<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, 1999
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 12, 1999 was 5,673,692 and 1,252,538, respectively.
<PAGE> 2
WRP Corporation
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1
Consolidated Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998 (audited) ............. pg. 1
Consolidated Statements of Operations (unaudited) for the
Three Months Ended September 30, 1999 and 1998 ............................. pg. 3
Consolidated Statements of Operations (unaudited) for the
Nine Months Ended September 30, 1999 and 1998 .............................. pg. 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 1999 and 1998 .............................. pg. 5
Notes to Interim Consolidated Financial Statements (unaudited) ............. pg. 6
Item 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................................... pg. 12
Item 3
Quantitative and Qualitative Disclosure About Market Risk .................. pg. 19
PART II - OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K ........................................... pg. 20
</TABLE>
<PAGE> 3
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 67,916 $ 679,725
Accounts receivable - trade, net of allowance for
doubtful accounts of $275,000 in 1999 and
$240,000 in 1998 6,661,669 5,532,405
Due from affiliate 2,427,702 1,340,261
Inventories, net 15,286,066 11,860,855
Prepaid expenses 1,056,461 958,318
Deferred tax assets 668,308 962,190
Other receivables 322,022 509,003
------------ ------------
Total current assets 26,490,144 21,842,757
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 736,535
Construction in progress 26,059 1,275,667
Equipment, furniture and fixtures 14,842,336 11,357,924
Building improvements 2,215,768 1,689,878
Vehicles 166,273 149,958
------------ ------------
Total property, plant and equipment 17,986,971 15,209,962
Less - Accumulated depreciation and amortization (4,030,758) (2,733,225)
------------ ------------
Property, plant and equipment, net 13,956,213 12,476,737
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $523,019
in 1999 and $472,595 in 1998 1,226,981 1,277,405
Other assets 205,623 203,040
------------ ------------
Total other assets 1,432,604 1,480,445
------------ ------------
$ 41,878,961 $ 35,799,939
============ ============
</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, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 1,849,194 $ 2,504,225
Trade notes payable to banks 1,198,910 3,322,882
Notes payable and current portion of
long-term obligations 9,897,506 2,086,833
Due to affiliate 4,178,397 3,891,944
Accrued expenses 2,430,483 3,507,487
------------ ------------
Total current liabilities 19,554,490 15,313,371
------------ ------------
LONG-TERM DEBT 1,262,378 1,668,982
------------ ------------
DEFERRED TAX LIABILITY 109,908 152,037
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 1,754,785 1,724,113
------------ ------------
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; 5,803,692 and 5,785,525 shares issued and
outstanding in 1999 and 1998, respectively 58,037 57,855
Additional paid-in capital 17,942,471 17,862,021
Retained earnings 2,507,403 332,071
Less - Common stock in treasury, at cost,
130,000 shares in 1999 and 1998 (1,323,036) (1,323,036)
------------ ------------
Total shareholders' equity 19,197,400 16,941,436
------------ ------------
$ 41,878,961 $ 35,799,939
============ ============
</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,
----------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 17,068,019 $ 16,259,268
COST OF GOODS SOLD 12,875,919 11,615,137
------------ ------------
GROSS PROFIT 4,192,100 4,644,131
OPERATING EXPENSES:
Selling, general and administrative 3,248,650 2,297,478
------------ ------------
INCOME FROM OPERATIONS 943,450 2,346,653
INTEREST EXPENSE 308,526 222,802
OTHER INCOME 14,178 100,213
------------ ------------
Income before (benefit from) provision for income taxes
and minority interest 649,102 2,224,064
(BENEFIT FROM) PROVISION FOR INCOME TAXES (360,900) 701,153
------------ ------------
Net income before minority interest 1,010,002 1,522,911
MINORITY INTEREST IN INCOME OF SUBSIDIARY (158,940) (102,903)
------------ ------------
Net Income $ 851,062 $ 1,420,008
============ ============
BASIC NET INCOME PER COMMON SHARE: $ 0.12 $ 0.21
============ ============
DILUTED NET INCOME PER COMMON SHARE: $ 0.12 $ 0.20
============ ============
</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,
-----------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 48,014,495 $ 47,157,200
COST OF GOODS SOLD 35,734,428 33,339,426
------------ ------------
GROSS PROFIT 12,280,067 13,817,774
OPERATING EXPENSES:
Selling, general and administrative 8,732,840 7,741,520
------------ ------------
INCOME FROM OPERATIONS 3,547,227 6,076,254
INTEREST EXPENSE 683,218 953,432
OTHER INCOME 140,147 389,031
------------ ------------
