<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: September 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 November 11, 1998 was 5,655,025 and 1,252,538, respectively.
<PAGE> 2
WRP Corporation
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1.
<S> <C>
Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997 (audited)........... pg. 1
Consolidated Statements of Operations (unaudited) for the
Three Months Ended September 30, 1998 and 1997........................... pg. 3
Consolidated Statements of Operations (unaudited) for the
Nine months Ended September 30, 1998 and 1997............................ pg. 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine months Ended September 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. 12
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K pg. 18
</TABLE>
<PAGE> 3
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 539,848 $ 161,981
Accounts receivable - trade, net
of allowance for doubtful accounts
of $224,800 in 1998 and $195,000
in 1997 6,468,628 5,410,843
Due from affiliate 2,464,804 -
Inventories 10,557,374 8,203,861
Prepaid expenses 665,912 1,055,788
Investment in LSAI - 1,076,496
Deferred income taxes - 219,951
Current assets of discontinued
operations 6,628 44,113
------------ ------------
Total current assets 20,703,193 16,173,033
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 736,535
Construction in progress 430,190 2,105,263
Equipment, furniture and fixtures 11,316,435 8,780,857
Building improvements 1,500,547 1,488,485
Vehicles 131,854 108,127
------------ ------------
Total property, plant
and equipment 14,115,561 13,219,267
Less - Accumulated depreciation (2,408,055) (1,495,868)
------------ ------------
Property, plant and
equipment, net 11,707,506 11,723,399
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $455,787
in 1998 and $405,363 in 1997 1,294,213 1,344,637
Due from affiliates - 206,885
Deferred income taxes 157,109 -
Other assets 367,841 83,291
------------ ------------
Total other assets 1,819,163 1,634,813
------------ ------------
$ 34,229,86 $ 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>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 1,803,791 $ 2,622,541
Trade notes payable to banks 1,865,240 5,449,181
Notes payable and current
portion of long-term obligations 1,686,574 6,711,659
Due to affiliates 5,405,354 342,873
Accrued expenses 4,564,015 2,366,984
Current liabilities of
discontinued operations 240,134 258,407
------------ ------------
Total current liabilities 15,565,108 17,751,645
------------ ------------
LONG-TERM OBLIGATIONS 2,006,649 5,647,867
------------ ------------
OTHER LONG-TERM LIABILITIES 56,908 689,162
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 1,680,198 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;
5,785,025 and 3,191,667 shares
issued and outstanding in 1998
and 1997, respectively 57,850 31,917
Additional paid-in capital 17,860,196 10,876,224
Accumulated deficit (1,686,536) (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 14,920,999 4,312,520
------------ ------------
$ 34,229,862 $ 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 September 30,
--------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
REVENUES:
Product sales, net $ 16,259,268 $ 14,329,900
Interest income 50,329 11,901
Rental income 41,533 42,424
Other income (loss) 8,350 7,225
------------- -------------
Total revenues 16,359,481 14,391,450
------------- -------------
COSTS AND EXPENSES:
Cost of product sales 11,615,137 11,121,561
Selling, general and administrative 2,297,478 2,057,980
Interest 222,802 314,822
------------- -------------
Total costs and expenses 14,135,417 13,494,363
------------- -------------
Net income before minority
interest and provision for
income taxes 2,224,064 897,087
MINORITY INTEREST IN INCOME OF SUBSIDIARY (102,903) (116,280)
------------- -------------
Net income before provision
for income taxes 2,121,161 780,807
PROVISION FOR INCOME TAXES/(REFUND) 701,153 (27,815)
------------- -------------
Net income $ 1,420,008 $ 808,622
============= =============
BASIC EARNINGS PER SHARE: $ 0.21 $ 0.19
============= =============
DILUTED EARNINGS PER SHARE: $ 0.20 $ 0.19
============= =============
</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 Nine Months
Ended September 30,
---------------------------
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
REVENUES:
Product sales, net $47,157,200 $38,136,037
Interest income 86,302 26,432
Rental income 119,739 118,590
Gain on sales of LSAI common stock 168,375 -
Other income 14,613 19,042
----------- -----------
Total revenues 47,546,230 38,300,101
----------- -----------
COSTS AND EXPENSES:
Cost of product sales 33,339,426 30,417,428
Selling, general and administrative 7,741,520 6,256,905
Interest 953,432 839,497
----------- -----------
Total costs and expenses 42,034,377 37,513,830
----------- -----------
Income from continuing operations before
minority interest, provision for
income taxes, and loss from
discontinued operations 5,511,853 786,271
MINORITY INTEREST IN INCOME OF SUBSIDIARY (550,147) (1,342)
