disposal activities initiated after December 31, 2002.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the market value of investments. We have not entered
into interest rate caps or collars or other hedging instruments.
Exposure to changes in interest rates is limited to borrowings under
revolving credit and debt agreements, which have variable interest rates, tied
to the prime and commercial paper rates. We estimate that the fair value of each
debt instrument approximated its market value at June 30, 2002 and 2001.
We are subject to fluctuations in the value of the Indonesian Rupiah
vis-a-vis the U.S. dollar. The investment in the Indonesian subsidiary is
remeasured into the U.S. dollar and the book value of the assets and liabilities
of this operation at June 30, 2002 and 2001, approximated its fair value. For
the year ended June 30, 2002 and 2001, the foreign exchange included in the
determination of net income was approximately $42,646 and $45,031, respectively.
RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES
In addition to those matters already set forth in Item 1, Business and
this Item 7, the following may result in us not achieving certain results
included in any statement that may be considered a forward looking statement. We
caution the reader that the following risks may not be exhaustive.
Variations in Quarterly Results. Our quarterly operating results are
subject to various risks and uncertainties, including risks and uncertainties
related to: local and international political and economic conditions; foreign
currency volatility; competitive pressures; the composition, timing and size of
orders from and shipments to major customers; variations in product mix and the
size mix between sales; variations in product cost; infrastructure costs;
obsolescence of inventory; and other factors as discussed below. Accordingly,
our operating results may vary materially from quarter to quarter.
We operate with little backlog and, as a result, net sales in any
quarter are substantially dependent on the orders booked and shipped in that
quarter. Because our operating expenses are based on anticipated revenue levels
and because a high percentage of our expenses are relatively fixed, if
anticipated shipments in any quarter do not occur as expected, our operating
results may be adversely affected and may fall significantly short of
expectations. Any other unanticipated decline in the growth rate of our net
revenues, without a corresponding and timely reduction in the growth of
operating expenses, could also have an adverse effect on us and our future
operating results.
We aim to prudently control our operating expenses. However, there is
no assurance that, in the event of any revenue, gross margin or other shortfall
in a quarter, we will be able to control expenses sufficiently to meet
profitability objectives for the quarter.
Financing. Our credit facility, which was due to expire in December
2001, has been renewed and extended until December 1, 2003. The terms and
conditions are similar to those in the current credit facility.
26
Dependence on Gloves. We are currently almost exclusively engaged in
the manufacture and sale of disposable gloves. Accordingly, our results of
operations and financial condition are highly dependent on the level of supply
of and demand for disposable gloves. There can be no assurance that the supply
of or demand for disposable gloves will continue at current levels or that
changes in such supply or such demand will not have a material adverse effect on
our results of operations or financial condition.
Dependence on Rubber Harvest and Latex Concentrate. Our ability to
produce and purchase our products profitably is entirely dependent upon the
consistent availability, at competitive prices, of raw rubber harvested by
independent growers in Malaysia, Thailand and Indonesia and locally processed by
others and us into latex concentrate. Any disruption in the consistent supply of
rubber for latex concentrate due to weather or other natural phenomena, labor or
transportation stoppages, shortages or other factors, could cause significant
adverse effects to our results of operations and financial condition. In
addition, rubber is a commodity traded on world commodities exchanges and is
subject to price fluctuations driven by changing market conditions over which we
have no control. Increases in the price of latex concentrate have adversely
affected our raw material costs in the past and could continue to do so.
Asia Pacific Risk Factors. Social, political and economic instability
may be significantly greater in many of the Asian-Pacific countries than that
typically associated with the United States and other industrialized countries.
Varying degrees of social, political and economic instability could
significantly disrupt the source of our supply of glove products.
Currencies of several Asian-Pacific countries, including Indonesia,
Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, have experienced
significant fluctuations against the U.S. dollar. Our Indonesian factory
maintains its books in the Indonesian currency, the Rupiah, and reports its
Indonesian income taxes with Rupiah financial reports. The Indonesian Rupiah
experienced volatile currency fluctuations against the U.S. dollar, which caused
significant income tax adjustments in 1999. Foreign currency exchange volatility
may continue and could cause us to incur significant income tax adjustments in
the future.
In the past, interest rates in many Asian-Pacific countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners,
principally, the United States, Japan, China and the European Union. The
enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the local
economies and general declines in the international securities markets could
have a significant adverse effect upon the economies of the Asian-Pacific
countries.
Governments in certain of the Asian-Pacific countries participate to a
significant degree, through ownership interests or regulation, in their
respective economies. Action by these governments could have a significant
adverse effect on the economies of such countries.
Changes in Gross Margins. Certain of our net product sales are derived
from products and markets which typically have lower gross margins compared to
other products and markets, due to higher costs and/or lower prices associated
with the lower gross margin products and markets. We currently expect that our
net product sales from powder-free and synthetic gloves
27
will continue to increase as a percentage of total net product sales. In
addition, we are currently experiencing pricing pressures due to a number of
factors, including competitive conditions, consolidation within certain groups
of suppliers, excess supply of products, changing technologies in the production
of powder-free gloves and increasing demand for new glove products.
Additionally, we may not be able to pass on price increases to our customers in
a timely manner, or at all. To the extent that these factors continue, our gross
margins could decline, which would adversely affect us and our future operating
results.
Downward pressure on our gross margins may be mitigated by other
factors, such as a reduction in product costs and/or an increased percentage of
new product sales from higher gross margin products, such as powder-free and
synthetic gloves. We are aiming to reduce our product costs and to increase our
percentage of net product sales from powder-free and synthetic gloves. However,
there is no assurance that these efforts will be successful.
New Products. The foodservice, industrial and retail industries look at
our current line of product offerings as just one of a bundle of safety products
used by their customers. Developing a profitable line of additional products
will be important to the future success of our business. During 2003, we will be
diversifying our product offerings with additional synergistic product lines
that address the current safety requirements of our markets. These additional
product offerings include polygloves, heavy-duty gloves, headwear, aprons and
bibs, food storage bags and educational services. These products will be offered
under our SafePrep brand and under private label.
Growth Dependencies. In general, our future growth is dependent on our
ability to successfully and timely enhance existing products, develop and
introduce new products, establish new distribution channels, develop
affiliations with leading market participants and continue to develop our
relationships with our existing customer base.
The failure to achieve these and other objectives could limit future
growth and have an adverse effect on both us and our future operating results.
In addition, the pressure to develop and enhance products and to establish and
expand markets may cause our SG&A expenses to increase, which could also have an
adverse effect on us and our future operating results.
Manufacturing in Indonesia - International Operations. Our
international manufacturing operation has grown substantially and, thus, we are
increasingly affected by the risks associated with international operations.
Such risks include: managing an organization in Indonesia; fluctuations in
currency exchange rates; the burden of complying with international laws and
other regulatory and product certification requirements; changes in such laws
and requirements; tariffs and other trade barriers; import and export controls;
international staffing and employment issues; and political and economic
stability. The inability to effectively control and manage these and other risks
could adversely affect both our future operating results and us.
Competition. The various markets in which we operate are becoming
increasingly competitive as a number of other companies develop and sell
products that compete with our products in these markets. Certain of these
competitors have significantly more financial and technical resources than us.
We face additional competitive factors besides price, such as product quality,
timeliness of delivery, service and the size and reliability of the
manufacturer.
28
These competitive factors may result in, among other things, price discounts by
us and sales lost by us to competitors that may adversely affect on our future
operating results and us.
Reliance Upon Distributors. We use various channels to market and
distribute our products to end-users via third-party distributors. Third-party
distributors are a substantial channel for distribution to end-users.
Accordingly, our ability to market and distribute our products depends
significantly on our relationship with third-party distributors, as well as the
performance and financial condition of these distributors. In the event that our
relationship with these distributors deteriorates or the performance or
financial condition of the distributor becomes unsatisfactory, our future
operating results could be adversely affected.
Reliance Upon Significant Contracts and Customers. During the year
ended June 30, 2002, 64.5% of net sales came from three of our customers: SYSCO
Corporation, Owens & Minor, Inc., and Maxxim Medical, Inc. The loss of any of
these customers could have a materially adverse impact on us, with the exception
of Maxxim Medical.
Excess or Obsolete Inventory. Managing our inventory of various size
mix and product mix is a complex task. A number of factors, including the need
to maintain a significant inventory of certain sizes or products which are in
short supply or which must be purchased in bulk to obtain favorable pricing, the
general unpredictability of demand for specific products and customer requests
for quick delivery schedules, may result in us maintaining excess inventory.
Other factors, including changes in market demand and technology, may cause
inventory to become obsolete. Any excess or obsolete inventory could result in
price reductions and inventory write-downs, which, in turn, could adversely
affect on our operating results.
Hiring and Retention of Employees. Our continued growth and success
depends to a significant extent on the continued service of senior management
and other key employees and the hiring of new qualified employees. Competition
for highly skilled business, technical, marketing and other personnel is
intense. The loss of one or more key employees or our inability to attract
additional qualified employees or retain other employees could have an adverse
effect on our operating results and us. In addition, we may experience increased
compensation costs in order to compete for skilled employees.
Product Liability Insurance. Participants in the medical supplies
business are potentially subject to lawsuits alleging product liability, many of
which involve significant damage claims and defense costs. A successful claim
against us in excess of our insurance coverage could have a material adverse
effect on our results of operations and financial condition. Claims made against
us, regardless of their merit, could also have a material adverse effect on our
reputation. There is no assurance that the coverage limits of our insurance
policy will be adequate or that present levels of coverage will be available at
affordable rates in the future. While we have been able to obtain product
liability insurance in the past, such insurance varies in cost, is difficult to
obtain and may not be available in the future on acceptable terms or at all. We
are subject to a number of lawsuits filed against us and other manufacturers.
This litigation is still in the early stages and there can be no assurance that
our insurance will be sufficient to meet any recovery for which we may be found
liable, that the outcome of such suits will not materially adversely affect our
results of operations or financial condition, or that our deductible obligation
(to fund a
29
portion of the initial cost of defense and/or liability of each such lawsuit)
will not prove financially burdensome.
Stock Market Fluctuations. In recent years, the stock market in
general, including our Common Stock, has experienced extreme price fluctuations.