Income before provision for income taxes
and minority interest 3,004,156 5,511,853
PROVISION FOR INCOME TAXES 798,151 1,101,153
------------ ------------
Net income before minority interest 2,206,005 4,410,700
MINORITY INTEREST IN INCOME OF SUBSIDIARY (30,673) (550,147)
------------ ------------
Net Income $ 2,175,332 $ 3,860,553
============ ============
BASIC NET INCOME PER COMMON SHARE: $ 0.31 $ 0.64
============ ============
DILUTED NET INCOME PER COMMON SHARE: $ 0.31 $ 0.63
============ ============
</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,
--------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,175,332 $ 3,860,553
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,297,533 912,187
Amortization 50,424 50,424
Deferred income taxes 251,753 (4,275)
Gain on sale of LSAI common stock -- (168,375)
Changes in operating assets and liabilities:
Accounts receivable - trade, net (1,129,264) (1,057,785)
Inventories, net (3,425,211) (2,353,512)
Prepaid expenses (98,143) 389,876
Other assets 184,398 (284,550)
Accounts payable - trade (655,031) (818,750)
Accrued expenses (1,077,004) 2,197,031
Amounts due to (from) affiliate (800,988) 2,804,562
Net assets of condom discontinued operations -- 19,212
----------- -----------
Net cash (used in) provided by operating activities (3,226,201) 5,546,598
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,777,009) (896,294)
Proceeds on sales of LSAI common stock -- 982,892
Minority interest in subsidiary 30,672 550,147
----------- -----------
Net cash (used in) provided by investing activities (2,746,337) 636,745
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on trade notes payable to banks (2,123,972) (3,583,941)
Net proceeds from stock option exercises 80,632 259,905
Proceeds from issuance of stock -- 6,750,000
Net borrowings (payments) on notes payable 7,404,069 (8,666,303)
Payments to Indonesian minority interest shareholders -- (565,137)
----------- -----------
Net cash provided by (used in) financing activities 5,360,729 (5,805,476)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (611,809) 377,867
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 679,725 161,981
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 67,916 $ 539,848
=========== ===========
</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, 1999
1. DESCRIPTION OF BUSINESS:
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 and powder-free latex examination gloves
through its 70% owned Indonesian subsidiary, PT WRP Buana Multicorpora ("PT
Buana"). 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, 1998. 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, 1999 may not
be indicative of the results that may be expected for the year ended December
31, 1999.
3. PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts
of the Company, 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 1999 and 1998, PT Buana sold approximately 15%
and 53%, respectively, of its production of gloves to AHPC. All significant
intercompany transactions have been eliminated in consolidation.
WRP Asia Pacific Sdn. Bhd. (formerly known as Wembley Rubber Products
(M) Sdn. Bhd.), a Malaysian corporation ("WRP Asia"), owns the Series A Common
Stock of the Company and is the majority shareholder of the Company.
4. MAJORITY SHAREHOLDER TRANSACTION:
On March 31, 1998, WRP Asia completed the following two transactions,
which transferred majority ownership in the Company to WRP Asia:
a. MBf International, Ltd. ("MBf International") sold all of the
Company's Series A Common Stock (1,252,538 shares) to WRP Asia
for $5.00 per share or $6,262,690; and
b. WRP Asia purchased 2,500,000 shares of the Company's
unregistered Common Stock for $2.70 per share for a total of
$6,750,000.
6
<PAGE> 9
On March 31, 1998, the Company received $6,750,000 from WRP Asia for
the sale of Common Stock and recorded an increase in its common stock and
additional paid-in capital for the amount of cash received. These transactions
provided WRP Asia with a 55% ownership interest in the Company at March 31,
1998. At September 30, 1999, WRP Asia had a 54.2% ownership interest in the
Company.
At December 31, 1998 MBf International owned 1,682,275 shares of the
Company's Common Stock which represented a 24.4% ownership interest in the
Company. WRP Asia entered into another agreement on March 31, 1998, with MBf
International (the "Call and Put Option Agreement") which provided WRP Asia with
the right to purchase 50% of the remaining shares owned by MBf International at
$6.00 per share during the one year period beginning March 31, 1999, and
provided MBf International with the right to sell up to 1,682,275 shares to WRP
Asia at $5.00 per share during that same one year period. In January, 1999, MBf
International sold its 1,682,275 shares to several U.S. institutional investors,
thus eliminating its entire ownership interest in the Company and terminating
the Call and Put Option Agreement with WRP Asia.
