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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, 2003
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
---------------
(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
----------------
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 285-9191
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value $0.01 per share None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registered is an accelerated filer
(as defined in Rule 12-b2 of the Act). Yes [ ] No [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 14, 2003: $1,817,031
At October 14, 2003, 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
We are incorporating, be reference, information from our Proxy Statement dated
May 8, 2003 and filed with the Commission on May 13, 2003 for information
contained in Item 14 of this report.
WRP CORPORATION
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.......................................................... 1
ITEM 2. PROPERTIES........................................................ 5
ITEM 3. LEGAL PROCEEDINGS................................................. 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 7
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................... 8
ITEM 6. SELECTED FINANCIAL DATA........................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................................... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................... 27
ITEM 9A. CONTROLS AND PROCEDURES........................................... 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 29
ITEM 11. EXECUTIVE COMPENSATION............................................ 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................... 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 34
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................ 35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS OF FORM 8-K............ 35
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").
During 2003, we diversified 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. We were
reincorporated in Maryland in December 1995 and have been involved in several
business operations.
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 substantially
reduced our personnel in our medical division and 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. On February 11, 2003, MAXXIM filed for bankruptcy. As of June 30,
2003, we had an outstanding account receivable with MAXXIM of $280,115.41. This
amount has been fully reserved.
In October 1995, we acquired a 70% interest in PT Buana, which owns and
operates an Indonesian latex examination glove manufacturing plant. In 1995 it
was in the start-up phase of operations. We purchased this 70% interest in PT
Buana from MBf International Limited ("MBf International"), a Hong Kong
corporation. PT Buana began shipping powdered latex examination gloves to AHPC
in May 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, 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 up to seven of the nine available seats on 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
seven Class A 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, 2003, these shares represented 53.2% ownership
interest in us, due to additional stock issued by 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, 2003, 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, nursing home 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, 2003, AHPC's sales ratios of latex
powdered, latex powder-free and non-latex glove sales were approximately 40%,
24% and 36%, 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, 2003. On July 12, 1995,
AHPC entered into a five-year distribution agreement with this unrelated factory
to purchase a minimum quantity of powdered
3
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.
COMPLIMENTARY 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 complimentary products will be
important to the future success of our business. During 2003, we diversified 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.
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 and 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. Our business of providing barrier protection products is
highly competitive in the markets in which we operate including healthcare,
foodservice and retail. The primary basis of competition includes, but is not
limited to price, product quality, breadth of product line, service and product
availability. Additionally, among our direct competitors are several large firms
with significantly greater resources available than the Company. Nonetheless, we
believe the Company has certain competitive advantages that enable us to compete
favorably with larger
4
competitors including our ability to provide high service levels and to react
quickly to changing customer requirements.
Customers. Our customers include leading foodservice distributors and
healthcare product suppliers. During the year ended June 30, 2003, AHPC's
national customer, SYSCO Corporation, accounted for 70.1% of net sales. The loss
of this customer would have a materially adverse effect on us. Our customers
tend to limit the number of qualified vendors they purchase from in order 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 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.
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 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, 2003, 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, 2003, our U.S. operations employed a total of 30
full-time employees. AHPC also uses the services of one manufacturer sales
representative organization and 25 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, 2003, our lease expense was $213,200.
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 $320,200 per year.
5
AHPC also uses public warehouse facilities, as needed, to store its
inventory in 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 was no longer leasing this
facility.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 2003, we, and AHPC (jointly the "WRP Defendants"), had a
total of 39 latex glove product liability suits pending against us throughout
the United States. We were an active defendant in one claim, and AHPC in 19
claims. Additionally, through a series of Private Label Supply and Trademark
Licensing Agreements with VHA, Inc. ("VHA"), AHPC agreed to defend and indemnify
VHA in six suits; AHPC was joined as a third party defendant in seven claims by
distributors of AHPC latex gloves (collectively the "Vendors") and in one claim
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 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, 2003, AHPC and the Vendors were dismissed
from 28 latex gloves product liability lawsuits.
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 14, 2003, 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
6
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of the Shareholders of was held on June 16, 2003.
The purpose of the Annual Meeting was to consider the vote on the following
matter:
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
------------ ------------
For 5,185,476 5,185,476
Against 0 0
Abstain 0 0
Non-votes 0 0
The above matter was approved by the Shareholders. There were no other
matters voted on at the meeting.
7
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
--- ----
JUNE 30, 2003
4th quarter $ .13 $ .58
3rd quarter $ .18 $ .35
2nd quarter $ .15 $ .43
1st quarter $ .44 $ .68
JUNE 30, 2002
4th quarter $ .48 $ .86
3rd quarter $ .65 $ 1.00
2nd quarter $ .68 $ 1.80
1st quarter $ .48 $ 1.15
JUNE 30, 2001
4th quarter $ .44 $ .98
3rd quarter $ .59 $ 1.06
2nd quarter $ 1.06 $ 1.63
1st quarter $ 1.09 $ 2.00
JUNE 30, 2000
2nd quarter $ 1.13 $ 2.00
1st quarter $ 1.75 $ 2.38
DECEMBER 31, 1999
4th quarter $ 2.00 $ 3.75
3rd quarter $ 3.5 $ 5.88
2nd quarter $ 5.25 $ 7.19
1st quarter $ 4.88 $ 7.88
There were approximately 275 shareholders of records of our Common
Stock as of June 30, 2003. We believe that there are approximately an additional
2,000 holders whose stock is held in "street name."
8
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.
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, 2003, we purchased 20,000 shares of our
Common Stock under this program. Subsequent to June 30, 2003 through October 14,
2003, we did not purchased shares of our Common Stock. As of the year ended June
30, 2003, there were up to an additional 707,700 shares available for
repurchase. We have purchased a total of 254,800 shares since the inception of
this program.
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. During the pendency of these proceedings, our stock
price began trading at or about $1.00 per share. On August 16, 2001, we were
notified by the Panel that our 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
needing to consider 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, 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. Subsequently, Nasdaq notified us that we had been afforded the
remainder of another 90-day period through May 12, 2003, due to certain changes
to Nasdaq's bid price rules and our continued ability to satisfy at least one
standard set forth in the Marketplace Rule 4310(c)(2)(A). However, as of May 14,
2003, we did not satisfy the bid price requirement and were not eligible for any
additional compliance periods. On June 6, 2003, we requested a hearing with the
Nasdaq Listing Qualifications Panel, which effectively stayed the delisting. The
Panel determined to continue the listing of our securities in order to allow us
to achieve the minimum bid price requirement. The Panel has subsequently
provided us the opportunity to present a plan for bringing our stock price up to
$1.00 or more and we expect that we will be provided with
9
additional time to do so. In the event the bid price deficiency is not remedied,
a new decision will be issued.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information about the securities
authorized for issuance under our equity compensation plans as of June 30, 2003:
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities remaining
Number of securities to be issued Weighted-average exercise price available for future issuance under
upon exercise of outstanding of outstanding options, warrants equity compensation plans (excluding
Plan Category options, warrants and rights and rights securities reflected in column (a))
---------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 326,316 $1.06 1,073,684
Equity compensation plans
not approved by security
holders - - -
---------------------------------------------------------------------------------------------------------
Total 326,316 $1.06 1,073,684
=========================================================================================================
The equity compensation plan approved by security holders consists of
our Omnibus Equity Compensation Plan.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of WRP Corporation presented
below for the years ended June 30, 2003, 2002, 2001, 2000 and 1999 should be
read in conjunction with the Consolidated Financial Statements, related notes
and other financial information included herein.
10
SIX MONTHS
ENDED JUNE FOR THE YEAR ENDED
YEAR ENDED JUNE 30, 30, DECEMBER 31,
------------------- --- ------------
(In thousands except per share amounts) 2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales $ 36,989 $ 47,357 $ 51,889 $ 31,737 $ 65,280 $ 64,968
Gross profit 5,737 11,580 14,698 9,040 16,635 18,111
Selling, general & administrative expenses 8,939 17,640 13,784 6,997 12,295 9,955
Minority interest in loss (income)
of subsidiary, net of tax 250 202 (185) (207) 97 (594)
Net (loss) income ($ 5,560) ($ 4,293) $ 529 $ 1,420 $ 2,453 $ 5,879
PER SHARE DATA:
Diluted (loss) earnings per share ($ 0.84) ($ 0.65) $ 0.08 $ 0.21 $ 0.35 $ 0.93
BALANCE SHEET DATA (END OF PERIOD):
Total assets $ 25,965 $ 32,947 $ 36,072 $ 35,854 $ 40,194 $ 35,800
Long-term debt $ 5 $ 19 $ 13 $ 750 $ 1,100 $ 1,669
Total shareholders' equity $ 11,266 $ 16,836 $ 21,176 $ 20,827 $ 19,475 $ 16,941
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, 2003, we recorded net glove sales of
approximately $37.0 million.
