10-K 1 c88761e10vk.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from _________ to _________. Commission file number 0-17458 AHPC HOLDINGS, INC. ------------------- (Exact name of registrant as specified in its charter) MARYLAND 73-1326131 -------- ---------- (State of incorporation) (I.R.S. Employer Identification No.) 500 PARK BOULEVARD, SUITE 1260 ITASCA, IL 60143 ---------------- (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 285-9191 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, par value $0.01 per share None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registered is an accelerated filer (as defined in Rule 12-2 of the Act). Yes [ ] No [X]. Aggregate market value of voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the stock as reported on Nasdaq on October 13, 2004: $1,817,031 At October 13, 2004, 1,108,452 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE We are incorporating, by reference, information from our Proxy Statement dated May 17, 2004 and filed with the Commission on May 21, 2004 for information contained in Item 14 of this report. AHPC HOLDINGS, INC. FORM 10-K FOR THE YEAR ENDED JUNE 30, 2004 TABLE OF CONTENTS
PAGE PART I ITEM 1. BUSINESS................................................................................. 1 ITEM 2. PROPERTIES............................................................................... 5 ITEM 3. LEGAL PROCEEDINGS........................................................................ 5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 7 PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 8 ITEM 6. SELECTED FINANCIAL DATA.................................................................. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 26 ITEM 9A. CONTROLS AND PROCEDURES.................................................................. 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 27 ITEM 11. EXECUTIVE COMPENSATION................................................................... 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 33 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 34 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................................... 34 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS OF FORM 8-K................................... 35
PART I This Form 10-K contains certain forward-looking statements. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing words such as "may," "will," "expect," "believe," "anticipate," "estimate," or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending upon a variety of factors, including those set forth in the section below entitled "Risk Factors." ITEM I. BUSINESS GENERAL AHPC Holdings, Inc, formerly WRP Corporation (refer to Note B), is a leading marketer of foodservice and medical examination gloves in the United States through our wholly owned subsidiary, American Health Products Corporation ("AHPC"). We were also a manufacturer of disposable latex examination and food service gloves through our formerly owned 70% owned Indonesian manufacturing facility, PT WRP Buana Multicorpora ("PT Buana") (refer to Note B of the financial statements). We were reincorporated in Maryland in December 1995 and have been involved in several business operations. From March, 1998 until April 30, 2004, WRP Asia Pacific Sdn Bhd ("WRP Asia") owned 53.2% of our Common Stock, comprised of 833,333 $0.01 par value shares and 417,513 "Class A" Shares (the latter of which was convertible into our $0.01 par value Common Stock and entitled WRP Asia to elect a majority of our directors). WRP Asia is one of the world's leading manufacturers of high quality disposable gloves, primarily for use by healthcare professionals in the acute care, alternative care and foodservice markets, and for critical environments in the electronics industries, scientific laboratories, pharmaceutical industries and other related industries. AHPC had been purchasing the majority of its powder-free latex exam gloves from WRP Asia for several years. As of April 30, 2004, we redeemed WRP Asia's shareholdings in the Company through the completion of our stock redemption and exchange agreement with WRP Asia (see Note 23 below). Through this transaction we redeemed 417,513 shares of Class A Common Stock and the 833,333 shares of $0.01 par value Common Stock, which comprised all of WRP Asia's holdings. These share amounts reflect the 1-for-3 reverse stock split which occurred on January 20, 2004. Collectively, these shares represented 53.2% of our outstanding capital stock. As consideration for the redemption we conveyed to WRP Asia, our 70% ownership interest in our subsidiary PT Buana and excused of all indebtedness owing to us from WRP Asia and PT Buana, with the exception of certain mutually agreed obligations related to recent purchases of product. We also entered into a five year supply agreement whereby we agreed to purchase certain minimum quantities of our latex glove needs from WRP Asia. On the closing of the transaction, the three of our seven directors who were employees of WRP Asia resigned their positions as our officers and directors ; our remaining independent directors continued to serve on our board. 1 Under the Stock Redemption and Exchange Agreement we also agreed to change our corporate name from WRP Corporation to AHPC Holdings, Inc. The name change was made effective on May 14, 2004. Over the past 12 months ended June 30, 2004, we have made the decision to increase our presence in the healthcare market. The healthcare market includes Dental and IDN/Medical Distribution channels. Our focus will be existing products in healthcare including the development of a separate branding identity for DermaSafe versus Glovetex. This decision reverses the direction that had been taken in March 2, 2002 by AHPC to substantially reduce its presence in this market. GLOVE PRODUCTS Through our wholly owned subsidiary, AHPC, we market a full product line of disposable gloves including latex, vinyl, synthetic and nitrile examination and surgical gloves used primarily in the foodservice, non-acute medical, dental, nursing home and retail industries. PT Buana, WRP Asia and other third parties manufacture gloves marketed by AHPC. Gloves are marketed by AHPC under the brand names "DermaSafe(R)," "Glovetex(R)," "ProFeel(R)" and "SafePrep(TM)" to foodservice distributors, medical distributors, dental distributors and nursing homes. AHPC also sells gloves to other companies, which market the gloves under their own brand names or "private labels." The gloves are sold in cases that are generally comprised of ten boxes with 100 gloves per box. For the year ended June 30, 2004, AHPC's sales ratios of latex powdered, latex powder-free and non-latex glove sales were approximately 36%, 26% and 32%, respectively. We anticipate that our sales ratio of latex powdered exam gloves will continue to decline and be replaced with powder-free and synthetic gloves, which is consistent with market trends. Manufacturing Operations. The production of latex gloves begins with the tapping of raw latex (natural polysporene) from rubber trees located on plantations in Malaysia and Indonesia. Once gathered, the raw latex is sent to a centrifuge where the latex is concentrated. PT Buana purchases the latex concentrate and ships it to its production plant where the latex concentrate is compounded in a proprietary formula to enhance glove durability, elasticity and tactility. A controlled dipping process causes consistency from batch to batch and eliminates air bubbles that can create pinholes. Glove-making formers, which are in five sizes and designed for the American hand, are dipped in the latex compound. The formers are cleansed both chemically and mechanically to prevent residue buildup which could compromise glove integrity. The PT Buana factory, which was 70% owned by us through April 30, 2004, had a production capacity of approximately 840,000,000 latex gloves per year. Under our Stock Redemption and Exchange Agreement with WRP Asia, we conveyed our 70% interest in PT Buana to WRP Asia and entered into a five year supply agreement. We continue to purchase powdered latex exam gloves from PT Buana under the supply agreement. Powdered Latex Examination and Foodservice Glove Suppliers. PT Buana and unrelated Malaysian and Indonesian glove manufacturers supplied AHPC with its powdered latex gloves inventory during the year ended June 30, 2004. 2 Powder-Free Latex Examination and Foodservice, Nitrile and Surgical Glove Supplier. AHPC continues to purchase the majority of its latex powder-free gloves from Indonesia and Malaysia. In addition, AHPC is supplied with its nitrile gloves from China. AHPC also purchases latex powder-free gloves from PT Buana. Non-Latex Examination and Foodservice Glove Suppliers. AHPC purchases its non-latex gloves from two unrelated suppliers in Taiwan, China, and Thailand. COMPLIMENTARY PRODUCTS The foodservice, industrial and retail industries view our current line of product offerings as one of a bundle of safety products used by their customers. Developing a profitable line of complimentary products will be important to the future success of our business. During 2003, we diversified our product offering with additional synergistic product lines that address the current safety requirements of our markets. These additional product offerings include polygloves, heavy-duty gloves, headwear, aprons and bibs, food storage bags and educational services. These products are being offered under our SafePrep brand and under private label. Markets and Methods of Distribution. AHPC markets its gloves through a network of national, regional and local foodservice, retail and medical distributors that sell primarily to restaurant, hotels, hospitals and nursing homes. AHPC also markets to alternate care and home health care dealers, dental dealers and major retail outlets. The principal methods of marketing are trade shows, advertising, seminars, direct mail and brokers, as well as sales representatives. AHPC employs a sales force comprised of regional sales managers and representatives, manufacturer sales representatives and an in-house sales and marketing staff to cover the U.S. FDA Regulation of Examination Glove Products. The quality control procedures for the manufacture of examination gloves marketed in the United States are regulated by the U.S. Food and Drug Administration ("FDA"). Included within such procedures are minimum testing requirements, as well as FDA current Quality Systems Regulations and American Society for Testing and Materials ("ASTM") standards. Competition. Our business of providing barrier protection products is highly competitive in the markets in which we operate including healthcare and foodservice. The primary basis of competition includes, but is not limited to price, product quality, breadth of product line, service and product availability. Additionally, among our direct competitors are several large firms with significantly greater resources available than us. Nonetheless, we believe we have certain competitive advantages that enable us to compete favorably with larger competitors including our ability to provide high service levels and to react quickly to changing customer requirements. Customers. Our customers include leading foodservice distributors and healthcare product suppliers. During the year ended June 30, 2004, AHPC's national customers, accounted for 86.1% of net sales. The loss of these customers would have a materially adverse effect on us. Our customers tend to limit the number of qualified vendors they purchase from in order to gain efficiencies across their product lines. We, therefore, expend substantial efforts to maintain and grow our relationships with our existing major customers. However, our products are ultimately distributed by three diversified distribution companies, through their combined networks of over 3 100 operating companies, to thousands of foodservice organizations and medical facilities throughout the United States. The ultimate end-users of our products are the foodservice organizations and medical facilities, healthcare professionals and individuals who use our gloves. Patents and Trademarks. AHPC owns the trademarks "SafePrep," "Dermasafe" and "Glovetex," which are registered in the United States. AHPC's surgical glove line utilizes the trademark name "ProFeel," which is a registered name owned by WRP Asia. Segment Financial Information. The segment information of AHPC Holdings, Inc., for the year ended June 30, 2004, is included in Note L to our Consolidated Financial Statements and includes two segments, manufacturing and distribution. Inventory. Since the majority of our products are imported from Southeast Asia, it is our practice to maintain a certain level of inventory as safety stock. Inventories are accounted for on a first-in, first-out ("FIFO") basis and are valued at the lower of actual cost or market. EMPLOYEES As of June 30, 2004, our U.S. operations employed a total of 28 full-time employees. AHPC also uses the services of one manufacturer sales representative organization and 25 broker representative organizations that do not work exclusively for AHPC and are paid on a commission basis. None of our employees are represented by a collective bargaining agreement. We consider relations with our employees to be good. BACKGROUND INFORMATION REGARDING OUR OWNERSHIP AND BUSINESS At December 31, 1997, MBf International owned all 1,252,538 shares of our Series A Common Stock and 1,682,275 shares of our Common Stock. On March 31, 1998, we announced that our majority shareholder, MBf International, had consummated the closing of two separate agreements (entered into in May 1997) with WRP Asia Pacific Sdn. Bhd. ("WRP Asia"), formerly known as Wembley Rubber Products (M) Sdn. Bhd., our supplier of latex powder-free exam gloves. These agreements transferred majority ownership in us to WRP Asia and were as follows: 1. MBf International sold all of our Series A Common Stock (1,252,538 shares) to WRP Asia for $5.00 per share or $6,262,690; and 2. WRP Asia purchased 2,500,000 shares of our unregistered Common Stock for $2.70 per share for a total of $6,750,000. The purchase price of $2.70 per share reflected a 12% discount from the average stock price over a seven consecutive business day range ended May 9, 1997, as detailed by a fairness opinion received from an independent valuation firm. These transactions provided WRP Asia with a 55.0% ownership interest in us at March 31, 1998. The above share amounts are prior to the 1-for-3 reverse stock split which was effected on January 20, 2004. Subsequent to June 30, 2003, WRP Asia is no longer a majority shareholder (refer to Note B of the financial statements). 4 At December 31, 1998, MBf International owned 1,682,275 shares of our Common Stock, which represented a 24.4% ownership interest in us at that time. In January 1999, MBf International sold its 1,682,275 shares to several U.S. institutional investors, thus eliminating any ownership interest in us. On March 1, 2002, we announced that our subsidiary, American Health Products Corp, had entered into a Transition Services Agreement with Maxxim Medical, Inc., ("MAXXIM"), whereby MAXXIM would service certain of our acute-care medical customers. As a result of this transition, we substantially reduced our personnel in our medical division and transitioned our business with respect to most of our customers in the medical division to MAXXIM. We have incurred severance costs of approximately $256,000 associated with the reduction in personnel. On February 11, 2003, MAXXIM filed for bankruptcy. As of June 30, 2003, we had an outstanding account receivable with MAXXIM of $280,115.41. This amount has been fully reserved. ITEM 2. PROPERTIES Our principal executive and administrative office is located in Itasca, Illinois. The lease for this location was renewed on April 9, 2001, for a term of five years. For the year ended June 30, 2004, our lease expense was $176,500. In May 1999, we entered into a five-year lease agreement for a 55,000 square-foot warehouse facility located in Itasca, Illinois. The lease term for this location commenced on August 1, 1999 and was to expire in July 2004; this has been extended for one year to July 2005. The annual rental expense for this lease is approximately $322,200 per year. AHPC also uses public warehouse facilities, as needed, to store its inventory in Oakland, California; Fond Du Lac, Wisconsin; and Hanover, Pennsylvania. Public warehouse charges are dependent upon the volume of products stored and the frequency of shipping or receiving products. ITEM 3. LEGAL PROCEEDINGS At June 30, 2004, AHPC was actively involved or otherwise named in 23 latex glove product liability suits pending throughout the United States. AHPC was an active defendant in 11 claims, and was named as a third party defendant in eight claims. AHPC has challenged the sufficiency of service in the eight third-party actions. Additionally, through a series of Private Label Supply and Trademark Licensing Agreements with VHA, Inc. ("VHA"), AHPC agreed to defend and indemnify VHA in four suits. There are no claims pending directly against AHPC Holdings, Inc. All of the claims involve plaintiffs that have worked in the medical and health industries and who allege injuries associated with the continued use and/or exposure to latex gloves products. In each of the claims, AHPC or VHA is one of several glove distributors, manufacturers or users named in the suits. Each of the claims alleges damages of an unspecified amount and is in a different stage of discovery or other pre-trial proceeding. It is not currently possible to determine a favorable or unfavorable outcome for AHPC or VHA in any of the claims. 