<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: March 31, 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)
<TABLE>
<S> <C>
Maryland 73-1326131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 May 14, 1999 was 5,673,692 and 1,252,538, respectively.
<PAGE> 2
WRP Corporation
---------------
INDEX
-----
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Item 1.
Consolidated Balance Sheets
<S> <C>
March 31, 1999 (unaudited) and December 31, 1998 (audited) ................pg. 1
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 1999 and 1998 ................................pg. 3
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1999 and 1998 ................................pg. 4
Notes to the Interim Consolidated Financial Statements (unaudited).........pg. 5
Item 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations .....................................................pg. 11
Item 3
Quantitative and Qualitative Disclosure About Market Risk .................pg. 17
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>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 690,293 $ 679,725
Accounts receivable - trade, net of allowance for
doubtful accounts of $255,000 in 1999 and
$240,000 in 1998 7,199,475 5,532,405
Due from affiliate 1,365,430 1,340,261
Inventories, net 12,497,824 11,860,855
Prepaid expenses 1,062,619 958,318
Deferred tax asset 906,254 962,190
Other receivables 245,903 509,003
------------ ------------
Total current assets 23,967,797 21,842,757
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 736,535
Construction in progress 2,784,980 1,275,667
Equipment, furniture and fixtures 11,540,516 11,357,924
Building improvements 1,692,806 1,689,878
Vehicles 165,125 149,958
------------ ------------
Total property, plant and equipment 16,919,963 15,209,962
Less - Accumulated depreciation (3,086,417) (2,733,225)
------------ ------------
Property, plant and equipment, net 13,833,546 12,476,737
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$489,403 in 1999 and $472,595 in 1998 1,260,597 1,277,405
Other assets 423,753 203,040
------------ ------------
Total other assets 1,684,350 1,480,445
------------ ------------
$ 39,485,693 $ 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>
March 31, 1999 December 31, 1998
------------------- -----------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable - trade $ 1,729,851 $ 2,504,225
Trade notes payable to banks 2,663,250 3,322,882
Notes payable and current portion of
long-term obligations 6,159,852 2,086,833
Due to affiliate 4,274,125 3,891,944
Accrued expenses 2,934,268 3,507,487
------------ ------------
Total current liabilities 17,761,345 15,313,371
------------ ------------
LONG-TERM DEBT 1,567,125 1,668,982
------------ ------------
DEFERRED TAX LIABILITY 157,865 152,037
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 1,763,642 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 as of March 31, 1999 and 1998, respectively 58,037 57,855
Additional paid-in capital 17,942,471 17,862,021
Retained earnings 1,545,719 332,071
Less - Common stock in treasury, at cost,
130,000 shares in 1999 and 1998 (1,323,036) (1,323,036)
------------ ------------
Total shareholders' equity 18,235,716 16,941,436
------------ ------------
$ 39,485,693 $ 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 March 31,
-----------------------------------
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $17,081,747 $15,213,338
COST OF GOODS SOLD 12,698,163 10,753,561
----------- -----------
GROSS PROFIT 4,383,584 4.459,777
OPERATING EXPENSES:
Selling, general and administrative 2,643,972 2,933,820
----------- -----------
INCOME FROM OPERATIONS 1,739,612 1,525,957
INTEREST EXPENSE 134,292 410,063
OTHER INCOME 54,110 223,352
----------- -----------
Net income before provision for income taxes
and minority interest 1,659,430 1,339,246
PROVISION FOR INCOME TAXES 406,254 50,000
----------- -----------
Net income before minority interest 1,253,176 1,289,246
MINORITY INTEREST IN INCOME OF SUBSIDIARY 39,528 187,756
----------- -----------
Net income $ 1,213,648 $ 1,101,490
=========== ===========
BASIC NET INCOME PER COMMON SHARE: $ 0.18 $ 0.25
=========== ===========
DILUTED NET INCOME PER COMMON SHARE: $ 0.17 $ 0.25
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
3
<PAGE> 6
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,213,648 $ 1,101,490
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation 353,192 316,309
Amortization 16,808 16,808
Deferred income taxes 61,764 --
Gain on sale of LSAI common stock -- (168,375)
Changes in operating assets and liabilities:
Accounts receivable - trade, net (1,667,070) (511,635)
Inventories, net (636,969) (272,956)
Prepaid expenses (104,301) (48,380)
Other assets 42,388 915
Accounts payable - trade (774,374) 331,563
Accrued expenses (573,219) 757,240
Amounts due to (from) affiliate 357,012 (71,612)
Net assets of condom discontinued operations -- 26,729
----------- -----------
Net cash (used in) provided by operating activities (1,711,121) 1,478,096
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,710,001) (572,068)
Proceeds on sales of LSAI common stock -- 982,892
Minority interest in subsidiary 39,528 187,757
----------- -----------
Net cash (used in) provided by investing activities (1,670,473) 598,581
