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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17458
WRP CORPORATION
---------------
(Exact name of registrant as specified in its charter)
MARYLAND 73-1326131
(State of incorporation) (I.R.S. employer identification no.)
500 PARK BOULEVARD, SUITE 1260 60143
ITASCA, IL -----
---------- (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 285-9191
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
Common Stock, par value $0.01 per share None
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 .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the stock as reported on Nasdaq
on March 10, 1999: $23,797,688.
At March 10, 1999, 5,673,025 shares of the Registrant's Common Stock and
1,252,538 shares of Series A Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
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WRP CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PAGE
PART I ----
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ITEM 1. BUSINESS...........................................................1
ITEM 2. PROPERTIES.........................................................6
ITEM 3. LEGAL PROCEEDINGS..................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................8
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ...............................................9
ITEM 6. SELECTED FINANCIAL DATA...........................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................25
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................26
ITEM 11. EXECUTIVE COMPENSATION............................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................................32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................33
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K............33
ii
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PART I
ITEM I. BUSINESS(1)
GENERAL
WRP Corporation (the "Company"), formerly known as MBf USA, Inc., is a
manufacturer of high quality disposable latex examination gloves and a leading
marketer of medical exam gloves in the United States through its wholly owned
subsidiary, American Health Products Corporation ("AHPC"). The Company, which
was reincorporated in Maryland in December 1995, had been involved in several
business operations. The Company has been only in the glove business since July
1, 1997 when all other business activities ceased. In June 1997, the Company
discontinued its sales of Playboy condoms after it had reached an agreement with
Playboy Enterprises, Inc. to terminate its license agreement under which the
Company distributed condoms in 15 countries.
In October 1995, the Company acquired a 70% interest in an Indonesian
powdered latex examination glove manufacturing plant, PT WRP Buana Multicorpora
("PT Buana"), which was in the start-up phase of operations at that time. The
Company purchased PT Buana from MBf International Limited. PT Buana began
shipping powdered latex examination gloves to AHPC in May 1996 after operations
commenced in April 1996.
On February 27, 1992, the Company acquired AHPC from MBf International
Limited ("MBf International"), a Hong Kong corporation, which is a subsidiary of
MBf Holdings Sdn. Bhd. ("MBf Holdings"), a Malaysian publicly traded company
listed on the Kuala Lumpur Stock Exchange. AHPC is a leading marketer of medical
examination gloves in the U.S. As a result of such acquisition, MBf
International acquired control of the Company by virtue of the issuance of
1,252,538 shares or 100% of the Series A Common Stock, which controls the
election of a majority of the Board of Directors.
- ------------------------
(1) Some of the statements included in Item 1, Business, may be considered to
be "forward looking statements" since such statements relate to matters which
have not yet occurred. For example, phrases such as "the Company anticipates,"
"believes" or "expects" indicate that it is possible that the event anticipated,
believed or expected may not occur. Should such event not occur, then the result
which the Company expected also may not occur or occur in a different manner,
which may be more or less favorable to the Company. The Company does not
undertake any obligations to publicly release the result of any revisions to
these forward looking statements that may be made to reflect any future events
or circumstance.
Readers should carefully review the items included under the subsection Risks
Affecting Forward Looking Statements and Stock Prices set forth under Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations as they relate to forward looking statements as actual results could
differ materially from those projected in the forward looking statements.
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The Series A Common Stock is substantially the same as the Company's
Common Stock except that each share of Series A Common Stock is convertible into
one share of the Company's Common Stock and the Series A Common Stock entitles
the holder to elect all Class A directors, which represent a majority of the
Company's Board of Directors.
At December 31, 1997, MBf International owned all 1,252,538 shares of
the Company's Series A Common Stock and 1,682,275 shares of the Company's Common
Stock. On March 31, 1998, the Company announced that its majority shareholder,
MBf International, had consummated the closing of two separate agreements
(entered into in May 1997) with WRP Asia Pacific Sdn. Bhd. ("WRP Asia"),
formerly known as Wembley Rubber Products (M) Sdn. Bhd., the Company's supplier
of latex powder-free exam gloves. These agreements transferred majority
ownership in the Company to WRP Asia and were as follows:
1. 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
2. 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. The
purchase price of $2.70 per share reflected a 12% discount from the
average stock price over a seven consecutive business day range ended
May 9, 1997, as detailed by a fairness opinion received from an
independent valuation firm.
On March 31, 1998, the Company received $6,750,000 from WRP Asia for
the sale of the 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 55.0% ownership interest in the Company at March 31,
1998. At December 31, 1998, WRP Asia had a 54.3% 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 24.3% 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 and
other related industries. AHPC has been purchasing the majority of its
powder-free latex exam gloves from WRP Asia for several years.
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As of March 10, 1999, the shares of Series A Convertible Common Stock
issued to WRP Asia constituted 18.1% of the total issued and outstanding shares
of Series A Common Stock and Common Stock. Upon conversion, such shares (when
coupled with the 2,500,000 shares of Common Stock acquired by WRP Asia) will
represent a total ownership of the Company to WRP Asia of 54.2% of the then
outstanding shares of Common Stock, excluding shares subject to issuance
pursuant to outstanding warrants and stock options.
GLOVE PRODUCTS
Through its wholly owned subsidiary, AHPC, the Company markets
non-sterile, ambidextrous latex, vinyl and synthetic examination gloves used
primarily in the medical, dental, food service and retail industries. Gloves
marketed by AHPC are manufactured by PT Buana, WRP Asia and other third parties.
Gloves are marketed by AHPC under the brand names "Glovetex(R)" and
"DermaSafe(R)" to medical/surgical distributors, dental distributors, nursing
homes and food servicE distributors. AHPC also sells gloves to other companies,
which market the gloves under their own brand names or "private labels." A case
of gloves generally comprises 10 or 20 boxes of 100 gloves per box.
In addition to the standard latex powdered examination gloves, AHPC
distributes other product lines which include powder-free latex exam gloves,
vinyl exam gloves and synthetic exam gloves. Expansion of the product line into
other products is planned, and AHPC has identified for possible introduction in
the future such products as nitrile gloves, surgical gloves and other products
related to infection control. For the year ended December 31, 1998, AHPC sales
ratio of latex powdered, latex powder-free, and non-latex examination glove
sales was 37%, 44%, and 19%, respectively. The Company anticipates that the
sales ratio of latex powdered exam gloves will decline in the future.
Manufacturing Operations. The production of latex examination gloves
begins with the tapping of raw latex (natural polysporene) from rubber trees
located on plantations in Malaysia, one of the world's largest producers of
rubber, and Indonesia. Once gathered, the raw latex is sent to a centrifuge
where the latex is concentrated. PT Buana purchases the latex concentrate and
ships it to its production plant where the latex concentrate is compounded in a
patented formula to enhance glove durability, elasticity and tactility. A
controlled dipping process causes consistency from batch to batch and eliminates
air bubbles which can create pinholes. Glove-making forms, which are in five
sizes and designed for the American hand, are dipped in latex compound. The
forms are cleansed both chemically and mechanically to prevent residue buildup
which could compromise glove integrity.
The PT Buana factory, which is 70% owned by the Company, was in the
start-up phase of operations until product shipments began in May 1996. PT Buana
now has the ability to manufacture approximately 700,000,000 powdered latex
examination gloves per year. PT Buana has plans to begin producing latex
powder-free gloves in 1999, which will require the installation of certain
specialized equipment.
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Continuous quality control inspections are performed on the production
line by trained supervisors and independent quality control inspectors. Each
glove is visually inspected, and a sample of gloves from each batch is tested in
the laboratory for air capacity and water-tightness.
Gloves are packaged in tamper-proof non-fibrous boxes. The gloves are
then shipped either to a leased warehouse in Des Plaines, Illinois, or to public
warehouses located in Sparks, Nevada, or Atlanta, Georgia, where they are stored
for delivery to medical and surgical dealers.
Powdered Latex Examination Glove Suppliers. PT Buana supplied
approximately 40% of AHPC's powdered latex examination glove inventory in 1998.
The remaining 60% of 1998 purchases of powdered latex examination glove
inventory was purchased from an unrelated Malaysian factory. On July 12, 1995,
AHPC entered into a five-year distribution agreement with this unrelated factory
to purchase a minimum quantity of powdered latex examination gloves each year.
Powder-Free Latex Examination Glove Supplier. AHPC continues to
purchase virtually all of its latex powder-free examination gloves from WRP
Asia. AHPC had entered into a supply agreement with WRP Asia for its powder-free
gloves and the prices charged by WRP Asia are made at prevailing market rates.
Non-Latex Examination Glove Suppliers. AHPC purchases its non-latex
examination glove from two unrelated suppliers in Taiwan and China.
Markets and Methods of Distribution. AHPC markets its gloves through a
network of national, regional and local medical/surgical dealers that sell
primarily to hospitals and nursing homes. AHPC also markets to alternate care
and home health care dealers, dental dealers, food service distributors and
major retail outlets. The principal methods of marketing are trade shows,
seminars and sales representatives, as well as advertising and direct mail. In
addition, at December 31, 1998, AHPC employed a sales force of 45 persons
comprised of regional sales managers and representatives, manufacturer sales
representatives and an in-house sales and customer support staff.
FDA Regulation of Latex Glove Products. The quality control procedures
for the manufacture of examination gloves marketed in the United States are
regulated by the U.S. Food and Drug Administration ("FDA"). Included within such
procedures are minimum testing requirements, as well as FDA current Quality
Systems Regulations.
Competition. The market for examination gloves is highly competitive.
With the discovery of the Acquired Immune Deficiency Syndrome/HIV virus ("AIDS")
in the 1980's, and the perception of the latex glove as being a barrier to
infection from AIDS and other communicable diseases, several companies entered
the glove industry, many of which failed or were acquired by other companies.
Further consolidation of companies in the industry may be expected to occur in
the future. The primary means of competition are price, product quality, service
and the size and reliability of the manufacturer.
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Customers. During calendar 1998, two of AHPC's national customers,
Owens & Minor, Inc. and Sysco Co., accounted for 36.3% and 35.0%, of net sales,
respectively. The loss of either of such customers would have a materially
adverse effect on the Company. However, the Company's products are ultimately
distributed by these two diversified distribution companies to thousands of
medical facilities and food service organizations across the United States. The
ultimate end user of the Company's glove products are the medical facilities,
professionals and individuals who use its gloves.
Patents and Trademarks. AHPC owns the trademarks "Glovetex" and
"Dermasafe," which are trademarks registered in the United States.
LATEX CONDOM PRODUCTS
Through June 30, 1997, the Company sold condoms in packaging bearing
the Playboy(R) name and rabbit-head logo. Under the termination agreement, the
Company, until June 30, 1997, continued to sell Playboy(R) condoms in the 15
countries where it has launched the product. As of December 31, 1998, the
Company had completely disposed of all assets and liabilities associated with
the discontinued condom operations.
Suppliers. Prior to October 1996, condoms bearing the Playboy(R) brand
name and rabbit-head design were manufactured primarily by MBf Personal Care
Sdn. Bhd. ("MBf Personal Care"), a Malaysian company owned indirectly by MBf
Holdings, which accounted for 95% of the Company's products sold. Subsequent to
October 1996, the Company purchased its condoms from an unrelated manufacturer
following the sale of MBf Personal Care by its parent.
EMPLOYEES
As of March 10, 1999, the Company's U.S. operations employed a total of
54 full-time and 10 part-time employees. AHPC also uses the services of 15
manufacturer sales representatives which do not work exclusively for AHPC and
which are paid on a commission basis. The Company's 70% owned Indonesian
subsidiary, PT Buana, employed 1,047 full-time workers in its factory and
administrative staff as of that date. None of the Company's employees are
represented by a collective bargaining agreement. The Company considers
relations with its employees to be good.
INVESTMENT IN LSAI
In connection with the sale of the operations of LSAI (a drug testing
business purchased by certain members of former management), the Company
received stock of LSAI. During 1998, the Company sold all remaining shares of
LSAI and thus has entirely liquidated its investment in LSAI.
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ITEM 2. PROPERTIES
The Company's principal executive and administrative office is located
in Itasca, Illinois. The lease term for this location is for a period of five
years and commenced on March 1, 1995. The yearly lease cost is approximately
$156,000 per year, with annual increases of approximately 3% per year.
The Company's executive office was located in Fort Lee, New Jersey
prior to its relocation to Itasca, Illinois. On December 1, 1994, the Company
entered into a five-year lease for this office with an annual lease cost of
approximately $77,000 per year. During June 1995, the Company closed the New
Jersey office as part of a restructuring which took place in the second quarter
of 1995. Effective July 1, 1995, the Company entered into a sublease agreement
for the New Jersey office space for the remaining lease term at the identical
terms as stated in the December 1, 1994 New Jersey lease agreement.
The Company's executive office was located in Boca Raton, Florida,
prior to its relocation to Fort Lee, New Jersey. The Company entered into a
five-year lease agreement effective February 1994, for approximately 4,000
square feet of space in Boca Raton, Florida. The annual rental expense for this
lease is approximately $79,500 per year. Effective December 1, 1996, the Company
entered into a sublease agreement for the Boca Raton office space for the
remaining lease term at the identical terms as stated in the February 1994
Florida lease agreement. The term of this sublease has been extended and will
terminate in June 1999.
AHPC's warehouse operations are housed in a 22,000 square-foot facility
in Des Plaines, Illinois. The lease term for this location commenced April 1,
1993 and expired on March 31, 1998. During early 1998, the Company obtained a
one-year extension of this lease through March 31, 1999. The yearly cost of the
lease is approximately $126,600 per year. In addition, AHPC uses public
warehouse facilities in Sparks, Nevada and Atlanta, Georgia, as needed. Public
warehouse charges are dependent upon the volume of products stored and the
frequency of shipping or receiving products.
In 1999, management intends to lease a larger warehouse located in
Illinois to replace the Illinois warehouse which is leased through March 31,
1999. The new facility will provide additional needed warehouse space.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1998, AHPC had 19 product liability claims pending
against it throughout the United States. As of that date, nine of the said
claims were consolidated in the Multi-District Litigation ("MDL") of the United
States District Court for the Eastern District of Pennsylvania. These claims
have been consolidated in the MDL for discovery management and other pre-trial
activities. Similarly, AHPC currently has five claims consolidated in the
California Coordinated Latex Glove Litigation for discovery management and
pre-trial proceedings.
All of the claims involve plaintiffs that have worked in the medical
and healthcare industries, and allege injuries associated with the continued
use and/or exposure to latex glove
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products. In each of the claims, AHPC is one of several glove distributors,
along with various glove manufacturers, named in the suits. Each of the nineteen
claims alleges damages of an unspecified amount and are in a different stage of
legal proceeding. All claims are currently in discovery or other pre-trial
proceedings. Two of the claims are scheduled for trial in California in February
2000 and April 2000. It is not currently possible to determine a favorable or
unfavorable outcome for AHPC in any of the claims.
Subsequent to December 31, 1998, AHPC was served with seven additional
product liability lawsuits in which the plaintiffs alleged unspecified damages
associated with the use of or exposure to latex gloves. AHPC was one of several
defendants named in each of the suits.
AHPC possesses product liability insurance coverage, which covers the
defense costs and certain damage awards associated with the product liability
claims against AHPC and the indemnity of AHPC's customers, to the limits of the
policies, after applicable deductibles. However, there is no assurance that the
Company's insurance will be sufficient to meet all damages for which the
Company may be held liable. Likewise there is no assurance that the outcome of
these suits will not adversely affect the Company's operations or financial
condition.
AHPC will vigorously contest any latex claim initiated against it, but
may enter into a settlement agreement, where, after careful consideration, the
Company's management determines that the best interests of the Company will be
served by settling the matter for a nominal monetary sum. In November 1997, AHPC
settled thirteen latex glove related product liability claims for a nominal sum.
From time to time, the Company is involved in other litigation relating
to claims arising out of its operations in the normal course of business. As of
the date hereof, the Company is not a party to any other legal proceedings, the
adverse outcome of which, in management's opinion, individually or in the
aggregate, would have a material adverse effect on the Company's financial
condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on
December 4, 1998. The purpose of the Annual Meeting was to consider the vote on
the following matters:
1. To elect six Class A directors and three Class B directors to hold
office until the next annual meeting of Shareholders or otherwise as
provided in the Company's By-Laws.
Class A Director Nominees
-------------------------
Kamaruddin Taib
Richard C.M. Wong
Edward J. Marteka
Kwong Ann Lew
George Jeff Mennen
Richard Swanson
Class B Director Nominees
-------------------------
Robert J. Simmons
Don L. Arnwine
Boon Teck Yap
The nominees for Class A directors received all 1,252,538 votes for
their election.
Each of the nominees for Class B directors received the following
number of votes:
For 5,405,976
Against 3,635
Non-votes 245,414
2. To concur in the selection of Arthur Andersen LLP as independent
auditor for the fiscal year ending December 31, 1998. The vote of the
Shareholders was as follows:
For 6,654,464
Against 7,685
Non-votes 245,414
All of the above matters were approved by the Shareholders. There were
no other matters voted on at the meeting.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") SmallCap Stock Market
under the symbol "WRPC." The range of high and low sale prices as reported by
Nasdaq for the Common Stock is shown below.
COMMON STOCK
FISCAL YEAR ENDED:
DECEMBER 31, 1998 HIGH LOW
----------------- ---- ---
4th quarter 7 4-3/4
3rd quarter 6-7/8 4-9/32
2nd quarter 7-3/8 5-1/2
1st quarter 5-7/8 3-1/16
DECEMBER 31, 1997
-----------------
4th quarter 6 1-3/4
3rd quarter 3-7/8 2-3/4
2nd quarter 5-3/4 2-3/4
1st quarter 4-3/8 3-3/8
There were approximately 350 record holders of Common Stock as of March
10, 1999. The Company believes that there are approximately an additional 2,000
holders whose stock is held in "street name."
The Company has not paid a dividend with respect to the Common Stock.
The Company expects to reinvest its earnings for expansion of its operations and
does not intend to pay a dividend in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five
calendar years ended December 31, 1998 should be read in conjunction with the
Consolidated Financial Statements, related notes and other financial information
included herein.
<TABLE>
<CAPTION>
WRP CORPORATION
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
*Net sales $64,968,401 $51,402,691 $45,811,462 $39,788,839 $33,575,488
Cost of goods sold 46,857,229 40,760,146 38,358,756 36,177,651 27,387,357
Gross profit 18,111,172 10,642,545 7,452,706 3,611,188 6,188,131
*Selling, general &
administrative expenses 9,954,785 8,226,945 6,684,467 6,160,011 5,671,360
Restructure charge - - - 1,808,757 -
Minority interest in income
of subsidiary (594,062) (300,145) (77,732) (2,174) -
Net income (loss) from
continuing operations before
discontinued operations 5,879,160 1,249,392 (247,608) (4,092,779) 1,093,786
Loss from discontinued operations - (783,670) (916,979) (771,625) (93,256)
Net income (loss) $ 5,879,160 $465,722 $(1,164,587) $(4,864,404) $ 1,000,530
PER SHARE DATA:
Diluted earnings (loss) per share .93 $ .11 $ (.32) $ (2.00) $ .41
BALANCE SHEET DATA (END OF PERIOD):
Total assets $35,799,939 $29,531,245 $27,513,624 $26,373,204 $18,493,771
Long-term debt $ 1,668,982 $ 5,647,867 $ 7,098,132 $10,342,500 $ 3,065,232
Total shareholders' equity $16,941,436 $ 4,312,520 $ 3,531,424 $ 1,319,661 $ 3,911,116
</TABLE>
* The 1994 through 1997 figures have been restated to reflect rebates as a
reduction of net sales to conform to the 1998 presentation for
comparability purposes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(2)
The Company's wholly owned subsidiary, AHPC, is engaged in the
marketing and distribution of high quality medical grade examination gloves in
the United States and has been in the glove business since its incorporation in
January 1989. The Company recorded record glove net sales in 1998 with an
increase of 26.4%.
PT Buana was incorporated in Indonesia on October 17, 1994, and
commenced operations in April 1996. PT Buana began manufacturing and shipping
powdered latex examination gloves to AHPC in May 1996 and sold approximately 47%
of its production to AHPC in 1998. PT Buana had total powdered latex exam glove
sales of $13.0 million for the year ended December 31, 1998. All significant
intercompany transactions have been eliminated in consolidation.
Through its Playboy license rights and condom distribution agreement,
the Company distributed Playboy(R) brand condoms through June 30, 1997 in
accordance with the negotiated termination agreement with Playboy Enterprises,
Inc. As such, the Company has accounted for the Playboy(R) condom business as a
discontinued operation effective December 31, 1996.
This analysis of the results of operations and financial condition of
the Company should be viewed in conjunction with the financial statements and
other information concerning the Company included throughout this Annual
Report. The consolidated financial statements for the years ended December 31,
1998 and 1997 include the results of operations and statements of cash flows of
the Company, AHPC and PT Buana, the Company's 70% owned subsidiary.
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a percentage
of net sales for the periods indicated.
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(2) Forward looking statements in this Item 7, 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, including the factors set forth below under the
heading "Risks Affecting Forward Looking Statements and Stock Prices". The
Company cautions investors that its business is subject to significant
risks and uncertainties.
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FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 72.1 79.3 83.7
---- ---- ----
Gross profit 27.9 20.7 16.3
Selling, general & administrative expenses 15.3 16.0 14.6
---- ---- ----
Income from operations 12.6 4.7 1.7
Interest (expense) / other income, net (1.2) (2.3) (2.2)
Provision for (benefit from) income taxes 1.5 (0.6) (0.1)
Minority interest in income of subsidiary (0.9) (0.6) (0.1)
Net loss from discontinued operations -- (1.5) (2.0)
--- ---- -----
Net income (loss) 9.0% 0.9% (2.5)%
==== ==== =====
Fiscal 1998 compared to Fiscal 1997. The results of operations for 1998
and 1997 include only the revenue and expenses of the glove business. The
discontinued operations of the Playboy(R) condom business are reflected in the
net loss from discontinued operations as separate line items in the consolidated
statements of operations.
Net sales include glove sales from AHPC's examination glove product
line and external powdered exam glove sales from PT Buana. Net sales totaled
$64,968,401 and $51,402,691 for the years ended December 31, 1998 and 1997,
respectively. This increase represents a 26.4% increase in glove sales in 1998
over 1997. This increase is attributable to AHPC's more developed customer
relationships and increased PT Buana sales to external customers, the
introduction of new products, growth in markets for its products, and a shift in
the product mix toward higher priced products, particularly powder-free exam
gloves. The Company's net sales are derived from the sale of finished products,
net of allowable rebates, discounts and returns.
Revenues from the Playboy(R) condom business were $376,422 for the year
ended December 31, 1997. These revenues are included in the net loss from
discontinued operations in the consolidated statements of operations. Under the
Company's exit plan, the Company sold Playboy(R) condoms through June 30, 1997.
Cost of goods sold includes all costs to manufacture and purchase the
finished product plus the related costs associated with ocean freight, customs
duty and warehousing. Cost of goods sold increased 15.0% from $40,760,146 for
the year ended December 31, 1997 to $46,857,229 for the year ended December 31,
1998. As a percentage of net sales, cost of goods sold decreased from 79.3% for
the year ended December 31, 1997 to 72.1% for the same period in 1998.
This reduction in the cost of goods sold and continued improvement in
gross margin is attributed to: (i) more favorable glove purchase prices obtained
in 1998 due to a continued reduction in raw material latex prices; (ii) an
increase in sales of higher profit margin glove products, particularly
powder-free examination gloves; (iii) improved operating efficiency in the
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<PAGE> 15
Indonesian facility, and (iv) reduced duty importation fees associated with
examination gloves in 1998. The Company currently expects its gross margin to
continue to be affected by changes in product mix, competition, the price of
latex and other factors. As a result of the above, gross profit increased by
70.2% from $10,642,545 for the year ended December 31, 1997 to $18,111,172 for
the year ended December 31, 1998.
The market for exam gloves is converting from latex powdered to latex
powder-free gloves and to non-latex gloves. The chlorination process used to
make latex powder-free gloves reduces the sensitivity to latex and reduces the
powder levels which emit latex particles in the air. Being customer driven, the
Company is providing and selling more latex powder-free exam gloves, and expects
that this trend will continue in the future. The Company's sales of latex
powder-free exam gloves were approximately 44% of net sales in 1998 versus 37%
in 1997. See the liquidity and capital resources section for a discussions of
the Company's plans to upgrade the PT Buana facility to manufacture latex
powder-free gloves.
