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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File Number: 0-17458
AHPC HOLDINGS, INC
(Exact name of registrant as specified in its charter)
MARYLAND 73-1326131
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 PARK BOULEVARD, SUITE 1260
ITASCA, IL 60143
---------------------------------------
(Address of principal executive office)
(630) 285-9191
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's Common Stock, par value $.01 per
share, and issuer's Common Stock, par value $.01 per share, outstanding as of
September 30, 2004, was 1,108,452.
AHPC HOLDINGS, INC
INDEX
PART I - FINANCIAL INFORMATION
A quarterly review of the first quarter financial statements has been
performed by an independent certified public accountant in accordance with
Statement of Auditing Standards No. 100.
Item 1.
Condensed Consolidated Balance Sheets
September 30, 2004 (unaudited) and June 30, 2004, (audited)................... pgs. 3-4
Condensed Consolidated Statements of Operations (unaudited) for the
Three Months Ended September 30, 2004 and 2003................................ pg. 5
Condensed Consolidated Statements of Cash Flow (unaudited) for the
Three months ended September 30, 2004 and 2003................................ pg. 6
Notes to Interim Consolidated Financial Statements (unaudited)................ pg. 7
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... pg. 18
Item 3.
Quantitative and Qualitative Disclosures About Market......................... pg. 21
Item 4.
Controls and Procedures....................................................... pg. 21
PART II - OTHER INFORMATION
Items 1.-5............................................................................. pg. 22
Item 6. ............................................................................... pg. 22
2
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND JUNE 30, 2004
ASSETS September 30, 2004 June 30, 2004
------------------ -------------
CURRENT ASSETS
Cash and cash equivalents $ 35,871 $ 359,012
Accounts receivable - trade, net of allowance for
doubtful accounts of $319,851 at September 30, 2004
and at June 30, 2004 1,618,639 1,823,149
Inventories, net 6,644,664 6,694,430
Prepaid expenses 535,444 425,301
Other receivables 5,694 5,193
------------ ------------
Total current assets 8,840,312 9,307,085
PROPERTY, PLANT AND EQUIPMENT
Equipment, furniture and fixtures 2,636,910 2,621,109
Building improvements 14,310 14,310
------------ ------------
Total property, plant and equipment 2,651,220 2,635,419
Less accumulated depreciation and amortization 2,104,553 2,028,981
------------ ------------
Property, plant and equipment, net 546,667 606,438
OTHER ASSETS
Other assets 69,595 69,595
------------ ------------
Total other assets 69,595 69,595
------------ ------------
$ 9,456,574 $ 9,983,118
============ ============
3
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
SEPTEMBER 30, 2004 AND JUNE 30, 2004
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, 2004 June 30, 2004
------------------ -------------
CURRENT LIABILITIES
Accounts payable - trade $ 2,476,426 $ 2,349,617
Trade notes payable 1,527,566 1,364,806
Notes payable 72,948 485,138
Accrued expenses 1,186,049 1,220,842
------------ ------------
Total current liabilities 5,262,989 5,420,403
LONG-TERM DEBT - -
DEFERRED TAX LIABILITIES 725,972 725,972
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN SUBSIDIARY - -
SHAREHOLDERS' EQUITY
Common stock, $.03 par value; 3,333,333 shares
authorized; 1,108,452 shares issued at
September 30, 2004 and June 30, 2004 33,037 33,037
Additional paid-in capital 17,782,619 17,778,099
Accumulated deficit (8,341,867) (7,968,217)
------------ ------------
9,473,789 9,842,919
Less common stock in treasury, at cost, 129,267
shares at September 30, 2004 and June 30, 2004 6,006,176 6,006,176
------------ ------------
Total shareholders' equity 3,467,613 3,836,743
------------ ------------
$ 9,456,574 $ 9,983,118
============ ============
4
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 AND 2003
Quarter Ended
----------------------------
2004 2003
----------- -----------
Net sales $ 6,543,234 $ 9,786,226
Cost of goods sold 5,023,062 8,048,922
----------- -----------
Gross profit 1,520,172 1,737,304
Operating expenses
Selling, general and administrative 1,873,905 2,297,740
----------- -----------
Loss from operations (353,733) (560,436)
Other Income and Expense
Interest expense 19,916 44,020
Other income - 29,479
----------- -----------
Loss from operations before provision
for (benefit from) income taxes
and minority interest (373,649) (574,977)
Provision for income taxes - 50,748
----------- -----------
Loss from operations before
minority interest (373,649) (625,725)
Minority interest in (loss) of subsidiary - (9,526)
----------- -----------
NET LOSS $ (373,649) $ (616,199)
=========== ===========
Basic net (loss) income per common share $ (0.39) $ (0.09)
