<PAGE> 1
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17458
WRP CORPORATION
---------------
(Exact name of registrant as specified in its charter)
MARYLAND 73-1326131
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(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
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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 29, 2000: $5,950,673.
At March 29, 2000, 5,673,692 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, 1999
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS......................................................... 1
ITEM 2. PROPERTIES....................................................... 5
ITEM 3. LEGAL PROCEEDINGS................................................ 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 8
PART II
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................... 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 24
ITEM 11. EXECUTIVE COMPENSATION.......................................... 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................. 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.......... 31
ii
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PART I
ITEM I. BUSINESS(1)
GENERAL
WRP Corporation is a manufacturer of high quality disposable latex
examination gloves and a leading marketer of medical exam gloves in the United
States through our wholly owned subsidiary, American Health Products Corporation
("AHPC"). We were reincorporated in Maryland in December 1995 and had been
involved in several business operations. We have been only in the glove business
since July 1, 1997 when all other business activities ceased. In June 1997, we
discontinued our sales of Playboy condoms after we reached an agreement with
Playboy Enterprises, Inc. to terminate its license agreement under which we
distributed condoms in 15 countries.
In October 1995, we acquired a 70% interest in an Indonesian latex
examination glove manufacturing plant, PT WRP Buana Multicorpora ("PT Buana"),
which was in the start-up phase of operations at that time. We 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.
During 1999, PT Buana purchased machinery and equipment which enables the
factory to manufacture powder-free latex exam gloves.
On February 27, 1992, we 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 us 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 our Board of Directors.
The Series A Common Stock is substantially the same as our Common Stock
except that each share of Series A Common Stock is convertible into one share of
our Common Stock and the Series A Common Stock entitles the holder to elect all
Class A directors, which represent a
- --------
(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 "we anticipate," "believe" or
"expect" indicate that it is possible that the event anticipated, believed or
expected may not occur. Should such event not occur, then the result which we
expected also may not occur or occur in a different manner, which may be more or
less favorable to us. We do 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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majority of our Board of Directors.
At December 31, 1997, MBf International owned all 1,252,538 shares of
our Series A Common Stock and 1,682,275 shares of our Common Stock. On March 31,
1998, we announced that our 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., our supplier of latex powder-free exam gloves. These
agreements transferred majority ownership in us to WRP Asia and were as follows:
1. MBf International sold all of our 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 our 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.
These transactions provided WRP Asia with a 55.0% ownership interest in
us at March 31, 1998. At December 31, 1999, WRP Asia had a 54.2% ownership
interest in us.
At December 31, 1998, MBf International owned 1,682,275 shares of our
Common Stock which represented a 24.4% ownership interest in us at that time. In
January 1999, MBf International sold its 1,682,275 shares to several U.S.
institutional investors, thus eliminating its entire ownership interest in us.
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.
As of March 29, 2000, the shares of Series A Common Stock issued to WRP
Asia constituted 18.1% of the total combined 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 in us by 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.
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GLOVE PRODUCTS
Through our wholly owned subsidiary, AHPC, we market 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 surgical gloves and other products related to
infection control. For the year ended December 31, 1999, AHPC's sales ratio of
latex powdered, latex powder-free, and non-latex examination glove sales were
approximately 27%, 51%, and 22%, respectively. We anticipate that the sales
ratio of latex powdered exam gloves will decline in the future in the U.S.
medical market.
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 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 us, has the ability to
manufacture approximately 750,000,000 latex examination gloves per year. Prior
to 1999, PT Buana manufactured only powdered latex exam gloves. During the
second quarter of 1999, PT Buana began purchasing and installing chlorination
equipment which enables the factory to produce powder-free latex exam gloves.
The benefit to manufacturing powder-free exam gloves is increased profit margins
over powdered gloves and alignment with the medical market trend towards
powder-free gloves. PT Buana produced only a small quantity of powder-free
gloves during 1999 to test on a trial basis its products in the European market
before sales to the U.S. were made.
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 Itasca, Illinois, or to public
warehouses located in Nevada, Georgia, California, Wisconsin or Maryland, where
they are stored for delivery to medical,
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surgical, dental, nursing home and foodservice dealers.
Powdered Latex Examination Glove Suppliers. PT Buana supplied
approximately 19% of AHPC's powdered latex examination glove inventory in 1999.
The remaining 81% of 1999 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. During 1999,
AHPC negotiated with this factory to reduce the minimum monthly quantity of
gloves to be purchased and extended the distribution agreement to August 2001.
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.
AHPC has plans to purchase latex powder-free gloves from PT Buana in 2000 in
addition to WRP Asia.
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,
telesales, seminars, advertising, direct mail, as well as sales representatives.
At December 31, 1999, AHPC employed a sales force of 57 persons comprised of
regional sales managers and representatives, manufacturer sales representatives,
tele-sales staff and an in-house sales and marketing 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, product availability, and the reliability of the manufacturer.
Customers. During calendar 1999, two of AHPC's national customers,
Owens & Minor, Inc. and Sysco Co., accounted for 38% and 31%, of net sales,
respectively. The loss of either of such customers would have a materially
adverse effect on us. However, our 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
our glove products are the medical facilities, professionals and individuals who
use our gloves.
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Patents and Trademarks. AHPC owns the trademarks "Glovetex" and
"Dermasafe," which are registered in the United States.
LATEX CONDOM PRODUCTS
Through June 30, 1997, we sold condoms in packaging bearing the
Playboy(R) name and rabbit-head logo. Under the termination agreement, we
continued to sell Playboy(R) condoms until June 30, 1997 in the 15 countries
where it has launched the product. As of December 31, 1998, we 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 our products sold. Subsequent to October
1996, we purchased its condoms from an unrelated manufacturer following the sale
of MBf Personal Care by its parent.
EMPLOYEES
As of March 29, 2000, our U.S. operations employed a total of 73
full-time and five part-time employees. AHPC also uses the services of 13
manufacturer sales representatives which do not work exclusively for AHPC and
which are paid on a commission basis. Our 70% owned Indonesian subsidiary, PT
Buana, employed 1,039 full-time and part-time workers in its factory and
administrative staff as of that date. None of our employees are represented by a
collective bargaining agreement. We consider relations with our 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), we received stock
of LSAI. During 1998, we sold all remaining shares of LSAI and thus have
entirely liquidated our investment in LSAI.
ITEM 2. PROPERTIES
Our principal executive and administrative office is located in Itasca,
Illinois. The lease term for this location is approximately five years,
commenced on March 1, 1995 and expires in May 2000. The 1999 yearly lease cost
was approximately $156,000, with an annual increase of approximately 3% per
year. We are currently negotiating for an extension of this office space lease
due to its expiration in May 2000.
Our executive office was located in Fort Lee, New Jersey prior to its
relocation to Itasca, Illinois in 1995. On December 1, 1994, we entered into a
five-year lease for this office with an annual lease cost of approximately
$78,000 per year. During June 1995, we closed the New Jersey office as part of a
restructuring which took place in the second quarter of 1995. Effective July 1,
1995, we 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. This office lease and sublease expired in
November 1999.
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Our executive office was located in Boca Raton, Florida, prior to its
relocation to Fort Lee, New Jersey. We 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 was approximately
$79,500 per year. Effective December 1, 1996, we 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. This
office lease and sublease expired in June 1999.
AHPC's Illinois warehouse operations were 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, we
obtained an extension of this lease through July 31, 1999. The yearly cost of
the lease was approximately $126,600 per year. This warehouse lease terminated
in July 1999 and AHPC moved its Illinois warehouse operations to a larger
warehouse, which provides additional needed warehousing space.
In May 1999, we entered into a five-year lease agreement for a 55,000
square-foot warehouse facility located in Itasca, Illinois. The lease term for
this location commenced on August 1, 1999 and expires in July 2004. The annual
rental expense for this lease is approximately $316,700 per year.
AHPC also uses public warehouse facilities to store its inventory in
Sparks, Nevada; Atlanta, Georgia; Union City, California; Fond Du Lac,
Wisconsin; and Baltimore, Maryland, as needed. Public warehouse charges are
dependent upon the volume of products stored and the frequency of shipping or
receiving products.