WRP Asia is one of the world's leading manufacturers of high quality
disposable gloves, primarily for use by healthcare professionals in the acute
care and alternative care markets and for critical environments in the
electronics industries, scientific laboratories, pharmaceutical industries, food
service industry and other related industries. AHPC has been purchasing the
majority of its powder-free latex exam gloves from WRP Asia for several years.
5. COMMON STOCK:
The terms of the Series A Common Stock owned by WRP Asia 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 WRP Asia to elect all Class A
directors, who 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 is
established and operates. For U.S. financial reporting purposes, PT Buana's
functional currency is the United States dollar, primarily since operations are
heavily dependent on U.S. dollar denominated transactions and economic trends.
Gains and losses from foreign currency exchange transactions are
included in net income in the period in which they occur. During the third
quarters ended September 30, 1999 and 1998, the foreign exchange losses included
in the determination of net income were $34,082 and $59,479, respectively.
During the nine months ended September 30, 1999 and 1998, the Company recorded
foreign exchange losses of $25,062 and $158,118, respectively.
7
<PAGE> 10
7. ASIAN ECONOMIC EVENTS:
In the past, the Asian Pacific region experienced an economic situation
that was characterized by reduced activity, illiquidity in certain sectors,
volatile foreign currency exchange, interest rates and stock markets. The Asian
Pacific region has been recovering from its economic downturn but continues to
experience volatile foreign currency fluctuations compared to the U.S. dollar.
During the third quarter of 1999, the Indonesian Rupiah has weakened
against the U.S. dollar by 24% from 6705 to 8337 Rupiah to the U.S. dollar. Due
to the Company's ownership interest in PT Buana, an Indonesian factory, and due
to the Company's purchase of product from the Asian Pacific region, the Company
can be affected by economic conditions in the region. The financial statements
do not include any adjustment that might result from these uncertainties and any
related effects will be reported in the financial statements as they become
known and estimable.
8. INVESTMENT IN LSAI:
During the first quarter of 1998, the Company disposed of its entire
investment in Laboratory Specialists of America, Inc. ("LSAI") by selling
156,405 shares of LSAI and discounting its note receivable from LSAI for
$315,000. These combined transactions resulted in proceeds of $982,892 and a
gain on sales of its investment in LSAI of $168,375 for the nine months ended
September 30, 1998.
9. NET INCOME PER SHARE:
The Company follows 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 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Basic weighted-average number of
common shares outstanding 6,926,230 6,905,189
Dilutive effect of common share
equivalents 34,024 46,699
--------- ---------
Diluted weighted-average number of
common shares outstanding 6,960,254 6,951,888
========= =========
</TABLE>
The weighted-average number of common shares and common share
equivalents outstanding for the nine months ended September 30 are as follows:
8
<PAGE> 11
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Basic weighted-average number of
common shares outstanding 6,923,344 6,037,906
Dilutive effect of common share
equivalents 52,003 46,699
--------- ---------
Diluted weighted-average number of
common shares outstanding 6,975,347 6,084,605
========= =========
</TABLE>
At September 30, 1999, there were 6,926,230 shares of the Company's
Common Stock and Series A Common Stock outstanding.
10. 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, 1998 of approximately $2,700,000 which were available to reduce Federal
taxable income in future periods and would begin expiring in 2004. 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 became limited on March 31, 1998 and the Company began recording a
provision for income taxes in 1998.
During the second quarter of 1999, the Indonesian Rupiah significantly
strengthened against the U.S. dollar causing PT Buana's tax reporting financial
statements (Rupiah financial statements) to report a significant unrealized gain
on foreign exchange, which is taxable in Indonesia. This resulted in additional
income tax expense of $578,796 on PT Buana's U.S. financial statements, which in
turn affected the Company's tax provision by this amount in the second quarter
of 1999. During the third quarter of 1999, the Rupiah weakened against the
dollar, which caused a reversal of the income tax expense recorded in the second
quarter and PT Buana to report a tax benefit of $518,600 in the third quarter of
1999. Because the Indonesian tax reporting financial statements are in Rupiahs,
the Company's tax provision will fluctuate as the Rupiah strengthens or weakens
against the U.S. dollar.
For the three months ended September 30, 1999 and 1998, the Company
recorded a (benefit from) provision for income taxes of ($360,900) and $701,153,
respectively. For the nine months ended September 30, 1999 and 1998, the Company
recorded a provision for income taxes of $798,151 and $1,101,153, respectively.