11
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 32.7% of its production to AHPC during the
year ended June 30, 2003. PT Buana recorded glove sales totaling $14.8 million
and $13.8 million during the years ended June 30, 2003 and June 30, 2002,
respectively. PT Buana's remaining production was sold primarily to WRP Asia and
other customers. 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, 2003, 2002 and
2001 include our results of operations and statements of cash flows, as well as
for AHPC and PT Buana.
During the year ended June 30, 2003, 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 substantially
reduced our personnel in our medical division and 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. On February 11, 2003, MAXXIM filed for bankruptcy. As of June 30,
2003, we had an outstanding account receivable with MAXXIM of $280,115.41. This
amount has been fully reserved.
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, 2003, we repurchased 20,000 shares of our Common Stock under
this program. We have purchased a total of 254,800 shares since the inception of
this program.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net
sales for the periods indicated.
12
SIX MONTHS
ENDED JUNE FOR THE YEAR ENDED
YEAR ENDED JUNE 30, 30, DECEMBER 31,
------------------- --- ------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales 100% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of goods sold 84.5 75.5 71.7 71.5 74.5 72.01
----- ------ ------ ------ ------ ------
Gross profit 15.5 24.5 28.3 28.5 25.5 27.9
Selling, general & administrative expenses 24.2 37.2 26.6 22.1 18.8 15.3
----- ------ ------ ------ ------ ------
(Loss) income from operations (8.7) (12.8) 1.7 6.4 6.7 12.6
Interest (expense) / other income, net (1.9) (0.6) (0.9) (0.9) (1.0) (1.2)
Provision for (benefit from) income taxes 5.1 (3.9) (0.5) 0.3 2.1 1.5
Minority interest in loss (income) of subsidiary 0.7 0.4 (0.3) (0.7) 0.2 (0.9)
Net loss from discontinued operations - - - - - -
----- ------ ------ ------ ------ ------
Net income (15.0%) (9.1%) 1.0% 4.5% 3.80% 9.0%
===== ====== ====== ====== ====== ======
YEAR ENDED JUNE 30, 2003, COMPARED TO THE YEAR ENDED JUNE 30, 2002
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, 2003 were
$36,988,567, which represents a 21.9% decrease over the year ended June 30,
2002, with consolidated net sales of $47,357,076. 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 $35,777,460 for the year
ended June 30, 2002 to $31,251,419 for the year ended June 30, 2003. As a
percentage of net sales, cost of goods sold increased from 75.5% for the year
ended June 30, 2002 to 84.5% for the year ended June 30, 2003; the gross profit
percentage decreased from 24.5% in the 2002 period to 15.5% in the 2003 period.
Our gross profit margin was negatively impacted by increase glove purchase
prices, product mix, lower selling prices, and the West Coast dock strike. 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. Subsequent to year end, we increased our price to our customers on all
latex products.
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
from $17,640,474 for the year ended June 30, 2002 to $8,939,480 for the
13
year ended June 30, 2003. As a percentage of net sales, SG&A expenses decreased
from 37.2% for the year ended June 30, 2002, to 24.2% for the year ended June
30, 2003. This decrease of $8,700,994 in SG&A expenses was attributable to the
reduction of our sales force in 2002 due to AHPC transitioning out of the
acute-care medical business and a reserve of $5,586,000 in 2002 for the
intercompany receivable balances between PT Buana and WRP Asia assigned to WRPC.
Loss from operations decreased by 47.2% from $(6,060,858) for the year
ended June 30, 2002, to $(3,202,332) for the year ended June 30, 2003. This
decrease was primarily attributed to the receivable reserve from WRP Asia in
2002. Operating margins decreased from (12.8%) in the 2002 period to (8.7%) in
the 2003 period.
Interest expense decreased during fiscal 2003 to $174,874 compared to
$384,609 in the 2002 period. This 54.5% 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 increased from $99,448 for the 2002 period to $507,786 for the 2003
period. In fiscal 2003, we billed $375,000 to MAXXIM for the Transition Service
Agreement.
At June 30, 2003 we tested for goodwill impairment, which resulted in
the carrying amount of goodwill exceeding its implied fair value. We evaluated
the realizablilty of the goodwill through the use of an independent appraisal,
which utilized the present values of future cash flows. We recorded a goodwill
impairment loss of $(1,042,094) for the year ended June 30, 2003.
We recorded a foreign currency exchange loss of $18,355 in 2003 versus
a foreign currency exchange loss of $42,646 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. 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 provision for (benefit from) income taxes for the year ended June
30, 2003 and June 30, 2002 was $1,898,169 and $(1,851,517), respectively. This
increase in income tax expense of $3,749,686 is primarily due to the
establishment of a valuation allowance against the deferred tax assets.
For the year ended June 30, 2003, our net loss was $(5,559,769)
compared to net loss of $(4,292,981) in the 2002 period. Diluted earnings per
share for the year ended June 30, 2003 and June 30, 2002, were $(0.84) and
$(0.65), respectively.
14
YEAR ENDED JUNE 30, 2002, COMPARED TO THE YEAR ENDED JUNE 30, 2001
Our net sales are derived from the sales of finished products; 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 AHPC transitioning out of the acute-care
medical business and a reserve of $5,586,000 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 of $5,586,000 from
WRP Asia. Operating margins decreased from 1.7% in the 2001 period to (12.8%) in
the 2002 period.
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.
15
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.
SEGMENT INFORMATION
During the year ended June 30, 2003 and 2002, 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. and also includes, to a significantly lesser extent, the sale of non-glove
disposable products. Discussion of the operations of each segment is included
throughout the Results of Operations and Liquidity and Capital Resources
sections.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED JUNE 30, 2003
Cash and cash equivalents, at June 30, 2003, were $420,949, a decrease
of $30,999 from $451,948 at June 30, 2002. We experienced a decrease in cash
flows for the year ended June 30, 2003, primarily from a decrease in net cash
used in investing activities. Our operations provided cash of $3,884,750 during
the 2003 fiscal year as a result of noncash depreciation and amortization of
$2,890,419 and a decline in accounts receivable of $2,529,218 and an increase in
accounts payable trade. Net inventories were $8,796,339, an increase of $289,687
from $8,506,652 at June 30, 2002.
16
Net trade accounts receivable at June 30, 2003 decreased by 52.2% to
$2,317,178 from $4,846,396 at June 30, 2002. This decline of $2,529,218 is
primarily due to a decrease in revenues associated with the medical transition.
The outstanding account 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 2003, 2002 and 2001. 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, 2003, we have an outstanding account receivable from WRP
Asia of approximately $8,906,815 (which has decreased by approximately $47,235
since June 30, 2002). 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, 2003, we have an account payable to WRP Asia of
approximately $3,890,537 (which has increased by $1,233,258 since June 30,
2002), primarily resulting from the purchase of inventories from WRP Asia.
The amount due from WRP Asia, before allowance for doubtful accounts at
June 30, 2003 was approximately $8,906,815, 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, 2003).
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. 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.
On July 9, 2003, WRP Asia-Pacific Sdn Bhd (WRP Asia), successfully
completed its financial restructuring involving total financing of approximately
Malaysian Ringgit (RM) 250 million (US $65 million).
The restructuring reduced WRP Asia's debt position by RM 143 million
(US $37.6 million) and resulted in the availability of RM 40 million (US $11.4
million) in new funding and an increase in the company's issued share capital
from RM 278 million (US $73.2 million) to RM 385.4 million (US $101.4 million).
The debt restructuring includes an investment by an established
UK-based fund management company, which has become a significant shareholder in
WRP Asia. This participation further strengthens the solid mix of existing
institutional shareholders, which consist of large and established private
equity and investment funds.
