Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period from _________ to _________.
Commission file number 0-17458
AHPC HOLDINGS, INC.
-------------------
(Exact name of registrant as specified in its charter)
MARYLAND 73-1326131
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
500 PARK BOULEVARD, SUITE 1260
ITASCA, IL 60143
----------------
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 285-9191
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value $0.01 per share None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registered is an accelerated filer (as
defined in Rule 12-2 of the Act). Yes [ ] No [X].
Aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the stock as reported on Nasdaq
on October 13, 2004: $1,817,031
At October 13, 2004, 1,108,452 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
We are incorporating, by reference, information from our Proxy Statement dated
May 17, 2004 and filed with the Commission on May 21, 2004 for information
contained in Item 14 of this report.
AHPC HOLDINGS, INC.
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2004
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS................................................................................. 1
ITEM 2. PROPERTIES............................................................................... 5
ITEM 3. LEGAL PROCEEDINGS........................................................................ 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 7
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 8
ITEM 6. SELECTED FINANCIAL DATA.................................................................. 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 26
ITEM 9A. CONTROLS AND PROCEDURES.................................................................. 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 27
ITEM 11. EXECUTIVE COMPENSATION................................................................... 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 34
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................................... 34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS OF FORM 8-K................................... 35
PART I
This Form 10-K contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-K that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing words such as "may," "will," "expect," "believe," "anticipate,"
"estimate," or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending upon
a variety of factors, including those set forth in the section below entitled
"Risk Factors."
ITEM I. BUSINESS
GENERAL
AHPC Holdings, Inc, formerly WRP Corporation (refer to Note B), is a
leading marketer of foodservice and medical examination gloves in the United
States through our wholly owned subsidiary, American Health Products Corporation
("AHPC"). We were also a manufacturer of disposable latex examination and food
service gloves through our formerly owned 70% owned Indonesian manufacturing
facility, PT WRP Buana Multicorpora ("PT Buana") (refer to Note B of the
financial statements). We were reincorporated in Maryland in December 1995 and
have been involved in several business operations.
From March, 1998 until April 30, 2004, WRP Asia Pacific Sdn Bhd ("WRP Asia")
owned 53.2% of our Common Stock, comprised of 833,333 $0.01 par value shares and
417,513 "Class A" Shares (the latter of which was convertible into our $0.01 par
value Common Stock and entitled WRP Asia to elect a majority of our directors).
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 had been purchasing the majority of its
powder-free latex exam gloves from WRP Asia for several years.
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 this transaction we redeemed 417,513 shares of
Class A Common Stock and the 833,333 shares of $0.01 par value Common Stock,
which comprised all of WRP Asia's holdings. These share amounts reflect the
1-for-3 reverse stock split which occurred on January 20, 2004. Collectively,
these shares represented 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 purchases of product. We also entered into a five
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 our officers and directors ; our remaining independent directors
continued to serve on our board.
1
Under the Stock Redemption and Exchange Agreement we also agreed to change
our corporate name from WRP Corporation to AHPC Holdings, Inc. The name change
was made effective on May 14, 2004.
Over the past 12 months ended June 30, 2004, we have made the decision to
increase our presence in the healthcare market. The healthcare market includes
Dental and IDN/Medical Distribution channels. Our focus will be existing
products in healthcare including the development of a separate branding identity
for DermaSafe versus Glovetex. This decision reverses the direction that had
been taken in March 2, 2002 by AHPC to substantially reduce its presence in this
market.
GLOVE PRODUCTS
Through our wholly owned subsidiary, AHPC, we market a full product line
of disposable gloves including latex, vinyl, synthetic and nitrile examination
and surgical gloves used primarily in the foodservice, non-acute medical,
dental, nursing home and retail industries. PT Buana, WRP Asia and other third
parties manufacture gloves marketed by AHPC. Gloves are marketed by AHPC under
the brand names "DermaSafe(R)," "Glovetex(R)," "ProFeel(R)" and "SafePrep(TM)"
to foodservice distributors, medical distributors, dental distributors and
nursing homes. AHPC also sells gloves to other companies, which market the
gloves under their own brand names or "private labels." The gloves are sold in
cases that are generally comprised of ten boxes with 100 gloves per box.
For the year ended June 30, 2004, AHPC's sales ratios of latex powdered,
latex powder-free and non-latex glove sales were approximately 36%, 26% and 32%,
respectively. We anticipate that our sales ratio of latex powdered exam gloves
will continue to decline and be replaced with powder-free and synthetic gloves,
which is consistent with market trends.
Manufacturing Operations. The production of latex gloves begins with the
tapping of raw latex (natural polysporene) from rubber trees located on
plantations in Malaysia and Indonesia. Once gathered, the raw latex is sent to a
centrifuge where the latex is concentrated. PT Buana purchases the latex
concentrate and ships it to its production plant where the latex concentrate is
compounded in a proprietary formula to enhance glove durability, elasticity and
tactility. A controlled dipping process causes consistency from batch to batch
and eliminates air bubbles that can create pinholes. Glove-making formers, which
are in five sizes and designed for the American hand, are dipped in the latex
compound. The formers are cleansed both chemically and mechanically to prevent
residue buildup which could compromise glove integrity.
The PT Buana factory, which was 70% owned by us through April 30, 2004,
had a production capacity of approximately 840,000,000 latex gloves per year.
Under our Stock Redemption and Exchange Agreement with WRP Asia, we conveyed our
70% interest in PT Buana to WRP Asia and entered into a five year supply
agreement. We continue to purchase powdered latex exam gloves from PT Buana
under the supply agreement.
Powdered Latex Examination and Foodservice Glove Suppliers. PT Buana and
unrelated Malaysian and Indonesian glove manufacturers supplied AHPC with its
powdered latex gloves inventory during the year ended June 30, 2004.
2
Powder-Free Latex Examination and Foodservice, Nitrile and Surgical Glove
Supplier. AHPC continues to purchase the majority of its latex powder-free
gloves from Indonesia and Malaysia. In addition, AHPC is supplied with its
nitrile gloves from China. AHPC also purchases latex powder-free gloves from PT
Buana.
Non-Latex Examination and Foodservice Glove Suppliers. AHPC purchases its
non-latex gloves from two unrelated suppliers in Taiwan, China, and Thailand.
COMPLIMENTARY PRODUCTS
The foodservice, industrial and retail industries view our current line of
product offerings as one of a bundle of safety products used by their customers.
Developing a profitable line of complimentary products will be important to the
future success of our business. During 2003, we diversified our product offering
with additional synergistic product lines that address the current safety
requirements of our markets. These additional product offerings include
polygloves, heavy-duty gloves, headwear, aprons and bibs, food storage bags and
educational services. These products are being offered under our SafePrep brand
and under private label.
Markets and Methods of Distribution. AHPC markets its gloves through a
network of national, regional and local foodservice, retail and medical
distributors that sell primarily to restaurant, hotels, hospitals and nursing
homes. AHPC also markets to alternate care and home health care dealers, dental
dealers and major retail outlets. The principal methods of marketing are trade
shows, advertising, seminars, direct mail and brokers, as well as sales
representatives. AHPC employs a sales force comprised of regional sales managers
and representatives, manufacturer sales representatives and an in-house sales
and marketing staff to cover the U.S.
FDA Regulation of Examination Glove Products. The quality control
procedures for the manufacture of examination gloves marketed in the United
States are regulated by the U.S. Food and Drug Administration ("FDA"). Included
within such procedures are minimum testing requirements, as well as FDA current
Quality Systems Regulations and American Society for Testing and Materials
("ASTM") standards.
Competition. Our business of providing barrier protection products is
highly competitive in the markets in which we operate including healthcare and
foodservice. The primary basis of competition includes, but is not limited to
price, product quality, breadth of product line, service and product
availability. Additionally, among our direct competitors are several large firms
with significantly greater resources available than us. Nonetheless, we believe
we have certain competitive advantages that enable us to compete favorably with
larger competitors including our ability to provide high service levels and to
react quickly to changing customer requirements.
Customers. Our customers include leading foodservice distributors and
healthcare product suppliers. During the year ended June 30, 2004, AHPC's
national customers, accounted for 86.1% 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 in order to gain
efficiencies across their product lines. We, therefore, expend substantial
efforts to maintain and grow our relationships with our existing major
customers. However, our products are ultimately distributed by three diversified
distribution companies, through their combined networks of over
3
100 operating companies, to thousands of foodservice organizations and medical
facilities throughout the United States. The ultimate end-users of our products
are the foodservice organizations and medical facilities, healthcare
professionals and individuals who use our gloves.
Patents and Trademarks. AHPC owns the trademarks "SafePrep," "Dermasafe"
and "Glovetex," which are registered in the United States. AHPC's surgical glove
line utilizes the trademark name "ProFeel," which is a registered name owned by
WRP Asia.
Segment Financial Information. The segment information of AHPC Holdings,
Inc., for the year ended June 30, 2004, is included in Note L to our
Consolidated Financial Statements and includes two segments, manufacturing and
distribution.
Inventory. Since the majority of our products are imported from Southeast
Asia, it is our practice to maintain a certain level of inventory as safety
stock. Inventories are accounted for on a first-in, first-out ("FIFO") basis and
are valued at the lower of actual cost or market.
EMPLOYEES
As of June 30, 2004, our U.S. operations employed a total of 28 full-time
employees. AHPC also uses the services of one manufacturer sales representative
organization and 25 broker representative organizations that do not work
exclusively for AHPC and are paid on a commission basis. None of our employees
are represented by a collective bargaining agreement. We consider relations with
our employees to be good.
BACKGROUND INFORMATION REGARDING OUR OWNERSHIP AND BUSINESS
At December 31, 1997, MBf International owned all 1,252,538 shares of our
Series A Common Stock and 1,682,275 shares of our Common Stock. On March 31,
1998, we announced that our majority shareholder, MBf International, had
consummated the closing of two separate agreements (entered into in May 1997)
with WRP Asia Pacific Sdn. Bhd. ("WRP Asia"), formerly known as Wembley Rubber
Products (M) Sdn. Bhd., our supplier of latex powder-free exam gloves. These
agreements transferred majority ownership in us to WRP Asia and were as follows:
1. MBf International sold all of our Series A Common Stock (1,252,538
shares) to WRP Asia for $5.00 per share or $6,262,690; and
2. WRP Asia purchased 2,500,000 shares of our unregistered Common Stock
for $2.70 per share for a total of $6,750,000. The purchase price of
$2.70 per share reflected a 12% discount from the average stock
price over a seven consecutive business day range ended May 9, 1997,
as detailed by a fairness opinion received from an independent
valuation firm.
These transactions provided WRP Asia with a 55.0% ownership interest in us
at March 31, 1998. The above share amounts are prior to the 1-for-3 reverse
stock split which was effected on January 20, 2004. Subsequent to June 30, 2003,
WRP Asia is no longer a majority shareholder (refer to Note B of the financial
statements).
4
At December 31, 1998, MBf International owned 1,682,275 shares of our
Common Stock, which represented a 24.4% ownership interest in us at that time.
In January 1999, MBf International sold its 1,682,275 shares to several U.S.
institutional investors, thus eliminating any ownership interest in us.
On March 1, 2002, we announced that our subsidiary, American Health
Products Corp, had entered into a Transition Services Agreement with Maxxim
Medical, Inc., ("MAXXIM"), whereby MAXXIM would service certain of our
acute-care medical customers. As a result of this transition, we substantially
reduced our personnel in our medical division and transitioned our business with
respect to most of our customers in the medical division to MAXXIM. We have
incurred severance costs of approximately $256,000 associated with the reduction
in personnel. On February 11, 2003, MAXXIM filed for bankruptcy. As of June 30,
2003, we had an outstanding account receivable with MAXXIM of $280,115.41. This
amount has been fully reserved.
ITEM 2. PROPERTIES
Our principal executive and administrative office is located in Itasca,
Illinois. The lease for this location was renewed on April 9, 2001, for a term
of five years. For the year ended June 30, 2004, our lease expense was $176,500.
In May 1999, we entered into a five-year lease agreement for a 55,000
square-foot warehouse facility located in Itasca, Illinois. The lease term for
this location commenced on August 1, 1999 and was to expire in July 2004; this
has been extended for one year to July 2005. The annual rental expense for this
lease is approximately $322,200 per year.
AHPC also uses public warehouse facilities, as needed, to store its
inventory in Oakland, California; Fond Du Lac, Wisconsin; and Hanover,
Pennsylvania. Public warehouse charges are dependent upon the volume of products
stored and the frequency of shipping or receiving products.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 2004, AHPC was actively involved or otherwise named in 23
latex glove product liability suits pending throughout the United States. AHPC
was an active defendant in 11 claims, and was named as a third party defendant
in eight claims. AHPC has challenged the sufficiency of service in the eight
third-party actions. Additionally, through a series of Private Label Supply and
Trademark Licensing Agreements with VHA, Inc. ("VHA"), AHPC agreed to defend and
indemnify VHA in four suits. There are no claims pending directly against AHPC
Holdings, Inc.
All of the claims involve plaintiffs that have worked in the medical and
health industries and who allege injuries associated with the continued use
and/or exposure to latex gloves products. In each of the claims, AHPC or VHA is
one of several glove distributors, manufacturers or users named in the suits.
Each of the claims alleges damages of an unspecified amount and is in a
different stage of discovery or other pre-trial proceeding. It is not currently
possible to determine a favorable or unfavorable outcome for AHPC or VHA in any
of the claims.
5
AHPC possesses product liability insurance coverage, which covers the
defense costs, and certain damage awards associated with the product liability
claims against AHPC and the indemnity of AHPC's customers to the limits of the
policies. However, there is no assurance that AHPC's insurance will be
sufficient to meet all damages, for which AHPC may be held liable, or the
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. Likewise, there is no assurance that the outcome of these
suits will not adversely affect our operations or financial condition. AHPC will
vigorously contest any latex claim initiated against it or one of its
indemnities, but will enter into a settlement agreement, where, after careful
consideration, our management determines that our best interests will be served
by settling the matter. During the year ended June 30, 2003, AHPC was dismissed
from or otherwise settled 16 latex gloves product liability lawsuits, including
two VHA claims. Typically, settlement amounts have been amounts not greater that
the deductible, so the at the insurer has not paid settlement amounts; there can
be no assurances that this will be the case in the future.
From time to time we are involved in other litigation relating to claims
arising out of our operations in the normal course of business. At October 13,
2004, we were not party to any other legal proceedings, the adverse outcome of
which, in management's opinion, individually or in the aggregate, would have a
material adverse effect on our financial condition. Management believes all
legal claims are adequately provided for and if not provided for, are without
merit or involve such amounts that would not materially adversely affect us.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of the shareholders of was held on June 28, 2004. The
purpose of the annual meeting was to consider the vote on the following matter:
1. To elect two directors to hold office until their three-year term expires
or otherwise as provided in our by-laws.
Director Nominees
Anthony F. Alibrio, Sr.