Diluted net (loss) income per common share $ (0.35) $ (0.09)
5
AHPC HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 AND 2003
Quarter Ended
-------------------------
2004 2003
---------- ----------
Cash flows from operating activities
Net loss $(373,649) $(616,199)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation 75,571 447,214
Deferred income taxes - 48,886
Changes in operating assets and liabilities
Accounts receivable - trade, net 204,510 271,553
Inventories, net 49,766 133,723
Prepaid expenses (110,143) 2,023
Other assets (500) 434,323
Accounts payable - trade 126,809 57,959
Accrued expenses (34,793) 158,101
Amounts due to and from affiliates - (380,898)
--------- ---------
Net cash (used in) provided by operating activities (62,429) 556,685
Cash flows from investing activities
Capital expenditures (15,801) (189,279)
Minority interest in subsidiary - (93,526)
--------- ---------
Net cash used in investing activities (15,801) (282,805)
Cash flows from financing activities
Borrowings on trade notes payable 162,760 (173,430)
Payments on notes payable (412,191) 10,522
Payments for treasury stock repurchases 4,520 -
--------- ---------
Net cash used in financing activities (244,911) (162,908)
--------- ---------
Net (decrease) increase in cash and cash equivalents (323,141) 110,972
Cash and cash equivalents, beginning of period 359,012 420,949
--------- ---------
Cash and cash equivalents, end of period $ 35,871 $ 531,921
========= =========
6
AHPC HOLDINGS, INC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1. DESCRIPTION OF BUSINESS:
We are a leading marketer of foodservice and medical examination gloves
in the United States through our wholly owned subsidiary, American Health
Products Corporation ("AHPC"). In 2002, we broadened our product line to include
other disposable items to be used primarily in the foodservice industry.
2. BASIS OF PRESENTATION:
The accompanying unaudited condensed, consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America, for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments necessary for a fair presentation,
consisting only of normal recurring adjustments, have been included. For further
information, refer to the consolidated financial statements contained in the
Annual Report on Form 10-K for the year ended June 30, 2004, filed October 13,
2004. The results of operations for the three-month period ended September 30,
2004, may not be indicative of the results that may be expected for the fiscal
year ended June 30, 2005.
We have made reclasses to the prior year balances to show comparatives.
3. PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include our
accounts and those of AHPC. On April 30, 2004, we conveyed our formerly owned
subsidiary, PT Buana (refer to Note 21). All significant intercompany
transactions have been eliminated in consolidation.
4. MAJORITY SHAREHOLDER:
WRP Asia Pacific Sdn. Bhd., a Malaysian corporation ("WRP Asia"), owned
all of our outstanding Series A Common Stock and was our majority shareholder.
On April 30, 2004, we redeemed WRP Asia's shareholdings in the Company
through the completion of our stock redemption and exchange agreement with WRP
Asia (see Note 23 below). Through transaction we redeemed 417,513 shares of
Class A Common Stock and the 833,333 shares of Class B Common Stock, which
comprised all of WRP Asia's holdings. These share amounts do reflect the 1 for 3
reverse stock split which occurred on January 20, 2004. Collectively, these
shares represent approximately 53.2% of our outstanding Capital Stock. As
consideration for the redemption we conveyed to WRP Asia, our 70% ownership
interest in our subsidiary PT Buana and excused of all indebtedness owing to us
from WRP Asia and PT Buana, with the exception of certain mutually agreed
obligations related to recent purchase of
7
product. We also entered into a five (5) year supply agreement whereby we agreed
to purchase certain minimum quantities of our latex glove needs from WRP Asia.
On the closing of the transaction, the three of our seven directors who were
employees of WRP Asia resigned their positions as officers and directors of us.
5. COMMON STOCK:
As of September 30, 2004, we had issued 1,108,452 shares of Common
Stock.
During the three months ended, September 30, 2004, we did not sell any
shares of our Common Stock.
On January 20, 2004, our Board of Directors approved a 1 share for 3
share reverse stock split. As a result of the reverse split, we have 1,108,452
shares of common stock outstanding.
6. FOREIGN CURRENCY TRANSACTIONS:
Gains and losses from foreign currency exchange transactions are
included in net loss in the period in which they occur. During the quarters
ended September 30, 2004 and 2003, the foreign exchange (loss)/gain included in
the determination of net loss was $0 and $(7,733), respectively. The functional
currency of PT Buana is the U.S. dollar, which was disposed of on April 30,
2004.