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
17
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 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 independent "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, 2003 increased by 3.4% to $8,796,339 from
$8,506,652 at June 30, 2002. This increase of $289,687 is due to new inventory
purchases from nonaffiliated parties.
During the year ended June 30, 2003, we used cash of $3,216,747 for
financing activities, and $289,687 in inventories.
During the year ended June 30, 2003, we used cash in net investing
activities of $699,002. We spent $365,088 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, 2003, we obtained funds from borrowings
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 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% (1.21% at June 30, 2003). At June 30, 2003, we had
outstanding $4,513,996 on the revolving line of credit and $970,374 of letter of
credit liabilities under the credit facility. As of June 30, 2003, we were not
in compliance with certain of our covenants and have obtained waivers of these
covenant violations from the financial institution.
18
In conjunction with the waiver of the covenant violations as of June
30, 2003, the existing credit facility agreement was amended to expire on
December 31, 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, 2003. 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 have prepared the consolidated financial statements under the
assumption that we are a going concern.
On March 12, 2003 we entered into a forbearance agreement with our
lender, GE Capital Services, whereby they agreed to forbear from exercising its
rights under the loan agreement as a result of events of defaults, which were
continuing at that time. The terms of this agreement required us to maintain
certain financial covenants and to receive payment of at least $2 million of
intercompany debt from WRP Asia (as described elsewhere in this document). This
agreement was scheduled to expire on June 30, 2003; however, we have entered
into an amendment to the forbearance agreement that extends the term through
December 31, 2003. Upon expiration of this agreement, as amended, the lender
will have the right to exercise its rights and remedies immediately, including
but not limited to (1) ceasing to make any further loans to us and (2) the
acceleration of our obligations to the lender. We are taking aggressive measures
to insure that we have adequate financing in the future; we are in discussions
with several financial institutions about replacing our current credit facility.
We fully expect, but cannot guarantee, that we will be successful in replacing
our existing credit facility, through either our existing lender or a new
lender, prior to December 31, 2003. We are also in discussion with several
potential investors regarding a significant equity investment. We can make no
assurances as to whether any investment proposals will be received and, if so,
to what extent they will be dilutive to existing investors. Due to the nature of
our business, importing product from Asia and the extended time period required
for those purchases to convert to cash, we rely on our credit facility to
finance these purchases.
On July 8, 2003 WRP Asia announced the completion of its financial
restructuring, which involved restructuring and reducing WRP Asia's debt
position and providing additional new funding. Due to the terms of the
restructuring WRP Asia was prohibited from repaying certain debt, including our
intercompany debt in the short term. At that time we began exploring other
opportunities to gain compliance with our lender's requirement of a paydown by
WRP Asia of it's intercompany debt and on September 12, 2003 entered into a
non-binding letter of intent with WRP Asia to enter into a stock redemption and
exchange agreement. The Letter of Intent calls for us to redeem 1,252,538 shares
of Class A Common Stock and the 2,500,000
19
shares of Class B Common Stock, which comprise all of WRP Asia's holdings.
Collectively, these shares represent approximately 53.2% of the outstanding
capital stock of WRPC. The consideration for the redemption would be: (i) the
conveyance to WRP Asia of our 70% ownership interest in PT Buana Multicorpora
("PTB"); and (ii) excuse of all indebtedness owing to us by WRP Asia. We would
continue to be responsible for trade payables owing to PTB for recent product
purchases. The transaction is subject to, among other things, execution of a
definitive redemption agreement, a five-year supply agreement from WRP Asia, as
well as the approval of the Company's and WRP Asia's boards of directors and our
lender.
We are in the process of negotiating definitive agreements at this
time, and there can be no assurances as to the final form of these agreements,
or that they will be executed, approved or closed. However, we are confident
that the contemplated transactions will be consummated.
On October 6, 2003 we announced the signing of a nonbinding letter of
intent to enter into a stock redemption and exchange agreement with WRP Asia.
The letter of intent calls for us to redeem 1,252,538 shares of Class A Common
Stock and the 2,500,000 shares of Class B Common Stock, which comprise all of
WRP Asia's holdings. Collectively, these shares represent approximately 53.2% of
our outstanding capital stock. The consideration for the redemption would be:
(i) the conveyance to WRP Asia of our 70% ownership interest in our subsidiary
PT Buana Multicorpora ("PTB") and (ii) excuse of all indebtedness owing to us
from WRP Asia and from PTB. The transaction is subject to, among other things,
execution of a definitive redemption agreement, a five-year supply agreement
from WRP Asia and PTB to the Company, as well as the approval of the Company's
and WRP Asia's Board of Directors.
We are in the process of negotiating definitive agreements at this
time, and there can be no assurances as to the final form of these agreements,
or that they will be executed, approved or closed.
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.
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 of June
30, 2003 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.
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
20
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 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.
21
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 31, 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 (MR
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.
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, 2003, we have established reserves of
$5,919,896 in relation to trade and inter company receivables.
We review on an ongoing basis the realizability of our inventory value
and the need for establishing reserves. We established the inventory reserves
for valuation, shrinkage, excess and obsolete inventory. As of June 30,
2003, we have established reserves of $364,625.
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 implemented SFAS 142 and no longer
amortizes the balance of goodwill.
22
On an ongoing basis, we review goodwill for impairment. During June 30,
2003 we tested for goodwill impairment, which resulted in the carrying amount of
goodwill exceeding its implied fair value. We evaluated the realizablilty of the
goodwill through the use of an independent appraisal, which utilized the present
values of future cash flows. We recorded a goodwill impairment loss of
$(1,042,094) for the year ended June 30, 2003.
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.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
LESS THAN 1-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
Operating Leases $783,703 $533,012 $250,691
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. 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 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. We have adopted
the provisions in this statement for fiscal years beginning after June 30, 2002.
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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 November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 were applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements of FIN 45 were effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of this standard did not have a material impact on our financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
This Interpretation addresses consolidation by business enterprises of certain
variable interest entities ("VIEs"). FIN 46 is effective immediately for all
enterprises with variable interests in VIEs created or acquired after January
31, 2003. For VIEs created or acquired prior to February 1, 2003, this
interpretation must be applied for the first interim or annual period beginning
after June 15, 2003. We have performed an evaluation to identify such entities
and we do not believe that any entities fall within the scope of this standard.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 addresses how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS 150 will apply to
financial instruments entered into or modified after May 31, 2003. We believe
that the adoption of this standard will have no impact on its financial
statements.
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
24
rates. We estimate that the fair value of each debt instrument approximated its
market value at June 30, 2003 and 2002.
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, 2003 and 2002, approximated its fair value. For
the year ended June 30, 2003 and 2002, the foreign exchange included in the
determination of net income was approximately $18,858 and $42,646, 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 August 31,
2003, has been renewed and extended until December 31, 2003. The terms and
conditions are similar to those in the current credit facility.
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
25
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. During the year ended June 30, 2003, the price of latex
concentrate increased by as much as 40%, causing us to incur higher cost of
goods sold.
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 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.
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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.
Complimentary 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 diversified 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 are
being 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. 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
27
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, 2003, 70.1% of net sales came from one customer. The loss of this
customer could have a materially adverse impact on us.
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.
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 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
28
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 QSR's, 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 Longshoremen 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 estimate the costs of this shutdown to be $297,000.
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,
air-freighting product, locating alternative sources and redirecting existing
inventory. We cannot guarantee that any of these contingency plans would
adequately protect us from loss in the event that a similar work stoppage or
strike should occur in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A list of financial statements and financial statement schedules for
the Registrant is contained in "Index to Financial Statements and Financial
Statement Schedules of WRP Corporation" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
29
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our Chief Financial
Officer evaluated our disclosure controls and procedures as of the end of the
fiscal year ended June 30, 2003, and has concluded that, as of June 30, 2003,
such controls and procedures have been effectively designed to ensure that
information required to be disclosed in reports that the we file with or submit
to the SEC is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and is accumulated and
communicated to management, including the Chief Financial Officer, as
appropriate to allow timely decisions regarding such disclosure.