5 AHPC possesses product liability insurance coverage, which covers the defense costs, and certain damage awards associated with the product liability claims against AHPC and the indemnity of AHPC's customers to the limits of the policies. However, there is no assurance that AHPC's insurance will be sufficient to meet all damages, for which AHPC may be held liable, or the product liability insurance for these claims will continue to be available to us or, if available, that it will be available in sufficient amounts and at affordable terms. Likewise, there is no assurance that the outcome of these suits will not adversely affect our operations or financial condition. AHPC will vigorously contest any latex claim initiated against it or one of its indemnities, but will enter into a settlement agreement, where, after careful consideration, our management determines that our best interests will be served by settling the matter. During the year ended June 30, 2003, AHPC was dismissed from or otherwise settled 16 latex gloves product liability lawsuits, including two VHA claims. Typically, settlement amounts have been amounts not greater that the deductible, so the at the insurer has not paid settlement amounts; there can be no assurances that this will be the case in the future. From time to time we are involved in other litigation relating to claims arising out of our operations in the normal course of business. At October 13, 2004, we were not party to any other legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material adverse effect on our financial condition. Management believes all legal claims are adequately provided for and if not provided for, are without merit or involve such amounts that would not materially adversely affect us. 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual meeting of the shareholders of was held on June 28, 2004. The purpose of the annual meeting was to consider the vote on the following matter: 1. To elect two directors to hold office until their three-year term expires or otherwise as provided in our by-laws. Director Nominees Anthony F. Alibrio, Sr. Don L. Arnwine Each of the nominees for directors received the following number of votes:
A.F. Alibrio, Sr. D.L. Arnwine ----------------- ------------ For 851,035 851,035 Against 745 745 Abstain 13,250 13,250 Non-votes 0 0
The above matter was approved by the shareholders. 2. To ratify the appointment of Grant Thornton, LLP to serve as our auditors for the next fiscal year ending June 30, 2004. The above matter was approved by the shareholders. There were no other matters voted on at the meeting. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is traded on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") SmallCap Stock Market under the symbol "GLOV" (refer to Note B). The table below sets forth for each quarter of the fiscal year indicated the reported high and low market prices of our Common Stock. COMMON STOCK PRICES
PERIOD ENDED LOW HIGH ------------ --- ---- JUNE 30, 2004 4th quarter $2.39 $4.95 3rd quarter $1.02 $2.70 2nd quarter $1.47 $2.91 1st quarter $1.02 $1.98 JUNE 30, 2003 4th quarter $ .13 $ .58 3rd quarter $ .18 $ .35 2nd quarter $ .15 $ .43 1st quarter $ .44 $ .68 JUNE 30, 2002 4th quarter $ .48 $ .86 3rd quarter $ .65 $1.00 2nd quarter $ .68 $1.80 1st quarter $ .48 $1.15 JUNE 30, 2001 4th quarter $ .44 $ .98 3rd quarter $ .59 $1.06 2nd quarter $1.06 $1.63 1st quarter $1.09 $2.00 JUNE 30, 2000 2nd quarter $1.13 $2.00 1st quarter $1.75 $2.38
There were approximately 277 shareholders of record of our Common Stock as of June 30, 2004. We believe that there are approximately an additional 2,000 holders whose stock is held in "street name." 8 We have not paid a dividend with respect to the Common Stock. We expect to reinvest any earnings for expansion of our operations and do not intend to pay a dividend in the foreseeable future. In March 2000, we announced that our Board of Directors had authorized a program to repurchase up to 10% of our public Common Stock. These purchases may be made in the open market and in block transactions over a two-year period. The program is subject to market conditions and its impact on share price as well as other investment options that we may consider to enhance shareholder value. During the year ended June 30, 2004, we had not purchased any shares of our Common Stock under this program. Subsequent to June 30, 2004 through September 28, 2004, we had not purchased shares of our Common Stock. As of the year ended June 30, 2004, there were up to an additional 707,700 shares available for repurchase (before giving effect to the 1-for-3 reverse stock split). We have purchased a total of 254,800 shares since the inception of this program (before giving effect to the 1-for-3 reverse stock split). The trading of our Common Stock on the Nasdaq SmallCap Market is conditioned upon meeting certain asset, capital and surplus, earnings and stock price tests. To maintain eligibility on the Nasdaq SmallCap Market, we must, among other things, maintain an average bid price of our Common Stock of at least $1.00 per share. Nasdaq notified us on May 3, 2001, that the average bid price of our Common Stock has been below $1.00 per share for 30 consecutive days, and that our Common Stock would be delisted as of the opening of business on May 11, 2001. However, we requested an appeal of Nasdaq's determination; this appeal stayed the delisting of our Common Stock pending the decision of the Nasdaq Listing Qualification Panel. During the pendency of these proceedings, our stock price began trading at or about $1.00 per share. On August 16, 2001, we were notified by the Panel that our stock had evidenced the required closing bid price of at least $1.00 per share for a minimum of ten consecutive trading days, and that the delisting proceedings were terminated. Accordingly, we canceled the Special Meeting of Shareholders scheduled for August 27, 2001, and are no longer needing to consider a reverse stock split. On February 14, 2002, NASDAQ notified us that the bid price of our common stock had closed at less than $1.00 per share over the previous 30 consecutive trading days, and, as a result, did not comply with Marketplace Rule 4310(c)(4) (the "Rule"). Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), we were provided 180 calendar days, or until August 13, 2002, to regain compliance with the Rule. On August 14, 2002, NASDAQ notified us that we had not regained compliance in accordance with Marketplace Rule 4310(c)(8)(D). However, NASDAQ noted that we meet the initial listing requirements for the NASDAQ SmallCap Market under Marketplace Rule 4310(c)(2)(A). Specifically, we qualified with the $5,000,000 stockholders equity requirement. Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), we were provided an additional 180 days, or until February 10, 2003, to regain compliance. In order to regain compliance, our Common Stock was required to close at $1.00 per share or more for a minimum of ten consecutive trading days. On January 30, 2003, NASDAQ extended its minimum bid price compliance periods. Specifically, NASDAQ announced it would maintain the initial 180-day, calendar-day bid price 9 grace period for all SmallCap issuers, but extend the bid price grace period for SmallCap issuers demonstrating compliance with the core SmallCap initial listing criteria from 180 to up to 540 days (approximately 12 months). Compliance with this standard is to be verified every 180 days. On April 9, 2003, we received notice from NASDAQ that, over the last 30 days, our Common Stock had not maintained a minimum market value of publicly held shares ("MVPHS") of $1,000,000, as required for continued inclusion by Marketplace Rule 4310 (c)(7) (the "Rule"). NASDAQ further advised that, in accordance with Marketplace Rule 4310 (c)(8)(B), we would be provided 90 days, or until July 8, 2003, to regain compliance. If, at any time before July 8, 2003, the MVPHS of our Common Stock is $1,000,000 or more for a minimum of ten consecutive trading days, NASDAQ would provide written notification that we were in compliance with the rule. If compliance with this rule was not demonstrated by July 8, 2003, NASDAQ advised it would provide written notification that our securities would be delisted, subject to the opportunity to appeal this determination to a listing Qualifications Panel. Subsequently, we achieved compliance with the MVPHS requirement but were still not in compliance with the $1.00 minimum bid price requirement. On July 24, 2003 a hearing was held before the Nasdaq Listing Qualifications Panel. The result of this hearing was that we received an additional period of time, until September 30, 2003, to comply with the minimum bid price requirement. On October 23, 2003 we were advised by Nasdaq that since we had demonstrated a plan to achieve the $1.00 minimum bid price and provided us with an extension based upon the following terms: (1) On or before November 5, 2003 we must file a proxy statement with the SEC and Nasdaq evidencing our intent to seek shareholder approval for the implementation of a reverse stock split sufficient to satisfy the $1.00 bid price requirement. (2) On or before January 5, 2004 we must evidence a closing bid price of at least $1.00 per share and, immediately thereafter, a closing bid price of at least $1.00 per share for a minimum of ten consecutive trading days. On November 5, 2003 we filed a Notice of Special Meeting of Shareholders with the SEC and Nasdaq. This meeting was called to have the following items approved: To amend our Articles of Incorporation, which will affect the following items: (a) change our name to AHPC Holdings, Inc.; (b) eliminate our Class A Common Stock, par value $.01 per share, increase the number of authorized shares of Common Stock, par value $.01 per share, from 10,000,000 to 50,000,000 shares and authorize the issuance of up to 2,000,000 shares of preferred stock, par value $.01 per share; (c) reflect a one share for two shares reverse stock split of our outstanding Common Stock, subject to an increase in the amount of this reverse split, if necessary, to result in an adjustment of the closing bid price of our Common Stock, as adjusted for the reverse stock split, to exceed $1.00 per share; and 10 (d) change the minimum number of persons who may comprise our board of directors from five to three. On January 20, 2004 we held the Special Meeting of Shareholders and received approval on all of the above items, and effected a 1-for-3 reverse stock split of our shares. The approval of items (a), (b) and (d) were contingent upon the transaction with WRP Asia Pacific being completed. Refer to Note 23 for a complete description of this transaction. As of February 10, 2004 our Common Stock had met the minimum bid requirement of Marketplace Rule 4310(c)(8)(D) for 12 consecutive trading days. We have received confirmation from NASDAQ, on February 11, 2004, that we met the minimum requirements and the delisting proceedings were therefore terminated. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table provides information about the securities authorized for issuance under our equity compensation plans as of June 30, 2004: EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c) Number of securities remaining Number of securities to be issued Weighted-average exercise price available for future issuance under upon exercise of outstanding of outstanding options, warrants equity compensation plans (excluding Plan Category options, warrants and rights and rights securities reflected in column (a)) ------------------------- --------------------------------- -------------------------------- ------------------------------------ Equity compensation plans approved by security holders 254,772 $2.36 211,895 Equity compensation plans not approved by security holders - - - ------- ----- ------- Total 254,772 $2.36 211,895 ======= ===== =======
The equity compensation plan approved by security holders consists of our Omnibus Equity Compensation Plan. 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data of AHPC Holdings, Inc. (formerly known as WRP Corporation) presented below for the years ended June 30, 2004, 2003, 2002, 2001, 2000 and 1999 should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
SIX MONTHS ENDED JUNE FOR THE YEAR ENDED DECEMBER YEAR ENDED JUNE 30, 30, 31, ---------------------------------- ---------- ---------------------------- (In thousands except per share amounts) 2004 2003 2002 2001 2000 1999 --------- -------- -------- --------- ------------- --------- STATEMENT OF OPERATIONS DATA: Net sales 36,560 $ 36,989 $ 47,357 $51,889 $31,737 $65,280 Gross profit 6,027 5,737 11,580 14,698 9,040 16,635 Selling, general & administrative expenses 9,134 8,939 17,640 13,784 6,997 12,295 Minority interest in loss (income) of subsidiary, net of tax 243 250 202 -185 -207 97 Net (loss) income ($ 2,850) ($ 5,560) ($ 4,293) $ 529 $ 1,420 $ 2,453 PER SHARE DATA: Diluted (loss) earnings per share ($ 2.80) ($ 0.84) ($ 0.65) $ 0.08 $ 0.21 $ 0.35 BALANCE SHEET DATA (END OF PERIOD): Total assets $ 9,983 $ 25,965 $ 32,947 $36,072 $35,854 $40,194 Long-term debt $ 0 $ 5 $ 19 $ 13 $ 750 $ 1,100 Total shareholders' equity $ 3,837 $ 11,266 $ 16,836 $21,176 $20,827 $19,475
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is to provide stockholders with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis for the following: - Business Overview - Results of Operations - Liquidity and Capital Resources - Business Segments - Critical Accounting Policies - New Accounting Standards and Announcements - Information Regarding Forward-Looking Statements - Subsequent Event - Business Outlook BUSINESS OVERVIEW Our wholly owned subsidiary, American Health Products Corporation ("AHPC"), is engaged in the marketing and distribution of high quality medical grade examination, foodservice gloves, and other complimentary items within the United States and Canada. We have been in the glove business since our incorporation in January 1989. For the year ended June 30, 2004, we recorded net glove sales of approximately $36.6 million. Our formerly owned 70% owned subsidiary (refer to Note B of the financial statements), PT WRP Buana Multicorpora ("PT Buana"), owns an Indonesian glove manufacturing plant, which commenced operations in April 1996. PT Buana manufactures high quality, disposable powdered and powder-free latex examination gloves. Under our Stock Redemption and Exchange Agreement with WRP Asia, we conveyed our 70% interest in PT Buana to WRP Asia and entered into a five year supply agreement. PT Buana sales included approximately 25.1% of related party sales to AHPC through the ten months ended April 30, 2004. PT Buana recorded glove sales totaling $15.4 million and $14.8 million during the period ended April 30, 2004 and the year ended June 30, 2003, respectively. PT Buana's remaining production was sold primarily to WRP Asia and other customers. All significant intercompany transactions and sales have been eliminated in consolidation. This analysis of our results of operations and financial condition should be viewed in conjunction with the financial statements and other information concerning us included throughout this Annual Report. The consolidated financial statements for the years ended June 30, 2004, 2003 and 2002 include our results of operations and statements of cash flows, as well as for AHPC and PT Buana through April 30, 2004 (refer to Note B of the financial statements). In March 2000, we announced that our Board of Directors had authorized a program to repurchase up to 10% of our publicly traded Common Stock. These purchases may be made in the open market and in block transactions over a two-year period. The program is subject to 13 market conditions as well as other investment options that we may consider to enhance shareholder value. During the year ended June 30, 2004, we did not repurchased any shares of our Common Stock under this program. We have purchased a total of 254,800 shares since the inception of this program. RESULTS OF OPERATIONS The following table summarizes our operating results as a percentage of net sales for the periods indicated.
