AHPC
Holdings, Inc. and Subsidiary
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March
31, 2005
|
1. |
Description
of Business: |
AHPC
Holdings, Inc. (the “Company”) is a leading marketer of foodservice and medical
examination gloves in the United States through its 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 nine-month period ended March 31, 2005,
may not be indicative of the results that may be expected for the fiscal year
ended June 30, 2005.
We have
made certain reclasses to the prior year balances to show comparatives.
3.
Principles
of Consolidation:
The
accompanying condensed consolidated financial statements include our accounts
and those of AHPC. On April 30, 2004, we conveyed our interest in our formerly
owned subsidiary, PT Buana (refer to Note 18). All significant intercompany
transactions have been eliminated in consolidation.
4. Majority
Shareholder:
Prior to
April 30, 2004, 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 us through the completion of
our Redemption Transaction (as defined in Note 18). Through this 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
reflect the 1 for 3 reverse stock split which occurred on January 20, 2004.
Collectively, these shares represented approximately 53.2% of our outstanding
Capital Stock prior to the redemption. As consideration for the redemption we
conveyed to WRP Asia, our 70% ownership interest in our subsidiary PT WRP Buana
Multicorpora (“PT Buana”) and excused repayment of all indebtedness owing to us
from WRP Asia and PT Buana. In addition, we were excused of all indebtedness
owing from us to WRP and PT Buana with the exception of certain mutually agreed
obligations related to recent purchase of product. We also entered into a five
(5) year supply agreement whereby we agreed to purchase certain minimum
quantities of our latex glove needs from WRP Asia. On the closing of the
transaction, the three of our seven directors who were employees of WRP Asia
resigned their positions as officers and directors of us.
5.
Common
Stock:
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 had 1,108,452 shares of common
stock issued at June 30, 2004.
During
the nine months ended, March 31, 2005, we did not sell any shares of our Common
Stock. During December 2004, we issued 10,950 shares of our Common Stock, valued
at $33,945, to Alan Zeffer, as part of bonus compensation for the fiscal year
ended June 30, 2004 which were expensed in fiscal year 2004. In addition, in
March 2005 LaSalle St. Capital Markets exercised warrants, pursuant to which we
issued 5,000 shares of our Common Stock to them valued at $15,000.
As of
March 31, 2005, we had issued 1,128,402 shares of Common Stock.
6.
Series A Convertible Preferred Stock:
On
February 2, 2005, we completed a private placement of 220,000 shares of Series A
Convertible Preferred Stock (the “Shares”). The Shares were issued at a discount
price of $2.60 per share. The Shares may be converted on a one-for-one basis
into the Company’s Common Stock. We filed a registration statement with the
Securities and Exchange Commission (the “SEC”) on March 25, 2005 registering the
shares of Common Stock issuable upon conversion of the Shares.
We
recorded the discount on the Series A Convertible Preferred Stock as a
beneficial conversion feature to additional paid-in-capital and retained
earnings. The shares were issued at a discount amount of $143,000.
Since the
Shares were sold at a discount to the closing price of the Common Stock and in
order to comply with the Nasdaq Stock Market, Inc., Rule 4351 (which limits the
voting rights allocable to preferred stock), the Shares possess, in the
aggregate, that number of votes which could be cast had the purchase price for
the Shares been used to purchase shares of common stock at the same closing
price of the common stock on the business day immediately preceding the closing
date.
The
Shares are convertible into our Common Stock by the holders at anytime, or by us
at anytime provided that the closing price of the Common Stock equal or exceeds
150% of the closing price of Common Stock (i.e. $4.88 per share) for 21
consecutive trading days.
7.
Foreign
Currency Transactions:
Gains and
losses from foreign currency exchange transactions are included in net income
(loss) in the period in which they occur. During the quarters ended, March 31,
2005 and 2004, the foreign exchange (loss) gain included in the determination of
net loss was $0 and $(6,131), respectively. The functional currency of PT Buana
is the U.S. dollar.
8.
