<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________ .
Commission File Number: 0-17458
---------
WRP Corporation
(Exact name of registrant as specified in its charter)
Maryland 73-1326131
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Park Boulevard, Suite 1260
Itasca, IL 60143
-----------------
(Address of principal executive office)
(630) 285-9191
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's Common Stock, par value $.01 per
share, and issuer's Series A Convertible Common Stock, par value $.01 per
share, outstanding as of August 4, 1998 was 5,649,875 and 1,252,538,
respectively.
<PAGE> 2
WRP Corporation
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1.
<S> <C>
Consolidated Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997 (audited).......... pg. 1
Consolidated Statements of Operations (unaudited) for the
Three Months Ended June 30, 1998 and 1997.......................... pg. 3
Consolidated Statements of Operations (unaudited) for the
Six Months Ended June 30, 1998 and 1997............................ pg. 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 1998 and 1997............................ pg. 5
Notes to the Interim Consolidated Financial
Statements (unaudited)............................................ pg. 6
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. pg. 11
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K................................... pg. 17
</TABLE>
<PAGE> 3
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,069,206 $ 161,981
Accounts receivable - trade, net of allowance for
doubtful accounts of $210,000 in 1998 and
$195,000 in 1997 5,422,693 5,410,843
Due from affiliate 2,261,040 -
Inventories 10,908,654 8,203,861
Prepaid expenses 728,379 1,055,788
Investment in LSAI - 1,076,496
Deferred income taxes 219,951 219,951
Current assets of discontinued operations 6,628 44,113
----------- -----------
Total current assets 22,616,551 16,173,033
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 736,535
Construction in progress 383,624 2,105,263
Equipment, furniture and fixtures 11,188,616 8,780,857
Building improvements 1,495,490 1,488,485
Vehicles 108,127 108,127
----------- -----------
Total property, plant and equipment 13,912,392 13,219,267
Less - Accumulated depreciation (2,099,671) (1,495,868)
----------- -----------
Property, plant and equipment, net 11,812,721 11,723,399
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $438,979
in 1998 and $405,363 in 1997 1,311,021 1,344,637
Due from affiliates - 206,885
Other assets 101,331 83,291
----------- -----------
Total other assets 1,412,352 1,634,813
----------- -----------
$35,841,624 $29,531,245
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
1
<PAGE> 4
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 1,459,314 $ 2,622,541
Trade notes payable to banks 2,816,104 5,449,181
Notes payable and current portion of
long-term obligations 4,681,336 6,711,659
Due to affiliates 5,479,510 342,873
Accrued expenses 3,686,789 2,366,984
Current liabilities of discontinued operations 240,134 258,407
------------ -----------
Total current liabilities 18,363,187 17,751,645
------------ -----------
LONG-TERM OBLIGATIONS 2,075,185 5,647,867
------------ -----------
OTHER LONG-TERM LIABILITIES 339,262 689,162
------------ -----------
MINORITY INTEREST IN SUBSIDIARY 1,577,296 1,130,051
------------ -----------
SHAREHOLDERS' EQUITY:
Series A common stock, $.01 par value, 1,252,538 shares
authorized; 1,252,538 shares issued and outstanding 12,525 12,525
Common stock, $.01 par value, 10,000,000 shares
authorized; 6,902,413 and 3,191,667 shares issued 57,799 31,917
and outstanding in 1998 and 1997, respectively
Additional paid-in capital 24,020,948 10,876,224
Accumulated deficit (9,281,542) (5,547,089)
Net unrealized gain on LSAI common stock - 261,979
Less - Common stock in treasury, at cost,
130,000 shares in 1998 and 1997 (1,323,036) (1,323,036)
------------ -----------
Total shareholders' equity 13,486,694 4,312,520
------------ -----------
$ 35,841,624 $29,531,245
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
2
<PAGE> 5
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
-----------------------------
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
REVENUES:
Product sales, net $15,684,594 $12,399,504
Interest income 16,984 7,984
Rental income 45,342 38,040
Other income (loss) 3,139 (5,324)
---------- ----------
Total revenues 15,750,059 12,440,204
---------- ----------
COSTS AND EXPENSES:
Cost of product sales 10,970,728 9,983,234
Selling, general and administrative 2,510,220 2,135,475
Interest 320,566 292,378
---------- ----------
Total costs and expenses 13,801,514 12,411,087
---------- ----------
Income from continuing operations before
minority interest, provision for income taxes,
and loss from discontinued operations 1,948,545 29,117
MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARY (259,488) 65,154
---------- ----------
Income from continuing operations before
provision for income taxes and loss from
discontinued operations 1,689,057 94,271
PROVISION FOR INCOME TAXES 350,000 -
---------- ----------
Income from continuing operations before
loss from discontinued operations 1,339,057 94,271
LOSS FROM DISCONTINUED OPERATIONS - (1,159,562)
---------- ----------
Net income (loss) $ 1,339,057 $(1,065,291)
========== ==========
