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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2004
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
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AHPC HOLDINGS, INC
(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 May 14, 2004, was 1,934,564 and 417,513, respectively.
AHPC HOLDINGS, INC
INDEX
PART I - FINANCIAL INFORMATION
A quarterly review of the third 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
March 31, 2004 (unaudited) and June 30, 2003, (audited)..................................... pgs.3-4
Condensed Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2004 and 2003.................................................... pg. 5
Condensed Consolidated Statements of Operations (unaudited) for the
Nine Months Ended March 31, 2004 and 2003..................................................... pg. 6
Condensed Consolidated Statements of Cash Flow (unaudited) for the
Nine months ended March 31, 2004 and 2003..................................................... 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.22
Item 3.
Quantitative and Qualitative Disclosures About Market......................................... pg.28
Item 4. Controls and Procedures....................................................................... pg.28
PART II - OTHER INFORMATION
Items 1.-5................................................................................................ pg.29
Item 6.................................................................................................... pg.29
2
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND JUNE 30, 2003
ASSETS March 31, 2004 June 30, 2003
-------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 680,184 $ 420,949
Accounts receivable - trade, net of allowance for
doubtful accounts of $319,851 at March 31, 2004
and $333,625 at June 30, 2003 2,314,128 2,317,178
Inventories, net 8,279,647 8,796,339
Prepaid expenses 808,511 522,914
Due from affiliate, net of allowance for doubtful
accounts of $5,586,271 at March 31, 2004 and
June 30, 2003 3,484,111 3,320,544
Other receivables 666,742 1,382,078
----------- -----------
Total current assets 16,233,323 16,760,002
PROPERTY, PLANT AND EQUIPMENT
Land rights and land improvements 736,535 736,535
Construction in progress 13,622 27,688
Equipment, furniture and fixtures 17,106,297 16,767,720
Building improvements 2,393,460 2,336,683
Vehicles 115,467 115,467
----------- -----------
Total property, plant and equipment 20,365,381 19,984,093
Less accumulated depreciation and amortization 12,215,814 10,876,090
----------- -----------
Property, plant and equipment, net 8,149,567 9,108,003
OTHER ASSETS
Other assets 294,781 531,870
----------- -----------
Total other assets 294,781 531,870
----------- -----------
$24,677,671 $26,399,875
=========== ===========
3
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
MARCH 31, 2004 AND JUNE 30, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, 2004 June 30, 2003
-------------- -------------
CURRENT LIABILITIES
Accounts payable - trade $ 2,226,808 $ 1,733,300
Trade notes payable to bank 2,630,489 2,959,587
Notes payable and current portion of long-term
obligations 1,395,634 1,264,992
Due to affiliates 3,890,536 3,890,537
Accrued expenses 3,314,343 2,716,428
------------ ------------
Total current liabilities 13,457,810 12,564,844
LONG-TERM DEBT -- 5,163
DEFERRED TAX LIABILITIES 1,131,652 1,080,329
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY 1,274,187 1,483,958
SHAREHOLDERS' EQUITY
Series A common stock, $.03 par value; 417,513 shares authorized; 417,513
shares issued and outstanding at
March 31, 2004 and June 30, 2003 12,525 12,525
Common stock, $.03 par value; 3,333,333 shares
authorized; 1,934,564 shares issued at March 31,
2004 and June 30, 2003 58,037 58,037
Additional paid-in capital 17,942,471 17,942,471
Accumulated deficit (7,569,835) (5,118,276)
------------ ------------
10,443,198 12,894,757
Less common stock in treasury, at cost, 129,267 shares
at March 31, 2004 and June 30, 2003 1,629,176 1,629,176
------------ ------------
Total shareholders' equity 8,814,022 11,265,581
------------ ------------
$ 24,677,671 $ 26,399,875
============ ============
4
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Three Months Ended
-----------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Net sales $ 9,340,989 $ 7,062,481
Cost of goods sold 8,141,178 6,399,130
----------- -----------
Gross profit 1,199,811 663,351
Operating expenses
Selling, general and administrative 2,265,421 2,103,707
----------- -----------
Loss from operations (1,065,610) (1,440,356)
Other Income and Expense
Interest expense 71,368 35,379
Other income 24,581 27,218
----------- -----------
Loss from continuing operations before
provision for (benefit from) income taxes
and minority interest (1,112,397) (1,448,517)
Provision for (benefit from) income taxes (10,454) (524,943)
----------- -----------
Loss from continuing operations before
minority interest (1,101,943) (923,574)