----------- -----------
Income from continuing operations
before provision for income taxes
and loss from discontinued operations 4,961,706 784,929
PROVISION FOR INCOME TAXES (REFUND) 1,101,153 (27,815)
----------- -----------
Income from continuing operations before
loss from discontinued operations 3,860,553 812,744
LOSS FROM DISCONTINUED OPERATIONS - (1,373,798)
----------- -----------
Net income (loss) $ 3,860,553 $ (561,054)
=========== ===========
BASIC EARNINGS PER SHARE:
Continuing operations $ 0.64 $ 0.19
Discontinued operations - (0.32)
=========== ===========
$ 0.64 $ (0.13)
=========== ===========
DILUTED EARNINGS PER SHARE:
Continuing operations $ 0.63 $ 0.19
Discontinued operations - (0.32)
============ ===========
$ 0.63 $ (0.13)
============ ===========
</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 Nine Months
Ended September 30,
-----------------------------
1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 3,860,553 $ (561,054)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 912,187 625,226
Amortization 50,424 30,793
Provision for doubtful accounts 29,800 160,000
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) (76)
Deferred income taxes (4,275) (5,584)
Changes in certain assets and
liabilities:
Accounts receivable - trade (1,087,585) (664,167)
Inventories (2,353,513) (720,001)
Prepaid expenses 389,876 407,543
Other assets (284,550) 106,871
Accounts payable - trade (818,750) 1,250,013
Accrued expenses 2,197,031 1,186,078
Amounts due to affiliates 2,804,562 338,573
Net assets of condom
discontinued operations 19,212 (326,712)
------------ ------------
Net cash provided by
operating activities 5,546,598 3,208,885
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (896,294) (1,917,662)
Proceeds on sale of LSAI common stock 982,892 112,176
Minority interest in subsidiary 550,147 883,269
------------ ------------
Net cash provided by (used in)
investing activities 636,745 (922,217)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on trade notes payable to banks (3,583,941) (2,825,551)
Proceeds from issuance of stock 9,168
7,009,905
Net borrowings (payments) from notes payable (8,666,303) 2,000,000
Payments to Indonesian minority
interest shareholders (565,137) (785,103)
------------ ------------
Net cash used in financing activities (5,805,477) (1,601,486)
------------ ------------
IMPACT OF EXCHANGE RATES ON CASH - (136,061)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 377,867 549,121
CASH AND CASH EQUIVALENTS, beginning of period 161,981 321,038
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 539,848 $ 870,159
============ ============
</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
SEPTEMBER 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 A-1 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 nine month period ended September 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 nine months of 1998, PT Buana sold approximately 53% 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
6
<PAGE> 9
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
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 Company recorded a dividend in the financial
statements for the three and six months ended March 31, 1998 and June 30, 1998,
respectively, for the difference between the market price of the public shares
as of the closing date (March 31, 1998) and the proceeds received from the sale
of unregistered shares to Wembley. Upon further review of the facts surrounding
the sale of shares, it was determined that the appropriate accounting was to
treat the transaction as a sale of shares for the amount of cash received, as
negotiated between Wembley and the Company, and not to record any dividend.
This accounting treatment has been revised at September 30, 1998 to reflect the
sale of Common Stock shares and additional paid-in-capital for $6,750,000, the
amount of cash received.
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 September 30, 1998, Wembley has a 54.3%
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 24.3%
ownership interest in the Company as of September 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.
7
<PAGE> 10
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.
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. 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 determined and changed PT
Buana's functional currency from the Indonesian Rupiah to the United States
dollar. This change in functional currency is primarily the result of the PT
Buana operations becoming more dependent on U.S. dollar denominated transactions
and economic trends. The Indonesian Rupiah has been experiencing volatile
foreign currency exchange fluctuations and has weakened compared to the U.S.
dollar during the year. 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 third quarters ended
September 30, 1998 and 1997, foreign exchange gains (losses) included in the
determination of net income were ($59,479) and $204,908, respectively. During
the nine months ended September 30, 1998 and 1997, the Company recorded foreign
currency losses of ($176,844) and ($37,371), respectively.