SIX MONTHS FOR THE YEAR ENDED ENDED YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31, ------------------------------------ -------- ------------ 2004 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales 100% 100% 100.00% 100.00% 100.00% 100.00% Cost of goods sold 83.5 84.5 75.5 71.7 71.5 74.5 ----- ------ ------ ------ ------ ------ Gross profit 16.5 15.5 24.5 28.3 28.5 25.5 Selling, general & administrative expenses 25.0 24.2 37.3 26.6 22.1 18.8 ----- ------ ------ ------ ------ ------ (Loss) income from operations -8.5 -8.7 -12.8 1.7 6.4 6.7 Interest (expense) / other income, net -0.3 -1.9 -0.6 -0.9 -0.9 -1 Provision for (benefit from) income taxes -0.3 5.1 -3.9 -0.5 0.3 2.1 Minority interest in loss (income) of subsidiary 0.7 0.7 0.4 -0.3 -0.7 0.2 Net loss from discontinued operations - - - - - - ----- ------ ------ ------ ------ ------ Net income -7.80% -15.00% -9.10% 1.00% 4.50% 3.80% ===== ====== ====== ====== ====== ======
YEAR ENDED JUNE 30, 2004, COMPARED TO THE YEAR ENDED JUNE 30, 2003 Consolidated sales for fiscal year ended June 30, 2004 were $36,560,430, which represents a decrease in sales compared to year ended June 30, 2003 of $428,137 or 1.2%. Our net sales are derived from the sales of finished product net of allowable rebates, discounts and returns. The decrease in sales was primarily attributable to our conveyance of our 70% ownership interest in our subsidiary PT Buana Multicorpora to WRP Asia at April 30, 2004, so that revenues from PT Buana were recognized by us for only the first 10 months of the year ended June 30, 2004, compared to a full 12 months for the year ended June 30, 2003. Consolidated gross profit increased $289,916 or 5.1% for June 30, 2004 compared to prior year. Cost of goods sold includes all costs to manufacture and purchase the finished product plus the related costs associated with ocean freight, customs duty and warehousing. This increase in our consolidated gross profit is primarily due to better acquisition costs and decrease of inventory storage at our outside warehouse facilities. We continue to expect our gross margins to be affected by the cost of latex, changes in product mix, competition, manufacturing capacity levels and other factors. We expect to improve our margins on our latex product sales due to certain price increases which we have recently passed on to our primary customers. There has 14 not been an appreciable increase in the cost of latex since June 30, 2003, and our recent price increases have allowed us (for our fourth quarter) to adjust for some of the cost increase in latex over the first three quarters of our fiscal year. Operating loss has decreased $95,482 or 3.0% for fiscal year ended June 30, 2004 from the prior year. Selling expenses include all salaries and payroll related costs for sales and marketing staff together with other sales related expenses such as sales commissions, travel costs, trade shows, advertising, promotions and delivery costs. During our year end June 30, 2004, our selling, general, administrative and other expenses increased by $194,434 or 2.2%. As a percentage of net sales, SG&A expenses increased from 24.2% for the year ended June 30, 2003, to 25.0% for the year ended June 30, 2004. This increase was primarily to due to an increase in sales consulting services due to our strategic decision to increase our market share in the healthcare industry. Loss from continuing operations decreased by $709,025 or 18.1% for year ended June 30, 2004 compared to the prior year. This significant decrease in the loss was due to our recording of a goodwill impairment loss of $(1,042,094) for the year ended June 30, 2003. Included in this is other income which consists of rental, interest and miscellaneous income. Other income decreased $406,381 from June 30, 2004 to the prior year. This was primarily due to our billing of $375,000 to MAXXIM for the Transition Services Agreement in the fiscal year ended June 30, 2003. The benefit for income taxes for the year ended June 30, 2004 was $(109,860) compared to prior year expense of $1,898,169. The prior year tax expense was due to the establishment of a valuation allowance against our deferred tax assets. As a result of the factors discussed above, we reported net loss of $(2,849,943) for the year ended June 30, 2004, which compares to a loss of $(5,559,769) during the prior year. Diluted earnings per share for the years ended June 30, 2004 and June 30, 2003, were $(2.80) and $(0.84), respectively. YEAR ENDED JUNE 30, 2003, COMPARED TO THE YEAR ENDED JUNE 30, 2002 Consolidated sales for fiscal year ended June 30, 2003 were $36,988,567, which represented a decrease in sales compared to the year ended June 30, 2002 of $10,368,509 or 21.9%. The decrease in net sales is attributable to AHPC exiting the acute-care medical market in March 2002, along with certain customer price decreases, effective February 1, 2002. Consolidated gross profit decreased $5,842,468 or 50.5% for June 30, 2003 compared to the prior year. Our gross profit margin was negatively impacted by increased glove purchase prices, product mix, lower selling prices, and the West Coast dock strike. We continue to expect our gross margins to be affected by the price of latex, changes in product mix, competition, manufacturing capacity levels and other factors. Subsequent to year end, we increased our price to our customers on all latex products. Operating loss decreased $2,858,526 or 47.2% for fiscal year ended June 30, 2003 from the prior year. During our year end June 30, 2003, our selling, general, administrative and other expenses decreased by $8,700,994 or 49.3%. As a percentage of net sales, SG&A expenses 15 decreased from 37.2% for the year ended June 30, 2002, to 24.2% for the year ended June 30, 2003. This decrease in SG&A expenses was attributable to the reduction of our sales force in 2002 due to AHPC transitioning out of the acute-care medical business and a reserve of $5,586,000 in 2002 for the intercompany receivable balances between PT Buana and WRP Asia assigned to us. Loss from continuing operations decreased by $2,434,505 or 38.4% for year ended June 30, 2003 compared to the prior year. At June 30, 2003 we tested for goodwill impairment, which resulted in the carrying amount of goodwill exceeding its implied fair value. We evaluated the realizablilty of the goodwill through the use of an independent appraisal, which utilized the present values of future cash flows. This decrease was attributable to a goodwill impairment loss of $(1,042,094) which we recorded for the year ended June 30, 2003. Other income increased from $99,448 for the 2002 period to $507,786 for the 2003 period. In fiscal 2003, we billed $375,000 to MAXXIM for the Transition Services Agreement. We recorded a foreign currency exchange loss of $18,355 in 2003 versus a foreign currency exchange loss of $42,646 in the comparable period in 2002, from our Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and depending upon the mix of assets and liabilities in PT Buana's books in Indonesian Rupiah, an exchange gain or loss will be incurred. Foreign currency exchange gains and losses are reported as a component of the SG&A expense category in the consolidated statements of operations. PT Buana continues to be exposed to foreign currency exchange rate fluctuations and may incur exchange gains or losses in the future. PT Buana's functional currency is the U.S. dollar. Indonesia continues to be exposed to economic and political instability, which is characterized with fluctuations in its foreign currency exchange rate, interest rates, stock market and inflation rate. Our financial statements do not include any adjustment that might result from these uncertainties and any related effects will be reported in the financial statements as they become known and estimable. The benefit for income taxes for the year ended June 30, 2003 was $1,898,169 compared to the prior year of $(1,851,517). This increase in income tax expense of $3,749,686 is primarily due to the establishment of a valuation allowance against the deferred tax assets. As a result of the factors discussed above, we reported net loss of $(5,559,769) for year ended June 30, 2003, compared to a loss of $(4,292,981) during the prior year. Diluted earnings per share for the year ended June 30, 2003 and June 30, 2002, were $(0.84) and $(0.65), respectively. BUSINESS SEGMENTS During the years ended June 30, 2004 and 2003, we were engaged solely in the business of manufacturing, through April 30, 2004, and distributing disposable gloves. We had two business segments, manufacturing (through April 30, 2004), and distribution. As of June 30, 2004 we have one business segment, distribution. These segments are managed as separate strategic business units. The manufacturing segment, which represented the Indonesian operations of PT Buana, manufactured powdered and powder-free latex gloves and sold them primarily to AHPC and WRP Asia. The distribution segment involves the procurement and sale of gloves purchased from the manufacturing segment and other glove manufacturers and then sold to national and regional healthcare, foodservice, retail and other distributors within the U.S. 16 and also includes, to a significantly lesser extent, the sale of non-glove disposable products. Discussion of the operations of each segment is included throughout the Results of Operations and Liquidity and Capital Resources sections. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS
FISCAL YEARS ENDED JUNE 30, --------------------------------------- 2004 2003 2002 ---- ---- ---- (IN THOUSANDS) Net cash provided by (used in) operating activities $ 339.4 $ 3,884.7 $ (1,845.7) Net cash used in investing activities $ (15.9) $ (699.0) $ (638.1) Net cash provided by (used in) financing activities $ (385.4) $ (3,216.7) $ 2,812.0 -------- ---------- ---------- Net (decrease) increase in cash and cash equivalents $ (61.9) $ (31.0) $ 328.2 ======== ========== ==========
CASH AND CASH EQUIVALENTS: Our cash and cash equivalents decreased from $420,949 to $359,012 in fiscal year 2004. Our operations provided cash of $339,399 during the 2004 fiscal year. Accounts payable increased by $1,194,830 due to timing on payments and PT Buana becoming an accounts payable as opposed to an intercompany transaction. Net inventories were $6,694,430, a decrease of $906,456 from $7,600,886 (excluding PT Buana amount of $1,195,453) at June 30, 2003. This decrease was due to lowering our excess safety stock levels to acceptable levels and monitoring inventory turns. Management currently believes that existing cash, funds generated from operations, and our credit facility will be sufficient to provide for our anticipated requirements for working capital for the next 12 months and the foreseeable future. There can be no assurance, however, that our business will continue to generate cash flow at current levels, or that anticipated operational improvements will be achieved. Our ability to make debt payments or pay interest on or extend our credit facility depends on out future performance and financial results, which, to certain extent, are subject to general conditions in or affecting our business (refer to Item 7A, Quantitative and Qualitative Disclosure About Market Risk). NET CASH PROVIDED BY OPERATING ACTIVITIES: Our net cash provide by operating activities was $339,399 in fiscal year 2004 compared to $3,884,750 in the prior year. The positive cash flows from operating activities in fiscal year 2004 was due to our increased management of inventory levels and reduction of excess safety stock. Net trade accounts receivable at June 30, 2004 decreased by 21.3% to $1,823,149 from $2,317,178 at June 30, 2003. This decline was attributable to a true reduction in net accounts receivable. Net inventories at June 30, 2004 decreased by 11.9% to $6,694,430 from $7,600,886 at June 30, 2003 (this is stated without PT Buana amount of $1,195,453). This decrease of 17 $906,456 is primarily due to the reduction of safety stock levels through improved inventory management. NET CASH USED IN INVESTING ACTIVITIES: Our net cash used in investing activities was $15,915 in fiscal year 2004 compared to $699,002 used in fiscal year 2003. The cash used was for capital expenditures relating to software and office equipment. NET CASH USED IN FINANCING ACTIVITIES: Our net cash used in financing activities in fiscal year 2004 was $385,421 compared to fiscal year 2003 of $3,216,747. This decrease was due to a reduction in our credit line borrowings. Interest rates in many Asian-Pacific countries have been heavily dependent upon international trade and are, accordingly, affected by protective trade barriers and the economic conditions of their trading partner. The enactment by the governments of our principal trading partners of protectionist trade legislation, reduction of foreign investment or general declines in the international securities markets could have a significant adverse effect upon the economies of the Asian-Pacific countries from which we purchase our products. CAPITAL STRUCTURE AND RESOURCES During the year ended June 30, 2004, we obtained funds from borrowings under our line of credit and other notes. On December 1, 1998, we obtained a domestic three-year credit facility from GE Capital, a large commercial credit company. This asset based lending loan and security agreement included a $10,000,000 revolving line of credit with a $7,000,000 letter of credit sub-facility. On March 31, 1999, we amended our Loan and Security Agreement by increasing the maximum credit loan limit from $10,000,000 to $15,000,000 subject to availability, based on a formula using accounts receivable and inventory. As part of the amendment, the letter of credit sub-facility was increased from $7,000,000 to $11,000,000. The line of credit borrowings carry an interest rate of commercial paper plus 4.5% (5.54% at June 30, 2004). At June 30, 2004, we had outstanding $448,084 on the revolving line of credit and $1,364,806 of letter of credit liabilities under the credit facility. As of June 30, 2004, we were not in compliance with certain of our covenants and have obtained waivers of these covenant violations from the financial institution. In conjunction with the waiver of the covenant violations as of June 30, 2003, the existing credit facility agreement was amended to expire on September 30, 2004. As of September 9, 2004, we signed a commitment for a one-year credit facility with Greenfield Commercial Corp, a privately held commercial financing company. This asset based lending loan and security agreement includes a $3 million revolving line of credit, in which we may borrow up to the lesser of (i) $3 million or (ii) the sum of 75% of eligible receivables and 35% of eligible inventory, with a limit of $1,000,000 on the amount of borrowing availability on the eligible inventory. The line of credit borrowings carry an interest rate of prime plus 8.0%. It contains certain penalties for early termination. We have prepared the consolidated financial statements under the assumption that we are a going concern. 18 CRITICAL ACCOUNTING POLICIES While all of our accounting policies are important in assuring that we adhere to current accounting standards, certain policies are particularly important to their impact on our financial statements. These are described in detail below. Reserves for Accounts Receivable and Inventory. We review on an ongoing basis the realizability of our trade and inter company receivables and the need for establishing reserves. As of June 30, 2004, we have established reserves of $319,851 in relation to trade and inter company receivables. We determine our allowances by considering a number of factors, including, but not limited to, the length of time trade accounts receivable are past due, our previous loss history, the customers current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We review on an ongoing basis the realizability of our inventory value and the need for establishing reserves. We established the inventory reserves for valuation, shrinkage, excess and obsolete inventory. As of June 30, 2004, we have established reserves of $291,245. Sales Incentives. Certain customers are granted discounts, rebates or other allowances which are intended to assist in the promotion of our products. We record these discounts and rebates as our customers earn them. All discounts, rebates and allowances are shown as a deduction from gross sales to arrive at Net Sales in the consolidated statements of income. Deferred Taxes. Deferred taxes result from the effect of transactions that are recognized in different periods for financial and tax reporting purposes. A valuation allowance is established when it is more likely than not that any portion of the deferred tax assets will not be realized. The valuation allowance is adjusted if the realization of deferred tax assets becomes more likely than not. Should our income projections result in the conclusion that realization of deferred tax assets is more likely than not, further adjustments to the valuation are made. CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD TOTAL LESS THAN AFTER 5 1 YEAR 1-3 YEARS 4-5 YEARS YEARS Operating Leases $542,156 $487,351 $54,805
On April 30, 2004, we entered into a five year supply agreement with WRP Asia. This agreement calls for us to purchase no less than a minimum of seven forty-foot containers of product per month and no less than 125 forty-foot containers of product per each 12 month period commencing on April 30, 2004. Our estimated 12 month liability, for 125 forty-foot containers, would be $4,625,000. However, in the event that our majority customer ceases purchasing latex gloves from us, we shall only be obligated to purchase from WRP Asia as many forty-foot containers of product per month as needed to meet 100% of our products needs, or the minimum annual amount, whichever is less. 19 NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 addresses how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 will apply to financial instruments entered into or modified after May 31, 2003. We believe that the adoption of this standard will have no impact on its financial statements. In December 2003, the FASB revised FIN No. 46 (FIN 46R), "Consolidation of Variable Interest Entities." FIN 46R clarifies the application of Accounting Research Bulletin No. 51 for certain entities for which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We would currently be required to adopt FIN 46R for any variable interest entities it had and would be required to meet the disclosure requirements of this pronouncement. We believe that the of this interpretation will not have an impact on its financial position, results of operations, or cash flows. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS Forward-looking statements in this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding new products and markets, gross margins, selling, general and administrative expenses, liquidity and cash needs and our plans and strategies, are all based on current expectations, and we assume no obligation to update this information. Numerous factors could cause actual results to differ from those described in the forward-looking statements, including the factors set forth below under the heading "Risks Affecting Forward-Looking Statements and Stock Prices." We caution investors that our business is subject to significant risks and uncertainties. SUBSEQUENT EVENT As of September 9, 2004, the Company signed a commitment for a one-year credit facility with Greenfield Commercial Corp, a privately held commercial financing facility. This asset based lending loan and security agreement includes a $3 million revolving line of credit, in which the Company may borrow up to the lesser of (i) $3 million or (ii) the sum of 75% of eligible receivables and 35% of eligible inventory, with a limit of $1,000,000 on the amount of borrowing availability on the eligible inventory. The line of credit borrowings carry an interest rate of prime plus 8.0%. It contains certain penalties for early termination. 20 BUSINESS OUTLOOK Our priorities for fiscal year 2005 are to: (i) solidify our position as a glove company in our present markets of foodservice, dental, and medical niches of specialty distribution and IDN's; and (ii) achieve in excess of ten percent product net revenue growth. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market value of investments. We have not entered into interest rate caps or collars or other hedging instruments. Exposure to changes in interest rates is limited to borrowings under revolving credit and debt agreements, which have variable interest rates, tied to the prime and commercial paper rates. We estimate that the fair value of each debt instrument approximated its market value at June 30, 2004 and 2003. We are subject to fluctuations in the value of the Indonesian Rupiah vis-a-vis the U.S. dollar. Our investment in the Indonesian subsidiary through April 30, 2004 was re-measured into the U.S. dollar and the book value of the assets and liabilities of this operation at June 30, 2004 and 2003, approximated its fair value. For the years ended June 30, 2004 and 2003, the foreign exchange included in the determination of net income was approximately $12,130 and $18,355, respectively. RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES In addition to those matters already set forth in Item 1, Business and this Item 7, our operating results and financial position may be adversely affected or fluctuated, on a quarterly basis, as a result of the following factors: (1) increases in raw latex pricing can adversely affect our earnings; (2) a decline in the demand for our products and the ability of our customers to meet their financial obligations; (3) competition from other companies, some of which are larger and more diversified than us; (4) anticipated acquisition cost saving projections can be no assurance that such cost savings will be achieved; (5) increase competition with respect to pricing would reduce future revenues; (6) ability to maintain a substantial credit facility to fund the current business and future opportunities and other items discussed below and the pricing of such a facility. The following may result in us not achieving certain results included in any statement that may be considered a forward looking statement. We caution the reader that the following risks may not be exhaustive. Variations in Quarterly Results. Our quarterly operating results are subject to various risks and uncertainties, including risks and uncertainties related to: local and international political and economic conditions; foreign currency volatility; competitive pressures; the composition, timing and size of orders from and shipments to major customers; variations in product mix and the size mix between sales; variations in product cost; infrastructure costs; obsolescence of inventory; and other factors as discussed below. Accordingly, our operating results may vary materially from quarter to quarter. 