In February 1999, AHPC entered into a three-year lease agreement for
1,877 square feet of office space located in San Diego, California to service
our tele-sales operations office. The lease term for this office space commenced
on June 1, 1999 and expires in May 2002. The current rental expense for this
lease is approximately $30,500 per year, with annual increases of approximately
3.5% per year.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1999, we, AHPC, and PT Buana, (jointly the "WRP
Defendants") had a total of 54 latex glove product liability suits pending
against them throughout the United States. We were an active defendant in three
claims, AHPC in 31 claims, and PT Buana in three claims. Additionally, through a
series of Private Label Supply and Trademark Licensing Agreements with VHA, Inc.
("VHA"), AHPC agreed to defend and indemnify VHA in 14 suits. AHPC was joined as
a third party defendant in three claims by a distributor of AHPC latex gloves.
All of the claims involve plaintiffs that have worked in the medical
and health industries and who allege injuries associated with the continued use
and/or exposure to latex glove products. In each of the claims the WRP
Defendants are one of several glove distributors and manufacturers named in the
suits. Each of the claims allege damages of an unspecified amount and is in a
different stage of discovery or other pre-trial proceeding. One of the claims is
scheduled for trial in California in April 2000. It is not currently possible to
determine a
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favorable or unfavorable outcome for the WRP Defendants in any of the claims.
Subsequent to December 31, 1999, AHPC was served with four additional
product liability lawsuits, joined in three and agreed to defend and indemnify
VHA in one additional suit. In each of the claims the plaintiff alleged damages
associated with the use of or exposure to latex gloves. AHPC is 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. However, there is no assurance that AHPC's insurance will be
sufficient to meet all damages for which AHPC may be held liable. Likewise,
there is no assurance that the outcome of these suits will not adversely affect
our operations or financial condition. We do not currently possess our own
product liability insurance to cover claims asserted directly against us as a
distributor, manufacturer or supplier of latex gloves. However, coverage is
afforded us through the AHPC policy, where our liability arises solely from our
relationship as a shareholder of AHPC. PT Buana does not possess product
liability insurance coverage and is currently seeking commercial product
liability coverage.
AHPC will vigorously contest any latex claim initiated against it, but
will enter into a settlement agreement, where, after careful consideration, our
management determines that our best interests will be served by settling the
matter. In 1999, AHPC settled one latex glove related product liability claim
for a nominal sum and was dismissed from one such claim. We were dismissed from
two latex glove product liability claims in 1999.
From time to time we are involved in other litigation relating to
claims arising out of our operations in the normal course of business. At March
29, 2000, we are 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 our financial condition. 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.
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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 July
25, 1999. The purpose of the Annual Meeting was to consider the vote on the
following matters:
1. To elect six Class A directors and two Class B directors to hold
officer until the next annual meeting of Shareholders or otherwise as
provided in the Company's By-Laws.
Class A Director Nominees
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Kamaruddin Taib
Richard C. M. Wong
Edward J. Marteka
Kwong Ann Lew
George Jeff Mennen
Richard Swanson
Class B Director Nominees
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Robert J. Simmons
Don L. Arnwine
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 5,144,251
Against 0
Non-votes 529,441
2. To concur in the selection of Arthur Andersen LLP as independent
auditor for the fiscal year ending December 31, 1999. The vote of the
Shareholders was as follows:
For 6,412,525
Against 7,693
Non-votes 506,012
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
Our 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:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 HIGH LOW
----------------- ---- ---
<S> <C> <C>
4th quarter $ 3.75 $ 2.00
3rd quarter $ 5.88 $ 3.50
2nd quarter $ 7.19 $ 5.25
1st quarter $ 7.88 $ 4.88
DECEMBER 31, 1998
-----------------
4th quarter $ 7.00 $ 4.75
3rd quarter $ 6.87 $ 4.28
2nd quarter $ 7.37 $ 5.50
1st quarter $ 5.87 $ 3.06
</TABLE>
There were approximately 350 record holders of Common Stock as of March
29, 2000. We believe that there are approximately an additional 2,000 holders
whose stock is held in "street name."
We have not paid a dividend with respect to the Common Stock. We expect
to reinvest our earnings for expansion of our operations and does not intend to
pay a dividend in the foreseeable future.
In March 2000, we announced that our Board of Directors had authorized
a program to repurchase up to 10% of our public Common Stock. These purchases
may be made in the open market and in block transactions over a two-year period.
The program is subject to market conditions and its impact on share price as
well as other investment options that we may consider to enhance shareholder
value.
During 2000, our Board of Directors also approved a change in our
fiscal year-end from December 31 to June 30, which corresponds to the year-end
of our majority shareholder, WRP Asia. This fiscal year-end change will be
effective June 30, 2000.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five
calendar years ended December 31, 1999 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,
-------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
*Net sales $ 65,280,104 $ 64,968,401 $ 51,402,691 $ 45,811,462 $ 39,788,839
Cost of goods sold 48,645,076 46,857,229 40,760,146 38,358,756 36,177,651
Gross profit 16,635,028 18,111,172 10,642,545 7,452,706 3,611,188
*Selling, general & administrative expenses 12,295,192 9,954,785 8,226,945 6,684,467 6,160,011
Restructure charge - - - - 1,808,757
Minority interest in loss (income)
of subsidiary, net of tax 97,033 (594,062) (300,145) (77,732) (2,174)
Net income (loss) from continuing operations
before discontinued operations, net of tax 2,452,744 5,879,160 1,249,392 (247,608) (4,092,779)
Loss from discontinued operations - - (783,670) (916,979) (771,625)
Net income (loss) $ 2,452,744 $ 5,879,160 $ 465,722 $ (1,164,587) $ (4,864,404)
PER SHARE DATA:
Diluted earnings (loss) per share $ 0.35 $ 0.93 $ 0.11 $ (.32) $ (2.00)
BALANCE SHEET DATA (END OF PERIOD):
Total assets $ 40,194,171 $ 35,799,939 $ 29,531,245 $ 27,513,624 $ 26,373,204
Long-term debt $ 1,100,000 $ 1,668,982 $ 5,647,867 $ 7,098,132 $ 10,342,500
Total shareholders' equity $ 19,474,812 $ 16,941,436 $ 4,312,520 $ 3,531,424 $ 1,319,661
</TABLE>
*The 1995 through 1997 figures have been restated to reflect rebates as a
reduction of net sales to conform to the 1999 and 1998 presentation for
comparability purposes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(2)
Our wholly owned subsidiary, American Health Products Corporation
("AHPC"), is engaged in the marketing and distribution of high quality medical
grade examination gloves in the United States and we have been in the glove
business since our incorporation in January 1989. We recorded record annual net
glove sales in 1999 of over $65.2 million.
Our 70% owned subsidiary, PT WRP Buana Multicorpora ("PT Buana"), owns
an Indonesian glove manufacturing plant which commenced operations in April
1996. PT Buana manufactures high quality, powdered latex exam gloves and in the
second quarter of 1999 began installing manufacturing equipment to produce
powder-free latex exam gloves. During 1999, PT Buana sold only a limited
quantity of powder-free gloves to the European market on a test market basis
before sales are going to be made to the U.S. marketplace.
PT Buana sold approximately 17% of its production to AHPC during 1999
as compared to 47% during the same period in 1998. PT Buana recorded glove sales
totaling $10.3 million and $13.0 million during the years ended December 31,
1999 and 1998, respectively. AHPC reduced its purchases from PT Buana as a
result of our fulfillment of certain glove purchase obligations with an
independent supplier pursuant to a preexisting contract requirement. PT Buana's
remaining production was primarily sold to WRP Asia. All significant
inter-company transactions and sales have been eliminated in consolidation.
Through our Playboy license rights and condom distribution agreement,
we distributed Playboy(R) brand condoms through June 30, 1997 in accordance with
the negotiated termination agreement with Playboy Enterprises, Inc. As such, we
have accounted for the Playboy(R) condom business as a discontinued operation
effective December 31, 1996.
This analysis of our results of operations and financial condition
should be viewed in conjunction with the financial statements and other
information concerning us included throughout this Annual Report. The
consolidated financial statements for the years ended December 31, 1999 and
1998 include our results of operations and statements of cash flows, as well as
for AHPC and PT Buana, our 70% owned subsidiary.
