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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File Number: 0-17458
WRP CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 73-1326131
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 PARK BOULEVARD, SUITE 1260
ITASCA, IL 60143
----------------
(Address of principal executive office)
(630) 285-9191
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
------------------------------------
The number of shares of the issuer's Common Stock, par value $.01 per
share, and issuer's Series A Convertible Common Stock, par value $.01 per share,
outstanding as of January 20, 2004, was 5,803,692 and 1,252,538, respectively.
WRP CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
A quarterly review of the second quarter financial statements has been
performed by an independent certified public accountant in accordance with
Statement of Auditing Standards No. 100.
Item 1.
Condensed Consolidated Balance Sheets
December 31, 2003 (unaudited) and June 30, 2003, (unaudited)................... pgs.3-4
Condensed Consolidated Statements of Operations (unaudited) for the
Three Months Ended December 31, 2003 and 2002.................................. pg. 5
Condensed Consolidated Statements of Operations (unaudited) for the
Six Months Ended December 31, 2003 and 2002.................................... pg. 6
Condensed Consolidated Statements of Cash Flow (unaudited) for the
Six months ended December 31, 2003 and 2002.................................... pg. 7
Notes to Interim Consolidated Financial Statements (unaudited)................. pg. 8
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... pg.20
Item 3.
Quantitative and Qualitative Disclosures About Market.......................... pg.26
Item 4. Controls and Procedures........................................................ pg.26
PART II - OTHER INFORMATION
Items 1.-5. ................................................................................ pg.27
Item 6. ................................................................................... pg.27
2
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND JUNE 30, 2003
December 31, 2003 June 30, 2003
----------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 334,853 $ 420,949
Accounts receivable - trade, net of allowance for
doubtful accounts of $319,851 at December 31, 2003
and $333,625 at June 30, 2003 2,524,550 2,317,178
Inventories, net 8,523,452 8,796,339
Prepaid expenses 769,929 522,914
Due from affiliate, net of allowance for doubtful
accounts of $5,586,271 at December 31, 2003 and
June 30, 2003 3,401,870 3,320,544
Deferred tax assets - (435,293)
Other receivables 1,104,365 1,382,078
------------ ------------
Total current assets 16,659,019 16,324,709
PROPERTY, PLANT AND EQUIPMENT
Land rights and land improvements 736,535 736,535
Construction in progress - 27,688
Equipment, furniture and fixtures 17,031,050 16,767,720
Building improvements 2,385,383 2,336,683
Vehicles 115,467 115,467
------------ ------------
Total property, plant and equipment 20,268,435 19,984,093
Less accumulated depreciation and amortization 11,768,052 10,876,090
------------ ------------
Property, plant and equipment, net 8,500,383 9,108,003
OTHER ASSETS
Other assets 529,774 531,870
------------ ------------
Total other assets 529,774 531,870
------------ ------------
$ 25,689,176 $ 25,964,582
============ ============
3
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31, 2003 AND JUNE 30, 2003
December 31, 2003 June 30, 2003
----------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 2,538,526 $ 1,733,300
Trade notes payable to bank 2,991,043 2,959,587
Notes payable and current portion of long-term
obligations 966,926 1,264,992
Due to affiliates 3,890,537 3,890,537
Accrued expenses 3,053,885 2,716,428
------------ ------------
Total current liabilities 13,440,917 12,564,844
LONG-TERM DEBT - 5,163
DEFERRED TAX LIABILITIES 1,142,106 645,036
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN SUBSIDIARY 1,310,904 1,483,958
SHAREHOLDERS' EQUITY
Series A common stock, $.01 par value; 1,252,538 shares
authorized; 1,252,538 shares issued and outstanding at
December 31, 2003 and June 30, 2003 12,525 12,525
Common stock, $.01 par value; 10,000,000 shares
authorized; 5,803,692 shares issued at December 31,
2003 and June 30, 2003 58,037 58,037
Additional paid-in capital 17,942,471 17,942,471
Accumulated deficit (6,588,608) (5,118,276)
------------ ------------
11,424,425 12,894,757
Less common stock in treasury, at cost, 387,800 shares
at December 31, 2003 and June 30, 2003 1,629,176 1,629,176
------------ ------------
Total shareholders' equity 9,795,249 11,265,581
------------ ------------
$ 25,689,176 $ 25,964,582
============ ============
4
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
Three Months Ended
-----------------------------------
December 31, 2003 December 31,2002
----------------- ----------------
Net sales $ 9,527,504 $ 8,792,517
Cost of goods sold 8,047,491 7,232,674
----------- -----------
Gross profit 1,480,013 1,559,843
Operating expenses
Selling, general and administrative 2,409,226 1,980,411
----------- -----------
Loss from operations (929,213) (420,567)
Other Income and Expense
Interest expense 73,007 21,099
Other income 40,371 151,972
----------- -----------
(Loss) income from continuing operations before
provision for (benefit from) income taxes
and minority interest (961,849) (289,694)
Provision for (benefit from) income taxes (28,186) (52,982)
----------- -----------
(Loss) income from continuing operations before
minority interest (933,663) (236,712)
Minority interest in (loss) income of subsidiary (79,528) (44,126)
----------- -----------
NET (LOSS) INCOME $ (854,135) $ (192,586)
=========== ===========
Basic net (loss) income per common share $ (0.13) $ (0.03)
Diluted net (loss) income per common share $ (0.13) $ (0.03)
5
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
Six Months Ended
------------------------------------
December 31, 2003 December 31, 2002
----------------- -----------------
Net sales $ 19,313,730 $ 19,334,021
Cost of goods sold 16,096,413 15,759,055
------------ ------------
Gross profit 3,217,317 3,574,966
Operating expenses
Selling, general and administrative 4,706,966 4,070,739
------------ ------------
Loss from operations (1,489,649) (495,772)
Other Income and Expense
Interest expense 117,027 69,824
Other income 69,850 436,121
------------ ------------
(Loss) income from continuing operations before
provision for (benefit from) income taxes
and minority interest (1,536,826) (129,475)
Provision for (benefit from) income taxes 22,562 (57,237)
------------ ------------
(Loss) income from continuing operations before