Minority interest in loss of subsidiary (120,716) (112,305)
----------- -----------
NET LOSS $ (981,227) $ (811,269)
=========== ===========
Basic net (loss) income per common share $ (0.44) $ (0.12)
Diluted net (loss) income per common share $ (0.44) $ (0.12)
5
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003
Nine Months Ended
------------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Net sales $ 28,654,719 $ 26,396,502
Cost of goods sold 24,237,592 22,158,185
------------ ------------
Gross profit 4,417,127 4,238,317
Operating expenses
Selling, general and administrative 6,972,386 6,174,445
------------ ------------
Loss from operations (2,555,259) (1,936,128)
Other Income and Expense
Interest expense 188,396 105,203
Other income 94,430 463,339
------------ ------------
Loss from continuing operations before
provision for (benefit from) income taxes
and minority interest (2,649,224) (1,577,992)
Provision for (benefit from) income taxes 12,108 (582,180)
------------ ------------
Loss from continuing operations before
minority interest (2,661,332) (995,812)
Minority interest in loss of subsidiary (209,771) (117,379)
------------ ------------
NET LOSS $ (2,451,561) $ (878,433)
============ ============
Basic net (loss) income per common share $ (1.10) $ (0.13)
Diluted net (loss) income per common share $ (1.10) $ (0.13)
6
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003
Nine Months Ended
----------------------------------
March 31, 2004 March 31, 2003
--------------- --------------
Cash flows from operating activities
Net loss $(2,451,561) $ (878,434)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation 1,339,724 1,390,091
Deferred income taxes 51,323 (1,328)
Gain on disposal of property, plant and equipment
-- 7,200
Changes in operating assets and liabilities
Accounts receivable - trade, net 3,050 2,939,872
Inventories, net 516,692 (979,313)
Prepaid expenses (285,596) (25,740)
Other assets 952,425 (356,958)
Accounts payable - trade 493,508 911,397
Accrued expenses 597,916 (983,653)
Amounts due to and from affiliates (163,568) 1,275,913
----------- -----------
Net cash provided by operating activities 1,053,913 3,299,047
Cash flows from investing activities
Capital expenditures (381,287) (301,872)
Minority interest in subsidiary (209,771) (201,379)
----------- -----------
Net cash used in investing activities (591,058) (503,251)
Cash flows from financing activities
Net borrowings on trade notes payable to bank (329,099) (352,090)
Net payments on notes payable 125,479 (2,459,911)
Payments for treasury stock repurchases
-- (10,800)
----------- -----------
Net cash used in financing activities (203,620) (2,822,801)
----------- -----------
Net increase in cash and cash equivalents 259,235 (27,005)
Cash and cash equivalents, beginning of period 420,949 451,948
----------- -----------
Cash and cash equivalents, end of period $ 680,184 $ 424,943
=========== ===========
7
AHPC HOLDINGS, INC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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 accounting principles generally
accepted 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 accounting principles generally accepted
in the United States of America 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 nine-month period ended March 31, 2004,
may not be indicative of the results that may be expected for the fiscal year
ended June 30, 2004.
We have made reclasses to the prior year balances to show
comparatives.
3. PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include
our accounts and those of AHPC and our 70% owned subsidiary, PT Buana. All
significant intercompany transactions have been eliminated in consolidation.
4. MAJORITY SHAREHOLDER:
WRP Asia Pacific Sdn. Bhd., a Malaysian corporation ("WRP Asia"),
owns all of our outstanding Series A Common Stock and is our majority
shareholder.
At March 31, 2004, 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
As of April 30, 2004, we redeemed WRP Asia's shareholdings in the
Company through the completion of our stock redemption and exchange agreement
with WRP Asia (see Note 23 below). Through transaction we redeemed 417,513
shares of Class A Common Stock and the 833,333 shares of Class B Common Stock,
which comprised all of WRP Asia's holdings. These share amounts do reflect the 1
for 3 reverse stock split which occurred on January 20, 2004. Collectively,
these shares represent approximately 53.2% of our outstanding Capital Stock. As
consideration for the redemption we conveyed to WRP Asia, our 70% ownership
interest in our subsidiary PT Buana and excused of all indebtedness owing to us
from WRP Asia and PT Buana, with the exception of certain mutually agreed
obligations related to recent purchase of product. We also entered into a five
(5) year supply agreement whereby we agreed to purchase certain minimum
quantities of our latex glove needs from WRP Asia. On the closing of the
transaction, the three of our seven directors who were employees of WRP Asia
resigned their positions as officers and directors of us.