Changes in Internal Control Over Financial Reporting. No changes in our
internal control over financial reporting have come to management's attention
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Review and evaluation of disclosure controls and procedures is an ongoing
process that we will continue to refine as we perform quarterly evaluations.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position
- ---- --- --------
Lew Kwong Ann 42 Chairman and Chief Executive Officer
Alan Zeffer 50 Chief Financial Officer, Secretary and Treasurer
Biographies for Messrs. Lew and Zeffer are included below.
At October 13, 2003, our directors consist of five Class A Directors
and two Class B Directors are as follows:
Class A Directors
Name Age Director Since
- ---- --- --------------
Eirik Bonde-Aslaksrud 40 2001
Lew Kwong Ann 42 1997
George Jeff Mennen 63 1994
Richard J. Swanson 68 1998
Robert Woon Yee Woh 55 2002
Class B Directors
Name Age Director Since
- ---- --- --------------
Robert J. Simmons 60 1995
Don L. Arnwine 70 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, including being the Vice Chairman of
that company. The Mennen Company was founded by
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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, 2003, our Board of Directors held seven
meetings and all other actions by the Board of Directors were taken by unanimous
written consent without a meeting.
32
The Board of Directors has adopted 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, 2003, the Compensation Committee held one meeting. The Audit Committee held
six meetings, all other actions were taken by unanimous written consent without
a meeting. At June 30, 2003, our Audit Committee consists of Don Arnwine,
Richard Swanson, and George Jeff Mennen, and is chaired by Mr. Swanson. All
members of the Audit Committee are deemed to be independent.
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.
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, 2003, 2002, and
the transition period ended June 30, 2001, to (i) our President and (ii) our
executive officers at June 30, 2003, whose aggregate annual salary and bonus are
expected to exceed $100,000 for the 2003 calendar year.
33
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)
2003 $ 185,000 $ 28,000 - 20,000 -
(1)Includes housing, automobile and other expenses.
EMPLOYMENT AGREEMENTS
On October 1, 2002, we renewed the October 1, 2001, 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 $185,000 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, 2003
On November 19, 2002 there were 20,000 options granted to Alan Zeffer
at $0.24, the exercise price of the closing price of the common stock on
November 19, 2002, the date of the grant. Mr. Zeffer's options vest immediately
and are exercisable for a period of ten years form the date of grant.
AGGREGATE OPTION EXERCISES DURING THE YEAR ENDED JUNE 30, 2003, AND FISCAL
PERIOD-END OPTION VALUES
There were no options exercised during the year ended June 30, 2003, by
the executive officers named in the Summary Compensation Table.
THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
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.
34
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Presently, all compensation decisions relating to the salary of Mr.
Zeffer are governed by the employment agreement between Mr. Zeffer and us, which
agreement originally provided for the payment of annual base salary of $185,000
per annum, housing expenses not to exceed $1,200 per month, a $400 per month
automobile allowance and non-qualified stock options to be determined by the
Compensation Committee. Because Mr. Zeffer's employment agreement presently
controls the compensation paid to him, the Compensation Committee did not
formulate policies with respect to Mr. Zeffer's compensation during the prior
fiscal year.
Members of the Compensation Committee:
Lew Kwong Ann George Jeff Mennen Richard Swanson
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.
35
6/30/98 6/30/99 6/30/00 6/30/01 6/30/02 6/30/03
WRP Corporation 181.5 168.1 38.9 16.0 19.3
NYSE/AMEX/Nasdaq Stock 128.1 151.0 166.5 140.0 116.1
Peer Group 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, 2003, 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 14, 2003.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2003, we purchased latex powder-free
exam gloves amounting to $3.4 million from our majority shareholder, WRP Asia.
In addition, our Indonesian factory sold approximately $4.8 million of powdered
latex exam gloves to WRP Asia during the period.
During the year ended June 30, 2003, 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 express purpose of negotiating and executing a purchase
agreement with various healthcare group-purchasing organizations. We paid
Alliance $170,439 during the year ended June 30, 2003, for its services.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SEVICES
Information responsive to this Item is set forth in "Fees Paid to
Independent Auditors" of the definitive proxy statement for the Company's annual
meeting of stockholders and is incorporated herein by reference. The Audit
Committee's Charter provides that audit services engagement terms and fees, and
any changes in such terms or fees, are subject to the specific pre-approval of
the Audit Committee. The Charter further provides that other auditservices,
audit-related services, tax services and permitted non-audit services are
subject to tgeneral pre-approval by the Audit Committee. The Audit Committee has
designated the Chief Financial Officer to monitor the performance of all
services provided by the independent auditor and to determine whether such
services are in compliance. The Chief Financial Officer will report to the Audit
Committee on a periodic basis on the results of his monitoring and will
immediately report to the Chairman of the Audit Committee any breach of this
procedure. The Chairman of the Audit Committee is authorized to act on behalf of
the Audit Committee between meetings.
37
PART IV
ITEM 15. 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).
38
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 incorporated by reference in Exhibit 10.46
included in the Company's Form 10-K Annual Report for the fiscal
year ended June 30, 2002 (File No. 0-17458).
21 Subsidiaries of the Company (1).
23.1 Consent of Grant Thornton LLP (1).
(b) During the 12 months ended June 30, 2003, the Company did not
file any report on Form 8-K.
(c) See item 15(a)
31(a) Certificate of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
31(b) Certificate of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
32(a) Certificate of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.
32(b) Certificate of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.
39
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 14, 2003 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 14, 2003 By: /s/ Lew Kwong Ann
-----------------
Lew Kwong Ann, Chief Executive
Officer and Chairman of the Board of Directors
Date: October 14, 2003 By: /s/ Eirik Bonde-Aslaksrud
-------------------------
Eirik Bonde-Aslaksrud, Director
Date: October 14, 2003 By: /s/ Robert Woon
---------------
Robert Woon, Director
Date: October 14, 2003 By: /s/ George Jeff Mennen
----------------------
George Jeff Mennen, Director
Date: October 14, 2003 By: /s/ Richard J. Swanson
----------------------
Richard J. Swanson, Director
Date: October 14, 2003 By: /s/ Robert J. Simmons
---------------------
Robert J. Simmons, Director
Date: October 14, 2003 By: /s/ Don L. Arnwine
------------------
Don L. Arnwine, Director
40
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
WRP CORPORATION AND SUBSIDIARIES
JUNE 30, 2003, 2002 AND 2001
CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................................ F-3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - OTHER AUDITORS............... F-4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - PREDECESSOR AUDITOR REPORT... F-5
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS................................................................ F-6
STATEMENTS OF OPERATIONS...................................................... F-8
STATEMENT OF SHAREHOLDERS' EQUITY............................................. F-9
STATEMENTS OF CASH FLOWS...................................................... F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................... F-11
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, 2003 and 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 2002 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 as of June 30, 2002, and for
the year then ended, 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, 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 audits 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 audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
2003 and 2002 financial statements referred to above present fairly, in all
material respects, the financial position of WRP Corporation and Subsidiaries as
of June 30, 2003 and 2002, and the consolidated results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company incurred a net loss of $5,559,769 for the year
ended June 30, 2003. Additionally, the Company has entered into a forbearance
agreement with its primary lender that will expire on December 31, 2003. These
factors, among others, as discussed in Note B to the financial statements, raise
substantial doubt about its ability to continue as a going concern. The
Company's business plan for 2004, which is also described in Note B,
contemplates reduced operating losses, obtaining additional working capital, the
refinancing of its bank credit agreements to long-term arrangements, and
restructuring of the overall business atmosphere of the Company. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
GRANT THORNTON, LLP
Chicago, Illinois
October 14, 2003
F-3
Intentionally Left Blank
F-4
PRASETIO, SARWOKO & SANDJAJA
REGISTERED PUBLIC ACCOUNTANTS
October 15, 2002 UNIPLAZA BUILDING WEST TOWER LEVEL 5
JALAN LETJEND HARYONO MT A-1
MEDAN 20231
INDONESIA
TEL : (62-61) 4556075
FAX : (62-61) 453 8251
GRANT THORNTON LLP
Attn: Jeff Robinson
Suite 700
One Prudential Plaza
130 E. Randolph Drive
Chicago IL, 60601-6203
United States of America
Dear Mr. Robinson:
In accordance with the requirements of AU 508.12, we give you permission to
include our report dated October 15, 2002 for PT WRP Buana Multicorpora ("PT
Buana") to be included with PT Buana's parent, WRP Corporation's 10k filing.