The market price of our Common Stock may be significantly affected by various
factors such as: quarterly variations in our operating results; changes in our
revenue growth rates; the loss of a significant customer or sales contract;
changes in earnings estimates by market analysis; the announcement of new
products or product enhancements by us or our competitors; speculation in the
press or analyst community; the inability of the market to absorb selling
pressure from one or more large institutional shareholders; and general market
conditions or market conditions specific to particular industries. There can be
no assurance that the market price of our Common Stock will not experience
significant fluctuations in the future.
Governmental Regulations. Our products are subject to regulation by
numerous governmental authorities in the United States and other countries,
particularly to safety and adherence to Quality System Regulations ("QSR's") for
medical devices. In the United States, examination gloves are classified as a
Class I medical device product regulated by the FDA. Noncompliance with these
FDA regulations can result in administrative enforcement, such as warning
letters, import alerts, administrative detention or in civil penalties, product
bans and recalls. Periodically, the FDA inspects shipments of medical gloves as
they arrive in the United States ports.
The FDA inspections and reviews may cause delays in product delivery
and this can result in a loss or delay in recognition of sales and income by us.
In addition, the FDA may inspect the manufacturing facilities for compliance
with QSRs, which incorporate pre-production design and development to achieve
consistency with quality system requirements worldwide. Failure to comply with
regulatory requirements could have a material adverse effect on our business
financial condition and results of operations.
West Coast Longshoreman Work Stoppage. On September 29, 2002, the
Pacific Maritime Association (PMA), which represents international shipping
lines, indefinitely locked out the longshoremen, effectively stopping all import
and export activity on 29 West coast ports. This followed a 36-hour lockout that
began on September 27, 2002. These shutdowns were in reaction to work slowdowns
by the International Longshoremen's & Warehouse Union (ILWU), which were taking
place over the last several weeks. On October 1, 2002 the U.S. District Court in
San Francisco issue a temporary restraining order under the authority of the
Taft-Hartley Act that requires the ports to reopen. On October 2, 2002 the ports
reopened.
We depend heavily on U.S. seaports, especially West coast ports where
all of our imports are entered. We have contingency plans in place in the event
another work stoppage should occur. These plans include, among other things,
airfreighting product, locating alternative sources and redirecting existing
inventory.
30
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 WRP Corporation" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position
- ---- --- --------
Lew Kwong Ann 41 Chairman and Chief Executive Officer
Alan Zeffer 49 Chief Financial Officer, Secretary and Treasurer
Biographies for Messrs. Lew and Zeffer are included below.
At October 15, 2002, our directors consist of six Class A Directors and
two Class B Directors are as follows:
Class A Directors
Name Age Director Since
- ---- --- --------------
Eirik Bonde Aslaksrud 39 2001
Lew Kwong Ann 41 1997
George Jeff Mennen 62 1994
Richard J. Swanson 67 1998
Robert Woon Yee Woh 54 2002
Class B Directors
Name Age Director Since
- ---- --- --------------
Robert J. Simmons 59 1995
Don L. Arnwine 69 1995
The following sets forth brief statements of the principal occupations
and other biographical information of each of the directors and executive
officers.
LEW KWONG ANN was appointed Chairman and Chief Executive Officer of us
in April 2001. He was elected Class A Director of us on May 20, 1997. Mr. Lew
was our Chief Financial Officer, Secretary and Treasurer from 1997 through March
2000. Mr. Lew is an Executive Director and Chief Financial Officer of WRP Asia.
He is a member of the Malaysian CPA Society and Institute of Taxation and was
with Arthur Andersen LLP from 1988 to 1991. Prior to joining WRP Asia, he held
various key management positions in two public listed companies, primarily in
the corporate and judicial advisory areas.
GEORGE JEFF MENNEN was elected to the Board of Directors on October 12,
1994. For over five years, Mr. Mennen has headed the G.J. Mennen Group, a
consulting firm specializing in family-owned businesses. Mr. Mennen had a
distinguished career at the Mennen Company,
32
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.
RICHARD J. SWANSON was elected Class A Director on June 12, 1998. Mr.
Swanson is presently a consultant with The Executive Committee, an international
company that focuses on strategic coaching and corporate troubleshooting for
CEO's of public and private companies. Also, since 1980, Mr. Swanson has been
the president of two Denver, Colorado-based companies: Investment Partners, Inc.
and Real Estate Associates, Inc. Investment Partners is engaged in the
restructuring and recapitalization of troubled companies and Real Estate
Associates focuses on the acquisition and development of real estate projects.
ROBERT J. SIMMONS was elected to the Board of Directors in December
1995. He is currently President of RJS Healthcare, Inc., a healthcare consulting
company, founded in 1990. He served as Executive Vice President at Baxter
International, Inc., from 1987 until founding RJS in 1990. Mr. Simmons joined
Baxter after serving over 20 years at American Hospital Supply Corporation. His
last position at American Hospital Supply was vice president of corporate
marketing.
DON L. ARNWINE was elected to the Board of Directors in December 1995.
He is currently President of Arnwine Associates, a company he formed 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. Mr. Arnwine became President and CEO of
Voluntary Hospitals of America (VHA) in 1982 and was named Chairman and CEO in
1985, in which capacity he served until founding Arnwine Associates.
EIRIK BONDE ASLAKSRUD was appointed a Class A Director of us in April
2001. Mr. Aslaksrud is an Executive Director and Executive Vice President,
Global Markets, for WRP Asia Pacific. He has been with WRP since 1991.
ALAN E. ZEFFER is the Chief Financial Officer, Secretary/Treasurer for
us. He joined us in April 2001. Prior to joining us, Mr. Zeffer was Managing
Partner for Quest Capital Corporation, a corporate finance advisory firm that he
founded in 1993. He also served as Treasurer for Sybron International Corp from
1987 until 1993.
ROBERT WOON YEE WOH was appointed a Class A director of us in February
2002. He is currently Group Company Secretary for WRP Asia and has served in
that capacity since May 1996. From 1992 to 1996, Mr. Woon served as Group
Company Secretary and Share Registrar for Damansara Realty Berhad, PLC.
BOARD MEETINGS AND COMMITTEES
During the year ended June 30, 2002, our Board of Directors held four
meetings and all other actions by the Board of Directors were taken by unanimous
written consent without a meeting.
33
The Board of Directors has a Compensation Committee for the purpose of
administering our Omnibus Equity Compensation Plan (the "Plan"). The Board has
not delegated its functions to any other standing committees except for the
Audit Committee, which was formed in 1997. During the year ended June 30, 2002,
the Compensation Committee held one meeting and the Audit Committee each held
four meetings and all other actions were taken by unanimous written consent
without a meeting. At June 30, 2002, our Audit Committee consists of Don
Arnwine, Richard Swanson, and George Jeff Mennen.
COMPENSATION OF DIRECTORS
All directors who are not also executive officers, which group is
comprised of George Jeff Mennen, Richard J. Swanson and the Class B Directors,
receive (i) an annual Board member retainer of $5,000, (ii) compensation of
$1,000 for each Board meeting attended, (iii) $500 for each committee meeting
attended, and (iv) an annual Committee member retainer of $1,000. Each new
Director is presently entitled to receive stock options under the Plan to
purchase 2,000 shares of our Common Stock in connection with his election and
1,000 shares of our Common Stock per Board meeting attended, up to a maximum of
5,000 shares for Board meetings attended. Under the terms of the Plan, the
Compensation Committee shall determine the exercise price of a Director Option,
provided that the exercise price shall not be less than the lowest fair market
value of our Common Stock during the six months preceding the election and
qualification of such Director. All Director options are immediately exercisable
for a period of ten years from the date of grant. All Directors will be
reimbursed for expenses incurred in attending meetings of the Board and meetings
of Committees.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires certain officers, directors and beneficial owners of more than 10% of
our Common Stock to file reports of ownership and changes in their ownership of
our equity securities with the Securities and Exchange Commission and Nasdaq.
Based solely on a review of the report and representations furnished to us, we
believe that each of these persons is in compliance with all applicable filing
requirements.
34
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation paid by us for services
rendered in all capacities to us during the year ended June 30, 2002 and the
transition period ended June 30, 2001 and fiscal years ended December 31, 1999
and 1998 to (i) our President and (ii) our executive officers at June 30, 2001
whose aggregate annual salary and bonus are expected to exceed $100,000 for the
2001 calendar year.
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Other Annual Stock All Other
Principal Position Year Salary Bonus Compensation Options Compensation
- ------------------ ---- ------ ----- ------------ ------- ------------
Lew Kwong Ann 2002 70,000
CEO
Alan Zeffer 2001 $49,452 - - -
CFO 2002 $140,000 $20,000 70,000 $9,416(1)
(1)Includes housing, automobile and other expenses.
EMPLOYMENT AGREEMENTS
On October 1, 2001, we entered into an employment agreement with Alan
E. Zeffer (the "Zeffer Agreement"). The Zeffer Agreement provided for (i) Mr.
Zeffer to serve as our Chief Financial Officer, Vice President Finance and
Operations; (ii) a base salary of $140,000 per annum; (iii) housing expenses not
to exceed $1,200.00 per month; (iv) a $400.00 per month automobile allowance;
and (v) nonqualified stock options to be determined by the Compensation
Committee.
OPTION GRANTS DURING THE YEAR JUNE 30, 2002
On February 27, 2002 there were 70,000 options granted to Alan Zeffer
at $0.75, the exercise price of the closing price of the common stock on
February 19, 2002, the date of the grant. Mr. Zeffer's options vest over a
three-year period and are exercisable for a period of ten years form the date of
grant.
As approved by the Board of Directors, all outstanding stock options at
February 29, 2000 to current employees and directors were repriced effective
February 29, 2000 to $2.07, the closing price on that date.
AGGREGATE OPTION EXERCISES DURING THE YEAR ENDED JUNE 30, 2002 AND FISCAL
PERIOD-END OPTION VALUES
There were no options exercised during the year ended June 30, 2002 by
the executive officers named in the Summary Compensation Table.