21 We operate with little backlog and, as a result, net sales in any quarter are substantially dependent on the orders booked and shipped in that quarter. Because our operating expenses are based on anticipated revenue levels and because a high percentage of our expenses are relatively fixed, if anticipated shipments in any quarter do not occur as expected, our operating results may be adversely affected and may fall significantly short of expectations. Any other unanticipated decline in the growth rate of our net revenues, without a corresponding and timely reduction in the growth of operating expenses, could also have an adverse effect on us and our future operating results. We aim to prudently control our operating expenses. However, there is no assurance that, in the event of any revenue, gross margin or other shortfall in a quarter, we will be able to control expenses sufficiently to meet profitability objectives for the quarter. Financing. Our credit facility, which was due to expire in August 31, 2003, and extended until December 31, 2003, has been renewed and extended until September 30, 2004. The terms and conditions are similar to those in the current credit facility. We have accepted a commitment for a new asset-based credit facility with a commercial credit company for up to $3,000,000 of borrowings. Advances under it are subject to numerous objective and certain subjective contingencies not fully within our control. There can be no assurances that such a credit facility will cover all of our needs. The cost of borrowing under such facility and/or of termination of the facility will be greater than under prior facility (prior to accounting for facility extension fees). Dependence on Gloves. We are currently almost exclusively engaged in the sale of disposable gloves. Accordingly, our results of operations and financial condition are highly dependent on the level of supply of and demand for disposable gloves. There can be no assurance that the supply of or demand for disposable gloves will continue at current levels or that changes in such supply or such demand will not have a material adverse effect on our results of operations or financial condition Dependence on Rubber Harvest and Latex Concentrate. Our ability to produce and purchase our latex products profitably is entirely dependent upon the consistent availability, at competitive prices, of raw rubber harvested by independent growers in Malaysia, Thailand and Indonesia and locally processed by others and us into latex concentrate. Any disruption in the consistent supply of rubber for latex concentrate due to weather or other natural phenomena, labor or transportation stoppages, shortages or other factors, could cause significant adverse effects to our results of operations and financial condition. In addition, rubber is a commodity traded on world commodities exchanges and is subject to price fluctuations driven by changing market conditions over which we have no control. During the year ended June 30, 2003, the price of latex concentrate increased by as much as 40%, causing us to incur higher cost of goods sold. We were not able to pass on these increased costs to customers as quickly as awe incurred them from our suppliers, resulting in significant margin compression in fiscal year 2004; we could experience similar margin pressures in the future. Asia Pacific Risk Factors. Social, political and economic instability may be significantly greater in many of the Asian-Pacific countries than that typically associated with the United States and other industrialized countries. Varying degrees of social, political and economic instability could significantly disrupt the source of our supply of glove products. 22 Currencies of several Asian-Pacific countries, including Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, have experienced significant fluctuations against the U.S. dollar. The WRP Asia Indonesian factory maintains its books in the Indonesian currency, the Rupiah, and reports its Indonesian income taxes with Rupiah financial reports. The Indonesian Rupiah experienced volatile currency fluctuations against the U.S. dollar, which caused significant income tax adjustments in 1999. Foreign currency exchange volatility may continue and could cause us to incur significant price fluctuations to us in the future with respect to Indonesian-sourced product. In the past, interest rates in many Asian-Pacific countries have been heavily dependent upon international trade and were accordingly affected by protective trade barriers and the economic conditions of their trading partners, principally, the United States, Japan, China and the European Union. The enactment by the United States or other principal trading partners of protectionist trade legislation, reduction of foreign investment in the local economies and general declines in the international securities markets could have a significant adverse effect upon the economies of the Asian-Pacific countries and accordingly impact price and availability of products from our suppliers. Governments in certain of the Asian-Pacific countries participate to a significant degree, through ownership interests or regulation, in their respective economies. Action by these governments could have a significant adverse effect on the economies of such countries. Changes in Gross Margins. Certain of our net product sales are derived from products and markets which typically have lower gross margins compared to other products and markets, due to higher costs and/or lower prices associated with the lower gross margin products and markets. We currently expect that our net product sales from powder-free and synthetic gloves will continue to increase as a percentage of total net product sales. In addition, we are currently experiencing pricing pressures due to a number of factors, including competitive conditions, consolidation within certain groups of suppliers, excess supply of products, changing technologies in the production of powder-free gloves and increasing demand for new glove products. Additionally, we may not be able to pass on price increases to our customers in a timely manner, or at all. To the extent that these factors continue, our gross margins could decline, which would adversely affect us and our future operating results. Downward pressure on our gross margins may be mitigated by other factors, such as a reduction in product costs and/or an increased percentage of new product sales from higher gross margin products, such as powder-free and synthetic gloves. We are aiming to reduce our product costs and to increase our percentage of net product sales from powder-free and synthetic gloves. However, there is no assurance that these efforts will be successful. Complimentary Products. The foodservice, industrial and retail industries look at our current line of product offerings as just one of a bundle of safety products used by their customers. Developing a profitable line of additional products will be important to the future success of our business. During 2003, we diversified our product offerings with additional synergistic product lines that address the current safety requirements of our markets. These additional product offerings include polygloves, heavy-duty gloves, headwear, aprons and bibs, food storage bags and educational services. These products are being offered under our SafePrep 23 brand and under private label, but continue to represent a relatively small portion of our total sales. Growth Dependencies. In general, our future growth is dependent on our ability to successfully and timely enhance existing products, develop and introduce new products, establish new distribution channels, develop affiliations with leading market participants and continue to develop our relationships with our existing customer base. The failure to achieve these and other objectives could limit future growth and have an adverse effect on both us and our future operating results. In addition, the pressure to develop and enhance products and to establish and expand markets may cause our SG&A expenses to increase, which could also have an adverse effect on us and our future operating results. In addition, to the extent that customers seek to focus primarily on price, versus factors such as service and quality, margins of product sales could compress substantially. Competition. The various markets in which we operate are becoming increasingly competitive as a number of other companies develop and sell products that compete with our products in these markets. Certain of these competitors have significantly more financial and technical resources than us. We face additional competitive factors besides price, such as product quality, timeliness of delivery, service and the size and reliability of the manufacturer. These competitive factors may result in, among other things, price discounts by us and sales lost by us to competitors that may adversely affect on our future operating results and us. Reliance Upon Distributors. We use various channels to market and distribute our products to end-users via third-party distributors. Third-party distributors are a substantial channel for distribution to end-users. Accordingly, our ability to market and distribute our products depends significantly on our relationship with third-party distributors, as well as the performance and financial condition of these distributors. In the event that our relationship with these distributors deteriorates or the performance or financial condition of the distributor becomes unsatisfactory, our future operating results could be adversely affected. Reliance Upon Significant Contracts and Customers. During the year ended June 30, 2004, 86.1% of net sales came from several of our national customers. The loss of any of these customers could have a materially adverse impact on us. Excess or Obsolete Inventory. Managing our inventory of various size mix and product mix is a complex task. A number of factors, including the need to maintain a significant inventory of certain sizes or products which are in short supply or which must be purchased in bulk to obtain favorable pricing, the general unpredictability of demand for specific products and customer requests for quick delivery schedules, may result in us maintaining excess inventory. Other factors, including changes in market demand and technology, may cause inventory to become obsolete. Any excess or obsolete inventory could result in price reductions and inventory write-downs, which, in turn, could adversely affect on our operating results. Hiring and Retention of Employees. Our continued growth and success depends to a significant extent on the continued service of senior management and other key employees and the hiring of new qualified employees. Competition for highly skilled business, technical, marketing and other personnel is intense. The loss of one or more key employees or our inability 24 to attract additional qualified employees or retain other employees could have an adverse effect on our operating results and us. In addition, we may experience increased compensation costs in order to compete for skilled employees. Product Liability Insurance. Participants in the medical supplies business are potentially subject to lawsuits alleging product liability, many of which involve significant damage claims and defense costs. A successful claim against us in excess of our insurance coverage could have a material adverse effect on our results of operations and financial condition. Claims made against us, regardless of their merit, could also have a material adverse effect on our reputation. There is no assurance that the coverage limits of our insurance policy will be adequate or that present levels of coverage will be available at affordable rates in the future either to cover medical-related claims or to qualify us as a supplier to key accounts (which may require product liability coverage at limits in excess of what we can obtain or afford). While we have been able to obtain product liability insurance in the past, such insurance varies in cost, is difficult to obtain and may not be available in the future on acceptable terms or at all. We are subject to a number of lawsuits filed against us and other manufacturers, distributors and/or end users. There can be no assurance that our insurance will be sufficient to meet any recovery for which we may be found liable, that the outcome of such suits will not materially adversely affect our results of operations or financial condition, or that our deductible obligation (to fund a portion of the initial cost of defense and/or liability of each such lawsuit) will not prove financially burdensome. Stock Market Fluctuations. In recent years, the stock market in general, including our Common Stock, has experienced extreme price fluctuations. The market price of our Common Stock may be significantly affected by various factors such as: quarterly variations in our operating results; changes in our revenue growth rates; the loss of a significant customer or sales contract; changes in earnings estimates by market analysis; the announcement of new products or product enhancements by us or our competitors; speculation in the press or analyst community; the inability of the market to absorb selling pressure from one or more large institutional shareholders; and general market conditions or market conditions specific to particular industries. There can be no assurance that the market price of our Common Stock will not experience significant fluctuations in the future. Governmental Regulations. Our products are subject to regulation by numerous governmental authorities in the United States and other countries, particularly to safety and adherence to Quality System Regulations ("QSR's") for medical devices. In the United States, examination gloves are classified as a Class I medical device product regulated by the FDA. Noncompliance with these FDA regulations can result in administrative enforcement, such as warning letters, import alerts, administrative detention or in civil penalties, product bans and recalls. Periodically, the FDA inspects shipments of medical gloves as they arrive in the United States ports. The FDA inspections and reviews may cause delays in product delivery and this can result in a loss or delay in recognition of sales and income by us. In addition, the FDA may inspect the manufacturing facilities for compliance with QSR's, which incorporate pre-production design and development to achieve consistency with quality system requirements worldwide. Failure to comply with regulatory requirements could have a material adverse effect on our business financial condition and results of operations. 25 West Coast Longshoremen Work Stoppage. On September 29, 2002, the Pacific Maritime Association (PMA), which represents international shipping lines, indefinitely locked out the longshoremen, effectively stopping all import and export activity on 29 West coast ports. This followed a 36-hour lockout that began on September 27, 2002. These shutdowns were in reaction to work slowdowns by the International Longshoremen's & Warehouse Union (ILWU), which were taking place over the last several weeks. On October 1, 2002 the U.S. District Court in San Francisco issued a temporary restraining order under the authority of the Taft-Hartley Act that required the ports to reopen. On October 2, 2002 the ports reopened. We estimate the costs of this shutdown to us to be $297,000. We depend heavily on U.S. seaports, especially West coast ports where all of our imports are entered. We have contingency plans in place in the event another work stoppage should occur. These plans include, among other things, air-freighting product, locating alternative sources and redirecting existing inventory. We cannot guarantee that any of these contingency plans would adequately protect us from loss in the event that a similar work stoppage or strike should occur in the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA A list of financial statements and financial statement schedules for the Registrant is contained in "Index to Financial Statements and Financial Statement Schedules of AHPC Holdings, Inc." on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. Our Chief Financial Officer evaluated our disclosure controls and procedures as of the end of the fiscal year ended June 30, 2004, and has concluded that, as of June 30, 2004, such controls and procedures have been effectively designed to ensure that information required to be disclosed in reports that the we file with or submit to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including the Chief Financial Officer, as appropriate to allow timely decisions regarding such disclosure. Changes in Internal Control Over Financial Reporting. No changes in our internal control over financial reporting have come to management's attention during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Review and evaluation of disclosure controls and procedures is an ongoing process that we will continue to refine as we perform quarterly evaluations. 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are as follows:
Name Age Position ------------- --- ------------------------------------------------ Alan Zeffer 51 President and Chief Executive Officer Deborah Bills 36 Chief Financial Officer, Secretary and Treasurer
Biographies for Messrs. Zeffer are included below. On May 18, 2004, the Board of Directors voted to amend our By-laws to create three classes of directors. Each class is made up of two directors, for a total number of six directors. Each class of directors has staggered three year terms, so that two directors will be elected at each annual meeting to serve for a term expiring on the third annual meeting after their elections. In light of the recent redemption of the shares of the Company's majority shareholder (see Change of Control Transaction below) the Board of Directors believed that a staggered board would provide stability to the management of the Company to provide a greater likelihood that the Company can implement its strategic plan to increase the Company's revenues and profits. At September 28, 2004, our directors consist of the following three classes: Class 1 Directors
Name Age Director Since ----------------------- --- -------------- Anthony F. Alibrio, Sr. 59 2004 Don L. Arnwine 70 1995
Class 2 Directors
Name Age Director Since ------------------ --- -------------- George Jeff Mennen 63 1994 Robert J. Simmons 60 1995
Class 3 Directors
Name Age Director Since ------------------ --- -------------- Richard J. Swanson 68 1998 Alan E. Zeffer 51 2004
The Class 1 Directors elected at our 2004 Annual Meeting have a term continuing until the third annual meeting following their election. The terms of the current Class 2 and Class 3 Directors shall expire on the 2005 and 2006 annual meetings, respectively. 27 The following sets forth brief statements of the principal occupations and other biographical information of each of the directors and executive officers. GEORGE JEFF MENNEN was elected to the Board of Directors on October 12, 1994. For over five years, Mr. Mennen has headed the G.J. Mennen Group, a consulting firm specializing in family-owned businesses. Mr. Mennen had a distinguished career at the Mennen Company, including being the Vice Chairman of that company. The Mennen Company was founded by Mr. Mennen's great grandfather in 1878 and remained privately owned until it was sold in 1992 to Colgate-Palmolive. RICHARD J. SWANSON was elected to the Board of Directors in June 1998. Mr. Swanson is presently a consultant with The Executive Committee, an international company that focuses on strategic coaching and corporate troubleshooting for CEO's of public and private companies. Also, since 1980, Mr. Swanson has been the president of two Denver, Colorado-based companies: Investment Partners, Inc. and Real Estate Associates, Inc. Investment Partners is engaged in the restructuring and recapitalization of troubled companies and Real Estate Associates focuses on the acquisition and development of real estate projects. ROBERT J. SIMMONS was elected to the Board of Directors in December 1995. He is currently President of RJS Healthcare, Inc., a healthcare consulting company, founded in 1990. He served as Executive Vice President at Baxter International, Inc., from 1987 until founding RJS in 1990. Mr. Simmons joined Baxter after serving over 20 years at American Hospital Supply Corporation. His last position at American Hospital Supply was vice president of corporate marketing. DON L. ARNWINE was elected to the Board of Directors in December 1995. He is currently President of Arnwine Associates, a company he formed in 1989 to provide specialized advisory services to the health care industry. From 1961 to 1972, Mr. Arnwine served as Director of the Hospital at the University of Colorado Medical Center. From 1972 to 1982, he served as President and CEO of the Charleston Area Medical Center. Mr. Arnwine became President and CEO of Voluntary Hospitals of America (VHA) in 1982 and was named Chairman and CEO in 1985, in which capacity he served until founding Arnwine Associates. ALAN E. ZEFFER was elected to the Board of Directors in May 2004. He currently is presently our President and Chief Executive Officer. He joined us in April 2001. Prior to joining us, Mr. Zeffer was Managing Partner for Quest Capital Corporation, a corporate finance advisory firm that he founded in 1993. He also served as Treasurer for Sybron International Corp from 1987 until 1993. ANTHONY F. ALIBRIO, SR. was elected to the Board of Directors in May 2004. He is currently President Emeritus of Sodexho Marriot, Inc's Health Care Division. Sodexho is the leading food and facilities management services company in North America. Mr. Alibrio has over 37 years experience in both health care and foodservice. As the President of Sodexho Marriott, Inc.'s Health Care Division, he led an organization with $3.2 billion in revenue that provided services to over 1,000 hospitals and long-term care institutions. 28 DEBORAH J. BILLS is currently our Chief Financial Officer, Secretary/Treasurer since May 2004. She joined us in October 2000. Previously she served as our Controller since July 2002 and has been with us since 2000. BOARD MEETINGS AND COMMITTEES During the year ended June 30, 2004, our Board of Directors held 10 meetings and all other actions by the Board of Directors were taken by unanimous written consent without a meeting. The Board of Directors has a Compensation Committee for the purpose of administering our Omnibus Equity Compensation Plan (the "Plan"). The Board has not delegated its functions to any other standing committees except for the Audit Committee, which was formed in 1997. During the year ended June 30, 2004, the Compensation Committee held two meetings. At June 30, 2004, our Compensation Committee consisted of Don L. Arnwine, Richard J. Swanson, George Jeff Mennen and Robert J. Simmons. The Audit Committee held three meetings; all other actions were taken by unanimous written consent without a meeting. At June 30, 2004, our Audit Committee consists of Don L. Arnwine, Richard J. Swanson, and George Jeff Mennen, and is chaired by Mr. Swanson. All members of the Audit Committee are deemed to be independent. During the last 12 month period ended June 30, 2004, our Board of Directors adopted a Governance and Nominating Committee. At June 30, 2004, our Governance and Nominating Committee consists of George Jeff Mennen, Richard J. Swanson, and Don L. Arnwine, with Mr. Arnwine as Chairman. COMPENSATION OF DIRECTORS All directors who were not also our executive officers: (presently Don L. Arnwine, George Jeff Mennen, Richard J. Swanson, Robert J. Simmons, and Anthony F. Alibrio, Sr.) receive the following compensation from us: an annual Board member retainer of $5,000; compensation of $1,000 for each Board meeting attended; $500 for each committee meeting attended; and an annual committee member retainer of $1,000. The non-executive chairman will receive an additional annual retainer of $5,000, and the chairman of the Audit Committee will receive an additional annual retainer of $3,000. Each new director is presently entitled to receive stock options under our Omnibus Equity Compensation Plan to purchase 2,000 shares of our Common stock in connection with his election. Under the terms of the Plan, the Compensation Committee determines the exercise price of each director option, provided that the exercise price may not be less than the lowest fair market value of our common stock during the six months preceding the election and qualification of such director. All director options are immediately exercisable for a period of ten years from the date of grant. All directors are reimbursed for expenses incurred in attending Board and committee meetings. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires certain officers, directors and beneficial owners of more than 10% of our Common Stock to file reports of ownership and changes in their ownership of our equity securities with the Securities and 29 Exchange Commission and Nasdaq. Based solely on a review of the report and representations furnished to us, we believe that each of these persons is in compliance with all applicable filing requirements. ITEM 11. EXECUTIVE COMPENSATION The following table discloses the compensation paid by us for services rendered in all capacities to us during the year ended June 30, 2004, 2003, and the transition period ended June 30, 2002, to (i) our President and (ii) our executive officers at June 30, 2004, whose aggregate annual salary and bonus are expected to exceed $100,000 for the 2004 calendar year.