7. 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. 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.
8
<PAGE> 11
9. 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 September 30 was as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
Basic weighted-average number of
common shares outstanding 6,905,189 4,310,871
Dilutive effect of common share
equivalents 46,699 --
----------- -----------
Diluted weighted-average number of
common shares outstanding 6,951,888 4,310,871
=========== ===========
The weighted-average number of common shares and common share equivalents
outstanding for the nine months ended September 30 were as follows:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
Basic weighted-average number of
common shares outstanding 6,037,906 4,310,871
Dilutive effect of common share
equivalents 46,699 --
----------- ----------
Diluted weighted-average number of
common shares outstanding 6,084,605 4,310,871
=========== ==========
At September 30, 1998, there were 6,907,563 shares of the Company's Common Stock
and Series A Common Stock outstanding.
10. STOCK OPTION PLAN:
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.
9
<PAGE> 12
11. 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 nine months ended
September 30, 1998, the Company recorded a provision for income taxes of
$701,153 and $1,101,153, respectively.
12. CONTINGENCIES:
Over the last several years, numerous product liability lawsuits have been
filed against suppliers and manufacturers of latex gloves alleging, among other
things, adverse allergic reactions. AHPC is one of numerous defendants that have
been named in such lawsuits. At September 30, 1998, there were fourteen lawsuits
outstanding against AHPC, three of which were served in the third quarter of
1998. Subsequent to September 30, 1998, AHPC was served with four additional
lawsuits. AHPC carries product liability insurance coverage which, management
believes, adequately provides for all legal claims. 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.
13. 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 nine months
ended September 30, 1997 have been restated to reclassify rebates to conform
with the 1998 presentation.
10
<PAGE> 13
14. 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 distributors 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 nine months
ended September 30, 1998 $ 3,860,553
Other comprehensive income -
sale of LSAI common stock (261,979) (261,979)
------------
Comprehensive income for the
nine months ended September 30, 1998 $ 3,598,574
===========
-----------
Balance, September 30, 1998 $ -0-
===========
</TABLE>
15. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for the
fiscal years beginning after December 15, 1997. SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company is evaluating
the disclosure requirements of SFAS 131 and believes that its adoption will not
have a material impact on the Company's future reported results.
11
<PAGE> 14
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 third quarter of 1998 of $16.4 million, a
13.7% increase over the same quarter in the previous year. Furthermore, this is
the Company's fifth consecutive quarter of record profits.
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 53% of its production to AHPC in the first nine months of 1998 as
compared to 88% during the same period in 1997. PT Buana had total powdered
latex exam glove sales of approximately $10.4 million and $6.6 million for the
nine months ended September 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
increase in sales and 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 nine months ended September 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.
- -----------------------------
(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 A-1 for
the year ended December 31, 1997 under the heading "Risks Affecting Forward
Looking Statements and Stock Prices."
12
<PAGE> 15
RESULTS OF OPERATIONS:
Total revenues are comprised primarily of glove sales from AHPC's
examination glove product line plus glove sales from PT Buana. Net glove product
sales totaled $16,259,268 and $14,329,900 for the three months ended September
30, 1998 and 1997, respectively. This increase represents a 13.5% increase in
glove sales in the third quarter of 1998 over the comparable period in 1997.
Glove product sales for the nine months ended September 30, 1998 were
$47,157,200 compared to $38,136,037 for the same period in 1997, an increase of
about 24%. These increases in sales are attributable to AHPC's more developed
customer relationships, the inclusion of PT Buana glove sales to third parties
(Wembley and others) of $2,047,201 and $4,913,483, respectively, in the three
and nine months ended September 30, 1998, and due to an increase in the sales
mix to higher priced products, particularly powder-free latex examination
gloves. The vast majority of PT Buana's sales during the first nine 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 nine months ended
September 30, 1998, two of AHPC's customers accounted for approximately 63.4%
and 77.9%, respectively, of glove sales.