Selling expenses include all salaries for sales and marketing staffs
together with other related expenses such as sales commissions, travel costs,
trade shows, advertising, and delivery costs. Selling, general and
administrative ("SG&A") expenses increased 21.0% from $8,226,945 in 1997 to
$9,954,785 in 1998. The increase is attributable to an increase in AHPC's
delivery and selling expenses commensurate with its sales growth and the
expansion of the Company's sales force. As a percentage of 1998 net sales, SG&A
expenses decreased to 15.3%, compared with 16.0% in 1997. The Company currently
expects to make additional investments in sales and marketing to further develop
established markets and to introduce new products to the marketplace.
Accordingly, the Company currently expects that its SG&A expense will continue
to increase in absolute dollars and may possibly increase as a percentage of net
sales in the future.
Prior to July 1, 1997, the financial statements and transactions of the
Company's Indonesian subsidiary, PT Buana, were maintained in the functional
currency, Indonesian rupiahs, and translated into U.S. dollars. Due to the
Company's business and operating facility in Indonesia, the Company experienced
transaction and translation gains and losses because of currency fluctuations.
Assets and liabilities were translated at the current exchange rate in effect at
the balance sheet date and shareholders' equity was translated at historical
exchange rates. Revenues and expenses were translated at the average exchange
rate for each period. Translation adjustments, which result from the process of
translating Indonesian rupiahs into U.S. dollars, were accumulated in a separate
component of shareholders' equity in accordance with Statement of Financial
Accounting Standards No. 52. Such adjustments were unrealized.
Effective July 1, 1997, in accordance with Statement No. 52, PT Buana
changed its functional currency for financial statements reporting purposes from
the Indonesian rupiah to the U.S. dollar. The net effect of this change in
functional currency resulted in a positive $277,035 foreign currency translation
adjustment by PT Buana which is recorded in 1997 as a component of cost of goods
sold.
Interest expense decreased from $1,481,467 in 1997 to $1,192,405 in
1998. This decrease is attributable to the repayment of all of PT Buana's debt
in 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.
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<PAGE> 16
Other income increased by $168,024 from $293,362 for the year ended
December 31, 1997 to $461,386 for the year ended December 31, 1998. The increase
is primarily due to the disposal of the investments in LSAI which generated a
gain of $168,375 in 1998.
The Company did not record income taxes in 1997 or in 1996 due to net
operating loss carryforwards (NOL's) which were generated in prior years. During
1998, the WRP Asia ownership change limited the NOL's which are available to
reduce taxable income in current and future years. Because of these NOL
limitations, the Company began recording a provision for income taxes in 1998.
The Company did not record any taxes to be paid for its foreign subsidiary in
Indonesia (PT Buana). PT Buana, based on Indonesian tax reporting, has generated
losses and thus has no current tax provision. As a result, the Company has
generated tax NOL's in Indonesia that can be utilized in the future. During
1998, the Company has also reviewed the adequacy of the valuation allowance it
had recorded for deferred tax assets that were generated during the current and
prior years. As a result of this assessment and the Company's continued
profitability, the Company recorded a reduction in its deferred tax valuation
allowance of $412,646. This amount has been reflected as a reduction in the
current year's tax provision. The income tax provision recorded in 1998 of
$952,146 is less than statutory rates due to the utilization of NOL's in 1998
and to the reduction of the valuation allowance for deferred tax assets which
were recorded in 1998.
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.
For the year ended December 31, 1998, net income for the Company was
$5,879,160, compared to a net income of $465,722 in 1997. The overall diluted
earnings per share was $.93 in 1998 compared to $.11 in 1997.
RESULTS OF OPERATIONS
Fiscal 1997 compared to Fiscal 1996. Income from operations in 1997 and
1996 includes only the sales and expenses of the glove business; the
discontinued operations of the Playboy(R) condom business is reflected in the
net loss from discontinued operations as separate line items in the consolidated
statements of operations.
Net sales are comprised of glove sales primarily from AHPC's
examination glove product line which totaled $51,402,691 and $45,811,462 for the
years ended December 31, 1997 and 1996, respectively. This increase represents a
12.2% increase in glove sales in 1997 over 1996. This increase is attributable
to AHPC's more developed customer relationships and a move in the sales mix
toward higher priced products, particularly latex powder-free exam gloves.
Revenues from the Playboy(R) condom business were $376,422 and
$1,380,435 for the years ended December 31, 1997 and 1996, respectively. These
revenues are included in the losses from discontinued operations in the
consolidated statements of operations and declined due to the Company's exit of
the condom business pursuant to agreement with Playboy in
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<PAGE> 17
November 1996. Under the exit plan, the Company sold Playboy(R) condoms until
June 30, 1997. The Company earned and recorded royalty income of $27,815 in 1997
and does not anticipate that future royalties will be significant.
Cost of goods sold for fiscal 1997 as a percentage of net sales was
79.3% compared to 83.7% in 1996. This reduction in the cost of goods sold and
improvement in gross margin is attributed to: (i) more favorable glove purchase
prices obtained in 1997 due to manufacturing efficiencies at its Indonesian
plant, PT Buana, and a reduction in raw material latex prices; (ii) an increase
in sales of higher profit margin glove products, particularly latex powder-free
examination gloves; (iii) reductions in the ocean freight import rates; (iv) the
U.S. government lowering the duty importation fees associated with examination
gloves effective January 1, 1997; (v) the duty free status of importing
Indonesia manufactured glove products into the U.S.; and (vi) the inclusion in
1997 of a positive $277,035 foreign currency translation adjustment by PT Buana.
The Company currently expects its gross margin to continue to be affected by
changes in product mix, competition and other factors.
The 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 lawsuits
being associated with the use of latex powdered 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. The Company is providing
and selling more latex powder-free exam gloves. The Company's sales of latex
powder-free exam gloves was approximately 37% of net product sales in 1997
versus 30% in 1996.
In August 1997, the Company was notified by its sole latex powder-free
exam glove manufacturer/supplier that the FDA had placed an FDA Import Alert on
its factory. This temporarily stopped the supplier from shipping product into
the U.S. marketplace and to AHPC. Because of this, AHPC had difficulty meeting
its customers' demands for powder-free gloves. To successfully satisfy
customers' demands, AHPC temporarily purchased powder-free gloves from other
Malaysian manufacturers at much higher costs until the FDA Import Alert was
lifted in December 1997 when the supply of powder-free gloves resumed. The
Company's sourcing of product from others during that short period resulted in a
significantly lower gross profit in the fourth quarter of 1997.
Selling, general and administrative ("SG&A") expenses increased to
$8,226,945 in 1997 from $6,684,467 in 1996, a 23.1% increase. This increase is
attributable to: (i) the increase in SG&A expenses from PT Buana's operations,
which began in April 1996; (ii) an increase in AHPC's selling expenses
commensurate with its sales growth; (iii) the expansion of the Company's sales
and support forces; (iv) increased reserves for lawsuit claims and other
purposes; and (v) costs incurred in 1997 for the research, study, and
recommendation to purchase, install and implement a new enterprise wide computer
system. As a percentage of 1997 net product sales, SG&A expenses increased to
16.0%, compared with 14.6% in 1996. The Company currently expects to make
additional investments in sales and marketing to further develop established
markets and to introduce new products to the marketplace. Accordingly, the
Company currently expects that its SG&A expense will continue to increase in
absolute dollars but may decline as a percentage of net sales in the future.
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<PAGE> 18
Prior to July 1, 1997, the financial statements and transactions of the
Company's Indonesian subsidiary, PT Buana, were maintained in the functional
currency, Indonesian rupiahs, and translated into U.S. dollars. Due to the
Company's business and operating facility in Indonesia, the Company experienced
transaction and translation gains and losses because of currency fluctuations.
Assets and liabiliities were translated at the current exchange rate in effect
at the balance sheet date and shareholders' equity was translated at historical
exchange rates. Revenues and expenses were translated at the average exchange
rate for each period. Translation adjustments, which result from the process of
translating Indonesian rupiahs into U.S. dollars, were accumulated in a separate
component of shareholders' equity in accordance with Statement of Financial
Accounting Standards No. 52. Such adjustments were unrealized.
Effective July 1, 1997, in accordance with Statement No. 52, PT Buana
changed its functional currency for financial statements reporting purposes from
the Indonesian Rupiah to the U.S. dollar. The net effect of this change in
functional currency resulted in a positive $277,035 foreign currency translation
adjustment by PT Buana which is recorded in 1997 as a component of cost of goods
sold.
Interest expense increased from $1,117,700 in 1996 to $1,481,467 in
1997. This increase is attributable to the inclusion of PT Buana's interest
expense which increased from $389,428 in 1996 to over $1.0 million in 1997 due
to additional borrowings to fund the growth and expansion of PT Buana and the
glove business.
At December 31, 1997, the Company had net operating loss carry-forwards
("NOLs") of approximately $5.0 million which will be available to reduce federal
taxable income in future periods. In accordance with federal tax regulations,
usage of the NOLs is subject to limitations should certain ownership changes
occur.
The Company continued to have losses from the condom discontinued
operations which amounted to $(783,670) in 1997. During the fourth quarter of
1997, the Company revised its estimate of possible condom returns and related
costs associated with the cessation of the condom business. The Company reduced
its reserves and condom discontinued loss by $590,128 compared to the June 30,
1997 loss as reported. The Company's exit of the condom business is part of the
strategy to return the Company to profitability.
For the year ended December 31, 1997, net income for the Company was
$465,722, compared to a net loss of $(1,164,587) in 1996. The overall net income
(loss) per share was $.11 in 1997 compared to $.(32) in 1996.
SEGMENT INFORMATION
1998. During 1998, the Company was engaged solely in the business of
manufacturing and distributing examination gloves. The Company has two business
segments, manufacturing and distribution. These segments are managed as separate
strategic business units. The manufacturing segment, which represents the
Indonesian operations of PT Buana, manufactures powdered latex gloves and sells
them primarily to AHPC and WRP Asia. The distribution
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<PAGE> 19
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 within the
U.S. The operations of the distribution segment are located entirely within the
U.S.
1997. At December 31, 1997, the Company was in the business of
manufacturing and distributing examination gloves in the U.S. The Company also
distributed Playboy(R) condoms through June 30, 1997 in accordance with the
termination agreement with Playboy(R) Enterprises Inc. As such, the Playboy(R)
condom business is reported as a discontinued operation of the Company.
1996. At December 31, 1996, the Company was engaged in the business of
manufacturing (through its 70% owned Indonesian subsidiary, PT Buana) and
distributing examination gloves primarily in the U.S. PT Buana began
manufacturing powdered latex examination gloves in April 1996 and shipping
product to AHPC in May 1996. The Company continued to sell Playboy(R) condoms in
1996 and through June 30, 1997 in accordance with its November 1996 plan to
discontinue all condom operations by such later date. During 1996, the Company
dissolved its wholly owned subsidiaries, DGI and Premier Latex, Inc., which were
discontinued operations and inactive entities.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1998 increased $517,744 from
December 31, 1997 levels. The Company experienced this increase in cash flow in
1998 primarily from cash provided by operating activities and the proceeds from
the Company's sale of Common Stock to WRP Asia, offset by the funding of capital
expenditures and the repayment of debt obligations.
The Company's operations generated cash of $5,284,472 in 1998 as a
result of net income of $5,879,160 plus non-cash depreciation of $1,247,111 and
an increase in accrued expenses and amounts due to affiliates, which was offset
by an increase in inventories. In 1998, the Company used cash of $2,005,123 for
investing in the installation of a new enterprise wide computer system for
AHPC's operations and for the purchase of equipment for expanding the PT Buana
manufacturing facility in Indonesia. The Company experienced decreased cash flow
from financing activities of $4,340,320. The use of cash for financing purposes
was for the repayment of all of PT Buana's debt and other debt of $9,225,756 and
a reduction in letter of credit obligations of $2,126,299. This was offset by
the proceeds from the Company's sale of Common Stock to WRP Asia of $6,750,000.
On December 1, 1998, the Company obtained a new, domestic two-year
credit facility from a large commercial credit company, G.E. Capital. This
asset-based lending facility includes 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% (8.05% at December 31,
1998). The new facility was used to repay and extinguish all obligations
outstanding under the previous bank facility. At December 31, 1998, the Company
had outstanding $1,100,000 on the revolving line of credit and $3,322,882 of
letter of credit liabilities under the new credit facility.
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Net inventories at December 31, 1998 increased 44.6% to $11,860,855
compared with $8,203,861 at December 31, 1997 in anticipation of higher sales
volume in 1999 and due to the addition of several inventory product lines. Net
trade accounts receivable at December 31, 1998 increased only slightly to
$5,532,405 from $5,410,843 at December 31, 1997 due to a strong collection
effort made at the end of 1998.
In October 1994, pursuant to two debenture and warrant purchase
agreements between the Company and two affiliated trusts, 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 the Common Stock of the
Company at an exercise price of $22.20 per share. At December 31, 1997 and 1998,
long-term debt of $2,000,000 was outstanding as a result of this transaction.
The Company anticipates repayments of $600,000 in 1999 on this debt and has
classified only $1,400,000 of this debt as long-term at December 31, 1998.
In 1998, the Indonesian factory, PT Buana increased its production
capacity by nearly 40% over the prior year. The factory placed in service an
additional 5 production lines in 1998, for a total of 15 lines, and now is
capable of producing at a run rate of approximately 700 million powdered exam
gloves per year.
PT Buana only manufactures latex powdered exam gloves but has plans to
begin producing latex powder-free exam gloves in the second quarter of 1999. At
December 31, 1998, PT Buana had capital commitments of approximately $1,000,000
for the purchase of chlorination machinery and equipment used for the production
of powder-free gloves. The Company anticipates this to be funded with internally
generated cash and debt borrowings.
The Company currently expects to have cash needs during 1999 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) the continued hiring of additional full time members of
its sales force; (iii) the hiring of additional support staff; (iv) the
continuing expansion of the manufacturing facility in Indonesia and upgrading to
produce powder-free gloves; (v) the completion and customization of its new
enterprise wide computer system; and (vi) for other operating expenses. The
Company believes that its cash generated from operations plus its new credit
facility will be sufficient to fund the Company's ongoing operations.
Additionally, the Company believes that it will be able to obtain additional
financing from its credit facility to fund additional growth should the need
arise.
YEAR 2000 OVERVIEW
The crux of the Year 2000 ("Y2K") Issue is whether information
technology (I.T.) and non-I.T. systems will be able to recognize and process
date-sensitive information before and after the Year 2000. The Company relies,
directly and indirectly, on I.T. systems, such as desktop computers, network
hardware equipment and applications software to manage its business data. The
Company also relies on non-I.T. systems including office equipment, security
systems, and
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<PAGE> 21
telephone systems, to carry out its day-to-day operations. In addition, third
party suppliers and customers, material to the Company's operations, rely on
I.T. and non-I.T. systems to manage their businesses. The Year 2000 Issue could
potentially affect all of their systems. In order to minimize the exposure of
Y2K related risks, the Company is conducting a comprehensive assessment of its
Y2K issues. The Company, through its Y2K Committee, is in the process of
identifying, updating or replacing non-Y2K compliant I.T. and non-I.T. systems
that are material to the Company's operations.
The Company has identified four stages for its Y2K compliance effort:
I. Assessment
II. Planning
III. Implementation
IV. Testing
The Assessment stage involves the determination of the readiness
status of all I.T. and non-I.T. systems. The Planning stage identifies the
actions required to achieve a ready state. During the Implementation stage, any
deficient components are replaced or upgraded. The replacements and upgrades are
verified during the Testing stage.
The Company's Y2K assessment is focusing primarily on four areas:
1) information technology equipment;
2) applications software;
3) non-information technology systems and infrastructure; and
4) third party suppliers and customers.
The assessment involves analyzing all I.T. equipment, applications
software, and non-I.T. systems used by the Company. The Company will also be
evaluating third parties critical to the Company's operations on their Y2K
preparedness. As of December 31, 1998, the Company's Assessment and Planning
stages for internal I.T. systems has been 100% completed. The Company has begun
to implement Y2K compliant, enterprise-wide, business systems application
software. The Company expects that the application software will be online and
fully operational in April 1999. The Company's overall Y2K Assessment stage is
approximately 75% complete, including the analysis of the PT Buana manufacturing
facility, located in Indonesia. The Company is developing plans for each of the
areas targeted by the Y2K assessment, such as the telephone, facsimile machines
and the readiness of third parties.
The readiness status of third parties will be acquired through
certifications requested from all suppliers and customers material to its
operations. The Company has begun to mail out questionnaires to third parties
but has not obtained all replies at this time. The Company expects to complete
the entire Assessment stage by April 30, 1999. The Planning stage is in progress
and is currently 70% complete. The Company anticipates the Planning stage to be
completed in May 1999. To date, the Implementation stage is 60% 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 on-I.T. systems by June 30, 1999. The Testing stage has not yet begun.
The Testing
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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 as known 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
$1,750,000, of which $1,500,000 is to be spent on replacing the enterprise wide
business applications hardware and software. As of December 31, 1998, the
Company has spent approximately $920,000 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.
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. In particular, the compliance and readiness of
its material third party suppliers, customers and vendors will be the focus of
further effort. 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.
RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES
In addition to those matters already set forth in Item 1, Business, and
this Item 7, the following may result in the Company not achieving certain
results included in any statement that may be considered a forward looking
statement. The Company cautions the reader that the following risks may not be
exhaustive.
Variations in Quarterly Results. The Company's quarterly operating
results are subject to various risks and uncertainties, including risks and
uncertainties related to: local and international economic conditions;
competitive pressures; the composition, timing and size of
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<PAGE> 23
orders from and shipments to major customers; variations in product mix and the
size mix between sales; variations in product cost; infrastructure costs;
obsolescence of inventory; and other factors as discussed below. Accordingly,
the Company's operating results may vary materially from quarter to quarter.
The Company operates with little backlog and, as a result, net sales in
any quarter are substantially dependent on the orders booked and shipped in that
quarter. Because the Company's operating expenses are based on anticipated
revenue levels and because a high percentage of the Company's expenses are
relatively fixed, if anticipated shipments in any quarter do not occur as
expected, the Company's operating results may be adversely affect and fall
significantly short of expectations. Any other unanticipated decline in the
growth rate of the Company's net revenues, without a corresponding and timely
reduction in the growth of operating expenses, could also have an adverse effect
on the Company and its future operating results.
The Company aims to prudently control its operating expenses. However,
there is no assurance that, in the event of any revenue, gross margin or other
shortfall in a quarter, the Company will be able to control expenses
sufficiently to meet profitability objectives for the quarter.
Financing. The Company's current credit facility expires in December
2000. There can be no assurances that it will be renewed, extended or sufficient
to finance continued growth of the Company.
Dependence on Gloves. The Company is exclusively engaged in the
manufacture and sale of disposable gloves. Accordingly, the Company's results of
operations and financial condition are highly dependent on the level of supply
of and demand for disposable gloves. There can be no assurance that the supply
of or demand for disposable gloves will continue at current levels or that
changes in such supply or such demand will not have a material adverse effect on
the Company's results of operations or financial condition. In addition, the
Company currently has a substantial investment in PT Buana, which exclusively
manufacturers powdered gloves, as well as a long-term supply contract with PIE
Healthcare for the purchase of powdered gloves. Should the demand for powdered
gloves continue to decline, then the Company will continue to be subject to the
aforesaid commitments.
Conversions of powdered glove manufacturing capacity to powder-free
capacity requires substantial time, capital investment and know how, and there
can be no assurance such conversion could be made economically or at all, in the
event of a substantial decline in the demand for powdered gloves.
See "New Glove Products."
Dependence on Rubber Harvest and Latex Concentrate. The ability of the
Company to produce and purchase its products profitably is entirely dependent
upon the consistent availability, at competitive prices, of raw rubber harvested
by independent growers in Malaysia and Indonesia and locally processed by the
Company and others into latex concentrate. Any disruption in the consistent
supply of rubber for latex concentrate due to weather or other natural
phenomena, labor or transportation stoppages, shortages or other factors, could
cause significant adverse effects to the Company's results of operations and
financial condition. In addition, rubber
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is a commodity traded on world commodities exchanges and is subject to price
fluctuations driven by changing market conditions over which the Company has no
control. Increases in the price of latex concentrate have adversely affected the
Company's raw material costs in the past and could do so again.
Asia Pacific Risk Factors. Social, political and economic instability
may be significantly greater in many of the Asian-Pacific countries than that
typically associated with the United States and other industrialized countries.
Varying degrees of social, political and economic instability could
significantly disrupt the source of the Company's supply of glove products.
Currencies of several Asian-Pacific countries, including Indonesia,
Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, have recently
experienced significant fluctuations against the U.S. dollar, commencing with
the devaluation of the Thai Baht in July 1997. Interest rates in many
Asian-Pacific countries have risen sharply and credit availability has been
reduced. Companies in these countries, with significant indebtedness or costs
denominated in foreign currencies that have appreciated in relation to the local
currency, may have difficulty passing on increased local currency costs to their
customers and may face financial difficulties and losses and may be unable to
meet their obligations.
The economies of most of the Asian-Pacific countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners,
principally, the United States, Japan, China and the European Union. The
enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the local
economies and general declines in the international securities markets could
have a significant adverse effect upon the economies of the Asian-Pacific
countries.
Governments in certain of the Asian-Pacific countries participate to a
significant degree, through ownership interests or regulation, in their
respective economies. Action by these governments could have a significant
adverse effect on the economies of such countries.
Changes in Gross Margins. Certain of the Company's net product sales
are derived from products and markets which typically have lower gross margins
compared to other products and markets, due to higher costs and/or lower prices
associated with the lower gross margin products and markets. The Company
currently expects that its net product sales from powder-free gloves will
continue to increase as a percentage of total net product sales. In addition,
the Company is currently experiencing pricing pressures due to a number of
factors, including competitive conditions, consolidation within certain groups
of suppliers and changing technologies in the production of powder-free gloves
and increasing demand for new glove products. To the extent that these factors
continue, the Company's gross margins could decline, which would adversely
affect the Company and its future operating results.
Downward pressure on the Company's gross margins may be mitigated by
other factors, such as a reduction in product costs and/or an increased
percentage of new product sales from higher gross margin products, such as
powder-free gloves. The Company is aiming to reduce its product costs and to
increase its percentage of net product sales from powder-free and synthetic
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gloves. However, there is no assurance that these efforts will be successful.
New Glove Products. The Company is planning to distribute a number of
new glove products, including nitrile and possibly surgeon's gloves. There is no
assurance that these development efforts will be successful or that, if
successfully developed, these products will achieve commercial success.
Growth Dependencies. In general, the Company's future growth is
dependent on the Company's ability to successfully and timely enhance existing
products, develop and introduce new products, establish new distribution
channels, develop affiliations with leading market participants and continue to
develop its relationships with its existing customer base.
The failure to achieve these and other objectives could limit future
growth and have an adverse effect on the Company and its future operating
results. In addition, the pressure to develop and enhance products and to
establish and expand markets may cause the Company's SG&A expenses to increase
substantially, which could also have an adverse effect on the Company and its
future operating results.
Manufacturing in Indonesia - International Operations. The Company's
international manufacturing operation has grown substantially, and thus, the
Company is increasingly affected by the risks associated with international
operations. Such risks include: managing an organization in Indonesia;
fluctuations in currency exchange rates; the burden of complying with
international laws and other regulatory and product certification requirements;
changes in such laws and requirements; tariffs and other trade barriers; import
and export controls; international staffing and employment issues; and political
and economic stability. The inability to effectively control and manage these
and other risks could adversely affect the Company and its future operating
results.
Competition. The various markets in which the Company operates are
becoming increasingly competitive as a number of other companies develop and
sell products that compete with the Company's products in these markets. Certain
of these competitors have significantly more financial and technical resources
than the Company. The Company faces additional competitive factors besides
price, such as product quality, consistency, timeliness of delivery, service,
and the size and reliability of the manufacturer. These competitive factors may
result in, among other things, price discounts by the Company and sales lost by
the Company to competitors that may adversely affect the Company and its future
operating results.
Reliance Upon Distributors. The Company uses various channels to market
and distribute its products primarily by sales to end-users via third-party
distributors. Third-party distributors are a substantial channel for
distribution to medical facilities. Accordingly, the Company's ability to market
and distribute its products depends significantly on its relationship with
third-party distributors, as well as the performance and financial condition of
these distributors. In the event that the Company's relationship with its
distributors deteriorates, or the performance or financial condition of the
distributor becomes unsatisfactory, the Company and its future operating results
could be adversely affected.