minority interest (1,559,388) (72,238)
Minority interest in (loss) income of subsidiary (89,054) (5,074)
------------ ------------
NET (LOSS) INCOME $ (1,470,334) $ (67,164)
============ ============
Basic net (loss) income per common share $ (0.22) $ (0.01)
Diluted net (loss) income per common share $ (0.22) $ (0.01)
6
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
Six Months Ended
------------------------------------
December 31, 2003 December 31, 2002
----------------- -----------------
Cash flows from operating activities
Net (loss) income $(1,470,334) $ (67,164)
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities
Depreciation 891,962 928,200
Deferred income taxes 61,777 105,266
Gain on disposal of property, plant and equipment - (3,811)
Changes in operating assets and liabilities
Accounts receivable - trade, net (207,371) 2,692,315
Inventories, net 272,887 (1,042,059)
Prepaid expenses (247,015) (147,801)
Other assets 279,809 (243,016)
Accounts payable - trade 805,226 1,307,983
Accrued expenses 337,459 (293,249)
Amounts due to and from affiliates (81,327) 331,045
----------- -----------
Net cash provided by operating activities 643,073 3,567,709
Cash flows from investing activities
Capital expenditures (284,341) (261,527)
Minority interest in subsidiary (173,054) (89,074)
----------- -----------
Net cash used in investing activities (457,395) (350,601)
Cash flows from financing activities
Net borrowings on trade notes payable to bank 31,455 644,387
Net payments on notes payable (303,229) (3,407,605)
Payments for treasury stock repurchases - (10,800)
----------- -----------
Net cash used in financing activities (271,774) (2,774,018)
----------- -----------
Net increase in cash and cash equivalents (86,096) 443,090
Cash and cash equivalents, beginning of period 420,949 451,948
----------- -----------
Cash and cash equivalents, end of period $ 334,853 $ 895,038
=========== ===========
7
WRP CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. DESCRIPTION OF BUSINESS:
We are a leading marketer of foodservice and medical examination gloves
in the United States through our wholly owned subsidiary, American Health
Products Corporation ("AHPC"). We are also a manufacturer of disposable latex
examination and foodservice gloves through our 70% owned Indonesian
manufacturing facility, PT WRP Buana Multicorpora ("PT Buana"). In 2002, we
broadened our product line to include other disposable items to be used
primarily in the foodservice industry.
2. BASIS OF PRESENTATION:
The accompanying unaudited condensed, consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
in the United States of America, for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
necessary for a fair presentation, consisting only of normal recurring
adjustments, have been included. For further information, refer to the
consolidated financial statements contained in the Annual Report on Form 10-K
for the year ended June 30, 2003, filed October 14, 2003. The results of
operations for the six-month period ended December 31, 2003, may not be
indicative of the results that may be expected for the fiscal year ended June
30, 2004.
3. PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include our
accounts and those of AHPC and our 70% owned subsidiary, PT Buana. All
significant intercompany transactions have been eliminated in consolidation.
4. MAJORITY SHAREHOLDER:
WRP Asia Pacific Sdn. Bhd., a Malaysian corporation ("WRP Asia"), owns
all of our outstanding Series A Common Stock and is our majority shareholder.
At December 31, 2003, WRP Asia had a 53.2% ownership interest in us.
WRP Asia is one of the world's leading manufacturers of high-quality, disposable
gloves primarily for use by healthcare professionals in the acute care,
alternative care and foodservice markets, and for critical environments in the
electronics industries, scientific laboratories, pharmaceutical industries and
other related industries. AHPC purchases a majority of its powder-free latex
exam gloves from WRP Asia.
8
5. COMMON STOCK:
As of December 31, 2003, we had issued 1,252,538 shares of Series A
Convertible Common Stock and 5,803,692 shares of Common Stock for a total of
7,056,230 shares. The terms of the Series A Common Stock owned by WRP Asia are
substantially the same as our Common Stock except:
a. Each share of Series A Common Stock is convertible
into one share of our Common Stock, $.01 par value.
We have reserved 1,252,538 shares of Common Stock for
issuance upon conversion of the Series A Common
Stock.
b. Series A Common Stock entitles WRP Asia to elect all
Class A directors, who represent a majority of our
Board of Directors, and to vote with the holders of
Common Stock as a single class with respect to all
other matters subject to a vote of the shareholders.
During the six months ended, December 31, 2003, we did not sell any
shares of our Common Stock.
6. FOREIGN CURRENCY TRANSACTIONS:
Gains and losses from foreign currency exchange transactions are
included in net loss in the period in which they occur. During the quarters
ended December 31, 2003 and 2002, the foreign exchange (loss)/gain included in
the determination of net income was $(5,435) and $6,050, respectively. The
functional currency of PT Buana is the U.S. dollar.
7. STOCK INCENTIVE PLANS:
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.
9
Three Months Ended Six Months Ended
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net earnings, as reported $ (854,135) $ (192,586) $(1,470,334) $ (67,164)
Deduct: total stock-based employee
compensation expense determined under
fair value based method for awards granted,
modified, or settled, net of related tax
effects 11,093 6,120 22,186 12,240
----------- ----------- ----------- -----------
Pro forma net earnings $ (843,042) $ (186,466) $(1,448,148) $ (54,924)
=========== =========== =========== ===========
2003 2002 2003 2002
---- ---- ---- ----
Earnings per share
Basic - as reported $ (0.13) $ (0.03) $ (0.22) $ (0.01)
Basic - pro forma (0.13) (0.03) (0.22) (0.01)
Dilutive - as reported $ (0.13) $ (0.03) $ (0.22) $ (0.01)
Dilutive - pro forma (0.13) (0.03) (0.22) (0.01)
8. RELATED-PARTY TRANSACTIONS:
At December 31, 2003 and 2002, amounts due from/to affiliates consist
of the following:
2003 2002
---- ----
Due from Affiliate-
Current - WRP Asia $ 8,988,141 $ 9,929,258
Due to Affiliate-
Current - WRP Asia $(3,890,537) $(3,963,261)
----------- -----------
Amounts due from
Affiliate - Net * $ 5,097,604 $ 5,965,997
=========== ===========
Purchases from Affiliate - $ (-) $(2,840,045)
=========== ===========
Sales to Affiliate - $ 242,701 $ 4,546,705
=========== ===========
*Right of set-off granted in October 2002.
