10-Q 1 c83123e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______. Commission File Number: 0-17458 WRP CORPORATION (Exact name of registrant as specified in its charter) MARYLAND 73-1326131 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 PARK BOULEVARD, SUITE 1260 ITASCA, IL 60143 ---------------- (Address of principal executive office) (630) 285-9191 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] APPLICABLE ONLY TO CORPORATE ISSUERS ------------------------------------ The number of shares of the issuer's Common Stock, par value $.01 per share, and issuer's Series A Convertible Common Stock, par value $.01 per share, outstanding as of January 20, 2004, was 5,803,692 and 1,252,538, respectively. WRP CORPORATION INDEX PART I - FINANCIAL INFORMATION A quarterly review of the second quarter financial statements has been performed by an independent certified public accountant in accordance with Statement of Auditing Standards No. 100. Item 1. Condensed Consolidated Balance Sheets December 31, 2003 (unaudited) and June 30, 2003, (unaudited)................... pgs.3-4 Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended December 31, 2003 and 2002.................................. pg. 5 Condensed Consolidated Statements of Operations (unaudited) for the Six Months Ended December 31, 2003 and 2002.................................... pg. 6 Condensed Consolidated Statements of Cash Flow (unaudited) for the Six months ended December 31, 2003 and 2002.................................... pg. 7 Notes to Interim Consolidated Financial Statements (unaudited)................. pg. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... pg.20 Item 3. Quantitative and Qualitative Disclosures About Market.......................... pg.26 Item 4. Controls and Procedures........................................................ pg.26 PART II - OTHER INFORMATION Items 1.-5. ................................................................................ pg.27 Item 6. ................................................................................... pg.27
2 WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND JUNE 30, 2003
December 31, 2003 June 30, 2003 ----------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 334,853 $ 420,949 Accounts receivable - trade, net of allowance for doubtful accounts of $319,851 at December 31, 2003 and $333,625 at June 30, 2003 2,524,550 2,317,178 Inventories, net 8,523,452 8,796,339 Prepaid expenses 769,929 522,914 Due from affiliate, net of allowance for doubtful accounts of $5,586,271 at December 31, 2003 and June 30, 2003 3,401,870 3,320,544 Deferred tax assets - (435,293) Other receivables 1,104,365 1,382,078 ------------ ------------ Total current assets 16,659,019 16,324,709 PROPERTY, PLANT AND EQUIPMENT Land rights and land improvements 736,535 736,535 Construction in progress - 27,688 Equipment, furniture and fixtures 17,031,050 16,767,720 Building improvements 2,385,383 2,336,683 Vehicles 115,467 115,467 ------------ ------------ Total property, plant and equipment 20,268,435 19,984,093 Less accumulated depreciation and amortization 11,768,052 10,876,090 ------------ ------------ Property, plant and equipment, net 8,500,383 9,108,003 OTHER ASSETS Other assets 529,774 531,870 ------------ ------------ Total other assets 529,774 531,870 ------------ ------------ $ 25,689,176 $ 25,964,582 ============ ============
3 WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED DECEMBER 31, 2003 AND JUNE 30, 2003
December 31, 2003 June 30, 2003 ----------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable - trade $ 2,538,526 $ 1,733,300 Trade notes payable to bank 2,991,043 2,959,587 Notes payable and current portion of long-term obligations 966,926 1,264,992 Due to affiliates 3,890,537 3,890,537 Accrued expenses 3,053,885 2,716,428 ------------ ------------ Total current liabilities 13,440,917 12,564,844 LONG-TERM DEBT - 5,163 DEFERRED TAX LIABILITIES 1,142,106 645,036 COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST IN SUBSIDIARY 1,310,904 1,483,958 SHAREHOLDERS' EQUITY Series A common stock, $.01 par value; 1,252,538 shares authorized; 1,252,538 shares issued and outstanding at December 31, 2003 and June 30, 2003 12,525 12,525 Common stock, $.01 par value; 10,000,000 shares authorized; 5,803,692 shares issued at December 31, 2003 and June 30, 2003 58,037 58,037 Additional paid-in capital 17,942,471 17,942,471 Accumulated deficit (6,588,608) (5,118,276) ------------ ------------ 11,424,425 12,894,757 Less common stock in treasury, at cost, 387,800 shares at December 31, 2003 and June 30, 2003 1,629,176 1,629,176 ------------ ------------ Total shareholders' equity 9,795,249 11,265,581 ------------ ------------ $ 25,689,176 $ 25,964,582 ============ ============
4 WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
Three Months Ended ----------------------------------- December 31, 2003 December 31,2002 ----------------- ---------------- Net sales $ 9,527,504 $ 8,792,517 Cost of goods sold 8,047,491 7,232,674 ----------- ----------- Gross profit 1,480,013 1,559,843 Operating expenses Selling, general and administrative 2,409,226 1,980,411 ----------- ----------- Loss from operations (929,213) (420,567) Other Income and Expense Interest expense 73,007 21,099 Other income 40,371 151,972 ----------- ----------- (Loss) income from continuing operations before provision for (benefit from) income taxes and minority interest (961,849) (289,694) Provision for (benefit from) income taxes (28,186) (52,982) ----------- ----------- (Loss) income from continuing operations before minority interest (933,663) (236,712) Minority interest in (loss) income of subsidiary (79,528) (44,126) ----------- ----------- NET (LOSS) INCOME $ (854,135) $ (192,586) =========== =========== Basic net (loss) income per common share $ (0.13) $ (0.03) Diluted net (loss) income per common share $ (0.13) $ (0.03)
5 WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
Six Months Ended ------------------------------------ December 31, 2003 December 31, 2002 ----------------- ----------------- Net sales $ 19,313,730 $ 19,334,021 Cost of goods sold 16,096,413 15,759,055 ------------ ------------ Gross profit 3,217,317 3,574,966 Operating expenses Selling, general and administrative 4,706,966 4,070,739 ------------ ------------ Loss from operations (1,489,649) (495,772) Other Income and Expense Interest expense 117,027 69,824 Other income 69,850 436,121 ------------ ------------ (Loss) income from continuing operations before provision for (benefit from) income taxes and minority interest (1,536,826) (129,475) Provision for (benefit from) income taxes 22,562 (57,237) ------------ ------------ (Loss) income from continuing operations before minority interest (1,559,388) (72,238) Minority interest in (loss) income of subsidiary (89,054) (5,074) ------------ ------------ NET (LOSS) INCOME $ (1,470,334) $ (67,164) ============ ============ Basic net (loss) income per common share $ (0.22) $ (0.01) Diluted net (loss) income per common share $ (0.22) $ (0.01)
6 WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
