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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File Number: 0-17458
WRP CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 73-1326131
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 PARK BOULEVARD, SUITE 1260
ITASCA, IL 60143
----------------
(Address of principal executive office)
(630) 285-9191
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
------------------------------------
The number of shares of the issuer's Common Stock, par value $.01 per
share, and issuer's Series A Convertible Common Stock, par value $.01 per share,
outstanding as of February 4, 2003, was 5,803,692 and 1,252,538, respectively.
WRP CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
A quarterly review of the third quarter financial statements has not
been performed by an independent certified public accountant in accordance with
Statement of Auditing Standards No. 100.
Item 1.
Condensed Consolidated Balance Sheets
March 31, 2003 (unaudited) and June 30, 2002, (unaudited).............. pgs.3-4
Condensed Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2003 and 2002............................. pg. 5
Condensed Consolidated Statements of Operations (unaudited) for the
Nine Months Ended March 31, 2003 and 2002.............................. pg. 6
Condensed Consolidated Statements of Cash Flow (unaudited) for the
Nine months ended March 31, 2003 and 2002.............................. pg. 7
Notes to Interim Consolidated Financial Statements (unaudited)......... pg. 8
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. pg.18
Item 3.
Quantitative and Qualitative Disclosures About Market.................. pg.24
Item 4. Controls and Procedures................................................ pgs. 24-25
PART II - OTHER INFORMATION
Items 1.-5...................................................................... pg.25
Item 6.......................................................................... pg.25
2
WRP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, 2003 June 30, 2002
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 424,943 $ 451,948
Accounts receivable - trade, net of allowance for
doubtful accounts of $57,571 at March 31, 2003 and $150,000
at June 30, 2002 1,906,524 4,846,396
Inventories, net 9,485,965 8,506,652
Prepaid expenses 765,684 739,944
Due from affiliate, net of allowance of $5,586,271 3,901,233 3,368,050
Deferred tax assets 2,816,924 2,752,312
Other receivables 493,634 389,242
------------- -------------
Total current assets 19,794,907 21,054,544
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 736,535
Construction in progress 56,360 36,084
Equipment, furniture and fixtures 16,677,077 16,534,201
Building improvements 2,336,683 2,304,128
Vehicles 115,467 90,201
------------- -------------
Total property, plant and equipment 19,922,122 19,701,149
Less - Accumulated depreciation and amortization 10,418,815 9,102,424
------------- -------------
Property, plant and equipment, net 9,503,307 10,598,725
------------- -------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $707,906
at March 31, 2003 and $707,906 at June 30, 2002 1,042,094 1,042,094
Other Assets 504,697 252,132
------------- -------------
Total other assets 1,546,791 1,294,226
------------- -------------
$ 30,845,005 $ 32,947,495
============= =============
3
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, 2003 June 30, 2002
-------------- -------------
CURRENT LIABILITIES:
Accounts payable - trade $ 2,166,911 $ 1,255,515
Trade notes payable to bank 2,508,324 2,860,414
Notes payable and current portion of long-term obligations 2,115,364 4,555,964
Due to affiliate 4,466,375 2,657,279
Accrued expenses 1,398,608 2,382,262
------------ ------------
Total current liabilities 12,655,582 13,711,434
------------ ------------
LONG-TERM DEBT - 19,311
------------ ------------
DEFERRED TAX LIABILITY 626,012 562,728
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 1,616,493 1,817,872
------------ ------------
SHAREHOLDERS' EQUITY:
Series A common stock, $.01 par value; 1,252,538 shares
authorized; 1,252,538 shares issued and outstanding in 2003 and 2002 12,525 12,525
Common stock, $.01 par value; 10,000,000 shares
authorized; 5,803,692 shares issued and
outstanding at March 31, 2003 and June 30, 2002 58,037 58,037
Additional paid-in capital 17,942,471 17,942,471
Retained earnings (436,939) 441,493
Less - Common stock in treasury, at cost, 432,600 and 412,600
shares at March 31, 2003 and June 30, 2002, respectively (1,629,176) (1,618,376)
------------ ------------
Total shareholders' equity 15,946,918 16,836,150
------------ ------------
$ 30,845,005 $ 32,947,495
============ ============
The accompanying notes to interim consolidated financial statements are an
integral part of these balance sheets.