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.
10
As of December 31, 2003, we have outstanding accounts receivable from
WRP Asia of approximately $8,988,141. Subsequent to June 30, 2002, the amounts
due to PT Buana of approximately $5,586,000 were assigned to us in partial
satisfaction of intercompany amounts due from PT Buana to us.
As of December 31, 2003, we have accounts payable to WRP Asia of
approximately $3,890,537, primarily resulting from the purchase of inventories
from WRP Asia.
The net amount due from WRP Asia, before allowance for doubtful
accounts at December 31, 2003, was approximately $8,988,141, against which we
have provided an allowance for doubtful accounts of approximately $5,586,000
(representing all amounts due for the sale of product from PT Buana to WRP Asia
at June 30, 2002).
Subsequent to September 30, 2002, we entered into a formal agreement
with WRP Asia, to provide for the full and complete right of offset of any trade
payables due against amounts they owe to us and AHPC. We continue to purchase
gloves from WRP Asia and believe that the unreserved amounts due to WRP Asia
from WRPC and AHPC of approximately $488,666 at December 31, 2003 are realizable
based upon the agreement granting right of offset and ongoing purchases from WRP
Asia. In management's opinion, while we have been advised by WRP Asia that it
does not currently intend to seek protection from creditors, should such action
take place, we would have to reevaluate the ability to offset payables to WRP
Asia against our receivables from them.
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 was comprised of our "B" Directors, Robert J.
Simmons and Don L. Arnwine, as well the independent "A" Directors, G. Jeff
Mennen and Richard J. Swanson. The purpose of the Committee is to examine the
WRP Asia restructuring process, as well as the options and alternatives
available to us. The approval of the stock redemption and exchange agreement
(see discussion in Note 22, below) has been unanimously approved by the
Committee, and it has obtained a fairness opinion advising that the transaction
is fair to our shareholders.
Additionally, interest rates in many Asian-Pacific countries have been
heavily dependent upon international trade and are, accordingly, affected by
protective trade barriers and the economic conditions of their trading partner.
The enactment by the government of principal trading partners protectionist
trade legislation, reduction of foreign investment or general declines in the
international securities markets could have a significant adverse effect upon
the economies of the Asian-Pacific countries. The financial statements do not
include any adjustment that might result from these uncertainties and any
related effects will be reported in the financial statements as they become
known and estimable.
9. NET LOSS PER SHARE:
We follow the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share (EPS)" ("SFAS 128"), which requires dual presentation of
basic and diluted earnings per share for all periods presented. Basic EPS
amounts are based on the weighted-average number of shares of common stock
outstanding during each period while diluted EPS amounts are based
11
on the weighted-average number of shares of common stock outstanding during the
period and the effect of dilutive stock options and warrants. The
weighted-average number of common shares and common share equivalents
outstanding for the three and six months ended December 31, 2003 and 2002 is as
follows:
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Basic weighted-average number of
Common shares outstanding 6,632,734 6,639,690
Dilutive effect of common share
Equivalents 17,448 -
--------- ---------
Dilutive weighted-average number of common shares outstanding 6,650,182 6,639,690
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Basic weighted-average number of
Common shares outstanding 6,632,734 6,642,871
Dilutive effect of common share
Equivalents 12,727 -
--------- ---------
Dilutive weighted-average number of common shares outstanding 6,645,461 6,642,871
At December 31, 2003, there were 7,056,230 shares of our Common Stock
and Series A Common Stock outstanding.
As approved by the Board of Directors, all outstanding stock options at
February 29, 2000, to current employees, officers and directors were repriced
effective February 29, 2000, to $2.07, the closing price on that date. All of
the stock options, which were repriced, totaling 483,600 options, originally
contained exercise prices that were significantly higher than the market price.
We are subject to variable accounting; however, the share price has not exceeded
$2.07.
10. ACCOUNTING FOR INCOME TAXES:
We record income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). SFAS 109 utilizes the liability
method and deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on the changes in the deferred tax asset or
tax liability from period to period.
Our U.S. operations had generated net operating loss carry-forwards
("NOL's") in prior years of which approximately $2.3 million is remaining at
December 31, 2003. These NOL's are fully reserved and are included as a
component of deferred tax assets. These NOL's will be available to offset future
U.S. generated taxable income and will begin expiring in 2004. In accordance
with federal tax regulations, usage of the NOL's are and have been subject to
limitations as a direct result of certain ownership changes that have occurred
in the past, and may be further limited should WRP Asia transfer ownership of
its shares of stock to another holder.
12
For the six months ended December 31, 2003 and 2002, we have recorded a
provision for (benefit) from income taxes of $22,562 and $(57,237),
respectively.
11. CONTINGENCIES:
Over the last several years, numerous product liability lawsuits have
been filed against suppliers and manufacturers of latex gloves alleging, among
other things, adverse allergic reactions. We are one of numerous defendants that
have been named in such lawsuits. During the six months ended December 31, 2003,
there were no additional product liability lawsuits filed, and we were dismissed
from four lawsuits. At December 31, 2003, we were involved in a total of 28
lawsuits, either as a named defendant, third party or an indemnifier. We have
agreed to defend and indemnify certain vendors in regard to the sale and
distribution of our products only. None of these lawsuits name us as the sole
defendant in these claims.