Long-Term Annual Compensation Compensation ---------------------------- ------------ Name and Other Annual Stock All Other Principal Position Year Salary Bonus Compensation Options Compensation ------------------ ---- -------- -------- ------------ -------- ------------ Alan E. Zeffer 2001 $ 49,452 - - - President and CEO 2002 $140,000 $ 20,000 - 23,333 $9,416(1) 2003 $185,000 $ 28,000 - 6,667 - 2004 $185,000 - 20,000 - Deborah J. Bills 2004 $ 93,166 - - 20,000 - CFO
(1)Includes housing, automobile and other expenses. EMPLOYMENT AGREEMENTS On August 19, 2004, we renewed the October 1, 2002, employment agreement with Alan E. Zeffer (the "Zeffer Agreement"). The Zeffer Agreement provided for (i) Mr. Zeffer to serve as our President and Chief Executive Officer; (ii) a base salary of $205,000 per annum; (iii) housing expenses not to exceed $1,200.00 per month; (iv) a $400.00 per month automobile allowance; and (v) nonqualified stock options to be determined by the Compensation Committee. OPTION GRANTS DURING THE YEAR JUNE 30, 2004 On February 20, 2004 there were 20,000 options granted to Alan Zeffer at $1.13, the exercise price of the closing price of the common stock on February 20, 2004, the date of the grant. Mr. Zeffer's options vest one third each year over the next three years beginning with June 30, 2004 and are exercisable for a period of ten years form the date of grant. On February 20, 2004 there were 20,000 options granted to Deborah Bills at $1.13, the exercise price of the closing price of the common stock on February 20, 2004, the date of the grant. Mrs. Bills's options vest one third each over the next three years beginning with June 30, 2004 and are exercisable for a period of ten years form the date of grant. AGGREGATE OPTION EXERCISES DURING THE YEAR ENDED JUNE 30, 2004, AND FISCAL PERIOD-END OPTION VALUES There were no options exercised during the year ended June 30, 2004, by the executive officers named in the Summary Compensation Table. 30 THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS The Compensation Committee of the Board of Directors is currently comprised of the George Jeff Mennen, Richard J. Swanson, Don L. Arnwime, and Robert J. Simmons, each of whom were appointed by the Board of Directors. The Committee oversees administration of our Omnibus Equity Compensation Plan. The purpose of the Plan is to attract and retain capable and experiences officers and employees by compensating them with equity-based awards whose value is connected to our continued growth and profitability. Under the Plan, awards may be made in the form of stock options or restricted stock. In general, we compensate executive officers and senior management through salary, bonus (where appropriate) and the grant of stock options. During the year ended June 30, 2003, all action of the Compensation Committee was made during the two meetings held or was taken by the Committee by unanimous written consent without a meeting. REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION Presently, all compensation decisions relating to the salary of Mr. Zeffer are governed by the employment agreement between Mr. Zeffer and us, which agreement as amended presently provides for the payment of annual base salary of $205,000 per annum, housing expenses not to exceed $1,200 per month, a $400 per month automobile allowance and non-qualified stock options to be determined by the Compensation Committee. Because Mr. Zeffer's employment agreement presently controls the compensation paid to him, the Compensation Committee did not formulate policies with respect to Mr. Zeffer's compensation during the prior fiscal year. Members of the Compensation Committee: George Jeff Mennen..Richard J. Swanson Don L. Arnwine Robert J. Simmons STOCK PERFORMANCE CHART The following graph compares the yearly percentage change in the cumulative total shareholder return on our Common Stock for each of our last five fiscal years ended June 30 with the cumulative total return (assuming reinvestment of dividends) of (i) the NYSE/AMEX/Nasdaq Stock Market - U.S. Index and (ii) a peer group selected by us, in good faith. The peer group consists of American Shared Hospital Services, Daxor Corp., DVI, Inc. and Prime Medical Services Inc. During the six-month transition period ended June 30, 2000, our peer group was changed to exclude two companies, which were no longer publicly traded. 31 [LINE GRAPH] * $100 invested on June 30, 1995 in stock or Index - including reinvestment of dividends.
6/30/99 6/30/00 6/30/01 6/30/02 6/30/03 6/30/04 AHPC Holdings, Inc. 168.1 38.9 16.0 19.3 6.0 27.3 NYSE/AMEX/Nasdaq Stock 151.0 166.5 140.0 116.1 82.8 94.9 Peer Group 95.8 93.1 96.6 135.8 92.4 139.5
32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of June 30, 2004, with respect to the beneficial ownership of our Common Stock by (i) each shareholder known by us to be the beneficial owner of more than 5% of our Common Stock, (ii) each director, nominee and certain executive officers and (iii) all directors and executive officers, as a group. Unless otherwise indicated, the shareholders named below have sole voting and investment power with respect to such shares of Common Stock beneficially owned by them.
Percent of Amount and Nature of Total Voting TITLE OF CLASS NAME OF BENEFICIAL OWNER Beneficial Ownership Stock(2) -------------- ------------------------------------ -------------------- ------------ Common Stock George Jeff Mennen 30,000(1) Common Stock George Jeff Mennen 3,333 33,333 2.92% ------- Common Stock Robert J. Simmons 30,000(1) Common Stock Robert J. Simmons 1,666 31,666 2.77% ------- Common Stock Don L. Arnwine 30,000(1) Common Stock Don L. Arnwine 1,000 31,000 2.72% ------- Common Stock Richard J. Swanson 29,000(1) Common Stock Richard J. Swanson 2,000 31,000 2.72% ------- Common Stock Alan E. Zeffer 50,000(1) 50,000 4.31% Common Stock Deborah J. Bills 16,192(1) 16,192 Common Stock Total Executive Officers & Directors 185,192(1) as a group (6 persons) 7,999 193,191 13.83% -------
--------------- *Represents less than 1% (1)Represents shares to be issued upon exercisable options granted under our Omnibus Equity Compensation Plan. (2)Percent of class is based on 7,056,230 shares of the combined number of Series A Common Stock and Common Stock outstanding on October 14, 2003. 33 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the year ended June 30, 2004, through the April 30, 2004 (refer to Note B), we did not purchase any latex powder-free exam gloves from our previous majority shareholder, WRP Asia. In addition, our Indonesian factory sold approximately $1.1 million of powdered latex exam gloves to WRP Asia through April 30, 2004. We entered into a five year supply agreement with WRP Asia, effective as of the date it ceased to be a shareholder of us (April 30, 2004), requiring us to purchase a minimum of seven containers of gloves per month, based upon our agreed upon price, which fluctuates up and down based upon the index price for raw latex. During the two months ended June 30, 2004, we purchased $990,640 of product from WRP Asia. During the year ended June 30, 2004, we received consulting services from Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by Robert J. Simmons, one of our directors. We engaged Alliance to assist us in marketing our products with the express purpose of negotiating and executing a purchase agreement with various healthcare group-purchasing organizations. We paid Alliance $184,612 during the year ended June 30, 2004, for its services. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information responsive to this Item is set forth in "Fees Paid to Independent Auditors" of the definitive proxy statement for the Company's annual meeting of stockholders and is incorporated herein by reference. The Audit Committee's Charter provides that audit services engagement terms and fees, and any changes in such terms or fees, are subject to the specific pre-approval of the Audit Committee. The Charter further provides that other audit services, audit-related services, tax services and permitted non-audit services are subject to a general pre-approval by the Audit Committee. The Audit Committee has designated the Chief Financial Officer to monitor the performance of all services provided by the independent auditor and to determine whether such services are in compliance. The Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of her monitoring and will immediately report to the Chairman of the Audit Committee any breach of this procedure. The Chairman of the Audit Committee is authorized to act on behalf of the Audit Committee between meetings. 34 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements. A list of financial statements for the Registrant is contained in "Index to Financial Statements of AHPC Holdings, Inc" on page F-1. (a)(3) Exhibits. The following exhibits are included with this report:
EXHIBIT NO. NAME OF EXHIBIT ----------- --------------- 3.1 Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit No. 3.1 to the Company's Form S-1 Registration Statement (Registration No. 33-36206). 3.2 Certificate of Amendment to Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit No. 3.2 to the Company's Form S-1 Registration Statement (Registration No. 33-36206). 3.3 Certificate of Amendment to Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.3 to the Company's form 10-K Annual Report for the fiscal year ended December 31, 1991 (File No. 0-17458). 3.4 Bylaws of the Company, incorporated herein by reference to Exhibit No. 3.4 to the Company's Form S-18 Registration Statement (Registration No. 33-23164-FW). 3.5 Amendment to Bylaws of the Company, incorporation herein by reference to Exhibit 3.5 to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1991 (File No. 0-17458). 4.2 Warrant Agreement with The Liberty National Bank & Trust Company, incorporated by reference to Exhibit No. 4.2 to the Company's Form S-1 Registration Statement (Registration No. 33-36206). 4.3 Warrant, incorporated by reference to Exhibit No. 4.3 to the Company's Form S-1 Registration Statement (Registration No. 33-36206). 10.37 Debenture and Warrant Purchase Agreement dated October 12, 1994, between the Company and Wilmington Trust Company and George Jeff Mennen as Co-Trustees U/A dated 11/25/70 with George S. Mennen for Christina M. Andrea incorporated herein by reference to Exhibit 10.37 included in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1994 (File No. 0-17458). 10.38 Debenture and Warrant Purchase Agreement dated October 12, 1994, between the Company and Wilmington Trust Company and George Jeff Mennen as Co-Trustees U/A dated 11/25/70 with George S. Mennen for John Henry Mennen incorporated herein by reference to Exhibit 10.38 included in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1994 (File No. 0-17458).
35 10.42 Articles of Amendment to Certificate of Incorporation, incorporated herein by reference to Exhibit 10.42 included in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1997 (File No. 0-17458). 10.43 Amended and Restated Omnibus Equity Compensation Plan, incorporated herein by reference to Exhibit 10.43 included in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1997 (File No. 0-17458). 10.44 Loan and Security Agreement dated as of December 1, 1998, between General Electric Capital Corporation and American Health Products Corporation, incorporated herein by reference to Exhibit 10.44 included in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1998 (File No. 0-17458). 10.45 GE Waivers and Amendments to the Loan and Security Agreement dated as of December 1, 1998. 10.46 Employment Agreement between AHPC Holdings, Inc. and Alan Zeffer dated October 1, 2001 incorporated by reference in Exhibit 10.46 included in the Company's Form 10-K Annual Report for the fiscal year ended June 30, 2002 (File No. 0-17458). 21 Subsidiaries of the Company(1). 23.1 Consent of Grant Thornton LLP(1). (b) During the 12 months ended June 30, 2004, the Company filed three reports on Form 8-K. (c) See item 16(a) 31(a) Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act(1). 31(b) Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act(1). 32 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act(1).