4
WRP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended March 31,
-----------------------------------
2003 2002
-----------------------------------
NET SALES $ 7,062,481 $ 10,153,320
COST OF GOODS SOLD 6,399,130 8,055,449
------------ ------------
GROSS PROFIT 663,351 2,097,871
OPERATING EXPENSES:
Selling, general and administrative 2,103,707 3,107,444
------------ ------------
LOSS FROM OPERATIONS (1,440,356) (1,009,573)
INTEREST EXPENSE 35,379 55,820
OTHER INCOME 27,218 35,047
------------ ------------
Loss from continuing operations before benefit from income taxes
and minority interest (1,448,517) (1,030,346)
BENEFIT FROM INCOME TAXES (524,943) (219,629)
------------ ------------
Loss from continuing operations before minority interest (923,574) (810,717)
MINORITY INTEREST IN LOSS OF SUBSIDIARY 112,305 57,739
------------ ------------
NET LOSS $ (811,269) $ (752,978)
BASIC NET LOSS PER COMMON SHARE
CONTINUING OPERATIONS $ (0.12) $ (0.11)
DILUTED NET LOSS PER COMMON SHARE
CONTINUING OPERATIONS $ (0.12) $ (0.11)
5
WRP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months
Ended March 31,
-----------------------------------
2003 2002
-----------------------------------
NET SALES $ 26,396,502 $ 34,495,468
COST OF GOODS SOLD 22,158,185 25,502,835
------------ ------------
GROSS PROFIT 4,238,317 8,992,633
OPERATING EXPENSES:
Selling, general and administrative 6,174,445 9,744,114
------------ ------------
LOSS FROM OPERATIONS (1,936,128) (751,481)
INTEREST EXPENSE 105,203 215,032
OTHER INCOME 463,339 71,606
------------ ------------
Loss from continuing operations before (benefit) provision
from income taxes and minority interest (1,577,992) (894,907)
(BENEFIT) PROVISION FROM INCOME TAXES (582,180) 53,793
------------ ------------
Loss from continuing operations before minority interest and
extraordinary item (995,812) (948,700)
MINORITY INTEREST IN LOSS OF SUBSIDIARY 117,379 149,709
------------ ------------
Loss from continuing operations before extraordinary item (878,433) (798,991)
EXTRAORDINARY ITEM, NET OF TAX - (105,232)
------------ ------------
NET LOSS $ (878,433) $ (904,223)
============ ============
BASIC NET LOSS PER COMMON SHARE
CONTINUING OPERATIONS $ (0.13) $ (0.12)
DILUTED NET LOSS PER COMMON SHARE
CONTINUING OPERATIONS $ (0.13) $ (0.13)
6
WRP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
Nine Months Nine Months
Ended Ended
March 31, 2003 March 31, 2002
-------------- --------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (878,433) $ (904,224)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 1,390,091 1,464,731
Amortization - 50,424
Deferred income taxes (1,328) (331,418)
Loss on disposal of property, plant and equipment 7,200 29,291
Changes in operating assets and liabilities-
Accounts receivable - trade, net 2,939,872 482,787
Inventories, net (979,313) (3,556,968)
Prepaid expenses (25,740) 169,352
Other assets (356,958) (249,870)
Accounts payable - trade 911,396 2,359,026
Accrued expenses (983,653) 367,268
Amounts due to and from affiliates 1,275,913 (766,196)
----------- -----------
Net cash provided by (used in) operating activities 3,299,047 (885,797)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (301,872) (367,010)
Proceeds on sale of property, plant and equipment - 7,714
Minority interest in subsidiary (201,379) (149,709)
----------- -----------
Net cash used in investing activities (503,251) (509,005)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on trade notes payable to banks (352,090) 238,171
Net payments on notes payable (2,459,911) 1,110,327
Payments for treasury stock repurchases (10,800) (46,376)
----------- -----------
Net cash (used in) provided by financing activities (2,822,801) 1,302,122
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,005) (92,680)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 451,948 123,741
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 424,943 $ 31,061
=========== ===========
integral part of these statements.
7
WRP CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
1. DESCRIPTION OF BUSINESS:
We are 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 foodservice gloves through our 70% owned Indonesian
manufacturing facility, PT WRP Buana Multicorpora ("PT Buana"). In 2002, we
broadened our product line to include other disposable items to be used
primarily in the foodservice industry.
2. BASIS OF PRESENTATION:
The accompanying unaudited condensed, consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
in the United States of America, for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
necessary for a fair presentation, consisting only of normal recurring
adjustments, have been included. For further information, refer to the
consolidated financial statements contained in the Annual Report on Form 10-K
for the year ended June 30, 2002, filed October 18, 2002. The results of
operations for the nine-month period ended March 31, 2003, may not be indicative
of the results that may be expected for the fiscal year ended June 30, 2003.
3. PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include our
accounts and those of AHPC and our 70% owned subsidiary, PT Buana. All
significant intercompany transactions have been eliminated in consolidation.
4. MAJORITY SHAREHOLDER:
WRP Asia Pacific Sdn. Bhd., a Malaysian corporation ("WRP Asia"), owns
all of our outstanding Series A Common Stock and is our majority shareholder.
At March 31, 2003, 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 purchases a majority of its powder-free latex
exam gloves from WRP Asia.
8
5. COMMON STOCK:
At March 31, 2003, we had issued 1,252,538 shares of Series A
Convertible Common Stock and 5,803,692 shares of Common Stock for a total of
7,056,230 shares. The terms of the Series A Common Stock owned by WRP Asia are
substantially the same as our Common Stock except:
a. Each share of Series A Common Stock is convertible
into one share of our Common Stock, $.01 par value.
We have reserved 1,252,538 shares of Common Stock for
issuance upon conversion of the Series A Common
Stock.
b. Series A Common Stock entitles WRP Asia to elect all
Class A directors, who represent a majority of our
Board of Directors, and to vote with the holders of
Common Stock as a single class with respect to all
other matters subject to a vote of the shareholders.
During the nine months ended, March 31, 2003, we purchased $10,800 of
shares of our Common Stock.
6. FOREIGN CURRENCY TRANSACTIONS:
Gains and losses from foreign currency exchange transactions are
included in net loss in the period in which they occur. During the quarter ended
March 31, 2003 and 2002, the foreign exchange loss included in the determination
of net income was $6,058 and $13,811, respectively. The functional currency of
PT Buana is the U.S. dollar.