We possess product liability insurance coverage which covers the
defense costs and certain damage awards associated with the product liability
claims against ourselves, AHPC and PT Buana, in addition to the indemnity of
AHPC's customers to the limits of its policy, subject to deductions on each
claim, to be paid by AHPC. We believe that all legal claims are adequately
provided for and if not provided for, are without merit or involve such amounts
that would not materially or adversely affect us. However, there is no assurance
that AHPC's insurance will be sufficient to meet all damages for which we may be
held liable. For example, in a jury trial, even where actual damages are
somewhat limited, or where causation of liability is questionable, the jury may
choose to award a substantial verdict to the plaintiff. Likewise, there is no
assurance that the outcome of these suits will not adversely affect our
operations or financial condition. We will vigorously contest any latex claim
initiated against us, but will enter into a settlement agreement, where, after
careful consideration, management determines that our best interests will be
served by settling the matter. In addition, there can be no assurances that
product liability insurance for these claims will continue to be available to us
or, if available, that it will be available in sufficient amounts and at
affordable terms.
12. COMPREHENSIVE INCOME:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), requires companies to report all changes in
equity during a period, except those resulting from investment by owners and
distributions to owners, in a financial statement for the period in which they
are recognized. Comprehensive profit (loss) for the six months ended December
31, 2003 and 2002 was equal to net profit (loss) and there were no accumulated
other comprehensive income items during those periods.
13. SEGMENT REPORTING:
We have two business segments: manufacturing and distribution. These
segments are managed as separate strategic business units due to the distinct
nature of their operations and customer bases. The manufacturing segment, which
represents the operations of PT Buana, manufactures latex gloves and sells them
primarily to AHPC and other customers through WRP Asia's distribution network.
All operations of the manufacturing segment are located in Indonesia. The
distribution segment involves the procurement and sale of gloves purchased from
13
the manufacturing segment and other glove manufacturers and then sold to
national and regional healthcare, foodservice, retail and other distributors.
The operations of the distribution segment are located entirely within the U.S.
We evaluate segment performance based on income (loss) before provision
for (benefit from) income taxes and minority interest ("Pre-tax income (loss)").
Transactions between operating segments are made at prevailing market rates.
The following tables provide financial data for the three and six
months ended December 31, 2003 and 2002 for these segments:
THREE MONTHS ENDED
DECEMBER 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 3,417,355 $ 6,110,149 $ - $ 9,527,504
Revenues from other operating segments 1,155,126 - (1,155,126) -
Pre-tax loss (293,281) (668,569) - (961,849)
Total Assets 12,120,095 13,569,080 - 25,689,176
THREE MONTHS ENDED
DECEMBER 31, 2002 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 1,636,758 $ 7,155,759 $ - $ 8,792,517
Revenues from other operating segments 1,568,318 - (1,568,318) -
Pre-tax loss (139,808) (149,886) - (289,694)
Total Assets 12,098,523 20,299,678 - 32,398,202
SIX MONTHS ENDED
DECEMBER 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 6,638,931 $ 12,674,799 $ - $ 19,313,730
Revenues from other operating segments 2,736,013 - (2,736,013) -
Pre-tax loss (274,287) (1,262,540) - (1,536,826)
Total Assets 12,120,095 13,569,080 - 25,689,176
SIX MONTHS ENDED
DECEMBER 31, 2002 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 4,988,184 $ 14,345,837 $ - $ 19,334,021
Revenues from other operating segments 2,612,392 - (2,612,392) -
Pre-tax loss (20,387) (109,097) - (129,475)
Total Assets 12,098,523 20,299,678 - 32,398,202
14. NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS:
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.
14
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Other." This interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligation under guarantees. This interpretation also
clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations the guarantor has
undertaken in issuing that guarantee. The initial recognition and measurement
provisions of this statement shall be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002 irrespective of the
guarantors fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 31,
2002. We believe that the adoption of this standard will have no impact on its
financial statements.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities." This interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities. The provisions of this interpretation
are effective immediately for all variable interest entities created after
January 31, 2003; for the first fiscal year or interim period beginning after
June 15, 2003 for variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. We believe that the
adoption of this standard will have no impact on its financial statements.
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.
15. INVENTORIES:
Since a majority of our product is imported from Southeast Asia, it is
our practice to maintain a certain level of safety-stock inventory. Inventories
are accounted for on a first-in, first-out ("FIFO") basis and are valued at the
lower of actual cost or market.
16. KEY CUSTOMERS:
Our customers include leading foodservice distributors and healthcare
product suppliers. During the six months ended December 31, 2003, AHPC's
national customers accounted for 82.3% 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 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 our national customer, through their combined networks
of over 40 operating companies, to thousands of foodservice organizations and
medical facilities throughout the United States. The ultimate end-users of our
products are foodservice organizations and medical facilities, healthcare
professionals and individuals who use our gloves.
15
17. CREDIT FACILITY:
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% (1.00% at
December 31, 2003). At December 31, 2003, we had outstanding $746,348 on the
revolving line of credit and $971,797 of letter of credit liabilities under the
credit facility. As of December 31, 2003, we were not in compliance with certain
of our covenants and have obtained waivers of these covenant violations from the
financial institution.
In conjunction with the waiver of the covenant violations as of
December 31, 2003, the existing credit facility agreement was amended to expire
on March 31, 2003 in connection with the Forbearance Agreement (see Note 22,
below, for a discussion of our efforts to renew or replace our credit facility).
18. MEDICAL BUSINESS:
On March 1, 2002, our subsidiary, American Health Products Corp,
entered into a Transition Services Agreement with Maxxim Medical, Inc. (MAXXIM),
whereby MAXXIM agreed to service most of our acute-care medical customers. As a
result of this transition, we have substantially reduced our personnel in our
medical division and have transitioned the business with respect to most of our
customers in the medical division to MAXXIM. As of December 31, 2003, we had an
outstanding account receivable with MAXXIM of $280,115.41 (which included
$250,000 of the fees they agreed to pay us for entering into the agreement).
This amount has been fully reserved due to MAXXIM's bankruptcy filing on
February 11, 2003. We now service our medical customers either direct or
indirect through distributors, other then MAXXIM.
19. NASDAQ LISTING:
On February 14, 2002, NASDAQ notified us that the bid price of our
common stock had closed at less than $1.00 per share over the previous 30
consecutive trading days, and, as a result, did not comply with Marketplace Rule
4310(c)(4) (the "Rule"). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), we were provided 180 calendar days, or until August 13, 2002, to
regain compliance with the Rule.