Cost of goods sold as a percentage of net product sales for the three and
nine months ended September 30, 1998 were 71.4% and 70.7%, respectively,
compared to 77.6% and 79.8%, 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 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 and
non-latex gloves. The Company does not presently have the capability of
manufacturing non-latex gloves. AHPC's sales of latex powder-free exam gloves
were approximately 48.4% and 44.2%, respectively, of net product sales in the
three and nine months ended September 30, 1998 versus 38.6% and 36.8%,
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
$2,057,980 in the third quarter ended September 30, 1997 to $2,297,478 in the
same period of 1998, an 11.6% increase. This increase of $239,498 is
attributable to the inclusion of a foreign currency loss of ($59,479) recorded
in the third quarter of 1998 (versus a foreign exchange gain of $204,908 in the
same period in 1997). As a percentage of total revenues, SG&A expenses decreased
to 14.0% during the third quarter ended September 30, 1998, compared with 14.3%
in the comparable
13
<PAGE> 16
period in 1997. For the nine months ended September 30, 1998, the SG&A expenses
as a percentage of total revenues remained at 16.3%, the same as for the nine
month 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 $839,497 during the nine months ended
September 30, 1997 to $953,432 in the comparable period in 1998. This increase
of $113,935 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.
Interest expense decreased in the third quarter of 1998 to $222,802 compared to
$314,822 in the third quarter of 1997. During the second quarter of 1998, the
Company paid down debt of over $3.75 million, including the complete payoff of
PT Buana's bridging loan. During the third quarter of 1998, the Company
completely paid off PT Buana's syndicated loan facility balance of approximately
$4.0 million. The funds for these debt payments was 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 loss of ($59,479) in the
third quarter of 1998 versus a foreign exchange gain of $204,908 in the
comparable period in 1997, primarily from its Indonesian subsidiary, PT Buana.
As currency exchange rates fluctuate and depending upon the mix of assets and
liabilities in PT Buana's books in Rupiahs, an exchange gain or loss will be
incurred. During the nine months ended September 30, 1998 and 1997, the Company
recorded foreign exchange losses of $176,844 and $37,371, 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
continues to be exposed to volatile foreign currency exchange rate 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.
During 1997, the Company did not owe income taxes and 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 $701,153 income tax
14
<PAGE> 17
provision in the third quarter of 1998 and $1,101,153 for the nine months of
1998 to provide for federal and state income tax liabilities.
The Company reported a record net income of $1,420,008 for the three months
ended September 30, 1998, an increase in earnings of over 75 percent compared to
the third quarter of 1997. This is the fifth consecutive quarter of record
profit. The net income for the nine months ended September 30, 1998 was
$3,860,553 versus a net loss of $561,054 with income from continuing operations
of $812,744 in the comparable period of 1997. Diluted earnings per share for the
three months ended September 30, 1998 and 1997 were $.20 and $.19, respectively.
However, the earnings per share in the third quarter of 1998 was diluted by the
2,500,000 shares of Common Stock issued to Wembley on March 31, 1998. Diluted
earnings per share from continuing operations for the nine months ended
September 1998 and 1997 were $.63 and $.19, respectively. For the nine months
ended September 30, 1997, the diluted earnings per share from discontinued
operations was ($.32).
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at September 30, 1998 was $539,848 and increased
$377,867 from $161,981 at December 31, 1997. The Company experienced an increase
in cash flows in the nine 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 $5,138,085 at September 30, 1998
compared to a deficit of $1,578,613 at December 31, 1997.
The Company experienced positive cash flow from operations of $5,546,598
during the nine months ended September 30, 1998 as a result of net income of
$3,860,553 plus non-cash depreciation of $912,187. 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 $636,745 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
$896,294 primarily for property, plant and equipment at the PT Buana Indonesian
manufacturing facility. The factory has expanded its operations and has begun to
acquire assets to manufacture powder-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 nine months ended September 30, 1998, cash was used in financing
activities in the amount of $5,805,477 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 PT Buana debt payments of $7,075,000. The Company
completely paid off PT Buana's syndicated loan facility debt in 1998. In
addition, AHPC paid down its bank line of credit during 1998 by $1,150,000.
At December 31, 1997, 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
15
<PAGE> 18
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 completely paid off all letter of credit obligations to
MBf Bank in the third quarter of 1998. AHPC is able to reduce its letter of
credit needs since virtually 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.