35
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors is currently
comprised of the following three (3) Class A Directors: Lew Kwong Ann, George
Jeff Mennen and Richard Swanson, each of whom were appointed by the Board of
Directors. The Committee oversees administration of our Omnibus Equity
Compensation Plan. The purpose of the Plan is to attract and retain capable and
experiences officers and employees by compensating them with equity-based awards
whose value is connected to our continued growth and profitability. Under the
Plan, awards may be made in the form of stock options or restricted stock. In
general, we compensate executive officers and senior management through salary,
bonus (where appropriate) and the grant of stock options. During the year ended
June 30, 2002, all action of the Compensation Committee was made during the one
meeting held or was taken by the Committee by unanimous written consent without
a meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Lew Kwong Ann and Eirik Bonde Aslaksrud are executive directors and
officers of WRP Asia. Accordingly, these members should not be considered as
independent Directors when serving on the Board of Directors or the Compensation
Committee.
STOCK PERFORMANCE CHART
The following graph compares the yearly percentage change in the
cumulative total shareholder return on our Common Stock for each of our last
five fiscal years ended June 30 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 us, in good faith. The peer group consists of
American Shared Hospital Services, Daxor Corp., DVI, Inc. and Prime Medical
Services Inc. During the six-month transition period ended June 30, 2000, our
peer group was changed to exclude two companies, which were no longer publicly
traded.
[LINE GRAPH]
* $100 invested on June 30, 1995 in stock or Index - including reinvestment of
dividends. Fiscal year ending June 30.
36
6/30/97 6/30/98 6/30/99 6/30/00 6/30/01 6/30/02
WRP Corporation 100 181.5 168.1 38.9 16.0 19.3
NYSE/AMEX/Nasdaq Stock 100 128.1 151.0 166.5 140.0 116.1
Peer Group 100 124.7 95.8 93.1 96.6 135.8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 2002, with
respect to the beneficial ownership of our Common Stock and Series A Common
Stock by (i) each shareholder known by us to be the beneficial owner of more
than 5% of our Common Stock and Series A Common Stock, (ii) each director,
nominee and certain executive officers and (iii) all directors and executive
officers, as a group. Unless otherwise indicated, the shareholders named below
have sole voting and investment power with respect to such shares of Common
Stock and Series A Common Stock beneficially owned by them.
PERCENT OF
AMOUNT AND NATURE OF TOTAL VOTING
TITLE OF CLASS NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP STOCK(4)
-------------- ------------------------ -------------------- --------
Series A Common Stock WRP Asia Pacific Sdn. Bhd.(1) 1,252,538 17.8%
Common Stock WRP Asia Pacific Sdn. Bhd.(1) 2,500,000 35.4%
Common Stock Lew Kwong Ann 30,000(3) *
Common Stock George Jeff Mennen 10,000(2)
Common Stock George Jeff Mennen 10,000 20,000 *
------
Common Stock Robert J. Simmons 10,000(2)
Common Stock Robert J. Simmons 5,000 15,000 *
------
Common Stock Don L. Arnwine 10,000(2)
Common Stock Don L. Arnwine 3,000 13,000 *
------
Common Stock Richard Swanson 7,000(2)
Common Stock Richard Swanson 1,000 8,000 *
------
Common Stock Total Executive Officers & Directors 322,000(2)
as a group (5 persons) 35,500
------ 357,500 5.2%
- ------------------------
*Represents less than 1%.
(1)WRP Asia Pacific Sdn. Bhd. (formerly known as Wembley Rubber Products (M)
Sdn. Bhd.) ("WRP Asia") is located at 28th Floor, Wisma Denmark, 86, Jalan
Ampang, 50450, Kuala Lumpur, Malaysia.
(2)Represents shares to be issued upon exercisable options granted under our
Omnibus Equity Compensation Plan.
(3)Percent of class is based on 7,056,230 shares of the combined number of
Series A Common Stock and Common Stock outstanding on October 15, 2002.
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2002, we purchased latex powder-free
exam gloves amounting to $13.5 million from our majority shareholder, WRP Asia.
In addition, our Indonesian factory sold approximately $7.4 million of powdered
latex exam gloves to WRP Asia during the period.
During the year ended June 30, 2002, we received consulting services
from Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by Robert
Simmons, one of our directors. We engaged Alliance to assist us in marketing our
products with the expressed purpose of negotiating and executing a purchase
agreement with various healthcare group-purchasing organizations. We paid
Alliance $137,772 during the year ended June 30, 2002 for its services.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements. A list of financial statements for the
Registrant is contained in "Index to Financial Statements of
WRP Corporation" on page F-1.
(a)(3) Exhibits. The following exhibits are included with this report:
EXHIBIT NO. NAME OF EXHIBIT
- ----------- ---------------
3.1 Certificate of Incorporation of the Company, incorporated herein by
reference to Exhibit No. 3.1 to the Company's Form S-1 Registration
Statement (Registration No. 33-36206).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company, incorporated herein by reference to Exhibit No. 3.2 to the
Company's Form S-1 Registration Statement (Registration No. 33-36206).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, incorporated herein by reference to Exhibit 3.3 to the
Company's form 10-K Annual Report for the fiscal year ended December
31, 1991 (File No. 0-17458).
3.4 Bylaws of the Company, incorporated herein by reference to Exhibit No.
3.4 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).
4.2 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).
10.37 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 10-K 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 incorporated herein by reference to Exhibit 10.38 included in
the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1994 (File No. 0-17458).
39
10.42 Articles of Amendment to Certificate of Incorporation, incorporated
herein by reference to Exhibit 10.42 included in the Company's Form
10-K Annual Report for the fiscal year ended December 31, 1997 (File
No. 0-17458).
10.43 Amended and Restated Omnibus Equity Compensation Plan, incorporated
herein by reference to Exhibit 10.43 included in the Company's Form
10-K Annual Report for the fiscal year ended December 31, 1997 (File
No. 0-17458).
10.44 Loan and Security Agreement dated as of December 1, 1998 between
General Electric Capital Corporation and American Health Products
Corporation, incorporated herein by reference to Exhibit 10.44 included
in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1998 (File No. 0-17458).
10.45 GE Waivers and Amendments to the Loan and Security Agreement dated as
of December 1, 1998.
10.46 Employment Agreement between WRP Corporation and Alan Zeffer dated
October 1, 2001 (1).
21 Subsidiaries of the Company (1).
23.1 Consent of Grant Thornton LLP (1).
(b) During the 12 months ended June 30, 2001, the Company filed one report
on Form 8-K.
On August 15, 2002, the Company filed a report on Form 8-K, changing
its certifying accountant to Grant Thornton LLP.
(c) See item 12(a)(b)
(1) Filed herewith.
40
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:
WRP CORPORATION
Date: October 15, 2002 By: /s/ Alan E. Zeffer
------------------
Alan E. Zeffer, Chief Financial Officer
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, in the capacities and on the dates indicated.
Date: October 15, 2002 By: /s/ Lew Kwong Ann
-----------------
Lew Kwong Ann, Chief Executive
Officer and Chairman of the Board of Directors
Date: October 15, 2002 By: /s/ Eirik Bonde Aslaksrud
-------------------------
Eirik Bonde Aslaksrud, Director
Date: October 15, 2002 By: /s/ Robert Woon
---------------
Robert Woon, Director
Date: October 15, 2002 By: /s/ George Jeff Mennen
----------------------
George Jeff Mennen, Director
Date: October 15, 2002 By: /s/ Richard J. Swanson
----------------------
Richard J. Swanson, Director
Date: October 15, 2002 By: /s/ Robert J. Simmons
---------------------
Robert J. Simmons, Director
Date: October 15, 2002 By: /s/ Don L. Arnwine
------------------
Don L. Arnwine, Director
41
CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................... F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
OTHER AUDITORS....................................................... F-3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
PREDECESSOR AUDITOR REPORT........................................... F-4
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS....................................................... F-5
STATEMENTS OF OPERATIONS............................................. F-7
STATEMENT OF SHAREHOLDERS' EQUITY.................................... F-8
STATEMENTS OF CASH FLOWS............................................. F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... F-10
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
WRP Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of WRP Corporation
(a Maryland corporation, 53.2% owned by WRP-Asia Pacific Sdn. Bhd.) and
Subsidiaries as of June 30, 2002, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. 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 audit. We did not audit the financial statements of PT
WRP Buana Multicorpa, a 70%-owned subsidiary, whose statements reflect total
assets of 36.4% of the consolidated total assets as of June 30, 2002, and net
sales of 17.6% of consolidated net sales for the year then ended. Those
statements were audited by other auditors, whose report thereon has been
furnished to us and shown elsewhere, and our opinion, insofar as it relates to
the amounts included for PT WRP Buana Multicorpa, is based solely on the report
of the other auditors. The consolidated financial statements of WRP Corporation
and Subsidiaries as of and for the years ended June 30, 2001, and December 31,
1999 and 1998, and for the six-month periods ended June 30, 2000 and 1999, were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report dated
September 28, 2001.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
the other auditors provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
2002 financial statements referred to above present fairly, in all material
respects, the financial position of WRP Corporation and Subsidiaries as of June
30, 2002, and the consolidated results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Chicago, Illinois
October 15, 2002
F-2
Report of Independent Certified Public
Accountants - Other Auditors
INDEPENDENT AUDITORS' REPORT
Report No. xxxxS
- ----------------
The Board of Directors
PT WRP BUANA MULTICORPORA
We have audited the accompanying balance sheets of PT WRP Buana Multicorpora (an
Indonesian company and subsidiary of WRP Corporation), remeasured into U.S.
Dollar, as of June 30, 2002 and 2001, and the related remeasured statements of
income, changes in stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these remeasured financial
statements based on our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The remeasured financial statements have been prepared for use in the
preparation of the consolidated financial statements of WRP Corporation and,
accordingly, they remeasure the assets, liabilities, stockholders' equity and
revenues and expenses of PT WRP Buana Multicorpora for that purpose, as
explained in Note 3 to the remeasured financial statements. The remeasured
financial statements have not been prepared for use by other parties and may not
be appropriate for such use.
In our opinion, the remeasured financial statements referred to above present
fairly in all material respects, for the purpose described in the preceding
paragraph, the financial position of PT WRP Buana Multicorpora as of June 30,
2002 and 2001, and the results of its operations, changes in its stockholders'
equity and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
PRASETIO, SARWOKO & SANDJAJA
Dra. Juanita Budijani
License No. 00.1.0714
October 15, 2002
NOTICE TO READERS
- -----------------
The accompanying financial statements are not intended to present the financial
position and results of operations, changes in stockholders' equity and cash
flows in accordance with accounting principles and practices generally accepted
in countries and jurisdictions other than United States of America. The
standards, procedures and practices to audit such financial statements are those
generally accepted and applied in United States of America.