7. RELATED-PARTY TRANSACTIONS:
At March 31, 2003 and 2002, amounts due from/to affiliates consist of
the following:
2003 2002
Due from Affiliate-
Current - WRP Asia $ 9,487,504 $ 3,227,728
Due to Affiliate-
Current - WRP Asia $ (4,466,375) $ (3,678,419)
------------ ------------
Amounts due from
Affiliate - Net * $ 5,021,129 $ 450,691
============ ============
Purchases from Affiliate - $ (3,369,690) $(11,594,370)
============ ============
Sales to Affiliate - $ 4,791,120 $ 5,383,925
============ ============
*Right of set-off granted in October 2002.
9
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 March 31, 2003, we have outstanding accounts receivable from WRP
Asia of approximately $9,487,504. Subsequent to June 30, 2002, the amounts due
to PT Buana of approximately $5,586,000 were assigned to us in partial
satisfaction of intercompany amounts due from PT Buana to us. As of March 31,
2003, there is approximately $278,911 owing PT Buana from WRP Asia.
As of March 31, 2003, we have accounts payable to WRP Asia of
approximately $4,466,375, primarily resulting from the purchase of inventories
from WRP Asia.
The net amount due from WRP Asia, before allowance for doubtful
accounts at March 31, 2003, was approximately $5,021,129, against which we have
provided an allowance for doubtful accounts of approximately $5,586,000
(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 WRP Asia's
refinancing plan, which has been ongoing for over 18 months without completion.
Subsequent to September 30, 2002, we entered into a formal agreement
with WRP Asia, to provide for the full and complete right of offset of any trade
payables due against amounts they owe to us 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 $844,053 at March 31, 2003, are realizable
based upon the agreement granting right of offset and ongoing purchases from WRP
Asia. In management's opinion, while we have been advised by WRP Asia that it
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 long-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 March 31, 2003, this restructuring initiative
has not been completed. WRP Asia has advised us that it believes this initiative
will now be completed in June 2003 and attributes the delays to extensive due
diligence being 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
approximately $5,586,000 in the event that WRP Asia is ultimately unable to
complete its restructuring and financing. WRP Asia advises us
10
that all of its shares of WRPC have been pledged as collateral security to its
lead lender, Standard Chartered Bank. Should WRP Asia fail to effect the
restructuring or should it enter into a loan workout in which it parts with our
shares, it is possible that Standard Chartered Bank or its designees may obtain
ownership of these shares, which represent a majority of the beneficial
ownership in us.
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, WRP Asia is required, under this
resolution, 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 exceeds $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 J. Simmons
and Don L. Arnwine, as well the independent "A" Directors, G. Jeff Mennen and
Richard J. Swanson. The purpose of the Committee is to examine the WRP Asia
restructuring process, as well as the options and alternatives available to us.
Additionally, 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 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. The 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.
8. NET LOSS PER SHARE:
We follow the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share (EPS)" ("SFAS 128"), which requires dual presentation of
basic and diluted earnings per share for all periods presented. Basic EPS
amounts are based on the weighted-average number of shares of common stock
outstanding during each period while diluted EPS amounts are based on the
weighted-average number of shares of common stock outstanding during the period
and the effect of dilutive stock options and warrants. The weighted-average
number of common shares and common share equivalents outstanding for the three
and six months ended December 31, 2002 and 2001 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Basic weighted-average number of
Common shares outstanding 6,632,734 6,673,230
Dilutive effect of common share
Equivalents - -
- ---------------------------------------------------------------------------------------------------------------
Dilutive weighted-average number of common shares
outstanding 6,632,734 6,673,230
11
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Basic weighted-average number of
Common shares outstanding 6,637,939 6,732,973
Dilutive effect of common share
Equivalents - -
- ---------------------------------------------------------------------------------------------------------------
Dilutive weighted-average number of common shares
outstanding 6,637,939 6,732,973
At March 31, 2003, there were 7,056,230 shares of our Common Stock and
Series A Common Stock outstanding.
As approved by the Board of Directors, all outstanding stock options at
February 29, 2000, to current employees, officers and directors were repriced
effective February 29, 2000, to $2.07, the closing price on that date. All of
the stock options, which were repriced, totaling 483,600 options, originally
contained exercise prices that were significantly higher than the market price.
We are subject to variable accounting; however, the share price has not exceeded
$2.07.
9. ACCOUNTING FOR INCOME TAXES:
We record income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). SFAS 109 utilizes the liability
method and deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on the changes in the deferred tax asset or
tax liability from period to period.
Our U.S. operations had generated net operating loss carry-forwards
("NOL's") in prior years of which approximately $1.3 million is remaining at
March 31, 2003. These NOL's are fully reserved and are included as a component
of deferred tax assets. These NOL's will be available to offset future U.S.
generated taxable income and will begin expiring in 2004. In accordance with
federal tax regulations, usage of the NOL's are and have been subject to
limitations as a direct result of certain ownership changes that have occurred
in the past, and may be further limited should WRP Asia transfer ownership of
its shares of stock to another holder. Our U.S. operations have generated NOL's
subsequent to June 30, 2002, which have not been reserved and we have recorded a
tax benefit associated with the U.S. generated book and tax losses subsequent to
June 30, 2002, which are available to be carried back against previous years'
taxable income.