Six Months Ended ------------------------------------ December 31, 2003 December 31, 2002 ----------------- ----------------- Cash flows from operating activities Net (loss) income $(1,470,334) $ (67,164) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation 891,962 928,200 Deferred income taxes 61,777 105,266 Gain on disposal of property, plant and equipment - (3,811) Changes in operating assets and liabilities Accounts receivable - trade, net (207,371) 2,692,315 Inventories, net 272,887 (1,042,059) Prepaid expenses (247,015) (147,801) Other assets 279,809 (243,016) Accounts payable - trade 805,226 1,307,983 Accrued expenses 337,459 (293,249) Amounts due to and from affiliates (81,327) 331,045 ----------- ----------- Net cash provided by operating activities 643,073 3,567,709 Cash flows from investing activities Capital expenditures (284,341) (261,527) Minority interest in subsidiary (173,054) (89,074) ----------- ----------- Net cash used in investing activities (457,395) (350,601) Cash flows from financing activities Net borrowings on trade notes payable to bank 31,455 644,387 Net payments on notes payable (303,229) (3,407,605) Payments for treasury stock repurchases - (10,800) ----------- ----------- Net cash used in financing activities (271,774) (2,774,018) ----------- ----------- Net increase in cash and cash equivalents (86,096) 443,090 Cash and cash equivalents, beginning of period 420,949 451,948 ----------- ----------- Cash and cash equivalents, end of period $ 334,853 $ 895,038 =========== ===========
7 WRP CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 1. DESCRIPTION OF BUSINESS: We are a leading marketer of foodservice and medical examination gloves in the United States through our wholly owned subsidiary, American Health Products Corporation ("AHPC"). We are also a manufacturer of disposable latex examination and foodservice gloves through our 70% owned Indonesian manufacturing facility, PT WRP Buana Multicorpora ("PT Buana"). In 2002, we broadened our product line to include other disposable items to be used primarily in the foodservice industry. 2. BASIS OF PRESENTATION: The accompanying unaudited condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation, consisting only of normal recurring adjustments, have been included. For further information, refer to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended June 30, 2003, filed October 14, 2003. The results of operations for the six-month period ended December 31, 2003, may not be indicative of the results that may be expected for the fiscal year ended June 30, 2004. 3. PRINCIPLES OF CONSOLIDATION: The accompanying interim consolidated financial statements include our accounts and those of AHPC and our 70% owned subsidiary, PT Buana. All significant intercompany transactions have been eliminated in consolidation. 4. MAJORITY SHAREHOLDER: WRP Asia Pacific Sdn. Bhd., a Malaysian corporation ("WRP Asia"), owns all of our outstanding Series A Common Stock and is our majority shareholder. At December 31, 2003, WRP Asia had a 53.2% ownership interest in us. WRP Asia is one of the world's leading manufacturers of high-quality, disposable gloves primarily for use by healthcare professionals in the acute care, alternative care and foodservice markets, and for critical environments in the electronics industries, scientific laboratories, pharmaceutical industries and other related industries. AHPC purchases a majority of its powder-free latex exam gloves from WRP Asia. 8 5. COMMON STOCK: As of December 31, 2003, we had issued 1,252,538 shares of Series A Convertible Common Stock and 5,803,692 shares of Common Stock for a total of 7,056,230 shares. The terms of the Series A Common Stock owned by WRP Asia are substantially the same as our Common Stock except: a. Each share of Series A Common Stock is convertible into one share of our Common Stock, $.01 par value. We have reserved 1,252,538 shares of Common Stock for issuance upon conversion of the Series A Common Stock. b. Series A Common Stock entitles WRP Asia to elect all Class A directors, who represent a majority of our Board of Directors, and to vote with the holders of Common Stock as a single class with respect to all other matters subject to a vote of the shareholders. During the six months ended, December 31, 2003, we did not sell any shares of our Common Stock. 6. FOREIGN CURRENCY TRANSACTIONS: Gains and losses from foreign currency exchange transactions are included in net loss in the period in which they occur. During the quarters ended December 31, 2003 and 2002, the foreign exchange (loss)/gain included in the determination of net income was $(5,435) and $6,050, respectively. The functional currency of PT Buana is the U.S. dollar. 7. STOCK INCENTIVE PLANS: The Company accounts for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," related to options and warrants issued to employees and directors. See note I for additional information regarding this plan. Options prices for options granted under this plan were not less than fair market value of the Company's on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation. 9
Three Months Ended Six Months Ended ---------------------------- ---------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net earnings, as reported $ (854,135) $ (192,586) $(1,470,334) $ (67,164) Deduct: total stock-based employee compensation expense determined under fair value based method for awards granted, modified, or settled, net of related tax effects 11,093 6,120 22,186 12,240 ----------- ----------- ----------- ----------- Pro forma net earnings $ (843,042) $ (186,466) $(1,448,148) $ (54,924) =========== =========== =========== ===========
2003 2002 2003 2002 ---- ---- ---- ---- Earnings per share Basic - as reported $ (0.13) $ (0.03) $ (0.22) $ (0.01) Basic - pro forma (0.13) (0.03) (0.22) (0.01) Dilutive - as reported $ (0.13) $ (0.03) $ (0.22) $ (0.01) Dilutive - pro forma (0.13) (0.03) (0.22) (0.01)
8. RELATED-PARTY TRANSACTIONS: At December 31, 2003 and 2002, amounts due from/to affiliates consist of the following:
2003 2002 ---- ---- Due from Affiliate- Current - WRP Asia $ 8,988,141 $ 9,929,258 Due to Affiliate- Current - WRP Asia $(3,890,537) $(3,963,261) ----------- ----------- Amounts due from Affiliate - Net * $ 5,097,604 $ 5,965,997 =========== =========== Purchases from Affiliate - $ (-) $(2,840,045) =========== =========== Sales to Affiliate - $ 242,701 $ 4,546,705 =========== ===========
*Right of set-off granted in October 2002. The outstanding accounts receivable from WRP Asia results primarily from sales of product to WRP Asia (powder-free exam gloves produced by PT Buana), cash advances, charges for obtaining FDA approval of the gloves imported from WRP Asia and other items. AHPC purchased virtually all of its latex powder-free exam gloves from WRP Asia in 2002, 2001, 2000 and 1999. Management believes transactions between operating segments are made at prevailing rates. AHPC purchases its powdered latex gloves from its 70% subsidiary, PT Buana, as well as from third-party suppliers other than WRP Asia. 10 As of December 31, 2003, we have outstanding accounts receivable from WRP Asia of approximately $8,988,141. Subsequent to June 30, 2002, the amounts due to PT Buana of approximately $5,586,000 were assigned to us in partial satisfaction of intercompany amounts due from PT Buana to us. As of December 31, 2003, we have accounts payable to WRP Asia of approximately $3,890,537, primarily resulting from the purchase of inventories from WRP Asia. The net amount due from WRP Asia, before allowance for doubtful accounts at December 31, 2003, was approximately $8,988,141, against which we have provided an allowance for doubtful accounts of approximately $5,586,000 (representing all amounts due for the sale of product from PT Buana to WRP Asia at June 30, 2002). Subsequent to September 30, 2002, we entered into a formal agreement with WRP Asia, to provide for the full and complete right of offset of any trade payables due against amounts they owe to us and AHPC. We continue to purchase gloves from WRP Asia and believe that the unreserved amounts due to WRP Asia from WRPC and AHPC of approximately $488,666 at December 31, 2003 are realizable based upon the agreement granting right of offset and ongoing purchases from WRP Asia. In management's opinion, while we have been advised by WRP Asia that it does not currently intend to seek protection from