F-3
(1) - This report is a copy of the previously issued report.
(2) - The predecessor auditor has not reissued the report.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
WRP Corporation:
We have audited the accompanying consolidated balance sheets of WRP CORPORATION
(a Maryland corporation owned 53.2% by WRP-Asia Pacific Sdn. Bhd.) AND
SUBSIDIARIES as of June 30, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended June 30, 2001, and December 31, 1999 and 1998, and for the six-month
periods ended June 30, 2000 and 1999. 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 conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WRP Corporation and
Subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for the years ended June 30, 2001, and December 31, 1999
and 1998, and for the six-month periods ended June 30, 2000 and 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN
Chicago, Illinois
September 28, 2001
F-4
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
ASSETS 2002 2001
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 451,948 $ 123,741
Accounts receivable - trade, net of allowance for
doubtful accounts of approximately $150,000
in 2002 and 2001 4,846,396 4,919,062
Inventories, net 8,506,652 7,187,386
Prepaid expenses 739,944 1,174,544
Due from affiliate, net of allowance for doubtful
accounts of approximately $5,586,000 in 2002
and $0 in 2001 3,368,050 8,262,937
Deferred tax assets 2,752,312 835,182
Other receivables 389,242 197,156
----------- -----------
Total current assets 21,054,544 22,700,008
PROPERTY, PLANT AND EQUIPMENT
Land rights and land improvements 736,535 736,535
Construction in progress 36,084 174,096
Equipment, furniture and fixtures 16,534,201 15,996,454
Building improvements 2,304,128 2,260,637
Vehicles 90,201 148,822
----------- -----------
Total property, plant and equipment 19,701,149 19,316,544
Less accumulated depreciation and amortization 9,102,424 7,206,846
----------- -----------
Property, plant and equipment, net 10,598,725 12,109,698
OTHER ASSETS
Goodwill, net of accumulated amortization of
$707,906 and $640,674 in 2002 and 2001, respectively 1,042,094 1,109,326
Other assets 252,132 153,456
----------- -----------
Total other assets 1,294,226 1,262,782
----------- -----------
$32,947,495 $36,072,488
=========== ===========
F-5
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
----------- -----------
CURRENT LIABILITIES
Accounts payable - trade $ 1,255,515 $ 2,335,421
Trade notes payable to bank 2,860,414 507,937
Notes payable and current portion of long-term
obligations 4,555,964 4,056,718
Due to affiliates 2,657,279 2,453,608
Accrued expenses 2,382,262 2,971,635
----------- -----------
Total current liabilities 13,711,434 12,325,319
LONG-TERM DEBT 19,311 12,687
DEFERRED TAX LIABILITIES 562,728 539,583
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN SUBSIDIARY 1,817,872 2,019,392
SHAREHOLDERS' EQUITY
Series A common stock, $.01 par value; 1,252,538 shares
authorized; 1,252,538 shares issued and outstanding at
2002 and 2001 12,525 12,525
Common stock, $.01 par value; 10,000,000 shares
authorized; 5,803,692 shares issued and outstanding
in 2002 and 2001 58,037 58,037
Additional paid-in capital 17,942,471 17,942,471
Retained earnings 441,493 4,734,474
----------- -----------
18,454,526 22,747,507
Less common stock in treasury, at cost, 412,600 shares
and 367,800 shares in 2002 and 2001, respectively 1,618,376 1,572,000
----------- -----------
Total shareholders' equity 16,836,150 21,175,507
----------- -----------
$32,947,495 $36,072,488
=========== ===========
F-6
The accompanying notes are an integral part of these balance sheets.
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002 AND 2001, AND DECEMBER 31, 1999,
AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------------------------------
Year ended
------------------------------------------------ Six-month period ended
June 30, June 30,
----------------------------- -------------------------
2002 2001 December 31, 1999 2000 1999
-------------- ------------ ---------------- ------------ ------------
Net sales $ 47,357,076 $ 51,888,852 $ 65,280,104 $ 31,737,482 $ 30,946,476
Cost of goods sold 35,777,460 37,190,499 48,645,076 22,697,004 22,858,509
-------------- ------------ ---------------- ------------ ------------
Gross profit 11,579,616 14,698,353 16,635,028 9,040,478 8,087,967
Operating expenses
Selling, general and administrative 17,640,474 13,784,354 12,295,192 6,996,574 5,484,190
-------------- ------------ ---------------- ------------ ------------
(Loss) income from operations (6,060,858) 913,999 4,339,836 2,043,904 2,603,777
Interest expense 384,609 719,954 802,159 332,429 374,692
Other income 99,448 249,311 166,155 22,432 125,969
-------------- ------------ ---------------- ------------ ------------
(Loss) income from continuing operations
before provision for (benefit from)
income taxes and minority interest (6,346,019) 443,356 3,703,832 1,733,907 2,355,054
Provision for (benefit from) income taxes (1,851,517) (271,478) 1,348,121 106,770 1,159,051
-------------- ------------ ---------------- ------------ ------------
(Loss) income from continuing operations
before minority interest (4,494,502) 714,834 2,355,711 1,627,137 1,196,003
Minority interest in (loss) income of subsidiary (201,521) 185,437 (97,033) 206,875 (128,267)
-------------- ------------ ---------------- ------------ ------------
NET (LOSS) INCOME $ (4,292,981) $ 529,397 $ 2,452,744 $ 1,420,262 $ 1,324,270
============== ============ ================ =========== ============
Basic net (loss) income per common share ($ 0.65) $ 0.08 $ 0.35 $ 0.21 $ 0.19
Diluted net (loss) income per common share ($ 0.65) $ 0.08 $ 0.35 $ 0.21 $ 0.19
The accompanying notes are an integral part of these statements.
F-7
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002 AND 2001, AND DECEMBER 31, 1999,
AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Series A common stock Common stock Additional
------------------------- ------------------------ paid-in Retained
Shares Amount Shares Amount capital earnings
--------- --------- --------- -------- ------------ ------------
Balance, December 31, 1998 1,252,538 $ 12,525 5,785,525 $ 57,855 $ 17,862,021 $ 332,071
Issuance of common stock upon
exercise of stock options - - 18,167 182 80,450 -
Net income - - - - - 1,324,270
--------- --------- --------- -------- ------------ ------------
Balance, June 30, 1999 1,252,538 12,525 5,803,692 58,037 17,942,471 1,656,341
Net income - - - - - 1,128,474
--------- --------- --------- -------- ------------ ------------
Balance, December 31, 1999 1,252,538 12,525 5,803,692 58,037 17,942,471 2,784,815
Net income - - - - - 1,420,262
Common stock repurchases - - - - - -
--------- --------- --------- -------- ------------ ------------
Balance, June 30, 2000 1,252,538 12,525 5,803,692 58,037 17,942,471 4,205,077
Net income - - - - - 529,397
Common stock repurchases - - - - - -
--------- --------- --------- -------- ------------ ------------
Balance, June 30, 2001 1,252,538 12,525 5,803,692 58,037 17,942,471 4,734,474
Net loss - - - - - (4,292,981)
Common stock repurchases - - - - - -
--------- --------- --------- -------- ------------ ------------
Balance, June 30, 2002 1,252,538 $ 12,525 5,803,692 $ 58,037 $ 17,942,471 $ 441,493
========= ============ ========= ============ ============ ============
Treasury Shareholders' Comprehensive
stock equity income (loss)
------------ ------------ ------------
Balance, December 31, 1998 $ (1,323,036) $ 16,941,436
Issuance of common stock upon
exercise of stock options - 80,632
Net income - 1,324,270 $ 1,324,270
------------ ------------ ============
Balance, June 30, 1999 (1,323,036) 18,346,338
Net income - 1,128,474 $ 1,128,474
------------ ------------ ============
Balance, December 31, 1999 (1,323,036) 19,474,812
Net income - 1,420,262 $ 1,420,262
------------ ------------ ============
Common stock repurchases (68,558) (68,558)
------------ ------------
Balance, June 30, 2000 (1,391,594) 20,826,516
Net income - 529,397 $ 529,397
============
Balance, June 30, 2001 (1,572,000) 21,175,507
------------ ------------
Net loss - (4,292,981) $ (4,292,981)
============
Common stock repurchases (46,376) (46,376)
------------ ------------
Balance, June 30, 2002 $ (1,618,376) $ 16,836,150
============ ============
The accompanying notes are an integral part of this statement.