7. STOCK INCENTIVE PLANS:
We account for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and have adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," related to options and warrants
issued to employees and directors. Options prices for options granted under this
plan were not less than fair market value of our shares of common stock on the
date of grant.
The following table illustrates the effect on net earnings and earnings
per share if we had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," to stock-based compensation.
During the three months ended September 30, 2004, an employee exercised
$4,520 of stock options.
8
Three Months Ended
---------------------------
2004 2003
----------- -----------
Net earnings, as reported $ (373,649) $ (616,199)
Deduct: total stock-based employee compensation expense
determined under fair value based method for awards
granted, modified, or settled, net of related tax effects 4,999 11,093
---------- ----------
Pro forma net earnings $ (378,648) $ (627,292)
========== ==========
Three Months Ended
---------------------------
2004 2003
----------- -----------
Earnings per share
Basic - as reported $ (0.39) $ (0.09)
Basic - pro forma (0.39) (0.09)
Dilutive - as reported $ (0.35) $ (0.09)
Dilutive - pro forma (0.35) (0.09)
8. RELATED-PARTY TRANSACTIONS:
At September 30, 2004 and 2003, amounts due from/to affiliates consist
of the following:
2004 2003
------ ------------
Due from Affiliate-
Current - WRP Asia $ - $ 9,287,712
Due to Affiliate-
Current - WRP Asia $ - $ (3,890,537)
------------
Amounts due from
Affiliate - Net * $ - $ 5,397,175
====== ============
Purchases from Affiliate - $ (-) $ (-)
====== ============
Sales to Affiliate - $ - $ 117,511
====== ============
*Right of set-off granted in October 2002.
The outstanding accounts receivable from WRP Asia results primarily
from sales of product to WRP Asia (powder-free exam gloves produced by PT
Buana), cash advances, charges for obtaining FDA approval of the gloves imported
from WRP Asia and other items. Management believes transactions between
operating segments were made at prevailing rates. AHPC now purchases its
powdered latex gloves from its formerly owned 70% subsidiary, PT Buana, as well
as from third-party suppliers other than WRP Asia, these purchases are no longer
a related party transaction.
9
9. NET LOSS PER SHARE:
We follow the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share (EPS)" ("SFAS 128"), which requires dual presentation of
basic and diluted earnings per share for all periods presented. Basic EPS
amounts are based on the weighted-average number of shares of common stock
outstanding during each period while diluted EPS amounts are based on the
weighted-average number of shares of common stock outstanding during the period
and the effect of dilutive stock options and warrants. The weighted-average
number of common shares and common share equivalents outstanding for the three
months ended September 30, 2004 and 2003 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------
Basic weighted-average number of Common shares
outstanding 960,066 6,632,734
Dilutive effect of common share Equivalents 107,505 11,111
--------- ---------
Dilutive weighted-average number of common
shares outstanding 1,067,571 6,643,845
At September 30, 2004, there were 1,108,452 shares of our Common Stock
outstanding.
As approved by the Board of Directors, all outstanding stock options at
February 29, 2000, to current employees, officers and directors were repriced
effective February 29, 2000, to $2.07, the closing price on that date. All of
the stock options, which were repriced, totaling 483,600 options, originally
contained exercise prices that were significantly higher than the market price.
As a result of the 1 for 3 reverse stock split effective on February 22, 2004,
these re-priced options now total 161,200 and carry a price of $6.21. We are
subject to variable accounting; however, the share price has not exceeded $6.21.
10. ACCOUNTING FOR INCOME TAXES:
We record income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). SFAS 109 utilizes the liability
method and deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on the changes in the deferred tax asset or
tax liability from period to period.
Our U.S. operations had generated net operating loss carry-forwards
("NOL's") in prior years of which approximately $5.1 million is remaining at
September 30, 2004. These NOL's are fully reserved with a valuation allowance
and are included as a component of deferred tax assets. 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. We will only be able to utilize only $2.2
million over the next 20 years, at which time all of the NOL's listed above will
have expired.
10
For the three months ended September 30, 2004 and 2003, we have
recorded a provision for (benefit) from income taxes of $0 and $50,748,
respectively.