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
exercise 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.
In
December 2004, the FASB issued SFAS No.123, “Share-Based Payment” (Revised 2004)
(“SFAS 123R”). SFAS No. 123R is a revision of SFAS No. 123, “Accounting for
Stock Based Compensation” and supersedes Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services that are based on the
fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments. We have granted stock options to our
employees in connection with the provisions of services. Accordingly, SFAS 123R
requires us to disclose the pro forma effect of compensation expense for these
stock options. Under SFAS 123R, we will be required to record this compensation
expense in our results of operations. In April 2005, however, the SEC voted
to delay the implementation of SFAS 123R for certain companies. Accordingly,
SFAS 123R will be effective for us beginning the first annual reporting period
that begins after June 15, 2005. We are currently evaluating the method of
adoption and the impact of SFAS 123R on our financial position and results of
operations.
The
following table illustrates the effect on net earnings and earnings per share if
we had applied the fair value recognition provisions of SFAS No. 123,
“Accounting
for Stock-Based Compensation,” to
stock-based compensation.
| |
|
Three
Months Ended
March
31, |
|
Nine
Months Ended
March
31, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net
loss, as reported |
|
$ |
(480,295 |
) |
$ |
(981,227 |
) |
$ |
(1,272,604 |
) |
$ |
(2,451,561 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
11,095 |
|
|
14,997 |
|
|
33,279 |
|
|
Pro
forma net loss |
|
$ |
(485,294 |
) |
$ |
(992,322 |
) |
$ |
(1,287,601 |
) |
$ |
(2,484,840 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported |
|
$ |
(0.50 |
) |
$ |
(0.44 |
) |
$ |
(1.33 |
) |
$ |
(1.10 |
) |
|
Basic
- pro forma |
|
|
(0.51 |
) |
|
(0.43 |
) |
|
(1.34 |
) |
|
(1.08 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
- as reported |
|
$ |
(0.44 |
) |
$ |
(0.44 |
) |
$ |
(1.20 |
) |
$ |
(1.10 |
) |
|
Dilutive
- pro forma |
|
|
(0.45 |
) |
|
(0.43 |
) |
|
(1.21 |
) |
|
(1.08 |
) |
9. Related-Party
Transactions:
At March
31, 2005 and 2004, amounts due from/to affiliates consisted of the
following:
|
|
|
2005 |
|
2004 |
|
Due
from Affiliate - Current - WRP Asia |
|
$ |
- |
|
$ |
9,070,382 |
|
| |
|
|
|
|
|
|
|
Due
to Affiliate - Current - WRP Asia |
|
$ |
- |
|
$ |
(3,890,537 |
) |
|
|
|
|
|
|
|
|
|
Amounts
due from Affiliate - Net * |
|
$ |
- |
|
$ |
5,179,845 |
|
| |
|
|
|
|
|
|
|
|
Purchases
from Affiliate - |
|
$ |
(- |
) |
$ |
(- |
) |
| |
|
|
|
|
|
|
|
|
Sales
to Affiliate - |
|
$ |
- |
|
$ |
742,831 |
|
*Right of
set-off granted in October 2002.
At March
31, 2005, the outstanding accounts receivable from WRP Asia resulted primarily
from sales of product to WRP Asia (e.g., 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. As of March 31, 2005, AHPC
purchases its powdered latex gloves from its formerly owned 70% subsidiary, PT
Buana. These purchases are no longer a related party transaction.