F-8
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002 AND 2001, AND DECEMBER 31, 1999,
AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Year ended
-----------------------------------------------
June 30,
--------------------------
2002 2001 December 31, 1999
------------ ----------- -----------------
Cash flows from operating activities
Net (loss) income $(4,292,981) $ 529,397 $ 2,452,744
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities
Depreciation 1,918,304 1,951,304 1,750,261
Amortization 67,232 67,231 67,232
Deferred income taxes (1,893,985) 49,846 672,064
Loss (gain) on disposal of property, plant and equipment 29,291 (10,066) 4,197
Changes in operating assets and liabilities
Accounts receivable - trade, net 72,666 702,355 (2,436,964)
Inventories, net (1,319,266) 2,937,025 (1,069,714)
Prepaid expenses 434,600 (743,394) 395,399
Other assets (290,762) (34,215) 267,751
Accounts payable - trade (1,079,906) 409,793 (1,360,967)
Accrued expenses (589,373) (667,700) (63,888)
Amounts due to and from affiliates 5,098,558 (3,552,199) (1,860,454)
----------- ----------- -----------------
Net cash provided by (used in) operating activities (1,845,622) 1,639,377 (1,182,339)
Cash flows from investing activities
Capital expenditures (444,336) (928,206) (2,972,837)
Proceeds on sales of property, plant and equipment 7,714 13,510 390
Minority interest in subsidiary (201,520) 185,437 (97,033)
----------- ----------- -----------------
Net cash used in investing activities (638,142) (729,259) (3,069,480)
Cash flows from financing activities
Net payments on trade notes payable to bank 2,352,477 (744,877) (1,994,472)
Net borrowings (payment) on notes payable 505,870 (85,147) 5,657,396
Net proceeds from stock option exercises - - 80,632
Payments for treasury stock repurchases (46,376) (180,406) -
----------- ----------- -----------------
Net cash provided by (used in) financing activities 2,811,971 (1,010,430) 3,743,556
----------- ----------- -----------------
Net increase (decrease) in cash and cash equivalents 328,207 (100,312) (508,263)
Cash and cash equivalents, beginning of period 123,741 224,054 679,725
----------- ----------- -----------------
Cash and cash equivalents, end of period $ 451,948 $ 123,742 $ 171,462
=========== =========== =================
Six-month period ended
June 30,
---------------------------
2000 1999
----------- -----------
Cash flows from operating activities
Net (loss) income $ 1,420,262 $ 1,324,270
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities
Depreciation 973,685 813,839
Amortization 33,616 33,616
Deferred income taxes (207,356) 550,015
Loss (gain) on disposal of property, plant and equipment 6,846 -
Changes in operating assets and liabilities
Accounts receivable - trade, net 2,347,952 (591,249)
Inventories, net 2,806,158 (5,369,264)
Prepaid expenses 131,769 (184,786)
Other assets 127,896 195,348
Accounts payable - trade 782,370 367,739
Accrued expenses 195,736 (1,281,639)
Amounts due to and from affiliates (2,948,359) 278,903
----------- -----------
Net cash provided by (used in) operating activities 5,670,575 (3,863,208)
Cash flows from investing activities
Capital expenditures (448,610) (2,428,223)
Proceeds on sales of property, plant and equipment 26,565 -
Minority interest in subsidiary 206,875 (128,268)
----------- -----------
Net cash used in investing activities (215,170) (2,556,491)
Cash flows from financing activities
Net payments on trade notes payable to bank (75,596) (1,685,904)
Net borrowings (payment) on notes payable (5,258,659) 7,394,144
Net proceeds from stock option exercises - 80,632
Payments for treasury stock repurchases (68,558) -
----------- -----------
Net cash provided by (used in) financing activities (5,402,813) 5,788,872
----------- -----------
Net increase (decrease) in cash and cash equivalents 52,592 (630,827)
Cash and cash equivalents, beginning of period 171,462 679,725
----------- -----------
Cash and cash equivalents, end of period $ 224,054 $ 48,898
=========== ===========
The accompanying notes are an integral part of these statements.
F-9
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
WRP Corporation and Subsidiaries (the "Company") is a leading marketer of
medical, surgical and food-service gloves in the United States through its
wholly owned subsidiary, American Health Products Corporation ("AHPC"). The
Company is a 53.2% controlled subsidiary of WRP-Asia Pacific Sdn. Bhd. ("WRP
Asia"). The Company also manufacturers high-quality disposable latex examination
and food-service gloves through its 70%-owned Indonesian manufacturing facility,
PT WRP Buana Multicorpa ("PT Buana"). The Company was incorporated in Maryland
in December 1995 and has been involved in several business operations.
During the first half of 2000, the Company's Board of Directors approved a
change in the Company's fiscal year-end from December 31 to June 30, which
corresponds to the year-end of the Company's majority shareholder, WRP Asia, a
Malaysian corporation. The new fiscal year commenced July 1, 2000.
The report on the financial statements of PT WRP Buana Multicorpa ("PT Buana")
for 2002 is included on F-4. Those financial statements were prepared utilizing
the US Dollar as the functional currency as required by SFAS 12 and are not
presented separately herein. The reference in the accompanying auditors report
to Note 3 refers to the preparation of those statements using the US Dollar as
the functional currency as discussed above.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of WRP
Corporation, AHPC and PT Buana. All significant intercompany transactions have
been eliminated.
WRP Asia owns the Series A common stock of the Company and is the majority
shareholder of the Company.
CASH AND CASH EQUIVALENTS
The Company considers cash in banks and highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
F-10
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVENTORIES
Inventories are accounted for on a first-in, first-out basis and are valued at
the lower of actual cost or market. Inventories consist of the following at June
30, 2002 and 2001:
2002 2001
---------- ----------
Raw materials $ 40,314 $ 46,516
Work in process 551,843 359,380
Finished goods 8,417,567 7,199,253
Reserves (503,072) (417,763)
---------- ----------
Total $8,506,652 $7,187,386
========== ==========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided by both the straight-line and accelerated methods over
lives ranging from 3 to 20 years. Building improvements are amortized on a
straight-line basis over their estimated useful lives or lease terms, whichever
is shorter. Accumulated construction in progress costs are reclassified to the
appropriate property, plant and equipment account when completed. The useful
lives of property, plant and equipment at June 30, 2002 and 2001, are as
follows:
Useful lives
------------
Land rights and land improvements 20 years
Equipment, furniture and fixtures 3-15 years
Building improvements 5-20 years
Vehicles 5 years
When property or equipment is retired or otherwise disposed of, the net book
value of the asset is removed from the Company's books, and the net gain or loss
is included in the determination of income.
GOODWILL
The excess of purchase price over the fair market value of the net assets of PT
Buana is recorded as goodwill in the accompanying consolidated balance sheets
and is being amortized using the straight-line method over 25 years.
F-11
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
GOODWILL - CONTINUED
On an ongoing basis, the Company reviews goodwill and other long-lived assets
for impairment whenever events or circumstances indicate that carrying amounts
may not be recoverable. If such events or changes in circumstances occur, the
Company will recognize an impairment loss if the undiscounted future cash flows
expected to be generated by the asset (or acquired business) are less than the
carrying value of the related asset. The impairment loss would adjust the asset
to its fair value. During 2002, the Company evaluated the realizability of the
goodwill through the use of an independent appraisal, which utilized the present
values of expected future cash flows in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The valuation
indicated adequate value to support the recorded amounts of goodwill as of June
30, 2002.
REVENUE RECOGNITION
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. Product sales are stated net of rebates,
sales returns, and sales discounts and allowances.
The Company records a liability for rebates and sales discounts in accordance
with terms as contracted with certain customers.
INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 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 PER COMMON SHARE
Basic Earnings per Share ("EPS") amounts are based on the weighted-average
number of shares of common stock outstanding during each year, while diluted EPS
amounts are based on the weighted-average number of shares of common stock
outstanding during the year and the effect of any dilutive stock options and
warrants (common stock equivalents).
F-12
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NET INCOME PER COMMON SHARE - CONTINUED
The weighted-average number of common shares and common share equivalents
outstanding for the years ended June 30, 2002 and 2001, and December 31, 1999,
and for the six-month periods ended June 30, 2000 and 1999, are as follows:
Year ended
--------------------------------------- Six-month period ended
June 30, December, 31 June 30,
----------------------- ------------ -----------------------
2002 2001 1999 2000 1999
--------- --------- ------------ --------- ---------
Basic weighted-average number of common
shares outstanding 6,655,123 6,790,833 6,924,538 6,921,010 6,921,877
Dilutive effect of common share
equivalents - - 40,318 2,273 63,277
--------- --------- --------- --------- ---------
Diluted weighted-average number of
common shares outstanding 6,655,123 6,790,833 6,964,856 6,923,283 6,985,154
========= ========= ========= ========= =========
The Company had additional vested stock options and warrants outstanding of
476,214, 370,272, 455,000, 483,609 and 127,500 at June 30, 2002 and 2001,
December 31, 1999, and June 30, 2000 and 1999, respectively. The options for the
periods June 30, 2001, December 31, 1999, June 30, 2000, and June 30, 1999, were
not included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common shares.
The impact of stock options has been excluded from the calculation of earnings
per share for the year ended June 30, 2002, as their effect would be
anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
1. CURRENT ASSETS AND CURRENT LIABILITIES - The carrying amount approximates
fair value due to the short maturity of these items.
F-13
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
2. LONG-TERM OBLIGATIONS - The fair value of the Company's long-term debt is
based on secondary market indicators. Since the Company's debt is not
quoted, estimates are based on each obligation's characteristics, including
maturities, interest rate, credit rating, collateral, amortization schedule
and liquidity. The carrying amount approximates fair value.
3. AMOUNTS DUE TO/DUE FROM AFFILIATE - Amounts due to/due from affiliate are
non-interest bearing and do not specify maturity dates; therefore, it is
not practicable to estimate the fair value of these financial instruments.
FOREIGN CURRENCY TRANSLATION
PT Buana's financial statements are prepared from the records maintained in the
Republic of Indonesia, the country in which PT Buana was established and
operates. Its functional currency is the U.S. dollar. This is primarily the
result of the PT Buana operations becoming more dependent on the
U.S.-dollar-denominated transactions and economic trends during its fiscal year
ended June 30, 1998.
Gains and losses from foreign currency transactions are included in net income
in the period in which they occur. For the years ended June 30, 2002 and 2001,
and December 31, 1999, and for the six-month periods ended June 30, 2000 and
1999, the foreign exchange (loss) gain included in the determination of net
income is $(42,646), $45,031, $3,563, $(6,223) and $9,021, respectively.
The Company does not use any derivative or financial instruments to manage its
foreign exchange exposures. The Company is subject to foreign currency
fluctuation risk in the regular course of business on sales, raw materials and
fixed asset purchase transactions denominated in a foreign currency.
LITIGATION
The Company is engaged in various lawsuits either as plaintiff or defendant
involving product liability. In the opinion of management, the ultimate outcome
of these lawsuits will not have a material impact on the Company's consolidated
financial statements. The Company expenses legal cost related to such litigation
as the costs are incurred.
F-14
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," related to options and warrants
issued to employees and directors.
INTERNAL USE SOFTWARE COSTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance on
the financial reporting of costs associated with purchased or developed software
for internal use. As the Company has adopted the provisions of this SOP, the
Company has capitalized or expensed as incurred certain of these software costs
as appropriate. As of June 30, 2002 and 2001, the net book value of capitalized
software was fully amortized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets." This pronouncement provides
guidance on financial accounting and reporting for acquired goodwill and other
intangible assets. This statement supercedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 will require that goodwill and certain intangibles no
longer be amortized but instead tested for impairment at least annually. The
provisions of this statement are required to be applied for fiscal years
beginning after December 15, 2001, with early application permitted in certain
circumstances. The Company anticipates that future earnings will increase
without amortization expense; however, the Company will annually assess its
existing goodwill for impairment.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The statement amends FASB statement No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies." The
provisions in this statement are effective for financial statements issued for
fiscal years beginning after June 15, 2002. Although early adoption is
encouraged, it is not required. The Company will adopt the provisions in this
statement for all tangible long-lived asset retirements initiated after June 30,
2002.