11. Contingencies:
Over the last several years, numerous product liability lawsuits have
been filed against suppliers and manufacturers of latex gloves alleging, among
other things, adverse allergic reactions. AHPC is one of numerous defendants
that have been named in such lawsuits. At September 30, 1999, there were
thirty-two lawsuits outstanding against the Company, three of which were served
in the third quarter of 1999, while one claim was dismissed in the third
9
<PAGE> 12
quarter of 1999. None of these lawsuits name AHPC or the Company as the sole
defendant in these claims. The Company 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,
which expires in October, 2000, 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 and the amounts up to the per claim deductible would be borne by the
Company.
12. RECLASSIFICATIONS:
The Company has revised the format of the consolidated statements of
operations which now includes the presentation of the Company's gross profit.
The consolidated statements of operations for the three and nine months ended
September 30, 1998 have been restated to conform to the 1999 presentation.
13. 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 investments by owners and distributions to owners, in a financial
statement for the period in which they are recognized. Comprehensive income for
the three and nine months ended September 30, 1999 and 1998 was equal to net
income and there were no accumulated other comprehensive income items during
those periods.
14. SEGMENT REPORTING:
The Company has two business segments: manufacturing and distribution.
These segments are managed as separate strategic business units due to the
distinct nature of their operations and customer bases. The manufacturing
segment, which represents the operations of PT Buana, manufactures primarily
powdered latex gloves and sells them to the Company and WRP Asia. All operations
of the manufacturing segment are located in Indonesia. The distribution segment
involves the procurement and sale of gloves purchased from the manufacturing
segment and other glove manufacturers and then sold to national and regional
healthcare, food service, retail and other distributors. The operations of the
distribution segment are located entirely within the U.S.
The Company evaluates segment performance based on income before
provision for income taxes and minority interest ("Pre-tax income").
Transactions between operating segments are made at prevailing market rates.
The following tables provide financial data for the three and nine
months ended September 30, 1999 and 1998 for these segments:
10
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999 Manufacturing Distribution Eliminations Consolidated
------------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 2,515,101 $14,552,918 $ -- $17,068,019
Revenues from other operating
segments 360,000 -- (360,000) --
Pre-tax income 11,200 637,902 -- 649,102
Total assets 16,740,666 25,138,295 -- 41,878,961
Three Months Ended
September 30, 1998 Manufacturing Distribution Eliminations Consolidated
------------------ -------------- ------------ ------------ ------------
Revenues from external customers $ 2,047,201 $14,212,067 $ -- $16,259,268
Revenues from other operating
segments 936,200 -- (936,200) --
Pre-tax income 365,149 1,858,915 -- 2,224,064
Total assets 14,021,192 20,208,670 -- 34,229,862
Nine Months Ended
September 30, 1999 Manufacturing Distribution Eliminations Consolidated
------------------ -------------- ------------ ------------ ------------
Revenues from external customers $ 6,888,802 $41,125,693 $ -- $48,014,495
Revenues from other operating
segments 1,169,537 -- (1,169,537) --
Pre-tax income 47,693 2,956,463 -- 3,004,156
Total assets 16,740,666 25,138,295 -- 41,878,961
Nine Months Ended
September 30, 1998 Manufacturing Distribution Eliminations Consolidated
------------------ -------------- ------------ ------------ ------------
Revenues from external customers $ 4,913,483 $42,243,717 $ -- $47,157,200
Revenues from other operating
segments 5,459,450 -- (5,459,450) --
Pre-tax income 1,945,961 3,565,892 -- 5,511,853
Total assets 14,021,192 20,208,670 -- 34,229,862
</TABLE>
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's 70% owned subsidiary, PT WRP Buana Multicorpora ("PT
Buana"), owns an Indonesian glove manufacturing plant which commenced operations
in April 1996. PT Buana manufactures high quality, powdered latex exam gloves
and has recently installed manufacturing equipment to produce powder-free latex
exam gloves. PT Buana is selling a limited quantity of powder-free gloves to
Europe on a trial basis before selling its gloves to the U.S. maketplace.
PT Buana sold approximately 15% of its production to AHPC in the first
nine months of 1999 as compared to 53% during the same period in 1998. PT Buana
recorded primarily powdered latex exam glove sales totalling $8.1 million and
$10.4 million during the nine months ended September 30, 1999 and 1998,
respectively. AHPC reduced its purchases from PT Buana as a result of the
Company's fulfillment of certain glove purchase obligations with an independent
supplier pursuant to a preexisting contract requirement. PT Buana's remaining
production was primarily sold to WRP Asia. All significant intercompany
transactions and sales have been eliminated in consolidation.
During the third quarter of 1999, the Company continued to face the
challenge of lower glove pricing and excess capacity in the marketplace.
Recently, the price of latex had dropped to its lowest levels in five years,
which has caused pricing instability in the marketplace. Foreign currency
fluctuations continued and impacted the Company's third quarter performance as
the Indonesian Rupiah weakened against the U.S. dollar, reversing the trend
which affected the second quarter of 1999.