At December 31, 1997, the Company's principal source of liquidity (besides
cash, cash provided by operations, and the MBf Bank facility) was a $7,900,000
secured asset based lending bank facility from Bank Bumiputra to AHPC comprised
of a $2,500,000 revolving line of credit, and letter of credit facility (up to
$5,400,000), all expiring on December 31, 1998. At September 30, 1998, the
Company had $1,300,000 outstanding on the revolving line of credit and
$1,865,240 of letters of credit obligations were outstanding under the
$7,900,000 facility. On October 6, 1998, the Company was notified by the bank
that the bank was immediately reducing its facility limit of $7,900,000 to
$3,500,000 because MBf Holdings, the guarantor, had filed for protection under
Section 176 in Malaysia, the U.S. equivalent of Chapter 11, triggering a
technical event of default. The Company has worked with the bank to remove its
default status effective October 21, but the bank has retained the reduced
facility limit of $3,500,000. The Company is not in default with any of the
payment obligations to the bank.
On October 13, the Company received an offer letter from a large commercial
credit company for a $10 million revolving secured asset based lending facility
to AHPC with a $7,000,000 letter of credit subfacility. The Company received a
commitment letter from the lender which was accepted by AHPC on November 5,
1998. The new credit facility carries an interest rate of commercial paper plus
2.75% (currently 7.9%) versus prime plus 3% (currently 11.25%) with the existing
bank facility.
The Company believes the new credit facility will enable the Company to
provide sufficient liquidity to fund the Company's ongoing operations, including
future growth. The Company anticipates closing on the new credit facility on or
about December 1, 1998, which will fully pay off the existing bank facility debt
obligations.
Inventories at September 30, 1998 increased to $10,557,374 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 accounts
receivable at September 30, 1998 increased to $6,468,628 compared to $5,410,843
at December 31, 1997. The increase in trade receivables is due to higher sales
volume in the third quarter of 1998. Trade notes payable at September 30, 1998
decreased to $1,865,240 from $5,449,181 at December 31, 1997. The decrease in
trade notes payable is due to the glove purchases from Wembley being reflected
as a due to affiliate liability at September 30, 1998, as their payment terms
did not require letters of credit financing.
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
16
<PAGE> 19
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 September 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 and beyond, 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 remaining
long-term debt; (iii) the continued hiring of an additional full time sales
force and sales personnel; (iv) the hiring of additional support staff; (v) the
upgrading of the Indonesian glove factory 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 for its U.S. operations in the amount of
approximately $1,500,000, of which $385,000 has been incurred through September
30, 1998. The Company anticipates the system will begin to be operational in the
first quarter of 1999.
The Company is currently faced with the "Year 2000 problem"; the extent of
the potential impact is not yet known. The Year 2000 problem arose because many
existing computer programs use only the last two digits to refer to a year.
Therefore, these computer programs do not properly recognize a year that begins
with "20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. The impact of the Year
2000 problem is not yet known, and if not timely corrected, it could affect the
global economy.
The Company's U.S. operations are currently installing a new enterprise
wide computer system. The Company has hired computer consultants to assist with
the customization, installation, testing and training of the new computer
system. The Company believes that the new computer system will be Year 2000
compliant.
The Company is currently assessing its Year 2000 issues and believes that
consequences of Year 2000 issues could have a material effect on the Company's
business, results of operations, or financial condition. The Company is working
on an assessment plan to determine whether third parties, with whom the Company
has material relationships, are Year 2000 compliant. Third parties such as
vendors, manufacturers, and suppliers (including the PT Buana factory) of the
Company's glove products, which are not Year 2000 compliant, could cause a
material impact to the Company. Should glove manufacturers not be Year 2000
complaint, the Company might not be able to obtain the necessary levels of
inventory to satisfy customer needs. Furthermore, significant customers which
are not Year 2000 compliant could cause a loss of business or significant
business disruption until the problem is corrected. The Company is currently
preparing a Year 2000 questionnaire to be submitted to these third parties to
determine their Year 2000 readiness and assessing the implications of Year 2000
exposure.
The transaction with Wembley substantially increased liquidity and working
capital to the Company. The Company has identified an additional source of
funding to provide capital, in addition to its cash and cash provided by
operations, which will provide sufficient liquidity to fund the Company's
ongoing operations.
17
<PAGE> 20
ITEM 6.
EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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: November 11, 1998 By: /s/ Edward J. Marteka
---------------------
Name: Edward J. Marteka
Title: President
18
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