For the nine months ended March 31, 2003 and 2002, we have recorded a
(benefit) provision from income taxes of $(582,180) and $53,793, respectively.
10. CONTINGENCIES:
Over the last several years, numerous product liability lawsuits have
been filed against suppliers and manufacturers of latex gloves alleging, among
other things, adverse allergic reactions. We are one of numerous defendants that
have been named in such lawsuits. During the nine months ended March 31, 2003,
there were no additional product liability lawsuits filed,
12
and we were dismissed from 13 lawsuits. At March 31, 2003, we were involved in a
total of 54 lawsuits, either as a named defendant, third party or an
indemnifier. None of these lawsuits name us as the sole defendant in these
claims.
We possess product liability insurance coverage which covers the
defense costs and certain damage awards associated with the product liability
claims against ourselves, AHPC and PT Buana, in addition to the indemnity of
AHPC's customers to the limits of its policy, subject to deductions on each
claim, to be paid by AHPC. We believe that all legal claims are adequately
provided for and if not provided for, are without merit or involve such amounts
that would not materially or adversely affect us. However, there is no assurance
that AHPC's insurance will be sufficient to meet all damages for which we may be
held liable. For example, in a jury trial, even where actual damages are
somewhat limited, or where causation of liability is questionable, the jury may
choose to award a substantial verdict to the plaintiff. Likewise, there is no
assurance that the outcome of these suits will not adversely affect our
operations or financial condition. We will vigorously contest any latex claim
initiated against us, but will enter into a settlement agreement, where, after
careful consideration, management determines that our best interests will be
served by settling the matter. In addition, there can be no assurances that
product liability insurance for these claims will continue to be available to us
or, if available, that it will be available in sufficient amounts and at
affordable terms.
11. COMPREHENSIVE INCOME:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), requires companies to report all changes in
equity during a period, except those resulting from investment by owners and
distributions to owners, in a financial statement for the period in which they
are recognized. Comprehensive profit (loss) for the nine months ended March 31,
2003 and 2002 was equal to net profit (loss) and there were no accumulated other
comprehensive income items during those periods.
12. SEGMENT REPORTING:
We have 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 AHPC and other customers through WRP Asia's distribution network.
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 manufacturers and then sold to
national and regional healthcare, foodservice, retail and other distributors.
The operations of the distribution segment are located entirely within the U.S.
We evaluate segment performance based on income (loss) before provision
for (benefit from) income taxes and minority interest ("Pre-tax income (loss)").
Transactions between operating segments are made at prevailing market rates.
13
The following tables provide financial data for the nine months ended
March 31, 2003 and 2002 for these segments:
THREE MONTHS ENDED
MARCH 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 1,323,972 $ 5,738,509 $ - $ 7,062,481
Revenues from other operating segments 790,534 - (790,534) -
Pre-tax loss (535,707) (912,810) - (1,448,517)
Total Assets 11,435,506 19,409,499 - 30,845,005
THREE MONTHS ENDED
MARCH 31, 2002 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 1,900,846 $ 8,252,474 $ - $ 10,153,320
Revenues from other operating segments 1,455,295 - (1,455,295) -
Pre-tax income (loss) 19,661 (1,022,008) (28,000) (1,030,347)
Total Assets 18,770,001 37,567,664 (16,231,946) 40,105,719
NINE MONTHS ENDED
MARCH 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 6,312,156 $ 20,084,346 $ - $ 26,396,502
Revenues from other operating segments 3,402,926 - (3,402,926) -
Pre-tax (loss) (556,085) (1,021,907) - (1,577,992)
Total assets 11,435,506 19,409,499 - 30,845,005
NINE MONTHS ENDED
MARCH 31, 2002 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 5,861,154 $ 28,634,314 $ - $ 34,495,468
Revenues from other operating segments 4,703,186 - (4,703,186) -
Pre-tax (loss) (11,390) (956,518) 73,000 (894,908)
Total assets 18,770,001 37,567,664 (16,231,946) 40,105,719
13. NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS:
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 have adopted 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 long-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
14
December 15, 2001, and interim periods within those fiscal years. Although early
adoption is encouraged, it is not required. We have adopted 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
have adopted the provision set forth in this statement for all exit and disposal
activities initiated after December 31, 2002.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
FAS No. 141 addresses the accounting and reporting for business combinations and
supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." We have
adopted this standard for all business combinations initiated after June 30,
2001.
Also in June 2001, the 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
supersedes APB Opinion No. 17, "Intangible Assets." The provisions of this
statement are required to be applied for fiscal years beginning after December
15, 2001. We anticipate that future earnings will increase without amortization
expense; however, we must assess its existing goodwill for impairment. Our
goodwill, previously disclosed as arising from its purchase of PT Buana,
represents the excess of purchase price over fair market value of the net assets
of AHPC. Our assessment of goodwill as of June 30, 2002, and the effective date
of SFAS No.142 does not require an impairment charge.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Other." This interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligation under guarantees. This interpretation also
clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations the guarantor has
undertaken in issuing that guarantee. The initial recognition and measurement
provisions of this statement shall be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002 irrespective of the
guarantors fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure an amendment of FASB
Statement No. 123". This statement provides alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends Accounting
Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting", to
require disclosure about those effects in interim financial information. The
provisions of this statement are effective for financial statements for fiscal
years ending after December 15, 2002, and for interim periods beginning after
December 15, 2002.