We faced several issues during 1999. First, the price of latex during
the middle of the year dropped to its lowest levels in five years, which caused
pricing instability in the marketplace. As previously announced, we changed to a
consignment inventory arrangement with a key customer which reduced sales in the
second quarter of 1999 by $2.3 million. The volatile Indonesian rupiah
fluctuated against the U.S. dollar which caused PT Buana to record significant
income tax adjustments on a quarterly basis in 1999. Finally, we reported in
early
- ------------
(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 our
plans and strategies, are all based on current expectations and we assume
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". We caution
investors that our business is subject to significant risks and
uncertainties.
11
<PAGE> 14
2000 that the group purchasing organization, Novation, will not renew its
contract with AHPC, which expires April 2000.
We were pleased to announce that we were awarded an exclusive five-year
contract to supply the AmeriNet, Inc. membership with its glove products.
AmeriNet is the largest membership-based group purchasing organization in the
U.S., representing 9,100 member facilities in all 50 states and includes
hospitals, medical group practices, nursing homes, surgery centers, managed care
organizations, pharmacies and integrated delivery networks. This membership
represents more than 326,000 healthcare beds. The launch of the AmeriNet Choice
private label glove products took place in late July 1999. During 1999, AmeriNet
sales totaled over $1.0 million.
During 1999, we began offering a medical examination glove made of
nitrile, a non-latex material. We have plans to develop and introduce other new
products in the near future as well, including surgical gloves, and possibly
other infection control products besides gloves.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net
sales for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 74.5 72.1 79.3
----- ----- -----
Gross profit 25.5 27.9 20.7
Selling, general & administrative expenses 18.8 15.3 16.0
----- ----- -----
Income from operations 6.7 12.6 4.7
Interest (expense) / other income, net (1.3) (1.2) (2.3)
Provision for (benefit from) income taxes 1.8 1.5 (0.6)
Minority interest in loss (income) of subsidiary 0.2 (0.9) (0.6)
Net loss from discontinued operations - - (1.5)
----- ----- -----
Net income 3.8% 9.0% 0.9%
===== ===== =====
</TABLE>
Fiscal 1999 compared to Fiscal 1998. The results of operations for 1999
and 1998 include only the revenue and expenses of the glove business. Net sales
include glove sales from AHPC's examination glove product line and external exam
glove sales from PT Buana. Net sales totaled $65,280,104 and $64,968,401 for the
years ended December 31, 1999 and 1998, respectively. This increase represents
less than a 1% increase in glove sales in 1999 over 1998. Sales for the year
ended December 31, 1999 were reduced by $2.3 million, as we changed to a
consignment inventory arrangement with a key food service customer in the second
quarter. The medical division experienced average sale price reductions of 8%
during 1999 due to a sharp decline in the price of raw material latex and
competitive forces. The medical division experienced a
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<PAGE> 15
16.1% increase in case volume over 1998, and product mix continues to reflect
increased powder-free latex and synthetic glove sales. Our net sales are derived
from the sale of finished products, net of allowable rebates, discounts and
returns.
During the month of December 1999, AHPC recorded record sales as
customers were preparing for the year 2000 and planning for any unknown events
associated with the new millennium. This increased sales volume towards the end
of 1999 led to a decline in sales for the month of January 2000.
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 3.8% from $46,857,229 for the
year ended December 31, 1998 to $48,645,076 for the year ended December 31,
1999. As a percentage of net sales, cost of goods sold increased from 72.1% for
the year ended December 31, 1998 to 74.5% for the same period in 1999. The
primary factors associated with the increase in cost of goods sold as a
percentage of net sales were lower average selling prices, increased warehousing
cost associated with higher inventory levels, the change to consignment
inventory and increased ocean freight rates, partially offset by an increased
mix of higher margin powder-free glove sales and reductions in glove purchase
prices from manufacturers.
AHPC is continuing to strive for reduced glove purchase prices from its
suppliers to counteract the impact of reductions in its selling prices. We
believe that the existing selling prices in the U.S. will not remain at their
low levels for an extended period of time as the price of latex has begun to
rise in 2000.
As a result of the above factors, our gross profit decreased 8.2% from
$18,111,172 for the year ended December 31, 1998 to $16,635,028 for the year
ended December 31, 1999. We expect our gross margins to continue to be affected
by changes in product mix, competition, the price of latex and other factors.
During the third quarter of 1999, the Indonesia factory, PT Buana,
completed its installation of chlorination equipment used for the manufacturing
of latex powder-free gloves, which produce a higher gross profit margin than
powdered gloves. PT Buana produced only a small quantity of powder-free gloves
in the second half of 1999, as it is selling on a trial basis its product in the
European market before sales to the U.S. are made.
The domestic market for exam gloves is converting rapidly from latex
powdered to latex powder-free gloves and to synthetic gloves. This move is a
result of greater user receptivity to powder-free gloves. The chlorination
process used to make powder-free gloves reduces the sensitivity to latex and
eliminates powder levels, which could carry latex particles in the air. Due to
customer demand, we are providing and selling more latex powder-free exam gloves
and synthetic gloves. We expect that this trend will continue. Our sales of
latex powder-free exam gloves and synthetic gloves were approximately 73% of
sales in 1999 versus 63% in 1998.
Selling expenses include all salaries for sales and marketing staff
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 by 23.5% from $9,954,785 in 1998 to $12,295,192 in
1999. As a percentage of 1999 net sales, SG&A expenses
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<PAGE> 16
increased to 18.8% in 1999 compared with 15.3% in 1998. This increase of
$2,340,407 in SG&A expenses is primarily attributable to an increase in selling
compensation related costs of $1,298,900 due to the planned expansion of our
tele-sales and medical sales force, additional travel, telephone and sample
expense of $321,000 associated with the larger sales staff, and an increase in
depreciation expense and consulting fees of $362,000 associated with our
recently implemented computer system.
Income from operations decreased by 46.8% from $8,156,387 for 1998 to
$4,339,836 for 1999. Operating margins decreased from 12.6% in the 1998 period
to 6.7% in the 1999 period.
Interest expense decreased from $1,192,405 during 1998 to $984,159 in
1999. This decrease in interest expense of $208,246 is due to (i) approximately
$7.5 million of PT Buana's debt having been repaid in 1998 as Indonesian rates
were very high and (ii) our new debt agreement entered into on December 1, 1998
carries a lower rate than the previous debt facility, offset by increased
borrowings in 1999 on the line of credit used to finance its increased inventory
levels and capital expenditures. The 1998 PT Buana debt repayments were made
with our proceeds from the sale of Common Stock to WRP Asia on March 31, 1998.
All inter-company interest income and interest expense is eliminated in
consolidation.
Other income consists of rental income, interest expense and
miscellaneous income. Other income for the year ended December 31, 1999 was
$166,155 compared to $461,386 for the comparable period in 1998. This decrease
in other income of $295,231 is primarily due to the disposal of the investment
in LSAI in 1998, which generated a gain of $168,375.
The provision for income taxes increased from $952,146 for the year
ended December 31, 1998 to $1,166,121 for the year ended December 31, 1999. The
1998 income tax provision is less than the U.S. statutory rates. During the
first quarter of 1998, we had net operating loss carry-forwards ("NOL's") which
were used to reduce taxable income for that period. In accordance with tax
regulations, usage of the NOL's is subject to limitations if certain ownership
changes occur. Due to the WRP Asia ownership change on March 31, 1998, our NOL's
became limited and subsequent to that date, we began recording a provision for
income taxes. At December 31, 1998, we had NOL's of approximately $2.7 million,
which will be available to reduce federal taxable income in the U. S. in future
periods not to exceed approximately $1.3 million per year.
The minority interest in loss (income) of subsidiary represents the
non-owned 30% profit or loss from PT Buana. The minority interest in loss
(income) of PT Buana was ($594,062) during 1998 compared to $97,033 in 1999.
During 1999, PT Buana's profitability decreased primarily due to the reductions
in its gross profit triggered by lower selling prices for powdered latex exam
gloves in the marketplace as well as due to reduced production output.
Net income decreased by $3,426,416 or 58.3% from $5,879,160 for the
year ended December 31, 1998 to $2,452,744 for the year ended 1999 due to the
previously mentioned factors. The diluted earnings per share was $.35 in 1999
compared to $.93 in 1998.
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.
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<PAGE> 17
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. Our 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 our exit plan, we 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
Indonesian facility, and (iv) reduced duty importation fees associated with
examination gloves in 1998. We currently expect our 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, we
are providing and selling more latex powder-free exam gloves and expect that
this trend will continue in the future. Our sales of latex powder-free exam
gloves were approximately 44% of net sales in 1998 versus 37% in 1997.