23
<PAGE> 26
Excess or Obsolete Inventory. Managing the Company's inventory of
various size mix and product mix is a complex task. A number of factors,
including the need to maintain a significant inventory of certain sizes or
products which are in short supply or which must be purchased in bulk to obtain
favorable pricing, the general unpredictability of demand for specific products
and customer requests for quick delivery schedules, may result in the Company
maintaining excess inventory. Other factors, including changes in market demand
and technology, may cause inventory to become obsolete. Any excess or obsolete
inventory could result in price reductions and inventory write-downs, which, in
turn, could adversely affect the Company and its operating results.
Hiring and Retention of Employees. The Company's continued growth and
success depend to a significant extent on the continued service of senior
management and other key employees and the hiring of new qualified employees.
Competition for highly skilled business, technical, marketing and other
personnel is intense, particularly in the strong economic cycle currently
prevailing for companies. The loss of one or more key employees or the Company's
inability to attract additional qualified employees or retain other employees
could have an adverse effect on the Company and its future operating results. In
addition, the Company may experience increased compensation costs in order to
compete for skilled employees.
Product Liability Insurance. Participants in the medical supplies
business are potentially subject to lawsuits alleging product liability, many of
which involve significant damage claims and defense costs. A successful claim
against the Company in excess of the Company's insurance coverage could have a
material adverse effect on the Company's results of operations or financial
condition. Claims made against the Company, regardless of their merit, could
also have a material adverse effect on the Company's reputation. There is no
assurance that the coverage limits of the Company's insurance policy will be
adequate or that present levels of coverage will be available at affordable
rates in the future. While the Company has been able to obtain product liability
insurance in the past, such insurance varies in cost, is difficult to obtain and
may not be available in the future on acceptable terms or at all. The Company is
subject to a number of lawsuits filed against it and other manufacturers. This
litigation is still in the early stages, and there can be no assurance that the
Company's insurance will be sufficient to meet any recovery for which the
Company may be found liable, that the outcome of such suits will not materially
adversely affect the Company's results of operations or financial condition or
that the Company's deductible obligation (to fund a portion of the initial cost
of defense and/or liability of each such lawsuit) will not prove burdensome.
Stock Market Fluctuations. In recent years, the stock market in
general, including the Company's Common Stock, have experienced extreme price
fluctuations. The market price of the Company's Common Stock may be
significantly affected by various factors such as: quarterly variations in the
Company's operating results; changes in revenue growth rates for the Company;
changes in earnings estimates by market analysts; the announcement of new
products or product enhancements by the Company or its competitors; speculation
in the press or analyst community; the inability of the market to absorb selling
pressure from one or more large institutional shareholders; and general market
conditions or market conditions specific to particular industries. There can be
no assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future.
24
<PAGE> 27
Governmental Regulations. The Company's products are subject to
regulation by numerous governmental authorities in the United States, and other
countries, particularly to safety and adherence to Quality System Regulations
(QSR's) for medical devices. In the United States, examination gloves are
classified as a Class I medical device product regulated by the FDA.
Noncompliance with these FDA regulations can result in administration
enforcement, such as warning letters, import alerts, and administrative
detention or in civil penalties, product bans and recalls. Periodically, the FDA
inspects shipments of medical gloves as they arrive in the United States ports.
The FDA inspections and reviews may cause delays in product delivery,
and this can result in a loss or delay in recognition of income by the Company.
In addition, the FDA may inspect the manufacturing facilities for compliance
with QSRs, which incorporate pre-production design and development to achieve
consistency with quality system requirements worldwide. Failure to comply with
regulatory requirements could have a material adverse effect on the Company's
business financial condition and results of operations.
Y2K Risks. Processing errors due to software failures arising from
calculations using the Year 2000 date are a recognized risk. The Company has
engaged management information system consultants for the management of its U.S.
information technology systems. Both the Company and its consultants are
addressing the risk, with respect to the availability and integrity of its
financial systems and the reliability of its operating systems and are in the
process of communicating with suppliers, customers and others with whom it
conducts transactions to assess whether they are Year 2000 compliant. The
Company does not believe that it will incur a material financial impact from the
risk, or from assessing the risk, arising from the Year 2000 issues. However,
there can be no guarantee that the Company's assessment of the financial impact
of this risk will be accurate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A list of financial statements and financial statement schedules for
the Registrant is contained in "Index to Financial Statements and Financial
Statement Schedules of WRP Corporation" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Richard Wong 54 Chairman and Chief Executive Officer
Edward J. Marteka 61 President
Kwong Ann Lew 38 Chief Financial Officer, Treasurer and Secretary
Robert C. Carter 37 Controller and Assistant Secretary
Biographies for Messrs. Wong, Marteka, Ann and Carter are included below.
At March 10, 1999, the directors of the Company consist of six Class A
Directors and two Class B Directors are as follows:
Class A Directors
Name Age Director Since
- ---- --- --------------
Kamaruddin Taib 41 1998
Richard C. M.Wong 54 1997
Edward J. Marteka 61 1995
Kwong Ann Lew 38 1997
George Jeff Mennen 58 1994
Richard Swanson 63 1998
Class B Directors
Name Age Director Since
- ---- --- --------------
Robert J. Simmons 56 1995
Don L. Arnwine 66 1995
The following sets forth brief statements of the principal occupations
and other biographical information of each of the directors and executive
officers. During March 1999, Mr. Boon Teck Yap, President of MBf Holdings,
resigned from the Board in connection with MBf Holdings' disposal of its
ownership interest in the Company. The Company does not intend to appoint a
replacement for Mr. Yap prior to the Company's 1999 Annual Meeting of
Stockholders, at which time the stockholders will elect persons to fill all
directorships.
Kamaruddin Taib was elected Class A Director on April 1, 1998.
Kamaruddin Taib is currently the Deputy Executive Chairman of WRP Asia. He
formerly served as the Group Managing Director of various Malaysian publicly
listed companies. Mr. Taib holds a Bachelor of Science (Mathematics) degree from
the University of Salford, United Kingdom. Upon
26
<PAGE> 29
completing his studies, he joined a leading local Merchant Bank for three years
(1980-1983) where he had extensive exposure in corporate and financial advisory
work.
Richard C. M. Wong was elected Class A Director of the Company on
May 20, 1997, Mr. Wong currently serves as Chairman of the Board and Chief
Executive Officer of the Company. Mr. Wong is the President and Chief Executive
Officer of WRP Asia. In addition, he is also a Deputy Chairman of Nylex Malaysia
Bhd., and a director of two other publicly listed companies in Malaysia. Mr.
Wong is the founder of TEC Asia Centre, an international organization of Chief
Executive Officers who share ideas to manage change and remain competitive.
Edward J. Marteka was the founder and is the President and Director
of the Company's subsidiary, AHPC since its incorporation in 1989. In May 1995,
Mr. Marteka was appointed to the Board of Directors and as President of the
Company. Mr. Marteka is responsible for the overall operations of AHPC and the
Company. Mr. Marteka had held various positions with Baxter Healthcare
Corporation, and served as Vice President of its International Division.
Kwong Ann Lew was elected Class A Director of the Company on May 20,
1997. Mr. Lew currently serves as Chief Financial Officer and Secretary of the
Company. Mr. Lew is an Executive Director and Chief Financial Officer of WRP
Asia. He is a member of the Malaysian CPA Society and Institute of Taxation and
was with Arthur Andersen & Co. from 1988 to 1991. Prior to joining WRP Asia, he
held various key management positions in two public listed companies, primarily
in the corporate and judicial advisory areas.
George Jeff Mennen was elected to the Board of Directors on October
12, 1994. Mr. Mennen heads the G.J. Mennen Group, a consulting firm specializing
in family owned businesses. Mr. Mennen had a distinguished career at The Mennen
Company including being the Vice Chairman of that company. The Mennen Company
was founded by Mr. Mennen's great grandfather in 1878 and remained privately
owned until it was sold in 1992 to Colgate-Palmolive.
Richard Swanson was elected Class A Director of the Company on June 12,
1998. Mr. Swanson is presently the Chairman of The Executive Committee, an
international company which focuses on strategic coaching and corporate
troubleshooting for CEO's of public and private companies. Also, since 1980, Mr.
Swanson has been the president of two Denver, Colorado based companies,
Investment Partners, Inc. and Real Estate Associates, Inc. Investment Partners
is engaged in the restructuring and recapitalization of troubled companies, and
Real Estate Associates focuses on the acquisition and development of real estate
projects.
Robert J. Simmons was elected to the Board of Directors in December
1995. He is currently President of RJS Healthcare, Inc., a healthcare consulting
company, founded in 1990. He served as Executive Vice President at Baxter
International, Inc., from 1987 until founding RJS in 1990. Mr. Simmons joined
Baxter after serving over 20 years at American Hospital Supply Corporation. His
last position at American Hospital Supply was Vice President of Corporate
Marketing.
Don L. Arnwine was elected to the Board of Directors in December 1995.
He is currently
27
<PAGE> 30
President of Arnwine Associates, a company he founded in 1989 to provide
specialized advisory services to the health care industry. From 1961 to 1972,
Mr. Arnwine served as Director of the Hospital at the University of Colorado
Medical Center. From 1972 to 1982, he served as President and CEO of the
Charleston Area Medical Center. In 1982, Mr. Arnwine became President and CEO of
Voluntary Hospitals of America and was named its Chairman and CEO in 1985, in
which capacity he served until founding Arnwine Associates.
Robert C. Carter joined the Company in March 1992 and has served as
the Controller of AHPC since that time. He was appointed Assistant Secretary of
the Company in May 1995. Previously, Mr. Carter was employed by Clifton,
Gunderson & Co. and Arthur Andersen LLP. Mr. Carter holds a B.S. in accounting
from the University of Denver and became a certified public accountant in 1988.
BOARD MEETINGS AND COMMITTEES
During the 1998 fiscal year, the Company's Board of Directors held four
meetings, and all other actions by the Board of Directors were taken by
unanimous written consent without a meeting.
The Board of Directors has a Compensation Committee for the purpose of
administering the Company's Omnibus Equity Compensation Plan (the "Plan"). The
Board has not delegated its functions to any other standing committees except
for the Audit Committee which was formed in 1997. During 1998, the Compensation
Committee and Audit Committee held two meetings and one meeting, respectively,
and all other actions were taken by unanimous written consent without a meeting.
COMPENSATION OF DIRECTORS
Effective January 1, 1998, all directors, who were not also executive
officers, which group is comprised of Kamaruddin Taib, George Jeff Mennen,
Richard J. Swanson and the Class B Directors, receive, (1) an annual Board
member retainer of $5,000, (2) compensation of $1,000 for each Board meeting
attended, (3) $500 for each committee meeting attended, and (4) an annual
Committee member retainer of $1,000. Each new Director is presently entitled to
receive stock options under the Plan to purchase 2,000 shares of the Company's
Common Stock in connection with his election, and 1,000 shares of the Company's
Common Stock per Board meeting attended, up to a maximum of 5,000 shares for
Board meetings attended. Under the terms of the Plan, the Compensation Committee
shall determine the exercise price of a Director Option, provided that the
exercise price shall not be less than the lowest fair market value of the Common
Stock of the Company during the six months preceding the election and
qualification of such Director. All Director options are immediately exercisable
for a period of ten years from the date of grant. All directors will be
reimbursed for expenses incurred in attending meetings of the Board and meetings
of Committees.
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<PAGE> 31
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires certain officers, directors and beneficial owners of more than 10% of
the Company's Common Stock to file reports of ownership and changes in their
ownership of the equity securities of the Company with the Securities and
Exchange Commission and Nasdaq. Based solely on a review of the reports and
representations furnished to the Company during the last fiscal year, the
Company believes that each of these persons is in compliance with all applicable
filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation awarded to or earned by
the President, who is the only executive officer whose aggregate annual salary
and bonus exceeded $100,000 during the Company's last three fiscal years:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Other Annual Restricted Stock Stock
Principal Position Fiscal Year Salary Bonus Compensation Awards ($) Options
- ------------------ ----------- -------- ------- ------------ ---------------- -------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Marteka 1998 $200,000 -* $7,200 $315,625 50,000
President 1997 $160,000 $26,667 $7,200 $ 18,300 5,000
1996 $160,000 $33,333 $7,200 - -
</TABLE>
*1998 bonus for Mr. Marteka of $100,000 was paid in March 1999.
There is no other long-term compensation for the executives listed above in
1996 through 1998.
EMPLOYMENT AGREEMENTS
On April 1, 1994, the Company entered into an employment agreement with
Edward J. Marteka (the "Marteka Agreement"). The Marteka Agreement, as amended
on June 30, 1995 and on July 22, 1996, provides for: (i) Mr. Marteka to serve as
President of the Company (since May 31, 1995) and AHPC; (ii) a base salary;
(iii) non-qualified stock options to purchase 35,000 shares of Common Stock
under the Plan, 5,000 shares exercisable commencing April 1, 1994, 20,000 shares
April 1, 1995 and 10,000 shares April 1, 1996 at an exercise price of $11.875,
the closing price of the Common Stock as reported on the Nasdaq SmallCap Market
on the day the options were granted by the Compensation Committee; and (iv) life
and medical insurance, automobile allowance and other additional customary
benefits. The amended Marteka Agreement also granted to Mr. Marteka additional
non-qualified stock options to purchase 14,000 shares of Common Stock, 7,000
shares exercisable commencing July 21, 1995 and 7,000 shares July 21, 1996, at
an exercise price of $7.80, the closing price of Common Stock as reported on the
Nasdaq SmallCap Market on the day the options were granted by Compensation
Committee. Mr. Marteka also received options to purchase 1,000 shares of the
Company's Common Stock upon his appointment as Class A Director in 1995.
As approved by the Compensation Committee, all of Mr. Marteka's options
outstanding in 1996 were repriced effective July 23, 1996 to $2.75, the closing
price on that date. During 1998, Mr. Marteka's base salary was increased to
$200,000 per year effective January 1, 1998 as approved by the Compensation
Committee.
29
<PAGE> 32
OPTION GRANTS IN FISCAL 1998
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------- ------------------------------
Potential Realizable Value at
Assumed Rates of Stock Price
Individual Grants Appreciation for Option Term
- ---------------------------------------------------------------------- ------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in of Expiration
Name Granted (#) Fiscal Year Base Price Date 5%($) 10%($)
- -------------- ------------ ------------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Edward Marteka 50,000 13.9% $6.3125 7/12/08 $511,500 $815,000
</TABLE>
On July 12, 1998, the Company issued options under the Company's
Omnibus Equity Compensation Plan to certain employees and directors to purchase
359,000 shares of the Company's Common Stock at an exercise price of $6.3125 per
share, the closing price of the Common Stock as reported on NASDAQ on the date
the options were granted by the Compensation Committee. The options are
exercisable for ten (10) years from the date of grant.
AGGREGATE OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal
1998 by the executive officer named in the summary compensation table and the
value of such officer's unexercised stock options as of December 31, 1998.
<TABLE>
<CAPTION>
Number of Unexercised Value of In-the-Money
Shares Value Options at 12/31/98 Options at 12/31/98
Acquired on Realized ------------------- -------------------
Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
----------- --- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Marteka $2,000 $13,000 101,000 - 0 - $135,700 $ - 0 -
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors is currently
comprised of the following four (4) Class A Directors: Kamaruddin Taib, Richard
Wong, George Jeff Mennen and Richard Swanson, each of whom were appointed by the
Board of Directors. The Committee oversees administration of the Company's
Omnibus Equity Compensation Plan. The purpose of the Plan is to attract and
retain capable and experienced officers and employees by compensating them with
equity-based awards whose value is connected to the continued growth and
profitability of the Company. Under the Plan, awards may be made in the form of
stock options or restricted stock. In general, the Company compensates executive
officers and senior management through salary, bonus (where appropriate) and the
grant of stock options. During fiscal 1998, all action of the Compensation
Committee was made during the two meetings held in 1998 or was taken by the
Committee by unanimous written consent without a meeting.
30
<PAGE> 33
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Kamaruddin Taib, Richard Wong, and Kwong Ann Lew are executive
directors and officers of WRP Asia. Accordingly, these members should not be
considered as independent Directors when serving on the Board of Directors, the
Compensation Committee, nor the Audit Committee.
STOCK PERFORMANCE CHART
The following graph compares the yearly percentage change in the
cumulative total shareholder return on the Company's Common Stock for each of
the Company's last five fiscal years with the cumulative total return (assuming
reinvestment of dividends) of (i) the NYSE/AMEX/Nasdaq Stock Market - U.S. Index
and (ii) a peer group selected by the Company, in good faith. The peer group
consists of American Shared Hospital Services, Daxor Corp., DVI, Inc., Hemacare
Corp., Medical Sterilization Inc., National Home Health Care Inc., Prime Medical
Services Inc. and Psicor Inc.
[GRAPH]
* $100 invested on December 31, 1993 in stock or Index - including
reinvestment of dividends. Fiscal year ending December 31.
CUMULATIVE TOTAL RETURN
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
WRP Corporation 100 149 34 33 35 52
NYSE/AMEX/Nasdaq
Stock 100 100 136 164 215 266
Peer Group 100 95 159 181 216 169
31
<PAGE> 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 10, 1999, with
respect to the beneficial ownership of the Company's Common Stock and Series A
Common Stock by (i) each shareholder known by the Company to be the beneficial
owner of more than 5% of its Common Stock and Series A Common Stock, (ii) each
director, nominee and certain executive officers, and (iii) all directors and
executive officers, as a group. Unless otherwise indicated, the shareholders
named below have sole voting and investment power with respect to such shares of
Common Stock and Series A Common Stock beneficially owned by them.
<TABLE>
<CAPTION>
Percent of
Amount and Nature of Total Voting
Title of Class Name of Beneficial Owner Beneficial Ownership Stock(4)
- -------------- ------------------------ --------------------- --------
<S> <C> <C> <C> <C>
Series A Common Stock WRP Asia Pacific Sdn. Bhd.(1) 1,252,538 18.1%
Common Stock WRP Asia Pacific Sdn. Bhd.(1) 2,500,000 36.1%
Common Stock White Rock Capital Group(2) 543,000 7.8%
Common Stock Kamaruddin Taib 6,000(3) *
Common Stock Richard Wong 90,000(3) 1.3%
Common Stock Kwong Ann Lew 30,000(3) *
Common Stock Edward J. Marteka 101,000(3)
Common Stock Edward J. Marteka 13,500 114,500 1.7%
-------
Common Stock George Jeff Mennen 9,000(3)
Common Stock George Jeff Mennen 10,000 19,000 *
-------
Common Stock Robert J. Simmons 9,000(3)
Common Stock Robert J. Simmons 5,000 14,000 *
-------
Common Stock Don L. Arnwine 9,000(3)
Common Stock Don L. Arnwine 2,000 11,000 *
-------
Common Stock Richard Swanson 5,000(3)
Common Stock Richard Swanson 1,000 6,000 *
-------
Common Stock Robert C. Carter 27,000(3)
Common Stock Robert C. Carter 3,000 30,000 *
-------
Common Stock Total Executive Officers & Directors 286,000(3)
as a group (9 persons) 34,500 320,500 4.6%
-------
</TABLE>
- ---------------
*Represents less than 1%
(1) WRP Asia Pacific Sdn. Bhd. (formerly known as Wembley Rubber Products (M)
Sdn. Bhd.) ("WRP Asia") is located at 28th Floor, Wisma Denmark, 86, Jalan
Ampang, 50450, Kuala Lumpur, Malaysia.
(2) White Rock Capital Group consists of White Rock Capital Partners L.P., White
Rock Capital Management L.P., White Rock Capital, Inc., Thomas V. Barton, and
Joseph V. Barton. The address of the White Rock Capital Group is 3131 Turtle
Creek Blvd., Suite 800, Dallas, Texas 75219.
(3) Represents shares to be issued upon exercisable options granted under the
Company's Omnibus Equity Compensation Plan.
(4) Percent of class is based upon the combined number of shares of Series A
Common Stock and Common Stock outstanding on March 10, 1999.
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<PAGE> 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, the Company purchased latex powder-free exam gloves
amounting to $18.6 million from its majority shareholder, WRP Asia. In addition,
the Company's Indonesian factory sold approximately $6.4 million of powdered
latex exam gloves to WRP Asia in 1998. The Company believes the prices charged
by each related entity are as favorable as those that could be negotiated with
unaffiliated third parties.
During 1998, the Company received consulting services from Healthcare
Alliance, Inc. ("Alliance"), a company 60% owned by Robert Simmons, a director
of the Company. Alliance was engaged to assist the Company in marketing its
products with the expressed purpose of negotiating and executing a purchase
agreement with various healthcare group purchasing organizations. The Company
paid Alliance $36,000 in 1998 for its services.
See Note 5 of the Notes to Consolidated Financial Statements for
additional information on related party transactions.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements. A list of financial statements for the
Registrant is contained in "Index to Financial Statements of
WRP Corporation" on page F-1.
(a)(3) Exhibits. The following exhibits are included with this report:
EXHIBIT NO. NAME OF EXHIBIT
- ----------- ---------------
3.1 Certificate of Incorporation of the Company, incorporated herein by
reference to Exhibit No. 3.1 to the Company's Form S-1 Registration
Statement (Registration No. 33-36206).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company, incorporated herein by reference to Exhibit No. 3.2 to the
Company's Form S-1 Registration Statement (Registration No. 33-36206).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, incorporated herein by reference to Exhibit 3.3 to the
Company's Form 10-K Annual Report for the fiscal year ended December
31, 1991 (File No. 0- 17458).
3.4 Bylaws of the Company, incorporated herein by reference to Exhibit No.
3.3 to the Company's Form S-18 Registration Statement (Registration
No. 33-23164-FW).
3.5 Amendment to Bylaws of the Company, incorporation herein by reference
to Exhibit 3.5 to the Company's Form 10-K Annual Report for the fiscal
year ended December 31, 1991 (File No. 0-17458).
33
<PAGE> 36
4.1 Common Stock Certificate, incorporated herein by reference to Exhibit
No. 4.1 to the Company's Form S-18 Registration Statement
(Registration No. 33-23164-FW).
4.2 Warrant Agreement with The Liberty National Bank & Trust Company,
incorporated by reference to Exhibit No. 4.2 to the Company's Form S-1
Registration Statement (Registration No. 33-36206).
4.3 Warrant, incorporated by reference to Exhibit No. 4.3 to the Company's
Form S-1 Registration Statement (Registration No. 33-36206).
10.13 Omnibus Equity Compensation Plan approved by the Company's shareholders
on February 27, 1992, incorporated herein by reference to Exhibit No.
10.13 to the Company's Form 10-K Annual Report for the fiscal year
ended December 31, 1991 (File No. 0-17458).
10.37 Debenture and Warrant Purchase Agreement dated October 12, 1994 between
the Company and Wilmington Trust Company and George Jeff Mennen as
Co-Trustees U/A dated 11/25/70 with George S. Mennen for Christina M.
Andrea incorporated herein by reference to Exhibit 10.37 included in
the Company's Form 10K Annual Report for the fiscal year ended December
31, 1994 (File No. 0-17458).
10.38 Debenture and Warrant Purchase Agreement dated October 12, 1994 between
the Company and Wilmington Trust Company and George Jeff Mennen as
Co-Trustees U/A dated 11/25/70 with George S. Mennen for John Henry
Mennen Andrea incorporated herein by reference to Exhibit 10.38
included in the Company's Form 10K Annual Report for the fiscal year
ended December 31, 1994 (File No. 0-17458).
10.41 Stock Acquisition Agreement dated October 31, 1995 between the Company
and MBf Holdings for the Company to exchange 255,072 shares of the
Company's Common Stock for a 70% ownership of PT Buana, an Indonesian
business entity, incorporated herein by reference to Exhibit 10.41
included in the Company's Form 10-K Annual Report for the fiscal year
ended December 31, 1995 (File No. 0-17458).
10.42 Articles of Amendment to Certificate of Incorporation, incorporated
herein by reference to Exhibit 10.42 included in the Company's Form
10-K Annual Report for the fiscal year ended December 31, 1997 (File
No. 0-17458).
10.43 Amended and Restated Omnibus Equity Compensation Plan, incorporated
herein by reference to Exhibit 10.43 included in the Company's Form
10-K Annual Report for the fiscal year ended December 31, 1997 (File
No. 0-17458).