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on trade notes payable to banks (659,632) 54,707
Net proceeds from stock option exercises 80,632 18,766
Proceeds from issuance of stock -- 6,750,000
Net borrowings (payments) on notes payable 3,971,162 (1,552,441)
Payments to Indonesian minority interest shareholders -- (80,000)
----------- -----------
Net cash provided by financing activities 3,392,162 5,191,032
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,568 7,267,709
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 679,725 161,981
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 690,293 $ 7,429,690
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE> 7
WRP CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 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 three month period ended March 31, 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 three months of 1999 and 1998, PT Buana sold approximately 19%
and 79%, 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.
5
<PAGE> 8
4. MAJORITY SHAREHOLDER TRANSACTION:
On March 31, 1998, WRP Asia closed the following two agreements, 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), which was
owned by MBf International 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.
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 March 31, 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. In addition, WRP Asia entered into an 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 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.
6
<PAGE> 9
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 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.
Gains and losses from foreign currency exchange transactions are
included in net income in the period in which they occur. During the quarters
ended March 31, 1999 and 1998, the foreign exchange losses included in the
determination of net income were ($19,227) and ($244,255), respectively.
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. Recently,
the Asian Pacific region has been recovering from its economic downturn. 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:
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. These combined transactions resulted in a
gain on sales of its investment in LSAI of $168,375 for the quarter ended March
31, 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
7
<PAGE> 10
shares and common share equivalents outstanding for the three months ended March
31 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Basic weighted-average number of
common shares outstanding 6,917,475 4,346,760
Dilutive effect of common share
equivalents 53,297 99,387
--------- ---------
Diluted weighted-average number of
common shares outstanding 6,970,772 4,446,147
========= =========
</TABLE>
At March 31, 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. For the three months ended March 31, 1999
and 1998, the Company recorded a provision for income taxes of $406,254 and
$50,000, respectively.
11. CONTINGENCIES:
Over the last several years, several 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 March 31, 1999, there were twenty-six
lawsuits outstanding against AHPC, seven of which were served in the first
quarter of 1999. None of these lawsuits name AHPC as the sole defendant in these
claims. 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.
8
<PAGE> 11
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 statement of operations for the three months ended March 31,
1998 has been restated to conform with 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 investment by owners and distributors to owners, in a financial
statement for the period in which they are recognized. Comprehensive income for
the three months ended March 31, 1999 and 1998 was equal to net income and there
were no accumulated other comprehensive income items during the quarters ended
March 31, 1999 or 1998.
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 powdered
latex gloves (and is in the process of upgrading its manufacturing capability to
include powder-free latex gloves) and sells them primarily 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 vendors 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 net 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 months ended
March 31, 1999 and 1998 for these segments:
<TABLE>
<CAPTION>
MARCH 31, 1999 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers $2,009,163 $15,072,584 $ - $17,081,747
Revenues from other operating
segments 460,637 - (460,637) -
Pre-tax income 33,016 1,626,414 - 1,659,430
Total assets 16,020,671 23,465,022 - 39,485,693
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
MARCH 31, 1998 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 769,604 $14,443,734 $ - $15,213,338
Revenues from other operating
segments 2,975,550 - (2,975,550) -
Pre-tax income 625,853 713,393 - 1,339,246
Total assets 14,023,238 22,737,887 - 36,761,125
</TABLE>
15. LOAN FACILITY INCREASE:
On March 31, 1999 AHPC increased its bank credit agreement limit from
$10,000,000 to $15,000,000. The increased credit facility includes a
$15,000,000 revolving line of credit with an $11,000,000 letter of
credit sub-facility, subject to certain borrowing limitations. The
asset based lending facility is secured by AHPC's inventories and
accounts receivable.