11. CONTINGENCIES:
Over the last several years, numerous product liability lawsuits have
been filed against suppliers and manufacturers of latex gloves alleging, among
other things, adverse allergic reactions. We are one of numerous defendants that
have been named in such lawsuits. During the three months ended September 30,
2004, there were no additional product liability lawsuits filed, and we were
dismissed from four lawsuits. At September 30, 2004, we were involved in a total
of 28 lawsuits, either as a named defendant, third party or an indemnifier. We
have agreed to defend and indemnify certain vendors in regard to the sale and
distribution of our products only. None of these lawsuits name us as the sole
defendant in these claims.
We possess product liability insurance coverage which covers the
defense costs and certain damage awards associated with the product liability
claims against ourselves, AHPC and PT Buana, in addition to the indemnity of
AHPC's customers to the limits of its policy, subject to deductions on each
claim, to be paid by AHPC. We believe that all legal claims are adequately
provided for and if not provided for, are without merit or involve such amounts
that would not materially or adversely affect us. However, there is no assurance
that AHPC's insurance will be sufficient to meet all damages for which we may be
held liable. For example, in a jury trial, even where actual damages are
somewhat limited, or where causation of liability is questionable, the jury may
choose to award a substantial verdict to the plaintiff. Likewise, there is no
assurance that the outcome of these suits will not adversely affect our
operations or financial condition. We will vigorously contest any latex claim
initiated against us, but will enter into a settlement agreement, where, after
careful consideration, management determines that our best interests will be
served by settling the matter. In addition, there can be no assurances that
product liability insurance for these claims will continue to be available to us
or, if available, that it will be available in sufficient amounts and at
affordable terms.
12. COMPREHENSIVE INCOME:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), requires companies to report all changes in
equity during a period, except those resulting from investment by owners and
distributions to owners, in a financial statement for the period in which they
are recognized. Comprehensive income (loss) for the three months ended September
30, 2004 and 2003 was equal to net profit (loss) and there were no accumulated
other comprehensive income items during those periods.
13. SEGMENT REPORTING:
We previously had two business segments: manufacturing and
distribution. These segments were 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,
manufactured latex gloves and sells them primarily to AHPC and other customers
through WRP Asia's distribution network. All operations of the manufacturing
segment were located in Indonesia. The distribution segment involves the
procurement and sale of gloves purchased from the manufacturing segment and
other glove manufacturers and then sold to
11
national and regional healthcare, foodservice, retail and other distributors.
The operations of the distribution segment are located entirely within the U.S.
We evaluated segment performance based on income (loss) before
provision for (benefit from) income taxes and minority interest ("Pre-tax income
(loss)"). Transactions between operating segments are made at prevailing market
rates.
As of the date of the Stock Redemption and Exchange Agreement, April
30, 2004, we gave up our interest in PT Buana. As a result, we now only have one
reporting segment, distribution.
The following tables provide financial data for the three months ended
September 30, 2004 and 2003 for these segments. The three months ended September
30, 2004 only has one segment.
THREE MONTHS ENDED
SEPTEMBER 30, 2004 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 0 $ 6,543,234 $ - $ 6,543,234
Revenues from other operating segments 0 - 0 -
Pre-tax loss 0 (373,649) - (373,649)
Total Assets 0 9,456,573 - 9,456,573
THREE MONTHS ENDED
SEPTEMBER 30, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from external customers $ 3,221,576 $ 6,564,650 $ - $ 9,786,226
Revenues from other operating segments 1,580,887 - (1,580,887) -
Pre-tax loss 18,994 (593,971) - (574,977)
Total Assets 11,810,012 13,982,177 - 25,792,189
14. CRITICAL ACCOUNTING POLICIES
While all of our accounting policies are important in assuring that WRP
Corporation adheres to current accounting standards, certain policies are
particularly important to their impact on our financial statements. These are
described in detail below.
Reserves for Accounts Receivable and Inventory. We review on an ongoing
basis the realizability of our trade and inter company receivables and the need
for establishing reserves. As of September 30, 2004 we have established reserves
of $319,851 in relation to trade receivables.
We review on an ongoing basis the realizability of our inventory value
and the need for establishing reserves. We established the inventory reserves
for valuation, shrinkage, excess and obsolete inventory. As of September 30,
2004, we have established reserves of $291,245.
Goodwill. The excess of purchase price over the fair market value of
the net assets purchased is recorded as goodwill. Prior to SFAS 142, the company
amortized the goodwill using the straight-line method over a period of 25 years.
Beginning with fiscal 2003, the company implemented SFAS 142 and no longer
amortizes the balance of goodwill.
12
Sales Incentives. Certain customers are granted discounts, rebates or
other allowances which are intended to assist in the promotion of our products.