10. 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 antidiluted
earnings per share for all periods presented. Basic EPS amounts are based on the
weighted-average number of shares of Common Stock outstanding during each period
while diluted EPS amounts are based on the weighted-average number of shares of
Common Stock outstanding during the period and the effect of dilutive stock
options and warrants. The weighted-average number of common shares and common
share equivalents outstanding for the three and nine months ended March 31, 2005
and 2004, respectively, are as follows:
| |
Three
Months Ended
March
31, 2005 |
|
Three
Months Ended
March
31, 2004 |
|
Basic
weighted-average number of
common
shares outstanding |
960,066 |
|
2,210,911 |
|
Antidilutive
effect of common share
equivalents |
121,175 |
|
34,070 |
|
Antidilutive
weighted-average number of
common
shares outstanding |
1,081,241 |
|
2,244,981 |
| |
Nine
Months Ended
March
31, 2005 |
|
Nine
Months Ended
March
31, 2004 |
|
Basic
weighted-average number of
common
shares outstanding |
960,066 |
|
2,210,911 |
|
Antidilutive
effect of common share
equivalents |
98,934 |
|
22,342
|
|
Antidilutive
weighted-average number of
common
shares outstanding |
1,059,000 |
|
2,233,253 |
As
approved by the Board of Directors, all outstanding stock options at February
29, 2000, previously issued to current employees, officers and directors were
repriced effective February 29, 2000, to $2.07, the closing price of our Common
Stock 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, all options now total 161,200 and have an
exercise price of $6.21. Although we are subject to variable accounting;
however, the share price has not exceeded $6.21 per share.
11. 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 March 31, 2005. 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 Redemption Transaction described in Note
18. We will only be able to utilize only $2.2 million of these NOL’s over the
next 20 years, at which time all of the NOL’s listed above will have expired.
For the
nine months ended March 31, 2005 and 2004, we have recorded a provision for
income taxes of $0 and $12,108, respectively.
12.
Contingencies:
Over the
last several years, numerous product liability lawsuits have been filed against
suppliers and manufacturers of latex gloves alleging, among other things,
adverse allergic reactions. We are one of numerous defendants that have been
named in such lawsuits. During the nine months ended March 31, 2005, there were
no additional product liability lawsuits filed against the Company, and we were
dismissed from four lawsuits. At March 31, 2005, we were involved in a total of
9 lawsuits, either as a named defendant, third party or an indemnifier. We have
agreed to defend and indemnify certain of our vendors solely in connection with
the sale and distribution of our products. 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 the
Company and AHPC. Additionally, AHPC’s customers typically procure product
liability insurance that limits our exposure to those claims for which we have
agreed to indemnify such customers, subject to deductions for such claims that
remain our resposnsibility. We believe that all legal claims are adequately
provided for or involve such amounts that would not materially or adversely
affect our financial condition. However, there is no assurance that AHPC’s or
its customers’ insurance will be sufficient to meet all damages for which we may
be held liable. 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.
13. Segment
Reporting:
As of
March 31, 2004, 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 consisted of the operations of PT Buana,
manufactured latex gloves and sold 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 national and regional healthcare,
foodservice, retail and other distributors. The operations of the distribution
segment are located entirely within the U.S.
As of the
date of the Redemption Transaction, April 30, 2004, we conveyed our interest in
PT Buana (and accordingly our manufacturing segment) to WRP Asia. As a result,
we now only have one reporting segment, distribution.
We
evaluate segment performance based on income (loss) before provision for
(benefit from) income taxes and minority interest (“Pre-tax income (loss)”).
Transactions between operating segments were made at prevailing market
rates.
The
following tables provide the financial data for the three and nine months ended
March 31, 2005 and 2004 for these segments. The financial data for the three and
nine months ended March 31, 2005 only includes results from the distribution
segment.