10
<PAGE> 13
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"), is an Indonesian glove manufacturing plant, which commenced operations
in April 1996. PT Buana currently manufactures high quality, powdered latex exam
gloves but has plans to produce powder-free latex exam gloves, commencing in the
second quarter of 1999.
PT Buana sold approximately 19% of its production to AHPC in the first
three months of 1999 as compared to 79% during the same period in 1998. PT Buana
had total powdered latex exam glove sales of approximately $2.5 million and $3.7
million for the first quarters ended March 31, 1999 and 1998, respectively. AHPC
reduced its purchases from PT Buana as a result of the Company's fulfillment of
certain of its powdered glove obligations with an independent supplier pursuant
to a preexisting contract requirement. All significant intercompany transactions
and sales have been eliminated in consolidation.
RESULTS OF OPERATIONS:
The Company's net sales are derived from the sale of finished product,
net of allowable rebates, discounts and returns. Net sales include glove sales
from AHPC's examination glove product line and external powdered exam glove
sales from PT Buana. Net sales totaled $17,081,747 and $15,213,338 for the three
months ended March 31, 1999 and 1998, respectively. This represents a 12.3%
increase in glove sales in the first quarter of 1999 over the comparable period
in 1998. This increase in sales is attributed to an increase in AHPC's sales of
powder-free latex and non-latex exam gloves and an increase in external glove
sales by PT Buana. The Company is continuing 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 months ended March 31,
1999, two of AHPC's distributors accounted for approximately 70% of glove sales.
These two diversified distributors have several branches located throughout the
U.S. and distribute the Company's products to numerous medical and food service
facilities
- ----------
(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."
11
<PAGE> 14
nationwide. The ultimate end users of the Company's product are these various
medical facilities, food service organizations and professionals, who purchase
the product from these distributors.
During the second quarter of 1999, the Company plans to more closely
align itself with a major customer through a consignment inventory arrangement.
This consignment program is consistent with the customer's other major vendor
inventory management programs. Currently, the customer purchases product from
the Company and maintains certain inventory levels at its hub warehouses for
distribution to its operating companies; sales are recorded upon shipment into
their warehouse. Under the consignment arrangement, the customer will transfer
ownership of its inventory to AHPC. During the second quarter of 1999, AHPC will
begin recording sales when the goods are shipped out of the consigned inventory.
The program will result in a change of the timing of revenue recognition, thus
potentially resulting in a one-time sales reduction of approximately $2.0
million in the second quarter of 1999. Sales continue to be strong with our
customer and the consignment program represents only a transition of inventory
and provides additional value-added services.
Cost of goods sold as a percentage of net sales for the three months
ended March 31, 1999 was 74.3%, compared to 70.7% for the comparable period in
1998. The gross profit percentage decreased from 29.3% in the first quarter of
1998 to 25.7% in the same period of 1999. This reduction in gross profit margin
is primarily attributed to a reduction in the gross profit generated from PT
Buana's operations. PT Buana's gross profit margin was reduced from 38% in the
first quarter of 1998 to 19% in the comparable period in 1999 due to a reduction
in the sell price of its powdered latex exam gloves. PT Buana's powdered latex
exam glove sell prices have declined from the first quarter of 1998 by 20%
versus the same quarter in 1999. This reduction in sell prices is in reaction to
the market's migration away from powdered latex exam gloves and market demand
for lower prices. PT Buana will begin manufacturing powder-free latex exam
gloves in the second quarter of 1999, which generate higher gross profit margins
than powdered gloves. The Company currently expects its gross margins to
continue to be affected by changes in product mix, competition, the price of
latex 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. Due to customer demand, the
Company is providing and selling more latex powder-free exam gloves and
non-latex gloves. AHPC's sales of latex powder-free exam gloves were
approximately 46% of net sales in the three months ended March 31, 1999 versus
41% in the comparable period in 1998. The Company expects that this trend will
continue in 1999.