On August 14, 2002, NASDAQ notified us that we had not regained
compliance in accordance with Marketplace Rule 4310(c)(8)(D). However, NASDAQ
noted that we meet the initial listing requirements for the NASDAQ SmallCap
Market under Marketplace Rule 4310(c)(2)(A). Specifically, we qualify with the
$5,000,000 stockholders equity requirement. Therefore, in accordance with
Marketplace Rule 4310(c)(8)(D), we were provided an additional
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180 days, or until February 10, 2003, to regain compliance. In order to regain
compliance, our common stock was required to close at $1.00 per share or more
for a minimum of ten consecutive trading days. If compliance with this Rule
could not be demonstrated by February 10, 2003, NASDAQ advised that our
securities would be delisted.
On January 30, 2003, NASDAQ extended its minimum bid price compliance
periods. Specifically, NASDAQ announced it would maintain the initial 180-day,
calendar-day bid price grace period for all SmallCap issuers, but extend the bid
price grace period for SmallCap issuers demonstrating compliance with the core
SmallCap initial listing criteria from 180 to up to 540 days (approximately 12
months). Compliance with this standard is to be verified every 180 days.
On April 9, 2003, we received notice from NASDAQ that, over the last 30
days, our Common Stock had not maintained a minimum market value of publicly
held shares ("MVPHS") of $1,000,000, as required for continued inclusion by
Marketplace Rule 4310 (c)(7) (the "Rule"). NASDAQ further advised that, in
accordance with Marketplace Rule 4310 (c)(8)(B), we would be provided 90 days,
or until July 8, 2003, to regain compliance. If, at any time before July 8,
2003, the MVPHS of our Common Stock is $1,000,000 or more for a minimum of ten
consecutive trading days, NASDAQ would provide written notification that we were
in compliance with the rule. If compliance with this rule was not demonstrated
by July 8, 2003, NASDAQ advised it would provide written notification that our
securities would be delisted, subject to the opportunity to appeal this
determination to a listing Qualifications Panel.
Subsequently, we achieved compliance with the MVPHS requirement but
were still not in compliance with the $1.00 minimum bid price requirement. On
July 24, 2003 a hearing was held before the Nasdaq Listing Qualifications Panel.
The result of this hearing was that we received an additional period of time,
until September 30, 2003, to comply with the minimum bid price requirement. On
October 23, 2003 we were advised by Nasdaq that since we had demonstrated a plan
to achieve the $1.00 minimum bid price and provided us with an extension based
upon the following terms:
(1) On or before November 5, 2003 we must file a proxy statement
with the SEC and Nasdaq evidencing our intent to seek
shareholder approval for the implementation of a reverse stock
split sufficient to satisfy the $1.00 bid price requirement.
(2) On or before January 5, 2004 we must evidence a closing bid
price of at least $1.00 per share and, immediately thereafter,
a closing bid price of at least $1.00 per share for a minimum
of ten consecutive trading days.
On November 5, 2003 we filed a Notice of Special Meeting of
Shareholders with the SEC and Nasdaq. This meeting was called to have the
following items approved:
To amend our Articles of Incorporation, which will affect the following
items:
(a) change our name to AHPC Holdings, Inc.;
(b) eliminate our Class A Common Stock, par value $.01
per share, increase the number of authorized shares
of Common Stock, par value $.01 per share,
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from 10,000,000 to 50,000,000 shares and authorize
the issuance of up to 2,000,000 shares of preferred
stock, par value $.01 per share;
(c) reflect a one share for two shares reverse stock
split of our outstanding Common Stock, subject to an
increase in the amount of this reverse split, if
necessary, to result in an adjustment of the closing
bid price of our Common Stock, as adjusted for the
reverse stock split, to exceed $1.00 per share; and
(d) change the minimum number of persons who may comprise
our board of directors from five to three.
On January 20, 2004 we held the Special Meeting of Shareholders and
received approval on all of the above items. The approval of items (a), (b) and
(d) are contingent upon the transaction with WRP Asia Pacific being completed.
Refer to Note 22 for a complete description of this transaction.
As of February 10, 2004 our common stock has met the minimum bid
requirement of Marketplace Rule 4310(c)(8)(D) for 12 consecutive trading days.
We have received confirmation from NASDAQ, on February 11, 2004, that we met the
minimum requirements.
20. WEST COAST DOCK STRIKE:
During October 2002, labor negotiations between the Pacific Maritime
Association and the International Longshore and Warehouse Union broke down
resulting in all West Coast ports being closed for ten days. Since we import all
our products through these ports, we were unable to have product delivered
during this time period. Additionally, by the end of the tenth day, work
stoppage we had 25 containers waiting to be unloaded at various ports on the
West Coast. It took us approximately 60 days to clear this backlog. Due to the
work stoppage and subsequent shipping delays we incurred additional costs of
approximately $297,000.
21. MAXXIM BANKRUPTCY:
On February 11, 2003, MAXXIM filed for protection under Chapter 11 of
the Federal Bankruptcy Act in the District of Delaware. It is our understanding
that they plan to continue to do business and to reorganize their operations as
a debtor in possession. Under our Transition Services Agreement dates as of
March 1, 2002, with MAXXIM, MAXXIM agreed to pay us $375,000 in the aggregate
upon achievement of certain milestones, all of which were achieved. To date,
MAXXIM has only paid $125,000 of such obligations; however, we have included as
income the accrued, unpaid portion of these obligations. The total amount due
from MAXXIM is $280,115; of this amount, $250,000 is for payments due under the
transition agreement. This amount has been fully reserved due to MAXXIM's
bankruptcy filing on February 11, 2003.
22. FORBEARANCE AGREEMENT
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
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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 two amendments to the forbearance agreement that extends the term
initially through December 31, 2003 and subsequently through March 31, 2004.
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 (i)
ceasing to make any further loans to us and (ii) 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 March 31, 2004. 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.
23. 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 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 its intercompany debt. On October 6, 2003 we announced the signing
of a non-binding letter of intent with WRP Asia to enter into a stock redemption
and exchange agreement.