We record these discounts and rebates as our customers earn them or when they
are paid, depending on the nature of the item. All discounts, rebates and
allowances are shown as a deduction from gross sales to arrive at Net Sales in
the consolidated statements of income.
Deferred Tax Asset. Deferred taxes result from the effect of
transactions that are recognized in different periods for financial and tax
reporting purposes. A valuation allowance is established when it is more likely
than not that any portion of the deferred tax assets will not be realized. The
valuation allowance is adjusted if the realization of deferred tax assets
becomes more likely than not. Should our income projections result in the
conclusion that realization of deferred tax assets is more likely than not,
further adjustments to the valuation are made.
15. NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS:
In 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 this adoption of this standard will have no impact on our financial
statements.
16. INVENTORIES:
Since a majority of our product is imported from Southeast Asia, it is
our practice to maintain a certain level of safety-stock inventory. Inventories
are accounted for on a first-in, first-out ("FIFO") basis and are valued at the
lower of cost or market.
17. KEY CUSTOMERS:
Our customers include leading foodservice distributors and healthcare
product suppliers. During the three months ended September 30, 2004, AHPC's
national customers accounted for 90.8% of net sales. The loss of these customers
would have a materially adverse effect on us. Our customers tend to limit the
number of qualified vendors they purchase from to gain efficiencies across their
product line. We, therefore, expend substantial efforts to maintain and grow our
relationships with our existing major customers. However, our products are
ultimately distributed by our national customer, through their combined networks
of over 40 operating companies, to thousands of foodservice organizations and
medical facilities throughout the
13
United States. The ultimate end-users of our products are foodservice
organizations and medical facilities, healthcare professionals and individuals
who use our gloves and other associated disposable products.
18. CREDIT FACILITY:
As of September 9, 2004, we signed a commitment for a one-year credit
facility with Greenfield Commercial Corp, LLC. ("GCC"), a privately held
commercial financing company, which replaced the GE Capital services agreement
which was operating under a forbearance agreement during 2003. 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.
We can pay down and reborrow amounts under the loan at any time during
the term of the loan. At maturity, we must pay all of the indebtedness
outstanding under the loan in full in one lump sum. The loan has a term maturing
on September 9, 2005. At anytime prior to maturity date, GCC has the
unrestricted right to demand payment of all outstanding indebtedness. In
addition, the loan will accelerate and become due upon a violation of any of the
default provisions contained in the loan agreement and related documents.
The outstanding indebtedness under the loan will bear interest at a
floating rate equal to the prime rate plus 8%. In addition to the stated
interest rate, we will be charged a fee on the unused borrowing availability
under the loan, a commitment fee and other fees that will have the aggregate
effect of raising the effective cost of borrowing under the loan.
The loan is secured by a security interest in substantially all our
tangible and intangible assets. Alan Zeffer, our Chief Executive Officer, has
guaranteed the repayment of the Revolving Loan in full if the Revolving Loan is
not repaid as a result of malfeasance by the Chief Executive Officer, Mr. Alan
Zeffer, in the performance of his duties.
19. NASDAQ LISTING:
On February 14, 2002, NASDAQ notified us that the bid price of our
common stock had closed at less than $1.00 per share over the previous 30
consecutive trading days, and, as a result, did not comply with Marketplace Rule
4310(c)(4) (the "Rule"). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), we were provided 180 calendar days, or until August 13, 2002, to
regain compliance with the Rule.
On August 14, 2002, NASDAQ notified us that we had not regained
compliance in accordance with Marketplace Rule 4310(c)(8)(D). However, NASDAQ
noted that we meet the initial listing requirements for the NASDAQ SmallCap
Market under Marketplace Rule 4310(c)(2)(A). Specifically, we 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.
14
On January 30, 2003, NASDAQ extended its minimum bid price compliance
periods. Specifically, NASDAQ announced it would maintain the initial 180-day,
calendar-day bid price grace period for all SmallCap issuers, but extend the bid
price grace period for SmallCap issuers demonstrating compliance with the core
SmallCap initial listing criteria from 180 to up to 540 days (approximately 12
months). Compliance with this standard is to be verified every 180 days.
On April 9, 2003, we received notice from NASDAQ that, over the last 30
days, our Common Stock had not maintained a minimum market value of publicly
held shares ("MVPHS") of $1,000,000, as required for continued inclusion by
Marketplace Rule 4310 (c)(7) (the "Rule"). NASDAQ further advised that, in
accordance with Marketplace Rule 4310 (c)(8)(B), we would be provided 90 days,
or until July 8, 2003, to regain compliance. If, at any time before July 8,
2003, the MVPHS of our Common Stock is $1,000,000 or more for a minimum of ten
consecutive trading days, NASDAQ would provide written notification that we were
in compliance with the rule. If compliance with this rule was not demonstrated
by July 8, 2003, NASDAQ advised it would provide written notification that our
securities would be delisted, subject to the opportunity to appeal this
determination to a listing Qualifications Panel.