15
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities." This interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities. The provisions of this interpretation
are effective immediately for all variable interest entities created after
January 31, 2003; for the first fiscal year or interim period beginning after
June 15, 2003 for variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003.
14. INVENTORIES:
Since a majority of our product is imported from Southeast Asia, it is
our practice to maintain a certain level of safety-stock inventory. Inventories
are accounted for on a first-in, first-out ("FIFO") basis and are valued at the
lower of actual cost or market.
15. KEY CUSTOMERS:
Our customers include leading foodservice distributors and healthcare
product suppliers. During the nine months ended March 31, 2003, three of AHPC's
national customers accounted for 68.4%, 8.3% and 2.6% of net sales. 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-users of our products
are 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 the vast majority of our medical customers, as we substantially reduced
our medical sales staff and presence in the medical market. This agreement has
reduced sales to Maxxim.
16. CREDIT FACILITY:
On December 1, 1998, AHPC entered into a $10,000,000 three-year credit
agreement through December 1, 2001, with a major financial services company.
Subsequently, on March 31, 1999, the limit was increased to $15,000,000. The new
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 (1.25% at March 31, 2003), plus 4.50%. The credit facility
was used to repay all obligations under the previous bank facility. On November
15, 2001, we completed the renewal and extension of this credit facility for an
additional term of three years, with terms and conditions similar to the
existing facility.
In conjunction with a waiver of the covenant violations as of June 30,
2002, the existing credit facility agreement was amended to expire on December
1, 2003. As of March 31, 2003, we were in compliance with our covenants.
16
17. MEDICAL BUSINESS:
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 most 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 the business with
respect to most of our customers in the medical division to MAXXIM.
18. NASDAQ LISTING:
On February 14, 2002, NASDAQ notified us that the bid price of our
common stock had closed at less than $1.00 per share over the previous 30
consecutive trading days, and, as a result, did not comply with Marketplace Rule
4310(c)(4) (the "Rule"). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), we were provided 180 calendar days, or until August 13, 2002, to
regain compliance with the Rule.
On August 14, 2002, NASDAQ notified us that we had not regained
compliance in accordance with Marketplace Rule 4310(c)(8)(D). However, NASDAQ
noted that we meet the initial listing requirements for the NASDAQ SmallCap
Market under Marketplace Rule 4310(c)(2)(A). Specifically, we qualify with the
$5,000,000 stockholders equity requirement. Therefore, in accordance with
Marketplace Rule 4310(c)(8)(D), we were provided an additional 180 days, or
until February 10, 2003, to regain compliance. In order to regain compliance our
common stock must close at $1.00 per share or more for a minimum of ten
consecutive trading days. If compliance with this Rule cannot be demonstrated by
February 10, 2003, NASDAQ will notify us that our securities will be delisted.
At that time, we may appeal NASDAQ's decision to a Listing Qualifications Panel.
On January 30, 2003, NASDAQ extended the minimum bid price compliance
periods. Specifically, NASDAQ will maintain the initial 180-day, calendar-day
bid price grace period for all SmallCap issuers, but extend the bid price grace
period for SmallCap issuers demonstrating compliance with the core SmallCap
initial listing criteria from 180 to up to 540 days (approximately 12 months).
Compliance with this standard will be verified every 180 days.
On April 9, 2003, we received notice from NASDAQ that, over the last 30
days, our Common Stock had not maintained a minimum market value of publicly
held shares ("MVPHS") of $1,000,000, as required for continued inclusion by
Marketplace Rule 4310 (c)(7) (the "Rule"). NASDAQ further advised that, in
accordance with Marketplace Rule 4310 (c)(8)(B), we will be provided 90 days, or
until July 8, 2003, to regain compliance. If, at any time before July 8, 2003,
the MVPHS of our Common Stock is $1,000,000 or more for a minimum of ten
consecutive trading days, NASDAQ will provide written notification that we are
in compliance with the rule. If compliance with this rule is not demonstrated by
July 8, 2003, NASDAQ will provide written notification that our securities will
be delisted. At that time, we will have the opportunity to appeal this
determination to a listing Qualifications Panel.
17
19. WEST COAST DOCK STRIKE:
During October 2002, labor negotiations between the Pacific Maritime
Association and the International Longshore and Warehouse Union broke down
resulting in all West Coast ports being closed for ten days. Since we import all
our products through these ports, we were unable to have product delivered
during this time period. Additionally, by the end of the tenth day, work
stoppage we had 25 containers waiting to be unloaded at various ports on the
West Coast. It took us approximately 60 days to clear this backlog. Due to the
work stoppage and subsequent shipping delays we incurred additional costs of
approximately $297,000.