5. COMMON STOCK:
As of March 31, 2004, we had issued 417,513 shares of Series A
Convertible Common Stock and 1,934,564 shares of Common Stock for a total of
2,352,077 shares. The terms of the Series A Common Stock owned by WRP Asia (all
of which have since been redeemed) were 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 417,513 shares of Common Stock for
issuance upon conversion of the Series A Common
Stock.
b. Series A Common Stock entitles WRP Asia to elect all
Class A directors, who represent a majority of our
Board of Directors, and to vote with the holders of
Common Stock as a single class with respect to all
other matters subject to a vote of the shareholders.
During the nine months ended, March 31, 2004, we did not sell any
shares of our Common Stock.
On January 20, 2004, our Board of Directors approved a 1 share for 3
share reverse stock split. As a result of the reverse split, we have
approximately 2 millions shares of common stock outstanding.
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 March 31, 2004 and 2003, the foreign exchange (loss)/gain included in the
determination of net loss was $(6,131) and $6,058, respectively. The functional
currency of PT Buana is the U.S. dollar.
7. STOCK INCENTIVE PLANS:
9
We account for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and have adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," related to options and warrants
issued to employees and directors. Options prices for options granted under this
plan were not less than fair market value of our shares of common stock on the
date of grant.
The following table illustrates the effect on net earnings and
earnings per share if we had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
compensation.
Three Months Ended Nine Months Ended
--------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Net earnings, as reported $ (981,227) $ (811,269) $ (2,451,561) $ (878,433)
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 33,279 18,360
--------------------------------------------------------------------
Pro forma net earnings $ (970,134) $ (805,149) $ (2,418,282) $ (860,073)
====================================================================
Three Months Ended Nine Months Ended
--------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Earnings per share
Basic - as reported $ (0.44) $ (0.12) $ (1.10) $ (0.13)
Basic - pro forma (0.43) (0.12) (1.08) (0.13)
Dilutive - as reported $ (0.44) $ (0.12) $ (1.10) $ (0.13)
Dilutive - pro forma (0.43) (0.12) (1.08) (0.13)
8. RELATED-PARTY TRANSACTIONS:
At March 31, 2004 and 2003, amounts due from/to affiliates consist
of the following:
2004 2003
----------- -----------
Due from Affiliate-
Current - WRP Asia $ 9,070,382 $ 9,487,504
Due to Affiliate-
Current - WRP Asia $(3,890,537) $(4,466,375)
----------- -----------
Amounts due from
Affiliate - Net * $ 5,179,845 $ 5,021,129
=========== ===========
Purchases from Affiliate - $ (--) $(3,369,690)
=========== ===========
Sales to Affiliate - $ 742,831 $ 4,791,120
=========== ===========
10
*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.
As of March 31, 2004, we have outstanding accounts receivable from
WRP Asia of $9,070,382. Subsequent to June 30, 2002, the amounts due to PT Buana
of approximately $5,586,000 were assigned to us in partial satisfaction of
intercompany amounts due from PT Buana to us.
As of March 31, 2004, we have accounts payable to WRP Asia of
$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 March 31, 2004, was $9,070,382, 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 March 31, 2004, 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 AHPC and us. We continue to purchase
gloves from WRP Asia and believe that the unreserved amounts due to WRP Asia
from WRPC and AHPC of $406,426 at March 31, 2004 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 23, 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
11
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 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 nine months ended March 31, 2004 and 2003 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Basic weighted-average number of
Common shares outstanding 2,210,911 6,632,734
Dilutive effect of common share
Equivalents 34,070 --
- -------------------------------------------------------------------------------------------------------------------------
Dilutive weighted-average number of common
shares outstanding 2,244,981 6,632,734
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Basic weighted-average number of
Common shares outstanding 2,210,911 6,637,939
Dilutive effect of common share
Equivalents 22,342 --
- -------------------------------------------------------------------------------------------------------------------------
Dilutive weighted-average number of common
shares outstanding 2,233,253 6,637,939
At March 31, 2004, there were 2,352,077 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.