Don L. Arnwine
Each of the nominees for directors received the following number of votes:
A.F. Alibrio, Sr. D.L. Arnwine
----------------- ------------
For 851,035 851,035
Against 745 745
Abstain 13,250 13,250
Non-votes 0 0
The above matter was approved by the shareholders.
2. To ratify the appointment of Grant Thornton, LLP to serve as our auditors
for the next fiscal year ending June 30, 2004.
The above matter was approved by the shareholders.
There were no other matters voted on at the meeting.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") SmallCap Stock Market under the
symbol "GLOV" (refer to Note B). The table below sets forth for each quarter of
the fiscal year indicated the reported high and low market prices of our Common
Stock.
COMMON STOCK PRICES
PERIOD ENDED LOW HIGH
- ------------ --- ----
JUNE 30, 2004
4th quarter $2.39 $4.95
3rd quarter $1.02 $2.70
2nd quarter $1.47 $2.91
1st quarter $1.02 $1.98
JUNE 30, 2003
4th quarter $ .13 $ .58
3rd quarter $ .18 $ .35
2nd quarter $ .15 $ .43
1st quarter $ .44 $ .68
JUNE 30, 2002
4th quarter $ .48 $ .86
3rd quarter $ .65 $1.00
2nd quarter $ .68 $1.80
1st quarter $ .48 $1.15
JUNE 30, 2001
4th quarter $ .44 $ .98
3rd quarter $ .59 $1.06
2nd quarter $1.06 $1.63
1st quarter $1.09 $2.00
JUNE 30, 2000
2nd quarter $1.13 $2.00
1st quarter $1.75 $2.38
There were approximately 277 shareholders of record of our Common Stock as
of June 30, 2004. We believe that there are approximately an additional 2,000
holders whose stock is held in "street name."
8
We have not paid a dividend with respect to the Common Stock. We expect to
reinvest any earnings for expansion of our operations and do not intend to pay a
dividend in the foreseeable future.
In March 2000, we announced that our Board of Directors had authorized a
program to repurchase up to 10% of our public Common Stock. These purchases may
be made in the open market and in block transactions over a two-year period. The
program is subject to market conditions and its impact on share price as well as
other investment options that we may consider to enhance shareholder value.
During the year ended June 30, 2004, we had not purchased any shares of our
Common Stock under this program. Subsequent to June 30, 2004 through September
28, 2004, we had not purchased shares of our Common Stock. As of the year ended
June 30, 2004, there were up to an additional 707,700 shares available for
repurchase (before giving effect to the 1-for-3 reverse stock split). We have
purchased a total of 254,800 shares since the inception of this program (before
giving effect to the 1-for-3 reverse stock split).
The trading of our Common Stock on the Nasdaq SmallCap Market is
conditioned upon meeting certain asset, capital and surplus, earnings and stock
price tests. To maintain eligibility on the Nasdaq SmallCap Market, we must,
among other things, maintain an average bid price of our Common Stock of at
least $1.00 per share.
Nasdaq notified us on May 3, 2001, that the average bid price of our
Common Stock has been below $1.00 per share for 30 consecutive days, and that
our Common Stock would be delisted as of the opening of business on May 11,
2001. However, we requested an appeal of Nasdaq's determination; this appeal
stayed the delisting of our Common Stock pending the decision of the Nasdaq
Listing Qualification Panel. During the pendency of these proceedings, our stock
price began trading at or about $1.00 per share. On August 16, 2001, we were
notified by the Panel that our stock had evidenced the required closing bid
price of at least $1.00 per share for a minimum of ten consecutive trading days,
and that the delisting proceedings were terminated. Accordingly, we canceled the
Special Meeting of Shareholders scheduled for August 27, 2001, and are no longer
needing to consider a reverse stock split.
On February 14, 2002, 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 qualified 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.
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
9
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, 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
10
(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, and effected a 1-for-3 reverse
stock split of our shares. 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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information about the securities authorized
for issuance under our equity compensation plans as of June 30, 2004:
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities remaining
Number of securities to be issued Weighted-average exercise price available for future issuance under
upon exercise of outstanding of outstanding options, warrants equity compensation plans (excluding
Plan Category options, warrants and rights and rights securities reflected in column (a))
- ------------------------- --------------------------------- -------------------------------- ------------------------------------
Equity compensation plans
approved by security
holders 254,772 $2.36 211,895
Equity compensation plans
not approved by security
holders - - -
------- ----- -------
Total 254,772 $2.36 211,895
======= ===== =======
The equity compensation plan approved by security holders consists of our
Omnibus Equity Compensation Plan.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of AHPC Holdings, Inc. (formerly
known as WRP Corporation) presented below for the years ended June 30, 2004,
2003, 2002, 2001, 2000 and 1999 should be read in conjunction with the
Consolidated Financial Statements, related notes and other financial information
included herein.
SIX MONTHS
ENDED JUNE FOR THE YEAR ENDED DECEMBER
YEAR ENDED JUNE 30, 30, 31,
---------------------------------- ---------- ----------------------------
(In thousands except per share amounts) 2004 2003 2002 2001 2000 1999
--------- -------- -------- --------- ------------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales 36,560 $ 36,989 $ 47,357 $51,889 $31,737 $65,280
Gross profit 6,027 5,737 11,580 14,698 9,040 16,635
Selling, general & administrative expenses 9,134 8,939 17,640 13,784 6,997 12,295
Minority interest in loss (income)
of subsidiary, net of tax 243 250 202 -185 -207 97
Net (loss) income ($ 2,850) ($ 5,560) ($ 4,293) $ 529 $ 1,420 $ 2,453
PER SHARE DATA:
Diluted (loss) earnings per share ($ 2.80) ($ 0.84) ($ 0.65) $ 0.08 $ 0.21 $ 0.35
BALANCE SHEET DATA (END OF PERIOD):
Total assets $ 9,983 $ 25,965 $ 32,947 $36,072 $35,854 $40,194
Long-term debt $ 0 $ 5 $ 19 $ 13 $ 750 $ 1,100
Total shareholders' equity $ 3,837 $ 11,266 $ 16,836 $21,176 $20,827 $19,475
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is to provide stockholders with an understanding of our financial
condition, changes in financial condition and results of operations. We will
discuss and provide our analysis for the following:
- Business Overview
- Results of Operations
- Liquidity and Capital Resources
- Business Segments
- Critical Accounting Policies
- New Accounting Standards and Announcements
- Information Regarding Forward-Looking Statements
- Subsequent Event
- Business Outlook
BUSINESS OVERVIEW
Our wholly owned subsidiary, American Health Products Corporation
("AHPC"), is engaged in the marketing and distribution of high quality medical
grade examination, foodservice gloves, and other complimentary items within the
United States and Canada. We have been in the glove business since our
incorporation in January 1989. For the year ended June 30, 2004, we recorded net
glove sales of approximately $36.6 million.
Our formerly owned 70% owned subsidiary (refer to Note B of the financial
statements), PT WRP Buana Multicorpora ("PT Buana"), owns an Indonesian glove
manufacturing plant, which commenced operations in April 1996. PT Buana
manufactures high quality, disposable powdered and powder-free latex examination
gloves. Under our Stock Redemption and Exchange Agreement with WRP Asia, we
conveyed our 70% interest in PT Buana to WRP Asia and entered into a five year
supply agreement.
PT Buana sales included approximately 25.1% of related party sales to AHPC
through the ten months ended April 30, 2004. PT Buana recorded glove sales
totaling $15.4 million and $14.8 million during the period ended April 30, 2004
and the year ended June 30, 2003, respectively. PT Buana's remaining production
was sold primarily to WRP Asia and other customers. All significant intercompany
transactions and sales have been eliminated in consolidation.
This analysis of our results of operations and financial condition should
be viewed in conjunction with the financial statements and other information
concerning us included throughout this Annual Report. The consolidated financial
statements for the years ended June 30, 2004, 2003 and 2002 include our results
of operations and statements of cash flows, as well as for AHPC and PT Buana
through April 30, 2004 (refer to Note B of the financial statements).
In March 2000, we announced that our Board of Directors had authorized a
program to repurchase up to 10% of our publicly traded Common Stock. These
purchases may be made in the open market and in block transactions over a
two-year period. The program is subject to
13
market conditions as well as other investment options that we may consider to
enhance shareholder value. During the year ended June 30, 2004, we did not
repurchased any shares of our Common Stock under this program. We have purchased
a total of 254,800 shares since the inception of this program.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net
sales for the periods indicated.
SIX
MONTHS FOR THE YEAR
ENDED ENDED
YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31,
------------------------------------ -------- ------------
2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales 100% 100% 100.00% 100.00% 100.00% 100.00%
Cost of goods sold 83.5 84.5 75.5 71.7 71.5 74.5
----- ------ ------ ------ ------ ------
Gross profit 16.5 15.5 24.5 28.3 28.5 25.5
Selling, general & administrative expenses 25.0 24.2 37.3 26.6 22.1 18.8
----- ------ ------ ------ ------ ------
(Loss) income from operations -8.5 -8.7 -12.8 1.7 6.4 6.7
Interest (expense) / other income, net -0.3 -1.9 -0.6 -0.9 -0.9 -1
Provision for (benefit from) income taxes -0.3 5.1 -3.9 -0.5 0.3 2.1
Minority interest in loss (income) of subsidiary 0.7 0.7 0.4 -0.3 -0.7 0.2
Net loss from discontinued operations - - - - - -
----- ------ ------ ------ ------ ------
Net income -7.80% -15.00% -9.10% 1.00% 4.50% 3.80%
===== ====== ====== ====== ====== ======
YEAR ENDED JUNE 30, 2004, COMPARED TO THE YEAR ENDED JUNE 30, 2003
Consolidated sales for fiscal year ended June 30, 2004 were $36,560,430,
which represents a decrease in sales compared to year ended June 30, 2003 of
$428,137 or 1.2%. Our net sales are derived from the sales of finished product
net of allowable rebates, discounts and returns. The decrease in sales was
primarily attributable to our conveyance of our 70% ownership interest in our
subsidiary PT Buana Multicorpora to WRP Asia at April 30, 2004, so that revenues
from PT Buana were recognized by us for only the first 10 months of the year
ended June 30, 2004, compared to a full 12 months for the year ended June 30,
2003.
Consolidated gross profit increased $289,916 or 5.1% for June 30, 2004
compared to prior year. Cost of goods sold includes all costs to manufacture and
purchase the finished product plus the related costs associated with ocean
freight, customs duty and warehousing. This increase in our consolidated gross
profit is primarily due to 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 due to certain price increases
which we have recently passed on to our primary customers. There has
14
not been an appreciable increase in the cost of latex since June 30, 2003, and
our recent price increases have allowed us (for our fourth quarter) to adjust
for some of the cost increase in latex over the first three quarters of our
fiscal year.
Operating loss has decreased $95,482 or 3.0% for fiscal year ended June
30, 2004 from the prior 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. During our year end June 30, 2004, our selling,
general, administrative and other expenses increased by $194,434 or 2.2%. As a
percentage of net sales, SG&A expenses increased from 24.2% for the year ended
June 30, 2003, to 25.0% for the year ended June 30, 2004. This increase was
primarily to due to an increase in sales consulting services due to our
strategic decision to increase our market share in the healthcare industry.
Loss from continuing operations decreased by $709,025 or 18.1% for year
ended June 30, 2004 compared to the prior year. This significant decrease in the
loss was due to our recording of a goodwill impairment loss of $(1,042,094) for
the year ended June 30, 2003. Included in this is other income which consists of
rental, interest and miscellaneous income. Other income decreased $406,381 from
June 30, 2004 to the prior year. This was primarily due to our billing of
$375,000 to MAXXIM for the Transition Services Agreement in the fiscal year
ended June 30, 2003.
The benefit for income taxes for the year ended June 30, 2004 was
$(109,860) compared to prior year expense of $1,898,169. The prior year tax
expense was due to the establishment of a valuation allowance against our
deferred tax assets.
As a result of the factors discussed above, we reported net loss of
$(2,849,943) for the year ended June 30, 2004, which compares to a loss of
$(5,559,769) during the prior year. Diluted earnings per share for the years
ended June 30, 2004 and June 30, 2003, were $(2.80) and $(0.84), respectively.
YEAR ENDED JUNE 30, 2003, COMPARED TO THE YEAR ENDED JUNE 30, 2002
Consolidated sales for fiscal year ended June 30, 2003 were $36,988,567,
which represented a decrease in sales compared to the year ended June 30, 2002
of $10,368,509 or 21.9%. The decrease in net sales is attributable to AHPC
exiting the acute-care medical market in March 2002, along with certain customer
price decreases, effective February 1, 2002.
Consolidated gross profit decreased $5,842,468 or 50.5% for June 30, 2003
compared to the prior year. Our gross profit margin was negatively impacted by
increased glove purchase prices, product mix, lower selling prices, and the West
Coast dock strike. We continue to expect our gross margins to be affected by the
price of latex, changes in product mix, competition, manufacturing capacity
levels and other factors. Subsequent to year end, we increased our price to our
customers on all latex products.
Operating loss decreased $2,858,526 or 47.2% for fiscal year ended June
30, 2003 from the prior year. During our year end June 30, 2003, our selling,
general, administrative and other expenses decreased by $8,700,994 or 49.3%. As
a percentage of net sales, SG&A expenses
15
decreased from 37.2% for the year ended June 30, 2002, to 24.2% for the year
ended June 30, 2003. This decrease in SG&A expenses was attributable to the
reduction of our sales force in 2002 due to AHPC transitioning out of the
acute-care medical business and a reserve of $5,586,000 in 2002 for the
intercompany receivable balances between PT Buana and WRP Asia assigned to us.
Loss from continuing operations decreased by $2,434,505 or 38.4% for year
ended June 30, 2003 compared to the prior year. At June 30, 2003 we tested for
goodwill impairment, which resulted in the carrying amount of goodwill exceeding
its implied fair value. We evaluated the realizablilty of the goodwill through
the use of an independent appraisal, which utilized the present values of future
cash flows. This decrease was attributable to a goodwill impairment loss of
$(1,042,094) which we recorded for the year ended June 30, 2003. Other income
increased from $99,448 for the 2002 period to $507,786 for the 2003 period. In
fiscal 2003, we billed $375,000 to MAXXIM for the Transition Services Agreement.
We recorded a foreign currency exchange loss of $18,355 in 2003 versus a
foreign currency exchange loss of $42,646 in the comparable period in 2002, from
our Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and
depending upon the mix of assets and liabilities in PT Buana's books in
Indonesian Rupiah, an exchange gain or loss will be incurred. Foreign currency
exchange gains and losses are reported as a component of the SG&A expense
category in the consolidated statements of operations. PT Buana continues to be
exposed to foreign currency exchange rate fluctuations and may incur exchange
gains or losses in the future. PT Buana's functional currency is the U.S.
dollar.
Indonesia continues to be exposed to economic and political instability,
which is characterized with fluctuations in its foreign currency exchange rate,
interest rates, stock market and inflation rate. Our financial statements do not
include any adjustment that might result from these uncertainties and any
related effects will be reported in the financial statements as they become
known and estimable.