10.44 Loan and Security Agreement dated as of December 1, 1998 between
General Electric Capital Corporation and American Health Products
Corporation (1).
21 Subsidiaries of the Company (1).
34
<PAGE> 37
23.1 Consent of Arthur Andersen LLP (1).
(b) During the last quarter of 1998, the Company did not file any reports
on Form 8-K.
(1) Filed herewith.
35
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
REGISTRANT:
WRP CORPORATION
Date: March 29, 1999 By: /s/ Edward J. Marteka
-------------------------------------
Edward J. Marteka, President
Date: March 29, 1999 By: /s/Kwong Ann Lew
-------------------------------------
Kwong Ann Lew, Chief Financial Officer,
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 29, 1999 By: /s/ Richard Wong
-------------------------------------
Richard Wong, Chief Executive Officer
and Chairman of Board of Directors
Date: March 29, 1999 By: /s/ Kamaruddin Taib
-------------------------------------
Kamaruddin Taib, Director
Date: March 29, 1999 By: /s/ Edward J. Marteka
-------------------------------------
Edward J. Marteka, Director
Date: March 29, 1999 By: /s/ Kwong Ann Lew
-------------------------------------
Kwong Ann Lew, Director
Date: March 29, 1999 By: /s/ George Jeff Mennen
-------------------------------------
George Jeff Mennen, Director
Date: March 29, 1999 By: /s/Richard Swanson
-------------------------------------
Richard Swanson, Director
Date: March 29, 1999 By: /s/ Don L. Arnwine
-------------------------------------
Don L. Arnwine, Director
Date: March 29, 1999 By: /s/ Robert J. Simmons
-------------------------------------
Robert J. Simmons, Director
36
<PAGE> 39
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 40
WRP CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1998, 1997 AND 1996 F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1998, 1997 AND 1996 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
</TABLE>
F-1
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
WRP Corporation:
We have audited the accompanying consolidated balance sheets of WRP CORPORATION
(a Maryland corporation) AND SUBSIDIARIES (formerly MBf USA, Inc. and
Subsidiaries) as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WRP Corporation and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 8, 1999
F-2
<PAGE> 42
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 679,725 $ 161,981
Accounts receivable--trade, net of allowance
for doubtful accounts of $240,000 in 1998
and $195,000 in 1997 5,532,405 5,410,843
Inventories, net 11,860,855 8,203,861
Prepaid expenses 958,318 1,055,788
Due from affiliate 1,340,261 --
Investment in LSAI -- 1,076,496
Deferred tax asset 962,190 219,951
Other receivables 509,003 --
Current assets of discontinued operations -- 44,113
Total current assets 21,842,757 16,173,033
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 736,535
Construction in progress 1,275,667 2,105,263
Equipment, furniture and fixtures 11,357,924 8,780,857
Building improvements 1,689,878 1,488,485
Vehicles 149,958 108,127
Total property, plant and equipment 15,209,962 13,219,267
Less- Accumulated depreciation and amortization (2,733,225) (1,495,868)
Property, plant and equipment, net 12,476,737 11,723,399
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$472,595 in 1998 and $405,363 in 1997 1,277,405 1,344,637
Due from affiliates -- 206,885
Other assets 203,040 83,291
Total other assets 1,480,445 1,634,813
$ 35,799,939 $ 29,531,245
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE> 43
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable--trade $ 2,504,225 $ 2,622,541
Trade notes payable to banks 3,322,882 5,449,181
Notes payable and current portion of long-term obligations 2,086,833 6,711,659
Due to affiliates 3,891,944 342,873
Accrued expenses 3,507,487 2,366,984
Current liabilities of discontinued operations -- 258,407
Total current liabilities 15,313,371 17,751,645
LONG-TERM DEBT 1,668,982 5,647,867
OTHER LONG-TERM OBLIGATIONS:
Deferred tax liability 152,037 67,117
Other liabilities -- 622,045
Total other long-term liabilities 152,037 689,162
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTEREST IN SUBSIDIARY 1,724,113 1,130,051
SHAREHOLDERS' EQUITY:
Series A common stock, $.01 par value; 1,252,538 shares
authorized; 1,252,538 shares issued and outstanding 12,525 12,525
Common stock, $.01 par value; 10,000,000 shares authorized; 5,785,525 and
3,191,667 shares issued and outstanding in 1998 and 1997, respectively 57,855 31,917
Additional paid-in capital 17,862,021 10,876,224
Retained earnings (deficit) 332,071 (5,547,089)
Net unrealized gain on LSAI common stock -- 261,979
Less- Common stock in treasury, at cost, 130,000 shares in 1998 and 1997 (1,323,036) (1,323,036)
Total shareholders' equity 16,941,436 4,312,520
$ 35,799,939 $ 29,531,245
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<PAGE> 44
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET SALES $ 64,968,401 $ 51,402,691 $ 45,811,462
COST OF GOODS SOLD 46,857,229 40,760,146 38,358,756
GROSS PROFIT 18,111,172 10,642,545 7,452,706
OPERATING EXPENSES:
Selling, general and administrative 9,954,785 8,226,945 6,684,467
INCOME FROM OPERATIONS 8,156,387 2,415,600 768,239
INTEREST EXPENSE 1,192,405 1,481,467 1,117,700
OTHER INCOME 461,386 293,362 122,696
Income (loss) from continuing operations
before provision for (benefit from)
income taxes, minority interest and loss
from discontinued operations 7,425,368 1,227,495 (226,765)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 952,146 (322,042) (56,889)
Income (loss) from continuing operations before
minority interest and loss from discontinued
operations 6,473,222 1,549,537 (169,876)
MINORITY INTEREST IN INCOME OF SUBSIDIARY (594,062) (300,145) (77,732)
Income (loss) from continuing operations before loss
from discontinued operations 5,879,160 1,249,392 (247,608)
NET LOSS FROM DISCONTINUED OPERATIONS:
Operations -- -- (840,792)
Disposal -- (783,670) (76,187)
Net income (loss) $ 5,879,160 $ 465,722 $ (1,164,587)
BASIC NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ 0.94 $ 0.29 $ (0.07)
Discontinued operations -- (0.18) (0.25)
$ 0.94 $ 0.11 $ (0.32)
DILUTED NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ 0.93 $ 0.29 $ (0.07)
Discontinued operations -- (0.18) (0.25)
$ 0.93 $ 0.11 $ (0.32)
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements
F-5
<PAGE> 45
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Series A Additional Retained
Common Stock Common Stock Paid-In Earnings
Shares Amount Shares Amount Capital (Deficit)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 1,252,538 $ 12,525 1,730,795 $17,308 $ 7,487,944 $(4,848,224)
Issuance of common stock to MBf
International for $1,402,528 -- -- 488,973 4,889 1,397,639 --
Issuance of common stock to PIE
Healthcare for $1,000,000 -- -- 296,296 2,963 997,037 --
Issuance of common stock to MBf
International for $1,000,000 -- -- 672,269 6,723 993,277 --
Net loss -- -- -- -- -- (1,164,587)
Foreign currency translation adjustments -- -- -- -- -- --
BALANCE, December 31, 1996 1,252,538 $ 12,525 3,188,333 31,883 10,875,897 (6,012,811)
Issuance of common stock upon exercise
of stock options -- -- 3,334 34 9,135 --
Net income -- -- -- -- -- 465,722
Foreign currency translation adjustment -- -- -- -- -- --
Indonesian paid-in capital adjustment -- -- -- -- (8,808) --
Unrealized gain on LSAI common stock -- -- -- -- -- --
BALANCE, December 31, 1997 1,252,538 12,525 3,191,667 31,917 10,876,224 (5,547,089)
Issuance of common stock to WRP Asia
Pacific Sdn. Bhd. (see Note 2) -- -- 2,500,000 25,000 6,725,000 --
Issuance of common stock upon exercise
of stock options -- -- 93,858 938 260,797 --
Net income -- -- -- -- -- 5,879,160
Unrealized gain on LSAI common stock -- -- -- -- -- --
BALANCE, December 31, 1998 1,252,538 12,525 5,785,525 $57,855 $17,862,021 $ 332,071
<CAPTION>
Cumulative Unrelated
Foreign Gain on
Currency LSAI
Translation Common Treasury Shareholders' Comprehensive
Adjustment Stock Stock Equity Income(Loss)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 $ (26,856) $ -- $ (1,323,036) $ 1,319,661
Issuance of common stock to MBf
International for $1,402,528 -- -- -- 1,402,528
Issuance of common stock to PIE
Healthcare for $1,000,000 -- -- -- 1,000,000
Issuance of common stock to MBf
International for $1,000,000 -- -- -- 1,000,000
Net loss -- -- -- (1,164,587) $ (1,164,587)
Foreign currency translation adjustments (26,178) -- -- (26,178) (26,178)
BALANCE, December 31, 1996 (53,034) -- (1,323,036) 3,531,424 $ (1,190,765)
Issuance of common stock upon exercise
of stock options -- -- -- 9,169
Net income -- -- -- 465,722 $ 465,722
Foreign currency translation adjustment 53,034 -- -- 53,034 53,034
Indonesian paid-in capital adjustment -- -- -- (8,808)
Unrealized gain on LSAI common stock -- 261,979 -- 261,979 261,979
BALANCE, December 31, 1997 -- 261,979 (1,323,036) 4,312,520 $ 780,735
Issuance of common stock to WRP Asia
Pacific Sdn. Bhd. (see Note 2) -- -- -- 6,759,000
Issuance of common stock upon exercise
of stock options -- -- -- 261,735
Net income -- -- -- 5,879,160 $ 5,879,160
Unrealized gain on LSAI common stock -- (261,979) -- (261,979) (261,979)
BALANCE, December 31, 1998 $ -- $ -- $ (1,323,036) $ 16,941,436 $ 5,617,181
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements
F-6
<PAGE> 46
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,879,160 $ 465,722 $(1,164,587)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operaing activities-
Depreciation 1,247,111 898,831 532,148
Amortization 67,232 41,058 57,778
Deferred income taxes (657,319) (133,169) 200,286
Change in net assets of condom discontinued operations (214,294) (340,021) (518,099)
Loss from discontinued operations -- -- 840,792
Loss from disposal of discontinued operations -- 783,670 76,187
Loss on disposal of property, plant and equipment 2,913 15,606 8,883
Gain on sales of LSAI common stock (168,375) (79,483) (998)
Changes in operating assets and liabilities-
Accounts receivable - trade, net (121,562) (733,353) (559,129)
Inventories, net (3,656,994) (109,212) 1,937,014
Prepaid expenses 97,470 (56,084) (551,594)
Other assets (628,752) 52,860 (69,636)
Accounts payable - trade (118,316) (668,965) (3,845,331)
Accrued expenses 1,140,503 1,147,070 432,090
Amounts due to and from affiliates 2,415,695 303,840 1,285,070
Net cash provided by (used in) operating activities 5,284,472 1,588,370 (1,339,126)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,005,123) (3,063,735) (4,675,556)
Proceeds on sales of LSAI common stock 982,892 280,083 45,248
Proceeds on sales of property, plant and equipment 1,761 7,747 --
Minority interest in subsidiary 594,062 900,070 76,616
Net cash used in investing activities (426,408) (1,875,835) (4,553,692)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on trade notes payable to banks (2,126,299) (1,561,272) 4,709,818
Net (payments) borrowings on notes payable (8,603,711) 1,346,480 (1,478,620)
Net proceeds from stock option exercises 261,735 9,168 --
Proceeds from issuance of stock 6,750,000 -- 3,402,528
Net (payments to) advances from Indonesian minority interest shareholders (622,045) 280,998 --
Payments on debt to affiliate -- -- (1,100,000)
Net cash (used in) provided by financing activities (4,340,320) 75,374 5,533,726
IMPACT OF EXCHANGE RATES ON CASH -- 53,034 (26,179)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 517,744 (159,057) (385,271)
CASH AND CASH EQUIVALENTS, beginning of year 161,981 321,038 706,309
CASH AND CASH EQUIVALENTS, end of year $ 679,725 $ 161,981 $ 321,038
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE> 47
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
WRP Corporation and Subsidiaries (the "Company" and formerly known as MBf
USA, Inc. and Subsidiaries) is a manufacturer and distributor of high
quality, disposable medical examination gloves and markets examination
gloves in the United States through its wholly owned subsidiary, American
Health Products Corporation ("AHPC"). The Company sells its gloves
primarily to the medical, dental, food service and retail markets.
The Company's factory in Indonesia, which manufactures medical examination
gloves, began production in April, 1996, and began shipping product in
May, 1996.
In November, 1996, the Company adopted a plan to discontinue its condom
operations and has reflected it as such in the accompanying consolidated
financial statements. The Company continued to distribute condoms through
June 30, 1997 (Note 4).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, AHPC and its 70% owned Indonesian glove manufacturing
subsidiary, PT WRP Buana Multicorpora ("PT Buana"). All significant
intercompany transactions have been eliminated.
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.
CASH AND CASH EQUIVALENTS
The Company considers cash in banks and highly liquid debt instruments
with a maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are accounted for on a first-in, first-out (FIFO) basis and
are valued at the lower of actual cost or market. Inventories consist of
the following at December 31, 1998 and 1997:
F-8
<PAGE> 48
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $ 79,213 $ 27,723
Work in process 120,700 79,348
Finished goods 12,430,942 8,446,790
Reserves (770,000) (350,000)
Total $ 11,860,855 $ 8,203,861
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided by both the straight-line and accelerated
methods over lives ranging from 3 to 20 years. Building improvements are
amortized on a straight-line basis over their estimated useful lives or
lease terms, whichever is shorter. Accumulated construction in progress
costs are reclassified to the appropriate property, plant, and equipment
account when completed. The useful lives of property, plant and equipment
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
USEFUL LIVES
<S> <C>
Land rights and land improvements 20 years
Equipment, furniture and fixtures 3-15 years
Building improvements 5-20 years
Vehicles 5 years
</TABLE>
GOODWILL
The excess purchase price over the value of the net assets of AHPC
acquired in February, 1992, was recorded as goodwill in the accompanying
consolidated balance sheets and is being amortized using the straight-line
method over 40 years.
On an ongoing basis, the Company reviews goodwill and other long-lived
assets for impairment whenever events or circumstances indicate that
carrying amounts may not be recoverable. To date, no such events or
changes in circumstances have occurred. If such events or changes in
circumstances occur, the Company will recognize an impairment loss if the
undiscounted future cash flows expected to be generated by the asset (or
acquired business) are less than the carrying value of the related asset.
The impairment loss would adjust the asset to its fair value.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped from the Company's warehouse, or upon the customer's receipt of
the goods, depending upon the terms of the sale. Product sales are stated
net of rebates, sales returns, and sales discounts and allowances, if
applicable.
INCOME TAXES
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 utilizes the
F-9
<PAGE> 49
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.
NET INCOME (LOSS) PER COMMON 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 common 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 any dilutive stock options and warrants.
The weighted-average number of common shares and common share equivalents
outstanding for each year are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Basic weighted-average number of common shares
outstanding 6,265,312 4,312,132 3,661,052
Dilutive effect of common share equivalents 68,198 49,077 --
Diluted weighted-average number of common shares
outstanding 6,333,510 4,361,209 3,661,052
</TABLE>
The Company had additional stock options and warrants of 492,324, 229,324
and 291,824 at December 31, 1998, 1997 and 1996, respectively, which were
not included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common
shares.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:
a. CURRENT ASSETS AND CURRENT LIABILITIES--The carrying amount
approximates fair value due to the short maturity of these items;
b. LONG-TERM OBLIGATIONS--The fair value of the Company's long-term debt
is based on secondary market indicators. Since the Company's debt is
not quoted, estimates are based on each obligation's characteristics,
including maturities, interest rate, credit rating,
F-10
<PAGE> 50
collateral, amortization schedule and liquidity. The carrying amount
approximates fair value; and
c. AMOUNTS DUE TO/DUE FROM AFFILIATES--Amounts due to/due from affiliates
are non-interest-bearing and do not specify maturity dates and,
therefore, it is not practicable to estimate the fair value of these
financial instruments.
RECLASSIFICATIONS
The Company has revised the format of the consolidated statements of
operations which now includes the presentation of the Company's gross
profit. In addition, during 1998, the Company began recording rebate
expense as a reduction to sales. Prior to 1998, the Company had been
reflecting rebates as a selling expense. The consolidated statements of
operations for 1997 and 1996 have been restated to conform with the 1998
presentation.
FOREIGN CURRENCY TRANSLATION
PT Buana's financial statements have been prepared from the records
maintained in the Republic of Indonesia, the country in which PT Buana was
established and operates. On July 1, 1997, the Company changed its
functional currency from the Indonesia 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. In accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation" ("SFAS 52"), the Company
recorded a gain of $277,035 during 1997 as a result of remeasuring the
foreign currency of record (rupiah) into the functional currency (U.S.
dollar).
Gains and losses from foreign currency transactions are included in net
income (loss) in the period in which they occur. For the years ended
December 31, 1998, 1997 and 1996, the foreign exchange gain (loss)
included in the determination of net income (loss) is $(30,292), $205,457
and $(69,294), respectively.
The Company does not use any derivative or financial instruments to manage
its foreign exchange exposures. The Company is subject to foreign currency
fluctuation risk in the regular course of business on sales, raw materials
and fixed asset purchase transactions denominated in a foreign currency.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123) related to options and warrants issued to
employees and directors.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which
F-11
<PAGE> 51
establishes standards for the reporting of comprehensive income. This
pronouncement requires that all items recognized under accounting
standards as components of comprehensive income, as defined in the
pronouncement, be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company has adopted
SFAS No. 130 at December 31, 1998, and has restated the consolidated
statements of shareholders' equity for all periods presented to reflect
comprehensive income (loss).
2. MAJORITY SHAREHOLDER TRANSACTION
On March 31, 1998, WRP Asia entered into 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 for a total of
$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. The
purchase price of $2.70 per share reflected a 12% discount from the
average stock price over a seven consecutive business day range ended
May 9, 1997, as detailed by a fairness opinion received from an
independent valuation firm.
On March 31, 1998, the Company received $6,750,000 from WRP Asia for the
sale of the 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 December 31, 1998, WRP Asia has a 54.3%
ownership interest in the Company.
At December 31, 1998, MBf International owned 1,682,275 shares of the
Company's common stock which represents 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
provides 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 provides 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 owns one of the largest glove manufacturing plants in Malaysia
and principally manufactures high quality powder-free latex exam gloves.
AHPC has been purchasing its powder-free latex exam gloves from WRP Asia
for several years. During 1998, 1997 and 1996, total purchases of gloves
from WRP Asia were $18,629,717, $11,150,721 and $9,056,083, respectively.
F-12
<PAGE> 52
3. COMMON STOCK
The terms of the Series A common stock 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, the majority shareholder of
the Company, to elect all Class A directors, which represent a
majority of the Company's Board of Directors and to vote with the
holders of common stock as a single class with respect to any matters
subject to a vote of the shareholders.
On December 5, 1996, the shareholders approved an increase in the
authorized common stock from 4,000,000 to 10,000,000 shares.
4. CORPORATE DEVELOPMENT
DISTRIBUTION AGREEMENT
Effective July 12, 1995, the Company entered into a five-year distributor
agreement with PIE Healthcare Products Sdn. Bhd. ("PIE") that requires the
Company to purchase a certain quantity of gloves from PIE each year. The
Company's net sales include glove products that are purchased under the
terms of this agreement.
DISCONTINUED OPERATIONS
In November, 1996, the Company reached a settlement with Playboy
Enterprises, Inc. to terminate their license agreement under which the
Company distributed Playboy(R) brand condoms in 15 countries. Under the
negotiated agreement, until June 30, 1997, the Company continued to sell
Playboy(R) condoms in the countries where it had launched the product.
In accordance with the termination agreement with Playboy Enterprises,
Inc., the Company's Playboy(R) condom operations ceased June 30, 1997. As
such, the Company has accounted for the Playboy(R) condom business as a
discontinued operation effective December 31, 1996. At December 31, 1998,
there were no assets or liabilities recorded which were associated with
the condom discontinued operations.
The accompanying financial statements include the assets and liabilities
of the discontinued condom operations which is detailed below.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets-
Current assets-
Prepaid expenses $-- $ 11,752
Accounts receivable--trade, net -- 32,361
Total assets $-- $ 44,113
Liabilities-
Current liabilities-
Accounts payable $-- $ 73,273
Accrued returns -- 185,134
Total liabilities $-- $258,407
</TABLE>
F-13
<PAGE> 53
Revenues from the Company's discontinued condom business were $0, $376,422
and $1,380,435 for the years ended December 31, 1998, 1997 and 1996,
respectively.
During 1997, the Company changed its estimate of costs to dispose of its
condom operations. This change resulted in the Company recording
additional costs of $783,670 equal to $0.18 basic and diluted loss per
common share for the year ended December 31, 1997.
INVESTMENT IN LSAI
During 1998, the Company liquidated its investment in Laboratory
Specialists of America, Inc. ("LSAI"). The Company sold all of its
remaining shares of LSAI and discounted its notes receivable from LSAI
which resulted in a total gain on sales of the investments in LSAI of
$168,375 in 1998. During 1997, the Company sold 68,000 shares of LSAI
which resulted in a gain of $79,483.
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), which requires that equity securities that have readily
determinable fair values shall be classified as "available-for-sale" if
not held for the objective of generating profits on short-term differences
in price. Accordingly, the Company's common stock investment in LSAI was
classified and treated as available for sale.
SFAS No. 115 further requires that unrealized holding gains and losses
related to available-for-sale securities shall be excluded from earnings
and reported as a net amount in a separate component of shareholders'
equity until realized. At December 31, 1997, the LSAI common stock had a
market value of $723,373, which was $261,979 over its cost basis of
$461,394. This unrealized gain of $261,979 is recorded as a separate
component of shareholders' equity at December 31, 1997.
INVESTMENT IN PT BUANA
During June, 1997, the Company and the minority shareholders of PT Buana
approved an increase in the paid in capital of PT Buana from $500,000 to
$2,500,000. To achieve this objective, PT Buana converted debt which was
owed to the Company and minority shareholders of $737,769 and $316,187,
respectively, to equity. Also, the Company and minority shareholders
contributed cash to PT Buana in their proportionate share to bring the
paid in capital of PT Buana to $2,500,000.
F-14
<PAGE> 54
5. RELATED-PARTY TRANSACTIONS
At December 31, 1998 and 1997, amounts due from/to affiliates consist of
the following:
1998 1997
Due from affiliates-
Current-
WRP Asia $ 1,340,261 $ --
Long-term-
MBf International, Ltd. and its
affiliates -- 206,885
Due to affiliates- all current
WRP Asia $(3,891,944) $ --
MBf International, Ltd. and its
affiliates -- (342,873)
The amount due from WRP Asia primarily represents trade receivables from
WRP Asia for the sale of inventories from PT Buana to WRP Asia. The
liability to WRP Asia represents amounts owed to WRP Asia for inventory
purchases by AHPC of latex powder-free exam gloves that are manufactured
by WRP Asia. AHPC purchased virtually all of its latex powder-free exam
gloves from WRP Asia in 1998. These transactions are made at prevailing
market rates.
The amounts due from MBf International represent costs associated with the
acquisition of AHPC in February, 1992. As the timing of repayment of the
due from affiliate amounts was uncertain, the receivables from affiliates
were classified as long-term as of December 31, 1997.
Amounts due to MBf International, Ltd. and its affiliates represent: a.)
liabilities owed for condom inventory purchases ($55,297), b.) the cost of
packaging materials and printing costs incurred for the condom and glove
businesses ($58,019), c.) amounts due for services received under a
management contract for which the Company was charged $0, $10,682 and
$3,977 in 1998, 1997 and 1996, respectively, and d.) amounts due for the
cost of insuring inventories in transit. Amounts paid for this coverage
were $0, $35,516 and $45,056 in 1998, 1997 and 1996, respectively.
In January, 1997, the Company entered into a consulting and services
agreement with Healthcare Alliance, Inc. ("Alliance"), a company 60% owned
by a director of the Company. The agreement engaged Alliance to assist the
Company in marketing its products with the expressed purpose of
negotiating and executing a purchase agreement with various healthcare
group purchasing organizations. The Company paid Alliance $36,000 and
$48,000 in 1998 and 1997, respectively, for its services.
6. TRADE NOTES PAYABLE TO BANKS
Trade notes payable to banks consist of amounts financed through
letter-of-credit arrangements which totaled $3,322,882 and $5,449,181 at
December 31, 1998 and 1997, respectively. At December 31, 1998, these bank
obligations are secured by the inventory and accounts receivable of AHPC.