creditors, should such action take place, we would have to reevaluate the ability to offset payables to WRP Asia against our receivables from them. On July 24, 2002, our Board of Directors approved a proposal submitted by the independent directors to form a Special Evaluation Committee (the "Committee"). The Committee was comprised of our "B" Directors, Robert J. Simmons and Don L. Arnwine, as well the independent "A" Directors, G. Jeff Mennen and Richard J. Swanson. The purpose of the Committee is to examine the WRP Asia restructuring process, as well as the options and alternatives available to us. The approval of the stock redemption and exchange agreement (see discussion in Note 22, below) has been unanimously approved by the Committee, and it has obtained a fairness opinion advising that the transaction is fair to our shareholders. Additionally, interest rates in many Asian-Pacific countries have been heavily dependent upon international trade and are, accordingly, affected by protective trade barriers and the economic conditions of their trading partner. The enactment by the government of principal trading partners protectionist trade legislation, reduction of foreign investment or general declines in the international securities markets could have a significant adverse effect upon the economies of the Asian-Pacific countries. The financial statements do not include any adjustment that might result from these uncertainties and any related effects will be reported in the financial statements as they become known and estimable. 9. NET LOSS PER SHARE: We follow the Statement of Financial Accounting Standards No. 128, "Earnings Per Share (EPS)" ("SFAS 128"), which requires dual presentation of basic and diluted earnings per share for all periods presented. Basic EPS amounts are based on the weighted-average number of shares of common stock outstanding during each period while diluted EPS amounts are based 11 on the weighted-average number of shares of common stock outstanding during the period and the effect of dilutive stock options and warrants. The weighted-average number of common shares and common share equivalents outstanding for the three and six months ended December 31, 2003 and 2002 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, 2003 DECEMBER 31, 2002 ----------------- ----------------- Basic weighted-average number of Common shares outstanding 6,632,734 6,639,690 Dilutive effect of common share Equivalents 17,448 - --------- --------- Dilutive weighted-average number of common shares outstanding 6,650,182 6,639,690
SIX MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, 2003 DECEMBER 31, 2002 ----------------- ----------------- Basic weighted-average number of Common shares outstanding 6,632,734 6,642,871 Dilutive effect of common share Equivalents 12,727 - --------- --------- Dilutive weighted-average number of common shares outstanding 6,645,461 6,642,871
At December 31, 2003, there were 7,056,230 shares of our Common Stock and Series A Common Stock outstanding. As approved by the Board of Directors, all outstanding stock options at February 29, 2000, to current employees, officers and directors were repriced effective February 29, 2000, to $2.07, the closing price on that date. All of the stock options, which were repriced, totaling 483,600 options, originally contained exercise prices that were significantly higher than the market price. We are subject to variable accounting; however, the share price has not exceeded $2.07. 10. ACCOUNTING FOR INCOME TAXES: We record income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"). SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on the changes in the deferred tax asset or tax liability from period to period. Our U.S. operations had generated net operating loss carry-forwards ("NOL's") in prior years of which approximately $2.3 million is remaining at December 31, 2003. These NOL's are fully reserved and are included as a component of deferred tax assets. These NOL's will be available to offset future U.S. generated taxable income and will begin expiring in 2004. In accordance with federal tax regulations, usage of the NOL's are and have been subject to limitations as a direct result of certain ownership changes that have occurred in the past, and may be further limited should WRP Asia transfer ownership of its shares of stock to another holder. 12 For the six months ended December 31, 2003 and 2002, we have recorded a provision for (benefit) from income taxes of $22,562 and $(57,237), respectively. 11. CONTINGENCIES: Over the last several years, numerous product liability lawsuits have been filed against suppliers and manufacturers of latex gloves alleging, among other things, adverse allergic reactions. We are one of numerous defendants that have been named in such lawsuits. During the six months ended December 31, 2003, there were no additional product liability lawsuits filed, and we were dismissed from four lawsuits. At December 31, 2003, we were involved in a total of 28 lawsuits, either as a named defendant, third party or an indemnifier. We have agreed to defend and indemnify certain vendors in regard to the sale and distribution of our products only. None of these lawsuits name us as the sole defendant in these claims. We possess product liability insurance coverage which covers the defense costs and certain damage awards associated with the product liability claims against ourselves, AHPC and PT Buana, in addition to the indemnity of AHPC's customers to the limits of its policy, subject to deductions on each claim, to be paid by AHPC. We believe that all legal claims are adequately provided for and if not provided for, are without merit or involve such amounts that would not materially or adversely affect us. However, there is no assurance that AHPC's insurance will be sufficient to meet all damages for which we may be held liable. For example, in a jury trial, even where actual damages are somewhat limited, or where causation of liability is questionable, the jury may choose to award a substantial verdict to the plaintiff. Likewise, there is no assurance that the outcome of these suits will not adversely affect our operations or financial condition. We will vigorously contest any latex claim initiated against us, but will enter into a settlement agreement, where, after careful consideration, management determines that our best interests will be served by settling the matter. In addition, there can be no assurances that product liability insurance for these claims will continue to be available to us or, if available, that it will be available in sufficient amounts and at affordable terms. 12. COMPREHENSIVE INCOME: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), requires companies to report all changes in equity during a period, except those resulting from investment by owners and distributions to owners, in a financial statement for the period in which they are recognized. Comprehensive profit (loss) for the six months ended December 31, 2003 and 2002 was equal to net profit (loss) and there were no accumulated other comprehensive income items during those periods. 13. SEGMENT REPORTING: We have two business segments: manufacturing and distribution. These segments are managed as separate strategic business units due to the distinct nature of their operations and customer bases. The manufacturing segment, which represents the operations of PT Buana, manufactures latex gloves and sells them primarily to AHPC and other customers through WRP Asia's distribution network. All operations of the manufacturing segment are located in Indonesia. The distribution segment involves the procurement and sale of gloves purchased from 13 the manufacturing segment and other glove manufacturers and then sold to national and regional healthcare, foodservice, retail and other distributors. The operations of the distribution segment are located entirely within the U.S. We evaluate segment performance based on income (loss) before provision for (benefit from) income taxes and minority interest ("Pre-tax income (loss)"). Transactions between operating segments are made at prevailing market rates. The following tables provide financial data for the three and six months ended December 31, 2003 and 2002 for these segments:
THREE MONTHS ENDED DECEMBER 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ Revenues from external customers $ 3,417,355 $ 6,110,149 $ - $ 9,527,504 Revenues from other operating segments 1,155,126 - (1,155,126) - Pre-tax loss (293,281) (668,569) - (961,849) Total Assets 12,120,095 13,569,080 - 25,689,176
THREE MONTHS ENDED DECEMBER 31, 2002 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ Revenues from external customers $ 1,636,758 $ 7,155,759 $ - $ 8,792,517 Revenues from other operating segments 1,568,318 - (1,568,318) - Pre-tax loss (139,808) (149,886) - (289,694) Total Assets 12,098,523 20,299,678 - 32,398,202
SIX MONTHS ENDED DECEMBER 31, 2003 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ Revenues from external customers $ 6,638,931 $ 12,674,799 $ - $ 19,313,730 Revenues from other operating segments 2,736,013 - (2,736,013) - Pre-tax loss (274,287) (1,262,540) - (1,536,826) Total Assets 12,120,095 13,569,080 - 25,689,176
SIX MONTHS ENDED DECEMBER 31, 2002 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ Revenues from external customers $ 4,988,184 $ 14,345,837 $ - $ 19,334,021 Revenues from other operating segments 2,612,392 - (2,612,392) - Pre-tax loss (20,387) (109,097) - (129,475) Total Assets 12,098,523 20,299,678 - 32,398,202
14. NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS: In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Disposal Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit and disposal activities that are initiated after December 31, 2002, with early adoption encouraged. We have adopted the provision set forth in this statement for all exit and disposal activities initiated after December 31, 2002. 14 In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other." This interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligation under guarantees. This interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee. The initial recognition and measurement provisions of this statement shall be applied only on a prospective basis to guarantees issued or modified after December 31, 2002 irrespective of the guarantors fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 31, 2002. We believe that the adoption of this standard will have no impact on its financial statements. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities." This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities. The provisions of this interpretation are effective immediately for all variable interest entities created after January 31, 2003; for the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We believe that the adoption of this standard will have no impact on its financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 addresses how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 will apply to financial instruments entered into or modified after May 31, 2003. We believe that the adoption of this standard will have no impact on its financial statements. 15. INVENTORIES: Since a majority of our product is imported from Southeast Asia, it is our practice to maintain a certain level of safety-stock inventory. Inventories are accounted for on a first-in, first-out ("FIFO") basis and are valued at the lower of actual cost or market. 16. KEY CUSTOMERS: Our customers include leading foodservice distributors and healthcare product suppliers. During the six months ended December 31, 2003, AHPC's national customers accounted for 82.3% of net sales. The loss of this customer would have a materially adverse effect on us. Our customers tend to limit the number of qualified vendors they purchase from to gain efficiencies across their product line. We, therefore, expend substantial efforts to maintain and grow our relationships with our existing major customers. However, our products are ultimately distributed by our national customer, through their combined networks of over 40 operating companies, to thousands of foodservice organizations and medical facilities throughout the United States. The ultimate end-users of our products are foodservice organizations and medical facilities, healthcare professionals and individuals who use our gloves. 15 17. CREDIT FACILITY: On December 1, 1998, we obtained a domestic three-year credit facility from GE Capital, a large commercial credit company. This asset based lending loan and security agreement included a $10,000,000 revolving line of credit with a $7,000,000 letter of credit sub-facility. On March 31, 1999, we amended our Loan and Security Agreement by increasing the maximum credit loan limit from $10,000,000 to $15,000,000 subject to availability, based on a formula using accounts receivable and inventory. As part of the amendment, the letter of credit subfacility was increased from $7,000,000 to $11,000,000. The line of credit borrowings carry an interest rate of commercial paper plus 4.5% (1.00% at December 31, 2003). At December 31, 2003, we had outstanding $746,348 on the revolving line of credit and $971,797 of letter of credit liabilities under the credit facility. As of December 31, 2003, we were not in compliance with certain of our covenants and have obtained waivers of these covenant violations from the financial institution. In conjunction with the waiver of the covenant violations as of December 31, 2003, the existing credit facility agreement was amended to expire on March 31, 2003 in connection with the Forbearance Agreement (see Note 22, below, for a discussion of our efforts to renew or replace our credit facility). 18. MEDICAL BUSINESS: On March 1, 2002, our subsidiary, American Health Products Corp, entered into a Transition Services Agreement with Maxxim Medical, Inc. (MAXXIM), whereby MAXXIM agreed to service most of our acute-care medical customers. As a result of this transition, we have substantially reduced our personnel in our medical division and have transitioned the business with respect to most of our customers in the medical division to MAXXIM. As of December 31, 2003, we had an outstanding account receivable with MAXXIM of $280,115.41 (which included $250,000 of the fees they agreed to pay us for entering into the agreement). This amount has been fully reserved due to MAXXIM's bankruptcy filing on February 11, 2003. We now service our medical customers either direct or indirect through distributors, other then MAXXIM. 19. NASDAQ LISTING: On February 14, 2002, NASDAQ notified us that the bid price of our common stock had closed at less than $1.00 per share over the previous 30 consecutive trading days, and, as a result, did not comply with Marketplace Rule 4310(c)(4) (the "Rule"). Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), we were provided 180 calendar days, or until August 13, 2002, to regain compliance with the Rule. On August 14, 2002, NASDAQ notified us that we had not regained compliance in accordance with Marketplace Rule 4310(c)(8)(D). However, NASDAQ noted that we meet the initial listing requirements for the NASDAQ SmallCap Market under Marketplace Rule 4310(c)(2)(A). Specifically, we qualify with the $5,000,000 stockholders equity requirement. Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), we were provided an additional 16 180 days, or until February 10, 2003, to regain compliance. In order to regain compliance, our common stock was required to close at $1.00 per share or more for a minimum of ten consecutive trading days. If compliance with this Rule could not be demonstrated by February 10, 2003, NASDAQ advised that our securities would be delisted. On January 30, 2003, NASDAQ extended its minimum bid price compliance periods. Specifically, NASDAQ announced it would maintain the initial 180-day, calendar-day bid price grace period for all SmallCap issuers, but extend the bid price grace period for SmallCap issuers demonstrating compliance with the core SmallCap initial listing criteria from 180 to up to 540 days (approximately 12 months). Compliance with this standard is to be verified every 180 days. On April 9, 2003, we received notice from NASDAQ that, over the last 30 days, our Common Stock had not maintained a minimum market value of publicly held shares ("MVPHS") of $1,000,000, as required for continued inclusion by Marketplace Rule 4310 (c)(7) (the "Rule"). NASDAQ further advised that, in accordance with Marketplace Rule 4310 (c)(8)(B), we would be provided 90 days, or until July 8, 2003, to regain compliance. If, at any time before July 8, 2003, the MVPHS of our Common Stock is $1,000,000 or more for a minimum of ten consecutive trading days, NASDAQ would provide written notification that we were in compliance with the rule. If compliance with this rule was not demonstrated by July 8, 2003, NASDAQ advised it would provide written notification that our securities would be delisted, subject to the opportunity to appeal this determination to a listing Qualifications Panel. Subsequently, we achieved compliance with the MVPHS requirement but were still not in compliance with the $1.00 minimum bid price requirement. On July 24, 2003 a hearing was held before the Nasdaq Listing Qualifications Panel. The result of this hearing was that we received an additional period of time, until September 30, 2003, to comply with the minimum bid price requirement. On October 23, 2003 we were advised by Nasdaq that since we had demonstrated a plan to achieve the $1.00 minimum bid price and provided us with an extension based upon the following terms: (1) On or before November 5, 2003 we must file a proxy statement with the SEC and Nasdaq evidencing our intent to seek shareholder approval for the implementation of a reverse stock split sufficient to satisfy the $1.00 bid price requirement. (2) On or before January 5, 2004 we must evidence a closing bid price of at least $1.00 per share and, immediately thereafter, a closing bid price of at least $1.00 per share for a minimum of ten consecutive trading days. On November 5, 2003 we filed a Notice of Special Meeting of Shareholders with the SEC and Nasdaq. This meeting was called to have the following items approved: To amend our Articles of Incorporation, which will affect the following items: (a) change our name to AHPC Holdings, Inc.; (b) eliminate our Class A Common Stock, par value $.01 per share, increase the number of authorized shares of Common Stock, par value $.01 per share, 17 from 10,000,000 to 50,000,000 shares and authorize the issuance of up to 2,000,000 shares of preferred stock, par value $.01 per share; (c) reflect a one share for two shares reverse stock split of our outstanding Common Stock, subject to an increase in the amount of this reverse split, if necessary, to result in an adjustment of the closing bid price of our Common Stock, as adjusted for the reverse stock split, to exceed $1.00 per share; and (d) change the minimum number of persons who may comprise our board of directors from five to three. On January 20, 2004 we held the Special Meeting of Shareholders and received approval on all of the above items. The approval of items (a), (b) and (d) are contingent upon the transaction with WRP Asia Pacific being completed. Refer to Note 22 for a complete description of this transaction. As of February 10, 2004 our common stock has met the minimum bid requirement of Marketplace Rule 4310(c)(8)(D) for 12 consecutive trading days. We have received confirmation from NASDAQ, on February 11, 2004, that we met the minimum requirements. 20. WEST COAST DOCK STRIKE: During October 2002, labor negotiations between the Pacific Maritime Association and the International Longshore and Warehouse Union broke down resulting in all West Coast ports being closed for ten days. Since we import all our products through these ports, we were unable to have product delivered during this time period. Additionally, by the end of the tenth day, work stoppage we had 25 containers waiting to be unloaded at various ports on the West Coast. It took us approximately 60 days to clear this backlog. Due to the work stoppage and subsequent shipping delays we incurred additional costs of approximately $297,000. 21. MAXXIM BANKRUPTCY: On February 11, 2003, MAXXIM filed for protection under Chapter 11 of the Federal Bankruptcy Act in the District of Delaware. It is our understanding that they plan to continue to do business and to reorganize their operations as a debtor in possession. Under our Transition Services Agreement dates as of March 1, 2002, with MAXXIM, MAXXIM agreed to pay us $375,000 in the aggregate upon achievement of certain milestones, all of which were achieved. To date, MAXXIM has only paid $125,000 of such obligations; however, we have included as income the accrued, unpaid portion of these obligations. The total amount due from MAXXIM is $280,115; of this amount, $250,000 is for payments due under the transition agreement. This amount has been fully reserved due to MAXXIM's bankruptcy filing on February 11, 2003. 22. FORBEARANCE AGREEMENT On March 12, 2003 we entered into a forbearance agreement with our lender, GE Capital Services, whereby they agreed to forbear from exercising its rights under the loan agreement as a result of events of defaults, which were continuing at that time. The terms of this agreement required us to maintain certain financial covenants and to receive payment of at least $2 million 18 of intercompany debt from WRP Asia (as described elsewhere in this document). This agreement was scheduled to expire on June 30, 2003; however, we have entered into two amendments to the forbearance agreement that extends the term initially through December 31, 2003 and subsequently through March 31, 2004. Upon expiration of this agreement, as amended, the lender will have the right to exercise its rights and remedies immediately, including but not limited to (i) ceasing to make any further loans to us and (ii) the acceleration of our obligations to the lender. We are taking aggressive measures to insure that we have adequate financing in the future; we are in discussions with several financial institutions about replacing our current credit facility. We fully expect, but cannot guarantee, that we will be successful in replacing our existing credit facility, through either our existing lender or a new lender, prior to March 31, 2004. We are also in discussion with several potential investors regarding a significant equity investment. We can make no assurances as to whether any investment proposals will be received and, if so, to what extent they will be dilutive to existing investors. Due to the nature of our business, importing product from Asia and the extended time period required for those purchases to convert to cash, we rely on our credit facility to finance these purchases. 