|
Three
Months Ended
March
31, 2005 |
|
Manufacturing |
|
Distribution |
|
Eliminations |
|
Consolidated |
|
|
Revenues
from external customers |
|
$ |
- |
|
$ |
6,413,177 |
|
$ |
- |
|
$ |
6,413,177 |
|
|
Revenues
from other operating segments |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Pre-tax
loss |
|
|
- |
|
|
(480,295 |
) |
|
- |
|
|
(480,295 |
) |
|
Total
Assets |
|
|
- |
|
|
8,240,503 |
|
|
- |
|
|
8,240,503 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March
31, 2004 |
|
|
Manufacturing |
|
|
Distribution |
|
|
Eliminations |
|
|
Consolidated |
|
|
Revenues
from external customers |
|
$ |
3,460,908 |
|
$ |
5,880,081 |
|
$ |
- |
|
$ |
9,340,989 |
|
|
Revenues
from other operating segments |
|
|
642,034
|
|
|
- |
|
|
(642,034 |
) |
|
- |
|
|
Pre-tax
loss |
|
|
(412,842 |
) |
|
(699,555 |
) |
|
- |
|
|
(1,112,397 |
) |
|
Total
Assets |
|
|
11,498,396 |
|
|
13,179,275 |
|
|
- |
|
|
24,677,671 |
|
|
Nine
Months Ended
March
31, 2005 |
|
Manufacturing |
|
Distribution |
|
Eliminations |
|
Consolidated |
|
|
Revenues
from external customers |
|
$ |
- |
|
$ |
19,471,243 |
|
$ |
- |
|
$ |
19,471,243 |
|
|
Revenues
from other operating segments |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Pre-tax
loss |
|
|
- |
|
|
(1,272,604 |
) |
|
- |
|
|
(1,272,604 |
) |
|
Total
Assets |
|
|
- |
|
|
8,240,503 |
|
|
- |
|
|
8,240,503 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
March
31, 2004 |
|
|
Manufacturing |
|
|
Distribution |
|
|
Eliminations |
|
|
Consolidated |
|
|
Revenues
from external customers |
|
$ |
10,099,839 |
|
$ |
18,554,880 |
|
$ |
- |
|
$ |
28,654,719 |
|
|
Revenues
from other operating segments |
|
|
3,378,047 |
|
|
- |
|
|
(3,378,047 |
) |
|
- |
|
|
Pre-tax
loss |
|
|
(687,129 |
) |
|
(1,962,095 |
) |
|
- |
|
|
(2,649,224 |
) |
|
Total
Assets |
|
|
11,498,396 |
|
|
13,179,275 |
|
|
- |
|
|
24,677,671 |
|
14. 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.
Concentration
of Credit Risk. A
relatively small number of national accounts comprise a substantial portion of
our revenues. As of March 31, 2005, receivables from our key national accounts
amounted to 75.2% of our accounts receivable.
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 March 31, 2005 and
June 30, 2004, respectively, we have established reserves of $339,851 and
$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. Accordingly, we have established the inventory reserves
for valuation, shrinkage, excess and obsolete inventory. As of March 31, 2005,
we have established reserves of $249,941 and as of June 30, 2004 our reserves
were $291,245.
Revenue
Recognition. Sales
for all products shipped from our Itasca, Illinois warehouse are recognized at
the time the product is shipped to our customers or picked up. Sales shipped or
picked up from our designated three public warehouse facilities are recognized
the day following the date of shipment. An accrual is recorded to recognize
these sales in accordance with our accounting policies.
Inventories.
Inventories are accounted for on a first-in, first-out basis and are valued at
the lower of actual cost or market. Inventories are stored at our Itasca,
Illinois warehouse and three independent public warehouses located in: Oakland,
California; Fond du Lac, Wisconsin; and Hanover, Pennsylvania.
Property,
Plant and Equipment. We
record property, plant and equipment at cost. Depreciation is provided by both
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.
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
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 are required to
adopt FIN 46R for any variable interest entities we have and are required to
meet the disclosure requirements of this pronouncement. We believe that the
adoption of this standard has not had a material impact on our financial
statements.
In
December 2004, the FASB issued SFAS No.123, “Share-Based Payment” (Revised 2004)
(“SFAS 123R”). SFAS No. 123R is a revision of SFAS No. 123, “Accounting for
Stock Based Compensation” and supersedes Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services that are based on the
fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments. We have granted stock options to our
employees in connection with the provisions of services. Accordingly, SFAS 123R
requires us to disclose the pro forma effect of compensation expense for these
stock options. Under SFAS 123R, we will be required to record this compensation
expense in our results of operations. In April 2005, however, the SEC voted
to delay the implementation of SFAS 123R for certain companies. Accordingly,
SFAS 123R will be effective for us beginning the first annual reporting period
that begins after June 15, 2005. We are currently evaluating the method of
adoption and the impact of SFAS 123R on our financial position and results of
operations.