The benefit for income taxes for the year ended June 30, 2003 was
$1,898,169 compared to the prior year of $(1,851,517). This increase in income
tax expense of $3,749,686 is primarily due to the establishment of a valuation
allowance against the deferred tax assets.
As a result of the factors discussed above, we reported net loss of
$(5,559,769) for year ended June 30, 2003, compared to a loss of $(4,292,981)
during the prior year. Diluted earnings per share for the year ended June 30,
2003 and June 30, 2002, were $(0.84) and $(0.65), respectively.
BUSINESS SEGMENTS
During the years ended June 30, 2004 and 2003, we were engaged solely in
the business of manufacturing, through April 30, 2004, and distributing
disposable gloves. We had two business segments, manufacturing (through April
30, 2004), and distribution. As of June 30, 2004 we have one business segment,
distribution. These segments are managed as separate strategic business units.
The manufacturing segment, which represented the Indonesian operations of PT
Buana, manufactured powdered and powder-free latex gloves and sold them
primarily to AHPC and WRP Asia. The distribution segment involves the
procurement and sale of gloves purchased from the manufacturing segment and
other glove manufacturers and then sold to national and regional healthcare,
foodservice, retail and other distributors within the U.S.
16
and also includes, to a significantly lesser extent, the sale of non-glove
disposable products. Discussion of the operations of each segment is included
throughout the Results of Operations and Liquidity and Capital Resources
sections.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
FISCAL YEARS ENDED JUNE 30,
---------------------------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Net cash provided by (used in) operating activities $ 339.4 $ 3,884.7 $ (1,845.7)
Net cash used in investing activities $ (15.9) $ (699.0) $ (638.1)
Net cash provided by (used in) financing activities $ (385.4) $ (3,216.7) $ 2,812.0
-------- ---------- ----------
Net (decrease) increase in cash and cash equivalents $ (61.9) $ (31.0) $ 328.2
======== ========== ==========
CASH AND CASH EQUIVALENTS: Our cash and cash equivalents decreased from
$420,949 to $359,012 in fiscal year 2004. Our operations provided cash of
$339,399 during the 2004 fiscal year. Accounts payable increased by $1,194,830
due to timing on payments and PT Buana becoming an accounts payable as opposed
to an intercompany transaction. Net inventories were $6,694,430, a decrease of
$906,456 from $7,600,886 (excluding PT Buana amount of $1,195,453) at June 30,
2003. This decrease was due to lowering our excess safety stock levels to
acceptable levels and monitoring inventory turns.
Management currently believes that existing cash, funds generated from
operations, and our credit facility will be sufficient to provide for our
anticipated requirements for working capital for the next 12 months and the
foreseeable future.
There can be no assurance, however, that our business will continue to
generate cash flow at current levels, or that anticipated operational
improvements will be achieved. Our ability to make debt payments or pay interest
on or extend our credit facility depends on out future performance and financial
results, which, to certain extent, are subject to general conditions in or
affecting our business (refer to Item 7A, Quantitative and Qualitative
Disclosure About Market Risk).
NET CASH PROVIDED BY OPERATING ACTIVITIES: Our net cash provide by
operating activities was $339,399 in fiscal year 2004 compared to $3,884,750 in
the prior year. The positive cash flows from operating activities in fiscal year
2004 was due to our increased management of inventory levels and reduction of
excess safety stock.
Net trade accounts receivable at June 30, 2004 decreased by 21.3% to
$1,823,149 from $2,317,178 at June 30, 2003. This decline was attributable to a
true reduction in net accounts receivable.
Net inventories at June 30, 2004 decreased by 11.9% to $6,694,430 from
$7,600,886 at June 30, 2003 (this is stated without PT Buana amount of
$1,195,453). This decrease of
17
$906,456 is primarily due to the reduction of safety stock levels through
improved inventory management.
NET CASH USED IN INVESTING ACTIVITIES: Our net cash used in investing
activities was $15,915 in fiscal year 2004 compared to $699,002 used in fiscal
year 2003. The cash used was for capital expenditures relating to software and
office equipment.
NET CASH USED IN FINANCING ACTIVITIES: Our net cash used in financing
activities in fiscal year 2004 was $385,421 compared to fiscal year 2003 of
$3,216,747. This decrease was due to a reduction in our credit line borrowings.
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 governments of our principal trading partners of protectionist trade
legislation, reduction of foreign investment or general declines in the
international securities markets could have a significant adverse effect upon
the economies of the Asian-Pacific countries from which we purchase our
products.
CAPITAL STRUCTURE AND RESOURCES
During the year ended June 30, 2004, we obtained funds from borrowings
under our line of credit and other notes. On December 1, 1998, we obtained a
domestic three-year credit facility from GE Capital, a large commercial credit
company. This asset based lending loan and security agreement included a
$10,000,000 revolving line of credit with a $7,000,000 letter of credit
sub-facility. On March 31, 1999, we amended our Loan and Security Agreement by
increasing the maximum credit loan limit from $10,000,000 to $15,000,000 subject
to availability, based on a formula using accounts receivable and inventory. As
part of the amendment, the letter of credit sub-facility 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% (5.54% at June 30, 2004). At June 30, 2004, we had
outstanding $448,084 on the revolving line of credit and $1,364,806 of letter of
credit liabilities under the credit facility. As of June 30, 2004, we were not
in compliance with certain of our covenants and have obtained waivers of these
covenant violations from the financial institution.
In conjunction with the waiver of the covenant violations as of June 30,
2003, the existing credit facility agreement was amended to expire on September
30, 2004.
As of September 9, 2004, we signed a commitment for a one-year credit
facility with Greenfield Commercial Corp, a privately held commercial financing
company. This asset based lending loan and security agreement includes a $3
million revolving line of credit, in which we may borrow up to the lesser of (i)
$3 million or (ii) the sum of 75% of eligible receivables and 35% of eligible
inventory, with a limit of $1,000,000 on the amount of borrowing availability on
the eligible inventory. The line of credit borrowings carry an interest rate of
prime plus 8.0%. It contains certain penalties for early termination.
We have prepared the consolidated financial statements under the
assumption that we are a going concern.
18
CRITICAL ACCOUNTING POLICIES
While all of our accounting policies are important in assuring that we
adhere 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, 2004, we have established reserves of
$319,851 in relation to trade and inter company receivables. We determine our
allowances by considering a number of factors, including, but not limited to,
the length of time trade accounts receivable are past due, our previous loss
history, the customers current ability to pay its obligation, and the condition
of the general economy and the industry as a whole.
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, 2004, we
have established reserves of $291,245.
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. 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 Taxes. Deferred taxes result from the effect of transactions that
are recognized in different periods for financial and tax reporting purposes. A
valuation allowance is established when it is more likely than not that any
portion of the deferred tax assets will not be realized. The valuation allowance
is adjusted if the realization of deferred tax assets becomes more likely than
not. Should our income projections result in the conclusion that realization of
deferred tax assets is more likely than not, further adjustments to the
valuation are made.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
TOTAL LESS THAN AFTER 5
1 YEAR 1-3 YEARS 4-5 YEARS YEARS
Operating Leases $542,156 $487,351 $54,805
On April 30, 2004, we entered into a five year supply agreement with WRP
Asia. This agreement calls for us to purchase no less than a minimum of seven
forty-foot containers of product per month and no less than 125 forty-foot
containers of product per each 12 month period commencing on April 30, 2004. Our
estimated 12 month liability, for 125 forty-foot containers, would be
$4,625,000. However, in the event that our majority customer ceases purchasing
latex gloves from us, we shall only be obligated to purchase from WRP Asia as
many forty-foot containers of product per month as needed to meet 100% of our
products needs, or the minimum annual amount, whichever is less.
19
NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
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.
In December 2003, the FASB revised FIN No. 46 (FIN 46R), "Consolidation of
Variable Interest Entities." FIN 46R clarifies the application of Accounting
Research Bulletin No. 51 for certain entities for which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. We would currently
be required to adopt FIN 46R for any variable interest entities it had and would
be required to meet the disclosure requirements of this pronouncement. We
believe that the of this interpretation will not have an impact on its financial
position, results of operations, or cash flows.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, including statements
regarding new products and markets, gross margins, selling, general and
administrative expenses, liquidity and cash needs and our plans and strategies,
are all based on current expectations, and we assume no obligation to update
this information. Numerous factors could cause actual results to differ from
those described in the forward-looking statements, including the factors set
forth below under the heading "Risks Affecting Forward-Looking Statements and
Stock Prices." We caution investors that our business is subject to significant
risks and uncertainties.
SUBSEQUENT EVENT
As of September 9, 2004, the Company signed a commitment for a one-year
credit facility with Greenfield Commercial Corp, a privately held commercial
financing facility. This asset based lending loan and security agreement
includes a $3 million revolving line of credit, in which the Company may borrow
up to the lesser of (i) $3 million or (ii) the sum of 75% of eligible
receivables and 35% of eligible inventory, with a limit of $1,000,000 on the
amount of borrowing availability on the eligible inventory. The line of credit
borrowings carry an interest rate of prime plus 8.0%. It contains certain
penalties for early termination.
20
BUSINESS OUTLOOK
Our priorities for fiscal year 2005 are to: (i) solidify our position as a
glove company in our present markets of foodservice, dental, and medical niches
of specialty distribution and IDN's; and (ii) achieve in excess of ten percent
product net revenue growth.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the market value of investments. We have not entered
into interest rate caps or collars or other hedging instruments.
Exposure to changes in interest rates is limited to borrowings under
revolving credit and debt agreements, which have variable interest rates, tied
to the prime and commercial paper rates. We estimate that the fair value of each
debt instrument approximated its market value at June 30, 2004 and 2003.
We are subject to fluctuations in the value of the Indonesian Rupiah
vis-a-vis the U.S. dollar. Our investment in the Indonesian subsidiary through
April 30, 2004 was re-measured into the U.S. dollar and the book value of the
assets and liabilities of this operation at June 30, 2004 and 2003, approximated
its fair value. For the years ended June 30, 2004 and 2003, the foreign exchange
included in the determination of net income was approximately $12,130 and
$18,355, respectively.
RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES
In addition to those matters already set forth in Item 1, Business and
this Item 7, our operating results and financial position may be adversely
affected or fluctuated, on a quarterly basis, as a result of the following
factors: (1) increases in raw latex pricing can adversely affect our earnings;
(2) a decline in the demand for our products and the ability of our customers to
meet their financial obligations; (3) competition from other companies, some of
which are larger and more diversified than us; (4) anticipated acquisition cost
saving projections can be no assurance that such cost savings will be achieved;
(5) increase competition with respect to pricing would reduce future revenues;
(6) ability to maintain a substantial credit facility to fund the current
business and future opportunities and other items discussed below and the
pricing of such a facility. The following may result in us not achieving certain
results included in any statement that may be considered a forward looking
statement. We caution the reader that the following risks may not be exhaustive.
Variations in Quarterly Results. Our quarterly operating results are
subject to various risks and uncertainties, including risks and uncertainties
related to: local and international political and economic conditions; foreign
currency volatility; competitive pressures; the composition, timing and size of
orders from and shipments to major customers; variations in product mix and the
size mix between sales; variations in product cost; infrastructure costs;
obsolescence of inventory; and other factors as discussed below. Accordingly,
our operating results may vary materially from quarter to quarter.
21
We operate with little backlog and, as a result, net sales in any quarter
are substantially dependent on the orders booked and shipped in that quarter.
Because our operating expenses are based on anticipated revenue levels and
because a high percentage of our expenses are relatively fixed, if anticipated
shipments in any quarter do not occur as expected, our operating results may be
adversely affected and may fall significantly short of expectations. Any other
unanticipated decline in the growth rate of our net revenues, without a
corresponding and timely reduction in the growth of operating expenses, could
also have an adverse effect on us and our future operating results.
We aim to prudently control our operating expenses. However, there is no
assurance that, in the event of any revenue, gross margin or other shortfall in
a quarter, we will be able to control expenses sufficiently to meet
profitability objectives for the quarter.
Financing. Our credit facility, which was due to expire in August 31,
2003, and extended until December 31, 2003, has been renewed and extended until
September 30, 2004. The terms and conditions are similar to those in the current
credit facility. We have accepted a commitment for a new asset-based credit
facility with a commercial credit company for up to $3,000,000 of borrowings.
Advances under it are subject to numerous objective and certain subjective
contingencies not fully within our control. There can be no assurances that such
a credit facility will cover all of our needs. The cost of borrowing under such
facility and/or of termination of the facility will be greater than under prior
facility (prior to accounting for facility extension fees).
Dependence on Gloves. We are currently almost exclusively engaged in the
sale of disposable gloves. Accordingly, our results of operations and financial
condition are highly dependent on the level of supply of and demand for
disposable gloves. There can be no assurance that the supply of or demand for
disposable gloves will continue at current levels or that changes in such supply
or such demand will not have a material adverse effect on our results of
operations or financial condition
Dependence on Rubber Harvest and Latex Concentrate. Our ability to produce
and purchase our latex products profitably is entirely dependent upon the
consistent availability, at competitive prices, of raw rubber harvested by
independent growers in Malaysia, Thailand and Indonesia and locally processed by
others and us into latex concentrate. Any disruption in the consistent supply of
rubber for latex concentrate due to weather or other natural phenomena, labor or
transportation stoppages, shortages or other factors, could cause significant
adverse effects to our results of operations and financial condition. In
addition, rubber is a commodity traded on world commodities exchanges and is
subject to price fluctuations driven by changing market conditions over which we
have no control. During the year ended June 30, 2003, the price of latex
concentrate increased by as much as 40%, causing us to incur higher cost of
goods sold. We were not able to pass on these increased costs to customers as
quickly as awe incurred them from our suppliers, resulting in significant margin
compression in fiscal year 2004; we could experience similar margin pressures in
the future.
Asia Pacific Risk Factors. Social, political and economic instability may
be significantly greater in many of the Asian-Pacific countries than that
typically associated with the United States and other industrialized countries.
Varying degrees of social, political and economic instability could
significantly disrupt the source of our supply of glove products.
22
Currencies of several Asian-Pacific countries, including Indonesia, Korea,
Malaysia, Philippines, Singapore, Taiwan and Thailand, have experienced
significant fluctuations against the U.S. dollar. The WRP Asia Indonesian
factory maintains its books in the Indonesian currency, the Rupiah, and reports
its Indonesian income taxes with Rupiah financial reports. The Indonesian Rupiah
experienced volatile currency fluctuations against the U.S. dollar, which caused
significant income tax adjustments in 1999. Foreign currency exchange volatility
may continue and could cause us to incur significant price fluctuations to us in
the future with respect to Indonesian-sourced product.
In the past, interest rates in many Asian-Pacific countries have been
heavily dependent upon international trade and were accordingly affected by
protective trade barriers and the economic conditions of their trading partners,
principally, the United States, Japan, China and the European Union. The
enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the local
economies and general declines in the international securities markets could
have a significant adverse effect upon the economies of the Asian-Pacific
countries and accordingly impact price and availability of products from our
suppliers.