23. WRP ASIA FINANCIAL RESTRUCTURING On July 8, 2003 WRP Asia announced the completion of its financial restructuring, which involved restructuring and reducing WRP Asia's debt position and providing additional new funding. Due to the terms of the restructuring, WRP Asia was prohibited from repaying certain debt, including our intercompany debt in the short term. At that time we began exploring other opportunities to gain compliance with our lender's requirement of a paydown by WRP Asia of its intercompany debt. On October 6, 2003 we announced the signing of a non-binding letter of intent with WRP Asia to enter into a stock redemption and exchange agreement. On November 3, 2003 we announced the signing of a definitive stock redemption and exchange agreement (the "Agreement") with WRP Asia. The Agreement calls for us to redeem 1,252,538 shares of Class A Common Stock and the 2,500,000 shares of Class B Common Stock, which comprise all of WRP Asia's holdings. Collectively, these shares represent approximately 53.2% of our outstanding Capital Stock. The consideration for the redemption is: (i) the conveyance to WRP Asia of our 70% ownership interest in its subsidiary PT Buana Multicorpora ("PTB") Indonesia, an Indonesian based manufacturer of gloves; and (ii) excuse of all indebtedness owing to us or our subsidiaries from WRP Asia and from PTB with the exception of our obligation to be responsible for trade payables owing to PTB for recent product purchases. We also announced the execution of a five-year supply agreement from WRP Asia and PTB to us (through our subsidiary American Health Products Corporation), calling for the purchase of a portion of our latex glove requirements, which equates to the appropriate annualized quantities that we are currently purchasing from PTB and WRP Asia. The pricing of such products has a variable factor keyed to the cost of raw latex. The Board of Directors of both WRP Asia and us have approved the transaction. We have received a fairness opinion from an independent professional valuation firm that the transaction is fair to our stockholders. We had anticipated that the transaction would close by November 30, 2003, however, since the transaction involves the transfer of ownership on an Indonesian company, we are required to obtain the approval of the Investment Board of the Government of Indonesia. This approval process has caused several unforeseen delays. We now anticipate the transaction to close by March 31, 2004. At that time, based on the split adjusted, current market price for our 19 common stock of $1.09 per share as of February 13, 2004, we anticipate incurring a loss on this transaction of approximately $2.7 million. An increase to our common stock price will reduce this loss and a considerable appreciation in common stock price would cause us to incur a gain on the transaction. Likewise, a decline in our common stock price would cause the loss on the transaction to increase. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-looking statements in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding new products and markets, gross margins, selling, general and administrative expenses, liquidity and cash need and our plans and strategies, are all based on current expectations, and we assume no obligation to update this information. Numerous factors could cause actual results to differ from those described in the forward-looking statements. We caution investors that our business is subject to significant risks and uncertainties. Our wholly owned subsidiary, American Health Products Corporation ("AHPC"), is engaged in the marketing and distribution of high-quality, disposable, examination, foodservice and specialty gloves in the United States and has been in the glove business since our incorporation in January 1989. For the six months ended December 31, 2003, we recorded net sales of $19,313,730. Our 70% owned subsidiary, PT WRP Buana Multicorpora ("PT Buana"), which commenced operations in April 1996, owns and operates an Indonesian glove manufacturing plant. PT Buana manufactures high-quality, disposable latex exam and foodservice gloves. THREE MONTHS ENDED DECEMBER 31, 2003, COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2002: Our net sales are derived from the sale of finished product, net of allowable rebates, royalties, discounts and returns. Net sales include glove sales from AHPC's glove product line and latex exam glove sales from PT Buana, exclusive of its sales to AHPC. Net sales totaled $9,527,504 and $8,792,517 for the three months ended December 31, 2003 and 2002, respectively. This represents an 8.4% increase in net sales for the year compared to the year earlier period. The increase in sales of $734,987 was due to a low sales volume PT Buana experienced in December 2002 as a result of the West Coast Dock strike. Cost of goods sold includes all costs to manufacture, purchase and obtain the finished product, including costs such as ocean freight, customs, duty and warehousing. Cost of goods sold increased 11.3% from $7,232,674 for the three months ended December 31, 2002, to $8,047,491 for the three months ended December 31, 2003, due to the increase in sales and, in part, due to the increase in cost of raw latex. As a percentage of net sales, cost of goods sold increased from 82.3% for the three months ended December 31, 2002, to 84.4% for the three months ended December 31, 2003. The gross profit percentage decreased to 15.5% in the three month ended December 31, 2003, versus 17.7% in the same period of 2002. The gross profit percentage decrease is attributed to an increase in the cost of raw latex, which increased by more than 40% versus the comparable 2002 period. We continue to expect our gross margins to be affected by the cost of latex, changes in product mix, competition, manufacturing capacity levels 20 and other factors. There has not been an appreciable increase in the cost of latex since December 31, 2003, and our recent price increases will allow us (for our fourth quarter) to adjust for some of the cost increase in latex over the first two quarters of our fiscal year. Selling expenses include all salaries and payroll related costs for sales and marketing staff together with other sales related expenses such as sales commissions, travel costs, trade shows, advertising, promotions and delivery costs. Selling, general and administrative ("SG&A") expenses increased by 21.7% from $1,980,411 for the three months ended December 31, 2002, to $2,409,226 for the three months ended December 31, 2003. The increase of $428,815 in SG&A expenses is attributable to an increase in manufacturing operating expenses and distribution marketing expenditures. Loss from operations was $(929,213) for the three months ended December 31, 2003, as compared to loss from operations of $(420,567) for the three months ended December 31, 2002. This loss from operations reflects the increased costs of goods sold and selling expenses. Interest expense increased during the three months ended December 31, 2003, to $73,007 compared to $21,099 in the same quarter of 2002. This increase is attributable to an increase in our line of credit and interest rates increase for PT Buana during the quarter in 2003 versus the 2002 comparable quarter. We recorded a foreign currency exchange loss of $5,435 in the quarter ended December 31, 2003 versus a foreign exchange gain of $6,050 in the comparable period in 2002 from our Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and depending upon the mix of assets and liabilities in PT Buana's books in Indonesian rupiah, an exchange gain or loss will be incurred. These foreign currency exchange gains or losses are reported as a component of the SG&A expense category in the consolidated statements of operations. PT Buana uses the U.S. dollar as its functional currency. PT Buana continues to be exposed to foreign currency exchange rate fluctuations and may incur exchange gains or losses in the future. Indonesia continues to experience economic and political instability, which is characterized by fluctuations in its foreign currency exchange rate, interest rates, stock market and inflation rate. The financial statements do not include any adjustment that might result from these uncertainties and any related effects will be reported in the financial statements as they become known and estimable. Other income for the quarter ended December 31, 2003 and 2002, was $40,371 and $151,972, respectively. The decrease was due to the proceeds from the Transition Services Agreement with MAXXIM in the three months ended December 31, 2003. The benefit for income taxes for the three months ended December 31, 2003, was $(28,186) and $(52,982) for the comparable 2002 period. Our U.S. operations generated net operating loss carry-forwards ("NOL's") in prior years of which approximately $2.3 million is remaining from June 30, 2003. These NOL's are fully reserved and are included as a component of deferred tax assets. Our ability to utilize allowed NOL's in the future may be reduced in the event of the closing of the definitive stock redemption and exchange agreement with WRP Asia Pacific. 