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 our sales force. As a percentage of 1998 net sales, SG&A expenses
decreased to 15.3%, compared with 16.0% in 1997. We currently expect to make
additional investments in sales and marketing to further develop established
markets and to introduce new products to the marketplace. Accordingly, we
currently expect that its SG&A expense will continue to increase in absolute
dollars and may
15
<PAGE> 18
possibly increase as a percentage of net sales in the future.
Prior to July 1, 1997, the financial statements and transactions of our
Indonesian subsidiary, PT Buana, were maintained in the functional currency,
Indonesian rupiahs, and translated into U.S. dollars. Due to our business and
operating facility in Indonesia, we 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
our sale of Common Stock to WRP Asia on March 31, 1998.
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.
We 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, we
began recording a provision for income taxes in 1998. We did not record any
taxes to be paid for our 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, we have generated tax NOL's in Indonesia that can be
utilized in the future. During 1998, we have 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 our
continued profitability, we recorded a reduction in our 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 we 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, our net income was $5,879,160,
compared to a net income of $465,722 in 1997. The overall diluted earnings per
share was $.93 in 1998
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<PAGE> 19
compared to $.11 in 1997.
SEGMENT INFORMATION
1999 and 1998. During 1999 and 1998, we were engaged solely in the
business of manufacturing and distributing examination gloves. We have 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 and powder-free
latex gloves and sells them primarily to AHPC and WRP Asia. The distribution
segment involves the procurement and sale of gloves purchased from the
manufacturing segment and other glove manufacturers and then sold to national
and regional healthcare, food service, retail and other distributors within the
U.S. The operations of the distribution segment are located entirely within the
U.S.
1997. At December 31, 1997, we were in the business of manufacturing
and distributing examination gloves in the U.S. We 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1999 decreased $508,263 from
December 31, 1998 levels. We experienced this decline in cash flow in 1999 due
to cash used in operations, the funding of capital expenditures and net
repayments of letter of credit obligations.
Our operations used cash of $1,182,339 in 1999 as a result of an
increase in accounts receivable, inventories and amounts due from affiliate,
offset by net income of $2,452,744 and non-cash depreciation expenses of
$1,750,261. In 1999, we used cash of $2,972,837 for the purchase of capital
expenditures. Capital expenditures were made in 1999 for the acquisition of
$2,084,939 of manufacturing equipment by PT Buana primarily to produce latex
powder-free exam gloves and by AHPC of $887,898 primarily to install and
implement a new enterprise wide computer system. We experienced increased cash
flow from financing activities of $3,743,556. The generation of cash for
financing purposes was from net borrowings on the line of credit facility of
$5,657,396, offset by net reductions in letter of credit obligations.
On December 1, 1998, we obtained a new, domestic three-year credit
facility from a large commercial credit company, G.E. Capital. This asset-based
lending facility included a $10,000,000 revolving line of credit with a
$7,000,000 letter of credit subfacility. The line of credit borrowings carry an
interest rate of commercial paper plus 2.75% (8.30% at December 31, 1999). On
March 31, 1999, AHPC amended its loan and security agreement by increasing the
maximum credit loan limit from $10,000,000 to $15,000,000. As part of the
amendment, the letter of credit subfacility was increased from $7,000,000 to
$11,000,000. At December 31, 1999, AHPC had outstanding $7,423,064 on the
revolving line of credit and $1,328,410 of letter of credit liabilities under
the credit facility.
Net inventories at December 31, 1999 increased 9.0% to $12,930,569
compared with $11,860,855 at December 31, 1998 due to the addition of several
inventory product lines. Net trade accounts receivable at December 31, 1999
increased by 44% to $7,969,369 from
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<PAGE> 20
$5,532,405 at December 31, 1998 due to a record sales month in December 1999 and
a strong collection effort made at the end of 1998.
In October 1994, pursuant to two debenture and warrant purchase
agreements between us and two trusts affiliated with one of our directors, we
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 our Common Stock 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 our Common Stock at an exercise price of
$22.20 per share. At December 31, 1999 and 1998, total debt of $1,700,000 and
$2,000,000, respectively, was outstanding as a result of this transaction. We
anticipate repayments of $600,000 in 2000 on this debt and have classified only
$1,100,000 of this debt as long-term at December 31, 1999.
We currently expect to have cash needs during 2000 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 and other infection control products; (ii) the continued hiring of
marketing staff; (iii) the hiring of additional support staff; (iv) the
continuing expansion of the manufacturing facility in Indonesia; (v) paying off
debt obligations; (vi) purchasing our Common Stock in connection with our stock
repurchase program; (vii) the possible funding of Indonesian income taxes
created by foreign currency fluctuations; and (viii) possible acquisitions. We
believe that our present cash and cash to be generated from future operations
plus our credit facility will be sufficient to fund our ongoing operations.
YEAR 2000
In preparation for the rollover to the year 2000, we initiated a year
2000 readiness project, the scope of which included the following steps:
ensuring the compliance of all applications, operating systems and hardware on
mainframe, personal computer, local area network and wide area network
platforms; addressing issues related to non-IT imbedded software and equipment;
and addressing the compliance of key suppliers and customers. We did not
experience any significant malfunctions or errors in our operating or business
systems when the date changed from 1999 to 2000. Based on operations since
January 1, 2000, we do not expect any significant impact to our ongoing business
operations as a result of the Year 2000 issue. However, Year 2000 compliance has
many elements and potential consequences, some of which may not be foreseeable
or may be realized in future periods. Consequently, there can be no assurance
that unforeseen circumstances may not arise, or that the we will not in the
future identify equipment or systems which are not Year 2000 compliant. We are
currently not aware of any significant Year 2000 or similar problem that may
have arisen with our key customers, suppliers or other significant third
parties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market value of investments. We have
not entered into interest rate caps of collars or other hedging instruments.
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<PAGE> 21
Exposure to changes in interest rates is limited to borrowings under
revolving credit and debt agreements, which have variable interest rates tied to
the prime and commercial paper rates. We estimate that the fair value of each
debt instrument approximated its market value at December 31, 1999.
We are subject to fluctuations in the value of the Indonesian Rupiah
vis-a-vis the U.S. dollar. The investment in the Indonesian subsidiary is
remeasured into the U.S. dollar and the book value of the assets and liabilities
of this operation at December 31, 1999 approximated its fair value.
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 us not achieving certain results
included in any statement that may be considered a forward looking statement. We
caution the reader that the following risks may not be exhaustive.
Variations in Quarterly Results. Our quarterly operating results are
subject to various risks and uncertainties, including risks and uncertainties
related to: local and international political and economic conditions; foreign
currency volatility; competitive pressures; the composition, timing and size of
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,
our operating results may vary materially from quarter to quarter.
We operate 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 our operating expenses are based on anticipated revenue levels
and because a high percentage of our expenses are relatively fixed, if
anticipated shipments in any quarter do not occur as expected, our operating
results may be adversely affected and may fall significantly short of
expectations. Any other unanticipated decline in the growth rate of our net
revenues, without a corresponding and timely reduction in the growth of
operating expenses, could also have an adverse effect on us and our future
operating results.
We aim to prudently control our operating expenses. However, there is
no assurance that, in the event of any revenue, gross margin or other shortfall
in a quarter, we will be able to control expenses sufficiently to meet
profitability objectives for the quarter.
Financing. Our current credit facility expires in December 2001. There
can be no assurances that it will be renewed, extended or sufficient to finance
continued growth of the Company.
Dependence on Gloves. We are exclusively engaged in the manufacture and
sale of disposable gloves. Accordingly, our 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 our results of
operations or financial condition. In addition, we currently have a long-term
supply contract with
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<PAGE> 22
an unrelated Malaysian glove manufacturing company for the purchase of powdered
gloves. Should the demand for powdered gloves continue to decline, we will
continue to be subject to the aforementioned commitments or, if such commitments
cannot be fulfilled, we will be subject to certain penalty provisions within the
supply contract.
Dependence on Rubber Harvest and Latex Concentrate. Our ability to
produce and purchase ours 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 us 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 our results of operations and financial condition. In
addition, rubber is a commodity traded on world commodities exchanges and is
subject to price fluctuations driven by changing market conditions over which we
have no control. Increases in the price of latex concentrate have adversely
affected our raw material costs in the past and could continue to do so.