As a result of the 1 for 3 reverse stock split effective on February 22, 2004,
these re-priced options now total 161,200 and carry a price of $6.21. We are
subject to variable accounting; however, the share price has not exceeded $6.21.
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.
12
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
March 31, 2004. 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 as a result of the redemption of
WRP Asia's shares pursuant to the Stock Redemption and Exchange Agreement.
For the nine months ended March 31, 2004 and 2003, we have recorded
a provision for (benefit) from income taxes of $12,108 and $(582,180),
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 nine months ended
March 31, 2004, there were no additional product liability lawsuits filed, and
we were dismissed from four lawsuits. At March 31, 2004, 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 income (loss) for the nine
13
months ended March 31, 2004 and 2003 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
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 nine
months ended March 31, 2004 and 2003 for these segments:
THREE MONTHS ENDED
MARCH 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues from external customers $ 3,460,908 $ 5,880,081 $ -- $ 9,340,989
Revenues from other operating segments 642,034 -- (642,034) --
Pre-tax loss (412,842) (699,555) -- (1,112,397)
Total Assets 11,498,396 13,179,275 -- 24,677,671
THREE MONTHS ENDED
MARCH 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues from external customers $ 1,323,972 $ 5,738,509 $ -- $ 7,062,481
Revenues from other operating segments 790,534 -- (790,534) --
Pre-tax loss (535,707) (912,810) -- (1,448,517)
Total Assets 11,435,506 19,409,499 -- 30,845,005
NINE MONTHS ENDED
MARCH 31, 2004 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues from external customers $ 10,099,839 $ 18,554,880 $ -- $ 28,654,719
Revenues from other operating segments 3,378,047 -- (3,378,047) --
Pre-tax loss (687,129) (1,962,095) -- (2,649,224)
Total Assets 11,498,396 13,179,275 -- 24,677,671
NINE MONTHS ENDED
MARCH 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues from external customers $ 6,312,156 $ 20,084,346 $ -- $ 26,396,502
Revenues from other operating segments 3,402,926 -- (3,402,926) --
Pre-tax loss (556,085) (1,021,907) -- (1,577,992)
Total Assets 11,435,506 19,409,499 -- 30,845,005
14
14. 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.
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
realizability 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.
15. 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.
15
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
guarantor's 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.
16. 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.
17. KEY CUSTOMERS:
Our customers include leading foodservice distributors and healthcare product
suppliers. During the nine months ended March 31, 2004, AHPC's national
customers accounted for 84.9% of net sales. The loss of these customers would
have a materially adverse effect on us. Our customers tend to limit the number
of qualified vendors they purchase from to gain efficiencies across their
product line. We, therefore, expend substantial efforts to maintain and grow our
relationships with our existing major customers. However, our products are
ultimately distributed by 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
16
facilities, healthcare professionals and individuals who use our gloves and
other associated disposable products.
18. 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 (0.98% at March 31,
2004) plus 4.5%. At March 31, 2004, we had outstanding $1,291,232 on the
revolving line of credit and $570,818 of letter of credit liabilities under the
credit facility. As of March 31, 2004, we were not in compliance with certain of
our covenants and have obtained a Forbearance Agreement amendment for these
covenant violations from the financial institution.
In conjunction with the waiver of the covenant violations as of March
31, 2004, the existing credit facility agreement was amended to expire on May
31, 2004 in connection with the Forbearance Agreement (see Note 22, below, for a
discussion of our efforts to renew or replace our credit facility). We are
currently negotiating an extension to this amendment as well as exploring
several alternatives to this credit facility.
19. 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 March 31, 2004, we had an
outstanding account receivable with MAXXIM of $278,941.00 (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.
20. 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
17
4310(c)(2)(A). Specifically, we qualify with the $5,000,000 stockholders equity
requirement. Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), we
were provided an additional 180 days, or until February 10, 2003, to regain
compliance. In order to regain compliance, our common stock 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.;
18
(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, 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) were contingent upon the transaction with WRP Asia Pacific being completed.