Governments in certain of the Asian-Pacific countries participate to a
significant degree, through ownership interests or regulation, in their
respective economies. Action by these governments could have a significant
adverse effect on the economies of such countries.
Changes in Gross Margins. Certain of our net product sales are derived
from products and markets which typically have lower gross margins compared to
other products and markets, due to higher costs and/or lower prices associated
with the lower gross margin products and markets. We currently expect that our
net product sales from powder-free and synthetic gloves will continue to
increase as a percentage of total net product sales. In addition, we are
currently experiencing pricing pressures due to a number of factors, including
competitive conditions, consolidation within certain groups of suppliers, excess
supply of products, changing technologies in the production of powder-free
gloves and increasing demand for new glove products. Additionally, we may not be
able to pass on price increases to our customers in a timely manner, or at all.
To the extent that these factors continue, our gross margins could decline,
which would adversely affect us and our future operating results.
Downward pressure on our gross margins may be mitigated by other factors,
such as a reduction in product costs and/or an increased percentage of new
product sales from higher gross margin products, such as powder-free and
synthetic gloves. We are aiming to reduce our product costs and to increase our
percentage of net product sales from powder-free and synthetic gloves. However,
there is no assurance that these efforts will be successful.
Complimentary Products. The foodservice, industrial and retail industries
look at our current line of product offerings as just one of a bundle of safety
products used by their customers. Developing a profitable line of additional
products will be important to the future success of our business. During 2003,
we diversified our product offerings with additional synergistic product lines
that address the current safety requirements of our markets. These additional
product offerings include polygloves, heavy-duty gloves, headwear, aprons and
bibs, food storage bags and educational services. These products are being
offered under our SafePrep
23
brand and under private label, but continue to represent a relatively small
portion of our total sales.
Growth Dependencies. In general, our future growth is dependent on our
ability to successfully and timely enhance existing products, develop and
introduce new products, establish new distribution channels, develop
affiliations with leading market participants and continue to develop our
relationships with our existing customer base.
The failure to achieve these and other objectives could limit future
growth and have an adverse effect on both us and our future operating results.
In addition, the pressure to develop and enhance products and to establish and
expand markets may cause our SG&A expenses to increase, which could also have an
adverse effect on us and our future operating results. In addition, to the
extent that customers seek to focus primarily on price, versus factors such as
service and quality, margins of product sales could compress substantially.
Competition. The various markets in which we operate are becoming
increasingly competitive as a number of other companies develop and sell
products that compete with our products in these markets. Certain of these
competitors have significantly more financial and technical resources than us.
We face additional competitive factors besides price, such as product quality,
timeliness of delivery, service and the size and reliability of the
manufacturer. These competitive factors may result in, among other things, price
discounts by us and sales lost by us to competitors that may adversely affect on
our future operating results and us.
Reliance Upon Distributors. We use various channels to market and
distribute our products to end-users via third-party distributors. Third-party
distributors are a substantial channel for distribution to end-users.
Accordingly, our ability to market and distribute our products depends
significantly on our relationship with third-party distributors, as well as the
performance and financial condition of these distributors. In the event that our
relationship with these distributors deteriorates or the performance or
financial condition of the distributor becomes unsatisfactory, our future
operating results could be adversely affected.
Reliance Upon Significant Contracts and Customers. During the year ended
June 30, 2004, 86.1% of net sales came from several of our national customers.
The loss of any of these customers could have a materially adverse impact on us.
Excess or Obsolete Inventory. Managing our inventory of various size mix
and product mix is a complex task. A number of factors, including the need to
maintain a significant inventory of certain sizes or products which are in short
supply or which must be purchased in bulk to obtain favorable pricing, the
general unpredictability of demand for specific products and customer requests
for quick delivery schedules, may result in us maintaining excess inventory.
Other factors, including changes in market demand and technology, may cause
inventory to become obsolete. Any excess or obsolete inventory could result in
price reductions and inventory write-downs, which, in turn, could adversely
affect on our operating results.
Hiring and Retention of Employees. Our continued growth and success
depends to a significant extent on the continued service of senior management
and other key employees and the hiring of new qualified employees. Competition
for highly skilled business, technical, marketing and other personnel is
intense. The loss of one or more key employees or our inability
24
to attract additional qualified employees or retain other employees could have
an adverse effect on our operating results and us. In addition, we may
experience increased compensation costs in order to compete for skilled
employees.
Product Liability Insurance. Participants in the medical supplies business
are potentially subject to lawsuits alleging product liability, many of which
involve significant damage claims and defense costs. A successful claim against
us in excess of our insurance coverage could have a material adverse effect on
our results of operations and financial condition. Claims made against us,
regardless of their merit, could also have a material adverse effect on our
reputation. There is no assurance that the coverage limits of our insurance
policy will be adequate or that present levels of coverage will be available at
affordable rates in the future either to cover medical-related claims or to
qualify us as a supplier to key accounts (which may require product liability
coverage at limits in excess of what we can obtain or afford). While we have
been able to obtain product liability insurance in the past, such insurance
varies in cost, is difficult to obtain and may not be available in the future on
acceptable terms or at all. We are subject to a number of lawsuits filed against
us and other manufacturers, distributors and/or end users. There can be no
assurance that our insurance will be sufficient to meet any recovery for which
we may be found liable, that the outcome of such suits will not materially
adversely affect our results of operations or financial condition, or that our
deductible obligation (to fund a portion of the initial cost of defense and/or
liability of each such lawsuit) will not prove financially burdensome.
Stock Market Fluctuations. In recent years, the stock market in general,
including our Common Stock, has experienced extreme price fluctuations. The
market price of our Common Stock may be significantly affected by various
factors such as: quarterly variations in our operating results; changes in our
revenue growth rates; the loss of a significant customer or sales contract;
changes in earnings estimates by market analysis; the announcement of new
products or product enhancements by us or our competitors; speculation in the
press or analyst community; the inability of the market to absorb selling
pressure from one or more large institutional shareholders; and general market
conditions or market conditions specific to particular industries. There can be
no assurance that the market price of our Common Stock will not experience
significant fluctuations in the future.
Governmental Regulations. Our products are subject to regulation by
numerous governmental authorities in the United States and other countries,
particularly to safety and adherence to Quality System Regulations ("QSR's") for
medical devices. In the United States, examination gloves are classified as a
Class I medical device product regulated by the FDA. Noncompliance with these
FDA regulations can result in administrative enforcement, such as warning
letters, import alerts, administrative detention or in civil penalties, product
bans and recalls. Periodically, the FDA inspects shipments of medical gloves as
they arrive in the United States ports.
The FDA inspections and reviews may cause delays in product delivery and
this can result in a loss or delay in recognition of sales and income by us. In
addition, the FDA may inspect the manufacturing facilities for compliance with
QSR's, which incorporate pre-production design and development to achieve
consistency with quality system requirements worldwide. Failure to comply with
regulatory requirements could have a material adverse effect on our business
financial condition and results of operations.
25
West Coast Longshoremen Work Stoppage. On September 29, 2002, the Pacific
Maritime Association (PMA), which represents international shipping lines,
indefinitely locked out the longshoremen, effectively stopping all import and
export activity on 29 West coast ports. This followed a 36-hour lockout that
began on September 27, 2002. These shutdowns were in reaction to work slowdowns
by the International Longshoremen's & Warehouse Union (ILWU), which were taking
place over the last several weeks. On October 1, 2002 the U.S. District Court in
San Francisco issued a temporary restraining order under the authority of the
Taft-Hartley Act that required the ports to reopen. On October 2, 2002 the ports
reopened. We estimate the costs of this shutdown to us to be $297,000.
We depend heavily on U.S. seaports, especially West coast ports where all
of our imports are entered. We have contingency plans in place in the event
another work stoppage should occur. These plans include, among other things,
air-freighting product, locating alternative sources and redirecting existing
inventory. We cannot guarantee that any of these contingency plans would
adequately protect us from loss in the event that a similar work stoppage or
strike should occur in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A list of financial statements and financial statement schedules for the
Registrant is contained in "Index to Financial Statements and Financial
Statement Schedules of AHPC Holdings, Inc." on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our Chief Financial
Officer evaluated our disclosure controls and procedures as of the end of the
fiscal year ended June 30, 2004, and has concluded that, as of June 30, 2004,
such controls and procedures have been effectively designed to ensure that
information required to be disclosed in reports that the we file with or submit
to the SEC is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and is accumulated and
communicated to management, including the Chief Financial Officer, as
appropriate to allow timely decisions regarding such disclosure.
Changes in Internal Control Over Financial Reporting. No changes in our
internal control over financial reporting have come to management's attention
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Review and evaluation of disclosure controls and procedures is an ongoing
process that we will continue to refine as we perform quarterly evaluations.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position
- ------------- --- ------------------------------------------------
Alan Zeffer 51 President and Chief Executive Officer
Deborah Bills 36 Chief Financial Officer, Secretary and Treasurer
Biographies for Messrs. Zeffer are included below.
On May 18, 2004, the Board of Directors voted to amend our By-laws to
create three classes of directors. Each class is made up of two directors, for a
total number of six directors. Each class of directors has staggered three year
terms, so that two directors will be elected at each annual meeting to serve for
a term expiring on the third annual meeting after their elections. In light of
the recent redemption of the shares of the Company's majority shareholder (see
Change of Control Transaction below) the Board of Directors believed that a
staggered board would provide stability to the management of the Company to
provide a greater likelihood that the Company can implement its strategic plan
to increase the Company's revenues and profits.
At September 28, 2004, our directors consist of the following three
classes:
Class 1 Directors
Name Age Director Since
- ----------------------- --- --------------
Anthony F. Alibrio, Sr. 59 2004
Don L. Arnwine 70 1995
Class 2 Directors
Name Age Director Since
- ------------------ --- --------------
George Jeff Mennen 63 1994
Robert J. Simmons 60 1995
Class 3 Directors
Name Age Director Since
- ------------------ --- --------------
Richard J. Swanson 68 1998
Alan E. Zeffer 51 2004
The Class 1 Directors elected at our 2004 Annual Meeting have a term
continuing until the third annual meeting following their election. The terms of
the current Class 2 and Class 3 Directors shall expire on the 2005 and 2006
annual meetings, respectively.
27
The following sets forth brief statements of the principal occupations and
other biographical information of each of the directors and executive officers.
GEORGE JEFF MENNEN was elected to the Board of Directors on October 12,
1994. For over five years, Mr. Mennen has headed the G.J. Mennen Group, a
consulting firm specializing in family-owned businesses. Mr. Mennen had a
distinguished career at the Mennen Company, including being the Vice Chairman of
that company. The Mennen Company was founded by Mr. Mennen's great grandfather
in 1878 and remained privately owned until it was sold in 1992 to
Colgate-Palmolive.
RICHARD J. SWANSON was elected to the Board of Directors in June 1998. Mr.
Swanson is presently a consultant with The Executive Committee, an international
company that focuses on strategic coaching and corporate troubleshooting for
CEO's of public and private companies. Also, since 1980, Mr. Swanson has been
the president of two Denver, Colorado-based companies: Investment Partners, Inc.
and Real Estate Associates, Inc. Investment Partners is engaged in the
restructuring and recapitalization of troubled companies and Real Estate
Associates focuses on the acquisition and development of real estate projects.
ROBERT J. SIMMONS was elected to the Board of Directors in December 1995.
He is currently President of RJS Healthcare, Inc., a healthcare consulting
company, founded in 1990. He served as Executive Vice President at Baxter
International, Inc., from 1987 until founding RJS in 1990. Mr. Simmons joined
Baxter after serving over 20 years at American Hospital Supply Corporation. His
last position at American Hospital Supply was vice president of corporate
marketing.
DON L. ARNWINE was elected to the Board of Directors in December 1995. He
is currently President of Arnwine Associates, a company he formed in 1989 to
provide specialized advisory services to the health care industry. From 1961 to
1972, Mr. Arnwine served as Director of the Hospital at the University of
Colorado Medical Center. From 1972 to 1982, he served as President and CEO of
the Charleston Area Medical Center. Mr. Arnwine became President and CEO of
Voluntary Hospitals of America (VHA) in 1982 and was named Chairman and CEO in
1985, in which capacity he served until founding Arnwine Associates.
ALAN E. ZEFFER was elected to the Board of Directors in May 2004. He
currently is presently our President and Chief Executive Officer. He joined us
in April 2001. Prior to joining us, Mr. Zeffer was Managing Partner for Quest
Capital Corporation, a corporate finance advisory firm that he founded in 1993.
He also served as Treasurer for Sybron International Corp from 1987 until 1993.
ANTHONY F. ALIBRIO, SR. was elected to the Board of Directors in May 2004.
He is currently President Emeritus of Sodexho Marriot, Inc's Health Care
Division. Sodexho is the leading food and facilities management services company
in North America. Mr. Alibrio has over 37 years experience in both health care
and foodservice. As the President of Sodexho Marriott, Inc.'s Health Care
Division, he led an organization with $3.2 billion in revenue that provided
services to over 1,000 hospitals and long-term care institutions.
28
DEBORAH J. BILLS is currently our Chief Financial Officer,
Secretary/Treasurer since May 2004. She joined us in October 2000. Previously
she served as our Controller since July 2002 and has been with us since 2000.
BOARD MEETINGS AND COMMITTEES
During the year ended June 30, 2004, our Board of Directors held 10
meetings and all other actions by the Board of Directors were taken by unanimous
written consent without a meeting.
The Board of Directors has a Compensation Committee for the purpose of
administering our Omnibus Equity Compensation Plan (the "Plan"). The Board has
not delegated its functions to any other standing committees except for the
Audit Committee, which was formed in 1997. During the year ended June 30, 2004,
the Compensation Committee held two meetings. At June 30, 2004, our Compensation
Committee consisted of Don L. Arnwine, Richard J. Swanson, George Jeff Mennen
and Robert J. Simmons. The Audit Committee held three meetings; all other
actions were taken by unanimous written consent without a meeting. At June 30,
2004, our Audit Committee consists of Don L. Arnwine, Richard J. Swanson, and
George Jeff Mennen, and is chaired by Mr. Swanson. All members of the Audit
Committee are deemed to be independent.
During the last 12 month period ended June 30, 2004, our Board of
Directors adopted a Governance and Nominating Committee. At June 30, 2004, our
Governance and Nominating Committee consists of George Jeff Mennen, Richard J.
Swanson, and Don L. Arnwine, with Mr. Arnwine as Chairman.
COMPENSATION OF DIRECTORS
All directors who were not also our executive officers: (presently Don L.