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 our supply of glove products.
Currencies of several Asian-Pacific countries, including Indonesia,
Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, have experienced
significant fluctuations against the U.S. dollar. Our Indonesian factory
maintains its books in the Indonesian currency, the rupiah, and reports its
Indonesian income taxes with rupiah financial reports. The Indonesian rupiah
experienced volatile currency fluctuations against the U.S. dollar which caused
significant income tax adjustments in 1999. Foreign currency exchange volatility
may continue and could cause us to incur significant income tax adjustments in
the future.
In the past, interest rates in many Asian-Pacific countries have risen
sharply and credit availability was 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 our net product sales are derived
from products
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<PAGE> 23
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. We currently expect that our net product
sales from powder-free and synthetic gloves will continue to increase as a
percentage of total net product sales. In addition, we are currently
experiencing pricing pressures due to a number of factors, including competitive
conditions, consolidation within certain groups of suppliers, excess supply of
products, changing technologies in the production of powder-free gloves and
increasing demand for new glove products. Additionally, we may not be able to
pass on price increases to our customers in a timely manner, or at all. To the
extent that these factors continue, our gross margins could decline, which would
adversely affect us and our future operating results.
Downward pressure on our 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 and
synthetic gloves. We are aiming to reduce our product costs and to increase our
percentage of net product sales from powder-free and synthetic gloves. However,
there is no assurance that these efforts will be successful.
New Products. We are planning to distribute new glove products,
including surgical gloves. We may begin to distribute other infection control
products besides 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, our future growth is dependent on our
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 our
relationships with our existing customer base.
The failure to achieve these and other objectives could limit future
growth and have an adverse effect on us and our future operating results. In
addition, the pressure to develop and enhance products and to establish and
expand markets may cause our SG&A expenses to increase substantially, which
could also have an adverse effect on us and our future operating results.
Manufacturing in Indonesia - International Operations. Our
international manufacturing operation has grown substantially and, thus, we are
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 us and our future operating results.
Competition. The various markets in which we operate are becoming
increasingly competitive as a number of other companies develop and sell
products that compete with our products in these markets. Certain of these
competitors have significantly more financial and technical resources than us.
We face 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 us
21
<PAGE> 24
and sales lost by us to competitors that may adversely affect us and out future
operating results.
Reliance Upon Distributors. We use various channels to market and
distribute our products primarily by sales to end-users via third-party
distributors. Third-party distributors are a substantial channel for
distribution to medical facilities. Accordingly, our ability to market and
distribute its products depends significantly on our relationship with
third-party distributors, as well as the performance and financial condition of
these distributors. In the event that our relationship with its distributors
deteriorates, or the performance or financial condition of the distributor
becomes unsatisfactory, us and our future operating results could be adversely
affected.
Reliance Upon Significant Contracts and Customers. A significant
portion of our acute care and medical division business had been obtained
through the achievement of being selected to supply group purchasing
organizations and integrated delivery networks ("IDN's") in the U.S. These group
purchasing organizations and IDN's, made up of a few or thousands of health care
facilities, centralize medical product purchases and offer its members the
ability to enjoy larger purchasing power discounts than an individual hospital
or member might enjoy independently. We reported in early 2000 that the group
purchasing organization, Novation, will not renew its supply contract with AHPC,
which expires in April 2000. Our sales of Novation products to Novation members
accounted for over half of our sales in 1999. We will strive to convert these
NovaPlus accounts to our branded products upon the expiration of the Novation
contract. There can be no assurance that we will be successful in our attempts
to maintain this business and our inability to retain a significant portion of
this business would materially adversely affect our sales, results of
operations, and financial condition.
In addition, during 1999, two of AHPC's customers accounted for 69% of
net sales. The loss of either of such customers would have a materially adverse
effect on us and our operating results.
Excess or Obsolete Inventory. Managing our 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 us 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 us and our operating results.
Hiring and Retention of Employees. Our 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. The loss of one
or more key employees or our inability to attract additional qualified employees
or retain other employees could have an adverse effect on us and our future
operating results. In addition, we may experience increased compensation costs
in order to compete for skilled employees.
Product Liability Insurance. Participants in the medical supplies
business are potentially
22
<PAGE> 25
subject to lawsuits alleging product liability, many of which involve
significant damage claims and defense costs. A successful claim against us in
excess of our insurance coverage could have a material adverse effect on our
results of operations or financial condition. Claims made against us, regardless
of their merit, could also have a material adverse effect on our reputation.
There is no assurance that the coverage limits of our insurance policy will be
adequate or that present levels of coverage will be available at affordable
rates in the future. While we have 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. We are 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 our
insurance will be sufficient to meet any recovery for which we may be found
liable, that the outcome of such suits will not materially adversely affect the
our results of operations or financial condition or that our 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 our Common Stock, have experienced extreme price
fluctuations. The market price of the our Common Stock may be significantly
affected by various factors such as: quarterly variations in our operating
results; changes in our revenue growth rates; the loss of a significant customer
or sales contract; changes in earnings estimates by market analysts; the
announcement of new products or product enhancements by us or our 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 our Common Stock
will not experience significant fluctuations in the future.
Governmental Regulations. Our 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 us. 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 our business
financial condition and results of operations.
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.
23
<PAGE> 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Richard Wong 55 Chairman and Chief Executive Officer
Edward J. Marteka 62 President
Kwong Ann Lew 39 Chief Financial Officer, Treasurer and Secretary
Robert C. Carter 38 Controller and Assistant Secretary
</TABLE>
Biographies for Messrs. Wong, Marteka, Lew and Carter are included below.
At March 29, 2000, our directors consist of six Class A Directors and
two Class B Directors are as follows:
Class A Directors
Name Age Director Since
- ---- --- --------------
Kamaruddin Taib 42 1998
Richard C. M.Wong 55 1997
Edward J. Marteka 62 1995
Kwong Ann Lew 39 1997
George Jeff Mennen 59 1994
Richard Swanson 64 1998
Class B Directors
Name Age Director Since
- ---- --- --------------
Robert J. Simmons 57 1995
Don L. Arnwine 67 1995
The following sets forth brief statements of the principal occupations
and other biographical information of each of the directors and executive
officers.
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 completing his studies, he
joined a leading local Merchant Bank for three years (1980-1983)
24
<PAGE> 27
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
our subsidiary, AHPC since its incorporation in 1989. In May 1995, Mr. Marteka
was appointed to the Board of Directors and as our President. Mr. Marteka is
responsible for our overall operations and of AHPC. Mr. Marteka had held various
positions with Baxter Healthcare Corporation, and served as Vice President of
its International Division.
Kwong Ann Lew was elected a Class A Director of the Company on May 20,
1997. Mr. Lew currently serves as our Chief Financial Officer and Secretary. 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 a Class A Director on June 12, 1998. Mr.
Swanson is presently a consultant with 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 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
25
<PAGE> 28
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 us in March 1992 and has served as the
Controller of AHPC since that time. He was appointed our Assistant Secretary 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 1999 fiscal year, our 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 our 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 1999, the Compensation
Committee and Audit Committee each held one meeting 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 our Common Stock in
connection with his election and 1,000 shares of our 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 our Common Stock 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.
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
our Common Stock to file reports of ownership and changes in their ownership of
our equity securities with the Securities and Exchange Commission and Nasdaq.
Based solely on a review of the reports and representations furnished to us
during the last fiscal year, we believe that each of these persons is in
compliance with all applicable filing requirements.
26
<PAGE> 29
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 $100,000 during our last three fiscal years:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- --------------------------
Name and Other Annual Restricted Stock Stock
Principal Position Fiscal Year Salary Bonus Compensation Awards ($) Options
- ------------------ ----------- ------ ----- ------------ ---------------- -------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Marteka 1999 $200,000 $ 20,000 $7,200 - -
President 1998 $200,000 $100,000 $7,200 $315,625 50,000
1997 $160,000 $ 26,667 $7,200 $ 18,300 5,000
</TABLE>
There is no other long-term compensation for the executive listed above in
1997 through 1999.
EMPLOYMENT AGREEMENTS
On April 1, 1994, we 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 our
President (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 the Compensation
Committee. Mr. Marteka also received options to purchase 1,000 shares of our
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.