F-15
<PAGE> 55
At December 31, 1997, AHPC had letter-of-credit facilities with two banks.
One of these banks, MBf Bank of Tonga ("MBf Bank"), was an affiliated
entity and a subsidiary of MBf Holdings, the parent company of MBf
International. The MBf Bank letter-of-credit facility was for T$ $5.75
million or approximately U.S. $4.6 million and was unsecured and
guaranteed by MBf Holdings. During 1998, the MBf Bank facility was
cancelled and all obligations to MBf Bank were repaid. The
letter-of-credit liabilities due to MBf Bank totaled $0 and $2,361,634 at
December 31, 1998 and 1997, respectively.
As of December 31, 1998 and 1997, the Company was contingently liable for
outstanding letters of credit totaling $788,437 and $2,182,726, respectively.
7. NOTES PAYABLE
Notes payable and long-term debt as of December 31, 1998 and 1997, consist
of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Borrowings under a bank revolving line-of-credit agreement with available
borrowings up to $10,000,000 at December 31, 1998, and $2,500,000 at
December 31, 1997, bearing interest at the commercial paper rate plus 2.75%
(8.05% at December 31, 1998) and at the prime rate plus 3.0% (11.50% at
December 31, 1997), secured by inventories and accounts receivable $ 1,100,000 $ 2,450,000
Subordinated debentures convertible into warrants to purchase 80,000 shares of
common stock at $25.00 per share, interest payable quarterly at prime plus
1.5% (9.25% at December 31, 1998), due November, 2001 2,000,000 2,000,000
PT Buana syndicated term loan, bearing interest at the Indonesian prime rate
(approximately 13.4% at December 31, 1997) secured by land, machinery and
equipment, accounts receivable and the common stock equity of PT Buana,
guaranteed by MBf Holdings and the minority shareholders of PT Buana,
payable in six semiannual installments, due November, 2000 -- 5,075,000
PT Buana short-term bank loan, bearing interest from 11% to 15%, due November,
1997, plus penalty interest of 2% per month subsequent to due date, secured
by a corporate guarantee of the Company -- 2,000,000
Insurance premium financing loans, bearing interest at 6.95% at December 31,
1998, payable in monthly installments through August, 2000 640,294 808,962
Other 15,521 25,564
3,755,815 12,359,526
Less- Current portion (2,086,833) (6,711,659)
Long-term debt $ 1,668,982 $ 5,647,867
</TABLE>
F-16
<PAGE> 56
The bank revolving line-of-credit agreement noted above contain covenants
which require, among other things, maintenance of financial ratios and
limitations on borrowings, investments and capital expenditures. As of
December 31, 1998, the Company was either in compliance with or has
obtained a waiver for its covenants.
On December 1, 1998, AHPC entered into a new $10,000,000 two-year bank
credit agreement through December 1, 2000. The new credit facility
includes a $10,000,000 revolving line of credit with a $7,000,000 letter
of credit sub-facility. The new facility carries an interest rate of
commercial paper plus 2.75% (8.05% at December 31, 1998). The new bank
facility was used to repay all obligations under the previous bank
facility.
During 1998, the Company retired all debt obligations of PT Buana. The PT
Buana debt consisted of a syndicated loan facility with three Indonesian
banks amounting to a total credit facility of $6.5 million. At December
31, 1997, $5,075,000 was outstanding on this debt, which was used for the
purchase of assets, construction and the start-up operation of the
Indonesian factory. During September, 1998, this loan facility was paid in
full and no liability existed at December 31, 1998.
PT Buana obtained a six-month bridging loan from an Indonesian bank in the
amount of $2.0 million in April, 1997. PT Buana was unable to repay the
loan when due in November, 1997, and a penalty interest rate of an
additional 2% per month was instituted. During April, 1998, this loan was
paid in full and no liability exists at December 31, 1998.
The principal portion of long-term debt becomes due as follows:
<TABLE>
<CAPTION>
Fiscal year ending-
<S> <C>
2000 $ 268,982
2001 1,400,000
$1,668,982
</TABLE>
OTHER LIABILITIES
During 1997, PT Buana borrowed $280,998 from its minority shareholders to
make payments on its syndicated term loan. At December 31, 1998 and 1997,
PT Buana owes $0 and $622,045, respectively, to its minority shareholders.
These shareholder loans were interest bearing at 13.5% and classified as
long-term liabilities since a formal repayment plan had not been
scheduled. During 1998, PT Buana paid all amounts owned to its minority
shareholders.
F-17
<PAGE> 57
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
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 December 31, 1998,
there were 19 lawsuits filed against AHPC. During November, 1997, AHPC
fully settled thirteen claims for a nominal sum. The said claimants
alleged adverse reactions to latex glove products allegedly distributed by
AHPC. AHPC carries product liability insurance. Management believes all
legal claims are adequately provided for, and if not provided for, are
without merit, or involve such amounts that would not materially adversely
affect the Company's results of operations or financial condition.
SIGNIFICANT CUSTOMERS
During 1998, two diversified distribution companies, Owens & Minor, Inc.
and Sysco Co., accounted for 36.3% and 35.0% of net sales,respectively.
These customers together accounted for 62.0% of accounts receivable at
December 31, 1998. During 1997, these two customers accounted for 37.6%
and 31.0% of net sales, respectively. These customers together accounted
for 66.8% of accounts receivable at December 31, 1997. During 1996, these
two customers accounted for 34.1% and 29.2% of net sales, respectively.
These customers together accounted for 63.3% of accounts receivable at
December 31, 1996.
These two distribution companies distribute the Company's products to
numerous medical and food service facilities throughout the U.S. 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.
OPERATING LEASES
The Company conducts all of its operations in leased facilities. Total
rent expense, net of rental income, included in the accompanying
statements of income for 1998, 1997 and 1996 was $291,685, $296,358, and
$348,227, respectively. The following summary presents future minimum
rental payments required under the terms of present operating leases:
<TABLE>
<CAPTION>
Fiscal year-
<S> <C>
1999 $344,917
2000 87,045
2001 16,526
2002 671
$449,159
</TABLE>
The Company subleases office space in New Jersey and Florida. Under these
sublease agreements, the Company will receive rental income in an amount
equal to the Company's rental expense. The Company's lease and sublease
agreements for the New Jersey and Florida office space expire in November,
1999, and June, 1999, respectively. The future rental income under the two
sublease agreements is $134,637 for 1999.
CAPITAL COMMITMENTS
PT Buana currently only manufactures latex powdered exam gloves but has
plans to begin producing latex powder-free exam gloves during 1999. As of
December 31, 1998, PT Buana
F-18
<PAGE> 58
has capital commitments of approximately $1 million for the purchase of
chlorination machinery and equipment used for the production of
powder-free gloves.
9. SHAREHOLDERS' EQUITY
On June 17, 1996, the Company issued (a) 488,953 shares of common stock to
MBf International, Ltd. for cash consideration of Malaysian ringgit
3,500,000 which approximated U.S.$1.4 million; and (b) 296,296 shares of
common stock in satisfaction of trade payables of $1,000,000 due to PIE
Healthcare.
On August 20, 1996, the Company issued an additional 672,269 shares of
common stock to MBf International Ltd. for cash consideration of U.S.$1
million.
In November, 1994, warrants were issued to purchase 7,500 shares of the
Company's common stock at an exercise price of $22.20. These warrants are
exercisable through November, 1999.
In 1994, warrants to purchase 185,000 shares of the Company's common stock
were issued at an exercise price of $15.00. During 1997 and 1995, 50,000
and 10,000, respectively, of these warrants, convertible into shares of
common stock, expired. The remaining 125,000 warrants are currently
exercisable at December 31, 1998, and expire in March, 1999.
A summary of warrant activity since December 31, 1995, is as follows:
<TABLE>
<CAPTION>
$15.00 $22.20
WARRANTS WARRANTS
<S> <C> <C>
Balance, December 31, 1995 and 1996 175,000 7,500
Expirations (50,000) --
Balance, December 31, 1998 and 1997 125,000 7,500
</TABLE>
At December 31, 1998, the Company had outstanding debt which is
convertible at any time at the noteholder's option (see Note 7) into
warrants to purchase 80,000 shares of common stock at $25.00 per share.
These convertible debentures expire in November, 2001.
10. STOCK OPTION PLAN
On June 12, 1998, the Board of Directors approved an amendment and
restatement of the Company's Omnibus Equity Compensation Plan (the
"Plan"), which authorized and adjusted the number of shares issuable from
400,000 to 1,400,000. Effective on July 23, 1996, the Board of Directors
approved the repricing of all current director and employee options to
$2.75, the closing market price on that date. A summary of options
outstanding under the Plan is as follows:
F-19
<PAGE> 59
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE
OPTIONS PRICE EXPIRATION
<S> <C> <C> <C>
Balance, December 31, 1995 149,949 $2.63-$25.00
Grants 35,000 2.75 2006
Rescissions/expirations (3,500) 13.40-22.80 2003-2005
Repricing of options 127,624 2.75 2003-2005
Rescission of repriced options (127,624) 7.80-25.00 2003-2005
Balance, December 31, 1996 181,449 2.63-14.40
Grants 92,500 3.66 2007
Rescissions/expirations (24,833) 2.75-3.66 2004-2007
Exercises (3,334) 2.75 2006
Balance, December 31, 1997 245,782 2.63-14.40
Grants 369,000 5.1875-6.3125 2008
Rescissions/expirations (16,500) 2.75-3.66 2005-2008
Exercises (93,858) 2.75-3.66 2006
Balance, December 31, 1998 504,424 $2.63-$14.40
</TABLE>
The exercise price of the stock options granted in 1998, 1997 and 1996 was
established at the market price on the date of the grants. Of the 504,424
options outstanding at December 31, 1998, 372,607 are currently
exercisable, 74,317 become exercisable in 1999, and 57,500 become
exercisable in 2000. The Company has reserved common stock for issuance
upon conversion of these options.
The Company accounts for employee stock options under APB Opinion 25, as
permitted under generally accepted accounting principles. Accordingly, no
compensation cost has been recognized in the accompanying financial
statements related to these options. Had compensation costs for these
options been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
which is an accounting alternative that is permitted but not required, the
Company's net income (loss) and net income (loss) per share (diluted)
would have been $4,560,341, $397,292 and $(1,409,603) and $.72, $.09 and
$(.39) for 1998, 1997 and 1996, respectively.
The pro forma disclosure is not likely to be indicative of pro forma
results which may be expected in future years. This primarily relates to
the fact that options vest over several years and pro forma compensation
cost is recognized as the options vest. Furthermore, the compensation cost
is dependent on the number of options granted which may vary in future
periods.
The fair value of each option is estimated on the date of grant based on
the Black-Scholes option pricing model assuming, among other things, a
risk-free interest rate of 5.25%, 6.12% and 7.50% for 1998, 1997 and 1996,
respectively; no dividend yield; expected volatility of 96%, 90% and 78%
in 1998, 1997 and 1996, respectively, and an expected life of four years
in 1998
F-2o
<PAGE> 60
and three years in 1997 and 1996. The options granted to employees in
1998, 1997 and 1996 vest between immediately and three years.
Options outstanding at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT REMAINING EXERCISE AT EXERCISE
PRICES DEC.31,1998 LIFE PRICE DEC.31,1998 PRICE
<S> <C> <C> <C> <C> <C>
$2.63-$3.66 127,100 5-8 years $ 3.20 110,281 $ 3.12
$5.19-$6.31 370,500 .5 - 10 years $ 6.29 255,502 $ 6.28
$14.40 6,824 .5 years $14.40 6,824 $14.40
$2.63-$14.40 504,424 .5-10 years $ 5.62 372,607 $ 5.49
</TABLE>
11. INCOME TAXES
The components of the Company's income tax provision (benefit) from
continuing operations consisted of:
<TABLE>
<CAPTION>
1998 1997 1996
Current-
<S> <C> <C> <C>
Federal $1,446,909 $ (25,006) $(178,256)
State 162,556 (2,809) (20,026)
Foreign - - -
Total current 1,609,465 (27,815) (198,282)
Deferred-
Federal (640,720) - -
State (90,696) - -
Foreign 74,097 (294,227) 141,393
Total deferred (657,319) (294,227) 141,393
Total income tax provision (benefit)
$ 952,146 $(322,042) $ (56,889)
</TABLE>
F-21
<PAGE> 61
Following is a reconciliation of income tax expense (benefit) at the
United States statutory tax rate to income tax expense (benefit) as
reported for financial statement purposes:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate of 34% $ 2,322,644 $ 48,851 $ (104,000)
State income taxes, net of federal income tax provision
257,811 -- --
Foreign tax rate difference (422,385) (322,042) (198,282)
Increase (decrease) in deferred tax asset valuation
allowance (412,646) 6,702 211,411
Utilization of loss carryforwards (836,538) (82,890) --
Goodwill amortization and other 43,260 27,337 33,982
----------- ----------- -----------
Total income tax provision (benefit) $ 952,146 $ (322,042) $ (56,889)
=========== =========== ===========
</TABLE>
The Company has net operating loss carryforwards at December 31, 1998, of
approximately $2.7 million which are available to reduce federal taxable
income in future periods and will begin expiring in 2004. In accordance
with federal tax regulations, usage of the net operating loss
carryforwards are subject to limitations in future years as a direct
result of certain ownership changes that have occurred. Because of these
factors, the utilization of the net operating loss at December 31, 1998,
is limited.
The Company's subsidiary in Indonesia has generated tax losses in current
and prior years. As a result, the Company does not have any current
foreign taxes payable as of December 31, 1998 and 1997.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current-
Accruals not deductible until paid $ 350,589 $ 411,000
Net operating loss carryforwards 1,041,921 1,650,000
Net operating loss carryforwards--PT Buana 216,520 220,000
Inventory 301,961 133,000
Allowance for doubtful accounts 93,120 81,000
Valuation allowance (1,041,921) (2,275,049)
----------- -----------
Total net current deferred tax assets $ 962,190 $ 219,951
=========== ===========
Noncurrent-
Difference between book and tax basis of property, plant
and equipment $ (14,254) $ (96,864)
Other noncurrent assets--PT Buana (137,783) 29,747
----------- -----------
Total noncurrent deferred tax
liabilities $ (152,037) $ (67,117)
=========== ===========
</TABLE>
F-22
<PAGE> 62
The Company establishes valuation allowances in accordance with the
provisions of SFAS 109. The Company continually reviews the adequacy of
the valuation allowance and is recognizing these benefits only as
reassessment indicates that it is more likely than not that the benefits
will be realized.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest on debt outstanding for the years ended December
31, 1998, 1997 and 1996 was $1,286,619, $1,488,211, and $1,493,782,
respectively.
Cash paid for income taxes during the year ended December 31, 1998 was
$1,270,000. There were no income taxes paid during 1997 or 1996.
During June, 1997, PT Buana converted debt obligations, owed to its
minority shareholders, to equity in the amount of $316,187.
At December 31, 1997, the Company recorded an unrealized gain in
shareholders' equity on the market value of the common stock in LSAI
exceeding its cost in the amount of $261,979.
The following represents significant related-party operating transactions
during the years ended December 31, 1998, 1997 and 1996, which are
included in the consolidated statements of cash flows as amounts due to
affiliates under the cash flows from operating activities.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Operating cash transactions-
Purchases from affiliates $ 18,629,717 $ 240,654 $ 2,938,793
Sales to affiliates (6,421,590) -- --
Cash payments (16,501,784) (796,317) (1,653,723)
Cash receipts 6,709,352 859,503 --
Amounts due to affiliates $ 2,415,695 $ 303,840 $ 1,285,070
</TABLE>
13. ASIAN ECONOMIC EVENTS
The Asian Pacific region is currently experiencing an economic situation
that has been characterized by reduced activity, illiquidity in certain
sectors, volatile foreign currency exchange, interest rates, and stock
markets. The Company will likely be affected by the region's unstable
economy and it is not possible to determine the effect a continuation of
the economic crisis may have. The ultimate outcome of this matter cannot
presently be determined. The financial statements do not include any
adjustment that might result from these uncertainties. Related effects
will be reported in the financial statements as they become known and
estimable.
14. VALUATION AND QUALIFYING ACCOUNTS
The following tables summarize the activity of the allowance for doubtful
accounts and the reserve for excess and obsolete inventory during 1998,
1997 and 1996:
F-23
<PAGE> 63
<TABLE>
<CAPTION>
NET
BALANCE AT CHARGES TO BALANCE
BEGINNING OPERATING AT END
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF YEAR EXPENSES OF YEAR
<S> <C> <C> <C>
Allowance for doubtful accounts activity for the
year ended December 31, 1996 $ 56,100 $ 16,900 $ 73,000
Allowance for doubtful accounts activity for the
year ended December 31, 1997 73,000 122,000 195,000
Allowance for doubtful accounts activity for the
year ended December 31, 1998 195,000 45,000 240,000
</TABLE>
<TABLE>
<CAPTION>
NET
BALANCE AT CHARGES TO BALANCE
RESERVE FOR EXCESS AND BEGINNING OPERATING AT END
OBSOLETE INVENTORY OF YEAR EXPENSES OF YEAR
<S> <C> <C> <C>
Reserve for excess and obsolete inventory
activity for the year ended December 31, 1996 $ -- $ -- $ --
Reserve for excess and obsolete inventory
activity for the year ended December 31, 1997 -- 350,000 350,000
Reserve for excess and obsolete inventory
activity for the year ended December 31, 1998 350,000 420,000 770,000
</TABLE>
15. 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 sells them primarily to the Company and WRP
Asia. All operations of the Manufacturing Segment are located in
Indosesia. 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 Distribution Segment's significant customers
include those discussed in Note 8. The operations of the Distribution
Segment are located entirely within the U.S.
Accounting policies for measuring segment assets and earnings are
substantially consistent with those described in Note 1. The Company
evaluates segment performance based on income from continuing operations
before provision for (benefit from) income taxes, minority interest and
loss from discontinued operations ("Pre-tax income"). Transactions between
operating segments are made at prevailing market rates.
F-24
<PAGE> 64
The following tables provide financial data for the years ended December
31, 1998, 1997 and 1996 for these segments:
<TABLE>
<CAPTION>
1998 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Revenues from external customers $ 6,894,637 $ 58,073,764 $ -- $ 64,968,401
Revenues from other operating segments
6,120,366 -- (6,120,366) --
Pre-tax income 2,054,301 5,371,067 -- 7,425,368
Depreciation and amortization expense
1,162,918 151,425 -- 1,314,343
Interest revenue 13,680 565,536 (477,786) 101,430
Interest expense 1,279,705 390,486 (477,786) 1,192,405
Total assets 14,184,928 21,615,011 -- 35,799,939
Capital expenditures 952,910 1,052,213 -- 2,005,123
Long-lived assets 11,402,620 2,554,562 -- 13,957,182
</TABLE>
<TABLE>
<CAPTION>
1997 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Revenues from external customers $ 1,675,136 $ 49,727,555 $ -- $ 51,402,691
Revenues from other operating segments 7,595,760 -- (7,595,760) --
Pre-tax income 856,259 371,236 -- 1,227,495
Depreciation and amortization expense 787,277 152,612 -- 939,889
Interest revenue 8,029 105,357 (76,076) 37,310
Interest expense 1,095,493 462,050 (76,076) 1,481,467
Total assets 12,991,497 16,539,748 -- 29,531,245
Capital expenditures 3,009,885 53,850 -- 3,063,735
Long-lived assets 11,590,157 1,768,055 -- 13,358,212
</TABLE>
<TABLE>
<CAPTION>
1996 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Revenues from external customers $ 175,545 $ 45,635,917 $ -- $ 45,811,462
Revenues from other operating segments 5,978,657 -- (5,978,657) --
Pre-tax income (loss) 411,772 (638,537) -- (226,765)
Depreciation and amortization expense 415,538 174,388 -- 589,926
Interest revenue -- 40,737 -- 40,737
Interest expense 389,428 728,272 -- 1,117,700
Total assets 10,796,436 16,717,188 -- 27,513,624
Capital expenditures 4,578,916 96,640 -- 4,675,556
Long-lived assets 9,498,480 3,598,850 -- 13,097,330
</TABLE>
F-25
<PAGE> 1
EXHIBIT 10.44
LOAN AND SECURITY AGREEMENT
DATED AS OF DECEMBER 1, 1998
BETWEEN
GENERAL ELECTRIC CAPITAL CORPORATION
AS LENDER
AND
AMERICAN HEALTH PRODUCTS CORPORATION
AS BORROWER
<PAGE> 2
<TABLE>
<CAPTION>
INDEX OF EXHIBITS AND SCHEDULES
<S><C>
Schedule A - Definitions
Schedule B - Lender's and Borrower's Addresses for Notices
Schedule C - Letters of Credit
Schedule D - Cash Management System
Schedule E - Fees and Expenses
Schedule F - Schedule of Documents
Schedule G - Financial Covenants
Schedule H - Account Debtors
Disclosure Schedule (3.2) - Places of Business; Corporate Names
Disclosure Schedule (3.6) - Real Estate
Disclosure Schedule (3.7) - Stock; Affiliates
Disclosure Schedule (3.12) - ERISA
Disclosure Schedule (3.13) - Litigation
Disclosure Schedule (3.14) - Intellectual Property
Disclosure Schedule (3.16) - Environmental Matters
Disclosure Schedule (3.17) - Insurance
Disclosure Schedule (5(c)) - Indebtedness
Disclosure Schedule (5(h)) - Liens
Disclosure Schedule (6.1) - Actions to Perfect Liens
Exhibit A - Form of Notice of Revolving Credit Advance
Exhibit B - Other Reports and Information
Exhibit C - Form of Borrowing Base Certificate
Exhibit D - Form of Accounts Payable Analysis (Not used)
Exhibit E - Form of Accounts Receivable Rollforward Analysis (Not used)
Exhibit F - Form of Revolving Credit Note
Exhibit G - Form of Term Note (Not Used)
Exhibit H - Form of Secretarial Certificate
Exhibit I - Form of Power of Attorney
Exhibit J - Form of Certificate of Compliance
Exhibit K - Form of Lockbox Agreement
Exhibit L - Form of Landlord's Waiver and Consent
Exhibit M-1 - Form of Mortgage Waiver and Consent (Trust) (Not Used)
Exhibit M-2 - Form of Mortgage Waiver and Consent (Mortgage) (Not Used)
Exhibit N-1.A - Form of Guarantee (variant) (Not Used)
Exhibit N-2 - Form of Joint and Several Guarantee (Not Used)
Exhibit N-2.A - Form of Joint and Several Guarantee (variant) (Not Used)
Exhibit 0 - Form of Opinion of Counsel to Borrower
Exhibit P-1 - Form of Intercreditor Agreement (secured junior debt) (Not Used)
Exhibit P-2 - Form of Intercreditor Agreement (unsecured junior debt) (Not Used)
Exhibit Q - Form of Standard Payoff Letter
Exhibit R - Form of U.C.C. Schedule
Exhibit S - Form of Payment of Proceeds Letter
</TABLE>
<PAGE> 3
GE CAPITAL COMMERCIAL FINANCE
This LOAN AND SECURITY AGREEMENT is dated as of December 1, 1998, and agreed to
by and between American Health Products Corporation, a Texas C corporation
("Borrower") and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation
("Lender").
RECITALS
A. The purpose of this Agreement is to provide to Borrower revolving credit
loans (including a subfacility for letters of credit) (collectively, the
"Loans") having the following general description:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TRANSACTION SUMMARY AS OF THE DATE OF THIS AGREEMENT
<S><C>
REVOLVING CREDIT LOAN
Maximum Amount: $10,000,000
Term: 3 years
Revolving Credit Rate: Index Rate plus 2.75%
Letter of Credit Subfacility: $7,000,000
Borrowing Base: 85% of the value (as determined by Lender) of
Borrower's Eligible Accounts, plus the lesser of (i)
$6,000,000 or (ii) 60% of the value of Borrower's
Eligible Inventory consisting of market value of
eligible finished goods, valued on a first in, first
out basis (at the lower of cost or market).
FEES
Closing Fee: $12,500
Collateral Monitoring Fee: $0 per annum.
Unused Line Fee: .25% on unused facility below $5,000,000
Letter of Credit Fee: .50%. Additional 2% during default.
Prepayment Fee: .75% in year one; .50% in year two;
and .0% in year three on total
commitment.