On November 3, 2003 we announced the signing of a definitive stock
redemption and exchange agreement (the "Agreement") with WRP Asia. The Agreement
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 is: (i) the
conveyance to WRP Asia of our 70% ownership interest in its subsidiary PT Buana
Multicorpora ("PTB") Indonesia, an Indonesian based manufacturer of gloves; and
(ii) excuse of all indebtedness owing to us or our subsidiaries from WRP Asia
and from PTB with the exception of our obligation to be responsible for trade
payables owing to PTB for recent product purchases. We also announced the
execution of a five-year supply agreement from WRP Asia and PTB to us (through
our subsidiary American Health Products Corporation), calling for the purchase
of a portion of our latex glove requirements, which equates to the appropriate
annualized quantities that we are currently purchasing from PTB and WRP Asia.
The pricing of such products has a variable factor keyed to the cost of raw
latex. The Board of Directors of both WRP Asia and us have approved the
transaction. We have received a fairness opinion from an independent
professional valuation firm that the transaction is fair to our stockholders.
We had anticipated that the transaction would close by November 30,
2003, however, since the transaction involves the transfer of ownership on an
Indonesian company, we are required to obtain the approval of the Investment
Board of the Government of Indonesia. This approval process has caused several
unforeseen delays. We now anticipate the transaction to close by March 31, 2004.
At that time, based on the split adjusted, current market price for our
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common stock of $1.09 per share as of February 13, 2004, we anticipate incurring
a loss on this transaction of approximately $2.7 million. An increase to our
common stock price will reduce this loss and a considerable appreciation in
common stock price would cause us to incur a gain on the transaction. Likewise,
a decline in our common stock price would cause the loss on the transaction to
increase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements in this Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, including statements
regarding new products and markets, gross margins, selling, general and
administrative expenses, liquidity and cash need and our plans and strategies,
are all based on current expectations, and we assume no obligation to update
this information. Numerous factors could cause actual results to differ from
those described in the forward-looking statements. We caution investors that our
business is subject to significant risks and uncertainties.
Our wholly owned subsidiary, American Health Products Corporation
("AHPC"), is engaged in the marketing and distribution of high-quality,
disposable, examination, foodservice and specialty gloves in the United States
and has been in the glove business since our incorporation in January 1989. For
the six months ended December 31, 2003, we recorded net sales of $19,313,730.
Our 70% owned subsidiary, PT WRP Buana Multicorpora ("PT Buana"), which
commenced operations in April 1996, owns and operates an Indonesian glove
manufacturing plant. PT Buana manufactures high-quality, disposable latex exam
and foodservice gloves.
THREE MONTHS ENDED DECEMBER 31, 2003, COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 2002:
Our net sales are derived from the sale of finished product, net of
allowable rebates, royalties, discounts and returns. Net sales include glove
sales from AHPC's glove product line and latex exam glove sales from PT Buana,
exclusive of its sales to AHPC. Net sales totaled $9,527,504 and $8,792,517 for
the three months ended December 31, 2003 and 2002, respectively. This represents
an 8.4% increase in net sales for the year compared to the year earlier period.
The increase in sales of $734,987 was due to a low sales volume PT Buana
experienced in December 2002 as a result of the West Coast Dock strike.
Cost of goods sold includes all costs to manufacture, purchase and
obtain the finished product, including costs such as ocean freight, customs,
duty and warehousing. Cost of goods sold increased 11.3% from $7,232,674 for the
three months ended December 31, 2002, to $8,047,491 for the three months ended
December 31, 2003, due to the increase in sales and, in part, due to the
increase in cost of raw latex. As a percentage of net sales, cost of goods sold
increased from 82.3% for the three months ended December 31, 2002, to 84.4% for
the three months ended December 31, 2003. The gross profit percentage decreased
to 15.5% in the three month ended December 31, 2003, versus 17.7% in the same
period of 2002. The gross profit percentage decrease is attributed to an
increase in the cost of raw latex, which increased by more than 40% versus the
comparable 2002 period. We continue to expect our gross margins to be affected
by the cost of latex, changes in product mix, competition, manufacturing
capacity levels
20
and other factors. There has not been an appreciable increase in the cost of
latex since December 31, 2003, and our recent price increases will allow us (for
our fourth quarter) to adjust for some of the cost increase in latex over the
first two quarters of our fiscal year.
Selling expenses include all salaries and payroll related costs for
sales and marketing staff together with other sales related expenses such as
sales commissions, travel costs, trade shows, advertising, promotions and
delivery costs. Selling, general and administrative ("SG&A") expenses increased
by 21.7% from $1,980,411 for the three months ended December 31, 2002, to
$2,409,226 for the three months ended December 31, 2003. The increase of
$428,815 in SG&A expenses is attributable to an increase in manufacturing
operating expenses and distribution marketing expenditures.
Loss from operations was $(929,213) for the three months ended December
31, 2003, as compared to loss from operations of $(420,567) for the three months
ended December 31, 2002. This loss from operations reflects the increased costs
of goods sold and selling expenses.
Interest expense increased during the three months ended December 31,
2003, to $73,007 compared to $21,099 in the same quarter of 2002. This increase
is attributable to an increase in our line of credit and interest rates increase
for PT Buana during the quarter in 2003 versus the 2002 comparable quarter.
We recorded a foreign currency exchange loss of $5,435 in the quarter
ended December 31, 2003 versus a foreign exchange gain of $6,050 in the
comparable period in 2002 from our Indonesian subsidiary, PT Buana. As currency
exchange rates fluctuate and depending upon the mix of assets and liabilities in
PT Buana's books in Indonesian rupiah, an exchange gain or loss will be
incurred. These foreign currency exchange gains or losses are reported as a
component of the SG&A expense category in the consolidated statements of
operations. PT Buana uses the U.S. dollar as its functional currency. PT Buana
continues to be exposed to foreign currency exchange rate fluctuations and may
incur exchange gains or losses in the future. Indonesia continues to experience
economic and political instability, which is characterized by fluctuations in
its foreign currency exchange rate, interest rates, stock market and inflation
rate. The financial statements do not include any adjustment that might result
from these uncertainties and any related effects will be reported in the
financial statements as they become known and estimable.