20. MAXXIM BANKRUPTCY:
On February 11, 2003, MAXXIM filed for protection under Chapter 11 of
the Federal Bankruptcy Act in the District of Delaware. It is our understanding
that they plan to continue to do business and to reorganize their operations as
a debtor in possession. Under our Transition Services Agreement dates as of
March 1, 2002, with MAXXIM, MAXXIM agreed to pay us $375,000 in the aggregate
upon achievement of certain milestones, all of which were achieved. To-date,
MAXXIM has only paid $125,000 of such obligations; however, we have included as
income the accrued, unpaid portion of these obligations. The total amount due
from MAXXIM is $283,279; of this amount, $250,000 is for payments due under the
transition agreement. Since the future success of MAXXIM may be contingent upon
the business we transitioned to MAXXIM, we believe this amount will ultimately
be collectible. The remaining balance due of $33,279 represents trade accounts
receivable, and we believe we have adequate reserves to cover this amount if
this receivable should prove uncollectible.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements in this Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, including statements
regarding new products and markets, gross margins, selling, general and
administrative expenses, liquidity and cash need 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. We caution investors that our
business is subject to significant risks and uncertainties.
Our wholly owned subsidiary, American Health Products Corporation
("AHPC"), is engaged in the marketing and distribution of high-quality,
disposable, examination, foodservice and specialty gloves in the United States
and has been in the glove business since our incorporation in January 1989. For
the nine months ended March 31, 2003, we recorded net sales of $26,396,502. Our
70% owned subsidiary, PT WRP Buana Multicorpora ("PT Buana"), which commenced
operations in April 1996, owns and operates an Indonesian glove manufacturing
plant. PT Buana manufactures high-quality, disposable latex exam and foodservice
gloves.
During February 2000, our Board of Directors elected to change our
reporting period from a calendar year ending December 31 to a fiscal year ending
June 30, which corresponds to
18
the year-end of our majority shareholder, WRP Asia. As a result, this Form 10-Q
represents the third quarter of our fiscal year ended June 30, 2002.
THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2002:
Our net sales are derived from the sale of finished product, net of
allowable rebates, royalties, discounts and returns. Net sales include glove
sales from AHPC's glove product line and latex exam glove sales from PT Buana,
exclusive of its sales to AHPC. Net sales totaled $7,062,481 and $10,153,320 for
the three months ended March 31, 2003 and 2002, respectively. This represents a
30.4% decline in net sales for the year compared to the year earlier period. The
decrease in sales of $3,090,839 was due, in part, to our transition out of most
of the medical business and a reduction in production from PT Buana in the third
quarter.
Cost of goods sold includes all costs to manufacture, purchase and
obtain the finished product, including costs such as ocean freight, customs,
duty and warehousing. Cost of goods sold decreased 20.6% from $8,055,449 for the
three months ended March 31, 2002, to $6,399,130 for the three months ended
March 31, 2003, due to the decline in sales caused by our transition out of most
of the acute-care medical business and the reduction in PT Buana's production.
As a percentage of net sales, cost of goods sold increased from 79.3% for the
three months ended March 31, 2002, to 90.6% for the three months ended March 31,
2003. The gross profit percentage decreased to 9.4% in the three month ended
March 31, 2003, versus 20.7% in the same period of 2002. The gross profit
percentage decrease is attributed to an increase in the cost of raw latex, which
increased by more than 50% versus the comparable 2002 period. The gross profit
percentage was also impacted by increases in product mix of lower-margin
products, costs associated with the West Coast dock strike and price decreases
provided to our customers. 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 decreased
by 32.3% from $3,107,444 for the three months ended March 31, 2002, to
$2,103,707 for the three months ended March 31, 2003. The decrease of $1,003,737
in SG&A expenses is attributable to a decrease in salaries and salary-related
expense associated with our transition out of the acute-care medical business
offset by an increase in marketing expense related to expanding our foodservice
product-line offerings.
Loss from operations was $(1,440,356) for the three months ended March
31, 2003, as compared to loss from operations of $(1,009,573) for the three
months ended March 31, 2002. This loss from operations reflects the reduction in
sales and increased costs of goods sold.
Interest expense declined during the three months ended March 31, 2003,
to $35,379 compared to $55,820 in the same quarter of 2002. This decrease is
attributable to debt reductions on our line of credit and lower interest rates
during the quarter in 2003 versus the 2002 comparable quarter.
19
We recorded a foreign currency exchange loss from our Indonesian
subsidiary, PT Buana, in the quarters ended March 31, 2003 and 2002, of $6,058
and $13,811, respectively. 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. These foreign currency exchange gains
or losses are reported as a component of the SG&A expense category in the
consolidated statements of operations. PT Buana uses the U.S. dollar as its
functional currency. 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 experience economic and political instability, which is
characterized by fluctuations in its foreign currency exchange rate, interest
rates, stock market and inflation rate. The 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.
Other income for the quarter ended March 31, 2003 and 2002, was $27,218
and $35,047, respectively.
The benefit for income taxes for the three months ended March 31, 2003,
was $(524,943) and $(219,629) for the comparable 2002 period. This change in
income taxes is primarily attributable to the net loss for the three-month
period and the fluctuations of the Indonesian rupiah against the US dollar
during the period. Our U.S. operations generated net operating loss
carry-forwards ("NOL's") in prior years of which approximately $1.3 million is
remaining from June 30, 2002, which can be used to offset future U.S. generated
taxable income through the year 2004.
For the three months ended March 31, 2003, our net loss was $(811,269),
compared to a net loss of $(752,978) in the same period of 2002. Diluted loss
per share for the three months ended March 31, 2003 and 2002, was $(.12) and
$(.11), respectively.