OPTION GRANTS IN FISCAL 1999
During 1999, there were no stock options granted to the president of
the Company.
On July 12, 1998, we issued options under our Omnibus Equity
Compensation Plan to certain employees and directors to purchase 359,000 shares
of our 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 years from
the date of grant.
As approved by the Board of Directors, all outstanding stock options at
February 29, 2000 to current employees and directors were re-priced effective
February 29, 2000 to $2.07, the
27
<PAGE> 30
closing price on that date.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal
1999 by the executive officer named in the summary compensation table and the
value of such officer's unexercised stock options as of December 31, 1999.
<TABLE>
<CAPTION>
Number of Unexercised Value of In-the-Money
Shares Value Options at 12/31/99 Options at 12/31/99
Acquired on Realized --------------------------- ----------------------------
Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Marteka 0 $ - 0 - 101,000 - 0 - $ - 0 - $ - 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 our 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 our continued growth and profitability. Under the
Plan, awards may be made in the form of stock options or restricted stock. In
general, we compensate executive officers and senior management through salary,
bonus (where appropriate) and the grant of stock options. During fiscal 1999,
all action of the Compensation Committee was made during the one meeting held in
1999 or was taken by the Committee by unanimous written consent without a
meeting.
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.
28
<PAGE> 31
STOCK PERFORMANCE CHART
The following graph compares the yearly percentage change in the
cumulative total shareholder return on our Common Stock for each of our 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 us, 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.
[LINE GRAPH]
* $100 invested on December 31, 1994 in stock or Index - including
reinvestment of dividends. Fiscal year ending December 31.
CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C> <C>
WRP Corporation 100 23.1 22.1 23.8 35.0 12.3
NYSE/AMEX/Nasdaq Stock 100 136.3 165.3 216.4 267.2 333.5
Peer Group 100 166.6 189.6 226.2 177.8 176.4
</TABLE>
29
<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 29, 2000, with
respect to the beneficial ownership of our Common Stock and Series A Common
Stock by (i) each shareholder known by us to be the beneficial owner of more
than 5% of our 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 Heartland Advisors, Inc.(5) 432,200 6.2%
Common Stock Kamaruddin Taib 7,000(3) *
Common Stock Richard Wong 90,000(3) 1.3%
Common Stock Kwong Ann Lew 30,000(3) *
Edward J. Marteka 101,000(3)
Common Stock Edward J. Marteka 13,500 114,500 1.7%
-------
Common Stock George Jeff Mennen 10,000(3)
Common Stock George Jeff Mennen 10,000 20,000 *
-------
Common Stock Robert J. Simmons 10,000(3)
Common Stock Robert J. Simmons 5,000 15,000 *
-------
Common Stock Don L. Arnwine 10,000(3)
Common Stock Don L. Arnwine 2,000 12,000 *
-------
Common Stock Richard Swanson 7,000(3)
Common Stock Richard Swanson 1,000 8,000 *
-------
Common Stock Robert C. Carter 27,000(3)
Common Stock Robert C. Carter 3,000 30,000 *
-------
Common Stock Total Executive Officers &
Directors as a group (9 persons) 292,000(3)
34,500 326,500 4.7%
-------
</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 our
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 3, 2000.
(5) Heartland Advisors, Inc. are located at 789 North Water Street, Milwaukee,
Wisconsin 53202.
30
<PAGE> 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, we purchased latex powder-free exam gloves amounting to
$18.4 million from our majority shareholder, WRP Asia. In addition, our
Indonesian factory sold approximately $8.3 million of powdered latex exam gloves
to WRP Asia in 1999. We believe the prices charged by each related entity are as
favorable as those that could be negotiated with unaffiliated third parties.
During 1999, we received consulting services from Healthcare Alliance,
Inc. ("Alliance"), a company 60% owned by Robert Simmons, one of our directors.
We engaged Alliance to assist us in marketing our products with the expressed
purpose of negotiating and executing a purchase agreement with various
healthcare group purchasing organizations. We paid Alliance $66,160 in 1999 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).
31
<PAGE> 34
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).
10.37 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).
10.42 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, incorporated herein by reference to Exhibit 10.44 included
in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1998 (File No. 0-17458).
21 Subsidiaries of the Company (1).
23.1 Consent of Arthur Andersen LLP (1).
27 Financial Data Schedule (1).
(b) During the last quarter of 1999, the Company did not file any reports
on Form 8-K.
(1) Filed herewith.
32
<PAGE> 35
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, 2000 By: /s/ Edward J. Marteka
-----------------------------
Edward J. Marteka, President
Date: March 29, 2000 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, 2000 By: /s/ Richard Wong
-----------------------------
Richard Wong, Chief Executive
Officer and Chairman of Board of
Directors
Date: March 29, 2000 By: /s/ Kamaruddin Taib
-----------------------------
Kamaruddin Taib, Director
Date: March 29, 2000 By: /s/ Edward J. Marteka
-----------------------------
Edward J. Marteka, Director
Date: March 29, 2000 By: /s/ Kwong Ann Lew
-----------------------------
Kwong Ann Lew, Director
Date: March 29, 2000 By: /s/ George Jeff Mennen
-----------------------------
George Jeff Mennen, Director
Date: March 29, 2000 By: /s/Richard Swanson
-----------------------------
Richard Swanson, Director
Date: March 29, 2000 By: /s/ Robert J. Simmons
-----------------------------
Robert J. Simmons, Director
Date: March 29, 2000 By: /s/ Don L. Arnwine
-----------------------------
Don L. Arnwine, Director
33
<PAGE> 36
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1999 AND 1998
TOGETHER WITH AUDITORS' REPORT
<PAGE> 37
WRP CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997 F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
<PAGE> 38
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 as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 4, 2000
F-2
<PAGE> 39
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------------------------------------------------------------------- -------------- ---------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 171,462 $ 679,725
Accounts receivable--trade, net of allowance for
doubtful accounts of $270,000 in 1999 and
$240,000 in 1998 7,969,369 5,532,405
Inventories, net 12,930,569 11,860,855
Prepaid expenses 562,919 958,318
Due from affiliate 2,519,347 1,340,261
Deferred tax assets 691,314 962,190
Other receivables 248,030 509,003
------------- -------------
Total current assets 25,093,010 21,842,757
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land rights and land improvements 736,535 736,535
Construction in progress 11,737 1,275,667
Equipment, furniture and fixtures 14,955,236 11,357,924
Building improvements 2,232,249 1,689,878
Vehicles 166,273 149,958
------------- -------------
Total property, plant and equipment 18,102,030 15,209,962
Less- Accumulated depreciation and
amortization (4,407,304) (2,733,225)
------------- -------------
Property, plant and equipment, net 13,694,726 12,476,737
------------- -------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$539,827 in 1999 and $472,595 in 1998 1,210,173 1,277,405
Other Assets 196,262 203,040
------------- -------------
Total other assets 1,406,435 1,480,445
------------- -------------
$ 40,194,171 $ 35,799,939
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
F-3
<PAGE> 40
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ ------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable--trade $ 1,143,258 $ 2,504,225
Trade notes payable to banks 1,328,410 3,322,882
Notes payable and current portion of long-term
obligations 8,313,211 2,086,833
Due to affiliate 3,210,576 3,891,944
Accrued expenses 3,443,599 3,507,487
Total current liabilities 17,439,054 15,313,371
------------ ------------
LONG-TERM DEBT 1,100,000 1,668,982
------------ ------------
DEFERRED TAX LIABILITY 553,225 152,037
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Note 8)
MINORITY INTEREST IN SUBSIDIARY 1,627,080 1,724,113
------------ ------------
SHAREHOLDERS' EQUITY:
Series A common stock, $.01 par value;
1,252,538 shares authorized; 1,252,538 shares
issued and outstanding in 1999 and 1998 12,525 12,525
Common stock, $.01 par value; 10,000,000 shares
authorized; 5,803,692 and 5,785,525 shares
issued and outstanding in 1999 and 1998,
respectively 58,037 57,855
Additional paid-in capital 17,942,471 17,862,021
Retained earnings 2,784,815 332,071
Less- Common stock in treasury, at cost, 130,000
shares in 1999 and 1998 (1,323,036) (1,323,036)
------------ ------------
Total shareholders' equity 19,474,812 16,941,436