Refer to Note 23 for a complete description of this transaction.
As of February 10, 2004 our common stock had 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 and the delisting proceedings were therefore terminated.
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 $278,941; 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 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 May 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
19
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 June 30, 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. 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.
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
called for us to redeem 1,252,538 shares of Class A Common Stock and the
2,500,000 shares of Class B Common Stock (pre-split totals), 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 was: (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.
As of April 30, 2004, we redeemed its shareholdings in the Company
through the completion of the stock redemption and exchange with WRP Asia.
Through transaction we redeemed 1,252,538 shares of Class A Common Stock and the
2,500,000 shares of Class B Common Stock (pre-split totals), which comprise all
of WRP Asia's holdings. These share amounts do not reflect the 1 for 3 reverse
stock split which occurred on January 22, 2004. Collectively, these shares
represent approximately 53.2% of our outstanding Capital Stock. As consideration
for the redemption we conveyed to WRP Asia, our 70% ownership interest in our
subsidiary PT Buana and excused of all indebtedness owing to us.
20
24. SUBSEQUENT EVENT:
On April 30, 2004, we have finalized the stock redemption agreement and
exchange with WRP Asia Pacific Sdn. Bhd., our majority shareholder. The
transaction called for us to redeem 1,252,538 shares of Class A Common Stock and
2,500,000 shares of Class B Common Stock, which comprise all of WRP Asia's
holdings. These share amounts do not reflect the 1 for 3 reverse stock split
announced on January 20, 2004. Collectively, the Class A and B shares represent
approximately 56% of the outstanding capital stock of WRP Corporation. As
consideration for the redemption, WRP Corporation conveyed its 70% ownership
interest in its subsidiary PT Buana Multicorpora ("PTB") Indonesia to WRP Asia
and excused all its indebtedness to WRP Corporation or its subsidiaries,
including PTB. [PT Buana Multicorpora is an Indonesian-based manufacturer of
latex gloves.]
As of April 30, 2004, the market value of the stock redeemed at the
close of the stock redemption agreement is approximately $4,377,000. The balance
sheet amounts that relate to our share of PTB financials are assets totaling
approximately $8,592,000 and liabilities of approximately $5,450,000. The
portion of revenues relating to PTB is approximately $10,765,000 with
approximately an operating loss of $294,000. We have agreed to excuse all
indebtedness owing to WRP Corporation or its subsidiaries from WRP Asia and from
PTB of approximately $1,185,000. The loss on this transaction is estimated to be
$25,000.
We also entered into a five (5) year supply agreement whereby we agreed
to purchase certain minimum quantities of our latex glove needs from WRP Asia.
These transactions will enable us to focus on the distribution of high-quality
barrier protection.
We also announced that we would change our corporate name from WPR
Corporation to AHPC Holding, Inc, effective May 14, 2004, following certain
state and Nasdaq approvals. We also announced the following management changes:
Mr. G. Jeff Mennen has been appointed Non-Executive Chairman of the Board; Mr.
Alan E. Zeffer has become President and Chief Executive Office; and Mrs. Deborah
J. Bills has become our Vice President and Chief Financial Officer. We also
entered into a five (5) year supply agreement whereby we agreed to purchase
certain minimum quantities or our latex glove needs from WRP Asia. In connection
with the closing of the Agreement, as required under the Agreement, our three
directors who are employees of WRP Asia (Lew Kwong Ann, Eirik Bonde-Aslaksrud,
and Robert Woon) resigned as our directors and officers, leaving as directors
our four independent directors.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements in this Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, including statements
regarding new products and markets, gross margins, selling, general and
administrative expenses, liquidity and cash need and our plans and strategies,
are all based on current expectations, and we assume no obligation to update
this information. Numerous factors could cause actual results to differ from
those described in the forward-looking statements. We caution investors that our
business is subject to significant risks and uncertainties.
Our wholly owned subsidiary, American Health Products Corporation
("AHPC"), is engaged in the marketing and distribution of high-quality,
disposable, examination, foodservice and specialty gloves in the United States
and has been in the glove business since our incorporation in January 1989. For
the nine months ended March 31, 2004, we recorded net sales of $28,654,719. 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 MARCH 31, 2004, COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2003:
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 $9,340,989 and $7,062,481 for
the three months ended March 31, 2004 and 2003, respectively. This represents a
32.3% increase in net sales for the year compared to the year earlier period.