</TABLE>
THE LOANS DESCRIBED GENERALLY HERE ARE ESTABLISHED AND GOVERNED BY THE TERMS AND
CONDITIONS SET FORTH BELOW IN THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AND
IF THERE IS ANY CONFLICT BETWEEN THIS GENERAL DESCRIPTION AND THE EXPRESS TERMS
AND CONDITIONS BELOW OR ELSEWHERE IN THE LOAN DOCUMENTS, SUCH OTHER EXPRESS
TERRNS AND CONDITIONS SHALL CONTROL.
- --------------------------------------------------------------------------------
B. Borrower desires to obtain the Loans and other financial accommodations from
Lender and Lender is willing to provide the Loans and accommodations all in
accordance with the terms of this Agreement.
C. Capitalized terms used herein shall have the meanings assigned to them in
Schedule A and, for purposes of this Agreement and the other Loan Documents, the
rules of construction set forth in Schedule A shall govern. All Schedules,
Disclosure Schedules, Attachments, Addenda and Exhibits (collectively,
"Appendices") hereto, or expressly identified to this Agreement, are
incorporated herein by reference, and taken together with this Agreement,
constitute but a single agreement. These Recitals shall be construed as part of
this Agreement.
1
<PAGE> 4
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.1 Loans.
(a) Subject to the terms and conditions of this Agreement, from the
Closing Date and until the Commitment Termination Date
(i) Lender agrees (A) to make available advances (each, a
"Revolving Credit Advance") and (B) to incur Letter of Credit
Obligations, in an aggregate outstanding amount not to exceed the
Borrowing Availability, and
(ii) Borrower may at its request from time to time borrow, repay
and reborrow, and may cause Lender to incur Letter of Credit
Obligations, under this Section 1.1.
(b) Borrower shall request each Revolving Credit Advance by written
notice to Lender substantially in the form of Exhibit A (each a "Notice of
Revolving Credit Advance") given no later than 11:30 A.M. (Chicago time) on the
Business Day of the proposed Revolving Credit Advance. Lender shall be fully
protected under this Agreement in relying upon, and shall be entitled to rely
upon,
(i) any Notice of Revolving Credit Advance believed by Lender to
be genuine, and
(ii) the assumption that the Persons making electronic requests or
executing and delivering a Notice of Revolving Credit Advance were duly
authorized, unless the responsible individual acting thereon for Lender
shall have actual knowledge to the contrary.
(c) The Revolving Credit Loan shall be evidenced by, and be repayable
in accordance with the terms of, the Revolving Credit Note and this Agreement.
(d) Borrower agrees that Lender, in making any Revolving Credit Advance
or incurring any other Obligation hereunder, shall be entitled to rely upon the
most recent Borrowing Base Certificate delivered to Lender by Borrower and other
information available to Lender. Borrower further agrees that Lender shall be
under no obligation to make any further Revolving Credit Advance or incur any
other Obligation if Borrower shall have failed to deliver a Borrowing Base
Certificate to Lender by the time specified in Section 4.1 (b).
(e) Letters of Credit. Subject to the terms and conditions of this
Agreement, including Schedule C, Borrower shall have the right to request, and
Lender agrees to incur, the Letter of Credit Obligations for the account of
Borrower in accordance with Schedule C.
2
<PAGE> 5
1.2 Term and Prepayment.
(a) The obligation of Lender to make Revolving Credit Advances and
extend other financial accommodations shall be in effect from the Closing Date
until the Commitment Termination Date. Upon the Commitment Termination Date
Borrower shall pay to Lender in full, in cash:
(i) all outstanding Revolving Credit Advances and all accrued but
unpaid interest thereon;
(ii) an amount sufficient to enable Lender to hold cash collateral
as specified in Schedule C; and
(iii) all other non-contingent Obligations due to or- incurred by
Lender. Upon payment of the amounts specified in the immediately
preceding sentence, Borrower's obligation to pay the Unused Line Fee
shall simultaneously terminate.
(b) If the Revolving Credit Loan shall at any time exceed the Borrowing
Availability, then Borrower shall immediately repay the Revolving Credit Loan in
the amount of such excess; any such excess balance outstanding shall
nevertheless constitute Obligations that are evidenced by the Revolving Credit
Note, secured by the Collateral and entitled to all of the benefits of the Loan
Documents.
(c) Each Borrower shall have the right, at any time upon 30 days prior
written notice to Lender to
(i) terminate voluntarily each Borrower's right to receive or
benefit from, and Lenders obligation to make and to incur, Revolving
Credit Advances and Letter of Credit Obligations and
(ii) prepay all of the Obligations. The effective date of
termination of the Revolving Credit Loan specified in such notice shall
be the Commitment Termination Date.
(d) If Borrower exercises its right of termination and prepayment, or
if Borrower's right to receive or benefit from, and Lenders obligation to make
Loans, are terminated for any reason prior to the Stated Expiry Date (including
as a result of the occurrence of a Default), Borrower shall pay to Lender the
applicable Prepayment Fee.
1.3 Use of Proceeds. Borrower shall use the proceeds of the Loans to
refinance on the Closing Date certain outstanding Indebtedness as provided in
Section 2.1(b) and for working capital and other general corporate purposes.
1.4 Single Loan. The Loans and all of the other Obligations of Borrower to
Lender shall constitute one general obligation of Borrower secured by all of the
Collateral.
3
<PAGE> 6
1.5 Interest.
(a) Borrower shall pay interest to Lender on the aggregate outstanding
Revolving Credit Advances at a floating rate equal to the Index Rate plus two
and seventy five hundredths percent (2.75%) per annum (the "Revolving Credit
Rate").
(b) Interest shall be payable on the outstanding Revolving Credit
Advances
(i) in arrears for the preceding calendar month on the first day
of each calendar month,
(ii) on the Commitment Termination Date, and
(iii) if any interest accrues or remains payable after the
Commitment Termination Date, upon demand by Lender.
(c) All computations of interest, and all calculations of the Letter of
Credit Fee, shall be made by Lender on the basis of a three hundred and sixty
(360) day year, in each case for the actual number of days occurring in the
period for which such interest or fee is payable. Each determination by Lender
of an interest rate hereunder shall be conclusive and binding for all purposes,
absent manifest error.
(d) Effective upon the occurrence of any Event of Default and for so
long as any Event of Default shall be continuing, upon notice to the Borrower
(except that no notice shall be required upon the occurrence of any Event of
Default specified in Sections 7.1 (e), (f) or (g)) the Revolving Credit Rate and
the Letter of Credit Fee shall automatically be increased by two percentage
points (2%) per annum (such increased rate, the "Default Rate"), and all
outstanding Obligations, including unpaid interest and Letter of Credit Fees,
shall continue to accrue interest from the date of such Event of Default at the
Default Rate applicable to such Obligations.
(e) If any interest or other payment (including Unused Line Fees,
Left'er of Credit Fees and Collateral Monitoring Fees) to Lender under this
Agreement becomes due and payable on a day other than a Business Day, such
payment date shall be extended to the next succeeding Business Day and interest
thereon shall be payable at the then applicable rate during such extension.
(f) In no event will Lender charge interest at a rate that exceeds the
highest rate of interest permissible under any law that a court of competent
jurisdiction shall, in a final determination, deem applicable.
1.6 Cash Management System. On or prior to the Closing Date and until the
Termination Date, Borrower will establish and maintain the cash management
system described in Schedule D. All payments in respect of the Collateral shall
be made to or deposited in the blocked or lockbox accounts described in Schedule
D in accordance with the terms thereof.
4
<PAGE> 7
1.7 Fees. As compensation for Lender's costs and efforts incurred and
expended in entering into this Agreement and in consideration of Lender's making
the Loans available to Borrower, Borrower agrees to pay to Lender the Fees set
forth in Schedule E.
1.8 Receipt of Payments. Borrower shall make each payment under this
Agreement (not otherwise made pursuant to Section 1.9) without setooff or
counterclaim not later than 11:30 A.M. (Chicago time) on the day when due in
lawful money of the United States of America in immediately available funds to
the Collection Account. For purposes of computing interest and Fees, all
payments shall be deemed received by Lender upon receipt of good funds in the
Collection Account so long as such funds are received not later than 11:30 A.M.
(Chicago time). For purposes of determining the Borrowing Availability, payments
shall be deemed received by Lender upon receipt of good funds in the Collection
Account.
1.9 Application and Allocation of Payments. Borrower irrevocably agrees
that Lender shall have the continuing and exclusive right to apply any and all
payments against the then due and payable Obligations in such order as Lender
may deem advisable. Lender is authorized to, and at its option may (without
prior notice or precondition and at any time or times), but shall not be
obligated to, make or cause to be made Revolving Credit Advances on behalf of
Borrower for:
(a) payment of all Fees, expenses, indemnities, charges, costs,
principal, interest, or other Obligations owing by Borrower under this Agreement
or any of the other Loan Documents,
(b) the payment, performance or satisfaction of any of Borrower's
obligations with respect to preservation of the Collateral or otherwise under
this Agreement, or
(c) any premium in whole or in part required in respect of any of the
policies of insurance required by this Agreement, even if the making of any such
Revolving Credit Advance causes the outstanding balance of the Revolving Credit
Loan to exceed the Borrowing Availability, and Borrower agrees to repay
immediately, in cash, any amount by which the Revolving Credit Loan exceeds the
Borrowing Availability.
1.10 Accounting. Lender is authorized to record on its books and records the
date and amount of each Loan and each payment of principal thereof and such
recordation shall constitute prima facie evidence of the accuracy of the
information so recorded. Lender shall provide Borrower on a monthly basis a
statement and accounting of such recordations but any failure on the part of the
Lender to keep any such recordation (or any errors therein) or to send a
statement thereof to Borrower shall not in any manner affect the obligation of
Borrower to repay (with applicable interest) the Loans made to Borrower under
this Agreement. Except to the extent that Borrower shall, within 30 days after
such statement and accounting is sent, notify Lender in writing of any objection
Borrower may have thereto (stating with particularity the basis for such
objection), such statement and accounting shall be deemed final, binding and
conclusive upon Borrower, absent manifest error.
1.11 Indemnity. Borrower agrees to indemnify and hold Lender and its
Affiliates, and their respective employees, attorneys and agents (each, an
"Indemnified Person"), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of
5
<PAGE> 8
any kind or nature whatsoever (including attorneys' fees and disbursements and
other costs of investigation or defense, including those incurred upon any
appeal) which may be instituted or asserted against or incurred by any such
Indemnified Person as the result of credit having been extended, suspended or
terminated under this Agreement and the other Loan Documents or with respect to
the execution, delivery, enforcement, performance and administration of, or in
any other way arising out of or relating to, this Agreement and the other Loan
Documents or any other documents or transactions contemplated by or referred to
herein or therein and any actions or failures to act with respect to any of the
foregoing, including any and all product liabilities, Environmental Liabilities
and legal costs and expenses arising out of or incurred in connection with
disputes between or among any parties to any of the Loan Documents
(collectively, "Indemnified Liabilities"), except to the extent that any such
Indemnified Liability is finally determined by a court of competent jurisdiction
to have resulted solely from such Indemnified Person's gross negligence or
willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO THE
BORROWER OR TO ANY OTHER PARTY TO ANY LOAN DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR
THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY
THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES
WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR
TERMINATED UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR AS A RESULT OF ANY
OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
1.12 Taxes. All payments to Lender under any Loan Document shall be made
free and clear of, and without deduction for, any Taxes. If Borrower shall be
required by law to deduct any Taxes from any payment to Lender under any Loan
Document, then the amount payable to Lender shall be increased so that, after
making all required deductions (including deductions applicable to additional
sums payable under this Section 1.12), Lender receives an amount equal to that
which it would have received had no such deductions been made and Borrower shall
pay the full amount deducted to the relevant taxing authority, and promptly
furnish to Lender tax receipts evidencing such payment. Borrower shall pay and
indemnify Lender for the full amount of Taxes (including any Taxes imposed by
any jurisdiction on amounts payable under this Section 1.12) paid by Lender and
any liability (including penalties, interest and expenses) arising therefrom or
with respect thereto, whether or not such Taxes were correctly or legally
asserted.
1.13 Borrowing Base: Reserves. The Borrowing Base shall be determined by
Lender (including the eligibility of Accounts and Inventory) based on the most
recent Borrowing Base Certificate delivered to Lender in accordance with Section
4.1 (b) and such other information available to Lender. Without limiting any
other rights and remedies of Lender hereunder or under the other Loan Documents,
the Revolving Credit Loan shall be subject to Lenders continuing right to
withhold from Borrowing Availability reserves, and to increase and decrease such
reserves from time to time, if and to the extent that in Lender's good faith
credit judgment such reserves are necessary, including to protect Lender's
interest in the Collateral or to protect Lender against possible non-payment of
Accounts for any reason by Account Debtors or possible diminution of the value
of any Inventory or possible non-payment of any of the Obligations or for any
taxes or customs duties or in respect of any state of facts which could
constitute a Default. Lender may, at its option, implement reserves by
designating as ineligible a sufficient amount of Accounts or Inventory which
would otherwise
6
<PAGE> 9
be Eligible Accounts or Eligible Inventory, as the case may be, so as to reduce
the Borrowing Base by the amount of the intended reserves.
2. CONDITIONS PRECEDENT
2.1 Conditions to the Initial Loans. Lender shall not be obligated to make
any of the Loans, or to take, fulfill, or perform any other action hereunder,
until the following conditions have been satisfied in a manner satisfactory to
Lender in its sole discretion, or waived in writing by Lender:
(a) the Loan Documents to be delivered on or before the Closing Date
shall have been duly executed and delivered by the appropriate parties, all as
set forth in the Schedule of Documents (Schedule F);
(b) Lender shall have received evidence satisfactory to it that:
(i) all of the obligations of Borrower to Bank Burniputra Malaysia
Berhad under its financing documentation as in effect immediately prior
to the Closing Date will be performed and paid in full from the
proceeds of the initial Loans; and
(ii) all Liens upon any of the property of Borrower in favor of
Bank Burniputra Malaysia Berhad shall have been terminated immediately
upon such payment;
(c) Lender shall have received evidence satisfactory to R that Borrower
has obtained all consents and acknowledgments of all Persons and Governmental
Authorities whose consents or acknowledgments may be required prior to the
execution and delivery of this Agreement and the other Loan Documents (or
pursuant to the terms hereof or thereof) and the consummation of the
transactions contemplated hereby and thereby and that such consents or
acknowledgments remain in full force and effect;
(d) Lender shall have received evidence satisfactory to it that the
insurance policies provided for in Section 3.17 are in full force and effect,
together with appropriate evidence showing loss payable or additional insured
clauses or endorsements in favor of Lender as required under such Section;
(e) Lender shall have received an opinion of counsel to the Borrower
with respect to the Loan Documents in form and substance satisfactory to Lender;
and
(f) payment by Borrower of the Closing Fee and all other fees, costs,
and expenses payable by Borrower hereunder that have accrued as of the Closing
Date.
2.2 Further Conditions to the Loans. Lender shall not be obligated to fund
any Loan (including the initial Loans), if, as of the date thereof:
(a) any representation or warranty by Borrower contained herein or in
any of the other Loan Documents shall be untrue or incorrect as of such date,
except to the extent that any such
7
<PAGE> 10
representation or warranty is expressly stated to relate to a specific earlier
date, in which case, such representation and warranty shall be true and correct
as of such earlier date; or
(b) any event or circumstance which has had or reasonably could be
expected to have a Material Adverse Effect shall have occurred since the Closing
Date; or
(c) any Default shall have occurred and be continuing or would result
after, giving effect to such Loan; or
(d) after giving effect to such Loan the Revolving Credit Loan would
exceed the Borrowing Availability; or
(e) any action, proceeding, investigation, regulation or legislation
shall have been instituted, threatened or proposed before any Governmental
Authority to enjoin, restrain or prohibit, or to obtain damages in respect of,
or which is related to or arises out of, this Agreement or any other Loan
Document or the consummation of any transaction contemplated hereby or thereby
and which, in Lender's sole judgment, would make it inadvisable to consummate
any transaction contemplated by this Agreement or any other Loan Document.
The request and acceptance by Borrower of the proceeds of any Loan shall be
deemed to constitute, as of the date of such request and the date of such
acceptance, (i) a representation and warranty by Borrower that the conditions in
this Section 2.2 have been satisfied and (ii) a reaffirmation by Borrower of the
granting and continuance of Lenders Liens pursuant to the Loan Documents.
3. REPRESENTATIONS, WARRANTIES AND AFFIRMATIVE COVENANTS
To induce Lender to enter into this Agreement and to make the Loans, Borrower
represents and warrants to Lender (each of which representations and warranties
shall survive the execution and delivery of this Agreement), and promise to and
agree with Lender until the Termination Date as follows:
3.1 Corporate Existence: Compliance with Law. Borrower:
(a) is, as of the Closing Date, and will continue to be
(i) a corporation duly organized, validly existing and in good
standing under the laws of Texas,
(ii) duly qualified to do business and in good standing in each
other jurisdiction where its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to be so qualified could not reasonably be expected to have a
Material Adverse Effect, and
8
<PAGE> 11
(iii) in compliance with all Requirements of Law and Contractual.
Obligations, except to the extent failure to comply therewith could
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect; and
(b) has and will continue to have
(i) the requisite corporate power and authority and the legal
right to execute, deliver and perform its obligations under the Loan
Documents, and to own, pledge, mortgage or otherwise encumber and
operate its properties, to lease the property it operates under lease,
and to conduct its business as now, heretofore or proposed to be
conducted, and
(ii) all licenses, permits, franchises, rights, powers, consents
or approvals from or by all Persons or Governmental Authorities having
jurisdiction over Borrower which are necessary or appropriate for the
conduct of its business.
3.2 Executive Offices: Corporate or Other Names: Conduct of Business. The
location of Borrowers chief executive office, corporate offices, warehouses,
other locations of Collateral and locations where records with respect to
Collateral are kept (including in each case the county of such locations) are as
set forth in Disclosure Schedule (3.2) and, except as set forth in such
Disclosure Schedule, such locations have not changed during the preceding twelve
months. As of the Closing Date, during the prior five years, except as set forth
in Disclosure Schedule (3.2), Borrower has not been known as or conducted
business in any other name (including tradenames). Borrower shall not shall
change its
(a) name,
(b) chief executive office,
(c) corporate offices,
(d) warehouses or other Collateral locations, or
(e) location of its records concerning the Collateral, or acquire,
lease or use any real estate after the Closing Date without Borrower, in each
instance, giving thirty (30) days prior written notice thereof to Lender and
taking all actions deemed necessary or appropriate by Lender to continuously
protect and perfect Lender's Liens upon the Collateral.
3.3 Corporate Power Authorization: Enforceable Obligations. The execution,
delivery and performance by Borrower of the Loan Documents to which it is a
party, and the creation of all Liens provided for herein and therein:
(a) are and will continue to be within such Borrower's power and
authority;
(b) have been and will continue to be duly authorized by all necessary
or proper action;
9
<PAGE> 12
(c) are not and will not be in violation of any Requirement of Law or
Contractual Obligation of such Borrower
(d) do not and will not result in the creation or imposition of any
Lien (other than Permitted Encumbrances) upon any of the Collateral; and
(e) do not and will not require the consent or approval of any
Governmental Authority or any other Person, except those referred to in Section
2.1(c) (all of which will have been duly obtained, made or complied with on or
before the Closing Date and shall be in full force and effect on such date). As
of the Closing Date, each Loan Document shall have been duly executed and
delivered on behalf of Borrower thereto, and each such Loan Document upon such
execution and delivery shall be and will continue to be a legal, valid and
binding obligation of Borrower, enforceable against it in accordance with its
terms, except as such enforcement may be limited by bankruptcy, insolvency and
other similar laws affecting creditors' rights generally, and by general
principles of equity.
3.4 Financial Statements and Projections: Books and Records.
(a) The Financial Statements delivered by Borrower to Lender for its
most recently ended Fiscal Year and Fiscal Month, are true, correct and complete
and reflect fairly and accurately the financial condition of Borrower as of the
date of each such Financial Statement in accordance with GAAP. The Projections
most recently delivered by Borrower to Lender have been prepared in good faith,
with care and diligence and use assumptions that are reasonable under the
circumstances at the time such Projections were prepared and as of the date
delivered to Lender and all such assumptions are disclosed in the Projections.
(b) Borrower shall keep adequate Books and Records with respect to the
Collateral and its business activities in which proper entries, reflecting all
consolidated and consolidating financial transactions, and payments received on
any and all credits granted to, and all other dealings with, the Collateral,
will be made in accordance with GAAP and all Requirements of Law and on a basis
consistent with the Financial Statements.
3.5 Material Adverse Change. Between the date of Borrower's most recently
audited Financial Statements delivered to Lender and the Closing Date:
(a) Borrower has incurred no obligations, contingent or non-contingent
liabilities, or liabilities for Charges, long-term leases or unusual forward or
long-term commitments which are not reflected in the Projections delivered on
the Closing Date and which could, alone or in the aggregate, reasonably be
expected to have a Material Adverse Effect;
(b) there has been no material deviation from such Projections; and
(c) no events have occurred which alone or in the aggregate has had or
could reasonably be expected to have a Material Adverse Effect. No Requirement
of Law or Contractual Obligation of Borrower has or have had or could reasonably
be expected to have a Material Adverse Effect and
10
<PAGE> 13
Borrower is not in default, and to such Borrowers knowledge no third party is in
default under or with respect to any of its Contractual Obligations, which alone
or in the aggregate has had or could reasonably be expected to have a Material
Adverse Effect.
3.6 Real Estate: Property. The real estate listed in Disclosure Schedule
(3.6) constitutes all of the real property owned, leased, or used by Borrower in
its business, and such Borrower will not execute any material agreement or
contract in respect of such real estate after the date of this Agreement without
giving Lender prompt written notice thereof. Borrower holds and will continue to
hold good and marketable fee simple title to all of its owned real estate, and
good and marketable title to all of its other properties and assets, and valid
and insurable leasehold interests in all of its leases (both as lessor and
lessee, sublessee or assignee), and none of the properties and assets of
Borrower are or will be subject to any Liens, except Permitted Encumbrances.
With respect to each of the premises identified in Disclosure Schedule (3.2) on
or prior the Closing Date a bailee, landlord or mortgagee agreement acceptable
to Lender has been obtained.
3.7 Ventures, Subsidiaries and Affiliates: Outstanding Stock and
Indebtedness. Except as set forth in Disclosure Schedule (3.7), as of the
Closing Date Borrower has no Subsidiaries, is not engaged in any joint venture
or partnership with any other Person, and is not an Affiliate of any other
Person. All of the issued and outstanding Stock of Borrower (including all
rights to purchase, options, warrants or similar rights or agreements pursuant
to which Borrower may be required to issue, sell, repurchase or redeem any of
its Stock) as of the Closing Date is owned by each of the Stockholders (and in
the amounts) set forth on Disclosure Schedule (3.7). All outstanding
Indebtedness of Borrower as of the Closing Date is described in Disclosure
Schedule (5(c)).
3.8 Government Regulation. Borrower is not subject to or regulated under
the Investment Company Act of 1940, the Public Utility Holding Company Act of
1935, the Federal Power Act or any other Federal or state statute, rule or
regulation that restricts or limits such Person's ability to incur Indebtedness,
pledge its assets, or to perform its obligations under the Loan Documents. The
making of the Loans, the application of the proceeds and repayment thereof, and
the consummation of the transactions contemplated by the Loan Documents do not
and will not violate any provision of any such statute or any rule, regulation
or order issued by the Securities and Exchange Commission.
3.9 Margin Regulations. Borrower is not engaged, nor will it engage,
principally or as one of its important activities, in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin security" as
such terms are defined in Regulations U or G of the Federal Reserve Board as now
and from time to time hereafter in effect (such securities being referred to
herein as "Margin Stock"). Borrower owns no Margin Stock, and none of the
proceeds of the Loans or other extensions of credit under this Agreement will be
used, directly or indirectly, for the purpose of purchasing or carrying any
Margin Stock, for the purpose of reducing or retiring any Indebtedness which was
originally incurred to purchase or carry any Margin Stock or for any other
purpose which might cause any of the Loans or other extensions of credit under
this Agreement to be considered a "purpose credit" within the meaning of
Regulation G, T, U or X of the Federal Reserve Board. Borrower will not take or
permit to be taken any action which might cause any Loan Document to violate any
regulation of the Federal Reserve Board.