As a percentage of net sales, SG&A expenses decreased to 15.5% during
the first quarter ended March 31, 1999, compared with 19.3% in the comparable
period in 1998. Selling, general and administrative ("SG&A") expenses decreased
from $2,933,820 in the first quarter ended March 31, 1998 to $2,643,972 in the
same period of 1999, a 9.9% decrease. This decrease of $289,848 is attributable
to the inclusion of a foreign currency loss of ($244,255) recorded in the first
quarter of 1998, versus only a foreign exchange loss of ($19,227) in the same
period in
12
<PAGE> 15
1999. The Company 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 expects that its SG&A expense will
increase in absolute dollars, but may decline as a percentage of net sales in
the future.
Interest expense decreased in the first quarter of 1999 to $134,292
compared to $410,063 in the first quarter of 1998. This decrease is attributable
to the repayment of all of PT Buana's debt (totaling $7.75 million) during the
second and third quarters of 1998. The funds for these debt payments were
primarily from the proceeds from the Company's sale of Common Stock to WRP Asia
on March 31, 1998.
Other income consists of rental income, interest income and other
income. Other income decreased by $169,242 from the first quarter of 1998
compared to the first quarter of 1999. This decrease is due to the disposal of
the investment in LSAI in the first quarter of 1998, which generated a gain of
$168,375.
The Company recorded a foreign currency exchange loss of ($19,277) in
the first quarter of 1999 versus a foreign exchange loss of ($244,255) in the
comparable period in 1998, 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. These foreign currency exchange losses are reported as a component of
the SG&A expense category in the consolidated statements of operations. PT Buana
continues to be exposed to foreign currency exchange rate fluctuations and may
incur exchange losses or gains in the future.
Indonesia continues to be exposed to economic instability, which is
characterized with fluctuations in its foreign currency exchanges, interest
rates and stock markets and inflation. Improvement of the Indonesian economic
situation is progressing due to the measures that are being taken by the
government of Indonesia. It is not possible to determine if the economic
recovery will continue or may decline. 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.
During the first quarter of 1998, the Company had net operating loss
carryforwards (NOL's) which were used to reduce taxable income for that period.
The Company recorded a provision for income taxes during the first quarter of
1998 of $50,000 to provide for federal alternative minimum tax. In accordance
with tax regulations, usage of the NOL's is subject to limitations if certain
ownership changes occur. Due to the WRP Asia ownership change on March 31, 1998,
the Company's NOL's became limited and subsequent to that date, the Company
began recording a provision for income taxes. The Company has recorded a
provision for income taxes of $406,254 in the first quarter of 1999. This
provision is less than statutory rates due to the utilization of usable NOL's.
At December 31, 1998, the Company had NOL's of approximately $2.7 million, which
will be available to reduce federal taxable income in the U.S. in future
periods, subject to limitations.
13
<PAGE> 16
For the three months ended March 31, 1999 net income was $1,213,648,
compared to net income of $1,101,490 in the same period of 1998. Diluted
earnings per share for the three months ended March 31, 1999 and 1998 were $0.17
and $0.25, respectively. The earnings per share in the first quarter of 1999 was
fully diluted by the 2,500,000 shares of Common Stock issued to WRP Asia on
March 31, 1998, principally responsible for raising the number of diluted shares
outstanding from 4,446,147 during the three months ended March 31, 1998 to
6,970,772 during the first three months of 1999.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at March 31, 1999 was $690,293 and increased
$10,568 from $679,725 at December 31, 1998. The Company experienced an increase
in cash flows in the first quarter of 1999 primarily from cash provided by
financing activities, offset by uses of cash in operating and investing
activities. The Company generated cash from financing activities of $3,392,162
principally from additional borrowings on its line of credit in the amount of
$3,971,162.
The Company's operations used cash of $1,711,121 as a result of an
increase in accounts receivable of $1,667,070 and inventories of $636,969 and a
reduction in trade accounts payable of $774,374, offset by net income of
$1,213,648 and non-cash depreciation expense of $353,192. Trade accounts
receivable at March 31, 1999 increased to $7,199,475 compared with $5,532,405 at
December 31, 1998. This increase is due to increased sales volume particularly
toward the end of March 1999.