F-15
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This
statement also amends ARB No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. Although early adoption is encouraged, it is not required.
The Company will adopt the provisions in this statement for fiscal years
beginning after June 30, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this statement are effective for exit and disposal activities that
are initiated after December 31, 2002, with early adoption encouraged. The
Company plans to adopt the provisions set forth in this statement for all exit
and disposal activities initiated after December 31, 2002.
RECLASSIFICATION
Certain prior-period balances have been reclassified to conform with the
current-year presentation.
NOTE B - COMMON STOCK
Each share of Series A common stock is convertible into one share of the
Company's common stock, $.01 par value. The Company has reserved 1,252,538
shares of common stock for issuance upon conversion of the Series A common
stock.
F-16
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE B - COMMON STOCK - CONTINUED
The terms of the Series A common stock are substantially the same as the
Company's common stock except that Series A common stock entitles WRP Asia, 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. (see note H for further information on the Company's
shareholders' equity.)
On February 29, 2000, the Company approved a stock repurchase plan, which may
include the repurchase of up to 10% of the Company's public common stock. These
purchases may be made in the open market and in block transactions over a
two-year period. The program is subject to market conditions and its impact on
share price, as well as other investment options that the Company may consider
to enhance shareholder value. As of June 30, 2002, 234,800 shares of public
common stock have been repurchased by the Company as part of this plan.
NOTE C - CORPORATE DEVELOPMENT
DISTRIBUTION AGREEMENT
Effective July 12, 1995, the Company entered into a five-year distributor
agreement with PIE Healthcare Products Sdn. Bhd. ("PIE") that requires the
Company to purchase a certain quantity of gloves from PIE each year. The
Company's net sales include glove products that are purchased under the terms of
this agreement. In connection with the loss of the Novation contract as
discussed in note H, on March 1, 2000, the Company renegotiated the PIE contract
to allow the Company to satisfy its remaining purchase obligations through July
31, 2001. The purchase obligations were satisfied at prices similar to
prevailing market rates. As of June 30, 2001, the Company was in compliance with
the agreement, and as of July 31, 2001, the agreement was terminated.
F-17
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE D - RELATED-PARTY TRANSACTIONS
At June 30, 2002 and 2001, amounts due from/to affiliates consist of the
following:
2002 2001
----------- -----------
Due from affiliate
Current WRP Asia $ 8,954,321 $ 7,792,937
Reserve (5,586,271) --
----------- -----------
Net $ 3,368,050 $ 7,792,937
=========== ===========
Due to affiliate
Current
WRP Asia $(2,657,279) $(2,453,608)
=========== ===========
The outstanding accounts receivable from WRP Asia result primarily from sales of
product, cash advances and charges for obtaining FDA approval of the gloves
imported from WRP Asia and other items. As of June 30 2002, $8,954,321 is due to
the Company. This amount includes amounts due to PT Buana at June 30, 2002, of
$5,586,321 and amounts due to AHPC of $3,368,000. Subsequent to June 30, 2002,
the amounts due to PT Buana of $5,586,321 were assigned to WRP USA in partial
satisfaction of intercompany amounts due from PT Buana to WRP USA. Subsequent to
June 30, 2002, the Company entered into a formal agreement with WRP Asia to
provide for full and complete right of offset of any trade payables due against
amounts they owe to WRPC and AHPC. Included in the WRP Asia receivable is a note
receivable of $470,000 as of June 30, 2002 and 2001.
WRP USA and AHPC have accounts payable to WRP Asia of $2,657,279 at June 30,
2002, primarily resulting from the purchase of inventories. AHPC purchased
virtually all of its latex, powder-free exam gloves from WRP Asia in 2002, 2001
and 2000. See note K for additional related-party transactions.
The net amount due from WRP Asia, before allowance for doubtful accounts at June
30, 2002, was $6,297,042, against which we have provided an allowance for
doubtful accounts of $5,586,000 (representing all amounts due for the sale of
product from PT Buana to WRP Asia at June 30, 2002).
The Company continues to purchase gloves from WRP Asia, and believes that the
unreserved amounts due from WRP Asia to WRPC and AHPC of approximately $711,000
at June 30,2002, are realizable based on the agreement granting right of offset
and ongoing purchases from WRP Asia.
F-18
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE D - RELATED-PARTY TRANSACTIONS - CONTINUED
On September 24, 2002, the Board of Directors passed a resolution limiting the
net receivables due from WRP Asia to $6,200,000. If net receivables exceed this
amount, WRP Asia will be required to either prepay for product or issue an
irrevocable letter of credit to cover the purchase price.
WRP Asia owns one of the largest glove manufacturing plants in Malaysia and
principally manufactures high-quality, powder-free, latex exam gloves. During
the years ended June 30, 2002 and 2001, and December 31, 1999, and for the
six-month periods ended June 30, 2000 and 1999, total purchases of gloves from
WRP Asia were $13,519,454, $10,906,263, $18,409,600, $6,621,531 and $8,813,942,
respectively.
WRP Asia undertook a restructuring plan during 2001, the objective of which was
to improve cash flows and profitability and to assure longer-term financial
viability. This plan included restructuring of the Company's debt facility and
additional investment from outside sources.
Social, political and economic instability may be significantly greater in many
of the Asian-Pacific countries than that typically associated with the United
States and other industrialized countries. These factors could significantly
disrupt both the source of the Company's supply of glove products as well as
product supplied to companies located in that area of the world.
Additionally, interest rates in many Asian-Pacific countries have been heavily
dependent on international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners.
The enactment by principal trading partners of protectionist trade legislation,
reduction of foreign investment or general declines in the international
securities markets could have a significant adverse effect on the economies of
the Asian-Pacific countries.
The impact of this potential instability could affect WRP Asia's ability to
achieve the restructuring plans discussed above, its ability to continue to
purchase the quantities projected in its restructuring plan from PT Buana, and
its ability to pay the amounts due to PT Buana and AHPC.
As of October 9, 2002, the restructuring of the debt facility has not been
completed, although discussions are ongoing with several sources. Amounts due in
the accompanying balance sheet from WRP Asia, net of amounts available for
offset of those receivables are $6,297,042 at June 30, 2002. The Company has
recorded an allowance of approximately $5,586,000 against these receivables to
reflect the uncertainty of collection on these amounts.
In January 1997, the Company entered into a consulting and services agreement
with Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by a director
of the Company.
F-19
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE D - RELATED-PARTY TRANSACTIONS - CONTINUED
The agreement engaged Alliance to assist the Company in marketing its products
with the expressed purpose of negotiating and executing a purchase agreement
with various healthcare group purchasing organizations. The Company paid
Alliance $137,772, $112,290, $66,160, $42,216 and $36,000 in the years ended
June 30, 2002 and 2001, and December 31, 1999, and the six-month periods ended
June 30, 2000 and 1999, respectively, for its services.
NOTE E - TRADE NOTES PAYABLE TO BANK
Trade notes payable to bank consist of the following:
Notes payable to bank, at rates charged to WRP Asia: $ 2,420,205
Payable to bank, letters of credit bearing interest at the
commercial paper rate plus 4.5%, due within 60 days: 440,209
-----------
Total: $ 2,860,414
===========
Trade notes payable to bank consist of amounts financed through letter of credit
arrangements and notes payable, which totaled $2,860,414 and $507,937 at June
30, 2002 and 2001, respectively. These bank obligations are collateralized by
the inventory and accounts receivable of AHPC.
The Company utilizes the facility of WRP Asia to discount PT Buana's receivables
from AHPC. Amounts available under this arrangement are $2,631,601 (MLR
$10,000,000) of which $2,420,205 is outstanding as of June 30, 2002. PT Buana
has guaranteed to WRP Asia's lender the payment of the discounted receivables in
the event AHPC does not remit payment.
As of June 30, 2002 and 2001, the Company was contingently liable for
outstanding letter of credit liabilities totaling $175,558 and $316,840,
respectively.
F-20
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE F - NOTES PAYABLE
Notes payable and long-term debt as of June 30, 2002 and 2001, consist of the
following:
2002 2001
----------- -----------
Borrowings under a bank revolving line-of-credit agreement
with available borrowings up to $15,000,000 at June 30,
2002 and 2001, bearing interest at the commercial paper
rate plus 4.50% (6.27% and 6.69% at June 30, 2002 and
2001, respectively), collateralized by inventories and
accounts receivable, expiring December 1, 2003 $ 4,513,996 $ 3,377,358
Subordinated debentures convertible into warrants to
purchase shares of common stock at $25.00 per share,
interest payable quarterly at prime plus 1.5% (8.25% at
June 30, 2001), due November 2001 - 550,000
Insurance premium financing loans, bearing interest at
4.95% and 6.95% at June 30, 2002 and 2001,
respectively, payable in monthly installments through
July 2002 41,968 129,360
Other 19,311 12,687
----------- -----------
4,575,275 4,069,405
Less current portion 4,555,964 4,056,718
----------- -----------
Long-term debt $ 19,311 $ 12,687
=========== ===========
The bank revolving line-of-credit agreement noted above contains covenants that
require, among other things, maintenance of financial ratios and limitations on
borrowings, investments and capital expenditures.
As of June 30, 2002, the Company was not in compliance with certain of its
covenants. The Company has obtained waivers for these covenant violations.
The Company's credit facility includes a $15,000,000 revolving line of credit
with an $11,000,000 letter of credit subfacility. The facility carries an
interest rate of commercial paper plus 4.5% (6.27% at June 30, 2002).
The facility agreement was amended to expire on December 1, 2003.
F-21
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE G - COMMITMENTS AND CONTINGENCIES
LITIGATION
Over the last several years, numerous product liability lawsuits have been filed
against suppliers and manufacturers of latex gloves alleging, among other
things, adverse allergic reactions. The Company is one of numerous defendants
that have been named in such lawsuits. At June 30, 2002, the Company was
involved in a total of 65 lawsuits as a named defendant, a third-party defendant
or an indemnitor. During the year ended June 30, 2002, the Company was named in
11 lawsuits and was dismissed from 12 lawsuits. The Company carries product
liability insurance. Management believes all legal claims are adequately
provided for or, if not provided for, are without merit, or involve such amounts
that would not materially affect the Company's results of operations or
financial condition.