---------- (1) Filed Herewith. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: WRP CORPORATION Date: October 13, 2004 By: /s/ Deborah J. Bills ----------------------------------------- Deborah J. Bills, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, in the capacities and on the dates indicated. Date: October 13, 2004 By: /s/ Alan E. Zeffer ----------------------------------------- Alan E. Zeffer, President and Chief Executive Officer Date: October 13, 2004 By: /s/ George Jeff Mennen ----------------------------------------- George Jeff Mennen, Director and Chairman of the Board of Directors Date: October 13, 2004 By: /s/ Richard J. Swanson ----------------------------------------- Richard J. Swanson, Director Date: October 13, 2004 By: /s/ Robert J. Simmons ----------------------------------------- Robert J. Simmons, Director Date: October 13, 2004 By: /s/ Don L. Arnwine ----------------------------------------- Don L. Arnwine, Director Date: October 13, 2004 By: /s/ Anthony F. Alibrio, Sr. ----------------------------------------- Anthony F. Alibrio, Sr., Director 37 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AHPC HOLDINGS, INC. AND SUBSIDIARY JUNE 30, 2004, 2003 AND 2002 C O N T E N T S
PAGE ---- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ... F-3 CONSOLIDATED FINANCIAL STATEMENTS BALANCE SHEETS ........................................ F-5 STATEMENTS OF OPERATIONS .............................. F-7 STATEMENT OF SHAREHOLDERS' EQUITY ..................... F-8 STATEMENTS OF CASH FLOWS .............................. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............ F-10
F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors of American Health Products Corporation We have audited the accompanying consolidated balance sheet of American Health Products Corporation (a Maryland corporation) and Subsidiary as of June 30, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity and cash flows for the three years ended June 30, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the 2002 financial statements of PT WRP Buana Multicorpa, a 70%-owned subsidiary, whose statements reflect net sales of 17.6% of consolidated net sales for the year then ended. Those statements were audited by other auditors, whose report thereon has been furnished to us and shown elsewhere, and our opinion, insofar as it relates to the amounts included for PT WRP Buana Multicorpa for the year ended June 30, 2002, is based solely on the report of the other auditors. We conducted our audits in accordance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of American Health Products Corporation and Subsidiary as of June 30, 2004 and 2003, and the consolidated results of their operations and their cash flows for the three years ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company incurred a net loss of $2,849,943 for the year ended June 30, 2004. Additionally, the Company has entered into a forbearance agreement with its primary lender that expired on September 30, 2004 and F-3 subsequently entered into short term financing with a transitional high interest rate facility as of September 9, 2004. These factors, among others, as discussed in Note B to the financial statements, raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ GRANT THORNTON LLP Chicago, Illinois October 13, 2004 F-4 AHPC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30,
2004 2003 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 359,012 $ 420,949 Accounts receivable - trade, net of allowance for doubtful accounts of $319,851 at June 30, 2004 and $333,625 at June 30, 2003 1,823,149 2,317,178 Inventories, net 6,694,430 8,796,339 Prepaid expenses 425,301 522,914 Due from affiliate, net of allowance for doubtful accounts of $0 at June 30, 2004 and $5,586,271 at June 30, 2003 - 3,320,544 Other receivables 5,193 1,382,078 ------------ ------------ Total current assets 9,307,085 16,760,002 PROPERTY, PLANT AND EQUIPMENT Land rights and land improvements - 736,535 Construction in progress - 27,688 Equipment, furniture and fixtures 2,621,109 16,767,720 Building improvements 14,310 2,336,683 Vehicles - 115,467 ------------ ------------ Total property, plant and equipment 2,635,419 19,984,093 Less accumulated depreciation and amortization 2,028,981 10,876,090 ------------ ------------ Property, plant and equipment, net 606,438 9,108,003 OTHER ASSETS Other assets 69,595 531,870 ------------ ------------ Total other assets 69,595 531,870 ------------ ------------ $ 9,983,118 $ 26,399,875 ============ ============
F-5 AHPC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED JUNE 30,
2004 2003 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable - trade $ 2,349,617 $ 1,733,300 Trade notes payable to bank 1,364,806 2,959,587 Notes payable and current portion of long-term obligations 485,138 1,264,992 Due to affiliates - 3,890,537 Accrued expenses 1,220,842 2,716,428 ------------ ------------ Total current liabilities 5,420,403 12,564,844 LONG-TERM DEBT - 5,163 DEFERRED TAX LIABILITIES 725,972 1,080,329 COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST IN SUBSIDIARY - 1,483,958 SHAREHOLDERS' EQUITY Series A common stock, $.01 par value; no shares authorized; no shares issued and outstanding at June 30, 2004 and 1,252,538 issued and outstanding - 12,525 at June 30, 2003 Common stock, $.01 par value; 3,333,333 shares authorized; 1,108,452 shares issued at June 30, 2004; 5,803,692 shares issued at June 30, 2003 33,037 58,037 Additional paid-in capital 17,778,099 17,942,471 Retained earnings (accumulated deficit) (7,968,217) (5,118,276) ------------ ------------ 9,842,919 12,894,757 Less common stock in treasury, at cost, 3,881,805 shares and 129,267 shares on June 30, 2004 and 387,800 shares on June 30, 2003 6,006,176 1,629,176 ------------ ------------ Total shareholders' equity 3,836,743 11,265,581 ------------ ------------ $ 9,983,118 $ 26,399,875 ============ ============
The accompanying notes are an integral part of these balance sheets. F-6 AHPC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Fiscal Year Ended -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Net sales $ 36,560,430 $ 36,988,567 $ 47,357,076 Cost of goods sold 30,533,366 31,251,419 35,777,460 ------------ ------------ ------------ Gross profit 6,027,064 5,737,148 11,579,616 Operating expenses Selling, general and administrative 9,133,914 8,939,480 17,640,474 ------------ ------------ ------------ Loss from operations (3,106,850) (3,202,332) (6,060,858) Other Income and (Expense) Interest expense (197,044) (174,874) (384,609) Other income 101,405 507,786 99,448 Impairment Loss - 1,042,094 - ------------ ------------ ------------ Loss from operations before provision for (benefit from) income taxes and minority interest (3,202,489) (3,911,514) (6,346,019) Provision for (benefit from) income taxes (109,860) 1,898,169 (1,851,517) ------------ ------------ ------------ Loss from operations before minority interest (3,092,629) (5,809,683) (4,494,502) Minority interest in loss of subsidiary (242,686) (249,914) (201,521) ------------ ------------ ------------ NET LOSS $ (2,849,943) $ (5,559,769) $ (4,292,981) ============ ============ ============ Basic net loss per common share $ (2.97) $ (0.84) $ (0.65) Diluted net loss per common share $ (2.80) $ (0.84) $ (0.65)
The accompanying notes are an integral part of these statements. F-7 AHPC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Series A common stock Common stock ---------------------------- ---------------------------- Shares Amount Shares Amount ------------ ------------ ------------ ------------ Balance, June 30, 2001 1,252,538 12,525 5,803,692 58,037 Net loss - - - - Common stock repurchases - - - - ------------ ------------ ------------ ------------ Balance, June 30, 2002 1,252,538 12,525 5,803,692 58,037 Net loss - - - - Common stock repurchases - - - - ------------ ------------ ------------ ------------ Balance, June 30, 2003 1,252,538 $ 12,525 5,803,692 $ 58,037 ============ ============ ============ ============ Net loss - - - - Stock Redemption & Exchange (12,525) (25,000) Warrants Exercised Reverse Stock Split (3-1) (835,025) (3,861,907) Common stock repurchases (417,513) - (833,333) - ------------ ------------ ------------ ------------ Balance, June 30, 2004 - $ - 1,108,452 $ 33,037 ============ ============ ============ ============
Retained Additional earnings paid-in (accumulated Treasury Shareholders' capital deficit) stock equity ------------ ------------ ------------ ------------ Balance, June 30, 2001 17,942,471 4,734,474 (1,572,000) 21,175,507 Net loss - (4,292,981) - (4,292,981) Common stock repurchases - - (46,376) (46,376) ------------ ------------ ------------ ------------ Balance, June 30, 2002 17,942,471 441,493 (1,618,376) 16,836,150 Net loss - (5,559,769) - (5,559,769) Common stock repurchases - - (10,800) (10,800) ------------ ------------ ------------ ------------ Balance, June 30, 2003 $ 17,942,471 $ (5,118,276) $ (1,629,176) $ 11,265,581 ============ ============ ============ ============ Net loss - (2,849,941) - (2,849,941) Stock Redemption & Exchange (174,372) (4,377,000) (4,588,897) Warrants Exercised 10,000 10,000 Reverse Stock Split (3-1) - Common stock repurchases - - - - ------------ ------------ ------------ ------------ Balance, June 30, 2004 $ 17,778,099 $ (7,968,217) $ (6,006,176) $ 3,836,743 ============ ============ ============ ============
The accompanying notes are an integral part of this statement. F-8 AHPC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Year Ended -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Cash flows from operating activities Net loss $ (2,849,943) $ (5,559,769) $ (4,292,981) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation 350,069 1,848,325 1,918,304 Amortization - - 67,232 Impairment of Goodwill - 1,042,094 - Deferred income taxes 593,795 3,269,913 (1,893,985) Loss on disposal of property, plant and equipment - 7,486 29,291 Changes in operating assets and liabilities Accounts receivable - trade, net 124,007 2,529,218 72,666 Inventories, net 906,456 (289,687) (1,319,266) Prepaid expenses 50,346 217,030 434,600 Other assets - (1,272,574) (290,762) Accounts payable - trade 1,194,830 477,785 (1,079,906) Accrued expenses (30,161) 334,165 (589,373) Amounts due to and from affiliates - 1,280,764 5,098,558 ------------ ------------ ------------ Net cash provided by (used in) operating activities 339,399 3,884,750 (1,845,622) Cash flows from investing activities Capital expenditures (15,915) (365,088) (444,336) Proceeds on sales of property, plant and equipment - - 7,714 Minority interest in subsidiary - (333,914) (201,520) ------------ ------------ ------------ Net cash used in investing activities (15,915) (699,002) (638,142) Cash flows from financing activities Net payments on trade notes payable to bank 394,433 99,173 2,352,477 Net borrowings (payment) on notes payable (779,854) (3,305,120) 505,870 Payments for treasury stock repurchases - (10,800) (46,376) ------------ ------------ ------------ Net cash provided by (used in) financing activities (385,421) (3,216,747) 2,811,971 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (61,937) (30,999) 328,207 Cash and cash equivalents, beginning of period 420,949 451,948 123,741 ------------ ------------ ------------ Cash and cash equivalents, end of period $ 359,012 $ 420,949 $ 451,948 ============ ============ ============ Non-Cash Transactions: Redemption of common shares (211,897) - -
The accompanying notes are an integral part of these statements. F-9 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AHPC Holdings, Inc (formerly WRP Corporation) and Subsidiaries (the "Company") is a leading marketer of medical and food-service gloves in the United States through its wholly owned subsidiary, American Health Products Corporation ("AHPC"). The Company was incorporated in Maryland in December 1995. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of AHPC Holdings, Inc., AHPC and PT Buana through April 30, 2004 (refer to Note B). All significant intercompany transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers cash in banks and highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At June 30, 2004 and 2003, the Company had approximately $259,012 and $320,949, respectively, on deposit at one financial institution in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company performs periodic evaluation of this institution for relative credit standing and has not experienced any losses as a result of this corporation. ACCOUNTS RECEIVABLE The majority of the Company's accounts receivable are due from companies in the foodservice, non-acute medical, dental and retail industries. Credit is extended based on an evaluation of a customer's financial condition, and generally, collateral is not required. Accounts receivable are due in accordance with agreed upon terms, and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payments terms are considered past due. The Company determines its allowance by considering a number of factors, including, but no limited to, the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. F-10 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVENTORIES Inventories are accounted for on a first-in, first-out basis and are valued at the lower of actual cost or market. The Company established inventory reserves for valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. Actual results differing from these estimates could significantly affect the Company's inventories and cost of product sold. The Company records provisions for excess and obsolete inventories for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. Actual product demand or market conditions could be different than projected by management. Inventories consist of the following at June 30, 2004 and 2003:
2004 2003 ----------- ----------- Raw materials $ - $ 268,525 Work in process - 701,899 Finished goods 6,985,675 8,190,540 Reserves (291,245) (364,625) ----------- ----------- Total $ 6,694,430 $ 8,796,339 =========== ===========
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation and amortization are provided by both the straight-line and accelerated methods over lives ranging from 3 to 20 years. Building improvements are amortized on a straight-line basis over their estimated useful lives or lease terms, whichever is shorter. Accumulated construction in progress costs are reclassified to the appropriate property, plant and equipment account when completed. The useful lives of property, plant and equipment at June 30, 2004 and 2003 are as follows:
Useful lives ------------ Land rights and land improvements 20 years Equipment, furniture and fixtures 3-15 years Building improvements 5-20 years Vehicles 5 years
F-11 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED When property or equipment is retired or otherwise disposed of, the net book value of the asset is removed from the Company's books, and the net gain or loss is included in the determination of income. GOODWILL The excess of purchase price over the fair market value of the net assets of AHPC was recorded as goodwill in the accompanying consolidated balance sheets. In contrast to accounting standards in effect during 2002, Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangibles Assets, which became effective beginning in fiscal 2003, provides that goodwill, as well as identifiable intangible assets with indefinite lives, should not be amortized. Accordingly, with the adoption of SFAS No. 142 in fiscal 2003, the Company discontinued the amortization of goodwill. In addition, useful lives of intangible assets with finite lives were reevaluated on adoption of SFAS No. 142. Goodwill will be tested for impairment on an annual basis and between annual tests whenever there is an impairment indicated. Impairment losses will be recognized whenever the implied fair value of goodwill is less than its carry value. As of June 30, 2003 the Company evaluated the goodwill of the AHPC reporting unit through and independent appraisal which used a present value of discounted cash flows method. As a result, the Company recorded an impairment charge of $1,042,094 for 2003 which reduced the balance of goodwill at June 30, 2003 to $0. LONG-LIVED ASSETS The Company has adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective May 1, 2002. SFAS No. 144 address financial accounting and reporting for the impairment or disposal of long-lived assets. This statement superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The adoption of this statement did not have a material effect on the Company's results of operations or financial position. In accordance with SFAS No. 144, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value of an asset is determined to be less than the carrying amount of the asset, a loss is recognized for the difference. F-12 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED REVENUE RECOGNITION Revenues from product sales are recognized at the time the product is shipped from the Company's warehouse or upon the customer's pick-up receipt of the goods, depending upon the terms of the sale. Product sales are stated net of rebates, sales returns, and sales discounts and allowances. The Company records a liability for rebates and sales discounts in accordance with terms as contracted with certain customers. SHIPPING AND HANDLING The Company records shipping and handling cost gross, within selling and administrative expenses. Customers are typically invoiced for shipping costs on all orders under the Company's 60 cases minimum requirement. Shipping and handling cost totaled $271,820, $469,666 and $1,014,161 in the fiscal years ended 2004, 2003 and 2002, respectively. INCOME TAXES The Company records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes the liability method, and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on the changes in the deferred tax asset or tax liability from period to period. Due to the uncertainty of the realization of the net deferred tax asset, the Company recorded a valuation allowance against it deferred tax asset. NET INCOME PER COMMON SHARE Basic Earnings per Share ("EPS") amounts are based on the weighted-average number of shares of common stock outstanding during each year, while diluted EPS amounts are based on the weighted-average number of shares of common stock outstanding during the year and the effect of any dilutive stock options and warrants (common stock equivalents). F-13 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED NET INCOME PER COMMON SHARE - CONTINUED The weighted-average number of common shares and common share equivalents outstanding for the years ended June 30, 2004 and 2003, and 2002, are as follows:
Year ended ------------------------------------ June 30, ------------------------------------ 2004 2003 2002 ---------- ---------- ---------- Basic weighted-average number of common shares outstanding 960,066 6,632,734 6,655,123 Dilutive effect of common share equivalents 56,933 5,882 - ---------- ---------- ---------- Diluted weighted-average number of common shares outstanding 1,016,999 6,638,616 6,655,123 ========== ========== ==========
The Company had additional vested stock options and warrants outstanding of 280,882, 468,811 and 476,214, at June 30, 2004, 2003 and 2002, respectively. The options for the periods June 30, 2001, were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and would have been anti-dilutive. The impact of stock options has been included in the calculation of earnings per share for the year ended June 30, 2004. As the dilutive shares were immaterial there was no effect to the earnings per share calculation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company: 1. CURRENT ASSETS AND CURRENT LIABILITIES - The carrying amount approximates fair value due to the short maturity of these items. F-14 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED 2. LONG-TERM OBLIGATIONS - The fair value of the Company's long-term debt is based on secondary market indicators. Since the Company's debt is not quoted, estimates are based on each obligation's characteristics, including maturities, interest rate, credit rating, collateral, amortization schedule and liquidity. The carrying amount approximates fair value. 3. AMOUNTS DUE TO/DUE FROM AFFILIATE - Amounts due to/due from affiliate are non-interest bearing and do not specify maturity dates; therefore, it is not practicable to estimate the fair value of these financial instruments. FOREIGN CURRENCY TRANSLATION Gains and losses from foreign currency transactions are included in net loss in the period in which they occur through April 30, 2004 (refer to Note B). For the years ended June 30, 2004, 2003 and 2002, the foreign exchange loss included in the determination of net income is $(12,130), $(18,355) and $(42,646), respectively. The Company does not use any derivative or financial instruments to manage its foreign exchange exposures. The Company is subject to foreign currency fluctuation risk in the regular course of business on sales, raw materials and fixed asset purchase transactions denominated in a foreign currency. LITIGATION The Company is engaged in various lawsuits either as plaintiff or defendant involving product liability. In the opinion of management, the ultimate outcome of these lawsuits will not have a material impact on the Company's consolidated financial statements. The Company expenses legal cost related to such litigation as the costs are incurred. F-15 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED STOCK-BASED COMPENSATION The Company accounts for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," related to options and warrants issued to employees and directors. See note H for additional information regarding this plan. Options prices for options granted under this plan were not less than fair market value of the Company's on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation.