The increase in sales of $2,278,508 was due to growth in the foodservice
business and our return to the healthcare market offset by a low sales volume PT
Buana experienced in third quarter of fiscal year 2003 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 27.2% from $6,399,130 for the
three months ended March 31, 2003, to $8,141,178 for the three months ended
March 31, 2004, due to the increase in sales. As a percentage of net sales, cost
of goods sold decreased from 90.6% for the three months ended March 31, 2003, to
87.2% for the three months ended March 31, 2004. The gross profit percentage
increased to 12.8% in the three month ended March 31, 2004, versus 9.4% in the
same period of 2003. The gross profit percentage increase is attributed to an
increase in the sales, better acquisition costs and decrease of inventory
storage at our outside warehouse facilities. We continue to expect our gross
margins to be affected by the cost of latex, changes in product mix,
competition, manufacturing capacity levels and other factors. We expect to
improve our margins on our latex product sales in subsequent quarters due to
certain price increases that have been approved, to enable us to pass on to our
primary customers certain of our increased costs of goods due to rises in recent
of raw latex. There has not been an appreciable increase in the cost of latex
since March 31,2004, and our recent price increases will
22
allow us (for our fourth quarter) to adjust for some of the cost increase in
latex over the first three 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 7.7% from $2,103,707 for the three months ended March 31, 2003, to $2,265,421
for the three months ended March 31, 2004. The increase of $161,714 in SG&A
expenses is attributable to an increase in legal fees and outside services
related to the reverse stock split and the stock redemption agreement.
Loss from operations was $(1,065,610) for the three months ended March
31, 2004, as compared to loss from operations of $(1,440,356) for the three
months ended March 31, 2003. This decrease in the loss from operations reflects
the increased in sales and increase in gross profit.
Interest expense increased during the three months ended March 31,
2004, to $71,368 compared to $35,379 in the same quarter of 2003. This increase
is attributable to an increase in our line of credit during the quarter in 2004
versus the 2003 comparable quarter.
We recorded a foreign currency exchange loss of $(6,131) in the quarter
ended March 31, 2004 versus a foreign exchange loss of $6,058 in the comparable
period in 2003 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 March 31, 2004 and 2003, was
$24,581 and $27,218, respectively.
The benefit for income taxes for the three months ended March 31, 2004,
was $(10,454) and $(524,943) for the comparable 2003 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.
For the three months ended March 31, 2004, our net loss was $(981,227),
compared to a net loss of $(811,269) in the same period of 2003. Diluted (loss)
income per share for the three months ended March 31, 2004 and 2003, was $(0.44)
and $(0.12), respectively.
23
NINE MONTHS ENDED MARCH 31, 2004, COMPARED TO THE NINE MONTHS ENDED
MARCH 31, 2003:
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 $28,654,719 and $26,396,502
for the nine months ended March 31, 2004 and 2003, respectively. This represents
an 8.6% increase in net sales for the year compared to the year earlier period.
This increase was due to growth in the foodservice business and our return to
the healthcare market offset by a low sales volume PT Buana experienced in
second and third quarter of fiscal year 2003 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 9.4% from $22,158,185 for the
nine-month period ended March 31, 2003, to $24,237,592 for the nine months ended
March 31, 2004, due to the increase in sales and the cost of raw latex. As a
percentage of net sales, cost of goods sold increased from 83.9% for the nine
months ended March 31, 2003, to 84.6% for the nine months ended March 31, 2004.
The gross profit percentage decreased to 15.4% in the nine month ended March 31,
2004 versus 16.1% in the same period of 2003. 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 2003 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 12.9% from $6,174,445 for the nine months ended March 31, 2003, to $6,972,386
for the nine months ended March 31, 2004. The increase of $797,941 in SG&A
expenses is attributable to an increase in manufacturing operating expenses, an
increase in marketing expenses and an increase in legal and investor relation
fees relating to the reverse stock split and the stock redemption transaction.
Loss from operations was $(2,555,259) for the nine months ended March
31, 2004, as compared to that of $(1,936,128) for the nine months ended March
31, 2003. This loss from operations reflects the increased costs of goods sold
relating to the cost of raw latex.