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3.10 Taxes; Charges. Except as disclosed on Disclosure Schedule (3.10) all
tax returns, reports and statements required by any Governmental Authority to be
filed by Borrower have, as of the Closing Date, been filed and will, until the
Termination Date, be filed with the appropriate Governmental Authority and no
tax Lien has been filed against Borrower or its property. Proper and accurate
amounts have been and will be withheld by Borrower from its employees for all
periods in complete compliance with all Requirements of Law and 'such
withholdings have and will be timely paid to the appropriate Governmental
Authorities. Disclosure Schedule (3.10) sets forth as of the Closing Date those
taxable years for which Borrower's tax returns are currently being audited by
the IRS or any other applicable Governmental Authority and any assessments or
threatened assessments in connection with such audit, or otherwise currently
outstanding. Except as described on Disclosure Schedule (3.10), Borrower has not
executed or filed with the IRS or any other Governmental Authority any agreement
or other document extending, or having the effect of extending, the period for
assessment or collection of any Charges. Neither Borrower nor any of its
predecessors are liable for any Charges:
(a) under any agreement (including any tax sharing agreements) or
(b) to Borrowers knowledge, as a transferee. As of the Closing Date,
Borrower has not agreed or been requested to make any adjustment under IRC
Section 481(a), by reason of a change in accounting method or otherwise, which
could reasonably be expected to have a Material Adverse Effect.
3.11 Payment of Obligations. Borrower will pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may
be, all of its Charges and other obligations of whatever nature, except where
the amount or validity thereof is currently being contested in good faith by
appropriate proceedings and reserves in conformity with GAAP with respect
thereto have been provided on the books of Borrower and none of the Collateral
is or could reasonably be expected to become subject to any Lien or forfeiture
or loss as a result of such contest.
3.12 ERISA.
(a) Disclosure Schedule (3.12) lists and separately identifies all
Title IV Plans, Multiemployer Plans, ESOPs and Retiree Welfare Plans. Copies of
all such listed Plans, together with a copy of the latest form 5500 for each
such Plan, have been delivered to Lender. Each Qualified Plan has been
determined by the IRS to quality under Section 401 of the IRC, and the trusts
created thereunder have been determined to be exempt from tax under the
provisions of Section 501 of the IRC, and nothing has occurred which would cause
the loss of such qualification or taxoexempt status. Each Plan is in compliance
with the applicable provisions of ERISA and the IRC , including the filing of
reports required under the IRC or ERISA. Neither Borrower nor any ERISA
Affiliate has failed to make any contribution or pay any amount due as required
by either Section 412 of the IRC or Section 302 of ERISA or the terms of any
such Plan. Neither Borrower nor any ERISA Affiliate has engaged in a prohibited
transaction, as defined in Section 4975 of the IRC, in connection with any Plan,
which would subject Borrower to a material tax on prohibited transactions
imposed by Section 4975 of the IRC.
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(b) Except as set forth in Disclosure Schedule (3.12):
(i) no Title IV Plan has any Unfunded Pension Liability;
(ii) no ERISA Event or event described in Section 4062(e) of ERISA
with respect to any Title IV Plan has occurred or is reasonably
expected to occur;
(iii) there are no pending, or to the knowledge of Borrower,
threatened claims (other than claims for benefits in the normal
course), sanctions, actions or lawsuits, asserted or instituted against
any Plan or any Person as fiduciary or sponsor of any Plan;
(iv) neither Borrower nor any ERISA Affiliate has incurred or
reasonably expects to incur any liability as a result of a complete or
partial withdrawal from a Multiemployer Plan;
(v) within the last five years no Title IV Plan with Unfunded
Pension Liabilities has been transferred outside of the "controlled
group" (within the meaning of Section 4001(a)(14) of ERISA) of Borrower
or any ERISA Affiliate; and
(vi) no liability under any Title IV Plan has been satisfied with
the purchase of a contract from an insurance company that is not rated
AAA by the Standard & Poor's Corporation or the equivalent by another
nationally recognized rating agency.
3.13 Litigation. No Litigation is pending or, to the knowledge of Borrower,
threatened by or against Borrower or its properties or revenues
(a) with respect to any of the Loan Documents or any of the
transactions contemplated hereby or thereby, or
(b) which could reasonably be expected to have a Material Adverse
Effect. Except as set forth on Disclosure Schedule (3.13), as of the Closing
Date there is no Litigation pending or threatened against Borrower which seeks
damages in excess of $50,000 or injunctive relief or alleges criminal misconduct
of Borrower. Borrower shall notify Lender promptly upon learning of the
existence or commencement of any Litigation commenced or to the knowledge of
Borrower threatened against any Borrower that: (x) may involve an amount in
excess of $50,000; (y) could reasonably be expected to have a Material Adverse
Effect whether or not determined adversely; or (z) regardless of amount
(i) is asserted or instituted, against any Plan, its fiduciaries
or its assets, or against any Borrower or any ERISA Affiliate in
connection with any Plan,
(ii) includes any demand for injunctive relief,
(iii) alleges criminal misconduct by Borrower, or
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(iv) alleges the violation of any law regarding, or seeks remedies
in connection with, any Environmental Liabilities.
3.14 Intellectual Property. As of the Closing Date, all material
Intellectual Property owned or used by Borrower is listed, together with
application or registration numbers, where applicable, in Disclosure Schedule
(3.14). Each Borrower owns, or is licensed to use, all Intellectual Property
necessary to conduct its business as currently conducted except for such
Intellectual Property the failure of which to own or license could not
reasonably be expected to have a Material Adverse Effect.
3.15 Full Disclosure. No information contained in any Loan Document, the
Financial Statements or any written statement furnished by or on behalf of
Borrower under any Loan Document, or to induce Lender to execute the Loan
Documents, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
3.16 Hazardous Materials. Except as set forth on Disclosure Schedule (3.16),
as of the Closing Date,
(a) each real property location owned, leased or occupied by Borrower
(the "Real Property") is maintained free of contamination from any Hazardous
Material,
(b) Borrower is not subject to any Environmental Liabilities or, to
Borrower's knowledge, potential Environmental Liabilities, in excess of $50,000
in the aggregate,
(c) no notice has been received by Borrower identifying it as a
"potentially responsible party" or requesting information under CERCLA or
analogous state statutes, and to the knowledge of Borrower, there are no facts,
circumstances or conditions that may result in Borrower being identified as a
"potentially responsible party" under CERCLA or analogous state statutes; and
(d) Borrower has provided to Lender copies of all existing
environmental reports, reviews and audits and all written information pertaining
to actual or potential Environmental Liabilities, in each case relating to
Borrower. Borrower:
(i) shall comply in all material respects with all applicable
Environmental Laws and Environmental Permits;
(ii) shall notify Lender in writing within seven days if and when
it becomes aware of any Release, on, at, in, under, above, to, from or
about any of its Real Property; and
(iii) shall promptly forward to Lender a copy of any order,
notice, permit, application, or any communication or report received by
it in connection with any such Release.
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3.17 Insurance. As of the Closing Date, Disclosure Schedule (3.17) lists all
insurance of any nature maintained for current occurrences by Borrower, as well
as a summary of the terms of such insurance. Borrower shall deliver to Lender
endorsements to all of its
(a) "All Risk" and business interruption insurance policies naming
Lender loss payee, and
(b) general liability and other liability policies naming Lender as an
additional insured. All policies of insurance on real and personal property will
contain an endorsement, in form and substance acceptable to Lender, showing loss
payable to Lender (Form 438 BFU or equivalent) and extra expense and business
interruption endorsements. Such endorsement, or an independent instrument
furnished to Lender, will provide that the insurance companies will give Lender
at least 30 days prior written notice before any such policy or policies of
insurance shall be altered or canceled and that no act or default of Borrower or
any other Person shall affect the right of Lender to recover under such policy
or policies of insurance in case of loss or damage. Borrower shall direct all
present and future insurers under its "All Risk" policies of insurance to pay
all proceeds payable thereunder directly to Lender. If any insurance proceeds
are paid by check, draft or other instrument payable to Borrower and Lender
jointly, Lender may endorse Borrower's name thereon and do such other things as
Lender may deem advisable to reduce the same to cash. Lendero reserves the right
at any time, upon review of Borrowers risk profile, to require additional forms
and limits of insurance to adequately protect Lender's interests in accordance
with Lender's normal practice for similarly situated borrowers. Borrower shall,
on each anniversary of the Closing Date and from time to time at Lenders
request, deliver to Lender a report by a reputable insurance broker,
satisfactory to Lender, with respect to such Person's insurance policies.
3.18 Deposit and Disbursement Accounts. Attachment I to Schedule D lists all
banks and other financial institutions at which Borrower maintains deposits
and/or other accounts, including the Disbursement Account, and such Attachment
correctly identifies the name, address and telephone number of each such
depository, the name in which the account is held, a description of the purpose
of the account, and the complete account number. Borrower shall not establish
any depository or other bank account of any kind with any financial institution
(other than the accounts set forth on Attachment 1 to Schedule D) without
Lender's prior written consent.
3.19 Accounts. As of the date of each Borrowing Base Certificate delivered
to Lender, each Account listed thereon as an Eligible Account shall be an
Eligible Account. Borrower has not made, and will not make, any agreement with
any Account Debtor for any extension of time for the payment of any Account, any
compromise or settlement for materially less than the full amount thereof, any
release of any Account Debtor from liability therefor, or any deduction
therefrom except a discount or allowance for prompt or early payment allowed by
Borrower in the ordinary course of its business consistent with historical
practice and as previously disclosed to Lender in writing. With respect to the
Accounts pledged as collateral pursuant to any Loan Document
(a) the amounts shown on all invoices, statements and reports which may
be delivered to the Lender with respect thereto are actually and absolutely
owing to Borrower as indicated thereon and are not in any way contingent;
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(b) no payments have been or shall be made thereon except payments
immediately delivered to the applicable Bank Accounts or the Lender as required
hereunder; and
(c) to Borrower's knowledge all Account Debtors have the capacity to
contract. Borrower shall notify Lender promptly of any event or circumstance
which to Borrower's knowledge would cause Lender to consider any then existing
Account as no longer constituting an Eligible Account.
3.20 Inventory. As of the date of each Borrowing Base Certificate delivered
to Lender, all Inventory listed thereon as Eligible Inventory shall be Eligible
Inventory. Borrower shall promptly notify Lender of any event or circumstance
which, to Borrowers knowledge, would cause Lender to consider any then existing
Inventory as no longer constituting Eligible Inventory.
3.21 Conduct of Business: Maintenance of Existence. Borrower
(a) shall conduct its business substantially as now conducted or as
otherwise permitted. hereunder and preserve all of its rights, privileges and
franchises necessary and desirable in connection therewith, and
(b) shall at all times maintain, preserve and protect all of the
Collateral and such Borrower's other property, used or useful in the conduct of
its business and keep the same in good repair, working order and condition
(taking into consideration ordinary wear and tear) and from time to time make,
or cause to be made, all necessary or appropriate repairs, replacements and
improvements thereto consistent with industry practices.
3.22 Further Assurances. At any time and from time to time, upon the written
request of Lender and at the sole expense of Borrower, Borrower shall promptly
and duly execute and deliver any and all such further instruments and documents
and take such further action as Lender may reasonably deem desirable
(a) to obtain the full benefits of this Agreement and the other Loan
Documents,
(b) to protect, preserve and maintain Lender's rights in the
Collateral, or any of it, and under this Agreement, or
(c) to enable Lender to exercise all or any of the rights and powers
herein granted.
3.23 Year 2000 Covenants. If not previously delivered to Lender, on or prior
to January 31, 1999, Borrower shall complete and deliver to Lender a Year 2000
Assessment, and, if not previously delivered to Lender, on or prior to March 31,
1999, Borrower shall complete and deliver to Lender a Year 2000 Corrective Plan.
If not previously implemented as delivered to Lender, on or prior to May 31,
1999, Borrower shall implement Year 2000 Corrective Actions. On or before July
31, 1999, Borrower shall complete Year 2000 Corrective Actions and Year 2000
Implementation Testing. On or before September 30, 1999, Borrower shall
eliminate all Year 2000 Problems, except where the
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failure to correct the same could not reasonably be expected to have a Material
Adverse Effect, individually or in the aggregate.
4. FINANCIAL MATTERS; REPORTS
4.1 Reports and Notices. Borrower represents, agrees and promises that from
and after the Closing Date until the Termination Date, Borrower shall deliver to
Lender:
(a) within 20 days following the end of each Fiscal Month, an aged
trial balance by Account Debtor and an Inventory Perpetual or Physical (as
requested by Lender) and as soon as available but in no event later than 30 days
following the end of each Fiscal Month, a reconciliation of the aged trial
balance and the Inventory Perpetual or Physical (as the case may be) to the
Borrowers general ledger and from the general ledger to the Financial Statements
for such Fiscal Month accompanied by supporting detail and documentation as
Lender may request, in each case the Inventory reports to separately detail in
form satisfactory to Lender Inventory in Borrower's warehouse, Inventory in
transit backed by letters of credit, and Inventory in transit on open account
terms;
(b) as frequently as Lender may request and in any event no later than
20 days following the end of each Fiscal Month, a Borrowing Base Certificate in
the form of Exhibit C as of the last day of the previous Fiscal Month detailing
ineligible Accounts and Inventory for adjustment to the Borrowing Base,
certified as true and correct by the Chief Financial Officer of Borrower or such
other officer as is acceptable to Lender,
(c) (Intentionally Omitted)
(d) within 30 days following the end of each Fiscal Month, the
Financial Statements for such Fiscal Month, which shall provide comparisons to
budget. and actual results for the corresponding period during the prior Fiscal
Year, both on a monthly and year-to-date basis, and accompanied by a
certification in the form of Exhibit J by the Chief Executive Officer or Chief
Financial Officer of Borrower that such Financial Statements are complete and
correct, that there was no Default (or specifying those Defaults of which he or
she was aware), and showing in reasonable detail the calculations used in
determining compliance with the financial covenants hereunder;
(e) within 120 days following the close of each Fiscal Year, the
Financial Statements of Borrower and WRP Corporation for such Fiscal Year,
certified for WRP Corporation without qualification by an independent certified
accounting firm acceptable to Lender, and which for Borrower shall provide
comparisons to budget and actual results for the prior Fiscal Year, both on a
monthly and annual basis, and shall be accompanied by
(i) a statement in reasonable detail showing the calculations used
in determining compliance with the financial covenants hereunder,
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(ii) a report from WRP Corporation's accountants to the effect
that in connection with their audit examination nothing has come to
their attention to cause them to believe that a Default has occurred or
specifying those Defaults of which they are aware, and
(iii) any management letter that may be issued;
(f) not less than 120 days after the close of each Fiscal Year, the
Projections, which will be prepared by Borrower in good faith, with care and
diligence, and using assumptions which are reasonable under the circumstances at
the time such Projections are delivered to Lender and disclosed therein when
delivered; and
(g) all the reports and other information set forth on Exhibit B in the
time frames set forth
4.2 Financial Covenants. Borrower shall not breach any of the financial
covenants set forth in Schedule G.
4.3 Other Reports and Information. Borrower shall advise Lender promptly,
in reasonable detail, of:
(a) any Lien, other than Permitted Encumbrances, attaching to or
asserted against any of the Collateral or any occurrence causing a material loss
or decline in value of any Collateral and the estimated (or actual, if
available) amount of such loss or decline;
(b) any material change in the composition of the Collateral; and
(c) the occurrence of any Default or other event which has had or could
reasonably be expected to have a Material Adverse Effect. Borrower shall, upon
request of Lender, furnish to Lender such other reports and information in
connection with the affairs, business, financial condition, operations,
prospects or management of Borrower or the Collateral as Lender may reasonably
request, all in reasonable detail.
5. NEGATIVE COVENANTS
Borrower covenants and agrees that, without Lender's prior written consent, from
the dosing Date until the Termination Date, Borrower shall not, directly or
indirectly, by operation of law or otherwise:
(a) merge with, consolidate with, acquire all or substantially all of
the assets or capital stock of, or otherwise combine with, any Person or form
any Subsidiary;
(b) except as otherwise permitted in this Section 5 below, make any
investment in, or make or accrue loans or advances of money to, any Person,
except that
(i) Borrower may hold investments comprised of notes payable, or
stock or other securities issued by Account Debtors to Borrower
pursuant to negotiated agreements with
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respect to settlement of such Account Debtors' Accounts in the ordinary
course of business, so long as the aggregate amount of such Accounts so
settled by Borrower in any Fiscal Quarter does not exceed $100,000 and
such notes and securities are delivered to Lender as Collateral, and
(ii) loans and advances to WRP Corporation or PT WRP Buana
Multicorpora Indonesia not exceeding $2,000,000 in the aggregate for
any Fiscal Year, provided that (x) all such loans and advances are
evidenced by a promissory note from each obligor in form and substance
satisfactory to Lender and that has been delivered to Lender as
Collateral, and (y) if the aggregate of all such loans and advances
(after giving effect to such loan and advance) exceeds $250,000, at the
time of and after giving effect to each such loan and advance, the
Fixed Charge Coverage Ratio for the most recent Fiscal Quarter then
ended shall not be less than 1.3 to 1.0.;
(c) create, incur, assume or permit to exist any Indebtedness, except:
(i) the Obligations;
(ii) Indebtedness other than the Obligations in an aggregate
outstanding amount not exceeding $100,000;
(iii) deferred taxes; and
(iv) other Indebtedness set forth in Disclosure Schedule 5(c);
(d) enter into any lending, borrowing or other commercial transaction
with any of its employees, directors or Affiliates (including upstrearning and
downstrearning of cash and intercompany advances which are not otherwise
permitted hereunder) other than loans or advances to employees in the ordinary
course of business in an aggregate outstanding amount not exceeding $50,000;
provided that Borrower may make a bona fide ordinary course purchases of
inventory from Wembley Rubber Products or PT WRP Buana Multicorporo Indonesia on
terms no less favorable to Borrower than in third party transactions;
(e) make any changes in any of its business objectives, purposes, or
operations which could reasonably be expected to adversely affect repayment of
the Obligations or could reasonably be expected to have a Material AdVerse
Effect or engage in any business other than that presently engaged in or
proposed to be engaged in the Projections delivered to Lender on the Closing
Date;
(f) amend its charter or materially amend its byolaws or other
organizational documents;
(g) incur any Guaranteed Indebtedness except
(i) by endorsement of instruments or items of payment for deposit
to the general account of Borrower, and
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(ii) for Guaranteed Indebtedness incurred for the benefit of
Borrower if the primary obligation is permitted by this Agreement;
(h) create or permit any Lien on any of its properties or assets,
except for Permitted Encumbrances;
(i) sell, transfer, issue, convey, assign or otherwise dispose of any
of its assets or properties, including its Accounts or any shares of its Stock
or engage in any saleoleaseback, synthetic lease or similar transaction
(provided, that the foregoing shall not prohibit the sale of Inventory or
obsolete or unnecessary Equipment in the ordinary course of its business);
(j) take any action or omit to take any action, which act or omission
would constitute a material default or an event of default pursuant to, or
material noncompliance with, any of its Contractual Obligations;
(k) cancel any debt owing to it, except for cancellation of debt not
constituting Accounts for reasonable consideration and in the ordinary course of
its business consistent with historical practice; or
(l) make or permit any Restricted Payment.
6. SECURITY INTEREST
6.1 Grant of Security Interest.
(a) As collateral security for the prompt and complete payment and
performance of the Obligations, the Borrower hereby grants to the Lender a
security interest in and Lien upon all of its property and assets, whether real
or personal, tangible or intangible, and whether now owned or hereafter
acquired, or in which it now has or at any time in the future may acquire any
right, title, or interest, including all of the following property in which it
now has or at any time in the future may acquire any right, title or interest:
all Accounts; all bank and deposit accounts and all funds on deposit therein;
all cash and cash equivalents; all commodity contracts; all investments; all
Inventory and Equipment; all Goods; all Chattel Paper, Documents and
Instruments; all Books and Records; all General Intangibles (including all
Intellectual Property, Stock, contract rights, and choices in action); and to
the extent not otherwise included, all Proceeds and products of all and any of
the foregoing and all collateral security and guarantees given by any Person
with respect to any of the foregoing, but excluding in all events Hazardous
Waste (all of the foregoing, together with any other collateral pledged to the
Lender pursuant to any other Loan Document, collectively, the "Collateral").
(b) Borrower and Lender agree that this Agreement creates, and is
intended to create, valid and continuing Liens upon the Collateral in favor of
Lender. Borrower represents, warrants and promises to Lender that:
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<PAGE> 23
(i) Borrower is the sole owner of each item of the Collateral upon
which it purports to grant a Lien pursuant to the Loan Documents, and
has good and marketable title thereto free and clear of any and all
Liens or claims of others, other than Permitted Encumbrances;
(ii) the security interests granted pursuant to this Agreement,
upon completion of the filings and other actions listed on Disclosure
Schedule (6.1) (which, in the case of all filings and other documents
referred to in said Schedule, have been delivered to the Lender in duly
executed form) will constitute valid perfected security interests in
all of the Collateral in favor of the Lender as security for the prompt
and complete payment and performance of the Obligations, enforceable in
accordance with the terms hereof against any and all creditors of and
purchasers from Borrower (other than purchasers of Inventory in the
ordinary course of business) and such security interests are prior to
all other Liens on the Collateral in existence on the date hereof
except for Permitted Encumbrances which have priority by operation of
law; and
(iii) no effective security agreement, financing statement,
equivalent security or Lien instrument or continuation statement
covering all or any part of the Collateral is or will be on file or of
record in any public office, except those relating to Permitted
Encumbrances. Borrower promises to defend the right, title and interest
of Lender in and to the Collateral against the claims and demands of
all Persons whomsoever, and each shall take such actions, including (x)
the prompt delivery of all original Instruments, Chattel Paper and
certificated Stock owned by Borrower to Lender, (y) notification of
Lenders interest in Collateral at Lenders request, and (z) the
institution of litigation against third parties as shall be prudent in
order to protect and preserve Borrower's and Lenders respective and
several interests in the Collateral. Borrower shall mark its Books and
Records pertaining to the Collateral to evidence the Loan Documents and
the Liens granted under the Loan Documents. All Chattel Paper shall be
marked with the following legend: "This writing and the obligations
evidenced or secured hereby are subject to the security interest of
General Electric Capital Corporation."
6.2 Lenders Rights.
(a) Lender may,
(i) at any time in Lenders own name or in the name of Borrower,
communicate with Account Debtors, parties to Contracts, and obligors in
respect of Instruments, Chattel Paper or other Collateral to verify to
Lenders satisfaction, the existence, amount and terms of any such
Accounts, Contracts, Instruments or Chattel Paper or other Collateral,
and
(ii) at any time and without prior notice to Borrower, notify
Account Debtors, parties to Contracts, and obligors in respect of
Chattel Paper, Instruments, or other Collateral that the Collateral has
been assigned to Lender and that payments shall be made directly to
Lender. Upon the request of Lender, Borrower shall so notify such
Account Debtors, parties to Contracts, and obligors in respect of
Instruments, Chattel Paper or other Collateral.
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Borrower hereby constitutes Lender or Lenders designee as Borrower's
attorney with power to endorse Borrowers name upon any notes,
acceptance drafts, money orders or other evidences of payment or
Collateral.
(b) It is expressly agreed by Borrower that, notwithstanding anything
herein to the contrary, Borrower shall remain liable under each Contract,
Instrument and License to observe and perform all the conditions and obligations
to be observed and performed by it thereunder, and Lender shall have no
obligation or liability whatsoever to any Person under any Contract, Instrument
or License (between Borrower and any Person other than Lender) by reason of or
arising out of the execution, delivery or performance of this Agreement, and
Lender shall not be required oro obligated in any manner
(i) to perform or fulfill any of the obligations of Borrower,
(ii) to make any payment or inquiry, or
(iii) to take any action of any kind to collect or enforce any
performance or the payment of any amounts which may have been assigned
to it or to which it may be entitled at any time or times under or
pursuant to any Contract, Instrument or License.
(c) Borrower shall, with respect to each owned, leased, or controlled
property or facility, during normal business hours and upon reasonable advance
notice (unless a Default shall have occurred and be continuing, in which event
no notice shall be required and Lender shall have access at any and all times):
(i) provide access to such facility or property to Lender and any
of its officers, employees and agents, as frequently as Lender
determines to be reasonably appropriate;
(ii) permit Lender and any of its officers, employees and agents
to inspect, audit and make extracts from all of Borrower's Books and
Records; and
(iii) permit Lender to inspect, review, evaluate and make physical
verifications and appraisals of the Inventory and other Collateral in
any manner and through any medium that Lender considers advisable, and
Borrower agrees to render to Lender, at Borrower's cost and expense,
such clerical and other assistance as may be reasonably requested with
regard thereto. Borrower shall make available to Lender and its
counsel, as quickly as practicable under the circumstances, originals
or copies of all Borrower's Books and Records and any other instruments
and documents which Lender may request. Borrower shall deliver any
document or instrument reasonably necessary for Lender, as it may from
time to time request, to obtain records from any service bureau or
other Person which maintains records for Borrower.