The Company has announced that it was awarded an exclusive five-year
contract to supply the members of Amerinet, Inc. with its glove products.
Amerinet is the largest membership-based group purchasing organization in the
U.S., representing 9,100 member facilities in all 50 states including hospitals,
medical group practices, nursing homes, surgery centers, managed care
organizations, pharmacies and integrated delivery networks. This membership
represents more than 326,000 healthcare beds. The launch of the Amerinet Choice
private label glove products took place in late July 1999 and these sales have
been increasing.
- --------------------
(1) Forward looking statements in the Notes to the Company's financial
statements 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, 1998 under the heading "Risks Affecting Forward Looking
Statements and Stock Prices."
12
<PAGE> 15
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the three months ended September 30, 1999 were
$17,068,019 versus net sales of $16,259,268 for the same period in 1998, a 5%
increase. AHPC experienced an increase in unit case volumes sold of 11% in the
third quarter of 1999 over the same period in 1998, offset by lower average
selling prices compared to 1998 by approximately 7% due to increased pricing
pressure in the U.S. marketplace. PT Buana's selling prices were reduced by over
13% in the third quarter of 1999 compared to the same period in 1998.
Cost of goods sold increased by 11% from $11,615,137 for the three
months ended September 30, 1998 to $12,875,919 for the three months ended
September 30, 1999. As a percentage of net sales, cost of goods sold increased
from 71% for the three months ended September 30, 1998 to 75% for the same
period in 1999. The primary factors associated with the increase in cost of
goods sold as a percentage of net sales were lower average selling prices,
increased warehousing cost associated with higher inventory levels, and
increased ocean freight rates, partially offset by an increased mix of higher
margin powder-free glove sales and reductions in glove purchase prices from
manufacturers.
AHPC is continuing to strive for reduced glove purchase prices from its
suppliers to counteract the impact of reductions in its selling prices. The
Company believes that the existing selling prices in the U.S. will not remain at
their low levels for an extended period of time and that the price of latex will
rise. Currently, raw material latex prices are just above the cost to harvest
the commodity, and the Company believes selling prices will begin to increase
within a year from their current low levels.
As a result of the above factors, the Company's gross profit decreased
10% from $4,644,131 for the three months ended September 30, 1998 to $4,192,100
for the three months ended September 30, 1999. The gross profit percentage
decreased from 29% in the third quarter of 1998 to 25% in the same period of
1999. The Company expects its gross margins to be affected by changes in product
mix, competition, the price of latex and other factors.
During the third quarter of 1999, the Indonesia factory, PT Buana,
completed its installation of chlorination equipment used for the manufacturing
of powder-free gloves, which produce a higher gross profit margin than powdered
gloves. PT Buana produced only a small quantity of powder-free gloves in the
third quarter, as it is selling and testing its product in the European market
before sales to the U.S. are made. PT Buana's gross profit percentage was
reduced from 28% in the third quarter of 1998 to 16% in the same period of 1999
primarily due to the reduction in powdered glove selling prices in the
marketplace and the impact of under utilized capacity at its manufacturing
facility.
The domestic market for exam gloves is converting rapidly 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
eliminates powder levels, which could carry latex particles in the air. Due to
customer demand, the Company is providing and selling more latex powder-free
exam gloves and non-latex gloves. The Company expects that this trend will
continue.
Selling, general and administrative expenses increased 41% from
$2,297,478 for the three months ended September 30, 1998 to $3,248,650 for the
three months ended September 30, 1999. As a percentage of net sales, selling,
general and administrative expenses increased from
13
<PAGE> 16
14% during the third quarter ended September 30, 1998 to 29% for the same period
in 1999. The Company experienced increased selling expenses related to its
efforts to expand its medical and telesales sales force and prepare for the
introduction of the Amerinet and nitrile product launches, which occurred in
July 1999. Additionally, the Company recorded increased administrative salaries
to support the infrastructure in place and incurred increased depreciation
expense and consulting fees in connection with AHPC's recently implemented
enterprise wide computer system.
Income from operations decreased 60% from $2,346,653 for the three
months ended September 30, 1998 to $943,450 for the three months ended September
30, 1999. Operating margins decreased from 14% in the 1998 period to 6% in the
1999 period.
Interest expense increased in the third quarter of 1999 to $308,526
compared to $222,802 in the third quarter of 1998. This 38% increase is
primarily due to increased borrowings on the Company line of credit used to
finance its increased inventory levels.