16.
Key
Customers:
Our
customers include leading foodservice distributors and healthcare product
suppliers. During the nine months ended March 31, 2005, AHPC’s national
customers accounted for 88.9% of net sales. The loss of these customers would
have a materially adverse effect on us. Our customers tend to limit the number
of qualified vendors they purchase from to gain efficiencies across their
product line. We, therefore, expend substantial efforts to maintain and grow our
relationships with our existing major customers. However, our products are
ultimately distributed by our national customers, through their combined
networks of over 50 operating companies, to thousands of foodservice
organizations and medical facilities throughout the United States. The ultimate
end-users of our products are foodservice organizations and medical facilities,
healthcare professionals and individuals who use our gloves and other associated
disposable products.
17. Credit
Facility:
As of
September 9, 2004, we signed a commitment for a one-year, renewable, credit
facility with Greenfield Commercial Corp, LLC. (“GCC”), a privately held
commercial financing company, which replaced our previous credit arrangement
with GE Capital services pursuant to which we were operating under a forbearance
agreement during 2003. This asset based lending loan and security agreement with
GCC 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 the 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 our
effective cost of borrowing under the loan.
The loan
is secured by a security interest in substantially all of our tangible and
intangible assets. Additionally, Alan Zeffer, our Chief Executive Officer, has
guaranteed the repayment of the revolving loan in full if the loan is not repaid
as a result of malfeasance by Mr. Alan Zeffer in the performance of his duties.
We
believe that we will be successful in obtaining a new credit facility, although
no assurance can be given in this regard.
18. 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 the same time we began exploring other opportunities to gain
compliance with our lender’s requirement of a paydown by WRP Asia of our
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 “Redemption Transaction”) with WRP Asia. The Redemption
Transaction 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 comprised
all of WRP Asia's holdings of our capital stock. Collectively, these shares
represented 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 PT Buana , an Indonesian based manufacturer of gloves; and
(ii) the forgiveness of all indebtedness owing to us or our subsidiaries from
WRP Asia and from PT Buana with the exception of our obligation to be
responsible for trade payables owing to PT Buana for certain recent product
purchases. We also announced the execution of a five-year supply agreement from
WRP Asia and PT Buana to us (through our subsidiary AHPC), calling for the
purchase of a portion of our latex glove requirements, which equates to the
appropriate annualized quantities that we were purchasing from PT Buana and WRP
Asia at the time of the Redemption Transaction. The pricing of such products has
a variable factor keyed to the cost of raw latex. Our Board of Directors and the
Board of Directors of WRP Asia both approved the transaction. Additionally, we
received a fairness opinion from an independent professional valuation firm that
the transaction was fair to our stockholders. As of April 30, 2004, we finalized
the closing of the Redemption Transaction. On the closing of the transaction,
the three of our seven directors who were employees of WRP Asia resigned as
officers and directors of the Company.
As of
April 30, 2004, (the closing date of the Redemption Transaction) the market
value of the stock redeemed under the redemption and exchange agreement was
$4,377,000. Additionally, the balance sheet amounts that related to our share of
PT Buana financials were assets totaling $11,305,439 and liabilities of
approximately $2,665,854. The portion of net revenues relating to PT Buana was
$11,511,161 with a net operating loss of $566,268. Moreover, we had agreed to
forgive all indebtedness owing to us or our subsidiaries from WRP Asia and from
PT Buana, which amount equaled $1,401,322. The loss on this transaction of
$174,361 was recorded in Paid-in-Capital.
In
connection with the Redemption Transaction, we also announced that we changed
our name from WRP Corporation to AHPC Holding, Inc, effective May 14, 2004, and,
as a result our NASDAQ trading symbol changed from WRPC to GLOV.
19.