21 For the three months ended December 31, 2003, our net loss was $(854,135), compared to a net loss of $(192,586) in the same period of 2002. Diluted (loss) income per share for the three months ended December 31, 2003 and 2002, was $(0.13) and $(0.03), respectively. SIX MONTHS ENDED DECEMBER 31, 2003, COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 2002: Our net sales are derived from the sale of finished product, net of allowable rebates, royalties, discounts and returns. Net sales include glove sales from AHPC's glove product line and latex exam glove sales from PT Buana, exclusive of its sales to AHPC. Net sales totaled $19,313,730 and $19,334,021 for the six months ended December 31, 2003 and 2002, respectively. This represents a 0.1% decline in net sales for the year compared to the year earlier period. Cost of goods sold includes all costs to manufacture, purchase and obtain the finished product, including costs such as ocean freight, customs, duty and warehousing. Cost of goods sold increased 2.1% from $15,759,055 for the six-month period ended December 31, 2002, to $16,096,413 for the six months ended December 31, 2003, due to the increase in the cost of raw latex. As a percentage of net sales, cost of goods sold increased from 81.5% for the six months ended December 31, 2002, to 83.3% for the six months ended December 31, 2003. The gross profit percentage decreased to 16.7% in the six month ended December 31, 2003 versus 18.5% in the same period of 2002. The gross profit percentage decrease is attributed to an increase in the cost of raw latex, which increased by more than 40% versus the comparable 2002 period. The gross profit percentage was also impacted by increases in product mix of lower-margin products. We continue to expect our gross margins to be affected by the price of latex, changes in product mix, competition, manufacturing capacity levels and other factors. As of the present time the cost of latex appears to have stabilized and recent price increases will enable us, beginning in the fourth quarter, to return to acceptable margins on the distribution of our products, assuming no substantial further increase in latex prices. We are also seeing a trend in the food service industry toward increasing use of vinyl gloves, historically, vinyl products have been subject to less pricing volatility than latex prices gloves. Selling expenses include all salaries and payroll related costs for sales and marketing staff together with other sales related expenses such as sales commissions, travel costs, trade shows, advertising, promotions and delivery costs. Selling, general and administrative ("SG&A") expenses increased by 15.6% from $4,070,738 for the six months ended December 31, 2002, to $4,706,966 for the six months ended December 31, 2003. The increase of $636,227 in SG&A expenses is attributable to an increase in manufacturing operating expenses and an increase in marketing expenses. Loss from operations was $(1,489,649) for the six months ended December 31, 2003, as compared to that of $(495,772) for the six months ended December 31, 2002. This loss from operations reflects the increased costs of goods sold relating to the cost of raw latex. Interest expense increase during the six months ended December 31, 2003, to $117,027 compared to $69,824 in the same six-month period of 2002. This decrease is attributable to an increase in our line of credit and interest rates increase for PT Buana during the six month period in 2002 versus the 2001 comparable. 22 We recorded a foreign currency exchange loss of $13,168 in the quarter ended December 31, 2003 versus a foreign exchange gain of $1,138 in the comparable period in 2002 from our Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and depending upon the mix of assets and liabilities in PT Buana's books in Indonesian rupiah, an exchange gain or loss will be incurred. These foreign currency exchange gains or losses are reported as a component of the SG&A expense category in the consolidated statements of operations. PT Buana uses the U.S. dollar as its functional currency. PT Buana continues to be exposed to foreign currency exchange rate fluctuations and may incur exchange gains or losses in the future. Indonesia continues to experience economic and political instability, which is characterized by fluctuations in its foreign currency exchange rate, interest rates, stock market and inflation rate. The financial statements do not include any adjustment that might result from these uncertainties and any related effects will be reported in the financial statements as they become known and estimable. Other income for the six-month ended December 31, 2003 and 2002 was $69,850 and $436,121, respectively. Other income for the six month period of 2002 consists of interest income proceeds from the Transition Services Agreement with MAXXIM ($375,000) and miscellaneous income. The (benefit) provision for income taxes for the six months ended December 31, 2003 was $22,562 and $(57,237) for the comparable 2002 period. This change in income taxes is primarily attributable to the net loss for the six-month period and the fluctuations of the Indonesian rupiah against the US dollar during the period. Our U.S. operations generated net operating loss carry-forwards ("NOL's") in prior years of which approximately $1.3 million is remaining from June 30, 2002 which can be used to offset future U.S. generated taxable income through the year 2004. The ability to use these NOL carryforwards may be impaired in the event of the closing of the stock redemption and exchange agreement with WRP Asia Pacific. For the six months ended December 31, 2003, our net loss was $(1,470,334), compared to a net loss of $(67,164) in the same period of 2002. Diluted loss per share for the six months ended December 31, 2003 and 2002 was $(0.22) and $(0.01), respectively. LIQUIDITY AND CAPITAL RESOURCES: SIX MONTHS ENDED DECEMBER 31, 2003: Cash and cash equivalents at December 31, 2003 was $334,853, a decrease of $86,096 from $420,929 at June 30, 2003. We experienced the decrease in cash flows during the six months ended December 31, 2003, primarily from cash used in investing activities. Our operations provided cash of $643,073 during the six months ended December 31, 2003, primarily as a result of a tax refunds received of $526,000 for 2002 amended returns. Net trade accounts receivable at December 31, 2003 increased 8.9% to $2,524,550 from $2,317,178 at June 30, 2003. The increase in accounts receivable was due to the an increase in second quarter sales. Net inventories at December 31, 2003 were $8,523,452, a decrease from the level at June 30, 2003, of $8,796,339, due to reduction of safety stock levels. 