During the second quarter of 1999, the Indonesian Rupiah strengthened
against the U.S. dollar by 23%, creating a significant unrealized foreign
currency gain on PT Buana's tax reporting financial statements, which are in
Rupiahs. This unrealized gain for tax reporting purposes caused an additional
$578,796 of income tax expense to PT Buana's U.S. financial statements in the
second quarter of 1999. During the third quarter of 1999, the Indonesian Rupiah
reversed its course and weakened by 24% against the U.S. dollar causing a
reversal of the income tax expense recorded in the second quarter. As a result,
PT Buana recorded a tax benefit of $518,600 in the third quarter of 1999. Thus,
a net benefit from income taxes of $360,900 is reflected in the third quarter of
1999. The income tax provision of $701,153 recorded in the third quarter 1998 is
less than the U.S. statutory rate due to net operating losses available to the
Company. PT Buana's income tax expense will be affected in the future by
fluctuations in the Rupiah exchange rate, relative to the U.S. dollar.
Net income decreased by 40% from $1,420,008 for the three months ended
September 30, 1998 to $851,062 in the same period of 1999. Due to the
aforementioned factors, net income as a percentage of net sales decreased from
9% in 1998 to 5% in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the nine months ended September 30, 1999 were
$48,014,495, which represents a 2% sales growth over the comparable 1998 period
with net sales of $47,157,200. The predominant reasons for the low sales dollar
growth was the reduction in selling prices in 1999 and the one-time inventory
consignment arrangement that occurred in the second quarter of 1999, which
reduced sales by $2.3 million. Without this one-time adjustment, net sales for
the 1999 period, on a pro forma basis, would have increased by 7% over the same
period in 1998. During the nine months of 1999, the Company's medical business
unit increased unit sales volume by 16% over the same period in 1998.
Cost of goods sold increased 7% from $33,339,426 for the nine month
period ended September 30, 1998 to $35,734,428 for the comparable 1999 period.
As a percentage of net sales, cost of goods sold increased from 71% for the nine
months ended September 30, 1998 to 74% for the same period in 1999. The
Company's gross profit margin was unfavorably impacted by PT Buana's reduced
selling prices on its powdered exam gloves. Due to market conditions for
powdered gloves, PT Buana's powdered glove selling prices declined by
approximately 17%
14
<PAGE> 17
in the first nine months of 1999 versus the same period in 1998; PT Buana's
gross profit margin was reduced from 34% in the first nine months of 1998 to 16%
in the comparable period in 1999. In addition, the increase in cost of goods
sold as a percentage of net sales was attributed to lower average selling prices
in 1999, increased warehousing costs and ocean freight rates, offset by a shift
of product mix to higher margin powder-free gloves in 1999 as well as reduced
glove purchase prices. The Company's gross profit percentage declined from 29%
for the nine months ended September 30, 1998 to 26% for the nine months ended
September 30, 1999.
Selling, general and administrative expenses increased by 13% from
$7,741,520 for the nine months ended September 30, 1998 to $8,732,840 for the
nine months ended September 30, 1999. As a percentage of net sales, selling,
general and administrative expenses increased from 16% for the nine months ended
September 30, 1998 to 18% for the nine months ended September 30, 1999. This
increase of $991,320 in selling, general and administrative expenses is
primarily attributable to an increase in selling compensation costs of $677,300
due to the planned expansion of the Company's telesales and medical sales force,
the management fee of $120,000 charged by WRP Asia in the second quarter of
1999, and an increase in depreciation expense of $168,000, associated with the
Company's recently implemented computer system. The Company has made an
investment in its sales force and may make additional hirings of marketing
personnel as needed to further develop and penetrate established markets and to
introduce new products to the marketplace. Accordingly, the Company expects that
its selling, general and administrative expenses will continue to increase in
absolute dollars, but may decline as a percentage of net sales in the future.
Income from operations decreased by 42% from $6,076,254 for the nine
months ended September 30, 1998 to $3,547,227 for the nine months ended
September 30, 1999. Operating margins decreased from 13% in the 1998 period to
7% in the 1999 period.
Interest expense decreased from $953,432 during the nine months ended
September 30, 1998 to $683,218 in the comparable period in 1999. This decrease
in interest expense of $270,214 is due to (i) approximately $7.5 million of PT
Buana's debt having been repaid in first nine months of 1998 as Indonesian rates
were very high and (ii) the Company's new debt agreement entered into on
December 1, 1998 carries a lower rate than the previous debt facility, offset by
increased borrowings in 1999 on the line of credit used to finance its increased
inventory levels and capital expenditures. The 1998 PT Buana debt repayments
were made with the Company's proceeds from the sale of Common Stock to WRP Asia
on March 31, 1998. All intercompany interest income and interest expense is
eliminated in consolidation.