Other income for the quarter ended December 31, 2003 and 2002, was
$40,371 and $151,972, respectively. The decrease was due to the proceeds from
the Transition Services Agreement with MAXXIM in the three months ended December
31, 2003.
The benefit for income taxes for the three months ended December 31,
2003, was $(28,186) and $(52,982) for the comparable 2002 period. Our U.S.
operations generated net operating loss carry-forwards ("NOL's") in prior years
of which approximately $2.3 million is remaining from June 30, 2003. These NOL's
are fully reserved and are included as a component of deferred tax assets. Our
ability to utilize allowed NOL's in the future may be reduced in the event of
the closing of the definitive stock redemption and exchange agreement with WRP
Asia Pacific.
21
For the three months ended December 31, 2003, our net loss was
$(854,135), compared to a net loss of $(192,586) in the same period of 2002.
Diluted (loss) income per share for the three months ended December 31, 2003 and
2002, was $(0.13) and $(0.03), respectively.
SIX MONTHS ENDED DECEMBER 31, 2003, COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 2002:
Our net sales are derived from the sale of finished product, net of
allowable rebates, royalties, discounts and returns. Net sales include glove
sales from AHPC's glove product line and latex exam glove sales from PT Buana,
exclusive of its sales to AHPC. Net sales totaled $19,313,730 and $19,334,021
for the six months ended December 31, 2003 and 2002, respectively. This
represents a 0.1% decline in net sales for the year compared to the year earlier
period.
Cost of goods sold includes all costs to manufacture, purchase and
obtain the finished product, including costs such as ocean freight, customs,
duty and warehousing. Cost of goods sold increased 2.1% from $15,759,055 for the
six-month period ended December 31, 2002, to $16,096,413 for the six months
ended December 31, 2003, due to the increase in the cost of raw latex. As a
percentage of net sales, cost of goods sold increased from 81.5% for the six
months ended December 31, 2002, to 83.3% for the six months ended December 31,
2003. The gross profit percentage decreased to 16.7% in the six month ended
December 31, 2003 versus 18.5% in the same period of 2002. The gross profit
percentage decrease is attributed to an increase in the cost of raw latex, which
increased by more than 40% versus the comparable 2002 period. The gross profit
percentage was also impacted by increases in product mix of lower-margin
products. 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. As of the present time the cost of latex appears to have
stabilized and recent price increases will enable us, beginning in the fourth
quarter, to return to acceptable margins on the distribution of our products,
assuming no substantial further increase in latex prices. We are also seeing a
trend in the food service industry toward increasing use of vinyl gloves,
historically, vinyl products have been subject to less pricing volatility than
latex prices gloves.
Selling expenses include all salaries and payroll related costs for
sales and marketing staff together with other sales related expenses such as
sales commissions, travel costs, trade shows, advertising, promotions and
delivery costs. Selling, general and administrative ("SG&A") expenses increased
by 15.6% from $4,070,738 for the six months ended December 31, 2002, to
$4,706,966 for the six months ended December 31, 2003. The increase of $636,227
in SG&A expenses is attributable to an increase in manufacturing operating
expenses and an increase in marketing expenses.
Loss from operations was $(1,489,649) for the six months ended December
31, 2003, as compared to that of $(495,772) for the six months ended December
31, 2002. This loss from operations reflects the increased costs of goods sold
relating to the cost of raw latex.
Interest expense increase during the six months ended December 31,
2003, to $117,027 compared to $69,824 in the same six-month period of 2002. This
decrease is attributable to an increase in our line of credit and interest rates
increase for PT Buana during the six month period in 2002 versus the 2001
comparable.
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We recorded a foreign currency exchange loss of $13,168 in the quarter
ended December 31, 2003 versus a foreign exchange gain of $1,138 in the
comparable period in 2002 from our Indonesian subsidiary, PT Buana. As currency
exchange rates fluctuate and depending upon the mix of assets and liabilities in
PT Buana's books in Indonesian rupiah, an exchange gain or loss will be
incurred. These foreign currency exchange gains or losses are reported as a
component of the SG&A expense category in the consolidated statements of
operations. PT Buana uses the U.S. dollar as its functional currency. PT Buana
continues to be exposed to foreign currency exchange rate fluctuations and may
incur exchange gains or losses in the future. Indonesia continues to experience
economic and political instability, which is characterized by fluctuations in
its foreign currency exchange rate, interest rates, stock market and inflation
rate. The financial statements do not include any adjustment that might result
from these uncertainties and any related effects will be reported in the
financial statements as they become known and estimable.
Other income for the six-month ended December 31, 2003 and 2002 was
$69,850 and $436,121, respectively. Other income for the six month period of
2002 consists of interest income proceeds from the Transition Services Agreement
with MAXXIM ($375,000) and miscellaneous income.
The (benefit) provision for income taxes for the six months ended
December 31, 2003 was $22,562 and $(57,237) for the comparable 2002 period. This
change in income taxes is primarily attributable to the net loss for the
six-month period and the fluctuations of the Indonesian rupiah against the US
dollar during the period. Our U.S. operations generated net operating loss
carry-forwards ("NOL's") in prior years of which approximately $1.3 million is
remaining from June 30, 2002 which can be used to offset future U.S. generated
taxable income through the year 2004. The ability to use these NOL carryforwards
may be impaired in the event of the closing of the stock redemption and exchange
agreement with WRP Asia Pacific.
For the six months ended December 31, 2003, our net loss was
$(1,470,334), compared to a net loss of $(67,164) in the same period of 2002.
Diluted loss per share for the six months ended December 31, 2003 and 2002 was
$(0.22) and $(0.01), respectively.
LIQUIDITY AND CAPITAL RESOURCES:
SIX MONTHS ENDED DECEMBER 31, 2003:
Cash and cash equivalents at December 31, 2003 was $334,853, a decrease
of $86,096 from $420,929 at June 30, 2003. We experienced the decrease in cash
flows during the six months ended December 31, 2003, primarily from cash used in
investing activities.