Arnwine, George Jeff Mennen, Richard J. Swanson, Robert J. Simmons, and Anthony
F. Alibrio, Sr.) receive the following compensation from us: an annual Board
member retainer of $5,000; compensation of $1,000 for each Board meeting
attended; $500 for each committee meeting attended; and an annual committee
member retainer of $1,000. The non-executive chairman will receive an additional
annual retainer of $5,000, and the chairman of the Audit Committee will receive
an additional annual retainer of $3,000. Each new director is presently entitled
to receive stock options under our Omnibus Equity Compensation Plan to purchase
2,000 shares of our Common stock in connection with his election. Under the
terms of the Plan, the Compensation Committee determines the exercise price of
each director option, provided that the exercise price may not be less than the
lowest fair market value of our common stock during the six months preceding the
election and qualification of such director. All director options are
immediately exercisable for a period of ten years from the date of grant. All
directors are reimbursed for expenses incurred in attending Board and committee
meetings.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
certain officers, directors and beneficial owners of more than 10% of our Common
Stock to file reports of ownership and changes in their ownership of our equity
securities with the Securities and
29
Exchange Commission and Nasdaq. Based solely on a review of the report and
representations furnished to us, we believe that each of these persons is in
compliance with all applicable filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation paid by us for services
rendered in all capacities to us during the year ended June 30, 2004, 2003, and
the transition period ended June 30, 2002, to (i) our President and (ii) our
executive officers at June 30, 2004, whose aggregate annual salary and bonus are
expected to exceed $100,000 for the 2004 calendar year.
Long-Term
Annual Compensation Compensation
---------------------------- ------------
Name and Other Annual Stock All Other
Principal Position Year Salary Bonus Compensation Options Compensation
- ------------------ ---- -------- -------- ------------ -------- ------------
Alan E. Zeffer 2001 $ 49,452 - - -
President and CEO 2002 $140,000 $ 20,000 - 23,333 $9,416(1)
2003 $185,000 $ 28,000 - 6,667 -
2004 $185,000 - 20,000 -
Deborah J. Bills 2004 $ 93,166 - - 20,000 -
CFO
(1)Includes housing, automobile and other expenses.
EMPLOYMENT AGREEMENTS
On August 19, 2004, we renewed the October 1, 2002, employment agreement
with Alan E. Zeffer (the "Zeffer Agreement"). The Zeffer Agreement provided for
(i) Mr. Zeffer to serve as our President and Chief Executive Officer; (ii) a
base salary of $205,000 per annum; (iii) housing expenses not to exceed
$1,200.00 per month; (iv) a $400.00 per month automobile allowance; and (v)
nonqualified stock options to be determined by the Compensation Committee.
OPTION GRANTS DURING THE YEAR JUNE 30, 2004
On February 20, 2004 there were 20,000 options granted to Alan Zeffer at
$1.13, the exercise price of the closing price of the common stock on February
20, 2004, the date of the grant. Mr. Zeffer's options vest one third each year
over the next three years beginning with June 30, 2004 and are exercisable for a
period of ten years form the date of grant.
On February 20, 2004 there were 20,000 options granted to Deborah Bills at
$1.13, the exercise price of the closing price of the common stock on February
20, 2004, the date of the grant. Mrs. Bills's options vest one third each over
the next three years beginning with June 30, 2004 and are exercisable for a
period of ten years form the date of grant.
AGGREGATE OPTION EXERCISES DURING THE YEAR ENDED JUNE 30, 2004, AND FISCAL
PERIOD-END OPTION VALUES
There were no options exercised during the year ended June 30, 2004, by
the executive officers named in the Summary Compensation Table.
30
THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors is currently
comprised of the George Jeff Mennen, Richard J. Swanson, Don L. Arnwime, and
Robert J. Simmons, each of whom were appointed by the Board of Directors. The
Committee oversees administration of our Omnibus Equity Compensation Plan. The
purpose of the Plan is to attract and retain capable and experiences officers
and employees by compensating them with equity-based awards whose value is
connected to our continued growth and profitability. Under the Plan, awards may
be made in the form of stock options or restricted stock. In general, we
compensate executive officers and senior management through salary, bonus (where
appropriate) and the grant of stock options. During the year ended June 30,
2003, all action of the Compensation Committee was made during the two meetings
held or was taken by the Committee by unanimous written consent without a
meeting.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Presently, all compensation decisions relating to the salary of Mr. Zeffer
are governed by the employment agreement between Mr. Zeffer and us, which
agreement as amended presently provides for the payment of annual base salary of
$205,000 per annum, housing expenses not to exceed $1,200 per month, a $400 per
month automobile allowance and non-qualified stock options to be determined by
the Compensation Committee. Because Mr. Zeffer's employment agreement presently
controls the compensation paid to him, the Compensation Committee did not
formulate policies with respect to Mr. Zeffer's compensation during the prior
fiscal year.
Members of the Compensation Committee:
George Jeff Mennen..Richard J. Swanson Don L. Arnwine Robert J. Simmons
STOCK PERFORMANCE CHART
The following graph compares the yearly percentage change in the
cumulative total shareholder return on our Common Stock for each of our last
five fiscal years ended June 30 with the cumulative total return (assuming
reinvestment of dividends) of (i) the NYSE/AMEX/Nasdaq Stock Market - U.S. Index
and (ii) a peer group selected by us, in good faith. The peer group consists of
American Shared Hospital Services, Daxor Corp., DVI, Inc. and Prime Medical
Services Inc. During the six-month transition period ended June 30, 2000, our
peer group was changed to exclude two companies, which were no longer publicly
traded.
31
[LINE GRAPH]
* $100 invested on June 30, 1995 in stock or Index - including reinvestment
of dividends.
6/30/99 6/30/00 6/30/01 6/30/02 6/30/03 6/30/04
AHPC Holdings, Inc. 168.1 38.9 16.0 19.3 6.0 27.3
NYSE/AMEX/Nasdaq Stock 151.0 166.5 140.0 116.1 82.8 94.9
Peer Group 95.8 93.1 96.6 135.8 92.4 139.5
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 2004, with
respect to the beneficial ownership of our Common Stock by (i) each shareholder
known by us to be the beneficial owner of more than 5% of our Common Stock, (ii)
each director, nominee and certain executive officers and (iii) all directors
and executive officers, as a group. Unless otherwise indicated, the shareholders
named below have sole voting and investment power with respect to such shares of
Common Stock beneficially owned by them.
Percent of
Amount and Nature of Total Voting
TITLE OF CLASS NAME OF BENEFICIAL OWNER Beneficial Ownership Stock(2)
- -------------- ------------------------------------ -------------------- ------------
Common Stock George Jeff Mennen 30,000(1)
Common Stock George Jeff Mennen 3,333 33,333 2.92%
-------
Common Stock Robert J. Simmons 30,000(1)
Common Stock Robert J. Simmons 1,666 31,666 2.77%
-------
Common Stock Don L. Arnwine 30,000(1)
Common Stock Don L. Arnwine 1,000 31,000 2.72%
-------
Common Stock Richard J. Swanson 29,000(1)
Common Stock Richard J. Swanson 2,000 31,000 2.72%
-------
Common Stock Alan E. Zeffer 50,000(1) 50,000 4.31%
Common Stock Deborah J. Bills 16,192(1) 16,192
Common Stock Total Executive Officers & Directors 185,192(1)
as a group (6 persons) 7,999 193,191 13.83%
-------
- ---------------
*Represents less than 1%
(1)Represents shares to be issued upon exercisable options granted under our
Omnibus Equity Compensation Plan.
(2)Percent of class is based on 7,056,230 shares of the combined number of
Series A Common Stock and Common Stock outstanding on October 14, 2003.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2004, through the April 30, 2004 (refer to
Note B), we did not purchase any latex powder-free exam gloves from our previous
majority shareholder, WRP Asia. In addition, our Indonesian factory sold
approximately $1.1 million of powdered latex exam gloves to WRP Asia through
April 30, 2004. We entered into a five year supply agreement with WRP Asia,
effective as of the date it ceased to be a shareholder of us (April 30, 2004),
requiring us to purchase a minimum of seven containers of gloves per month,
based upon our agreed upon price, which fluctuates up and down based upon the
index price for raw latex. During the two months ended June 30, 2004, we
purchased $990,640 of product from WRP Asia.
During the year ended June 30, 2004, we received consulting services from
Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by Robert J.
Simmons, one of our directors. We engaged Alliance to assist us in marketing our
products with the express purpose of negotiating and executing a purchase
agreement with various healthcare group-purchasing organizations. We paid
Alliance $184,612 during the year ended June 30, 2004, for its services.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information responsive to this Item is set forth in "Fees Paid to
Independent Auditors" of the definitive proxy statement for the Company's annual
meeting of stockholders and is incorporated herein by reference. The Audit
Committee's Charter provides that audit services engagement terms and fees, and
any changes in such terms or fees, are subject to the specific pre-approval of
the Audit Committee. The Charter further provides that other audit services,
audit-related services, tax services and permitted non-audit services are
subject to a general pre-approval by the Audit Committee. The Audit Committee
has designated the Chief Financial Officer to monitor the performance of all
services provided by the independent auditor and to determine whether such
services are in compliance. The Chief Financial Officer will report to the Audit
Committee on a periodic basis on the results of her monitoring and will
immediately report to the Chairman of the Audit Committee any breach of this
procedure. The Chairman of the Audit Committee is authorized to act on behalf of
the Audit Committee between meetings.
34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements. A list of financial statements for the
Registrant is contained in "Index to Financial Statements of AHPC
Holdings, Inc" on page F-1.
(a)(3) Exhibits. The following exhibits are included with this report:
EXHIBIT NO. NAME OF EXHIBIT
- ----------- ---------------
3.1 Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit No. 3.1 to the Company's
Form S-1 Registration Statement (Registration No. 33-36206).
3.2 Certificate of Amendment to Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit
No. 3.2 to the Company's Form S-1 Registration Statement (Registration No. 33-36206).
3.3 Certificate of Amendment to Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit
3.3 to the Company's form 10-K Annual Report for the fiscal year ended December 31, 1991 (File No. 0-17458).
3.4 Bylaws of the Company, incorporated herein by reference to Exhibit No. 3.4 to the Company's Form S-18 Registration
Statement (Registration No. 33-23164-FW).
3.5 Amendment to Bylaws of the Company, incorporation herein by reference to Exhibit 3.5 to the Company's Form 10-K
Annual Report for the fiscal year ended December 31, 1991 (File No. 0-17458).
4.2 Warrant Agreement with The Liberty National Bank & Trust Company, incorporated by reference to Exhibit No. 4.2 to the
Company's Form S-1 Registration Statement (Registration No. 33-36206).
4.3 Warrant, incorporated by reference to Exhibit No. 4.3 to the Company's Form S-1 Registration Statement (Registration
No. 33-36206).
10.37 Debenture and Warrant Purchase Agreement dated October 12, 1994, between the Company and Wilmington Trust Company and
George Jeff Mennen as Co-Trustees U/A dated 11/25/70 with George S. Mennen for Christina M. Andrea incorporated
herein by reference to Exhibit 10.37 included in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1994 (File No. 0-17458).
10.38 Debenture and Warrant Purchase Agreement dated October 12, 1994, between the Company and Wilmington Trust Company and
George Jeff Mennen as Co-Trustees U/A dated 11/25/70 with George S. Mennen for John Henry Mennen incorporated herein
by reference to Exhibit 10.38 included in the Company's Form 10-K Annual Report for the fiscal year ended December
31, 1994 (File No. 0-17458).
35
10.42 Articles of Amendment to Certificate of Incorporation, incorporated herein by reference to Exhibit 10.42 included in
the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1997 (File No. 0-17458).
10.43 Amended and Restated Omnibus Equity Compensation Plan, incorporated herein by reference to Exhibit 10.43 included in
the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1997 (File No. 0-17458).
10.44 Loan and Security Agreement dated as of December 1, 1998, between General Electric Capital Corporation and American
Health Products Corporation, incorporated herein by reference to Exhibit 10.44 included in the Company's Form 10-K
Annual Report for the fiscal year ended December 31, 1998 (File No. 0-17458).
10.45 GE Waivers and Amendments to the Loan and Security Agreement dated as of December 1, 1998.
10.46 Employment Agreement between AHPC Holdings, Inc. and Alan Zeffer dated October 1, 2001 incorporated by reference in
Exhibit 10.46 included in the Company's Form 10-K Annual Report for the fiscal year ended June 30, 2002 (File No.
0-17458).
21 Subsidiaries of the Company(1).
23.1 Consent of Grant Thornton LLP(1).
(b) During the 12 months ended June 30, 2004, the Company filed three reports on Form 8-K.
(c) See item 16(a)
31(a) Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act(1).
31(b) Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act(1).
32 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act(1).
- ----------
(1) Filed Herewith.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
WRP CORPORATION
Date: October 13, 2004 By: /s/ Deborah J. Bills
-----------------------------------------
Deborah J. Bills, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
Date: October 13, 2004 By: /s/ Alan E. Zeffer
-----------------------------------------
Alan E. Zeffer, President and Chief
Executive Officer
Date: October 13, 2004 By: /s/ George Jeff Mennen
-----------------------------------------
George Jeff Mennen, Director
and Chairman of the Board of Directors
Date: October 13, 2004 By: /s/ Richard J. Swanson
-----------------------------------------
Richard J. Swanson, Director
Date: October 13, 2004 By: /s/ Robert J. Simmons
-----------------------------------------
Robert J. Simmons, Director
Date: October 13, 2004 By: /s/ Don L. Arnwine
-----------------------------------------
Don L. Arnwine, Director
Date: October 13, 2004 By: /s/ Anthony F. Alibrio, Sr.
-----------------------------------------
Anthony F. Alibrio, Sr., Director
37
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
AHPC HOLDINGS, INC. AND SUBSIDIARY
JUNE 30, 2004, 2003 AND 2002
C O N T E N T S
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ... F-3
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS ........................................ F-5
STATEMENTS OF OPERATIONS .............................. F-7
STATEMENT OF SHAREHOLDERS' EQUITY ..................... F-8
STATEMENTS OF CASH FLOWS .............................. F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............ F-10
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors of
American Health Products Corporation
We have audited the accompanying consolidated balance sheet of American
Health Products Corporation (a Maryland corporation) and Subsidiary as of
June 30, 2004 and 2003, and the related consolidated statements of
operations, shareholders' equity and cash flows for the three years ended
June 30, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. We
did not audit the 2002 financial statements of PT WRP Buana Multicorpa, a
70%-owned subsidiary, whose statements reflect net sales of 17.6% of
consolidated net sales for the year then ended. Those statements were
audited by other auditors, whose report thereon has been furnished to us
and shown elsewhere, and our opinion, insofar as it relates to the amounts
included for PT WRP Buana Multicorpa for the year ended June 30, 2002, is
based solely on the report of the other auditors.