Other income consists of rental income, interest income and
miscellaneous income. Other income for the nine months ended September 30, 1999
was $140,147 compared to $389,031 for the comparable period in 1998. This
decrease in other income of $248,884 is primarily due to the disposal of the
investment in LSAI in 1998, which generated a gain of $168,375.
The provision for income taxes decreased from $1,101,153 for the nine
months ended September 30, 1998 to $798,151 for the nine months ended September
30, 1999, primarily the result of reduced taxable income in 1999. The 1999 and
1998 income tax provisions are less than the U.S. statutory rates due to net
operating losses, which were available to the Company. At December 31, 1998, the
Company's U.S. operations had net operating loss carry forwards of $2.7 million,
limited to approximately $1.3 million per year.
15
<PAGE> 18
The minority interest in income of subsidiary represents the non-owned
30% profit in PT Buana. The minority interest in income of PT Buana decreased
from $550,147 during the nine months of 1998 to $30,673 in the same period of
1999. During the nine months of 1999, PT Buana's profitablity decreased
primarily due to the reductions in its gross profit triggered by lower selling
prices for powdered latex exam gloves in the marketplace as well as due to
reduced production output.
Net income decreased by $1,685,221 or 44% from $3,860,553 for the nine
months ended September 30, 1998 to $2,175,332 in the 1999 period due to the
previously mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at September 30, 1999 were $67,916 and
decreased $612,009 from $679,725 at December 31, 1998. The Company experienced a
decrease in cash flows in the first nine months of 1999 primarily from cash used
in operating and investing activities, offset by cash provided by financing
activities. The Company generated cash from financing activities of $5,360,729
principally from additional borrowings on its line of credit in the amount of
$7,404,069. These borrowings were made to build up inventory levels primarily
for the Amerinet and nitrile product launches, as well as to make its capital
asset acquisitions.
The Company's operations used cash of $3,226,201 as a result of
increases in accounts receivable of $1,129,264 and inventories of $3,425,211 and
a reduction in accounts payable and accrued expenses of $1,732,035, offset by
net income of $2,175,332 and non-cash depreciation expense of $1,297,533. Trade
accounts receivable at September 30, 1999 increased to $6,661,669 compared with
$5,532,405 at December 31, 1998. This increase is due to increased sales volume
for the month of September 1999 and due to a strong collection effort during the
month of December 1998 which reduced the Company's outstanding accounts
receivable.
The Company's inventory level at September 30, 1999 was $15,286,066
versus $11,860,855 at December 31, 1998. This represents an increase of 29% and
is attributed to (i) inventory returns of approximately $2.3 million in the
second quarter of 1999 for the switch to consignment (ii) an inventory build-up
in the second quarter of 1999 of almost $2.2 million of Amerinet private label,
nitrile and other products for the July 1999 launches and (iii) the fulfillment
of certain glove purchase obligations with an independent supplier pursuant to a
preexisting contract requirement. The Company has reduced its inventory levels
during the third quarter of 1999 by 11%, as planned.
The Company used cash in investing activities of $2,746,337 primarily
for capital expenditures totaling $2,777,009 in the first nine months of 1999.
The Company purchased manufacturing equipment at PT Buana in the amount of
$2,036,813, primarily for chlorination machinery and equipment used for the
production of powder-free gloves. PT Buana has produced minimal quantities of
powder-free latex exam gloves in the third quarter of 1999 as it is currently
testing its powder-free product in the European market before it is sold to the
U.S. AHPC made capital expenditures of $740,196 in the first nine months of
1999, primarily for the implementation of its new enterprise wide computer
system, which was implemented in the second quarter of 1999, as well as for new
warehouse racking associated with the Company's move to a new warehouse in the
midwest during the third quarter of 1999.
On December 1, 1998, AHPC obtained a domestic two-year credit facility
from GE Capital. This asset based lending loan and security agreement included a
$10,000,000 revolving line of credit with a $7,000,000 letter of credit
subfacility. The line of credit borrowings carry an
16
<PAGE> 19
interest rate of commercial paper plus 2.75% (8.05% at September 30, 1999). On
March 31, 1999, AHPC amended its loan and security agreement by increasing the
maximum credit loan limit from $10,000,000 to $15,000,000. As part of the
amendment, the letter of credit subfacility was increased from $7,000,000 to
$11,000,000. At September 30, 1999, AHPC had outstanding $8,887,422 on the
revolving line of credit and $1,198,910 of letter of credit liabilities under
the credit facility.