Subsequent
Event:
On April
7, 2005, we filed a Form 8-K disclosing that on March 31, 2005 we entered into a
Lease Agreement with ProLogis to lease warehouse and office space in the
building known as 80 Internationale Boulevard, Unit A in Glendale Heights,
Illinois. The term of the Lease Agreement will commence on May 1, 2005 and end
on June 30, 2010, subject to our option to extend the lease term for an
additional term of 5 years. The average base rent for the Premises for the first
year of the Lease Agreement will be approximately $2.23 per square foot, or
approximately $176,000. The average rent for the Premises during the remaining
four years of the initial term of the Lease Agreement will be approximately
$3.88 per square foot, or $306,000 per year. In addition, AHPC expects common
area, real estate taxes, and insurance to approximate $110,000 during the first
year of the lease term and to average approximately $140,000 per year over the
remaining four years of the initial term.
ITEM
2. 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 shareholders 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 nine months ended March 31, 2005, we recorded net sales of
approximately $19.5 million.
Our
formerly 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 Redemption Transaction (as described in Note 18 to
our Condensed Consolidated Financial Statements) with WRP Asia, effective April
30, 2004, 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 March 31, 2005, Compared to the Three Months Ended March 31,
2004:
Consolidated
sales for the three months ended March 31, 2005 were $6,413,177 which represents
a decrease in net sales of $2,927,812 or 31.3% compared to the three months
ended March 31, 2004. This decrease in sales is due to the Redemption
Transaction 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 increased $330,926 or 27.6% for the three months ended March 31,
2005 compared to the three months ended March 31, 2004. Cost of goods sold
includes all costs to purchase the finished product plus the related costs
associated with ocean freight, customs duty and warehousing. Without the effect
of the Redemption Transaction, our pro forma gross profit increased by $350,033
or 29.6% from the three months ended March 31, 2004. This pro forma increase in
our consolidated gross profit is primarily due to better acquisition costs and a
decrease in 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.
Our
operating loss has decreased $626,394 or 58.8% for three months ended March 31,
2005 from the same time period in the prior year. Without the effect of the
Redemption Transaction, our actual operating loss decreased by $314,317 or
41.7%. 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 the three months ended March 31, 2005, our selling, general,
administrative and other expenses (“SG&A expenses”) decreased by $295,468 or
13.0%. Without the effect of the Redemption Transaction, our pro forma SG&A
expenses increased by $35,716 or 1.8%. As a percentage of net sales, SG&A
expenses increased from 24.3% (32.9% without the effect the Redemption
Transaction) for the three months ended March 31, 2004, to 30.7% for the three
months ended March 31, 2005. This increase was primarily due to an increase in
sales consulting services due to our strategic decision to increase our market
share in the healthcare industry.
Loss from
operations before taxes and minority interest decreased by $632,102 or 56.8% for
the three months ended March 31, 2005 compared to the same period in the prior
year. Without the effect of the Redemption Transaction, our pro forma loss from
operations before taxes and minority interest decreased by $292,995 or 37.9%.
This decrease in the loss was primarily due to the better acquisition pricing
and decrease in inventory storage. Included in this computation is other income
which consists of rental, interest and miscellaneous income. Other income and
expense decreased by $5,708 for the three months ended March 31, 2005 from the
reported amount in the same period in the prior year. Without the effect of the
Redemption Transaction, our pro forma other income and expense decreased by
$21,322.
The
expense for income taxes for the three months ended March 31, 2005 was $0
compared to a benefit of $10,454 in the prior year period. The reduction in the
current year period was due PT Buana, which operating results were not included
in the current year due to the Redemption Transaction.
As a
result of the factors discussed above, we reported a net loss of $(480,295) for
the three months ended March 31, 2005, which compares to a not loss of
$(981,227) during the same period in the prior year. Due to the Redemption
Transaction, the current net loss of $(480,295) would be compared to a net loss
of $(773,290) for the three months ended March 31, 2004 without PT Buana
operating results. Basic loss per share for the three months ended March 31,
2005 and March 31, 2004, were $(0.50) and $(0.44), respectively. For comparative
purposes, the basic loss per share after the reverse stock split, on January 20,
2004, and after the elimination of income and shares related to the Redemption
Transaction, equaled $(0.50) and $(0.78), respectively for the three months
ended March 31, 2005 and March 31, 2004.