BASIC EARNINGS PER SHARE:
Continuing operations $ 0.20 $ 0.02
Discontinued operations 0.00 (0.27)
---------- ----------
$ 0.20 $ (0.25)
========== ==========
DILUTED EARNINGS PER SHARE:
Continuing operations $ 0.19 $ 0.02
Discontinued operations 0.00 (0.27)
---------- ----------
$ 0.19 $ (0.25)
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
3
<PAGE> 6
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
REVENUES:
Product sales, net $30,897,932 $23,806,137
Interest income 35,973 14,531
Rental income 78,206 76,166
Gain on sales of LSAI common stock 168,375 -
Other income 6,263 11,817
---------- ----------
Total revenues 31,186,749 23,908,651
---------- ----------
COSTS AND EXPENSES:
Cost of product sales 21,724,289 19,295,867
Selling, general and administrative 5,444,040 4,198,925
Interest 730,629 524,675
---------- ----------
Total costs and expenses 27,898,958 24,019,467
---------- ----------
Income from continuing operations before
minority interest, provision for income taxes,
and loss from discontinued operations 3,287,791 (110,816)
MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARY (447,244) 114,938
---------- ----------
Income from continuing operations before
provision for income taxes and loss from
discontinued operations 2,840,547 4,122
PROVISION FOR INCOME TAXES 400,000 -
---------- ----------
Income from continuing operations before
loss from discontinued operations 2,440,547 4,122
LOSS FROM DISCONTINUED OPERATIONS - (1,373,798)
---------- ----------
Net income (loss) $ 2,440,547 $(1,369,676)
========== ==========
BASIC AND DILUTED EARNINGS PER SHARE:
Continuing operations $ 0.43 $ 0.00
Discontinued operations 0.00 (0.32)
---------- ----------
$ 0.43 $ (0.32)
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
4
<PAGE> 7
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------
1998 1997
---------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 2,440,547 $(1,369,676)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 603,803 390,269
Amortization 33,616 20,529
Provision for doubtful accounts 15,000 102,000
Loss from discontinued operations - 1,373,798
Loss on disposal of property, plant and equipment - 7,584
Gain on sale of LSAI common stock (168,375) (37)
Changes in certain assets and liabilities:
Accounts receivable - trade (26,850) 225,468
Inventories (2,704,794) (801,610)
Prepaid expenses 327,409 242,335
Other assets (18,040) 213,525
Accounts payable - trade (1,163,227) 621,050
Accrued expenses 1,319,805 909,213
Deferred income taxes - (5,584)
Amounts due (from) to affiliates 3,082,482 (266,771)
Net assets of condom discontinued operations 19,212 (294,151)
---------- -----------
Net cash provided by operating activities 3,760,588 1,367,942
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (693,125) (1,573,917)
Proceeds on sale of LSAI common stock 982,892 14,787
Minority interest in subsidiary 447,245 692,581
---------- -----------
Net cash provided by (used in) investing activities 737,012 (866,549)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on trade notes payable to banks (2,633,076) (1,606,693)
Proceeds from issuance of stock 6,995,606 -
Net borrowings (payments) from notes payable (5,603,005) 2,015,000
Payments to Indonesian minority interest shareholders (349,900) (681,053)
---------- -----------
Net cash used in financing activities (1,590,375) (272,746)
---------- -----------
IMPACT OF EXCHANGE RATES ON CASH - (127,033)
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,907,225 101,614
CASH AND CASH EQUIVALENTS, beginning of period 161,981 321,038
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,069,206 $ 422,652
========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
5
<PAGE> 8
WRP Corporation
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. DESCRIPTION OF BUSINESS:
On June 23, 1998, the shareholders of MBf USA, Inc. (a Maryland
Corporation) approved the proposal to change the name of the Company to WRP
Corporation. WRP Corporation (together with its subsidiaries, the "Company")
markets medical examination gloves in the United States through its wholly owned
subsidiary, American Health Products Corporation ("AHPC") and is a manufacturer
of high quality, disposable, powdered latex examination gloves through its 70%
owned Indonesian subsidiary, PT WRP Buana Multicorpora ("PT Buana"), formerly
known as PT MBf Buana Multicorpora. The Company sells its examination gloves
primarily to the medical, food service, dental and retail markets.
2. BASIS OF PRESENTATION:
The unaudited consolidated financial statements have been prepared for
interim periods only and do not include all of the information and note
disclosures required by generally accepted accounting principles. These
consolidated statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997. The accompanying consolidated
financial statements have not been audited by independent accountants in
accordance with generally accepted accounting standards, but in the opinion of
management, such consolidated financial statements include all adjustments
(consisting solely of normal recurring adjustments) necessary to fairly present
the Company's financial position, results of operations and cash flows. The
results of operations for the six month period ended June 30, 1998 may not be
indicative of the results that may be expected for the year ended December 31,
1998.
3. PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, AHPC, and its 70% owned subsidiary,
PT Buana. Accordingly, PT Buana's assets, liabilities, equity and minority
interest are included in the consolidated financial statements of the Company.
During the first half of 1998, PT Buana sold approximately 61% of its production
of gloves to AHPC. All significant intercompany transactions have been
eliminated in consolidation.
4. MAJORITY SHAREHOLDER TRANSACTION:
On March 31, 1998, Wembley Rubber Products (M) Sdn. Bhd. ("Wembley") closed
the following two agreements, which transferred majority ownership in the
Company to Wembley:
A. MBf International, Ltd. ("MBf International") sold all of the Company's
Series A Common Stock (1,252,538 shares), which was owned by MBf
International to Wembley for $5.00 per share or $6,262,690 pursuant to
the May 20, 1997 stock purchase agreement between MBf International
and Wembley; and
6
<PAGE> 9
B. Wembley purchased 2,500,000 shares of the Company's unregistered Common
Stock for $2.70 per share for a total of $6.75 million, pursuant to its
May 20, 1997 subscription agreement with the Company. The purchase
price of $2.70 per share reflected a 12 percent discount from the
average stock price over the seven consecutive business day range ended
May 9, 1997, as detailed by a fairness opinion received from an
independent valuation firm.
On the March 31, 1998 closing date, the market price for the Company's
Common Stock was $5.875. The appreciation in the market price of the Company's
Common Stock from $2.70 at the date of subscription by Wembley to $5.875 at the
closing of the Agreement, created a discount to Wembley totaling $6,175,000.
This non-cash dividend totaling $6,175,000 has been recorded as an increase in
accumulated deficit and additional paid-in-capital on March 31, 1998 and had no
effect on 1998 earnings.
These transactions provided Wembley with a majority 55% ownership interest
in the Company at March 31, 1998. The Company received cash proceeds of $6.75
million from Wembley on that date. At June 30, 1998, Wembley has a 54.4%
ownership interest in the Company.
Subsequent to the closing on March 31, 1998, MBf International still owns
1,682,275 shares of the Company's Common Stock which represents a 24.4%
ownership interest in the Company as of June 30, 1998. In addition, Wembley
entered into another agreement on March 31, 1998 with MBf International (the
"Call and Put Option Agreement") which provides Wembley with the right to
purchase 50% of any remaining shares owned by MBf International at $6.00 per
share during the one year period beginning March 31, 1999, and provides MBf
International with the right to sell up to 1,682,275 shares to Wembley at $5.00
per share during that same one year period.
MBf International, a Hong Kong corporation, is a wholly owned subsidiary of
MBf Holdings Sdn. Bhd. ("MBf Holdings") a Malaysian publicly traded company
listed on the Kuala Lumpur Stock Exchange.
Wembley owns one of the largest glove manufacturing plants in Malaysia and
principally manufactures high quality powder free latex exam gloves. AHPC has
been purchasing its powder free latex exam gloves from Wembley for several
years.
5. COMMON STOCK:
The terms of the Series A Common Stock owned by Wembley are substantially
the same as the Company's Common Stock except:
A. 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.
7
<PAGE> 10
B. Series A Common Stock entitles its holder (Wembley) 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 all other matters subject to a vote of the
shareholders.
6. CONDOM DISCONTINUED OPERATIONS:
Effective on November 12, 1996, the Company adopted a plan to discontinue
its Playboy(R) condom business. The Company reached an amicable settlement with
Playboy Enterprises, Inc. to terminate their license agreement under which the
Company distributed Playboy(R) brand condoms in 15 countries. Under the
negotiated agreement, the Company, until June 30, 1997, would continue to sell
Playboy(R) condoms in the countries where it had launched the product.
Subsequent to June 30, 1997, the Company is entitled to receive royalty revenues
on sales, if any, of Playboy(R) condoms in these 15 countries and Japan through
June 30, 2000 and June 30, 1998, respectively. The royalties received by the
Company are not significant and the Company does not anticipate future royalties
will be significant.
Due to the exit of the condom business, the Company ceased selling
Playboy(R) condoms on June 30, 1997. For the three and six months ended June
30, 1997, the loss from discontinued operations of the condom business amounted
to $1,159,562 and $1,373,798, respectively. These losses include revenues from
Playboy(R) condom sales which were $174,488 and $385,461 for the three and six
months ended June 30, 1997, respectively.