We conducted our audits in accordance with the Standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of American Health Products Corporation
and Subsidiary as of June 30, 2004 and 2003, and the consolidated results
of their operations and their cash flows for the three years ended June
30, 2004, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company incurred a net loss of $2,849,943 for
the year ended June 30, 2004. Additionally, the Company has entered into a
forbearance agreement with its primary lender that expired on September
30, 2004 and
F-3
subsequently entered into short term financing with a transitional high interest
rate facility as of September 9, 2004. These factors, among others, as discussed
in Note B to the financial statements, raise substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Chicago, Illinois
October 13, 2004
F-4
AHPC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 359,012 $ 420,949
Accounts receivable - trade, net of allowance for
doubtful accounts of $319,851 at June 30, 2004
and $333,625 at June 30, 2003 1,823,149 2,317,178
Inventories, net 6,694,430 8,796,339
Prepaid expenses 425,301 522,914
Due from affiliate, net of allowance for doubtful
accounts of $0 at June 30, 2004 and
$5,586,271 at June 30, 2003 - 3,320,544
Other receivables 5,193 1,382,078
------------ ------------
Total current assets 9,307,085 16,760,002
PROPERTY, PLANT AND EQUIPMENT
Land rights and land improvements - 736,535
Construction in progress - 27,688
Equipment, furniture and fixtures 2,621,109 16,767,720
Building improvements 14,310 2,336,683
Vehicles - 115,467
------------ ------------
Total property, plant and equipment 2,635,419 19,984,093
Less accumulated depreciation and amortization 2,028,981 10,876,090
------------ ------------
Property, plant and equipment, net 606,438 9,108,003
OTHER ASSETS
Other assets 69,595 531,870
------------ ------------
Total other assets 69,595 531,870
------------ ------------
$ 9,983,118 $ 26,399,875
============ ============
F-5
AHPC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JUNE 30,
2004 2003
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 2,349,617 $ 1,733,300
Trade notes payable to bank 1,364,806 2,959,587
Notes payable and current portion of long-term
obligations 485,138 1,264,992
Due to affiliates - 3,890,537
Accrued expenses 1,220,842 2,716,428
------------ ------------
Total current liabilities 5,420,403 12,564,844
LONG-TERM DEBT - 5,163
DEFERRED TAX LIABILITIES 725,972 1,080,329
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN SUBSIDIARY - 1,483,958
SHAREHOLDERS' EQUITY
Series A common stock, $.01 par value; no shares
authorized; no shares issued and outstanding at
June 30, 2004 and 1,252,538 issued and outstanding - 12,525
at June 30, 2003
Common stock, $.01 par value; 3,333,333 shares
authorized; 1,108,452 shares issued at June 30, 2004;
5,803,692 shares issued at June 30, 2003 33,037 58,037
Additional paid-in capital 17,778,099 17,942,471
Retained earnings (accumulated deficit) (7,968,217) (5,118,276)
------------ ------------
9,842,919 12,894,757
Less common stock in treasury, at cost, 3,881,805 shares and
129,267 shares on June 30, 2004 and 387,800 shares
on June 30, 2003 6,006,176 1,629,176
------------ ------------
Total shareholders' equity 3,836,743 11,265,581
------------ ------------
$ 9,983,118 $ 26,399,875
============ ============
The accompanying notes are an integral part of these balance sheets.
F-6
AHPC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Fiscal Year Ended
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net sales $ 36,560,430 $ 36,988,567 $ 47,357,076
Cost of goods sold 30,533,366 31,251,419 35,777,460
------------ ------------ ------------
Gross profit 6,027,064 5,737,148 11,579,616
Operating expenses
Selling, general and administrative 9,133,914 8,939,480 17,640,474
------------ ------------ ------------
Loss from operations (3,106,850) (3,202,332) (6,060,858)
Other Income and (Expense)
Interest expense (197,044) (174,874) (384,609)
Other income 101,405 507,786 99,448
Impairment Loss - 1,042,094 -
------------ ------------ ------------
Loss from operations before provision
for (benefit from) income taxes
and minority interest (3,202,489) (3,911,514) (6,346,019)
Provision for (benefit from) income taxes (109,860) 1,898,169 (1,851,517)
------------ ------------ ------------
Loss from operations before minority
interest (3,092,629) (5,809,683) (4,494,502)
Minority interest in loss of subsidiary (242,686) (249,914) (201,521)
------------ ------------ ------------
NET LOSS $ (2,849,943) $ (5,559,769) $ (4,292,981)
============ ============ ============
Basic net loss per common share $ (2.97) $ (0.84) $ (0.65)
Diluted net loss per common share $ (2.80) $ (0.84) $ (0.65)
The accompanying notes are an integral part of these statements.
F-7
AHPC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Series A common stock Common stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance, June 30, 2001 1,252,538 12,525 5,803,692 58,037
Net loss - - - -
Common stock repurchases - - - -
------------ ------------ ------------ ------------
Balance, June 30, 2002 1,252,538 12,525 5,803,692 58,037
Net loss - - - -
Common stock repurchases - - - -
------------ ------------ ------------ ------------
Balance, June 30, 2003 1,252,538 $ 12,525 5,803,692 $ 58,037
============ ============ ============ ============
Net loss - - - -
Stock Redemption & Exchange (12,525) (25,000)
Warrants Exercised
Reverse Stock Split (3-1) (835,025) (3,861,907)
Common stock repurchases (417,513) - (833,333) -
------------ ------------ ------------ ------------
Balance, June 30, 2004 - $ - 1,108,452 $ 33,037
============ ============ ============ ============
Retained
Additional earnings
paid-in (accumulated Treasury Shareholders'
capital deficit) stock equity
------------ ------------ ------------ ------------
Balance, June 30, 2001 17,942,471 4,734,474 (1,572,000) 21,175,507
Net loss - (4,292,981) - (4,292,981)
Common stock repurchases - - (46,376) (46,376)
------------ ------------ ------------ ------------
Balance, June 30, 2002 17,942,471 441,493 (1,618,376) 16,836,150
Net loss - (5,559,769) - (5,559,769)
Common stock repurchases - - (10,800) (10,800)
------------ ------------ ------------ ------------
Balance, June 30, 2003 $ 17,942,471 $ (5,118,276) $ (1,629,176) $ 11,265,581
============ ============ ============ ============
Net loss - (2,849,941) - (2,849,941)
Stock Redemption & Exchange (174,372) (4,377,000) (4,588,897)
Warrants Exercised 10,000 10,000
Reverse Stock Split (3-1) -
Common stock repurchases - - - -
------------ ------------ ------------ ------------
Balance, June 30, 2004 $ 17,778,099 $ (7,968,217) $ (6,006,176) $ 3,836,743
============ ============ ============ ============
The accompanying notes are an integral part of this statement.
F-8
AHPC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Year Ended
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities
Net loss $ (2,849,943) $ (5,559,769) $ (4,292,981)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation 350,069 1,848,325 1,918,304
Amortization - - 67,232
Impairment of Goodwill - 1,042,094 -
Deferred income taxes 593,795 3,269,913 (1,893,985)
Loss on disposal of property, plant and equipment - 7,486 29,291
Changes in operating assets and liabilities
Accounts receivable - trade, net 124,007 2,529,218 72,666
Inventories, net 906,456 (289,687) (1,319,266)
Prepaid expenses 50,346 217,030 434,600
Other assets - (1,272,574) (290,762)
Accounts payable - trade 1,194,830 477,785 (1,079,906)
Accrued expenses (30,161) 334,165 (589,373)
Amounts due to and from affiliates - 1,280,764 5,098,558
------------ ------------ ------------
Net cash provided by (used in) operating activities 339,399 3,884,750 (1,845,622)
Cash flows from investing activities
Capital expenditures (15,915) (365,088) (444,336)
Proceeds on sales of property, plant and equipment - - 7,714
Minority interest in subsidiary - (333,914) (201,520)
------------ ------------ ------------
Net cash used in investing activities (15,915) (699,002) (638,142)
Cash flows from financing activities
Net payments on trade notes payable to bank 394,433 99,173 2,352,477
Net borrowings (payment) on notes payable (779,854) (3,305,120) 505,870
Payments for treasury stock repurchases - (10,800) (46,376)
------------ ------------ ------------
Net cash provided by (used in) financing activities (385,421) (3,216,747) 2,811,971
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (61,937) (30,999) 328,207
Cash and cash equivalents, beginning of period 420,949 451,948 123,741
------------ ------------ ------------
Cash and cash equivalents, end of period $ 359,012 $ 420,949 $ 451,948
============ ============ ============
Non-Cash Transactions:
Redemption of common shares (211,897) - -
The accompanying notes are an integral part of these statements.
F-9
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
AHPC Holdings, Inc (formerly WRP Corporation) and Subsidiaries (the "Company")
is a leading marketer of medical and food-service gloves in the United States
through its wholly owned subsidiary, American Health Products Corporation
("AHPC"). The Company was incorporated in Maryland in December 1995.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of AHPC
Holdings, Inc., AHPC and PT Buana through April 30, 2004 (refer to Note B). All
significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers cash in banks and highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. At June 30, 2004
and 2003, the Company had approximately $259,012 and $320,949, respectively, on
deposit at one financial institution in excess of amounts insured by the Federal
Deposit Insurance Corporation. The Company performs periodic evaluation of this
institution for relative credit standing and has not experienced any losses as a
result of this corporation.
ACCOUNTS RECEIVABLE
The majority of the Company's accounts receivable are due from companies in the
foodservice, non-acute medical, dental and retail industries. Credit is extended
based on an evaluation of a customer's financial condition, and generally,
collateral is not required. Accounts receivable are due in accordance with
agreed upon terms, and are stated at amounts due from customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the
contractual payments terms are considered past due. The Company determines its
allowance by considering a number of factors, including, but no limited to, the
length of time trade accounts receivable are past due, the Company's previous
loss history, the customer's current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a whole.
The Company writes off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts.
F-10
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVENTORIES
Inventories are accounted for on a first-in, first-out basis and are valued at
the lower of actual cost or market. The Company established inventory reserves
for valuation, shrinkage, and excess and obsolete inventory. The Company records
provisions for inventory shrinkage based on historical experience to account for
unmeasured usage or loss. Actual results differing from these estimates could
significantly affect the Company's inventories and cost of product sold. The
Company records provisions for excess and obsolete inventories for the
difference between the cost of inventory and its estimated realizable value
based on assumptions about future product demand and market conditions. Actual
product demand or market conditions could be different than projected by
management. Inventories consist of the following at June 30, 2004 and 2003:
2004 2003
----------- -----------
Raw materials $ - $ 268,525
Work in process - 701,899
Finished goods 6,985,675 8,190,540
Reserves (291,245) (364,625)
----------- -----------
Total $ 6,694,430 $ 8,796,339
=========== ===========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided by both the straight-line and accelerated methods over
lives ranging from 3 to 20 years. Building improvements are amortized on a
straight-line basis over their estimated useful lives or lease terms, whichever
is shorter. Accumulated construction in progress costs are reclassified to the
appropriate property, plant and equipment account when completed. The useful
lives of property, plant and equipment at June 30, 2004 and 2003 are as follows:
Useful lives
------------
Land rights and land improvements 20 years
Equipment, furniture and fixtures 3-15 years
Building improvements 5-20 years
Vehicles 5 years
F-11
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
When property or equipment is retired or otherwise disposed of, the net book
value of the asset is removed from the Company's books, and the net gain or loss
is included in the determination of income.
GOODWILL
The excess of purchase price over the fair market value of the net assets of
AHPC was recorded as goodwill in the accompanying consolidated balance sheets.
In contrast to accounting standards in effect during 2002, Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangibles
Assets, which became effective beginning in fiscal 2003, provides that goodwill,
as well as identifiable intangible assets with indefinite lives, should not be
amortized. Accordingly, with the adoption of SFAS No. 142 in fiscal 2003, the
Company discontinued the amortization of goodwill. In addition, useful lives of
intangible assets with finite lives were reevaluated on adoption of SFAS No.
142.
Goodwill will be tested for impairment on an annual basis and between annual
tests whenever there is an impairment indicated. Impairment losses will be
recognized whenever the implied fair value of goodwill is less than its carry
value. As of June 30, 2003 the Company evaluated the goodwill of the AHPC
reporting unit through and independent appraisal which used a present value of
discounted cash flows method. As a result, the Company recorded an impairment
charge of $1,042,094 for 2003 which reduced the balance of goodwill at June 30,
2003 to $0.
LONG-LIVED ASSETS
The Company has adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," effective May 1, 2002. SFAS No. 144 address financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement superseded SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
The adoption of this statement did not have a material effect on the Company's
results of operations or financial position.
In accordance with SFAS No. 144, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the fair value of an asset is determined to be less
than the carrying amount of the asset, a loss is recognized for the difference.
F-12
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped
from the Company's warehouse or upon the customer's pick-up receipt of the
goods, depending upon the terms of the sale. Product sales are stated net of
rebates, sales returns, and sales discounts and allowances.
The Company records a liability for rebates and sales discounts in accordance
with terms as contracted with certain customers.
SHIPPING AND HANDLING
The Company records shipping and handling cost gross, within selling and
administrative expenses. Customers are typically invoiced for shipping costs on
all orders under the Company's 60 cases minimum requirement. Shipping and
handling cost totaled $271,820, $469,666 and $1,014,161 in the fiscal years
ended 2004, 2003 and 2002, respectively.
INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 utilizes the liability method, and deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities given
the provisions of enacted tax laws. Deferred income tax provisions and benefits
are based on the changes in the deferred tax asset or tax liability from period
to period. Due to the uncertainty of the realization of the net deferred tax
asset, the Company recorded a valuation allowance against it deferred tax asset.
NET INCOME PER COMMON SHARE
Basic Earnings per Share ("EPS") amounts are based on the weighted-average
number of shares of common stock outstanding during each year, while diluted EPS
amounts are based on the weighted-average number of shares of common stock
outstanding during the year and the effect of any dilutive stock options and
warrants (common stock equivalents).
F-13
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NET INCOME PER COMMON SHARE - CONTINUED
The weighted-average number of common shares and common share equivalents
outstanding for the years ended June 30, 2004 and 2003, and 2002, are as
follows:
Year ended
------------------------------------
June 30,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Basic weighted-average number of common
shares outstanding 960,066 6,632,734 6,655,123
Dilutive effect of common share
equivalents 56,933 5,882 -
---------- ---------- ----------
Diluted weighted-average number of
common shares outstanding 1,016,999 6,638,616 6,655,123
========== ========== ==========
The Company had additional vested stock options and warrants outstanding of
280,882, 468,811 and 476,214, at June 30, 2004, 2003 and 2002, respectively. The
options for the periods June 30, 2001, were not included in the computation of
diluted earnings per share because the exercise price was greater than the
average market price of the common shares and would have been anti-dilutive. The
impact of stock options has been included in the calculation of earnings per
share for the year ended June 30, 2004. As the dilutive shares were immaterial
there was no effect to the earnings per share calculation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
1. CURRENT ASSETS AND CURRENT LIABILITIES - The carrying amount approximates
fair value due to the short maturity of these items.
F-14
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
2. LONG-TERM OBLIGATIONS - The fair value of the Company's long-term debt is
based on secondary market indicators. Since the Company's debt is not
quoted, estimates are based on each obligation's characteristics,
including maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates fair
value.
3. AMOUNTS DUE TO/DUE FROM AFFILIATE - Amounts due to/due from affiliate are
non-interest bearing and do not specify maturity dates; therefore, it is
not practicable to estimate the fair value of these financial instruments.
FOREIGN CURRENCY TRANSLATION
Gains and losses from foreign currency transactions are included in net loss in
the period in which they occur through April 30, 2004 (refer to Note B). For the
years ended June 30, 2004, 2003 and 2002, the foreign exchange loss included in
the determination of net income is $(12,130), $(18,355) and $(42,646),
respectively.