Nine
Months Ended March 31, 2005, Compared to the Nine Months Ended March 31,
2004:
Consolidated
net sales for the nine months ended March 31, 2005 were $19,471,243 which
represents a decrease in net sales compared to the nine months ended March 31,
2004 of $9,183,476 or 32.0%. This decrease in net sales is due to the Redemption
Transaction 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 increased $182,052 or 4.1% for the nine-month period ended March
31, 2005 compared to the nine-month period ended March 31, 2004. Cost of goods
sold includes all costs to purchase the finished product plus the related costs
associated with ocean freight, customs duty and warehousing. This minimal
increase in gross profit related to the Redemption Transaction. Our pro forma
gross profit for the nine-months ended March 31, 2005 increased by $1,016,344 or
28.4% without the effect of our formerly owned subsidiary, PT Buana, over the
gross profit reported for the nine-month period ending March 31, 2004. The pro
forma increase in our consolidated gross profit is primarily due to better
acquisition costs and a decrease in inventory storage levels on hand. 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.
Our
operating loss has decreased $1,395,534 or 54.6% for the nine months ended March
31, 2005 from the same period in the prior year. Without the effect of the
Redemption Transaction, our pro forma operating loss decreased by $1,038,863 or
47.3%. 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 nine months ended March 31, 2005, our SG&A expenses
decreased by $1,213,482 or 17.4%. Without the effect of the Redemption
Transaction, our pro forma SG&A expenses would have decreased by $22,519 or
0.4%. As a percentage of net sales, SG&A expenses increased from 24.3%
(31.2% without the effect of the Redemption Transaction) for the nine months
ended March 31, 2004, to 29.6% for the nine months ended March 31, 2005. 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
operations before taxes and minority interest decreased by $1,395,534 or 54.6%
for the nine months ended March 31, 2005 compared to the nine months ended March
31, 2004. Without the effect of the Redemption Transaction, our pro forma loss
from operations before taxes and minority interest would have decreased by
$1,038,863 or 47.3%. This decrease in the loss was primarily due to the better
acquisition pricing and a decrease in inventory storage. Included in this
computation is other income which consists of rental, interest and miscellaneous
income. Other income and expense increased $18,914 in the nine-month period
ended March 31, 2005 from the amount reported for the same period in the prior
year. Without the effect of the Redemption Transaction, our pro forma other
income and expense would have increased by $77,611.
The
benefit for income taxes for the nine months ended March 31, 2005 was $0
compared to an expense of $12,108 for the nine-month period ended March 31,
2004. The expense recorded in the prior year period was primarily due to the
operating results of PT Buana, which was not included in the current year due to
the Redemption Transaction.
As a
result of the factors discussed above, we reported net loss of $(1,272,604) for
the nine-month period ended March 31, 2005, which compares to a net loss of
$(2,451,562) during the same period in the prior year. The current loss of
$(1,272,604) would have equaled a net loss of $(2,233,856) for the nine-month
period ended March 31, 2004 if the operating results of PT Buana were not
included as a result of the Redemption Transaction. Basic loss per share for the
nine months ended March 31, 2005 and March 31, 2004, were $(1.33) and $(1.10),
respectively. For comparative purposes, the basic loss per share after the
reverse stock split, on January 20, 2004, and after the elimination of income
and shares related to the Redemption Transaction, equaled to $(1.33) and
$(2.27), respectively, for the nine months ended March 31, 2005 and March 31,
2004.
Liquidity
and Capital Resources:
Nine Months Ended March 31, 2005:
Cash and
cash equivalents at March 31, 2005 was $15,424, a decrease of $343,588 from
$359,012 at June 30, 2004. We experienced a decrease in cash flows during the
nine months ended March 31, 2005, primarily as a result of cash used in
operating activities through a reduction of inventory levels and because of the
timing of accrued expenses.