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 3,750
shares of Common Stock of the Company at an exercise price of $22.20 per share.
At September 30, 1999 and December 31, 1998, total debt of $1,850,000 and
$2,000,000, respectively, was outstanding. During the first nine months of 1999,
the Company repaid $150,000 against this debt. The Company anticipates
additional repayments of this debt in 1999 and plans to make future payment of
$50,000 per month. As a result, the Company has classified $600,000 of this debt
as short-term at September 30, 1999.
The Company expects to have cash needs during the remainder of 1999 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: (i) the
expansion into new glove products; (ii) paying off debt obligations,
particularly the remaining long-term debt; (iii) the continued hiring of
additional marketing staff and additional full time members of its sales force,
as needed; (iv) the hiring of additional support staff; (v) the possible funding
of Indonesian income taxes created by foreign currency fluctuations; and (vi)
possible acquisitions. The Company believes that its cash and cash to be
generated from future operations plus its credit facility will be sufficient to
fund the Company's ongoing operations.
YEAR 2000 OVERVIEW
The crux of the Year 2000 issue is whether information technology
systems and non-information technology systems will be able to recognize and
process date-sensitive information before and after the Year 2000. The Company
relies, directly and indirectly, on information technology systems, such as
desktop computers, network hardware equipment and applications software to
manage its business data. The Company also relies on non-information technology
systems including office equipment, security systems and telephone systems, to
carry out its day-to-day operations. In addition, third party suppliers and
customers rely on information technology and non-information technology systems
to manage their businesses. The Year 2000 issue could potentially affect all of
their systems. All of these technology systems could potentially be affected by
the Year 2000 issue.
In order to minimize the exposure of Year 2000 related risks, the
Company completed a comprehensive assessment of its Year 2000 issues. The
Company had identified four stages for its Year 2000 compliance effort: (i)
Assessment; (ii) Planning; (iii) Implementation; and (iv) Testing. The
Assessment stage involved the determination of the readiness status of all
information technology and non-information technology systems. The Planning
stage identified the actions required to achieve a ready state. During the
Implementation stage, any identified deficient components were replaced or
upgraded. The replacements and upgrades were verified
17
<PAGE> 20
during the Testing stage. At this time, the Company has completed all four
stages of its Year 2000 compliance effort.
The Company's Year 2000 assessment focused primarily on four areas: (i)
information technology equipment; (ii) applications software; (iii)
non-information technology systems and infrastructure; and (iv) third party
suppliers and customers. The assessment phase involved analyzing all information
technology equipment, applications software, and non-information technology
systems used by the Company. The Company identified and evaluated third parties
critical to the Company's operations on their Year 2000 preparedness. The
readiness status of third parties has been determined through certifications
requested from, or questionnaires sent to, all suppliers and customers material
to its operations. At this time, the Company's assessment in each of these areas
is completed. In addition, the Company has developed a contingency plan in the
event that Year 2000 issues arise.
YEAR 2000 COSTS
The total costs associated with becoming Year 2000 compliant were
approximately $1,500,000, of which approximately $1,400,000 was spent on
upgrading and installing the new enterprise wide business applications hardware
and software.
YEAR 2000 RISKS
The failure to address a material Year 2000 problem increases the
possibility of interruption or failure of certain normal business activities of
the Company. Such failures could have a material 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. Additionally, ocean
freight carriers, port authorities and transportation companies may not be Year
2000 compliant. 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 Year 2000 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 adverse impact
on the Company's results of operations or financial condition. However, the
Company expects its Year 2000 remediation efforts to significantly reduce the
Company's risks regarding the Year 2000 Issue. Furthermore, the Company believes
that, with the implementation of new business systems and the completion of its
Year 2000 remediation plan, the possibility of significant interruptions of
normal operations should be minimal.
18
<PAGE> 21
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market value of investments. The
Company has not entered into interest rate caps or collars or other hedging
instruments.
Exposure to changes in interest rates is limited to borrowings under
revolving credit and debt agreements, which have variable interest rates tied to
the prime and commercial paper rates. The Company estimates that the fair value
of each debt instrument approximated its market value at September 30, 1999.
The Company is subject to fluctuations in the value of the Indonesian
Rupiah vis-a-vis the U.S. dollar. The investment in the Indonesian subsidiary is
remeasured into the U.S. dollar and the book value of the assets and liabilities
of this operation at September 30, 1999 approximated its fair value.
19
<PAGE> 22
ITEM 6.
EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the
quarter covered by this Form 10-Q.
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 12, 1999 By: /s/ Edward J. Marteka
------------------------
Name: Edward J. Marteka
Title: President
20
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