NINE MONTHS ENDED MARCH 31, 2003, COMPARED TO THE NINE MONTHS ENDED
MARCH 31, 2002:
Our net sales are derived from the sale of finished product, net of
allowable rebates, royalties, discounts and returns. Net sales include glove
sales from AHPC's glove product line and latex exam glove sales from PT Buana,
exclusive of its sales to AHPC. Net sales totaled $26,396,502 and $34,495,468
for the nine months ended March 31, 2003 and 2002, respectively. This represents
a 23.5% decline in net sales for the year compared to the year earlier period.
The decrease in sales of $8,098,966 was due, in part, to our transition out of
most of the medical business and a reduction in production from PT Buana in the
month of December 2002 and during the third quarter ended March 31, 2003.
Cost of goods sold includes all costs to manufacture, purchase and
obtain the finished product, including costs such as ocean freight, customs,
duty and warehousing. Cost of goods sold decreased 13.1% from $25,502,835 for
the nine-month period ended March 31, 2002, to $22,158,185 for the nine months
ended March 31, 2003, due to the decline in sales caused by our transition out
of most of the acute-care medical business and the reduction in PT Buana's
production. As a percentage of net sales, cost of goods sold increased from
73.9% for the nine months ended March 31, 2002, to 83.9% for the nine months
ended March 31, 2003. The gross profit percentage decreased to 16.1% in the nine
months ended March 31, 2003, versus 26.1% in
20
the same period of 2002. The gross profit percentage decrease is attributed to
an increase in the cost of raw latex, which increased by more than 50% versus
the comparable 2002 period. The gross profit percentage was also impacted by
increases in product mix of lower-margin products, costs associated with the
west coast dock strike and price decreases provided to our customers. 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 decreased
by 36.6% from $9,744,114 for the nine months ended March 31, 2002, to $6,174,445
for the nine months ended March 31, 2003. The decrease of $3,569,669 in SG&A
expenses is attributable to a decrease in salaries and salary-related expense
associated with our transition out of the acute-care medical business offset by
an increase in marketing expense related to expanding our foodservice
product-line offerings.
Loss from operations was $(1,936,128) for the nine months ended March
31, 2003, as compared to income from operations of $(751,481) for the nine
months ended March 31, 2002. This loss from operations reflects the reduction in
sales and increased costs of goods sold.
Interest expense declined during the nine months ended March 31, 2003,
to $105,203 compared to $215,032 in the same nine-month period of 2002. This
decrease is attributable to debt reductions on our line of credit and lower
interest rates during the quarter in 2003 versus the 2002 comparable quarter.
We recorded a foreign currency exchange loss of $4,920 in the quarter
ended March 31, 2003, versus a foreign exchange loss of $50,490 in the
comparable period in 2002 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. These foreign currency exchange gains or losses are reported as a
component of the SG&A expense category in the consolidated statements of
operations. PT Buana uses the U.S. dollar as its functional currency. 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 experience
economic and political instability, which is characterized by fluctuations in
its foreign currency exchange rate, interest rates, stock market and inflation
rate. The 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.
Other income consists of interest income proceeds from the Transition
Services Agreement with MAXXIM ($375,000) and miscellaneous income. Other income
for the nine-month ended March 31, 2003 and 2002, was $463,339 and $71,606,
respectively.
The (benefit) provision for income taxes for the nine months ended
March 31, 2003, was $(582,180) and $53,793 for the comparable 2002 period. This
change in income taxes is primarily attributable to the net loss for the
nine-month period and the fluctuations of the Indonesian rupiah against the US
dollar during the period. Our U.S. operations generated net operating loss
carry-forwards ("NOL's") in prior years of which approximately $1.3 million is
21
remaining from June 30, 2002, which can be used to offset future U.S. generated
taxable income through the year 2004.
For the nine months ended March 31, 2003, our net loss was $(878,433),
compared to a net loss of $(904,223) in the same period of 2002. Diluted loss
per share for the nine months ended March 31, 2003 and 2002, was $(.13) and
$(.12), respectively.
LIQUIDITY AND CAPITAL RESOURCES:
NINE MONTHS ENDED MARCH 31, 2003:
Cash and cash equivalents at March 31, 2003, was $424,943, a decrease
of $27,005 from $451,948 at June 30, 2002. We experienced a decrease in cash
flows during the nine months ended March 31, 2003, primarily from cash provided
by operating activities.
Our operations provided cash of $3,299,047 during the nine months ended
March 31, 2003, primarily as a result of a decrease in accounts receivable of
$2,939,872.
Net trade accounts receivable at March 31, 2003, decreased 60.7% to
$1,906,524 from $4,846,396 at June 30, 2002. The decrease in accounts receivable
was due to our transition out of most of the medical business. Net inventories
at March 31, 2003, were $9,485,965 an increase from the level at June 30, 2002,
of $8,506,652, due to our build up on our Dermasafe brand glove and increases in
safety stock levels. We anticipate our inventory to decrease over the near-term
as we complete our transition out of the acute-care medical business and due to
anticipated short-term shortages caused by the West Coast dock strike.
During the nine months ended March 31, 2003, we used cash in investing
activities of $503,251. We spent $301,872 for capital improvement expenditures
during the nine-month period primarily at PT Buana, our Indonesian manufacturing
plant. These expenditures included equipment purchases and upgrades to expand
our capacity to manufacture higher-margin products, including powder-free latex
gloves.
