<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q/A-1
[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>
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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."
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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
2
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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
3
<PAGE> 6
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
4
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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
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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.
YEAR 2000 OVERVIEW:
The crux of the Year 2000 ("Y2K") Issue is whether information technology
(I.T.) and non-I.T. systems will be able to recognize and process
date-sensitive information before and after the year 2000. The Company relies,
directly and indirectly, on I.T. systems, such as desktop computers, network
hardware equipment and applications software, to manage its business data. The
Company also relies on non-I.T. systems including office equipment, security
systems, and telephone systems, to carry out its day-to-day operations. In
addition, third party suppliers and customers, material to the Company's
operations, rely on I.T. and non-I.T. systems to manage their businesses. The
Year 2000 Issue could potentially effect all of their systems. In order to
minimize the exposure of Y2K related risks, the Company is conducting a
comprehensive assessment of its Y2K issues. The Company, through its Y2K
Committee, is in the process of identifying, updating or replacing non-Y2K
compliant I.T. and non-I.T. systems that are material to the Company's
operations.
The Company has identified four stages for its Y2K compliance effort:
I. Assessment
II. Planning
III. Implementation
IV. Testing
The Assessment stage involves the determination of the readiness status of all
I.T. and non-I.T. systems. The Planning stage identifies the actions required
to achieve a ready state. During the Implementation stage any deficient
components are replaced or upgraded. The replacements and upgrades are verified
during the Testing stage.
The Company's Y2K assessment is focusing primarily on four areas:
1) information technology equipment;
2) applications software;
3) non-information technology systems and infrastructure; and
4) third party suppliers and customers.
The assessment involves analyzing all I.T. equipment, applications software,
and non-I.T. systems used by the Company. The Company will also be evaluating
third parties critical to the Company's operations on their Y2K preparedness.
As of September 30, 1998, the Company's Assessment and Planning stages for
internal I.T. systems has been 100% completed. The Company has begun to
implement Y2K compliant, enterprise-wide, business systems application
software. The Company expects that the application software will be online by
March 31, 1999. The Company's overall Y2K Assessment stage is approximately 50%
complete, including the analysis of the PT Buana manufacturing facility,
located in Indonesia. The Company is developing plans for each of the areas
targeted by the Y2K assessment, such as the telephone, facsimile machines, and
the readiness of third parties. The readiness status of third parties will be
acquired through certifications requested from all suppliers and customers
material to its operations. The Company expects to complete the entire
Assessment stage by December 31, 1998. The Planning stage is in progress and is
33% complete as of September 30, 1998. The Company anticipates the Planning
stage to be completed by March 31, 1999. As of September 30, 1998, the
Implementation stage is 30% complete, primarily attributed to the status of the
installation of the new enterprise-wide business applications software, and
will be finalized for both I.T. and non-I.T. systems by June 30, 1999. The
Testing stage has not yet begun at September 30, 1998. The Testing stage will
begin as warranted by the progress of the Implementation stage and is expected
to be completed by June 30, 1999. Contingency plans for any of the Company's
known Y2K issues will be developed beginning February 1, 1999 and finalized by
July 31, 1999.
YEAR 2000 COSTS
Although the total costs associated with becoming Y2K compliant have not been
fully identified, the Company estimates the costs of remediating to be
$1,750,000, of which $1,500,000 is to be spent on replacing the enterprise wide
business applications software. As of September 30, 1998, the Company has spent
approximately $400,000 on Y2K issues, primarily attributable to the cost of
hardware, software, and professional services associated with its new computer
system.
YEAR 2000 RISKS
The failure to address a material Y2K problem increases the possibility of
interruption or failure of certain normal business activities of the Company.
Such failures could have a material or adverse effect on the Company's results
of operations and financial condition. The likely "worst case scenario" for the
Company with respect to the Year 2000 Issue is the failure of suppliers,
particularly a glove supplier, to be compliant such that the supply of products
or services to the Company is temporarily interrupted. This could result in the
Company not being able to supply product to meet the full demands of its
customers, which in turn could result in lost sales and profits. Due to the
general uncertainty inherent in the Y2K problem resulting in part from the
uncertainty of the readiness of third parties and of the infrastructure in
those countries in which the Company operates, there can be no assurance that
the Year 2000 Issue will not have a material impact on the Company's results of
operations or financial condition. However, the Company expects its Y2K
remediation efforts to significantly reduce the Company's risks regarding the
Year 2000 Issue. In particular, the compliance and readiness of its material
third party suppliers, customers and vendors will be the focus of further
efforts. Furthermore, the Company believes that, with the implementation of new
business systems and the completion of its Y2K remediation plan as scheduled,
the possibility of significant interruptions of normal operations should be
minimal.
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.
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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: December 14, 1998 By: /s/ Edward J. Marteka
---------------------
Name: Edward J. Marteka
Title: President
7
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 540
<SECURITIES> 0
<RECEIVABLES> 6,694
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