7. FOREIGN CURRENCY TRANSACTIONS:
PT Buana's financial statements have been prepared from the records
maintained in the Republic of Indonesia, the country in which PT Buana was
established and operates. On July 1, 1997, the Company changed PT Buana's
functional currency from the Indonesia Rupiah to the United States dollar. The
Indonesian Rupiah has been experiencing volatile foreign currency exchange
fluctuations and has weakened substantially compared to the U.S. dollar. Because
of this, the Company is apt to experience foreign currency exchange gains and
losses in the remeasurement process to U.S. dollars and incur foreign currency
transaction gains and losses. Gains and losses from foreign currency exchange
transactions are included in net income (loss) in the period in which they
occur. During the second quarters ended June 30, 1998 and 1997, foreign exchange
gains (losses) included in the determination of net income (loss) were $145,616
and ($14,262), respectively. During the six months ended June 30, 1998 and 1997,
the Company recorded foreign currency losses of ($98,639) and ($146,226),
respectively.
8. ASIAN ECONOMIC EVENTS:
The Asian Pacific region is currently experiencing an economic situation
that has been characterized by reduced activity, illiquidity in certain sectors,
volatile foreign currency exchange, interest rates and stock markets. The
Company will likely be affected by the region's unstable economy and it is not
possible to determine the effect a continuation of the economic crisis may have.
The ultimate outcome of this matter cannot presently be determined. The
financial statements do not include any adjustment that might result from these
uncertainties. Related effects will be reported in the financial statements as
they become known and estimable.
8
<PAGE> 11
9. INVESTMENT IN LSAI:
At March 31, 1998, the Company had disposed of its entire investment in
Laboratory Specialists of America, Inc. ("LSAI"). During the quarter ending
March 31, 1998, the Company sold 156,405 shares of LSAI and discounted its note
receivable from LSAI for $315,000 which combined resulted in a gain on sales of
its investment in LSAI of $168,375 for the quarter ended March 31, 1998.
10. NET INCOME (LOSS) PER SHARE:
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share (EPS)" ("SFAS 128"), which
requires dual presentation of basic and diluted earnings per share for all
periods presented. Basic EPS amounts are based on the weighted-average number
of shares of common stock outstanding during each 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 dilutive stock options and
warrants. The weighted-average number of common shares and common share
equivalents outstanding for the three months ended June 30 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
----------------- ------------------
<S> <C> <C>
Basic weighted-average number of
common shares outstanding 6,866,183 4,310,871
Dilutive effect of common share
equivalents 66,802 ___
---------------- ------------------
Diluted weighted-average number of
common shares outstanding 6,932,985 4,310,871
================ ==================
</TABLE>
The weighted-average number of common shares and common share equivalents
outstanding for the six months ended June 30 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
----------------- ------------------
<S> <C> <C>
Basic weighted-average number of
common shares outstanding 5,613,469 4,310,871
Dilutive effect of common share
equivalents 66,802 ___
------------- -----------------
Diluted weighted-average number of
common shares outstanding 5,680,271 4,310,871
============= =================
</TABLE>
At June 30, 1998, there were 6,902,413 shares of the Company's Common Stock and
Series A Common Stock outstanding.
9
<PAGE> 12
11. SUBSEQUENT EVENT:
On June 23, 1998, the shareholders of the Company approved the increase in
the number of shares of common stock which may be issued under the Company's
stock option plan ("Plan") from 400,000 to 1,400,000 shares and changed the
name of the Plan to the WRP Corporation Amended and Restated Omnibus Equity
Compensation Plan. On July 12, 1998, the Company awarded options to purchase
359,000 shares to officers, directors, and employees of the Company with an
exercise price of $6.3125, the fair market value of the Company's stock price
on the grant date.
12. ACCOUNTING FOR INCOME TAXES:
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). SFAS 109 utilizes the liability
method and deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on the changes in the deferred tax asset or
tax liability from period to period.
The Company had net operating loss carry forwards ("NOLs") at December 31,
1997 of approximately $4,300,000 which are available to reduce Federal taxable
income in future periods and will begin expiring in 2004. Accordingly, no
income tax expense was recorded in 1997. In accordance with Federal tax
regulations, usage of NOLs is subject to limitations in future years if certain
ownership changes occur. Such ownership changes occurred with the transactions
described in Note 4. Because of this factor, the utilization of the NOLs
generated prior to December 31, 1997 are significantly limited and the Company
began recording a provision for income taxes in 1998. For the three and six
months ended June 30, 1998, the Company recorded a provision for income taxes
of $350,000 and $400,000, respectively.
13. CONTINGENCIES:
Over the last several years, numerous product liability lawsuits have been
filed against suppliers and manufacturers of latex gloves alleging, among other
things, adverse allergic reactions. AHPC is one of numerous defendants that
have been named in such lawsuits. At June 30, 1998, there were eleven lawsuits
outstanding against AHPC, two of which were filed in the second quarter of
1998. During November, 1997, AHPC fully settled thirteen claims for a nominal
sum. The said claimants alleged adverse reactions to latex glove products
allegedly distributed by AHPC. AHPC carries product liability insurance.