Our
operations used cash of $95,457 during the nine months ended March 31, 2005,
primarily as a result of increases in our SG&A expenses related to expenses
in marketing our products.
Net trade
accounts receivable at March 31, 2005 was $1,978,413 which increased from
$1,823,149 at June 30, 2004 due to the timing of cash receipts and increased
sales for the nine-month period ended March 31, 2005. Net inventories at March
31, 2005 were $5,232,389, a decrease from the level at June 30, 2004, of
$6,694,430, due to management’s efforts to maintain inventory levels.
During
the nine months ended March 31, 2005, we used cash in investing activities of
$16,110 in connection with capital improvement expenditures during such period
primarily relating to computer software and hardware.
During
the nine months ended March 31, 2005, cash was used from financing activities in
the amount of $232,021. The cash was used to pay down outstanding
debt.
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, pursuant to 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%. Additionally, the credit facility contains certain penalties
for early termination.
We
currently expect to have cash needs during the next year and beyond to fund the
growth of the existing glove business, to launch and promote our SafePrep
foodservice business and to be used for other purposes. These cash needs may
arise in connection with various events including: (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 we will be successful in
obtaining a new credit facility, although no assurance can be given in this
regard.
As of
March 31, 2005, 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 |
$
2,210,795 |
$
124,879 |
$
1,264,326 |
$
821,590 |
Operating
leases primarily represent our leases for our corporate office and warehouse
facilities.
Forward
Looking Statements
Certain
matters discussed in this Form 10-Q are “forward-looking statements,” and the
Company intends these forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and is including this statement for
purposes of those safe harbor provisions. These forward-looking statements can
generally be identified as such because the context of the statement includes
phrases such as the Company “expects,” “believes,” “anticipates” or other words
of similar meaning. Similarly, statements that describe the Company’s future
plans, objectives or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties which
could cause actual results or outcomes to differ materially from those currently
anticipated. Factors that could affect actual results or outcomes include
changes in consumer spending patterns; unanticipated issues related to the
Company’s business; the Company’s success in implementing its strategic plan;
actions of companies that compete with the Company; the Company’s success in
managing inventory; the success of suppliers and customers; the ability of the
Company to deploy its capital successfully; unanticipated outcomes related to
outsourcing certain manufacturing processes; and unanticipated outcomes related
to outstanding litigation matters. Shareholders, potential investors and other
readers are urged to consider these factors in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included herein are only made as of
the date of this Form 10-Q. The Company assumes no obligation, and disclaims any
obligation, to update such forward-looking statements to reflect subsequent
events or circumstances.
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 rate of
interest. We estimate that the fair value of each debt instrument approximated
its market value at March 31, 2005.
ITEM
4. Controls and Procedures
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on
this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective in timely alerting them to material information relating to the
Company required to be included in the Company's periodic filings with the
Securities and Exchange Commission. It should be noted that in designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. The Company has
designed its disclosure controls and procedures to reach a level of reasonable
assurance of achieving the desired control objectives and, based on the
evaluation described above, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective at reaching that level of reasonable
assurance.
There was
no change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART
II
Other
Information
ITEM
1. Legal Proceedings.
In the normal
course of business, the Company may be involved in various legal proceedings
from time to time. The Company does not believe it is currently involved in any
claim or action the ultimate disposition of which would have a material adverse
effect on the Company’s financial statements.
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None
ITEM
3. Defaults Upon Senior Securities.
None
ITEM
4. Submission of Matters to a Vote of Security
Holders.
None
ITEM
5. Other Information.
None
ITEM
6. 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(1) |
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
_________________
(1)
This
certification is not "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AHPC
Holdings, Inc.
(Registrant)
BY: /s/
Deborah J.
Bills
Deborah
J. Bills, Chief Financial Officer
Dated:
May 23, 2005