The Company does not use any derivative or financial instruments to manage its
foreign exchange exposures. The Company is subject to foreign currency
fluctuation risk in the regular course of business on sales, raw materials and
fixed asset purchase transactions denominated in a foreign currency.
LITIGATION
The Company is engaged in various lawsuits either as plaintiff or defendant
involving product liability. In the opinion of management, the ultimate outcome
of these lawsuits will not have a material impact on the Company's consolidated
financial statements. The Company expenses legal cost related to such litigation
as the costs are incurred.
F-15
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," related to options and warrants
issued to employees and directors. See note H for additional information
regarding this plan. Options prices for options granted under this plan were not
less than fair market value of the Company's on the date of grant.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation.
For the Fiscal Years Ended June 30,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net loss, as reported $ (2,849,943) $ (5,559,769) $ (4,292,981)
Deduct: total stock-based employee
compensation expense determined under fair
value based method for awards granted,
modified, or settled, net of related tax
effects 90,636 53,712 203,892
------------ ------------ ------------
Pro forma net loss $ (2,940,579) $ (5,613,481) $ (4,496,873)
============ ============ ============
2004 2003 2002
------------ ------------ ------------
Net loss per share
Basic - as reported $ (2.97) $ (0.84) $ (0.65)
Basic - pro forma $ (3.06) $ (0.83) $ (0.68)
Dilutive - as reported $ (2.80) $ (0.84) $ (0.65)
Dilutive - pro forma $ (2.89) $ (0.83) $ (0.68)
F-16
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
EMPLOYEE BENEFIT PLANS
The Company provides all employees who have completed 30 days of service with a
401(k) retirement savings plan. This 401(k) retirement savings plan name is
"AHPC Holdings, Inc. 401(k) Profit Sharing Plan & Trust." Participants are
allowed to contribute up to 15% of their annual compensation, and the Company
will match up to the first 8% of the participants contribution. All
contributions are made to a trust, which are held for the sole benefit of the
participant. During fiscal years ended 2004, 2003 and 2002, the Company
contributed to the plan $37,960, $24,464 and $36,803, respectively. The
Company's expense, relating to the plan's administration, for fiscal years ended
June 30, 2004, 2003 and 2002 were $6,850, $6,850 and $6,850, respectively.
INTERNAL USE SOFTWARE COSTS
The Company has capitalized or expensed as incurred certain internal use
software costs as appropriate. As of June 30, 2004, 2003 and 2002, the net book
value of capitalized software is $517,034, $757,605 and $983,781, respectively.
These capitalized costs are included in Property, Plant and Equipment in the
accompanying financial statements and are being amortized over seven years.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
This Interpretation addresses consolidation by business enterprises of certain
variable interest entities ("VIEs"). FIN 46 is effective immediately for all
enterprises with variable interests in VIEs created or acquired after January
31, 2003. For VIEs created or acquired prior to February 1, 2003, this
interpretation must be applied for the first interim or annual period beginning
after June 15, 2003. We have performed an evaluation to identify such entities
and we do not believe that any entities fall within the scope of this standard.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 addresses how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS 150 will apply to
financial instruments entered into or modified after May 31, 2003. We believe
that the adoption of this standard will have no impact on the Company's
financial statements.
F-17
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
In December 2003, the FASB revised FIN No. 46 (FIN 46R), "Consolidation of
Variable Interest Entities." FIN 46R clarifies the application of Accounting
Research Bulletin No. 51 for certain entities for which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. We would currently
be required to adopt FIN 46R for any variable interest entities it had and would
be required to meet the disclosure requirements of this pronouncement. We
believe that the of this interpretation will not have an impact on its financial
position, results of operations, or cash flows.
RECLASSIFICATION
Certain prior-period balances have been reclassified to conform with the
current-year presentation.
NOTE B - MANAGEMENT PLAN & THE STOCK REDEMPTION TRANSACTION
FORBEARANCE AGREEMENT
On March 12, 2003 the Company entered into a forbearance agreement with its
lender, GE Capital Services, whereby it was agreed the lender would forbear from
exercising certain rights under the loan agreement as a result of events of
defaults, which were continuing at that time. The terms of this agreement, as
amended, required the Company to maintain certain financial covenants and to
receive payment of at least $2 million of intercompany debt from WRP Asia (as
described in Footnote D, Related Party Transactions). This agreement was
scheduled to expire on June 30, 2003; however, the Company entered into an
amendment to the forbearance agreement that extends the term through September
30, 2004. Upon expiration of this agreement and subsequent amendment the lender
will have the right to exercise its rights and remedies immediately, including
but not limited to (1) ceasing to make any further loans to the Company and (2)
the acceleration of the Company's obligations to the lender. Due to the nature
of the Company's business, importing product from Asia and the extended time
period required for those purchases to convert to cash, the Company relies on
the credit facility to finance these purchases. Failure to have access to such a
facility or to have adequate cash to self-fund these requirements would impair
the Company's ability to continue as a going concern.
As of September 9, 2004, the Company signed a commitment for a one-year credit
facility with Greenfield Commercial Corp, a privately held commercial financing
company. This agreement is short term with high interest rates (refer to Note
N). The Company is in the process of seeking a permanent credit facility to
replace Greenfield Commercial Corp.
F-18
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE B - MANAGEMENT PLAN & THE STOCK REDEMPTION TRANSACTION - CONTINUED
WRP ASIA FINANCIAL RESTRUCTURING
On July 8, 2003 WRP Asia announced the completion of its financial
restructuring, which involved restructuring and reducing WRP Asia's debt
position and providing additional new funding. Due to the terms of the
restructuring, WRP Asia was prohibited from repaying certain debt, including the
Company's intercompany debt in the short term. On September 12, 2003 the Company
entered into a non-binding letter of intent with WRP Asia to enter into a stock
redemption and exchange agreement. The Letter of Intent calls for the Company to
redeem 1,252,538 shares of Class A Common Stock and the 2,500,000 shares of
Class B Common Stock, which comprise all of WRP Asia's holdings. Collectively,
these shares represent approximately 53.2% of the outstanding Capital Stock of
WRPC. The consideration for the redemption was: (i) the conveyance to WRP Asia
of WRPC's 70% ownership interest in its subsidiary PT Buana Multicorpora
("PTB"); and (ii) forgiveness of all indebtedness owing to WRPC by WRP Asia. The
Company would continue to be responsible for trade payables owing to PTB for
recent product purchases by the Company. The transaction was subject to, among
other things, execution of a definitive redemption agreement, a five-year supply
agreement from WRP.
On November 3, 2003 The Company announced the signing of a definitive stock
redemption and exchange agreement (the "Agreement") with WRP Asia. The Agreement
called for The Company to redeem 1,252,538 shares of Class A Common Stock and
the 2,500,000 shares of Class B Common Stock (pre-split totals), which comprise
all of WRP Asia's holdings. Collectively, these shares represent approximately
53.2% of the Company's outstanding capital stock. The consideration for the
redemption was: (i) the conveyance to WRP Asia of the Companies 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 its subsidiaries from WRP Asia and from PTB with the exception of the
Companies obligation to be responsible for trade payables owing to PTB for
recent product purchases. The Company also announced the execution of a
five-year supply agreement from WRP Asia and PTB (through the Companies
subsidiary American Health Products Corporation), calling for the purchase of a
portion of its latex glove requirements, which equates to the appropriate
annualized quantities that the Company is 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 the Company, had
approved the transaction. The Company had received a fairness opinion from an
independent professional valuation firm that the transaction is fair to The
Company's stockholders.
F-19
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE B - MANAGEMENT PLAN & THE STOCK REDEMPTION TRANSACTION - CONTINUED
As of April 30, 2004, The Company redeemed WRP Asia's shareholdings in the
Company through the completion of the Company's stock redemption and exchange
agreement with WRP Asia. Through this transaction the Company 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 the Company's outstanding Capital
Stock. As consideration for the redemption the Company conveyed to WRP Asia, its
70% ownership interest in the Company's subsidiary PT Buana and excused of all
indebtedness owing to the Company from WRP Asia and PT Buana, with the exception
of certain mutually agreed obligations related to recent purchase of product.
The Company also entered into a five (5) year supply agreement whereby the
Company agreed to purchase certain minimum quantities of its latex glove needs
from WRP Asia. On the closing of the transaction, the three of the Company's
seven directors who were employees of WRP Asia resigned their positions as
officers and directors of the Company.
As of April 30, 2004, the market value of the stock redeemed at the close of the
stock redemption agreement is $4,377,000. The balance sheet amounts that relate
to our share of PTB financials are assets totaling $11,305,439 and liabilities
of approximately $2,665,854. The portion of net revenues relating to PTB is
$11,511,161 with a net operating loss of $566,268. The Company had agreed to
forgive all indebtedness owing to the Company or its subsidiaries from WRP Asia
and from PTB of $1,401,322. The loss on this transaction is $174,361, recorded
in Paid-in-Capital.
The Company also announced that it would change its name from WRP Corporation to
AHPC Holding, Inc, effective May 14, 2004, at that time the Company's NASDAQ
trading symbol changed from WRPC to GLOV.
NOTE C - COMMON STOCK
Each share of Series A common stock is convertible into one share of the
Company's common stock, $.01 par value. The Company has reserved 1,252,538
shares of common stock for issuance upon conversion of the Series A common
stock.
The terms of the Series A common stock are substantially the same as the
Company's common stock except that Series A common stock entitles WRP Asia, the
majority shareholder of the Company, to elect all Class A directors, which
represent a majority of the Company's Board of Directors, and to vote with the
holders of common stock as a single class with respect to any matters subject to
a vote of the shareholders.
F-20
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE C - COMMON STOCK - CONTINUED
On February 29, 2000, the Company approved a stock repurchase plan, which may
include the repurchase of up to 10% of the Company's public common stock. These
purchases may be made in the open market and in block transactions over a
two-year period. The program is subject to market conditions and its impact on
share price, as well as other investment options that the Company may consider
to enhance shareholder value. As of June 30, 2004, 254,800 shares of public
common stock have been repurchased by the Company as part of this plan.
NOTE D - RELATED-PARTY TRANSACTIONS
At June 30, 2004 and 2003, amounts due from/to affiliates consist of the
following:
2004 2003
------------ ------------
Due from affiliate
Current WRP Asia $ 0 $ 8,906,815
Reserve (0) (5,586,271)
------------ ------------
Net $ 0 $ 3,320,544
============ ============
Due to affiliate
Current WRP Asia $ 0 $ (3,890,537)
============ ============
During 2003, the amounts due to PT Buana of $5,586,321 were assigned to AHPC
Holdings, Inc. in partial satisfaction of intercompany amounts due from PT Buana
to AHPC Holdings, Inc.. During 2003, the Company entered into a formal agreement
with WRP Asia to provide for full and complete right of offset of any trade
payables due against amounts they owe to AHPC Holdings, Inc. and AHPC. Included
in the WRP Asia receivable is a note receivable of $0 and $470,000 as of June
30, 2004 and 2003, respectively.
AHPC Holdings, Inc. and AHPC have accounts payable to WRP Asia of $3,890,537 at
June 30, 2003, primarily resulting from the purchase of inventories. See Note J
for additional related-party transactions.
WRP Asia owns one of the largest glove manufacturing plants in Malaysia and
principally manufactures high-quality, powder-free, latex exam gloves. During
the years ended June 30, 2004, 2003 and 2002, total purchases of gloves from WRP
Asia as a related party were $0, $3,355,310 and $13,519,454, respectively.
In January 1997, the Company entered into a consulting and services agreement
with Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by a director
of the Company.
F-21
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE D - RELATED-PARTY TRANSACTIONS - CONTINUED
The agreement engaged Alliance to assist the Company in marketing its products
with the expressed purpose of negotiating and executing a purchase agreement
with various healthcare group purchasing organizations. The Company paid
Alliance $184,612, $170,439 and $137,772, in the years ended June 30, 2004, 2003
and 2002, respectively, for its services.
NOTE E - TRADE NOTES PAYABLE TO BANK
Trade notes payable to bank consist of the following:
2004 2003
---------- ----------
Notes payable to bank, at rates charged to WRP Asia: $ 916,722 $1,989,213
Payable to bank, letters of credit bearing interest at the
commercial paper rate plus 4.5%, due within 60 days: 448,084 970,374
---------- ----------
Total: $1,364,806 $2,959,587
========== ==========
Trade notes payable to bank consist of amounts financed through letter of credit
arrangements and notes payable, which totaled $1,364,806 and $2,959,587 at June
30, 2004 and 2003, respectively. These bank obligations are collateralized by
the inventory and accounts receivable of AHPC and are subject to the convents
discussed as in Note F.
As of June 30, 2004 and 2003, the Company was contingently liable for
outstanding letter of credit liabilities totaling $0 and $595,488, respectively.
F-22
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE F - NOTES PAYABLE
Notes payable and long-term debt as of June 30, 2004 and 2003, consist of the
following:
2004 2003
---------- ----------
Borrowings under a bank revolving line-of-credit agreement with available
borrowings up to $15,000,000 at June 30, 2004 and 2003, bearing interest at
the commercial paper rate plus 4.50% (5.54% and 5.71% at June 30, 2004 and
2003, respectively), collateralized by inventories and accounts receivable,
expiring September 30, 2004 $ 448,084 $1,235,149
Insurance premium financing loans, bearing interest at 4.425% and 5.24% at June
30, 2004 and 2003, respectively, payable in monthly installments through
July 2004 37,054 29,843
Other - 5,163
---------- ----------
485,138 1,270,155
Less current portion 485,138 1,264,992
---------- ----------
Long-term debt $ - $ 5,163
========== ==========
The bank revolving line-of-credit agreement noted above contains covenants that
require, among other things, maintenance of financial ratios and limitations on
borrowings, investments and capital expenditures. As a result of continued
covenant violations, the Company entered into a forbearance agreement with its
lender on March 12, 2003. The agreement has been extended to September 30, 2004.
See Note B for further discussion.
The Company's credit facility includes a $5,000,000 revolving line of credit
with a $5,000,000 letter of credit subfacility. The facility carries an interest
rate of commercial paper plus 4.5% (5.54% at June 30, 2004).
On September 9, 2004, the Company signed a commitment for a one-year credit
facility with Greenfield Commercial Corp, a privately held commercial financing
company replacing it's bank line of credit (refer to Note N).
F-23
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE G - COMMITMENTS AND CONTINGENCIES
LITIGATION
Over the last several years, numerous product liability lawsuits have been filed
against suppliers and manufacturers of latex gloves alleging, among other
things, adverse allergic reactions. The Company is one of numerous defendants
that have been named in such lawsuits. At June 30, 2004, the Company was
involved in a total of 23 lawsuits as a named defendant, a third-party defendant
or an indemnitor. During the year ended June 30, 2004, the Company was named in
no new lawsuits and was dismissed from or otherwise settled 16 lawsuits. The
Company carries product liability insurance. Management believes all legal
claims are adequately provided for or, if not provided for, are without merit,
or involve such amounts that would not materially affect the Company's results
of operations or financial condition.