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 the Company's results of operations or financial
condition. However, the actual outcome of these, or any, lawsuits is not
subject to certainty, and there can be no assurances that the Company's
reserves or insurance coverage will be adequate to cover all of the resultant
impact of these lawsuits or that the Company will be able to renew insurance
coverage should these outcomes be adverse. Generally, any award of compensatory
damages would be an obligation of the Company's insurance carrier to the limits
of available insurance coverage, while any punitive damages would be borne by
the Company.
10
<PAGE> 13
14. RECLASSIFICATIONS:
During 1998, the Company began recording rebates as a net product sales
item. Prior to 1998, the Company had been recording rebates expense as a selling
expense. The consolidated statement of operations for the three and six months
ended June 30, 1997 have been restated to reclassify rebates to conform with the
1998 presentation.
15. SUPPLEMENTAL CASH FLOW INFORMATION:
On March 31, 1998, the Company recorded a noncash dividend of $6,175,000 on
the issuance of 2,500,000 shares to Wembley at a price below discounted market
value. This dividend had no effect on either total shareholders' equity nor net
income of the Company.
16. COMPREHENSIVE INCOME:
In 1998, the Company adopted Statement of Financial Accounting Standards
No.130 (SFAS 130), "Reporting Comprehensive Income," which requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distributions to owners, in a financial statement for
the period in which they are recognized. The disclosure of comprehensive income
and accumulated other comprehensive income, which encompasses net income and
unrealized gain on LSAI common stock, is as follows:
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income-
Comprehensive Unrealized Gain on LSAI
Income Common Stock
---------------- -------------------------
<S> <C> <C>
Balance, December 31, 1997 $ 261,979
Net income for the six months
ended June 30, 1998 $ 2,440,547
Other comprehensive income-
Sale of LSAI common stock (261,979) (261,979)
Comprehensive income for the -----------------
six months ended June 30, 1998 2,178,568
=================
----------------
Balance, June 30, 1998 0
================
</TABLE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. (1)
The Company's wholly owned subsidiary, American Health Products Corporation
("AHPC") is engaged in the marketing and distribution of high quality,
disposable, medical examination gloves in the United States and has been in the
glove business since its incorporation in January 1989. The Company continued to
achieve record glove sales in the second quarter of 1998, with a 26.5% increase
over the same quarter in the previous year.
__________________
(1) Forward looking statements in the Notes to the Company's financial
statement and in this Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, including statements regarding new products
and markets, gross margins, selling, general and administrative expenses,
liquidity and cash needs, and the Company's plans and strategies, are all based
on current expectations and the Company assumes no obligation to update this
information. Numerous factors could cause actual results to differ from those
described in the forward looking statements. The Company cautions investors
that its business is subject to significant risks and uncertainties. See the
risk factors as disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 under the heading "Risks Affecting Forward Looking
Statements and Stock Prices."
11
<PAGE> 14
PT Buana was incorporated in Indonesia on October 17, 1994, and commenced
operations in April 1996. PT Buana began manufacturing and shipping high
quality, powdered latex examination gloves to AHPC in May 1996 and sold
approximately 61% of its production to AHPC in the first six months of 1998 as
compared to 98% during the same period in 1997. PT Buana had total powdered
latex exam glove sales of approximately $7.4 million and $4.0 million for the
six months ended June 30, 1998 and 1997, respectively. All significant
intercompany transactions and sales have been eliminated in consolidation. PT
Buana has almost doubled its production capacity over the past year by expanding
the number of glove manufacturing lines and now is capable of producing at a run
rate of approximately 700 million powdered exam gloves per year. The factory
has placed in service all 15 production lines in 1998 which accounts for the
reduction in construction in progress during 1998. At present, PT Buana only
manufactures powdered latex exam gloves, but has plans to begin producing powder
free exam gloves in 1999.
Through its Playboy(R) license rights and condom distribution agreement,
the Company distributed Playboy(R) brand condoms only through June 30, 1997 in
accordance with the negotiated termination agreement with Playboy Enterprises,
Inc. The Company had accounted for the Playboy(R) condom business as a
discontinued operation effective December 31, 1996 and the disposal period
through June 30, 1997.
The results of operations for the three and six months ended June 30, 1997
exclude the revenues and expenses from the discontinued operations of the
Playboy(R) condom business. Accordingly, all condom business activity was
reflected in the loss from discontinued operations as a separate line item in
the consolidated statements of operations.