SIGNIFICANT CUSTOMERS
The following summary presents the total percentage of sales the Company made to
Owens and Minor Inc., composed of numerous operating branch locations throughout
the U.S., Sysco, and Maxxim Medical Inc. (Maxxim) and the total percentage of
accounts receivable these three customers accounted for:
June 30, June 30,
------------------- ------------------
2002 2001 Dec. 31, 1999 2000 1999
------ ------ ------------- ------ ------
Owens and Minor Inc. sales as a
percentage of net sales 10.3% 17.9% 37.9% 30.0% 35.5%
Sysco sales as a percentage of net sales 45.5 44.7 30.6 44.8 32.8
Maxxim Medical Inc. 8.7 - - - -
Owens and Minor Inc., Sysco and Maxxim
Medical Inc. accounts receivable as a
percentage of total accounts receivable 62.6 66.4 63.4 65.1 61.0
These three distribution companies distribute the Company's products to numerous
medical and food-service facilities throughout the U.S. The ultimate end users
of the Company's product are those various medical facilities, food-service
organizations and professionals who purchase the product from these
distributors. During the year ended June 30, 2002, the Company entered into a
Transition Services Agreement with Maxxim whereby Maxxim would service certain
medical customers. The agreement is expected to reduce sales to Maxxim in future
years.
OPERATING LEASES
The Company conducts all of its operations in leased facilities.
F-22
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
OPERATING LEASES - CONTINUED
Total rent expense, net of rental income, included in the accompanying
consolidated statements of operations for the years ended June 30, 2002 and
2001, and December 31, 1999, and for the six-month periods ended June 30, 2000
and 1999, was $595,669, $605,578, $440,441, $289,886 and $169,980, respectively.
The following summary presents future minimum rental payments required under the
terms of present operating leases:
Fiscal year ending June 30,
2003 $ 577,025
2004 581,469
2005 265,991
2006 59,887
2007 and thereafter -
-----------
$ 1,484,372
===========
NOTE H - SHAREHOLDERS' EQUITY
In November 1999, warrants to purchase 7,500 shares of the Company's common
stock at an exercise price of $22.20 expired.
In March 1999, warrants to purchase 125,000 shares of the Company's common stock
at an exercise price of $15.00 expired.
At June 30, 2000, the Company had outstanding debt, which is convertible at any
time at the noteholder's option (see note F) into warrants to purchase 54,000
shares of common stock at $25.00 per share. These convertible debentures expired
in November 2001.
F-23
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE I - STOCK OPTION PLAN
On June 12, 1998, the Board of Directors approved an amendment and restatement
of the Company's Omnibus Equity Compensation Plan (the "Plan"), which authorized
and adjusted the number of shares issuable from 400,000 to 1,400,000. Effective
on February 29, 2000, the Board of Directors approved the repricing of all
current director and employee options to $2.07, the closing market price on that
date. This change will require variable Plan accounting for future appreciation
in stock prices. A summary of options outstanding under the Plan is as follows:
Outstanding Exercise
options price Expiration
----------- ------------ ----------
Balance, December 31, 1998 504,424 $2.63-$14.40
Grants 54,000 4.75-7.1875 2009
Rescissions/expirations (56,657) 2.75-14.40 1999-2009
Exercises (18,167) 2.75-6.3125 2005-2009
----------- ------------ ----------
Balance, December 31, 1999 483,600 2.63-7.1875
Repricing of options 483,600 2.07 2003-2009
Rescission of repriced options (483,600) 2.63-7.1875 2003-2009
Grants 30,000 1.44 2010
Rescissions/expirations (23,000) 2.07 2008-2009
----------- ------------ ----------
Balance, June 30, 2000 490,600 1.44-2.07
Grants 3,500 1.50-1.53 2011
Rescissions/expirations (125,500) 2.07 2008-2009
----------- ------------ ----------
Balance, June 30, 2001 368,600 1.44-2.07
Grants 760,525 .75-.77 2012
Rescissions/expirations (408,932) .75-2.07 2003-2012
----------- ------------ ----------
Balance, June 30, 2002 720,193 $.75-$2.07
=========== ============
The exercise price of the stock options granted in 2002, 2001, 2000, 1999 and
1998 was established at the market price on the date of the grants. Of the
720,193 options outstanding at June 30, 2002, 476,214 are currently exercisable,
and 121,989 become exercisable in 2003 and 2004. The Company has reserved common
stock for issuance upon conversion of these options.
F-24
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE I - STOCK OPTION PLAN - CONTINUED
The Company accounts for employee stock options under APB Opinion No. 25 and
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB No. 25" as permitted under accounting
principles generally accepted in the United States of America. No compensation
cost has been recognized in the accompanying financial statements related to
these options.
Had compensation costs for these options been determined consistent with SFAS
No. 123, which is an accounting alternative that is permitted but not required,
the Company's net income and net (loss) income per share (diluted) for the years
ended June 30, 2002 and 2001, and December 31, 1999, and for the six-month
periods ended June 30, 2000 and 1999, would have been $(4,496,873), $313,052,
$1,780,936, $1,190,558 and $1,098,470 and $(0.68), $0.05, $0.26, $0.17 and
$0.16, respectively.
The pro forma disclosure is not likely to be indicative of pro forma results
that may be expected in future years. This primarily relates to the fact that
options vest over several years and pro forma compensation cost is recognized as
the options vest. Furthermore, the compensation cost is dependent on the number
of options granted which may vary in future periods.
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model using the following assumptions:
Year ended
-------------------------------------- Six-month period
June 30, December 31, ended June 30,
---------------------- ------------ ----------------------
Assumption 2002 2001 1999 2000 1999
- ------------------------- ------- ------- ------------ ------- -------
Risk-free interest rates 3.89% 6.10% 5.43% 6.26% 4.75%
Dividend yield - - - - -
Expected volatility 76.71% 71.63% 84.74% 70.34% 85.00%
Expected life 4 years 4 years 4 years 4 years 4 years
F-25
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE I - STOCK OPTION PLAN - CONTINUED
Options outstanding and exercisable at June 30, 2002, were as follows:
Weighted- Weighted-
Range of Number average Number average
exercise outstanding at Remaining exercise exercisable at exercise
prices June 30, 2002 life price June 30, 2002 price
- ---------- -------------- ------------ --------- -------------- ---------
$2.07 151,100 1.5-7 years $2.07 151,100 $2.07
0.77 190,000 10 years 0.77 190,000 0.77
0.75 379,093 10 years 0.75 135,114 0.75
- ---------- -------------- ------------ --------- -------------- ---------
$.75-$2.07 720,193 1.5-10 years $1.03 476,214 $1.18
========== ============== ============ ========= ============== =========
NOTE J - INCOME TAXES
The components of the Company's income tax provision (benefit) from continuing
operations consisted of:
June 30, December 31, June 30,
--------------------------- ------------ -------------------------
2002 2001 1999 2000 1999
------------ --------- ------------ --------- ----------
Current
Federal $ (238,602) $(321,324) $ 285,482 $ 148,986 $ 282,174
State (33,685) - 153,295 81,140 116,326
Foreign 314,755 - 237,280 84,000 209,909
------------ --------- ------------ --------- ----------
Total current 42,468 (321,324) 676,057 314,126 608,409
Deferred
Federal (1,808,214) (31,104) 408,690 (29,378) 245,718
State (255,277) (7,202) 67,324 (15,999) 34,782
Foreign 169,506 88,152 196,050 (161,979) 270,142
------------ --------- ------------ --------- ----------
Total deferred (1,893,985) 49,846 672,064 (207,356) 550,642
------------ --------- ------------ --------- ----------
Total income tax
provision (benefit) $(1,851,517) $(271,478) $ 1,348,121 $ 106,770 $1,159,051
============ ========= ============ ========= ==========
F-26
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE J - INCOME TAXES - CONTINUED
A reconciliation of the statutory U.S. Federal income tax rate to the effective
tax rate is as follows:
June 30, December 31, June 30,
----------------------------- ------------ ----------------------------
2002 2001 1999 2000 1999
----------- ----------- ----------- ----------- -----------
Tax provision at statutory rate of
34% $(2,195,434) $ (140,689) $ 1,197,423 $ 560,968 $ 800,718
State income taxes, net of Federal
income tax provision $ (309,931) (21,281) 169,048 79,196 111,099
Foreign tax rate difference 567,431 (177,848) 565,035 (342,461) 464,880
Increase (decrease) in deferred tax
asset valuation allowance - - (198,710) - -
Utilization of loss carryforwards - - (454,897) (220,097) (220,097)
Goodwill amortization and other 86,417 68,340 70,222 29,164 2,451
----------- ----------- ----------- ----------- -----------
Total income tax
provision (benefit) $(1,851,517) $ (271,478) $ 1,348,121 $ 106,770 $ 1,159,051
=========== =========== =========== =========== ===========
The Company's subsidiary in Indonesia has generated tax losses in current and
prior years. As a result, the Company does not have any current foreign taxes
payable as of June 30, 2002.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
2002 2001
----------- -----------
Deferred income tax asset
Accruals not deductible until paid $ 181,863 $ 200,978
Net operating loss carryforwards
U.S 546,741 666,619
PT Buana -- 144,060
Inventory 249,477 216,767
Allowance for doubtful accounts 2,225,673 58,200
Valuation allowance (451,442) (451,442)
----------- -----------
Total deferred tax assets $ 2,752,312 $ 835,182
=========== ===========
Deferred income tax liabilities
Difference between book and tax basis of property, plant $ (349,736) $ (352,037)
and equipment
Other noncurrent liabilities - PT Buana (212,992) (187,546)
----------- -----------
Total deferred tax liabilities $ (562,728) $ (539,583)
=========== ===========
F-27
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE J - INCOME TAXES - CONTINUED
The Company has net operating loss carryforwards at June 30, 2002, of
approximately $1.5 million, which are available to reduce Federal taxable income
in future periods and will begin expiring in 2004. In accordance with Federal
tax regulations, usage of the net operating loss carryforwards is subject to
limitations in future years as a direct result of certain ownership changes that
have occurred. Because of these factors, the utilization of the net operating
losses at June 30, 2002, is limited.
The Company establishes valuation allowances in accordance with the provisions
of SFAS No. 109. The Company continually reviews the adequacy of the valuation
allowance and is recognizing these benefits only as reassessment indicates that
it is more likely than not that the benefits will be realized.