Interest expense increase during the nine months ended March 31, 2004,
to $188,396 compared to $105,203 in the same nine-month period of 2003. This
increase is attributable to an increase in our line of credit and interest rates
increase for PT Buana during the nine-month period in 2004 versus the 2003
comparable.
24
We recorded a foreign currency exchange loss of $19,299 in the quarter
ended March 31, 2004 versus a foreign exchange loss of $4,920 in the comparable
period in 2003 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 nine-month ended March 31, 2004 and 2003 was
$94,430 and $463,339, respectively. Other income for the nine-month period of
2003 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 nine months ended
March 31, 2004 was $12,108 and $(582,180) for the comparable 2003 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 nine months ended March 31, 2004, our net loss was
$(2,451,561), compared to a net loss of $(878,433) in the same period of 2003.
Diluted loss per share for the nine months ended March 31, 2004 and 2003 was
$(1.10) and $(0.13), respectively.
LIQUIDITY AND CAPITAL RESOURCES:
NINE MONTHS ENDED MARCH 31, 2004:
Cash and cash equivalents at March 31, 2004 was $680,184, an increase
of $259,255 from $420,929 at June 30, 2003. We experienced the increase in cash
flows during the nine months ended March 31, 2004, primarily from cash used in
operating activities through reduction of inventory levels and timing of accrued
expenses.
Our operations provided cash of $1,137,913 during the nine months ended
March 31, 2004, primarily as a result of a tax refunds received of $526,000 for
2002 amended returns and reduction in inventory levels.
Net trade accounts receivable at March 31, 2004 was $2,314,128 from $2,317,178
at June 30, 2003. Net inventories at March 31,2 004 were $8,279,647, a decrease
from the level at June
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30, 2003, of $8,796,339, due to reduction in safety stock levels and the final
phase out of Walgreen's inventory levels at June 30, 2003.
During the nine months ended March 31, 2004, we used cash in investing
activities of $675,058. We spent $381,287 for capital improvement expenditures
during the nine-month period primarily at PT Buana, our Indonesian manufacturing
plant. These expenditures included equipment purchases and upgrades to expand
our capacity to manufacture higher-margin products, including powder-free latex
gloves.
During the nine months ended March 31, 2004, cash was used from
financing activities in the amount of $203,620. 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 March 31, 2004, we have outstanding accounts receivable from WRP
Asia of approximately $9,070,382. Subsequent to June 30, 2002, the amounts due
to PT Buana of approximately $5,586,000 were assigned to us in partial
satisfaction of intercompany amounts due from PT Buana to us.
As of March 31, 2004, 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 March 31, 2004, was approximately $5,179,845, 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 March 31, 2004).
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 $406,426 at March 31, 2004 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
26
irrevocable letter of credit to PT Buana to cover the purchase price of the
order to the extent such amount exceed $6,200,000.
On July 24, 2002, our Board of Directors approved a proposal submitted
by the independent directors to form a Special Evaluation Committee (the
"Committee"). The Committee is comprised of our "B" Directors, Robert J. Simmons
and Don L. Arnwine as well the independent "A" Directors, G. Jeff Mennen and
Richard J. Swanson. The purpose of the 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% (0.98% at
March 31, 2004). At March 31, 2004, we had outstanding $1,291,232 on the
revolving line of credit and $570,818 of letter of credit liabilities under the
credit facility. As of March 31, 2004, 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 March 31, 2004, 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 $ 679,145 $ 133,354 $ 545,791 -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 March 31, 2004.
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 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Document
-------------- -----------------------
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 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On January 21, 2004, we filed a report on Form 8-K, under Item 5 and 7, relating
to our Press Release on January 21, 2004, in which we announced our 1-for-3
stock split and the approval by our shareholders on four matters pertaining to
amendments of our Articles of Incorporation: (1) a corporate name change to AHPC
Holding, Inc.; (2) an amendment to our by-laws to change our name to AHPC
Holdings, Inc.; (3) creation of new preferred stock in the amount of 2,000,000
shares; and (4) an increase in the number of authorized shares of Common Stock
to 50,000,000 shares.
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AHPC Holdings, Inc
(Registrant)
BY: /s/ Deborah J. Bills
--------------------------------------------
Deborah J. Bills, Chief Financial Officer
Dated: May 19, 2004
29