Sincerely,
PRASETIO, SARWOKO & SANDJAJA
Tjoe Mun Tong
Senior Manager
F-5
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
2003 2002
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 420,949 $ 451,948
Accounts receivable - trade, net of allowance for
doubtful accounts of $333,625 and $150,000
in 2003 and 2002 2,317,178 4,846,396
Inventories, net 8,796,339 8,506,652
Prepaid expenses 522,914 739,944
Due from affiliate, net of allowance for doubtful
accounts of $5,586,271 in 2003 and $5,586,271 in 2002 3,320,544 3,368,050
Deferred tax assets (435,293) 2,752,312
Other receivables 1,382,078 389,242
-------------- --------------
Total current assets 16,324,709 21,054,544
PROPERTY, PLANT AND EQUIPMENT
Land rights and land improvements 736,535 736,535
Construction in progress 27,688 36,084
Equipment, furniture and fixtures 16,767,720 16,534,201
Building improvements 2,336,683 2,304,128
Vehicles 115,467 90,201
-------------- --------------
Total property, plant and equipment 19,984,093 19,701,149
Less accumulated depreciation and amortization 10,876,090 9,102,424
-------------- --------------
Property, plant and equipment, net 9,108,003 10,598,725
OTHER ASSETS
Goodwill, net of accumulated amortization of $0 and
$707,906 in 2003 and 2002, respectively - 1,042,094
Other assets 531,870 252,132
-------------- --------------
Total other assets 531,870 1,294,226
-------------- --------------
$ 25,964,582 $ 32,947,495
============== ==============
F-6
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade $ 1,733,300 $ 1,255,515
Trade notes payable to bank 2,959,587 2,860,414
Notes payable and current portion of long-term
obligations 1,264,992 4,555,964
Due to affiliates 3,890,537 2,657,279
Accrued expenses 2,716,428 2,382,262
------------ ------------
Total current liabilities 12,564,844 13,711,434
LONG-TERM DEBT 5,163 19,311
DEFERRED TAX LIABILITIES 645,036 562,728
COMMITMENTS AND CONTINGENCIES - -
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 1,483,958 1,817,872
SHAREHOLDERS' EQUITY
Series A common stock, $.01 par value; 1,252,538 shares
authorized; 1,252,538 shares issued and outstanding at
2003 and 2002 12,525 12,525
Common stock, $.01 par value; 10,000,000 shares
authorized; 5,803,692 shares issued in 2003 and 2002 58,037 58,037
Additional paid-in capital 17,942,471 17,942,471
Retained earnings (accumulated deficit) (5,118,276) 441,493
------------ ------------
12,894,757 18,454,526
Less common stock in treasury, at cost, 387,800 shares
and 367,800 shares in 2003 and 2002, respectively 1,629,176 1,618,376
------------ ------------
Total shareholders' equity 11,265,581 16,836,150
------------ ------------
$ 25,964,582 $ 32,947,495
============ ============
The accompanying notes are an integral part of these balance sheets.
F-7
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
Year ended
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net sales $ 36,988,567 $ 47,357,076 $ 51,888,852
Cost of goods sold 31,251,419 35,777,460 37,190,499
------------ ------------ ------------
Gross profit 5,737,148 11,579,616 14,698,353
Operating expenses
Selling, general and administrative 8,939,480 17,640,474 13,784,354
------------ ------------ ------------
(Loss) income from operations (3,202,332) (6,060,858) 913,999
Other Income and Expense
Interest expense 174,874 384,609 719,954
Other income 507,786 99,448 249,311
Impairment Loss 1,042,094 - -
------------ ------------ ------------
(Loss) income from continuing operations before
provision for (benefit from) income taxes
and minority interest (3,911,514) (6,346,019) 443,356
Provision for (benefit from) income taxes 1,898,169 (1,851,517) (271,478)
------------ ------------ ------------
(Loss) income from continuing operations before
minority interest (5,809,683) (4,494,502) 714,834
Minority interest in (loss) income of subsidiary (249,913) (201,521) 185,437
------------ ------------ ------------
NET (LOSS) INCOME $ (5,559,769) $ (4,292,981) $ 529,397
============ ============ ============
Basic net (loss) income per common share ($ 0.84) ($ 0.65) $ 0.08
Diluted net (loss) income per common share ($ 0.84) ($ 0.65) $ 0.08
The accompanying notes are an integral part of these statements.
F-8
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
Series A common stock Common stock Additional
------------------------- -------------------------- paid-in
Shares Amount Shares Amount capital
---------- ------------ ------------ ------------ ------------
Balance, June 30, 2000 1,252,538 12,525 5,803,692 58,037 17,942,471
Net income - - - - -
Common stock repurchases - - - - -
---------- ------------ ------------ ------------ ------------
Balance, June 30, 2001 1,252,538 12,525 5,803,692 58,037 17,942,471
Net loss - - - - -
Common stock repurchases - - - - -
---------- ------------ ------------ ------------ ------------
Balance, June 30, 2002 1,252,538 12,525 5,803,692 58,037 17,942,471
Net loss - - - - -
Common stock repurchases - - - - -
---------- ------------ ------------ ------------ ------------
Balance, June 30, 2003 1,252,538 $ 12,525 5,803,692 $ 58,037 $ 17,942,471
========== ============ ============ ============ ============
Retained
earnings
(accumulated Treasury Shareholders' Comprehensive
deficit) stock equity income (loss)
------------ ------------ ------------ -------------
Balance, June 30, 2000 4,205,077 (1,391,594) 20,826,516
Net income 529,397 - 529,397 $ 529,397
============
Common stock repurchases - (180,406) (180,406)
------------ ------------ ------------
Balance, June 30, 2001 4,734,474 (1,572,000) 21,175,507
Net loss (4,292,981) - (4,292,981) $ (4,292,981)
============
Common stock repurchases - (46,376) (46,376)
------------ ------------ ------------
Balance, June 30, 2002 441,493 (1,618,376) 16,836,150
Net loss (5,559,769) - (5,559,769) $ (5,559,769)
============
Common stock repurchases - (10,800) (10,800)
------------ ------------ ------------
Balance, June 30, 2003 $ (5,118,276) $ (1,629,176) $ 11,265,581
============ ============ ============
The accompanying notes are an integral part of this statement.
F-9
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
Year ended
------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities
Net (loss) income $ (5,559,769) $ (4,292,981) $ 529,397
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities
Depreciation 1,848,325 1,918,304 1,951,304
Amortization -- 67,232 67,231
Impairment of Goodwill 1,042,094 -- --
Deferred income taxes 3,269,913 (1,893,985) 49,846
Loss (gain) on disposal of property, plant and equipment 7,486 29,291 (10,066)
Changes in operating assets and liabilities
Accounts receivable - trade, net 2,529,218 72,666 702,355
Inventories, net (289,687) (1,319,266) 2,937,025
Prepaid expenses 217,030 434,600 (743,394)
Other assets (1,272,574) (290,762) (34,215)
Accounts payable - trade 477,785 (1,079,906) 409,793
Accrued expenses 334,165 (589,373) (667,700)
Amounts due to and from affiliates 1,280,764 5,098,558 (3,552,199)
------------ ------------ ------------
Net cash provided by (used in) operating activities 3,884,750 (1,845,622) 1,639,377
Cash flows from investing activities
Capital expenditures (365,088) (444,336) (928,206)
Proceeds on sales of property, plant and equipment - 7,714 13,510
Minority interest in subsidiary (333,914) (201,520) 185,437
------------ ------------ ------------
Net cash used in investing activities (699,002) (638,142) (729,259)
Cash flows from financing activities
Net payments on trade notes payable to bank 99,173 2,352,477 (744,877)
Net borrowings (payment) on notes payable (3,305,120) 505,870 (85,147)
Payments for treasury stock repurchases (10,800) (46,376) (180,406)
------------ ------------ ------------
Net cash provided by (used in) financing activities (3,216,747) 2,811,971 (1,010,430)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (30,999) 328,207 (100,312)
Cash and cash equivalents, beginning of period 451,948 123,741 224,054
------------ ------------ ------------
Cash and cash equivalents, end of period $ 420,949 $ 451,948 $ 123,742
============ ============ ============
The accompanying notes are an integral part of these statements.