------------ ------------
$ 40,194,171 $ 35,799,939
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<PAGE> 41
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
NET SALES $ 65,280,104 $64,968,401 $51,402,691
COST OF GOODS SOLD 48,645,076 46,857,229 40,760,146
------------ ----------- -----------
GROSS PROFIT 16,635,028 18,111,172 10,642,545
OPERATING EXPENSES:
Selling, general and administrative 12,295,192 9,954,785 8,226,945
------------ ----------- -----------
INCOME FROM OPERATIONS 4,339,836 8,156,387 2,415,600
INTEREST EXPENSE 984,159 1,192,405 1,481,467
OTHER INCOME 166,155 461,386 293,362
------------ ----------- -----------
Income from continuing operations before provision for (benefit
from) income taxes, minority interest and loss from discontinued
operations 3,521,832 7,425,368 1,227,495
PROVISION FOR (BENEFIT FROM) INCOME TAXES 1,166,121 952,146 (322,042)
------------ ----------- -----------
Income from continuing operations before minority interest and loss
from discontinued operations 2,355,711 6,473,222 1,549,537
MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARY 97,033 (594,062) (300,145)
------------ ----------- -----------
Income from continuing operations before loss from discontinued
operations 2,452,744 5,879,160 1,249,392
------------ ----------- -----------
NET LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS - - (783,670)
------------ ----------- -----------
Net income $ 2,452,744 $ 5,879,160 $ 465,722
============ =========== ===========
BASIC NET INCOME PER COMMON SHARE:
Continuing operations $0.35 $0.94 $0.29
Discontinued operations - - (0.18)
------------ ----------- -----------
$0.35 $0.94 $0.11
============ =========== ===========
DILUTED NET INCOME PER COMMON SHARE:
Continuing operations $0.35 $0.93 $0.29
Discontinued operations - - (0.18)
------------ ----------- -----------
$0.35 $0.93 $0.11
============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE> 42
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK COMMON STOCK ADDITIONAL
----------------------- ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 1,252,538 $12,525 3,188,333 $31,883 $10,875,897
Issuance of common stock upon
exercise of stock options - - 3,334 34 9,135
Net income - - - - -
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
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 - - - - -
Unrealized gain on LSAI common stock - - - - -
---------- --------- ---------- ---------- -----------
BALANCE, December 31, 1998 1,252,538 12,525 5,785,525 57,855 17,862,021
Issuance of common stock upon
exercise of stock options - - 18,167 182 80,450
Net income - - - - -
---------- --------- ---------- ---------- -----------
BALANCE, December 31, 1999 1,252,538 $12,525 5,803,692 $58,037 $17,942,471
========== ========= ========== ========== ===========
<CAPTION>
CUMULATIVE UNREALIZED
FOREIGN GAIN ON
RETAINED CURRENCY LSAI
EARNINGS TRANSLATION COMMON TREASURY SHAREHOLDERS'
(DEFICIT) ADJUSTMENT STOCK STOCK EQUITY
--------- -------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $(6,012,811) $(53,034) $ - $(1,323,036) $3,531,424
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
Indonesian paid-in capital adjustment - - - - (8,808)
Unrealized gain on LSAI common stock - - 261,979 - 261,979
----------- ------------ --------- ----------- ------------
BALANCE, December 31, 1997 (5,547,089) - 261,979 (1,323,036) 4,312,520
Issuance of common stock to WRP Asia
Pacific Sdn. Bhd. (see Note 2) - - - - 6,750,000
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)
----------- ------------ --------- ----------- ------------
BALANCE, December 31, 1998 332,071 - - (1,323,036) 16,941,436
Issuance of common stock upon
exercise of stock options - - - - 80,632
Net income 2,452,744 - - - 2,452,744
----------- ------------ --------- ----------- ------------
BALANCE, December 31, 1999 $ 2,784,815 $ - $ - $(1,323,036) $19,474,812
============ ============ ========= =========== ============
<CAPTION>
COMPREHENSIVE
INCOME
-------------
<S> <C>
BALANCE, December 31, 1996
Issuance of common stock upon
exercise of stock options
Net income $ 465,722
Foreign currency translation adjustment 53,034
Indonesian paid-in capital adjustment
Unrealized gain on LSAI common stock 261,979
------------
BALANCE, December 31, 1997 $ 780,735
============
Issuance of common stock to WRP Asia
Pacific Sdn. Bhd. (see Note 2)
Issuance of common stock upon
exercise of stock options
Net income $ 5,879,160
Unrealized gain on LSAI common stock (261,979)
-----------
BALANCE, December 31, 1998 $ 5,617,181
===========
Issuance of common stock upon
exercise of stock options $ -
Net income 2,452,744
-----------
BALANCE, December 31, 1999 $ 2,452,744
===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE> 43
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,452,744 $5,879,160 $ 465,722
Adjustments to reconcile net income to net cash (used in) provided by
operating activities-
Depreciation 1,750,261 1,247,111 898,831
Amortization 67,232 67,232 41,058
Deferred income taxes 672,064 (657,319) (133,169)
Change in net assets of discontinued operations - (214,294) (340,021)
Loss from disposal of discontinued operations - - 783,670
Loss on disposal of property, plant and equipment 4,197 2,913 15,606
Gain on sales of LSAI common stock - (168,375) (79,483)
Changes in operating assets and liabilities-
Accounts receivable--trade, net (2,436,964) (121,562) (733,353)
Inventories, net (1,069,714) (3,656,994) (109,212)
Prepaid expenses 395,399 97,470 (56,084)
Other assets 267,751 (628,752) 52,860
Accounts payable--trade (1,360,967) (118,316) (668,965)
Accrued expenses (63,888) 1,140,503 1,147,070
Amounts due to and from affiliates (1,860,454) 2,415,695 303,840
----------- ---------- -----------
Net cash (used in) provided by operating activities (1,182,339) 5,284,472 1,588,370
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,972,837) (2,005,123) (3,063,735)
Proceeds on sales of LSAI common stock - 982,892 280,083
Proceeds on sales of property, plant and equipment 390 1,761 7,747
Minority interest in subsidiary (97,033) 594,062 900,070
----------- ---------- -----------
Net cash used in investing activities (3,069,480) (426,408) (1,875,835)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on trade notes payable to banks (1,994,472) (2,126,299) (1,561,272)
Net borrowings (payments) on notes payable 5,657,396 (8,603,711) 1,346,480
Net proceeds from stock option exercises 80,632 261,735 9,168
Proceeds from issuance of stock - 6,750,000 -
Net (payments to) advances from Indonesian minority interest shareholders - (622,045) 280,998
----------- ---------- -----------
Net cash provided by (used in) financing activities 3,743,556 (4,340,320) 75,374
----------- ---------- -----------
IMPACT OF EXCHANGE RATES ON CASH - - 53,034
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (508,263) 517,744 (159,057)
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, beginning of year 679,725 161,981 321,038
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 171,462 $ 679,725 $ 161,981
=========== ========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE> 44
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
WRP Corporation and Subsidiaries (the "Company") 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, through its subsidiary in Indonesia, PT WRP Buana
Multicorpa ("PT Buana") manufactures medical examination gloves.
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
WRP Corporation, AHPC and PT Buana, a 70% owned Indonesian glove
manufacturing subsidiary. 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.
F-8
<PAGE> 45
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Raw materials $ 137,180 $ 79,213
Work in process 442,089 120,700
Finished goods 13,096,039 12,430,942
Reserves (744,739) (770,000)
------------ -----------
Total $ 12,930,569 $11,860,855
============ ===========
</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, 1999 and 1998, 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>
When property or equipment is retired or otherwise disposed of, the net
book value of the asset is removed from the Company's books and the net
gain or loss is included in the determination of income.
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.
F-9
<PAGE> 46
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.
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 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 PER COMMON SHARE
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
(common stock equivalents). The weighted-average number of common shares
and common share equivalents outstanding for the years ended December 31,
1999, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted-average number
of common shares outstanding 6,924,538 6,265,312 4,312,132
Dilutive effect of common share
equivalents 40,318 68,198 49,077
--------- --------- ---------
Diluted weighted-average
number of common shares
outstanding
6,964,856 6,333,510 4,361,209
========= ========= =========
</TABLE>
The Company had additional stock options and warrants of 455,000, 492,324
and 229,324 at December 31, 1999, 1998 and 1997, 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.