Subsequently, we achieved compliance with the MVPHS requirement but
were still not in compliance with the $1.00 minimum bid price requirement. On
July 24, 2003 a hearing was held before the Nasdaq Listing Qualifications Panel.
The result of this hearing was that we received an additional period of time,
until September 30, 2003, to comply with the minimum bid price requirement. On
October 23, 2003 we were advised by Nasdaq that since we had demonstrated a plan
to achieve the $1.00 minimum bid price and provided us with an extension based
upon the following terms:
(1) On or before November 5, 2003 we must file a proxy statement
with the SEC and Nasdaq evidencing our intent to seek
shareholder approval for the implementation of a reverse stock
split sufficient to satisfy the $1.00 bid price requirement.
(2) On or before January 5, 2004 we must evidence a closing bid
price of at least $1.00 per share and, immediately thereafter,
a closing bid price of at least $1.00 per share for a minimum
of ten consecutive trading days.
On November 5, 2003 we filed a Notice of Special Meeting of
Shareholders with the SEC and Nasdaq. This meeting was called to have the
following items approved:
To amend our Articles of Incorporation, which will affect the following
items:
(a) change our name to AHPC Holdings, Inc.;
(b) eliminate our Class A Common Stock, par value $.01 per share,
increase the number of authorized shares of Common Stock, par
value $.01 per share, 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
15
necessary, to result in an adjustment of the closing bid price
of our Common Stock, as adjusted for the reverse stock split,
to exceed $1.00 per share; and
(d) change the minimum number of persons who may comprise our
board of directors from five to three.
On January 20, 2004 we held the Special Meeting of Shareholders and
received approval on all of the above items, 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.
20. MAXXIM BANKRUPTCY:
On February 11, 2003, MAXXIM filed for protection under Chapter 11 of
the Federal Bankruptcy Act in the District of Delaware. It is our understanding
that they plan to continue to do business and to reorganize their operations as
a debtor in possession. Under our Transition Services Agreement dates as of
March 1, 2002, with MAXXIM, MAXXIM agreed to pay us $375,000 in the aggregate
upon achievement of certain milestones, all of which were achieved. To date,
MAXXIM has only paid $125,000 of such obligations; however, we have included as
income the accrued, unpaid portion of these obligations. The total amount due
from MAXXIM is $278,941; of this amount, $250,000 is for payments due under the
transition agreement. This amount has been fully reserved due to MAXXIM's
bankruptcy filing on February 11, 2003.
21. WRP ASIA FINANCIAL RESTRUCTURING
On July 8, 2003 WRP Asia announced the completion of its financial
restructuring, which involved restructuring and reducing WRP Asia's debt
position and providing additional new funding. Due to the terms of the
restructuring, WRP Asia was prohibited from repaying certain debt, including our
intercompany debt in the short term. At that time we began exploring other
opportunities to gain compliance with our lender's requirement of a paydown by
WRP Asia of its intercompany debt. On October 6, 2003 we announced the signing
of a non-binding letter of intent with WRP Asia to enter into a stock redemption
and exchange agreement.
On November 3, 2003 we announced the signing of a definitive stock
redemption and exchange agreement (the "Agreement") with WRP Asia. The Agreement
called for us to redeem 1,252,538 shares of Class A Common Stock and the
2,500,000 shares of Class B Common Stock (pre-split totals), which comprise all
of WRP Asia's holdings. Collectively, these shares represent approximately 53.2%
of our outstanding capital stock. The consideration for the redemption was: (i)
the conveyance to WRP Asia of our 70% ownership interest in its subsidiary PT
Buana Multicorpora ("PTB") Indonesia, an Indonesian based manufacturer of
gloves; and (ii) excuse of all indebtedness owing to us or our subsidiaries from
WRP Asia and from PTB with the exception of our obligation to be responsible for
trade payables owing to PTB for recent product purchases. We also announced the
execution of a five-year supply agreement from
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WRP Asia and PTB to us (through our subsidiary American Health Products
Corporation), calling for the purchase of a portion of our latex glove
requirements, which equates to the appropriate annualized quantities that we are
currently purchasing from PTB and WRP Asia. The pricing of such products has a
variable factor keyed to the cost of raw latex. The Board of Directors of both
WRP Asia and us have approved the transaction. We have received a fairness
opinion from an independent professional valuation firm that the transaction is
fair to our stockholders.