F-10
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
WRP Corporation and Subsidiaries (the "Company") is a leading marketer of
medical 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.
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-11
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ACCOUNTS RECEIVABLE
The majority of the Company's accounts receivable are due from companies in the
foodservice, non-acute medical, dental and retail industries. Credit is extended
based on an evaluation of a customer's financial condition, and generally,
collateral is not required. Accounts receivable are due in accordance with
agreed upon terms, and are stated at amounts due from customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the
contractual payments terms are considered past due. The Company determines its
allowance by considering a number of factors, including, but no limited to, the
length of time trade accounts receivable are past due, the Company's previous
loss history, the customers current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a whole.
The Company writes off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts.
INVENTORIES
Inventories are accounted for on a first-in, first-out basis and are valued at
the lower of actual cost or market. The Company established inventory reserves
for valuation, shrinkage, and excess and obsolete inventory. The Company records
provisions for inventory shrinkage based on historical experience to account for
unmeasured usage or loss. Actual results differing from these estimates could
significantly affect the Company's inventories and cost of product sold. The
Company records provisions for excess and obsolete inventories for the
difference between the cost of inventory and its estimated realizable value
based on assumptions about future product demand and market conditions. Actual
product demand or market conditions could be different than projected by
management. Inventories consist of the following at June 30, 2003 and 2002:
2003 2002
---------- ----------
Raw materials $ 268,525 $ 40,314
Work in process 701,899 551,843
Finished goods 8,190,540 8,417,567
Reserves (364,625) (503,072)
---------- ----------
Total $8,796,339 $8,506,652
========== ==========
F-12
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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, 2003 and 2002, 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
AHPC is recorded as goodwill in the accompanying consolidated balance sheets.
In contrast to accounting standards in effect during 2002 and 2001, SFAS 12,
Goodwill and Other Intangibles Assets, which became effective beginning in 2002,
provides that goodwill, as well as identifiable intangible assets with
indefinite lives, should not be amortized. Accordingly, with the adoption of
SFAS 142 in 2002, the Company discontinued the amortization of goodwill and
indefinite-lived intangibles. In addition, useful lives of intangible assets
with finite lives were reevaluated on adoption of SFAS 142.
Goodwill will be tested for impairment on an annual basis and between annual
tests whenever there is an impairment indicated. Impairment losses will be
recognized whenever the implied fair value of goodwill is less than its carry
value. As of June 30, 2003 the Company evaluated the goodwill of the AHPC
reporting unit through and independent appraisal which used a present value of
discounted cash flows method. As a result, the Company recorded an impairment
charge of $1,042,094 for 2003 which reduced the balance of goodwill at June 30,
2003 to $0.
F-13
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Had the Company not amortized goodwill in 2002 and 2001, the Company's reported
net (loss)/income and basic and dilutive net (loss)/income per share would have
been the adjusted amounts as indicated below:
For the Fiscal Years Ended June 30,
-----------------------------------
2002 2001
----------------------------------
Net earnings, as reported $ (4,292,981) $ 529,397
Add: Goodwill amortization 67,232 67,231
----------------------------------
Net earning, as adjusted $ (4,225,749) $ 596,628
==================================
Net income per basic and dilutive common
share, as reported $ (0.65) $ 0.08
Change in amortization expense - 0.01
----------------------------------
Net income per basic and dilutive common
share, as adjusted $ (0.65) $ 0.09
==================================
LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective
May 1, 2002. SFAS No. 144 address financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assts and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of
Accounting Principles Board ("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," for
the disposal of a segment of a business. The adoption of this statement did not
have a material effect on the Company's results of operations or financial
position.
In accordance with SFAS No.144, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the fair value of an asset is determined to be less
than the carrying amount of the asset, a loss is recognized for the difference.
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.
F-14
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company records a liability for rebates and sales discounts in accordance
with terms as contracted with certain customers.
SHIPPING AND HANDLING
The Company records shipping and handling cost gross, within selling and
administrative expenses. Customers are typically invoiced for shipping costs on
all orders under the Company's 60 cases minimum requirement. Shipping and
handling cost totaled $469,666, $1,014,161 and $1,201,672 in fiscal 2003, 2002
and 2001, respectively.
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. Due to the uncertainty of the realization of the net deferred tax
asset, the Company recorded a valuation allowance against it deferred tax asset.
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).
The weighted-average number of common shares and common share equivalents
outstanding for the years ended June 30, 2003 and 2002, and 2001, are as
follows:
F-15
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Year ended
-------------------------------------
June 30,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Basic weighted-average number of common
shares outstanding 6,632,734 6,655,123 6,790,833
Dilutive effect of common share
equivalents 5,882 - -
--------- --------- ---------
Diluted weighted-average number of
common shares outstanding 6,638,616 6,655,123 6,790,833
========= ========= =========
The Company had additional vested stock options and warrants outstanding of
468,811, 476,214 and 370,272, at June 30, 2003, 2002 and 2001, respectively. The
options for the periods June 30, 2001, 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
included from the calculation of earnings per share for the year ended June 30,
2003. As the dilutive shares were immaterial, there was no effect to the
earnings per share calculation.
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-16
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
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, 2003, 2002 and
2001, the foreign exchange (loss) gain included in the determination of net
income is $(18,355), $(42,646) and $45,031, 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-17
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
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. See note I for additional information
regarding this plan. Options prices for options granted under this plan were not
less than fair market value of the Company's on the date of grant.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation.
For the Fiscal Years Ended June 30,
--------------------------------------------------
2003 2002 2001
--------------------------------------------------
Net earnings, as reported $ (5,559,769) $ (4,292,981) $ 529,397
Deduct: total stock-based employee
compensation expense determined under fair
value based method for awards granted,
modified, or settled, net of related tax
effects 53,712 203,892 216,345
--------------------------------------------------
Pro forma net earnings $ (5,613,481) $ (4,496,873) $ 313,052
==================================================
2003 2002 2001
--------------------------------------------------
Earnings per share
Basic - as reported $ (0.84) $ (0.65) $ 0.08
Basic - pro forma $ (0.83) $ (0.68) $ 0.05
Dilutive - as reported $ (0.84) $ (0.65) $ 0.08
Dilutive - pro forma $ (0.83) $ (0.68) $ 0.05
F-18
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
EMPLOYEE BENEFIT PLANS
The Company provides all employees who have completed 30 days of service with a
401(k) retirement savings plan. This 401(k) retirement savings plan name is "WRP
Corporation 401(k) Profit Sharing Plan & Trust." Participants are allowed to
contribute up to 15% of their annual compensation, and the Company will match up
to the first 8% of the participants contribution. All contributions are made to
a trust, which are held for the sole benefit of the participant. During fiscal
years 2003, 2002 and 2001, the Company contributed to the plan $24,464, $36,803
and $134,289, respectively. The Company's expense, relating to the plan's
administration, for June 30, 2003, 2002 and 2001 were $6,850, $6,850 and $6,850,
respectively.
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, 2003, 2002 and 2001, the net book value of
capitalized software is $757,605, $983,781 and $1,215,107, respectively. These
captialized costs are included in Property, Plant and Equipment in the
accompanying financial statements and are being amortized over seven years.
RECENT ACCOUNTING PRONOUNCEMENTS
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 has adopted the provisions in this
statement for all tangible long-lived asset retirements initiated after June 30,
2002.
F-19
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 has adopted the provisions set forth in this statement for all exit and
disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 were applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 were effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of this
standard did not have a material impact on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
This Interpretation addresses consolidation by business enterprises of certain
variable interest entities ("VIEs"). FIN 46 is effective immediately for all
enterprises with variable interests in VIEs created or acquired after January
31, 2003. For VIEs created or acquired prior to February 1, 2003, this
interpretation must be applied for the first interim or annual period beginning
after June 15, 2003. We have performed an evaluation to identify such entities
and we do not believe that any entities fall within the scope of this standard.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 addresses how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS 150 will apply to
financial instruments entered into or modified after May 31, 2003. We believe
that the adoption of this standard will have no impact on the Company's
financial statements.
F-20
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
RECLASSIFICATION
Certain prior-period balances have been reclassified to conform with the
current-year presentation.