For the Fiscal Years Ended June 30, -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Net loss, as reported $ (2,849,943) $ (5,559,769) $ (4,292,981) Deduct: total stock-based employee compensation expense determined under fair value based method for awards granted, modified, or settled, net of related tax effects 90,636 53,712 203,892 ------------ ------------ ------------ Pro forma net loss $ (2,940,579) $ (5,613,481) $ (4,496,873) ============ ============ ============
2004 2003 2002 ------------ ------------ ------------ Net loss per share Basic - as reported $ (2.97) $ (0.84) $ (0.65) Basic - pro forma $ (3.06) $ (0.83) $ (0.68) Dilutive - as reported $ (2.80) $ (0.84) $ (0.65) Dilutive - pro forma $ (2.89) $ (0.83) $ (0.68)
F-16 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED EMPLOYEE BENEFIT PLANS The Company provides all employees who have completed 30 days of service with a 401(k) retirement savings plan. This 401(k) retirement savings plan name is "AHPC Holdings, Inc. 401(k) Profit Sharing Plan & Trust." Participants are allowed to contribute up to 15% of their annual compensation, and the Company will match up to the first 8% of the participants contribution. All contributions are made to a trust, which are held for the sole benefit of the participant. During fiscal years ended 2004, 2003 and 2002, the Company contributed to the plan $37,960, $24,464 and $36,803, respectively. The Company's expense, relating to the plan's administration, for fiscal years ended June 30, 2004, 2003 and 2002 were $6,850, $6,850 and $6,850, respectively. INTERNAL USE SOFTWARE COSTS The Company has capitalized or expensed as incurred certain internal use software costs as appropriate. As of June 30, 2004, 2003 and 2002, the net book value of capitalized software is $517,034, $757,605 and $983,781, respectively. These capitalized costs are included in Property, Plant and Equipment in the accompanying financial statements and are being amortized over seven years. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." This Interpretation addresses consolidation by business enterprises of certain variable interest entities ("VIEs"). FIN 46 is effective immediately for all enterprises with variable interests in VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, this interpretation must be applied for the first interim or annual period beginning after June 15, 2003. We have performed an evaluation to identify such entities and we do not believe that any entities fall within the scope of this standard. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 addresses how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 will apply to financial instruments entered into or modified after May 31, 2003. We believe that the adoption of this standard will have no impact on the Company's financial statements. F-17 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED In December 2003, the FASB revised FIN No. 46 (FIN 46R), "Consolidation of Variable Interest Entities." FIN 46R clarifies the application of Accounting Research Bulletin No. 51 for certain entities for which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We would currently be required to adopt FIN 46R for any variable interest entities it had and would be required to meet the disclosure requirements of this pronouncement. We believe that the of this interpretation will not have an impact on its financial position, results of operations, or cash flows. RECLASSIFICATION Certain prior-period balances have been reclassified to conform with the current-year presentation. NOTE B - MANAGEMENT PLAN & THE STOCK REDEMPTION TRANSACTION FORBEARANCE AGREEMENT On March 12, 2003 the Company entered into a forbearance agreement with its lender, GE Capital Services, whereby it was agreed the lender would forbear from exercising certain rights under the loan agreement as a result of events of defaults, which were continuing at that time. The terms of this agreement, as amended, required the Company to maintain certain financial covenants and to receive payment of at least $2 million of intercompany debt from WRP Asia (as described in Footnote D, Related Party Transactions). This agreement was scheduled to expire on June 30, 2003; however, the Company entered into an amendment to the forbearance agreement that extends the term through September 30, 2004. Upon expiration of this agreement and subsequent amendment the lender will have the right to exercise its rights and remedies immediately, including but not limited to (1) ceasing to make any further loans to the Company and (2) the acceleration of the Company's obligations to the lender. Due to the nature of the Company's business, importing product from Asia and the extended time period required for those purchases to convert to cash, the Company relies on the credit facility to finance these purchases. Failure to have access to such a facility or to have adequate cash to self-fund these requirements would impair the Company's ability to continue as a going concern. As of September 9, 2004, the Company signed a commitment for a one-year credit facility with Greenfield Commercial Corp, a privately held commercial financing company. This agreement is short term with high interest rates (refer to Note N). The Company is in the process of seeking a permanent credit facility to replace Greenfield Commercial Corp. F-18 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE B - MANAGEMENT PLAN & THE STOCK REDEMPTION TRANSACTION - CONTINUED WRP ASIA FINANCIAL RESTRUCTURING On July 8, 2003 WRP Asia announced the completion of its financial restructuring, which involved restructuring and reducing WRP Asia's debt position and providing additional new funding. Due to the terms of the restructuring, WRP Asia was prohibited from repaying certain debt, including the Company's intercompany debt in the short term. On September 12, 2003 the Company entered into a non-binding letter of intent with WRP Asia to enter into a stock redemption and exchange agreement. The Letter of Intent calls for the Company to redeem 1,252,538 shares of Class A Common Stock and the 2,500,000 shares of Class B Common Stock, which comprise all of WRP Asia's holdings. Collectively, these shares represent approximately 53.2% of the outstanding Capital Stock of WRPC. The consideration for the redemption was: (i) the conveyance to WRP Asia of WRPC's 70% ownership interest in its subsidiary PT Buana Multicorpora ("PTB"); and (ii) forgiveness of all indebtedness owing to WRPC by WRP Asia. The Company would continue to be responsible for trade payables owing to PTB for recent product purchases by the Company. The transaction was subject to, among other things, execution of a definitive redemption agreement, a five-year supply agreement from WRP. On November 3, 2003 The Company announced the signing of a definitive stock redemption and exchange agreement (the "Agreement") with WRP Asia. The Agreement called for The Company to redeem 1,252,538 shares of Class A Common Stock and the 2,500,000 shares of Class B Common Stock (pre-split totals), which comprise all of WRP Asia's holdings. Collectively, these shares represent approximately 53.2% of the Company's outstanding capital stock. The consideration for the redemption was: (i) the conveyance to WRP Asia of the Companies 70% ownership interest in its subsidiary PT Buana Multicorpora ("PTB") Indonesia, an Indonesian based manufacturer of gloves; and (ii) excuse of all indebtedness owing to its subsidiaries from WRP Asia and from PTB with the exception of the Companies obligation to be responsible for trade payables owing to PTB for recent product purchases. The Company also announced the execution of a five-year supply agreement from WRP Asia and PTB (through the Companies subsidiary American Health Products Corporation), calling for the purchase of a portion of its latex glove requirements, which equates to the appropriate annualized quantities that the Company is currently purchasing from PTB and WRP Asia. The pricing of such products has a variable factor keyed to the cost of raw latex. The Board of Directors, of both WRP Asia and the Company, had approved the transaction. The Company had received a fairness opinion from an independent professional valuation firm that the transaction is fair to The Company's stockholders. F-19 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE B - MANAGEMENT PLAN & THE STOCK REDEMPTION TRANSACTION - CONTINUED As of April 30, 2004, The Company redeemed WRP Asia's shareholdings in the Company through the completion of the Company's stock redemption and exchange agreement with WRP Asia. Through this transaction the Company redeemed 417,513 shares of Class A Common Stock and the 833,333 shares of Class B Common Stock, which comprised all of WRP Asia's holdings. These share amounts do reflect the 1 for 3 reverse stock split which occurred on January 20, 2004. Collectively, these shares represent approximately 53.2% of the Company's outstanding Capital Stock. As consideration for the redemption the Company conveyed to WRP Asia, its 70% ownership interest in the Company's subsidiary PT Buana and excused of all indebtedness owing to the Company from WRP Asia and PT Buana, with the exception of certain mutually agreed obligations related to recent purchase of product. The Company also entered into a five (5) year supply agreement whereby the Company agreed to purchase certain minimum quantities of its latex glove needs from WRP Asia. On the closing of the transaction, the three of the Company's seven directors who were employees of WRP Asia resigned their positions as officers and directors of the Company. As of April 30, 2004, the market value of the stock redeemed at the close of the stock redemption agreement is $4,377,000. The balance sheet amounts that relate to our share of PTB financials are assets totaling $11,305,439 and liabilities of approximately $2,665,854. The portion of net revenues relating to PTB is $11,511,161 with a net operating loss of $566,268. The Company had agreed to forgive all indebtedness owing to the Company or its subsidiaries from WRP Asia and from PTB of $1,401,322. The loss on this transaction is $174,361, recorded in Paid-in-Capital. The Company also announced that it would change its name from WRP Corporation to AHPC Holding, Inc, effective May 14, 2004, at that time the Company's NASDAQ trading symbol changed from WRPC to GLOV. NOTE C - COMMON STOCK Each share of Series A common stock is convertible into one share of the Company's common stock, $.01 par value. The Company has reserved 1,252,538 shares of common stock for issuance upon conversion of the Series A common stock. The terms of the Series A common stock are substantially the same as the Company's common stock except that Series A common stock entitles WRP Asia, the majority shareholder of the Company, to elect all Class A directors, which represent a majority of the Company's Board of Directors, and to vote with the holders of common stock as a single class with respect to any matters subject to a vote of the shareholders. F-20 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE C - COMMON STOCK - CONTINUED On February 29, 2000, the Company approved a stock repurchase plan, which may include the repurchase of up to 10% of the Company's public common stock. These purchases may be made in the open market and in block transactions over a two-year period. The program is subject to market conditions and its impact on share price, as well as other investment options that the Company may consider to enhance shareholder value. As of June 30, 2004, 254,800 shares of public common stock have been repurchased by the Company as part of this plan. NOTE D - RELATED-PARTY TRANSACTIONS At June 30, 2004 and 2003, amounts due from/to affiliates consist of the following:
2004 2003 ------------ ------------ Due from affiliate Current WRP Asia $ 0 $ 8,906,815 Reserve (0) (5,586,271) ------------ ------------ Net $ 0 $ 3,320,544 ============ ============ Due to affiliate Current WRP Asia $ 0 $ (3,890,537) ============ ============
During 2003, the amounts due to PT Buana of $5,586,321 were assigned to AHPC Holdings, Inc. in partial satisfaction of intercompany amounts due from PT Buana to AHPC Holdings, Inc.. During 2003, the Company entered into a formal agreement with WRP Asia to provide for full and complete right of offset of any trade payables due against amounts they owe to AHPC Holdings, Inc. and AHPC. Included in the WRP Asia receivable is a note receivable of $0 and $470,000 as of June 30, 2004 and 2003, respectively. AHPC Holdings, Inc. and AHPC have accounts payable to WRP Asia of $3,890,537 at June 30, 2003, primarily resulting from the purchase of inventories. See Note J for additional related-party transactions. WRP Asia owns one of the largest glove manufacturing plants in Malaysia and principally manufactures high-quality, powder-free, latex exam gloves. During the years ended June 30, 2004, 2003 and 2002, total purchases of gloves from WRP Asia as a related party were $0, $3,355,310 and $13,519,454, respectively. In January 1997, the Company entered into a consulting and services agreement with Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by a director of the Company. F-21 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE D - RELATED-PARTY TRANSACTIONS - CONTINUED The agreement engaged Alliance to assist the Company in marketing its products with the expressed purpose of negotiating and executing a purchase agreement with various healthcare group purchasing organizations. The Company paid Alliance $184,612, $170,439 and $137,772, in the years ended June 30, 2004, 2003 and 2002, respectively, for its services. NOTE E - TRADE NOTES PAYABLE TO BANK Trade notes payable to bank consist of the following:
2004 2003 ---------- ---------- Notes payable to bank, at rates charged to WRP Asia: $ 916,722 $1,989,213 Payable to bank, letters of credit bearing interest at the commercial paper rate plus 4.5%, due within 60 days: 448,084 970,374 ---------- ---------- Total: $1,364,806 $2,959,587 ========== ==========
Trade notes payable to bank consist of amounts financed through letter of credit arrangements and notes payable, which totaled $1,364,806 and $2,959,587 at June 30, 2004 and 2003, respectively. These bank obligations are collateralized by the inventory and accounts receivable of AHPC and are subject to the convents discussed as in Note F. As of June 30, 2004 and 2003, the Company was contingently liable for outstanding letter of credit liabilities totaling $0 and $595,488, respectively. F-22 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE F - NOTES PAYABLE Notes payable and long-term debt as of June 30, 2004 and 2003, consist of the following:
2004 2003 ---------- ---------- Borrowings under a bank revolving line-of-credit agreement with available borrowings up to $15,000,000 at June 30, 2004 and 2003, bearing interest at the commercial paper rate plus 4.50% (5.54% and 5.71% at June 30, 2004 and 2003, respectively), collateralized by inventories and accounts receivable, expiring September 30, 2004 $ 448,084 $1,235,149 Insurance premium financing loans, bearing interest at 4.425% and 5.24% at June 30, 2004 and 2003, respectively, payable in monthly installments through July 2004 37,054 29,843 Other - 5,163 ---------- ---------- 485,138 1,270,155 Less current portion 485,138 1,264,992 ---------- ---------- Long-term debt $ - $ 5,163 ========== ==========
The bank revolving line-of-credit agreement noted above contains covenants that require, among other things, maintenance of financial ratios and limitations on borrowings, investments and capital expenditures. As a result of continued covenant violations, the Company entered into a forbearance agreement with its lender on March 12, 2003. The agreement has been extended to September 30, 2004. See Note B for further discussion. The Company's credit facility includes a $5,000,000 revolving line of credit with a $5,000,000 letter of credit subfacility. The facility carries an interest rate of commercial paper plus 4.5% (5.54% at June 30, 2004). On September 9, 2004, the Company signed a commitment for a one-year credit facility with Greenfield Commercial Corp, a privately held commercial financing company replacing it's bank line of credit (refer to Note N). F-23 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE G - COMMITMENTS AND CONTINGENCIES LITIGATION Over the last several years, numerous product liability lawsuits have been filed against suppliers and manufacturers of latex gloves alleging, among other things, adverse allergic reactions. The Company is one of numerous defendants that have been named in such lawsuits. At June 30, 2004, the Company was involved in a total of 23 lawsuits as a named defendant, a third-party defendant or an indemnitor. During the year ended June 30, 2004, the Company was named in no new lawsuits and was dismissed from or otherwise settled 16 lawsuits. The Company carries product liability insurance. Management believes all legal claims are adequately provided for or, if not provided for, are without merit, or involve such amounts that would not materially affect the Company's results of operations or financial condition. SIGNIFICANT CUSTOMERS The following summary presents the total percentage of sales the Company's significant customer.