The Company used cash in investing activities of $1,670,473 primarily
for capital expenditures totaling $1,710,001 in the first quarter of 1999. The
Company purchased manufacturing equipment at PT Buana in the amount of
$1,332,506, primarily for chlorination machinery and equipment used for the
production of powder-free gloves. PT Buana has plans to begin production of
powder-free latex exam gloves in the second quarter of 1999. AHPC made capital
expenditures of $377,495 in the first quarter of 1999, primarily for the
implementation of its new enterprise wide computer system, which will be fully
implemented in the second quarter of 1999.
On December 1, 1998, AHPC obtained a domestic two-year credit facility
from a large commercial credit company, 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 interest rate of commercial paper plus 2.75% (7.6% at March 31, 1999). At
March 31, 1999, AHPC had outstanding $5,176,404 on the revolving line of credit
and $2,663,250 of letter of credit liabilities under the credit facility. 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.
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
14
<PAGE> 17
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 March 31, 1999 and December 31, 1998, total debt of
$1,900,000 and $2,000,000, respectively, was outstanding. During the first
quarter of 1999, the Company repaid $100,000 against this debt. The Company
anticipates additional repayments of this debt in 1999 and has classified
$1,400,000 of this debt as long-term at March 31, 1999 and December 31, 1998.
The Company currently expects to have cash needs during 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 for: (i) the
expansion into new glove products; (ii) paying off debt obligations,
particularly the remaining long-term debt; (iii) the continued hiring of
additional full time members of its sales force; (iv) the hiring of additional
support staff; (v) the continued upgrading of the Indonesian glove factory to
produce powder-free gloves; (vi) the completion of its new enterprise wide
computer system; and (vii) for possible acquisitions. The Company has made
purchase commitments for the purchase and installation of its sophisticated,
integrated enterprise computer system for its U.S. operations in the amount of
approximately $1,500,000, of which approximately $1,300,000 has been incurred
through March 31, 1999. The Company anticipates the system will be fully
implemented in the second quarter of 1999. The Company believes that its cash
and cash 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 ("Y2K") Issue is whether information
technology (I.T.) systems 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 rely on I.T. and non-I.T.
systems to manage their businesses. The Y2K Issue could potentially affect all
of their systems. In order to minimize the exposure of Y2K related risks, the
Company has completed a comprehensive assessment of its Y2K issues and has
identified its 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 involved 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.
15
<PAGE> 18
During the Implementation stage, any identified deficient components are
replaced or upgraded. The replacements and upgrades are verified during the
Testing stage.
The Company's Y2K assessment focuses 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 phase involved analyzing all I.T. equipment,
applications software, and non-I.T. systems used by the Company. The Company has
also identified and evaluated third parties critical to the Company's operations
on their Y2K 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. The Company's Assessment
stage is completed, including the analysis of the PT Buana manufacturing
facility, located in Indonesia.
The Planning stage is in progress and is currently 85% complete. The
Company anticipates the Planning stage to be completed in May 1999. To date, the
Implementation stage is 80% complete, primarily attributed to the status of the
installation of the new enterprise-wide business applications software, and
should be finalized for both I.T. and non-I.T. systems by June 30, 1999. The
Testing stage has not yet begun. The Testing stage will begin as warranted by
the progress of the Implementation stage and is expected to be completed by July
31, 1999. Contingency plans for any of the Company's known Y2K issues will be
developed and are estimated to be finalized before August 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
$1,700,000, of which approximately $1,500,000 is to be spent on replacing the
enterprise wide business applications hardware and software. As of March 31,
1999, the Company has spent approximately $1,300,000 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 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 Y2K
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.
16
<PAGE> 19
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 adverse 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. 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.
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 March 31, 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 March 31, 1999 approximated its fair value.
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
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: May 14, 1999 By: /s/ Lew Kwong Ann
---------------------
Name: Lew Kwong Ann
Title: Chief Financial Officer
18
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