NOTE B - MANAGEMENT PLAN
FORBEARANCE AGREEMENT
On March 12, 2003 the Company entered into a forbearance agreement with its
lender, GE Capital Services, whereby it was agreed the lender would forbear from
exercising certain rights under the loan agreement as a result of events of
defaults, which were continuing at that time. The terms of this agreement, as
amended, required the Company to maintain certain financial covenants and to
receive payment of at least $2 million of intercompany debt from WRP Asia (as
described in Footnote D, Related Party Transactions). This agreement was
scheduled to expire on June 30, 2003; however, the Company entered into an
amendment to the forbearance agreement that extends the term through December
31, 2003. Upon expiration of this agreement and subsequent amendment the lender
will have the right to exercise its rights and remedies immediately, including
but not limited to (1) ceasing to make any further loans to the Company and (2)
the acceleration of the Company's obligations to the lender. Due to the nature
of the Company's business, importing product from Asia and the extended time
period required for those purchases to convert to cash, the Company relies on
the credit facility to finance these purchases. Failure to have access to such a
facility or to have adequate cash to self-fund these requirements would impair
the Company's ability to continue as a going concern.
WRP ASIA FINANCIAL RESTRUCTURING
On July 8, 2003 WRP Asia announced the completion of its financial
restructuring, which involved restructuring and reducing WRP Asia's debt
position and providing additional new funding. Due to the terms of the
restructuring, WRP Asia was prohibited from repaying certain debt, including the
Company's intercompany debt in the short term. On September 12, 2003 the Company
entered into a non-binding letter of intent with WRP Asia to enter into a stock
redemption and exchange agreement. The Letter of Intent calls for the Company to
redeem 1,252,538 shares of Class A Common Stock and the 2,500,000 shares of
Class B Common Stock, which comprise all of WRP Asia's holdings. Collectively,
these shares represent approximately 53.2% of the outstanding Capital Stock of
WRPC. The consideration for the redemption would be: (i) the conveyance to WRP
Asia of WRPC's 70% ownership interest in its subsidiary PT Buana Multicorpora
("PTB"); and (ii) forgiveness of all indebtedness owing to WRPC by WRP Asia. The
Company would continue to be responsible for trade payables owing to PTB for
recent product purchases by the Company. The transaction is subject to,
F-21
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE B - MANAGEMENT PLAN - CONTINUED
among other things, execution of a definitive redemption agreement, a five-year
supply agreement from WRP Asia, as well as the approval of the Company's and WRP
Asia's boards of directors and the Company's lender.
WRPC and WRP Asia are in the process of negotiating definitive agreements at
this time, and there can be no assurances as to the final form of these
agreements, or that they will be executed, approved or closed.
The Company is analyzing the potential accounting treatment of this transaction.
The Company anticipates it will incur a loss on the transaction of between $1
million and $1.5 million.
NOTE C - 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.
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, 2003, 254,800 shares of public
common stock have been repurchased by the Company as part of this plan.
F-22
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE D - RELATED-PARTY TRANSACTIONS
At June 30, 2003 and 2002, amounts due from/to affiliates consist of the
following:
2003 2002
----------- -----------
Due from affiliate
Current WRP Asia $ 8,906,815 $ 8,954,321
Reserve (5,586,271) (5,586,271)
----------- -----------
Net $ 3,320,544 $ 3,368,050
=========== ===========
Due to affiliate
Current WRP Asia $(3,890,537) $(2,657,279)
=========== ===========
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 2003, $8,906,815 is due to
the Company. During 2003, 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. During 2003, 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, 2003 and 2002.
WRP USA and AHPC have accounts payable to WRP Asia of $3,890,537 at June 30,
2003, 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, 2003, was $8,906,815, against which the Company has 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, 2003).
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, 2003, 2002 and 2001, total purchases of gloves from WRP
Asia were $3,355,310, $13,519,454 and $10,906,263, respectively.
F-23
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE D - RELATED-PARTY TRANSACTIONS - CONTINUED
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.
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 $170,439, $137,772 and $112,290, in the years ended June 30, 2003, 2002
and 2001, respectively, for its services.
NOTE E - TRADE NOTES PAYABLE TO BANK
Trade notes payable to bank consist of the following:
2003 2002
---- ----
Notes payable to bank, at rates charged to WRP Asia: $ 1,989,213 $2,420,205
Payable to bank, letters of credit bearing interest at the
commercial paper rate plus 4.5%, due within 60 days: 970,374 440,209
----------- ----------
Total: $ 2,959,587 $2,860,414
=========== ==========
Trade notes payable to bank consist of amounts financed through letter of credit
arrangements and notes payable, which totaled $2,959,587 and $2,860,414 at June
30, 2003 and 2002, respectively. These bank obligations are collateralized by
the inventory and accounts receivable of AHPC and are subject to the convents
discussed as in Note F.
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 $1,989,213 is outstanding as of June 30, 2003. 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, 2003 and 2002, the Company was contingently liable for
outstanding letter of credit liabilities totaling $595,488 and $175,558,
respectively.
F-24
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE F - NOTES PAYABLE
Notes payable and long-term debt as of June 30, 2003 and 2002, consist of the
following:
2003 2002
---------- -----------
Borrowings under a bank revolving line-of-credit agreement with available
borrowings up to $15,000,000 at June 30, 2003 and 2002, bearing interest at
the commercial paper rate plus 4.50% (5.71% and 6.27% at June 30, 2003 and
2002, respectively), collateralized by inventories and accounts receivable,
expiring December 31, 2003. $1,235,149 $ 4,513,996
Insurance premium financing loans, bearing interest at 5.24% and 4.95% at June
30, 2003 and 2002, respectively, payable in monthly installments through
July 2003 29,843 41,968
Other 5,163 19,311
---------- -----------
1,270,155 4,575,275
Less current portion 1,264,992 4,555,964
---------- -----------
Long-term debt $ 5,163 $ 19,311
========== ===========
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 a result of continued
covenant violations, the Company entered into a forbearance agreement with its
lender on March 12, 2003. The agreement has been extended to December 31, 2003.
See Note B for further discussion.
The Company's credit facility includes a $5,000,000 revolving line of credit
with a $5,000,000 letter of credit subfacility. The facility carries an interest
rate of commercial paper plus 4.5% (5.71% at June 30, 2003).
F-25
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
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, 2003, the Company was
involved in a total of 39 lawsuits as a named defendant, a third-party defendant
or an indemnitor. During the year ended June 30, 2003, the Company was named in
no new lawsuits and was dismissed from 28 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
Sysco.
June 30,
----------------------
2003 2002 2001
---- ---- ----
Sysco sales as a percentage of net sales 70.1 45.5 44.7
Sysco distributes the Company's products to numerous food-service facilities
throughout the U.S. The ultimate end users of the Company's product are those
various food-service organizations and professionals who purchase the product
from these distributors.
OPERATING LEASES
The Company conducts all of its operations in leased facilities.
Total rent expense, net of rental income, included in the accompanying
consolidated statements of operations for the years ended June 30, 2003, 2002
and 2001, was $569,548, $595,669 and $605,578, respectively. The following
summary presents future minimum rental payments required under the terms of
present operating leases:
F-26
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
Fiscal year ending June 30,
2004 $ 533,012
2005 206,292
2006 44,399
2007 and thereafter -
-----------
$ 783,703
===========
NOTE H - SHAREHOLDERS' EQUITY
At June 30, 2000, the Company had outstanding debt, which is convertible at any
time at the noteholder's option into warrants to purchase 54,000 shares of
common stock at $25.00 per share. These convertible debentures expired in
November 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:
F-27
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE I - STOCK OPTION PLAN - CONTINUED
Weighted-
Outstanding Average
options Price Expiration
----------- --------- ----------
Balance, June 30, 2000 490,600 $ 1.90
Grants 3,500 1.53 2011
Rescissions/expirations (125,500) 2.07 2008-2009
-------- --------- ---------
Balance, June 30, 2001 368,600 $ 1.92
Grants 760,525 0.75 2012
Rescissions/expirations (408,932) 1.36 2003-2012
-------- --------- ---------
Balance, June 30, 2002 720,193 $ 1.03
======== =========
Grants 20,000 0.24
Rescissions/expirations (199,877) 0.98 2003-2012
-------- --------- ---------
Balance, June 30, 2003 540,316 $ 1.02
======= =========
The exercise price of the stock options granted in 2003, 2002 and 2001 was
established at the market price on the date of the grants. The weighted-average
fair value, at grant date, of the options granted during fiscal years 2003, 2002
and 2001 was $1.02, $1.03 and $1.92, respectively. Of the 540,316 options
outstanding at June 30, 2003, 468,811 are currently exercisable, and 71,505
become exercisable in 2004. The Company has reserved common stock for issuance
upon conversion of these options.