June 30, -------------------- 2004 2003 2002 ---- ---- ---- Significant customer's percentage of net sales 86.1 70.1 45.5
The Company's significant customer ships products to numerous food-service facilities throughout the U.S. The ultimate end users of the Company's product are those various food-service organizations and professionals who purchase the product from these distributors. OPERATING LEASES The Company conducts all of its operations in leased facilities. Total rent expense, net of rental income, included in the accompanying consolidated statements of operations for the fiscal years ended June 30, 2004, 2003 and 2002, was $532,605, $569,548 and $595,669, respectively. The following summary presents future minimum rental payments required under the terms of present operating leases: F-24 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED Fiscal year ending June 30, 2005 $487,351 2006 54,805 2007 - 2008 and thereafter - -------- $542,156 ========
NOTE H - STOCK OPTION PLAN On June 12, 1998, the Board of Directors approved an amendment and restatement of the Company's Omnibus Equity Compensation Plan (the "Plan"), which authorized and adjusted the number of shares issuable from 400,000 to 1,400,000. Effective on February 29, 2000, the Board of Directors approved the repricing of all current director and employee options to $2.07, the closing market price on that date. This change will require variable Plan accounting for future appreciation in stock prices. A summary of options outstanding under the Plan is as follows:
Weighted- Outstanding Average options Price Expiration ----------- --------- ---------- Balance, July 1, 2001 368,600 $ 1.92 Grants 760,525 0.75 2012 Rescissions/expirations (408,932) 1.36 2004-2012 --------- --------- --------- Balance, June 30, 2002 720,193 $ 1.03 ========= ========= Grants 20,000 0.24 Rescissions/expirations (199,877) 0.98 2004-2012 --------- Balance, June 30, 2003 540,316 $ 1.02 ========= ========= Grants 146,000 1.13 Rescissions/expirations (361,434) 0.92 2004-2012 --------- --------- --------- Balance, June 30, 2004 324,882 $ 2.04 ========= =========
The exercise price of the stock options granted in 2004, 2003 and 2002 was established at the market price on the date of the grants. The weighted-average fair value, at grant date, of the options granted during fiscal years 2004, 2003 and 2002 was $2.04, $1.02 and $1.03, F-25 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE H - STOCK OPTION PLAN - CONTINUED respectively. Of the 324,882 options outstanding at June 30, 2004, 280,882 are currently exercisable, and 44,000 become exercisable in 2005. The Company has reserved common stock for issuance upon conversion of these options. The Company accounts for employee stock options under APB Opinion No. 25 and FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation an Interpretation of APB No. 25" as permitted under accounting principles generally accepted in the United States of America. No compensation cost has been recognized in the accompanying financial statements related to these options. Had compensation costs for these options been determined consistent with SFAS No. 123, which is an accounting alternative that is permitted but not required, the Company's net loss per share diluted for the years ended June 30, 2004, 2003 and 2002, would have been $(2,940,579), $(5,613,481), $(4,496,873), and $(2.70), $(0.83) and $(0.68), respectively. The pro forma disclosure is not likely to be indicative of pro forma results that may be expected in future years. This primarily relates to the fact that options vest over several years and pro forma compensation cost is recognized as the options vest. Furthermore, the compensation cost is dependent on the number of options granted which may vary in future periods. The fair value of each option is estimated on the date of grant based on the Black-Scholes option pricing model using the following assumptions:
Year ended ----------------------------- June 30, ----------------------------- Assumption 2004 2003 2002 ------------------------ ------- ------- -------- Risk-free interest rates 2.66% 3.02% 3.89% Dividend yield - - - Expected volatility 85.00% 81.14% 76.71% Expected life 4 years 4 years 4 years
F-26 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE H - STOCK OPTION PLAN - CONTINUED Options outstanding and exercisable at June 30, 2004, were as follows:
Weighted- Weighted- Range of Number average Number average exercise outstanding at Remaining exercise exercisable at exercise prices June 30, 2004 life Price June 30, 2004 price ----------- -------------- ------------ --------- --------------- --------- $6.21 45,267 1.5-7 years $6.21 45,267 $6.21 2.31 56,667 9 years 2.31 56,667 2.31 2.25 70,281 9 years 2.25 70,281 2.25 1.13 146,000 10 years 1.13 102,000 1.13 0.72 6,667 10 years 0.72 6,667 0.72 ---------- ------- ------------ ----- ------- ----- $.72-$6.21 324,882 1.5-10 years $2.04 280,882 $2.36 ========== ======= ============ ===== ======= =====
NOTE I - INCOME TAXES The components of the Company's income tax provision (benefit) from continuing operations consisted of:
June 30, ----------------------------------------- 2004 2003 2002 --------- ----------- ------------ Current Federal $ (52,892) $ (252,489) $ (238,602) State - (168,084) (33,685) Foreign - - 314,755 --------- ----------- ----------- Total current (52,892) (420,573) 42,468 Deferred Federal (63,260) 2,197,152 (1,808,214) State - 4,271 (255,277) Foreign 6,292 117,319 169,506 --------- ----------- ----------- Total deferred (56,968) 2,318,742 (1,893,985) --------- ----------- ----------- Total income tax provision (benefit) $(109,860) $ 1,898,169 $(1,851,517) ========= =========== ===========
F-27 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE I - INCOME TAXES - CONTINUED A reconciliation of the statutory U.S. Federal income tax rate to the effective tax rate is as follows:
June 30, -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Tax benefit at statutory rate of 34% $(1,075,246) $(1,419,763) $(2,195,434) State income taxes, net of Federal income tax provision $ (113,272) (200,425) (309,931) Foreign tax rate difference 278,792 937,755 567,431 Increase (decrease) in deferred tax asset valuation allowance 790,979 2,166,897 - Utilization of loss carryforwards - - - Goodwill amortization and other 8,887 413,705 86,417 ----------- ----------- ----------- Total income tax provision (benefit) $ (109,860) $ 1,898,169 $(1,851,517) =========== =========== ===========
The Company's subsidiary in Indonesia has generated tax losses in the current period. As a result, the Company does not have any current foreign taxes payable as of June 30, 2004. Significant components of the Company's deferred tax assets and liabilities are as follows:
2004 2003 ------------ ------------ Deferred income tax asset Accruals not deductible until paid $ 95,566 $ 100,313 Net operating loss carryforwards U.S 2,664,328 1,717,559 PT Buana - 37,928 Inventory 158,085 197,798 Allowance for doubtful accounts 124,102 129,447 Valuation allowance (3,042,081) (2,183,045) ----------- ----------- Total deferred tax assets $ 0 $ 0 =========== =========== Deferred income tax liabilities Difference between book and tax basis of property, plant and equipment $ (252,751) $ (314,725) Valuation Allowance - (435,293) ----------- ----------- Other noncurrent liabilities - PT Buana (473,221) (330,311) ----------- ----------- Total deferred tax liabilities $ (725,972) $(1,080,329) =========== ===========
F-28 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE I - INCOME TAXES - CONTINUED The Company has approximately $5.121 million net operating loss carryforwards available at June 30, 2004. In accordance with Federal tax regulations, usage of the net operating loss carryforwards is subject to limitations in future years as a direct result of the stock redemption and exchange transaction. The Company will only be able to utilize $2.2 million over the next 20 years, at which time all of the NOL's listed above will have expired. The Company establishes valuation allowances in accordance with the provisions of SFAS No. 109. The Company continually reviews the adequacy of the valuation allowance and is recognizing these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. NOTE J - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest on debt outstanding for the years ended June 30, 2004, 2003 and 2002, was $43,122, $148,066 and $275,580, respectively. The following represents significant related-party operating transactions during the years ended June 30, 2004, 2003 and 2002, which are included in the consolidated statements of cash flows as amounts due to affiliate under the cash flows from operating activities:
Year ended -------------------------------------------- June 30, -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------- Operating cash transactions Purchases from affiliate $ 0 $ 3,384,810 $ 13,519,454 Sales to affiliate (1,086,606) (4,808,544) (7,366,124) Cash payments (0) (2,202,552) (13,258,230) Cash receipts 516,613 4,710,372 12,203,458 ----------- ----------- ------------ Amounts due to (from) affiliate $ (569,993) $ 1,084,086 $ 5,098,558 =========== =========== ============
F-29 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE K - VALUATION AND QUALIFYING ACCOUNTS The following tables summarize the activity of the allowance for doubtful accounts and the reserve for excess and obsolete inventory during 2004, 2003 and 2002:
Balance at Accounts Additions Balance Allowance for beginning written (Reductions) at end doubtful accounts of period off to account of period ----------------------------------------------------------- ----------- ---------- ----------- ---------- Allowance for doubtful accounts activity for the year ended June 30, 2002 150,000 - 5,586,271 5,736,271 Allowance for doubtful accounts activity for the year ended June 30, 2003 5,736,271 (19,894) 203,519 5,919,896 Allowance for doubtful accounts activity for the year ended June 30, 2004 5,919,896 (5,593,045) (7,000) 319,851
Balance at Additions Balance Reserve for excess and beginning Inventory (Reductions) at end obsolete inventory of period write-offs to account of period ---------------------------------------------------------- ---------- ---------- ------------ --------- Reserve for excess and obsolete inventory activity for the year ended June 30, 2002 417,763 - 85,309 503,072 Reserve for excess and obsolete inventory activity for the year ended June 30, 2003 503,072 (142,488) 4,041 364,625 Reserve for excess and obsolete inventory activity for the year ended June 30, 2004 364,625 (39,180) (34,200) 291,245
NOTE L - SEGMENT REPORTING The Company had two business segments: Manufacturing and Distribution. These segments are managed as separate strategic business units due to the distinct nature of their operations and customer bases. The Manufacturing segment, which represented the operations of PT Buana, manufactures latex gloves and sells them primarily to the Company and WRP Asia. All operations of the Manufacturing segment was located in Indonesia. The Distribution segment involves the procurement and sale of gloves purchased from the Manufacturing segment and other glove vendors and then sold to national and regional healthcare, food service, retail and other distributors. The Distribution segment's significant customers include those discussed in Note G. The operations of the Distribution segment are located entirely within the U.S. F-30 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE L - SEGMENT REPORTING - CONTINUED Accounting policies for measuring segment assets and earnings are substantially consistent with those described in Note A. The Company evaluates segment performance based on income from operations before provision for (benefit from) income taxes and minority interest ("Pretax (loss) income"). Management believes transactions between operating segments are made at prevailing market rates. The following tables provide financial data for the years ended June 30, 2004, 2003 and 2002, for these segments:
June 30, 2004 Manufacturing Distribution Eliminations Consolidated -------------------------------------- ------------- ------------ ------------ ------------ Revenues from external customers $ 11,511,161 $ 25,049,269 $ - $ 36,560,430 Revenues from other operating segments 3,867,695 - (3,867,695) - Pretax loss (802,662) (2,399,827) - (3,202,489) Depreciation and amortization expense - 350,069 - 350,069 Interest income 28,852 377,173 (358,896) 47,129 Interest expense 450,896 70,871 (358,896) 162,871 Total assets - 9,983,118 - 9,983,118 Capital expenditures 334,154 15,914 - 350,068 Long-lived assets - 676,033 - 676,033
June 30, 2003 Manufacturing Distribution Eliminations Consolidated -------------------------------------- ------------- ------------ ------------ ------------ Revenues from external customers $ 10,185,290 $ 26,803,277 $ - $ 36,988,567 Revenues from other operating segments 4,586,311 - (4,586,311) - Pretax loss (715,726) (3,195,788) - (3,911,514) Depreciation and amortization expense 1,474,414 437,341 - 1,911,755 Interest income 11,969 452,453 (396,053) 68,369 Interest expense 499,718 60,064 (396,053) 163,729 Total assets 11,283,099 15,116,776 - 26,399,875 Capital expenditures 296,360 (13,415) - 282,945 Long-lived assets 8,629,685 1,010,188 - 9,639,873
June 30, 2002 Manufacturing Distribution Eliminations Consolidated -------------------------------------- ------------- ------------ ------------ ------------ Revenues from external customers $ 8,334,491 $ 39,022,585 $ - $ 47,357,076 Revenues from other operating segments 5,469,376 (5,469,376) - Pretax loss (187,474) (6,158,544) - (6,346,018) Depreciation and amortization expense 1,547,936 437,600 - 1,985,536 Interest income 797 923,735 (867,334) 57,198 Interest expense 999,428 252,515 (867,334) 384,609 Total assets 12,010,021 20,937,474 - 32,947,495 Capital expenditures 378,446 13,872 - 392,318 Long-lived assets 9,527,999 2,364,952 - 11,892,951
F-31 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE M - QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
3/31/04 6/30/04 -------- -------- (In thousands except for per share data) Net revenues $ 9,341 $ 7,905 Income from operations (1,066) (552) Net loss (981) (399) Net income per share Basic $ (0.44) $ (0.18) Diluted (0.44) (0.18)
3/31/03 6/30/03 9/30/03 12/31/03 -------- --------- -------- -------- (In thousands except for per share data) Net revenues $ 7,062 $ 10,593 $ 9,786 $ 9,528 Income from operations (1,440) (1,266) (560) (929) Net loss (811) (4,681) (616) (854) Net income per share Basic $ (0.12) $ (0.71) $ (0.09) $ (0.13) Diluted (0.12) (0.71) (0.09) (0.13)
3/31/02 6/30/02 9/30/02 12/31/02 --------- --------- --------- -------- (In thousands except for per share data) Net revenues $ 10,153 $ 12,861 $ 10,542 $ 8,792 Income from operations (1,010) (5,309) (75) (421) Net income (loss) (753) (3,388) 125 (193) Net income per share Basic $ (0.11) $ (0.52) $ 0.02 $ (0.03) Diluted (0.11) (0.52) 0.02 (0.03)
F-32 AHPC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2004 AND 2003 NOTE M - QUARTERLY FINANCIAL SUMMARY (UNAUDITED) - CONTINUED
9/30/01 12/31/01 --------- --------- (In thousands except for per share data) Net revenues $ 12,325 $ 12,018 Income from operations 263 (5) Net loss (21) (131) Net income per share Basic $ (0.01) $ (0.01) Diluted (0.01) (0.01)
NOTE N - SUBSEQUENT EVENT As of September 9, 2004, the Company signed a commitment for a one-year credit facility with Greenfield Commercial Corp, a privately held commercial financing company. This asset based lending loan and security agreement includes a $3 million revolving line of credit, in which the Company may borrow up to the lesser of (i) $3 million or (ii) the sum of 75% of eligible receivables and 35% of eligible inventory, with a limit of $1,000,000 on the amount of borrowing availability on the eligible inventory. The line of credit borrowings carry an interest rate of prime plus 8.0%. It contains certain penalties for early termination. F-33