(d) After the occurrence and during the continuance of a Default,
Borrower, at its own expense, shall cause the certified public accountant then
engaged by Borrower to prepare and deliver to Lender at any time and from time
to time, promptly upon Lender's request, the following reports:
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(i) a reconciliation of all Accounts;
(ii) an aging of all Accounts;
(iii) trial balances; and
(iv) test verifications of such Accounts as Lender may request.
Borrower, at its own expense, shall cause its certified independent
public accountants to deliver to Lender the results of any physical
verifications of all or any portion of the Inventory made or observed
by such accountants when and if such verification is conducted. Lender
shall be permitted to observe and consult with Borrower's accountants
in the performance of these tasks.
6.3 Lender's Appointment as Attorney-in-fact. On the Closing Date, Borrower
shall execute and deliver a Power of Attorney in the form attached as Exhibit 1.
The power of attorney granted pursuant to the Power of Attorney and all powers
granted under any Loan Document are powers coupled with an interest and shall be
irrevocable until the Termination Date. The powers conferred on Lender under the
Power of Attorney are solely to protect Lender's interests in the Collateral and
shall not impose any duty upon it to exercise any such powers. Lender agrees and
promises that
(a) it shall not exercise any power or authority granted under the
Power of Attorney unless an Event of Default has occurred and is continuing,
(b) Lender shall only exercise the powers granted under the Power of
Attorney in respect of Collateral, provided, except as otherwise required by
applicable law, Lender shall not have any duty as to any Collateral, and Lender
shall be accountable only for amounts that it actually receives as a result of
the exercise of such powers. NONE OF LENDER OR ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO BORROWER FOR ANY
ACT OR FAILURE TO ACT PURSUANT TO THE POWERS GRANTED UNDER THE POWER OF ATTORNEY
OR OTHERWISE, EXCEPT FOR ITS OR THEIR OWN GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT, NOR FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.
Borrower also hereby authorizes Lender to file any financing or continuation
statement without the signature of Borrower to the extent permitted by
applicable law.
6.4 Grant of License to Use Intellectual Property Collateral. For the
purpose of enabling Lender to exercise its rights and remedies under the Loan
Documents, Borrower hereby grants to Lender'oan irrevocable, nonoexclusive
license (exercisable upon the occurrence and during the continuance of an Event
of Default without payment of royalty or other compensation to Borrower) to use,
transfer, license or sublicense any Intellectual Property now owned, licensed
to, or hereafter acquired by Borrower, and wherever the same may be located, and
including in such license access to all media in which any of the licensed items
may be recorded or stored and to all computer and automatic machinery software
and programs used for the compilation or printout thereof, and represents,
promises and agrees that any such license or sublicense is not and will not be
in conflict with the
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contractual or commercial rights of any third Person; provided, that such
license will terminate on the Termination Date.
7. EVENTS OF DEFAULT: RIGHTS AND REMEDIES
7.1 Events of Default. The occurrence of any one or more of the following
events (regardless of the reason therefor) shall constitute an "Event of
Default" hereunder which shall be deemed to be continuing until waived in
writing by Lender in accordance with Section 9.3:
(a) Borrower shall fail to make any payment in respect of any
Obligations when due and payable or declared due and payable; or
(b) Borrower shall fail or neglect to perform, keep or observe any of
the covenants, promises, agreements, requirements, conditions or other terms or
provisions contained in this Agreement or any of the other Loan Documents; or
(c) an event of default shall occur under any Contractual Obligation of
the Borrower (other than this Agreement and the other Loan Documents), and such
event of default
(i) involves the failure to make any payment (whether or not such
payment is blocked pursuant to the terms of an intercreditor agreement
or otherwise), whether of principal, interest or otherwise, and whether
due by scheduled maturity, required prepayment, acceleration, demand or
otherwise, in respect of any Indebtedness (other than the Obligations)
of Borrower in an aggregate amount exceeding the Minimum Actionable
Amount, or
(ii) causes (or permits any holder of such Indebtedness or a
trustee to cause) such Indebtedness, or a portion thereof, in an
aggregate amount exceeding the Minimum Actionable Amount to become due
prior to its stated maturity or prior to its regularly scheduled dates
of payment; or
(d) any representation or warranty in this Agreement or any other Loan
Document, or in any written statement pursuant hereto or thereto, or in any
report, financial statement or certificate made or delivered to Lender by
Borrower shall be untrue or incorrect as of the date when made; or
(e) there shall be commenced against the Borrower any Litigation
seeking issuance of a warrant of attachment, execution, distraint or similar
process against all or any substantial part of its assets which results in the
entry of an order for any such relief which remains unstayed or undismissed for
thirty (30) consecutive days; or Borrower shall have concealed, removed or
permitted to be concealed or removed, any part of its property with intent to
hinder, delay or defraud its creditors or any of them or made or suffered a
transfer of any of its property or the incurring of an obligation which may be
fraudulent under any bankruptcy, fraudulent transfer or other similar law; or
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(f) a case or proceeding shall have been commenced involuntarily
against Borrower in a court having competent jurisdiction seeking a decree or
order:
(i) under the United States Bankruptcy Code or any other
applicable Federal, state or foreign bankruptcy or other similar law,
and seeking either (x) the appointment of a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) for
such Person or of any substantial part of its properties, or (y) the
reorganization or winding up or liquidation of the affairs of any such
Person, and such case or proceeding shall remain undismissed or
unstayed for sixty (60) consecutive days or such court shall enter a
decree or order granting the relief sought in such case or proceeding;
or
(ii) invalidating or denying any Person's right, power, or
competence to enter into or perform any of its obligations under any
Loan Document or invalidating or denying the validity or enforceability
of this Agreement or any other Loan Document or any action taken
hereunder or thereunder; or
(g) Borrower shall
(i) commence any case, proceeding or other action under any
existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization, conservatorship or
relief of debtors, seeking to have an order for relief entered with
respect to it or seeking appointment of a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) for
it or any substantial part of its properties,
(ii) make a general assignment for the benefit of creditors,
(iii) consent to or take any action in furtherance of, or,
indicating its consent to, approval of, or acquiescence in, any of the
acts set forth in paragraphs (e) or (f) of this Section 7.1 or clauses
(i) and (ii) of this paragraph (g), or
(iv) shall admit in writing its inability to, or shall be
generally unable to, pay its debts as such debts become due; or
(h) a final judgment or judgments for the payment of money in excess of
the Minimum Actionable Amount in the aggregate shall be rendered against
Borrower, unless the same shall be
(i) fully covered by insurance and the issuer(s) of the applicable
policies shall have acknowledged full coverage in writing within
fifteen (15) days of judgment, or
(ii) vacated, stayed, bonded, paid or discharged within a period
of fifteen (15) days from the date of such judgment; or
(i) any other event shall have occurred which has had or could
reasonably be expected to have a Material Adverse Effect and Lender shall have
given Borrower notice thereof; or
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(j) any material provision of any Loan Document shall for any reason
cease to be valid, binding and enforceable in accordance with its terms, or any
Lien granted, or intended by the Loan Documents to be granted, to Lender shall
cease to be a valid and perfected Lien having the first priority (or a lesser
priority if expressly permitted in the Loan Documents) in any of the Collateral;
or
(k) a Change of Control shall occur.
7.2 Remedies.
(a) If any Default shall have occurred and be continuing, then Lender
may terminate or suspend its obligation to make further Revolving Credit
Advances and to incur additional Letter of Credit Obligations. In addition, if
any Event of Default shall have occurred and be continuing, Lender may, without
notice, take any one or more of the following actions:
(i) declare all or any portion of the Obligations to be forthwith
due and payable, including contingent liabilities with respect to
Letter of Credit Obligations, whereupon such Obligations shall become
and be due and payable;
(ii) require that all Letter of Credit Obligations be fully cash
collateralized pursuant to Schedule C; or
(iii) exercise any rights and remedies provided to Lender under
the Loan Documents or at law or equity, including all remedies provided
under the Code; provided, that upon the occurrence of any Event of
Default specified in Sections 7.1 (e), (f) or (g), the Obligations
shall become immediately due and payable (and any obligation of Lender
to make further Loans, if not previously terminated, shall immediately
be terminated) and the Obligations shall automatically begin to accrue
interest at the Default Rate, in each case, without declaration, notice
or demand by Lender.
(b) Without limiting the generality of the foregoing, Borrower
expressly agrees that upon the occurrence of any Event of Default, Lender may
collect, receive, assemble, process, appropriate and realize upon the
Collateral, or any part thereof, and may forthwith sell, lease, assign, give an
option or options to purchase or otherwise dispose of and deliver said
Collateral (or contract to do so), or any part thereof, in one or more parcels
at public or private sale or sales, at any exchange at such prices as it may
deem best, for cash or on credit or for future delivery without assumption of
any credit risk. Lender shall have the right upon any such public sale or sales
and, to the extent permitted by law, upon any such private sale or sales, to
purchase for the benefit of Lender the whole or any part of said Collateral so
sold, free of any right or equity of redemption, which equity of redemption
Borrower hereby releases. Such sales may be adjourned, or continued from time to
time with or without notice. Lender shall have the right to conduct such sales
on Borrower's premises or elsewhere and shall have the right to use Borrowers
premises without rent or other charge for such sales or other action with
respect to the Collateral for such time or times as Lender deems necessary or
advisable.
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(c) Borrower further agrees, upon the occurrence and during the
continuance of an Event of Default and at Lenders request, to assemble the
Collateral and make it available to Lender at places which Lender shall
reasonably select, whether at its premises or elsewhere. Until Lender is able to
effect a sale, lease, or other disposition of the Collateral, Lender shall have
the right to complete, assemble, use or operate the Collateral or any part
thereof, to the extent that Lender deems appropriate, for the purpose of
preserving such Collateral or its value or for any other purpose. Lender shall
have no obligation to Borrower to maintain or preserve the rights of Borrower as
against third parties with respect to any Collateral while such Collateral is in
the possession of Lender. Lender may, if it so elects, seek the appointment of a
receiver or keeper to take possession of any Collateral and to enforce any of
Lenders remedies with respect to such appointment without prior notice or
hearing. To the maximum extent permitted by applicable law, Borrower waives all
claims, damages, and demands against Lender, its Affiliates, agents, and the
officers and employees of any of them arising out of the repossession, retention
or sale of any Collateral except such as are determined in a final judgment by a
court of competent jurisdiction to have arisen solely out of the gross
negligence or willful misconduct of such Person. Borrower agrees that ten (10)
days prior notice by Lender to Borrower of the time and place of any public sale
or of the time after which a private sale may take place is reasonable
notification of such matters. Borrower shall remain liable for any deficiency if
the proceeds of any sale or disposition of the Collateral are insufficient to
pay all amounts to which Lender is entitled.
(d) Lender's rights and remedies under this Agreement shall be
cumulative and nonexclusive of any other rights and remedies which Lender may
have under any Loan Document or at law or in equity. Recourse to the Collateral
shall not be required. All provisions of this Agreement are intended to be
subject to all applicable mandatory provisions of law that may be controlling
and to be limited, to the extent necessary, so that they do not render this
Agreement invalid or unenforceable, in whole or in part.
7.3 Waivers by Borrower. Except as otherwise provided for in this Agreement
and to the fullest extent permitted by applicable law, Borrower waives:
(a) presentment, demand and protest, and notice of presentment,
dishonor, intent to accelerate, acceleration, protest, default, nonpayment,
maturity, release, compromise, settlement, extension or renewal of any or all
Loan Documents, the Notes or any other notes, commercial paper, Accounts,
Contracts, Documents, Instruments, Chattel Paper and guaranties at any time held
by Lender on which Borrower may in any way be liable, and hereby ratifies and
confirms whatever Lender may do in this regard;
(b) all rights to notice and a hearing prior to Lender's taking
possession or control of, or to Lender's replevy, attachment or levy upon, any
Collateral or any bond or security which might be required by any court prior to
allowing Lender to exercise any of its remedies; and
(c) the benefit of all valuation, appraisal and exemption laws.
Borrower acknowledges that it has been advised by counsel of its choices and
decisions with respect to this Agreement, the other Loan Documents and' the
transactions evidenced hereby and thereby.
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7.4 Proceeds. The Proceeds of any sale, disposition or other realization
upon any Collateral shall be applied by Lender upon receipt, in the following
order of priorities: first, to reimburse or pay in full the actual expenses of
Lender incurred in connection with such sale, disposition or other realization,
including all other expenses, liabilities and advances incurred or made by
Lender in connection therewith; second, to the other Obligations in such order
as the Lender may deem advisable; third, to cash collateralize any outstanding.
Letter of Credit Obligations pursuant to Schedule C; and finally, after the
indefeasible payment and satisfaction in full in cash of all of the Obligations,
and after the payment by Lender of any other amount required by any provision of
law, including Section 9-504(l)(c) of the Code (but only after Lender has
received what Lender considers reasonable proof of a subordinate party's
security interest), the surplus, if any, to Borrower or its representatives or
to whomsoever may be lawfully entitled to receive the same, or as a court of
competent jurisdiction may direct.
8. SUCCESSORS AND ASSIGNS
Each Loan Document shall be binding on and shall inure to the benefit of
Borrower, Lender, and their respective successors and assigns, except as
otherwise provided herein or therein. Borrower may not assign, transfer,
hypothecate, delegate or otherwise convey its rights, benefits, obligations or
duties under any Loan Document without the prior express written consent of
Lender. Any such purported assignment, transfer, hypothecation, delegation or
other conveyance by Borrower without the prior express written consent of Lender
shall be void. The terms and provisions of this Agreement and the other Loan
Documents are for the purpose of defining the relative rights and obligations of
Borrower and Lender with respect to the transactions contemplated hereby and
thereby, and there shall be no third party beneficiaries of any of the terms and
provisions of any of the Loan Documents. Lender reserves the right at any time
to create and sell participations in the Loans and the Loan Documents and to
sell, transfer or assign any or all of its rights in the Loans and under the
Loan Documents.
9. MISCELLANEOUS
9.1 Complete Agreement: Modification of Agreement. This Agreement and the
other Loan Documents constitute the complete agreement between the parties with
respect to the subject matter hereof and thereof, supersede all prior
agreements, commitments, understandings or inducements (oral or written,
expressed or implied), and no Loan Document may be modified, altered or amended
except by a written agreement signed by Lender and Borrower. Borrower shall have
all duties and obligations under this Agreement and such other Loan Documents
from the date of its execution and delivery, regardless of whether the initial
Loan has been funded at that time.
9.2 Expenses. Borrower agrees to pay or reimburse Lender for all costs and
expenses incurred in connection with:
(a) the preparation, negotiation, execution, delivery, performance and
enforcement of the Loan Documents and the preservation of any rights thereunder;
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(b) collection (including the reasonable fees and expenses of all
special counsel, advisors, consultants (including environmental and management
consultants) and auditors retained in connection therewith), including
deficiency collections;
(c) the forwarding to Borrower or any other Person on behalf of
Borrower by Lender of the proceeds of any Loan (including a wire transfer fee of
$15 per wire transfer);
(d) any amendment, extension, modification or waiver of, or consent
with respect to any Loan Document or advice in connection with the
administration of the Loans of the rights thereunder;
(e) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by or between any combination of Lender, Borrower or any
other Person or Persons), and an appeal or review thereof, in any way relating
to the Collateral, any Loan Document, or any action taken or any other
agreements to be executed or delivered in connection therewith, whether as a
party, witness or otherwise; and
(f) any effort
(i) to monitor the Loans,
(ii) to evaluate, observe or assess Borrower or its affairs, and
(iii) to verify, protect, evaluate, assess, appraise, collect,
sell, liquidate or otherwise dispose of the Collateral including the
following with respect to all of the foregoing provisions of this
Section 9.2: the fees, costs and expenses of attorneys, accountants,
environmental advisors, appraisers, investment bankers, management and
other consultants, and paralegals; court costs and expenses;
photocopying and duplicating expenses; court reporter fees, costs and
expenses; long distance telephone charges; air express charges;
telegram charges; secretarial overtime charges; and expenses for
travel, lodging and food paid or incurred in connection therewith.
9.3 No Waiver. Neither Lender's failure, at any time or times, to require
strict performance by Borrower of any provision of any Loan Document, nor
Lenders failure to exercise, nor any delay in exercising, any right, power or
privilege hereunder,
(a) shall waive, affect or diminish any right of Lender thereafter to
demand strict compliance and performance therewith, or
(b) shall operate as a waiver thereof. No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or future
exercise thereof or the exercise of any other right, power or privilege. Any
suspension or waiver of a Default or other provision under the Loan Documents
shall not suspend, waive or affect any other Default under any Loan Document,
whether the same is prior or subsequent thereto and whether of the same or of a
different type, and shall not be construed as a bar to any right or remedy which
Lender would otherwise have had on any future
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occasion. None of the undertakings, indemnities, agreements, warranties,
covenants and representations of Borrower to Lender contained in any Loan
Document and no Default by Borrower under any Loan Document shall be deemed to
have been suspended or waived by Lender, unless such waiver or suspension is by
an instrument in writing signed by an officer or other authorized employee of
Lender and directed to Borrower specifying such suspension or waiver (and then
such waiver shall be effective only to the extent therein expressly set forth),
and Lender shall not, by any act (other than execution of a formal written
waiver), delay, omission or otherwise, be deemed to have waived any of its
rights or remedies hereunder.
9.4 Severability. Wherever possible, each provision of the Loan Documents
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of any Loan Document shall be prohibited by
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of such Loan Document. Except as
otherwise expressly provided for in the Loan Documents, no termination or
cancellation (regardless of cause or procedure) of any financing arrangement
under the Loan Documents shall in any way affect or impair the Obligations,
duties, covenants, representations and warranties, indemnities, and liabilities
of Borrower or the rights of Lender relating to any unpaid Obligation, (due or
not due, liquidated, contingent or unliquidated), or any transaction or event
occurring prior to such termination, or any transaction or event, the
performance of which is not required until after the Commitment Termination
Date, all of which shall not terminate or expire, but rather shall survive such
termination or cancellation and shall continue in full force and effect until
the Termination Date; provided, that all indemnity obligations of Borrower under
the Loan Documents shall survive the Termination Date.
9.5 Conflict of Terms. Except as otherwise provided in any Loan Document by
specific reference to the applicable provisions of this Agreement, if any
provision contained in this Agreement is in conflict with, or inconsistent with,
any provision in any other Loan Document, the provision contained in this
Agreement shall govern and control.
9.6 Authorized Signature. Until Lender shall be notified in writing by
Borrower to the contrary, the signature upon any document or instrument
delivered pursuant hereto and believed by Lender or any of Lenders officers,
agents, or employees to be that of an officer of Borrower listed in the
Secretarial Certificate in the form of Exhibit H shall bind Borrower and be
deemed to be the act of Borrower affixed pursuant to and in accordance with
resolutions duly adopted by Borrowers Board of Directors, and Lender shall be
entitled to assume the authority of each signature and authority of the person
whose signature it is or appears to be unless the person acting in reliance of
such signature shall have actual knowledge of the fact that such signature is
false or the person whose signature oor purported signature is presented is
without authority.
9.7 Notices. Except as otherwise provided herein, whenever any notice,
demand, request, consent, approval, declaration or other communication shall or
may be given to or served upon any party by any other party, or whenever any
party desires to give or serve upon any other party any communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be deemed to
have been validly served, given or delivered
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(a) upon the earlier of actual receipt and three (3) days after deposit
in the United States Mail, registered or certified mail, return receipt
requested, with proper postage prepaid,
(b) upon transmission, when sent by telecopy or other similar facsimile
transmission (with such telecopy or facsimile promptly confirmed by delivery of
a copy by personal delivery or United States Mail as otherwise provided in this
Section 9.7),
(c) one (1) Business Day after deposit with a reputable overnight
courier with all charges prepaid or (d) when hand-delivered, all of which shall
be addressed to the party to be notified and sent to the address or facsimile
number indicated in Schedule B or to such other address (or facsimile number) as
may be substituted by notice given as herein provided. The giving of any notice
required hereunder may be waived in writing by the party entitled to receive
such notice. Failure or delay in delivering copies of any notice, demand,
request, consent, approval, declaration or other communication to any Person
(other than Borrower or Lender) designated in Schedule B to receive copies shall
in no way adversely affect the effectiveness of such notice, demand, request,
consent, approval, declaration or other communication.
9.8 Section Titles. The Section titles and Table of Contents contained in
any Loan Document are and shall be without substantive meaning or content of any
kind whatsoever and are not a part of the agreement between the parties hereto.
9.9 Counterparts. Any Loan Document may be executed in any number of
separate counterparts by any one or more of the parties thereto, and all of said
counterparts taken together shall constitute one and the same instrument.
9.10 Time of the Essence. Time is of the essence for performance of the
Obligations under the Loan Documents.
9.11 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE
LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS ARISING UNDER THE LOAN
DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICTS OF
LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
9.12 SUBMISSION TO JURISDICTION: WAIVER OF JURY TRIAL.
(a) BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN ILLINOIS SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS
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AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT LENDER AND BORROWER
ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF ILLINOIS; AND FURTHER PROVIDED, THAT NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS,
TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. BORROWER EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH IT
MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT
AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF
SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN SCHEDULE B OF THIS
AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF
BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID.
(b) BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY
(RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE
BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE
PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR
OTHERWISE BETWEEN LENDER AND BORROWER ARISING OUT OF, CONNECTED WITH, RELATED OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THE
LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO.
9.13 Press Releases. Borrower agrees that neither it nor its Affiliates will
in the future issue any press release or other public disclosure using the name
of GE Capital or its affiliates or referring to this Agreement or the other Loan
Documents without at least two (2) Business Days' prior notice to GE Capital and
without the prior written consent of GE Capital unless (and only to the extent
that) Borrower or Affiliate is required to do so under law and then, in any
event, Borrower or Affiliate will consult with GE Capital before issuing such
press release or other public disclosure. Borrower consents to the publication
by Lender of a tombstone or similar advertising material relating to the
financing transactions contemplated by this Agreement.
9.14 Reinstatement. This Agreement shall continue to be effective, or be
reinstated, as the case may be, if at any time payment of all or any part of the
Obligations is rescinded or must otherwise
32
<PAGE> 35
be returned or restored by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower, or otherwise, all as
though such payments had not been made.
IN WITNESS WHEREOF, this Loan and Security Agreement has been duly
executed as of the date first written above.
AMERICAN HEALTH PRODUCTS
CORPORATION
By: /s/ Edward Marteka
--------------------------------------------
Name: Edward Marteka
Title: President
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Robert O. McNabb
--------------------------------------------
Name: Robert O. McNabb
Title: Duly Authorized Signatory
33
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
NAME UNDER WHICH
NAME STATE OF INCORPORATION SUBSIDIARY DOES BUSINESS
- ---- ---------------------- ------------------------
<S> <C> <C>
American Health Products Corporation Texas American Health Products Corporation
AHPC, Inc. Oklahoma AHPC, Inc.
PT WRP Buana Multicorpora Indonesia PT WRP Buana Multicorpora
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
Registration Statements Nos. 333-23630 and 333-28003.
/s/ Arthur Andersen LLP
---------------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 680
<SECURITIES> 0
<RECEIVABLES> 5,772
<ALLOWANCES> (240)
<INVENTORY> 11,861
<CURRENT-ASSETS> 21,843
<PP&E> 15,210
<DEPRECIATION> (2,733)
<TOTAL-ASSETS> 35,800
<CURRENT-LIABILITIES> 15,313
<BONDS> 0
70
0
<COMMON> 0
<OTHER-SE> 16,871
<TOTAL-LIABILITY-AND-EQUITY> 35,800
<SALES> 64,968
<TOTAL-REVENUES> 64,968
<CGS> 46,857
<TOTAL-COSTS> 9,910
<OTHER-EXPENSES> 133
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 1,192
<INCOME-PRETAX> 6,831
<INCOME-TAX> 952
<INCOME-CONTINUING> 5,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,879
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.93
</TABLE>