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, 2003, 2002 and 2001, would have been $(5,613,481), $(4,496,873),
$313,052, and $(0.83), $(0.68) and $0.05, respectively.
F-28
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE I - STOCK OPTION PLAN - CONTINUED
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
------------------------------
June 30,
------------------------------
Assumption 2003 2002 2001
- ------------------------ ------- ------- -------
Risk-free interest rates 3.02% 3.89% 6.10%
Dividend yield - - -
Expected volatility 81.14% 76.71% 71.63%
Expected life 4 years 4 years 4 years
Options outstanding and exercisable at June 30, 2003, were as follows:
Weighted- Weighted-
Range of Number average Number average
exercise outstanding at Remaining exercise exercisable at exercise
prices June 30, 2003 life Price June 30, 2003 price
- ---------- -------------- ------------ --------- -------------- ---------
$ 2.07 115,800 1.5-7 years $2.07 115,800 $2.07
0.77 190,000 10 years 0.77 190,000 0.77
0.75 214,516 10 years 0.75 143,011 0.75
0.24 20,000 10 years 0.24 20,000 0.24
- ---------- ------- ------------ ----- ------- -----
$.24-$2.07 540,316 1.5-10 years $1.02 468,811 $1.06
========== ======= ============ ===== ======= =====
F-29
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE J - INCOME TAXES
The components of the Company's income tax provision (benefit) from continuing
operations consisted of:
June 30,
------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Current
Federal $ (252,489) $ (238,602) $ (321,324)
State (168,084) (33,685) -
Foreign - 314,755 -
-------------- -------------- --------------
Total current $ (420,573) 42,468 (321,324)
Deferred
Federal $ 2,197,152 (1,808,214) (31,104)
State 4,271 (255,277) (7,202)
Foreign 117,319 169,506 88,152
-------------- -------------- --------------
Total deferred 2,318,742 (1,893,985) 49,846
-------------- -------------- --------------
Total income tax provision
(benefit) $ 1,898,169 $ (1,851,517) $ (271,478)
============== ============== ==============
A reconciliation of the statutory U.S. Federal income tax rate to the effective
tax rate is as follows:
June 30,
------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Tax provision at statutory rate of 34% $ (1,419,763) $ (2,195,434) $ (140,689)
State income taxes, net of Federal
income tax provision $ (200,425) (309,931) (21,281)
Foreign tax rate difference 937,755 567,431 (177,848)
Increase (decrease) in deferred tax
asset valuation allowance 2,166,896 - -
Utilization of loss carryforwards - - -
Goodwill amortization and other 413,705 86,417 68,340
-------------- -------------- --------------
Total income tax provision
(benefit) $ 1,898,169 $ (1,851,517) $ (271,478)
============== ============== ==============
The Company's subsidiary in Indonesia has generated tax losses in the current
period. As a result, the Company does not have any current foreign taxes payable
as of June 30, 2003.
F-30
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE J - INCOME TAXES - CONTINUED
Significant components of the Company's deferred tax assets and liabilities are
as follows:
2003 2002
------------ ------------
Deferred income tax asset
Accruals not deductible until paid $ 100,313 $ 181,863
Net operating loss carryforwards
U.S 1,717,559 546,741
PT Buana 37,928 -
Inventory 197,798 249,477
Allowance for doubtful accounts 129,447 2,225,673
Valuation allowance (2,618,338) (451,442)
------------ ------------
Total deferred tax assets $ (435,293) $ 2,752,312
============ ============
Deferred income tax liabilities
Difference between book and tax basis of property, plant
and equipment $ (314,725) $ (349,736)
Other noncurrent liabilities - PT Buana (330,311) (212,992)
------------ ------------
Total deferred tax liabilities $ (645,036) $ (562,728)
============ ============
The Company has net operating loss carryforwards at June 30, 2003, of
approximately $2.3 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, 2003, 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.
F-31
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest on debt outstanding for the years ended June 30, 2003,
2002 and 2001, was $148,066, $275,580 and $619,479, respectively.
Cash paid for income taxes during the years ended June 30, 2003, 2002 and 2001,
was $0, $0 and $65,000, respectively.
The following represents significant related-party operating transactions during
the years ended June 30, 2003, 2002 and 2001, which are included in the
consolidated statements of cash flows as amounts due to affiliate under the cash
flows from operating activities:
Year ended
June 30,
----------------------------------------------
2003 2002 2001
----------- ------------ ------------
Operating cash transactions
Purchases from affiliate $ 3,384,810 $ 13,519,454 $ 10,906,262
Sales to affiliate (4,808,544) (7,366,124) (9,714,384)
Cash payments (2,202,552) (13,258,230) (11,452,521)
Cash receipts 4,710,372 12,203,458 6,708,444
----------- ------------ ------------
Amounts due to (from)
affiliate $ 1,084,086 $ 5,098,558 $ (3,552,199)
=========== ============ ============
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 2003, 2002 and
2001:
Balance at Accounts Additions Balance
Allowance for beginning written (Reductions) at end
doubtful accounts of period off to account of period
- ------------------------------------------------ ---------- -------- ---------- ---------
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
Allowance for doubtful accounts activity for the
year ended June 30, 2003 5,736,271 (19,894) 203,519 5,919,896
F-32
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE L - VALUATION AND QUALIFYING ACCOUNTS - CONTINUED
Balance at Additions Balance
Reserve for excess and beginning Inventory (Reductions) at end
obsolete inventory of period write-offs to account period
- -------------------------------------------------- ---------- ---------- ---------- ---------
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
Reserve for excess and obsolete inventory activity
for the year ended June 30, 2003 503,072 (142,488) 4,041 364,625
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.
F-33
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE M - SEGMENT REPORTING - CONTINUED
The following tables provide financial data for the years ended June 30, 2003,
2002 and 2001, for these segments:
June 30, 2003 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- -------------- -------------- -------------- --------------
Revenues from external customers $ 10,185,290 $ 26,803,277 $ - $ 36,988,567
Revenues from other operating segments 4,586,311 - (4,586,311) -
Pretax income (loss) (715,726) (3,195,788) - (3,911,514)
Depreciation and amortization expense 1,474,414 437,341 - 1,911,755
Interest income 11,969 452,453 (396,053) 68,369
Interest expense 499,718 60,064 (396,053) 163,729
Total assets 11,283,099 14,681,483 - 25,964,582
Capital expenditures 296,360 (13,415) - 282,944
Long-lived assets 8,629,685 1,010,188 - 9,639,873
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-34
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE N - QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
3/31/03 6/30/03
-------- --------
(In thousands except
for per share data)
Net revenues $ 7,062 $ 10,593
Income from operations (1,440) (1,266)
Net loss (811) (4,681)
Net income per share
Basic $ (0.12) $ (0.71)
Diluted (0.12) (0.71)
3/31/02 6/30/02 9/30/02 12/31/02
-------- -------- --------- ---------
(In thousands except for per share data)
Net revenues $ 10,153 $ 12,861 $ 10,542 $ 8,792
Income from operations (1,010) (5,309) (75) (421)
Net (loss) income (753) (3,388) 125 (193)
Net income per share
Basic $ (0.11) $ (0.52) $ 0.02 $ (0.03)
Diluted (0.11) (0.52) 0.02 (0.03)
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 income (loss) (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)
F-35
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2003 AND 2002
NOTE N - QUARTERLY FINANCIAL SUMMARY (UNAUDITED) - CONTINUED
9/30/00 12/31/00
------- --------
(In thousands except for per
share data)
Net revenues $ 13,865 $ 12,709
Income from operations 683 (511)
Net income 241 (444)
Net income per share
Basic $ 0.04 $ (0.07)
Diluted 0.04 (0.07)
F-36