As of April 30, 2004, we redeemed its shareholdings in the Company
through the completion of the stock redemption and exchange with WRP Asia.
Through transaction we redeemed 1,252,538 shares of Class A Common Stock and the
2,500,000 shares of Class B Common Stock (pre-split totals), which comprise all
of WRP Asia's holdings. These share amounts do not reflect the 1 for 3 reverse
stock split which occurred on January 22, 2004. Collectively, these shares
represent approximately 53.2% of our outstanding Capital Stock. As consideration
for the redemption we conveyed to WRP Asia, our 70% ownership interest in our
subsidiary PT Buana and excused of all indebtedness owing to us. We also entered
into a five (5) year supply agreement whereby we agreed to purchase certain
minimum quantities of its latex glove needs from WRP Asia. On the closing of the
transaction, the three of our seven directors who were employees of WRP Asia
resigned their positions as officers and directors.
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. We had agreed to
forgive all indebtedness owing to us or our subsidiaries from WRP Asia and from
PTB of $1,401,322. The loss on this transaction is $174,361, recorded in
Paid-in-Capital.
We also announced that we would change its name from WRP Corporation to
AHPC Holding, Inc, effective May 14, 2004, at that time our NASDAQ trading
symbol changed from WRPC to GLOV.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements in this Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, including statements
regarding new products and markets, gross margins, selling, general and
administrative expenses, liquidity and cash need and our plans and strategies,
are all based on current expectations, and we assume no obligation to update
this information. Numerous factors could cause actual results to differ from
those described in the forward-looking statements. We caution investors that our
business is subject to significant risks and uncertainties.
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.
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, 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 with WRP Asia.
THREE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2003:
Consolidated sales for three months ended September 30, 2004 were
$6,543,234 which represents a decrease in sales compared to prior three months
ended September 30, 2003 of $3,242,992 or 33.1%. This decrease in sales is due
to the April 30, 2004 Stock Redemption and Exchange Transaction in which we
conveyed our formerly owned 70% ownership interest in PT Buana (refer to Note
21) and the loss of PT Buana sales. Our net sales are derived from the sales of
finished product net of allowable rebates, discounts and returns.
Consolidated gross profit decreased $217,132 or 12.5% for September 30,
2004 compared to prior year three months ending. 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. The decrease in
gross profit related to our formerly owned 70% ownership interest in PT Buana
(refer to Note 21) for the three months ended September 30, 2003. Our actual
gross profit increased by $371,685 or 32.4% without the effect of our formerly
owned subsidiary, PT Buana, prior year gross profit. The actual decrease in our
consolidated gross profit is primarily due to better acquisition costs and
decrease of inventory
18
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.
Operating loss has decreased $206,703 or 36.9% for three months ended
September 30, 2004 from the prior year same quarter. Without the effect of our
formerly owned subsidiary PT Buana (refer to Note 21), our actual operating loss
decreased by $348,210 or 49.6%. 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 three months end
September 30, 2004, our selling, general, administrative and other expenses
decreased by $423,835 or 18.4%. Without the effect of our formerly owned
subsidiary PT Buana (refer to Note 21), our actual selling, general,
administrative and other expenses increased by $23,475 or 1.3%. As a percentage
of net sales, SG&A expenses increased from 23.4% (19.8% without the effect of
our formerly owned subsidiary PT Buana (refer to Note 21)) for the three months
ended September 30, 2003, to 28.6% for the three months ended September 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 $201,328 or 35.0% for
three months ended September 30, 2004 compared to the prior year same quarter.
Without the effect of our formerly owned subsidiary PT Buana (refer to Note 21),
our actual loss from continuing operations decreased by $319,335 or 46.1%. This
decrease in the loss was primarily due to the better acquisition pricing and
decrease in inventory storage. Included in this is other income which consists
of rental, interest and miscellaneous income. Other income decreased $29,479
from September 30, 2004 to the prior year same quarter.
The benefit for income taxes for the three months ended September 30,
2004 was $0 compared to prior year expense of $50,748. The prior year tax
exchange was due PT Buana, which was eliminated in the current year due to the
April 30, 2004 Stock Redemption and Exchange Transaction in which we conveyed
our formerly owned 70% ownership interest in PT Buana (refer to Note 21).