23 During the six months ended December 31, 2003, we used cash in investing activities of $457,395. We spent $284,341 for capital improvement expenditures during the six-month period primarily at PT Buana, our Indonesian manufacturing plant. These expenditures included equipment purchases and upgrades to expand our capacity to manufacture higher-margin products, including powder-free latex gloves. During the six months ended December 31, 2003, cash was used from financing activities in the amount of $271,774. The cash was used to pay down our line of credit with GE Capital. The outstanding accounts receivable from WRP Asia results primarily from sales of product to WRP Asia (powder-free exam gloves produced by PT Buana), cash advances, charges for obtaining FDA approval of the gloves imported from WRP Asia and other items. AHPC purchased virtually all of its latex powder-free exam gloves from WRP Asia in 2002, 2001, 2000 and 1999. Management believes transactions between operating segments are made at prevailing rates. AHPC purchases its powdered latex gloves from its 70% subsidiary, PT Buana, as well as from third-party suppliers other than WRP Asia. As of December 31, 2003, we have outstanding accounts receivable from WRP Asia of approximately $8,988,141. Subsequent to June 30, 2002, the amounts due to PT Buana of approximately $5,586,000 were assigned to us in partial satisfaction of intercompany amounts due from PT Buana to us. As of December 31, 2003, we have accounts payable to WRP Asia of approximately $3,890,537, primarily resulting from the purchase of inventories from WRP Asia. The net amount due from WRP Asia, before allowance for doubtful accounts at December 31, 2003, was approximately $5,097,605, against which we have provided an allowance for doubtful accounts of approximately $5,586,000 (representing all amounts due for the sale of product from PT Buana to WRP Asia at December 31, 2003). Subsequent to June 30, 2002, we entered into a formal agreement with WRP Asia to provide for the full and complete right of offset of any trade payables due against amounts they owe to us and AHPC. We continue to purchase gloves from WRP Asia and believe that the unreserved amounts due to WRP Asia from AHPC of approximately $565,142 at March 31, 2003 are realizable based upon the agreement granting right of offset and ongoing purchases from WRP Asia. In management's opinion, while we have been advised by WRP Asia that it does not currently intend to seek protection from creditors, should such action take place, we would have to reevaluate the ability to offset payables to WRP Asia against our receivables from them. On September 18, 2002, our Board of Directors passed a resolution that limits the net intercompany amount due from WRP Asia exceeding the balance of $6,200,000 on a consolidated basis. In the event that WRP Asia desires to purchase product from PT Buana, and the effect of this sale would be to increase the net amount due beyond $6,200,000, the resolution requires WRP Asia to support these purchases by payment of cash in advance or tender of an irrevocable letter of credit to PT Buana to cover the purchase price of the order to the extent such amount exceed $6,200,000. 24 On July 24, 2002, our Board of Directors approved a proposal submitted by the independent directors to form a Special Evaluation Committee (the "Committee"). The Committee is comprised of our "B" Directors, Robert J. Simmons and Don L. Arnwine as well the independent "A" Directors, G. Jeff Mennen and Richard J. Swanson. The purpose of the Committee is to examine the WRP Asia restructuring process as well as the options and alternatives available to us, which include the negotiation and possible closing of the stock redemption agreement with WRP Asia presently in effect. On December 1, 1998, we obtained a domestic three-year credit facility from GE Capital, a large commercial credit company. This asset based lending loan and security agreement included a $10,000,000 revolving line of credit with a $7,000,000 letter of credit sub-facility. On March 31, 1999, we amended our Loan and Security Agreement by increasing the maximum credit loan limit from $10,000,000 to $15,000,000 subject to availability, based on a formula using accounts receivable and inventory. As part of the amendment, the letter of credit subfacility was increased from $7,000,000 to $11,000,000. The line of credit borrowings carry an interest rate of commercial paper plus 4.5% (1.00% at December 31, 2003). At December 31, 2003, we had outstanding $746,348 on the revolving line of credit and $971,797 of letter of credit liabilities under the credit facility. As of December 31, 2003, we were not in compliance with all of our covenants and have obtained waivers of these covenant violations from the financial institution. We currently expect to have cash needs during the next year and beyond for funding the growth of the existing glove business, launch and promotion of our SafePrep foodservice business and for other uses. These cash needs may arise in connection with various events such as for: (i) the expansion into new products; (ii) the expansion into new markets; (iii) funding the promotion of our branded products; (iv) repayment of debt obligations; (v) purchasing our Common Stock in connection with our stock repurchase program; and (vi) manufacturing capital improvements. We believe that our cash and cash to be generated from future operations plus our credit facility will be sufficient to fund our ongoing operations. As of December 31, 2003, we had the following contractual obligations and commercial commitments:
PAYMENTS DUE BY PERIOD CONTRACTUAL ---------------------- OBLIGATION TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS ---------- ----- ---------------- --------- --------- Operating Leases $829,448 $283,658 $545,790 -0-
Operating leases primarily represent our leases for our corporate office and warehouse facilities. The letters of credit are issued under our credit facility and are commercial obligations related to product purchases. Insurance premium financing was used to finance our product liability insurance. Short-term borrowings represent borrowings under our credit facility primarily to finance working capital. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market value of investments. We have not entered into interest rate caps or collars or other hedging instruments. Exposure to changes in interest rates is limited to borrowings under revolving credit and debt agreements, which have variable interest rates, tied to the prime and commercial paper rates. We estimate that the fair value of each debt instrument approximated its market value at December 31, 2003. We are subject to fluctuations in the value of the Indonesian rupiah vis-a-vis the U.S. dollar. The investment in the Indonesian subsidiary is remeasured into the U.S. dollar and the book value of the assets and liabilities of this operation at September 30, 2003, approximated its fair value. ITEM 4. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. However, no cost effective internal control system will preclude all errors and irregularities, and management is necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our chief executive officer and chief financial officer, within 90 days prior to the filing date of the report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. 26 PART II ITEM 1-5. No changes ITEM 6 (a) EXHIBIT 99.1 31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K On October 6, 2003, we filed a Report of Form 8-K wherein we reported information under Item 12, Results of Operations and Financial Condition. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WRP Corporation (Registrant) Date: February 19, 2004 By: /s/ Alan E. Zeffer ------------------- Name: Alan E. Zeffer Title: Chief Financial Officer 27