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest on debt outstanding for the years ended June 30, 2002 and
2001, and December 31, 1999, and for the six-month periods ended June 30, 2000
and 1999, was $275,580, $619,479, $690,496, $321,945 and $228,560, respectively.
Cash paid for income taxes during the years ended June 30, 2002 and 2001, and
December 31, 1999, and the six-month periods ended June 30, 2000 and 1999, was
$0, $65,000, $780,000, $30,000 and $740,000, respectively.
The following represents significant related-party operating transactions during
the years ended June 30, 2002 and 2001, and December 31, 1999, and the six-month
periods ended June 30, 2000 and 1999, which are included in the consolidated
statements of cash flows as amounts due to affiliate under the cash flows from
operating activities:
Year ended
-------------------------------------------------- Six-month period ended
June 30, December 31, June 30,
------------------------------- ------------ -------------------------------
2002 2001 1999 2000 1999
------------ ------------ ------------ ------------ ------------
Operating cash transactions
Purchases from affiliate $ 13,519,454 $ 10,906,262 $ 18,409,600 $ 6,621,531 $ 8,813,942
Sales to affiliate (7,366,124) (9,714,384) (9,512,942) (5,188,011) (4,155,636)
Cash payments (13,258,230) (11,452,521) (19,491,663) (7,433,706) (7,626,099)
Cash receipts 12,203,458 6,708,444 8,734,551 3,051,827 3,246,696
------------ ------------ ------------ ------------ ------------
Amounts due to (from)
affiliate $ 5,098,558 $ (3,552,199) $ (1,860,454) $ (2,948,359) $ 278,903
============ ============ ============ ============ ============
F-28
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE L - VALUATION AND QUALIFYING ACCOUNTS
The following tables summarize the activity of the allowance for doubtful
accounts and the reserve for excess and obsolete inventory during 2002, 2001,
2000 and 1999:
Balance at Accounts Balance
Allowance for beginning written Additions at end
doubtful accounts of period off to account of period
- ------------------------------------------------ ------------ -------- ---------- ----------
Allowance for doubtful accounts activity
for the year ended December 31, 1999 $ 240,000 $ - $ 30,000 $ 270,000
Allowance for doubtful accounts activity
for the six-month period ended June
30, 2000 270,000 - (95,000) 175,000
Allowance for doubtful accounts activity
for the year ended June 30, 2001 175,000 (5,262) (19,738) 150,000
Allowance for doubtful accounts activity
for the year ended June 30, 2002 150,000 - 5,586,271 5,736,271
Balance at Balance
Reserve for excess and beginning Inventory Additions at end
obsolete inventory of period write-offs to account of period
- ------------------------------------------------ ------------ ---------- ----------- ----------
Reserve for excess and obsolete inventory
activity for the year ended December
31, 1999 $770,000 $(180,261) $ 155,000 $ 744,739
Reserve for excess and obsolete inventory
activity for the six-month period ended
June 30, 2000 744,739 (422,924) 215,000 536,815
Reserve for excess and obsolete inventory
activity for the year ended
June 30, 2001 536,815 (15,458) (103,594) 417,763
Reserve for excess and obsolete inventory
activity for the year ended June 30,
2002 417,763 - 85,309 503,072
F-29
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE M - SEGMENT REPORTING
The Company has two business segments: Manufacturing and Distribution. These
segments are managed as separate strategic business units due to the distinct
nature of their operations and customer bases. The Manufacturing segment, which
represents the operations of PT Buana, manufactures latex gloves and sells them
primarily to the Company and WRP Asia. All operations of the Manufacturing
segment are located in Indonesia. The Distribution segment involves the
procurement and sale of gloves purchased from the Manufacturing segment and
other glove vendors and then sold to national and regional healthcare, food
service, retail and other distributors. The Distribution segment's significant
customers include those discussed in note H. The operations of the Distribution
segment are located entirely within the U.S.
Accounting policies for measuring segment assets and earnings are substantially
consistent with those described in note A. The Company evaluates segment
performance based on income from operations before provision for (benefit from)
income taxes and minority interest ("Pretax (loss) income"). Management believes
transactions between operating segments are made at prevailing market rates.
The following tables provide financial data for the years ended June 30, 2002
and 2001, and December 31, 1999, and for the six-month periods ended June 30,
2000 and 1999, for these segments:
June 30, 2002 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- ------------- ------------ ------------ ------------
Revenues from external customers $ 8,334,491 $ 39,022,585 $ - $ 47,357,076
Revenues from other operating segments 5,469,376 (5,469,376) -
Pretax loss (187,474) (6,158,544) - (6,346,018)
Depreciation and amortization expense 1,547,936 437,341 - 1,985,536
Interest income 797 923,735 (867,334) 57,198
Interest expense 999,428 252,515 (867,334) 384,609
Total assets 12,010,021 20,937,474 - 32,947,495
Capital expenditures 378,446 13,872 - 392,318
Long-lived assets 9,527,999 2,364,952 - 11,892,951
June 30, 2001 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- ------------- ------------ ------------ ------------
Revenues from external customers $ 9,994,989 $ 41,893,863 $ - $ 51,888,852
Revenues from other operating segments 3,254,850 - (3,254,850) -
Pretax income (loss) 706,275 (262,919) - 443,356
Depreciation and amortization expense 1,623,736 394,799 - 2,018,535
Interest income 2,266 906,005 (854,915) 53,356
Interest expense 1,040,389 534,480 (854,915) 719,954
Total assets 18,280,618 17,791,870 - 36,072,488
Capital expenditures 487,326 440,880 - 928,206
Long-lived assets 10,575,816 2,796,664 - 13,372,480
F-30
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE M - SEGMENT REPORTING - CONTINUED
June 30, 2000 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- ------------- ------------ ------------ ------------
Revenues from external customers $ 5,499,811 $26,237,671 $ - $31,737,482
Revenues from other operating segments 1,766,036 - (1,766,036) -
Pretax income 527,608 1,122,299 - 1,649,907
Depreciation and amortization expense 791,388 215,913 - 1,007,301
Interest income 821 421,200 421,200 821
Interest expense 539,729 213,900 (421,200) 332,429
Total assets 16,183,414 19,670,973 - 35,854,387
Capital expenditures 386,853 61,757 - 448,610
Long-lived assets 11,647,386 2,876,976 - 14,524,362
June 30, 1999 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- ------------- ------------ ------------ ------------
Revenues from external customers $ 4,373,701 $26,572,775 $ - $30,946,476
Revenues from other operating segments 809,537 - (809,537) -
Pretax income 36,493 2,318,561 - 2,355,054
Depreciation and amortization expense 678,839 168,616 - 847,455
Interest income 4,345 490,943 (490,777) 4,511
Interest expense 581,260 284,209 (490,777) 374,692
Total assets 16,025,896 26,605,210 - 42,631,106
Capital expenditures 1,830,824 597,399 - 2,428,223
Long-lived assets 12,542,322 2,997,350 - 15,539,672
December 31, 1999 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- ------------- ------------ ------------ ------------
Revenues from external customers $ 8,610,232 $ 56,669,872 $ - $ 65,280,104
Revenues from other operating segments 1,726,945 - (1,726,945) -
Pretax (loss) income (88,115) 3,609,947 - 3,521,832
Depreciation and amortization expense 1,465,593 351,900 - 1,817,493
Interest income 5,949 912,553 (912,004) 6,498
Interest expense 1,128,629 585,534 (912,004) 802,159
Total assets 15,420,491 24,773,680 - 40,194,171
Capital expenditures 2,084,939 887,898 - 2,972,837
Long-lived assets 12,060,563 3,040,598 - 15,101,161
F-31
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE N - QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
3/31/02 6/30/02
------- -------
(In thousands except
for per share data)
Net revenues $10,153 $12,861
Income from operations (1,010) (5,309)
Net loss (753) (3,388)
Net income per share
Basic $ (0.11) $ (0.52)
Diluted (0.11) (0.52)
3/31/01 6/30/01 9/30/01 12/31/01
------- ------- ------- --------
(In thousands except for per share data)
Net revenues $12,461 $12,854 $12,325 $12,018
Income from operations (100) 842 263 (5)
Net (loss) income (64) 796 (21) (131)
Net income per share
Basic $ (0.01) $ 0.12 $ (0.01) $ (0.01)
Diluted (0.01) 0.12 (0.01) (0.01)
3/31/00 6/30/00 9/30/00 12/31/00
------- ------- ------- --------
(In thousands except for per share data)
Net revenues $17,234 $14,503 $13,865 $12,709
Income from operations 1,146 898 683 (511)
Net income (loss) 871 549 241 (444)
Net income per share
Basic $ 0.13 $ 0.08 $ 0.04 $ (0.07)
Diluted 0.13 0.08 0.04 (0.07)
F-32
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002 AND 2001
NOTE N - QUARTERLY FINANCIAL SUMMARY (UNAUDITED) - CONTINUED
3/31/99 6/30/99 9/30/99 12/31/99
------- ------- ------- --------
(In thousands except for per share data)
Net revenues $17,082 $13,865 $17,068 $17,265
Income from operations 1,740 873 943 784
Net income 1,214 111 851 277
Net income per share
Basic $ 0.18 $ 0.02 $ 0.12 $ 0.03
Diluted 0.17 0.02 0.12 0.04
F-33
CERTIFICATIONS
I, Lew Kwong Ann, certify that:
1. I have reviewed this annual report on Form 10-KSB of WRP Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. Based on my knowledge, the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on October 15, 2002, by WRP Corporation and
to which this certification is appended (the "Periodic Report") fully complies
with the requirements of Section 13(a) of the Securities and Exchange Act of
1934, and the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of operation of WRP
Corporation.
Date: October 15, 2002
/s/ Lew Kwong Ann
--------------------------
Chief Executive Officer
CERTIFICATIONS
I, Alan E. Zeffer, certify that:
1. I have reviewed this annual report on Form 10-KSB of WRP Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. Based on my knowledge, the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on October 15, 2002, WRP Corporation and to
which this certification is appended (the "Periodic Report") fully complies with
the requirements of Section 13(a) of the Securities and Exchange Act of 1934,
and the information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operation of WRP
Corporation.
Date: October 15, 2002
/s/ Alan E. Zeffer
--------------------------
Alan E. Zeffer
Title: Chief Financial Officer