RESULTS OF OPERATIONS:
Total revenues are comprised primarily of glove sales from AHPC's
examination glove product line. Net glove product sales totaled $15,684,594 and
$12,399,504 for the three months ended June 30, 1998 and 1997, respectively.
This increase represents a 26.5% increase in glove sales in the second quarter
of 1998 over the comparable period in 1997. Glove product sales for the six
months ended June 30, 1998 were $30,897,932 compared to $23,806,137 for the same
period in 1997, an increase of about 30%. These increases in sales are
attributable to AHPC's more developed customer relationships, the inclusion of
PT Buana glove sales to Wembley of $2,096,678 and $2,866,282, respectively, in
the three and six months ended June 30, 1998, and due to an increase in the
sales mix to higher priced products, particularly powder free latex examination
gloves. Virtually all of PT Buana's sales during the first six months of 1997
were to AHPC. The Company is continuing to strive to increase powder free and
non-latex glove sales as the exam glove market moves toward these products and
away from powdered latex exam gloves. During the three and six months ended June
30, 1998, two of AHPC's customers accounted for approximately 68.6% and 71.2%
respectively, of glove sales.
Cost of goods sold as a percentage of net product sales for the three and
six months ended June 30, 1998 were 70.0% and 70.3%, respectively, compared to
80.5% and 81.0%, respectively, for the comparable periods in 1997. These
percentage reductions in the cost of sales and improvements in gross margin are
attributed to: (i) more favorable glove purchase prices obtained in 1998 due
to a reduction in the raw material latex price; (ii) an increase in sales of
higher profit margin glove products, particularly powder free latex examination
12
<PAGE> 15
gloves and non-latex gloves; (iii) improved operations at PT Buana obtained from
increased manufacturing capacity and efficiencies; and to a lesser extent; (iv)
reduced ocean freight import rates; and (iv) the U.S. government lowering the
duty importation fees associated with examination gloves, effective January 1,
1998. The Company currently expects its gross margins to continue to be affected
by changes in product mix, competition and other factors.
The domestic market for exam gloves is converting from latex powdered to
latex powder free gloves and to non-latex gloves. This move is a result of
greater user receptivity to powder free gloves. The chlorination process used to
make powder free gloves reduces the sensitivity to latex and reduces the powder
levels, which emit latex particles in the air. Being customer driven, the
Company is providing and selling more latex powder free exam gloves. AHPC's
sales of latex powder free exam gloves was approximately 43.2% and 42.1%,
respectively, of net product sales in the three and six months ended June 30,
1998 versus 37.4% and 35.7%, respectively, in the comparable periods in 1997.
The Company expects that this trend will continue in 1998.
Selling, general and administrative ("SG&A") expenses increased from
$2,135,475 in the three months ended June 30, 1997 to $2,510,220 in the same
period of 1998, a 17.5% increase. This increase of $374,475 is attributable to
an increase in selling expenses at AHPC of $433,098 commensurate with its sales
growth, offset by a foreign currency gain of $145,616 in the second quarter of
1998 (versus a foreign exchange loss of $14,262 in the same period in 1997). As
a percentage of total revenues, SG&A expenses decreased to 15.9% for the three
months ended June 30, 1998, compared with 17.2% in the comparable period in
1997. For the six months ended June 30, 1998, the SG&A expenses as a percentage
of total revenue improved to 17.4% from 17.6% for the same period in 1997. The
Company currently expects to make additional investments in sales and marketing
personnel to further develop established markets and to introduce new products
to the marketplace. Accordingly, the Company currently expects that its SG&A
expense will continue to increase in absolute dollars, but may decline as a
percentage of total revenues in the future.
Interest expense increased from $524,675 during the six months ended June
30, 1997 to $730,629 in the comparable period in 1998. This increase of
$205,954 in interest expense is due to (i) PT Buana capitalizing a majority of
its interest cost to its factory lines machinery during 1997 when the lines were
in progress of completion; (ii) PT Buana's bridging loan which was outstanding
in 1998 which incurred an additional penalty interest rate of 3% per month; and
(iii) an increase in the Indonesian prime lending rates in 1998 (average yearly
interest rates of 17.7% versus 10.41%, respectively, at June 30, 1998 and 1997).
The Company has paid down debt of over $3.75 million, including the complete
payoff of PT Buana's bridging loan, during the second quarter of 1998 primarily
from the Wembley cash infusion on March 31, 1998. Because of this, the Company
anticipates that interest expense may decline in future quarters.
The Company recorded a foreign currency exchange gain of $145,616 in the
second quarter of 1998 versus a foreign exchange loss of $14,262 in the
comparable period in 1997, primarily from its Indonesian subsidiary, PT Buana.