SIGNIFICANT CUSTOMERS
The following summary presents the total percentage of sales the Company's
significant customer.
June 30,
--------------------
2004 2003 2002
---- ---- ----
Significant customer's percentage of net sales 86.1 70.1 45.5
The Company's significant customer ships products to numerous food-service
facilities throughout the U.S. The ultimate end users of the Company's product
are those various food-service organizations and professionals who purchase the
product from these distributors.
OPERATING LEASES
The Company conducts all of its operations in leased facilities.
Total rent expense, net of rental income, included in the accompanying
consolidated statements of operations for the fiscal years ended June 30, 2004,
2003 and 2002, was $532,605, $569,548 and $595,669, respectively. The following
summary presents future minimum rental payments required under the terms of
present operating leases:
F-24
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
Fiscal year ending June 30,
2005 $487,351
2006 54,805
2007 -
2008 and thereafter -
--------
$542,156
========
NOTE H - STOCK OPTION PLAN
On June 12, 1998, the Board of Directors approved an amendment and restatement
of the Company's Omnibus Equity Compensation Plan (the "Plan"), which authorized
and adjusted the number of shares issuable from 400,000 to 1,400,000. Effective
on February 29, 2000, the Board of Directors approved the repricing of all
current director and employee options to $2.07, the closing market price on that
date. This change will require variable Plan accounting for future appreciation
in stock prices. A summary of options outstanding under the Plan is as follows:
Weighted-
Outstanding Average
options Price Expiration
----------- --------- ----------
Balance, July 1, 2001 368,600 $ 1.92
Grants 760,525 0.75 2012
Rescissions/expirations (408,932) 1.36 2004-2012
--------- --------- ---------
Balance, June 30, 2002 720,193 $ 1.03
========= =========
Grants 20,000 0.24
Rescissions/expirations (199,877) 0.98 2004-2012
---------
Balance, June 30, 2003 540,316 $ 1.02
========= =========
Grants 146,000 1.13
Rescissions/expirations (361,434) 0.92 2004-2012
--------- --------- ---------
Balance, June 30, 2004 324,882 $ 2.04
========= =========
The exercise price of the stock options granted in 2004, 2003 and 2002 was
established at the market price on the date of the grants. The weighted-average
fair value, at grant date, of the options granted during fiscal years 2004, 2003
and 2002 was $2.04, $1.02 and $1.03,
F-25
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE H - STOCK OPTION PLAN - CONTINUED
respectively. Of the 324,882 options outstanding at June 30, 2004, 280,882 are
currently exercisable, and 44,000 become exercisable in 2005. The Company has
reserved common stock for issuance upon conversion of these options.
The Company accounts for employee stock options under APB Opinion No. 25 and
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB No. 25" as permitted under accounting
principles generally accepted in the United States of America. No compensation
cost has been recognized in the accompanying financial statements related to
these options.
Had compensation costs for these options been determined consistent with SFAS
No. 123, which is an accounting alternative that is permitted but not required,
the Company's net loss per share diluted for the years ended June 30, 2004, 2003
and 2002, would have been $(2,940,579), $(5,613,481), $(4,496,873), and $(2.70),
$(0.83) and $(0.68), respectively.
The pro forma disclosure is not likely to be indicative of pro forma results
that may be expected in future years. This primarily relates to the fact that
options vest over several years and pro forma compensation cost is recognized as
the options vest. Furthermore, the compensation cost is dependent on the number
of options granted which may vary in future periods.
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model using the following assumptions:
Year ended
-----------------------------
June 30,
-----------------------------
Assumption 2004 2003 2002
- ------------------------ ------- ------- --------
Risk-free interest rates 2.66% 3.02% 3.89%
Dividend yield - - -
Expected volatility 85.00% 81.14% 76.71%
Expected life 4 years 4 years 4 years
F-26
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE H - STOCK OPTION PLAN - CONTINUED
Options outstanding and exercisable at June 30, 2004, were as follows:
Weighted- Weighted-
Range of Number average Number average
exercise outstanding at Remaining exercise exercisable at exercise
prices June 30, 2004 life Price June 30, 2004 price
- ----------- -------------- ------------ --------- --------------- ---------
$6.21 45,267 1.5-7 years $6.21 45,267 $6.21
2.31 56,667 9 years 2.31 56,667 2.31
2.25 70,281 9 years 2.25 70,281 2.25
1.13 146,000 10 years 1.13 102,000 1.13
0.72 6,667 10 years 0.72 6,667 0.72
- ---------- ------- ------------ ----- ------- -----
$.72-$6.21 324,882 1.5-10 years $2.04 280,882 $2.36
========== ======= ============ ===== ======= =====
NOTE I - INCOME TAXES
The components of the Company's income tax provision (benefit) from continuing
operations consisted of:
June 30,
-----------------------------------------
2004 2003 2002
--------- ----------- ------------
Current
Federal $ (52,892) $ (252,489) $ (238,602)
State - (168,084) (33,685)
Foreign - - 314,755
--------- ----------- -----------
Total current (52,892) (420,573) 42,468
Deferred
Federal (63,260) 2,197,152 (1,808,214)
State - 4,271 (255,277)
Foreign 6,292 117,319 169,506
--------- ----------- -----------
Total deferred (56,968) 2,318,742 (1,893,985)
--------- ----------- -----------
Total income tax provision
(benefit) $(109,860) $ 1,898,169 $(1,851,517)
========= =========== ===========
F-27
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE I - INCOME TAXES - CONTINUED
A reconciliation of the statutory U.S. Federal income tax rate to the effective
tax rate is as follows:
June 30,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Tax benefit at statutory rate of 34% $(1,075,246) $(1,419,763) $(2,195,434)
State income taxes, net of Federal income
tax provision $ (113,272) (200,425) (309,931)
Foreign tax rate difference 278,792 937,755 567,431
Increase (decrease) in deferred tax asset
valuation allowance 790,979 2,166,897 -
Utilization of loss carryforwards - - -
Goodwill amortization and other 8,887 413,705 86,417
----------- ----------- -----------
Total income tax provision
(benefit) $ (109,860) $ 1,898,169 $(1,851,517)
=========== =========== ===========
The Company's subsidiary in Indonesia has generated tax losses in the current
period. As a result, the Company does not have any current foreign taxes payable
as of June 30, 2004.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
2004 2003
------------ ------------
Deferred income tax asset
Accruals not deductible until paid $ 95,566 $ 100,313
Net operating loss carryforwards
U.S 2,664,328 1,717,559
PT Buana - 37,928
Inventory 158,085 197,798
Allowance for doubtful accounts 124,102 129,447
Valuation allowance (3,042,081) (2,183,045)
----------- -----------
Total deferred tax assets $ 0 $ 0
=========== ===========
Deferred income tax liabilities
Difference between book and tax basis of property, plant and equipment $ (252,751) $ (314,725)
Valuation Allowance - (435,293)
----------- -----------
Other noncurrent liabilities - PT Buana (473,221) (330,311)
----------- -----------
Total deferred tax liabilities $ (725,972) $(1,080,329)
=========== ===========
F-28
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE I - INCOME TAXES - CONTINUED
The Company has approximately $5.121 million net operating loss carryforwards
available at June 30, 2004. In accordance with Federal tax regulations, usage of
the net operating loss carryforwards is subject to limitations in future years
as a direct result of the stock redemption and exchange transaction. The Company
will only be able to utilize $2.2 million over the next 20 years, at which time
all of the NOL's listed above will have expired.
The Company establishes valuation allowances in accordance with the provisions
of SFAS No. 109. The Company continually reviews the adequacy of the valuation
allowance and is recognizing these benefits only as reassessment indicates that
it is more likely than not that the benefits will be realized.
NOTE J - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest on debt outstanding for the years ended June 30, 2004,
2003 and 2002, was $43,122, $148,066 and $275,580, respectively.
The following represents significant related-party operating transactions during
the years ended June 30, 2004, 2003 and 2002, which are included in the
consolidated statements of cash flows as amounts due to affiliate under the cash
flows from operating activities:
Year ended
--------------------------------------------
June 30,
--------------------------------------------
2004 2003 2002
------------ ------------ -------------
Operating cash transactions
Purchases from affiliate $ 0 $ 3,384,810 $ 13,519,454
Sales to affiliate (1,086,606) (4,808,544) (7,366,124)
Cash payments (0) (2,202,552) (13,258,230)
Cash receipts 516,613 4,710,372 12,203,458
----------- ----------- ------------
Amounts due to (from)
affiliate $ (569,993) $ 1,084,086 $ 5,098,558
=========== =========== ============
F-29
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE K - VALUATION AND QUALIFYING ACCOUNTS
The following tables summarize the activity of the allowance for doubtful
accounts and the reserve for excess and obsolete inventory during 2004, 2003 and
2002:
Balance at Accounts Additions Balance
Allowance for beginning written (Reductions) at end
doubtful accounts of period off to account of period
- ----------------------------------------------------------- ----------- ---------- ----------- ----------
Allowance for doubtful accounts activity for the year ended
June 30, 2002 150,000 - 5,586,271 5,736,271
Allowance for doubtful accounts activity for the year ended
June 30, 2003 5,736,271 (19,894) 203,519 5,919,896
Allowance for doubtful accounts activity for the year ended
June 30, 2004 5,919,896 (5,593,045) (7,000) 319,851
Balance at Additions Balance
Reserve for excess and beginning Inventory (Reductions) at end
obsolete inventory of period write-offs to account of period
- ---------------------------------------------------------- ---------- ---------- ------------ ---------
Reserve for excess and obsolete inventory activity for the
year ended June 30, 2002 417,763 - 85,309 503,072
Reserve for excess and obsolete inventory activity for the
year ended June 30, 2003 503,072 (142,488) 4,041 364,625
Reserve for excess and obsolete inventory activity for the
year ended June 30, 2004 364,625 (39,180) (34,200) 291,245
NOTE L - SEGMENT REPORTING
The Company had 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
represented the operations of PT Buana, manufactures latex gloves and sells them
primarily to the Company and WRP Asia. All operations of the Manufacturing
segment was located in Indonesia. The Distribution segment involves the
procurement and sale of gloves purchased from the Manufacturing segment and
other glove vendors and then sold to national and regional healthcare, food
service, retail and other distributors. The Distribution segment's significant
customers include those discussed in Note G. The operations of the Distribution
segment are located entirely within the U.S.
F-30
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE L - SEGMENT REPORTING - CONTINUED
Accounting policies for measuring segment assets and earnings are substantially
consistent with those described in Note A. The Company evaluates segment
performance based on income from operations before provision for (benefit from)
income taxes and minority interest ("Pretax (loss) income"). Management believes
transactions between operating segments are made at prevailing market rates.
The following tables provide financial data for the years ended June 30, 2004,
2003 and 2002, for these segments:
June 30, 2004 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- ------------- ------------ ------------ ------------
Revenues from external customers $ 11,511,161 $ 25,049,269 $ - $ 36,560,430
Revenues from other operating segments 3,867,695 - (3,867,695) -
Pretax loss (802,662) (2,399,827) - (3,202,489)
Depreciation and amortization expense - 350,069 - 350,069
Interest income 28,852 377,173 (358,896) 47,129
Interest expense 450,896 70,871 (358,896) 162,871
Total assets - 9,983,118 - 9,983,118
Capital expenditures 334,154 15,914 - 350,068
Long-lived assets - 676,033 - 676,033
June 30, 2003 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- ------------- ------------ ------------ ------------
Revenues from external customers $ 10,185,290 $ 26,803,277 $ - $ 36,988,567
Revenues from other operating segments 4,586,311 - (4,586,311) -
Pretax loss (715,726) (3,195,788) - (3,911,514)
Depreciation and amortization expense 1,474,414 437,341 - 1,911,755
Interest income 11,969 452,453 (396,053) 68,369
Interest expense 499,718 60,064 (396,053) 163,729
Total assets 11,283,099 15,116,776 - 26,399,875
Capital expenditures 296,360 (13,415) - 282,945
Long-lived assets 8,629,685 1,010,188 - 9,639,873
June 30, 2002 Manufacturing Distribution Eliminations Consolidated
- -------------------------------------- ------------- ------------ ------------ ------------
Revenues from external customers $ 8,334,491 $ 39,022,585 $ - $ 47,357,076
Revenues from other operating segments 5,469,376 (5,469,376) -
Pretax loss (187,474) (6,158,544) - (6,346,018)
Depreciation and amortization expense 1,547,936 437,600 - 1,985,536
Interest income 797 923,735 (867,334) 57,198
Interest expense 999,428 252,515 (867,334) 384,609
Total assets 12,010,021 20,937,474 - 32,947,495
Capital expenditures 378,446 13,872 - 392,318
Long-lived assets 9,527,999 2,364,952 - 11,892,951
F-31
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE M - QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
3/31/04 6/30/04
-------- --------
(In thousands except
for per share data)
Net revenues $ 9,341 $ 7,905
Income from operations (1,066) (552)
Net loss (981) (399)
Net income per share
Basic $ (0.44) $ (0.18)
Diluted (0.44) (0.18)
3/31/03 6/30/03 9/30/03 12/31/03
-------- --------- -------- --------
(In thousands except for per share data)
Net revenues $ 7,062 $ 10,593 $ 9,786 $ 9,528
Income from operations (1,440) (1,266) (560) (929)
Net loss (811) (4,681) (616) (854)
Net income per share
Basic $ (0.12) $ (0.71) $ (0.09) $ (0.13)
Diluted (0.12) (0.71) (0.09) (0.13)
3/31/02 6/30/02 9/30/02 12/31/02
--------- --------- --------- --------
(In thousands except for per share data)
Net revenues $ 10,153 $ 12,861 $ 10,542 $ 8,792
Income from operations (1,010) (5,309) (75) (421)
Net income (loss) (753) (3,388) 125 (193)
Net income per share
Basic $ (0.11) $ (0.52) $ 0.02 $ (0.03)
Diluted (0.11) (0.52) 0.02 (0.03)
F-32
AHPC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2004 AND 2003
NOTE M - QUARTERLY FINANCIAL SUMMARY (UNAUDITED) - CONTINUED
9/30/01 12/31/01
--------- ---------
(In thousands except for per
share data)
Net revenues $ 12,325 $ 12,018
Income from operations 263 (5)
Net loss (21) (131)
Net income per share
Basic $ (0.01) $ (0.01)
Diluted (0.01) (0.01)
NOTE N - SUBSEQUENT EVENT
As of September 9, 2004, the Company signed a commitment for a one-year credit
facility with Greenfield Commercial Corp, a privately held commercial financing
company. This asset based lending loan and security agreement includes a $3
million revolving line of credit, in which the Company may borrow up to the
lesser of (i) $3 million or (ii) the sum of 75% of eligible receivables and 35%
of eligible inventory, with a limit of $1,000,000 on the amount of borrowing
availability on the eligible inventory. The line of credit borrowings carry an
interest rate of prime plus 8.0%. It contains certain penalties for early
termination.
F-33