Our operations provided cash of $643,073 during the six months ended
December 31, 2003, primarily as a result of a tax refunds received of $526,000
for 2002 amended returns.
Net trade accounts receivable at December 31, 2003 increased 8.9% to
$2,524,550 from $2,317,178 at June 30, 2003. The increase in accounts receivable
was due to the an increase in second quarter sales. Net inventories at December
31, 2003 were $8,523,452, a decrease from the level at June 30, 2003, of
$8,796,339, due to reduction of safety stock levels.
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During the six months ended December 31, 2003, we used cash in
investing activities of $457,395. We spent $284,341 for capital improvement
expenditures during the six-month period primarily at PT Buana, our Indonesian
manufacturing plant. These expenditures included equipment purchases and
upgrades to expand our capacity to manufacture higher-margin products, including
powder-free latex gloves.
During the six months ended December 31, 2003, cash was used from
financing activities in the amount of $271,774. The cash was used to pay down
our line of credit with GE Capital.
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 December 31, 2003, we have outstanding accounts receivable from
WRP Asia of approximately $8,988,141. Subsequent to June 30, 2002, the amounts
due to PT Buana of approximately $5,586,000 were assigned to us in partial
satisfaction of intercompany amounts due from PT Buana to us.
As of December 31, 2003, we have accounts payable to WRP Asia of
approximately $3,890,537, primarily resulting from the purchase of inventories
from WRP Asia.
The net amount due from WRP Asia, before allowance for doubtful
accounts at December 31, 2003, was approximately $5,097,605, 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 December 31, 2003).
Subsequent to June 30, 2002, we entered into a formal agreement with
WRP Asia to provide for the full and complete right of offset of any trade
payables due against amounts they owe to us and AHPC. We continue to purchase
gloves from WRP Asia and believe that the unreserved amounts due to WRP Asia
from AHPC of approximately $565,142 at March 31, 2003 are realizable based upon
the agreement granting right of offset and ongoing purchases from WRP Asia. In
management's opinion, while we have been advised by WRP Asia that it does not
currently intend to seek protection from creditors, should such action take
place, we would have to reevaluate the ability to offset payables to WRP Asia
against our receivables from them.
On September 18, 2002, our Board of Directors passed a resolution that
limits the net intercompany amount due from WRP Asia exceeding the balance of
$6,200,000 on a consolidated basis. In the event that WRP Asia desires to
purchase product from PT Buana, and the effect of this sale would be to increase
the net amount due beyond $6,200,000, the resolution requires WRP Asia to
support these purchases by payment of cash in advance or tender of an
irrevocable letter of credit to PT Buana to cover the purchase price of the
order to the extent such amount exceed $6,200,000.
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On July 24, 2002, our Board of Directors approved a proposal submitted
by the independent directors to form a Special Evaluation Committee (the
"Committee"). The Committee is comprised of our "B" Directors, Robert J. Simmons
and Don L. Arnwine as well the independent "A" Directors, G. Jeff Mennen and
Richard J. Swanson. The purpose of the Committee is to examine the WRP Asia
restructuring process as well as the options and alternatives available to us,
which include the negotiation and possible closing of the stock redemption
agreement with WRP Asia presently in effect.
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% (1.00% at
December 31, 2003). At December 31, 2003, we had outstanding $746,348 on the
revolving line of credit and $971,797 of letter of credit liabilities under the
credit facility. As of December 31, 2003, we were not in compliance with all of
our covenants and have obtained waivers of these covenant violations from the
financial institution.
We currently expect to have cash needs during the next year and beyond
for funding the growth of the existing glove business, launch and promotion of
our SafePrep foodservice business and for other uses. These cash needs may arise
in connection with various events such as for: (i) the expansion into new
products; (ii) the expansion into new markets; (iii) funding the promotion of
our branded products; (iv) repayment of debt obligations; (v) purchasing our
Common Stock in connection with our stock repurchase program; and (vi)
manufacturing capital improvements. We believe that our cash and cash to be
generated from future operations plus our credit facility will be sufficient to
fund our ongoing operations.
As of December 31, 2003, we had the following contractual obligations
and commercial commitments:
PAYMENTS DUE BY PERIOD
CONTRACTUAL ----------------------
OBLIGATION TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS
---------- ----- ---------------- --------- ---------
Operating Leases $829,448 $283,658 $545,790 -0-
Operating leases primarily represent our leases for our corporate
office and warehouse facilities. The letters of credit are issued under our
credit facility and are commercial obligations related to product purchases.
Insurance premium financing was used to finance our product liability insurance.
Short-term borrowings represent borrowings under our credit facility primarily
to finance working capital.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the market value of investments. We have not entered
into interest rate caps or collars or other hedging instruments.
Exposure to changes in interest rates is limited to borrowings under
revolving credit and debt agreements, which have variable interest rates, tied
to the prime and commercial paper rates. We estimate that the fair value of each
debt instrument approximated its market value at December 31, 2003.
We are subject to fluctuations in the value of the Indonesian rupiah
vis-a-vis the U.S. dollar. The investment in the Indonesian subsidiary is
remeasured into the U.S. dollar and the book value of the assets and liabilities
of this operation at September 30, 2003, approximated its fair value.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. However, no cost effective internal control
system will preclude all errors and irregularities, and management is
necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision and with the
participation of management, including our chief executive officer and chief
financial officer, within 90 days prior to the filing date of the report. Based
upon that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
Securities and Exchange Commission filings. No significant changes were made to
our internal controls or other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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PART II
ITEM 1-5.
No changes
ITEM 6 (a) EXHIBIT 99.1
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On October 6, 2003, we filed a Report of Form 8-K wherein we reported
information under Item 12, Results of Operations and Financial
Condition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WRP Corporation
(Registrant)
Date: February 19, 2004 By: /s/ Alan E. Zeffer
-------------------
Name: Alan E. Zeffer
Title: Chief Financial Officer
27