The foreign exchange gain in the second quarter of 1998 can be attributed to the
remeasurement process performed in the conversion of PT Buana's Indonesian
13
<PAGE> 16
Rupiah financial statements into its functional currency, the U.S. dollar. As
the currency exchange fluctuates and depending upon the mix of assets and
liabilities in PT Buana's books in Rupiahs, an exchange gain or loss will be
incurred. AHPC pays PT Buana in U.S. dollars which enabled the factory to
benefit as the U.S. dollars provided stronger purchasing power. During the six
months ended June 30, 1998 and 1997, the Company recorded foreign exchange
losses of $98,639 and $146,226, respectively. These foreign currency exchange
gains and losses are reported as a component of the SG&A expenses category in
the consolidated statement of operations. PT Buana's debt facility is a U.S.
Dollar based facility and the majority of its foreign exchange loss in 1997 was
due to the transaction losses associated with its U.S. Dollar based debt
facility transactions. This exchange loss exposure was minimized once the
functional currency was changed to the U.S. dollar effective July 1, 1997. PT
Buana continues to be exposed to volatile foreign currency exchanges
fluctuations and may incur exchange losses or gains in the future.
Indonesia is currently experiencing economic instability which is
characterized with volatile foreign currency exchanges, illiquidity in its
banking sector, volatile interest rates and stock markets, and inflation.
Resolution of the Indonesian economic crisis is dependent in part on the
measures that will be taken by the government of Indonesia, actions which are
beyond the Company's control, to achieve economic recoverability. It is not
possible to determine the future effect a continuation of the economic crisis
may have on the Company's liquidity and earnings, including the effect on
transactions with the Company's affiliates, customers and suppliers. The
ultimate outcome of this matter cannot presently be determined. The financial
statements do not include any adjustment that might result from these
uncertainties. The related effects will be reported in the financial statements
as they become known and estimable.
At December 31, 1997, the Company had a net operating loss carry-forward
("NOL") of approximately $4.3 million which will be available to reduce federal
taxable income in future periods. In accordance with federal tax regulations,
usage of the NOL is subject to limitations due to certain ownership changes,
which occurred in the first quarter of 1998. The Company has recorded a $350,000
income tax provision in the second quarter of 1998 to provide for federal and
state income tax liabilities.
For the second quarter ended June 30, 1998, the net income for the Company
was $1,339,057 or 8.5% of total revenues, compared to a net loss of ($1,065,291)
in the comparable second quarter of 1997. The basic and diluted earnings per
share was $.20 and .19, respectively, in the second quarter of 1998 compared to
a basic and diluted loss per share of ($.25) in the same quarter of 1997. For
the six months ended June 30, 1998, the Company reported net income of
$2,440,547 or 7.8% of total revenues, with a basic and diluted earnings per
share of $.43. This favorably compares to a net loss of ($1,369,676) and loss
per share of ($.32) in the comparable six month period in 1997.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at June 30, 1998 was $3,069,206 and increased
$2,907,225 from $161,981 at December 31, 1997. The Company experienced an
increase in cash flows in the six month period primarily from the sale and
issuance of 2,500,000 shares of Common Stock to Wembley on March 31, 1998.
Wembley's significant cash infusion of $6,750,000 provided the Company with a
strengthened balance sheet and a working capital surplus of $4,253,364 at June
30, 1998 compared to a deficit of $1,578,613 at December 31, 1997.
14
<PAGE> 17
The Company experienced positive cash flow from operations of $3,760,588
during the six months ended June 30, 1998 as a result of net income of
$2,440,547 plus noncash depreciation of $603,803. Additionally, cash was
provided by an increase in accrued expenses and amounts due to its affiliate,
Wembley, offset by an increase in inventories and a decline in trade accounts
payable.
The Company provided cash from investing activities of $737,012 primarily
from the disposal and sale of its investments in LSAI which generated proceeds
of $982,892 in the first quarter of 1998, offset by capital expenditures of
$693,125 primarily for property, plant and equipment at the PT Buana Indonesian
manufacturing facility. The factory continued to expand its operations and has
begun to acquire assets to manufacture power free exam gloves. PT Buana plans
to begin manufacturing powder free gloves by chlorination in 1999. The disposal
of the Company's investments in LSAI resulted in a gain on sales of $168,375
during 1998.
During the six months ended June 30, 1998, cash was used in financing
activities in the amount of $1,590,375 comprised of the cash provided by the
$6,750,000 from Wembley from the issuance of 2,500,000 shares of Common Stock,
which was offset by net payments on notes payable of $5,603,005. The Company
completely paid off the PT Buana bridge loan by June 30, 1998 due to its very
high cost of capital. Also, AHPC paid off its bank line of credit during the
second quarter of 1998.