As a result of the factors discussed above, we reported net loss of
$(373,649) for the three months ended September 30, 2004, which compares to a
loss of $(616,199) during the prior year same quarter. Due to the April 30, 2004
Stock Redemption and Exchange Transaction in which we conveyed our formerly
owned 70% ownership interest in PT Buana (refer to Note 23) the current loss of
$(373,649) would be compared to a loss of $(692,984) for prior year three months
ended without PT Buana. Diluted earnings per share for the three months ended
September 30, 2004 and September 30, 2003, were $(0.35) and $(0.09),
respectively. For comparative purposes, the diluted earnings per share with the
reverse stock split, on January 20, 2004, and the elimination of income and
shares related to the April 30, 2004 Stock Redemption and Exchange Transaction
in which we conveyed our formerly owned 70% ownership interest in PT Buana,
(refer to Note 21), the three months ended September 30, 2004 and September 30,
2003, were $(0.35) and $(0.72), respectively.
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LIQUIDITY AND CAPITAL RESOURCES:
THREE MONTHS ENDED SEPTEMBER 30, 2004:
Cash and cash equivalents at September 30, 2004 was $35,871, a decrease
of $323,141 from $359,012 at June 30, 2004. We experienced the decrease in cash
flows during the three months ended September 30, 2004, primarily from cash used
in operating activities through reduction of inventory levels and timing of
accrued expenses.
Our operations used cash of $62,429 during the three months ended
September 30, 2004, primarily as a result of our selling, general and
administrative expenses.
Net trade accounts receivable at September 30, 2004 was $1,618,639 from
$1,823,149 at June 30, 2004 due to timing of cash receipts. Net inventories at
September 30, 2004 were $6,644,664, a slight decrease from the level at June 30,
2004, of $6,694,430, due to maintaining inventory levels.
During the three months ended September 30, 2004, we used cash in
investing activities of $15,801. This was spent on capital improvement
expenditures during the three month period primarily on computer software and
hardware.
During the three months ended September 30, 2004, cash was used from
financing activities in the amount of $244,911. The cash was used to pay down a
note payable.
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 currently expect to have cash needs during the next year and beyond
for funding the growth of the existing glove business, launch and promotion of
our SafePrep foodservice business and for other uses. These cash needs may arise
in connection with various events such as for: (i) the expansion into new
products; (ii) the expansion into new markets; (iii) funding the promotion of
our branded products; (iv) repayment of debt obligations; (v) purchasing our
Common Stock in connection with our stock repurchase program; and (vi)
manufacturing capital improvements. We believe that our cash and cash to be
generated from future operations plus our credit facility will be sufficient to
fund our ongoing operations.
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As of September 30, 2004, we had the following contractual obligations
and commercial commitments:
PAYMENTS DUE BY PERIOD
CONTRACTUAL -----------------------------------------
OBLIGATION TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS
- ---------------- -------- ---------------- --------- ---------
Operating Leases $419,112 $374,637 $44,475 -0-
Operating leases primarily represent our leases for our corporate
office and warehouse facilities. The letters of credit are issued under our
credit facility and are commercial obligations related to product purchases.
Insurance premium financing was used to finance our product liability insurance.
Short-term borrowings represent borrowings under our credit facility primarily
to finance working capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the market value of investments. We have not entered
into interest rate caps or collars or other hedging instruments.
Exposure to changes in interest rates is limited to borrowings under
revolving credit and debt agreements, which have variable interest rates, tied
to the prime and commercial paper rates. We estimate that the fair value of each
debt instrument approximated its market value at September 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. However, no cost effective internal control
system will preclude all errors and irregularities, and management is
necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision and with the
participation of management, including our chief executive officer and chief
financial officer, within 90 days prior to the filing date of the report. Based
upon that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
Securities and Exchange Commission filings. No significant changes were made to
our internal controls or other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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PART II
ITEM 1-5.
No changes
ITEM 6 - EXHIBITS
(a) Exhibits
Exhibit Number Description of Document
- -------------- ------------------------------------------------------------
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
10.1 Creation of a Direct Financial Obligation By and Among AHPC
Holdings, Inc ("the Company") and its wholly-owned
subsidiary American Health Products Corporation ("AHPC", and
together with the Company, collectively the "Borrower") and
Greenfield Commercial Credit, LLC ("Lender"), was previously
filed as an exhibit to the Company's Current Report on Form
8-K, filed September 14, 2004 (SEC File No. 000-17458) and
is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AHPC Holdings, Inc
(Registrant)
BY: /s/ Deborah J. Bills
-----------------------------------------
Deborah J. Bills, Chief Financial Officer
Dated: November 19, 2004
23