During the nine months ended March 31, 2003, cash was used from
financing activities in the amount of $2,822,801. We decreased borrowings on our
line of credit facility by $2,459,911 and made stock repurchases of $10,800.
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 March 31, 2003, we have outstanding accounts receivable from WRP
Asia of approximately $9,487,504. Subsequent to June 30, 2002, the amounts due
to PT Buana of approximately $5,586,000 were assigned to us in partial
satisfaction of intercompany amounts due from PT Buana to us. As of March 31,
2003, there is approximately $278,911 owing PT Buana from WRP Asia.
22
As of March 31, 2003, we have accounts payable to WRP Asia of
approximately $4,466,375, primarily resulting from the purchase of inventories
from WRP Asia.
The net amount due from WRP Asia, before allowance for doubtful
accounts at March 31, 2003, was approximately $5,021,129, against which we have
provided an allowance for doubtful accounts of approximately $5,586,000
(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 18 months, without completion.
Subsequent to June 30, 2002, we entered into a formal agreement with
WRP Asia to provide for the full and complete right of offset of any trade
payables due against amounts they owe to us and AHPC. We continue to purchase
gloves from WRP Asia, and believe that the unreserved amounts due to WRP Asia
from AHPC of approximately $565,142 at March 31, 2003, are realizable based upon
the agreement granting right of offset and ongoing purchases from WRP Asia. In
management's opinion, while we have been advised by WRP Asia that it 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 May 13, 2003, this restructuring initiative has
not been completed. WRP Asia has advised us that it believes this initiative
will now be completed no later than the June 2003 and attributes the delays to
extensive due diligence being performed by potential strategic investors and the
regulatory delays associated with a Malaysian governmental agency involved with
one segment of the proposed transition. 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 approximately $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, the resolution requires WRP Asia 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 J. Simmons
and Don L. Arnwine as well the independent "A" Directors, G. Jeff Mennen and
Richard J. Swanson. The purpose of the
23
Committee is to examine the WRP Asia restructuring process as well as the
options and alternatives available to us.
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 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% (1.25% at
March 31, 2003). At March 31, 2003, we had outstanding $1,995,995 on the
revolving line of credit and $361,833 of letter of credit liabilities under the
credit facility. As of March 31, 2003, we were in compliance with all of our
covenants.
We currently expect to have cash needs during the next year and beyond
for funding the growth of the existing glove business, launch and promotion of
our SafePrep foodservice business and for other uses. These cash needs may arise
in connection with various events such as for: (i) the expansion into new
products; (ii) the expansion into new markets; (iii) funding the promotion of
our branded products; (iv) repayment of debt obligations; (v) purchasing our
Common Stock in connection with our stock repurchase program; and (vi)
manufacturing capital improvements. We believe that our cash and cash to be
generated from future operations plus our credit facility will be sufficient to
fund our ongoing operations.
As of March 31, 2003, we had the following contractual obligations and
commercial commitments:
PAYMENTS DUE BY PERIOD
----------------------
CONTRACTUAL
OBLIGATION TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS
---------- ----- ---------------- --------- ---------
Operating Leases $1,051,672 $ 144,325 $ 907,346 -0-
Operating leases primarily represent our leases for our corporate
office and warehouse facilities. The letters of credit are issued under our
credit facility and are commercial obligations related to product purchases.
Insurance premium financing was used to finance our product liability insurance.
Short-term borrowings represent borrowings under our credit facility primarily
to finance working capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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
24
rates. We estimate that the fair value of each debt instrument approximated its
market value at March 31, 2003.
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 March 31, 2003, approximated its fair value.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. However, no cost effective internal control
system will preclude all errors and irregularities, and management is
necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision and with the
participation of management, including our chief executive officer and chief
financial officer, within 90 days prior to the filing date of the report. Based
upon that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
Securities and Exchange Commission filings. No significant changes were made to
our internal controls or other factors that could significantly affect these
controls subsequent to the date of their evaluation.
25
PART II
ITEM 1-5.
No changes
ITEM 6 (a) EXHIBIT 99.1
Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
During the nine-month period ended March 31, 2003, we did not file any
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WRP Corporation
(Registrant)
Date: May 20, 2003 By:/s/ Alan E. Zeffer
------------------
Name: Alan E. Zeffer
Title: Chief Financial Officer
26
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Lew Kwong Ann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WRP Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I (herein the "Certifying
Officers") are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a) designed such internal controls to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, (collectively the "Company") is
made known to the Certifying Officers by others within the
Company, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's internal
controls as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report the conclusions of the
Certifying Officers about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's Certifying Officers have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors:
a) all significant deficiencies (if any) in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's Certifying Officers have indicated in this quarterly
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Lew Kwong Ann
Lew Kwong Ann
- -----------------------------
Chief Executive Officer
27
CERTIFICATION
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Alan E. Zeffer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WRP Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I (herein the "Certifying
Officers") are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a) designed such internal controls to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, (collectively the "Company") is
made known to the Certifying Officers by others within the
Company, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's internal
controls as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report the conclusions of the
Certifying Officers about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's Certifying Officers have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors:
a) all significant deficiencies (if any) in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's Certifying Officers have indicated in this quarterly
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Alan E. Zeffer
Alan E. Zeffer
Chief Financial Officer
28