At June 30, 1998, the Company's principal sources of liquidity included:
$3,069,206 of cash and cash equivalents; $7,900,000 total available under a
secured bank revolving line of credit (up to $2,500,000) and letter of credit
facility (up to $5,400,000), all expiring on December 31, 1998; and $4,025,000
available under a secured Indonesian bank loan facility with a banking
syndicate. At June 30, 1998, $0 of the revolving line of credit and $1,264,065
of letters of credit were outstanding under the $7,900,000 facility and all
$4,025,000 was outstanding under the Indonesian syndicated bank facility. The
Company paid down the entire $2,500,000 bank revolving line of credit in the
second quarter of 1998 and has plans to pay off the Indonesia bank loan by
August 31, 1998. Thus, the entire $4,025,000 Indonesian loan is classified as a
current liability at June 30, 1998.
AHPC had available a $3,300,000 unsecured letter of credit facility with MBf
Bank of Tonga, ("MBf Bank") a bank which is majority owned by MBf Holdings. MBf
Bank notified AHPC in May, 1998 that it can only provide a letter of credit
facility to AHPC in the amount of approximately $400,000 and that all debt
obligations above this amount are to be fully relieved by the end of September,
1998. MBf Bank was required to reduce AHPC's facility to comply with its
country's banking regulations which limit credit to a single borrower in excess
of 30% of the bank's equity. The Company has ceased issuing letters of credit
through MBf Bank and has outstanding letters of credit obligations to MBf Bank
totaling $1,552,740 at June 30, 1998. AHPC is able to comply with MBf Bank's
new limit since all of AHPC's powder free glove purchases are presently from
Wembley, whose financing has been converted from letters of credit financing to
virtually open payment terms. Additionally, AHPC is working with Wembley to
obtain a $2,500,000 letter of credit facility from another bank to provide
additional letter of credit financing should the need arise in the future.
15
<PAGE> 18
MBf Holdings, the prior ultimate parent company, had provided corporate
guarantees on all bank financing arrangements of the Company. Since Wembley
acquired the majority interest in the Company from MBf Holdings on March 31,
1998, Wembley is obligated to provide a corporate guarantee to replace those of
MBf Holdings. According to the Sale and Purchase Agreement between MBf Holdings
and Wembley, Wembley was required to procure within three months from closing an
unconditional release without liability of all guarantees given by MBf Holdings.
The Company and Wembley are still working toward obtaining the replacement
corporate guarantees and the deadline has been extended by MBf Holdings to
achieve this objective.
Inventories at June 30, 1998 increased to $10,908,654 compared with
$8,203,861 at December 31, 1997. This increase was primarily due to managed
inventory levels in anticipation of future increased sales volume. Net trade
accounts payable at June 30, 1998 decreased to $1,459,314 from $2,622,541 at
December 31, 1997. The decrease in trade payables is due to the glove purchases
from Wembley being reclassified from a trade payables liability to a due to
affiliate liability at June 30, 1998.
In October 1994, pursuant to two debenture and warrant purchase agreements
between the Company and two trusts affiliated with a director of the Company,
the Company issued, and each trust purchased, a convertible subordinated
debenture in the amount of $1,000,000 payable in seven years with interest at
1.5% over the prime rate. Each debenture is convertible into Common Stock of the
Company at a conversion price of $25.00 per share. In addition, each trust
received a warrant exercisable over five years to purchase 7,500 shares of
Common Stock of the Company at an exercise price of $22.20 per share. At June
30, 1998 and December 31, 1997, long-term debt of $2,000,000 was outstanding as
a result of this transaction.
The Company currently expects to have cash needs during 1998 in addition to
funding the expected growth in the glove business. These cash needs may arise in
connection with various events such as for: (i) the expansion into new glove
products; (ii) paying off debt obligations, particularly the outstanding PT
Buana debt; (iii) the continued hiring of an additional full time sales force
and sales personnel; (iv) the hiring of additional support staff; (v) the
continuing expansion of the manufacturing facility in Indonesia and upgrading to
produce powder free gloves; (vi) upgrading its information technology via a new
enterprise wide computer system; and (vii) for other operating expenses. The
Company has made purchase commitments for the purchase and installation of a
sophisticated, integrated enterprise computer system in the amount of
approximately $1,200,000. The Company anticipates the system will begin to be
operational by December, 1998.
The transaction with Wembley substantially increased liquidity and working
capital to the Company. The Company is continuing to seek and identify
additional sources of funding to provide capital in the event its cash and
credit facilities do not provide sufficient liquidity to fund the Company's
ongoing operations.
16
<PAGE> 19
ITEM 6.
EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
1) Form 8-K dated April 10, 1998 wherein information was reported in
Items 1 and 9.
2) Form 8-K dated May 5, 1998 wherein information was reported in
Item 1.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WRP Corporation
(Registrant)
Date: August 4, 1998 By: /s/ Kwong Ann Lew
----------------------------
Name: Kwong Ann Lew
Title: Chief Financial Officer
18
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