F-10
<PAGE> 47
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,
collateral, amortization schedule and liquidity. The carrying amount
approximates fair value; and
c. AMOUNTS DUE TO/DUE FROM AFFILIATE--Amounts due to/due from affiliate
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.
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 component of cost of goods
sold 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 in the period in which they occur. For the years ended December 31,
1999, 1998 and 1997, the foreign exchange gain (loss) included in the
determination of net income is $3,563, $(30,292) and $205,457,
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.
F-11
<PAGE> 48
INTERNAL USE SOFTWARE COSTS
In March, 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." This SOP provides guidance on the financial
reporting of costs associated with purchased or developed software for
internal use. As the Company has adopted the provisions of this SOP, the
Company has capitalized or expensed as incurred certain of these software
costs as appropriate.
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.
These transactions provided WRP Asia with a 55% ownership interest in the
Company at March 31, 1998. At December 31, 1999, WRP Asia has a 54.2%
ownership interest in the Company.
At December 31, 1998, MBf International owned 1,682,275 shares of the
Company's common stock which represented a 24.4% ownership interest in the
Company.
In 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.
WRP Asia owns one of the largest glove manufacturing plants in Malaysia
and principally manufactures high quality powder-free latex exam gloves.
During the years ended December 31, 1999, 1998 and 1997, total purchases
of gloves from WRP Asia were $18,409,600, $18,629,717 and $11,150,721,
respectively.
3. COMMON STOCK
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. The terms of the Series A common stock are substantially the same
as the Company's common stock except that 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
F-12
<PAGE> 49
with the holders of common stock as a single class with respect to any
matters subject to a vote of the shareholders. (see Note 9 for further
information on the Company's shareholder's equity):
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. As of December 31, 1999 the Company is in
compliance with the agreement. In connection with the loss of the Novation
contract as discussed in Note 16, the Company is in the process of
re-negotiating the PIE contract to allow the Company to satisfy its
remaining purchase obligations over a longer period of time. If the
Company is unable to successfully re-negotiate the PIE contract, it may be
obligated to purchase quantities of gloves in excess of customer demand or
may be subject to certain penalties under the terms of the existing
agreement. The potential exposure to the Company related to this matter
cannot be quantified at this time.
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 on 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, 1999
and 1998, there were no assets or liabilities recorded which were
associated with the condom discontinued operations.
Revenues from the Company's discontinued condom business were $376,422 for
the year ended December 31, 1997.
During 1997, the Company revised 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 net 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 has 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
F-13
<PAGE> 50
"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.
5. RELATED-PARTY TRANSACTIONS
At December 31, 1999 and 1998, amounts due from/to affiliates consist of
the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Due from affiliate-
Current-
WRP Asia $ 2,519,347 $ 1,340,261
----------- -----------
Due to affiliate--all current-
WRP Asia $(3,210,576) $(3,891,944)
=========== ===========
</TABLE>
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 primarily 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 1999 and 1998. Management
believes transactions between operating segments are made at prevailing
rates.
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 $66,160, $36,000
and $48,000 in the years ended December 31, 1999, 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 $1,328,410 and $3,322,882 at December
31, 1999 and 1998, respectively. These bank obligations are secured by the
inventory and accounts receivable of AHPC.
At December 31, 1997, AHPC had letter of credit facilities with two banks.
One of these banks, MBf Bank of Tonga ("MBf Bank"), was an affiliated
entity and a subsidiary of MBf Holdings, the parent company of MBf
International. The MBf Bank letter of credit facility was for T$ $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
canceled and all obligations to MBf
F-14
<PAGE> 51
Bank were repaid. There was no letter of credit liabilities due to MBf
Bank at December 31, 1999 and 1998.
As of December 31, 1999 and 1998, the Company was contingently liable for
outstanding letters of credit liabilities totaling $355,081 and $788,437,
respectively.
7. NOTES PAYABLE
Notes payable and long-term debt as of December 31, 1999 and 1998, consist
of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Borrowings under a bank revolving line-of-credit agreement with available
borrowings up to $15,000,000 at December 31, 1999, and $10,000,000 at
December 31, 1998, bearing interest at the commercial paper rate plus 2.75%
(8.30% at December 31, 1999, and 8.05% at December 31, 1998), secured by
inventories and accounts receivable $ 7,423,064 $ 1,100,000
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% (10.0% at December 31, 1999), due November, 2001 1,700,000 2,000,000
Insurance premium financing loans, bearing interest at 6.95% at December 31,
1999 and 1998, payable in monthly installments through August, 2000 286,309 640,294
Other 3,838 15,521
----------- -----------
9,413,211 3,755,815
Less- Current portion (8,313,211) (2,086,833)
----------- -----------
Long-term debt $ 1,100,000 $ 1,668,982
=========== ===========
</TABLE>
The bank revolving line-of-credit agreement noted above contains covenants
which require, among other things, maintenance of financial ratios and
limitations on borrowings, investments and capital expenditures. As of
December 31, 1999, the Company was in compliance with its covenants.
On December 1, 1998, AHPC entered into a new $10,000,000 three-year bank
credit agreement through December 1, 2001. Subsequently, on March 31,
1999, the limit was increased to $15,000,000. The new credit facility
includes a $15,000,000 revolving line of credit with a $11,000,000 letter
of credit subfacility. The facility carries an interest rate of commercial
paper plus 2.75% (8.3% at December 31, 1999). 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
F-15
<PAGE> 52
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.
The principal portion of long-term debt becomes due as follows:
<TABLE>
<S> <C>
Fiscal year ending-
2001 $1,100,000
----------
$1,100,000
==========
</TABLE>
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. The Company is one of numerous
defendants that have been named in such lawsuits. At December 31, 1999,
the Company was involved in a total of 54 lawsuits, either as a named
defendant, third party defendant, or an indemnitor. During 1999, the
Company fully settled one claim for a nominal sum and was dismissed from
three others. 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 the year ended December 31, 1999, two diversified distribution
companies, Owens & Minor, Inc. and Sysco, accounted for 37.9% and 30.6% of
net sales, respectively. These customers together accounted for 63.4% of
accounts receivable at December 31, 1999. During the year ended December
31, 1998, these two customers 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 the year ended December 31, 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.
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.
F-16
<PAGE> 53
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 the years ended December 31, 1999, 1998 and 1997,
was $440,441, $291,685 and $296,358, respectively. The following summary
presents future minimum rental payments required under the terms of
present operating leases:
<TABLE>
<CAPTION>
Fiscal year-
<S> <C>
2000 $ 479,456
2001 410,704
2002 369,965
2003 338,255
2004 197,316
------------
$ 1,795,696
============
</TABLE>
9. SHAREHOLDERS' EQUITY
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
expired in November, 1999.
In 1994, warrants to purchase 125,000 shares of the Company's common stock
were issued at an exercise price of $15.00. These warrants expired in
March, 1999.
A summary of warrant activity since December 31, 1997, is as follows:
<TABLE>
<CAPTION>
$15.00 $22.20
WARRANTS WARRANTS
-------- --------
<S> <C> <C>
Balance, December 31, 1998 and 1997 125,000 7,500
Expirations (125,000) (7,500)
-------- ------
Balance, December 31, 1999 - -
======== ======
</TABLE>
At December 31, 1999, 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
F-17
<PAGE> 54
closing market price on that date. A summary of options outstanding under
the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE
OPTIONS PRICE EXPIRATION
------- ----- ----------
<S> <C> <C> <C>
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
Grants 54,000 4.75-7.1875 2009
Rescissions/expirations (56,657) 2.75-14.40 1999-2009
Exercises (18,167) 2.75-6.3125 2005-2009
--------- ------------- ----------
Balance, December 31, 1999 483,600 2.63-7.1875
========= =============
</TABLE>
The exercise price of the stock options granted in 1999, 1998 and 1997 was
established at the market price on the date of the grants. Of the 483,600
options outstanding at December 31, 1999, 397,611 are currently
exercisable, 61,995 become exercisable in 2000, 16,332 become exercisable
in 2001 and 7,662 become exercisable in 2002. 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 SFAS No. 123, which is an
accounting alternative that is permitted but not required, the Company's
net income and net income per share (diluted) would have been $1,780,936,
$4,560,341 and $397,292 and $0.26, $0.72 and $0.09 for 1999, 1998 and
1997, 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.
F-18
<PAGE> 55
The fair value of each option is estimated on the date of grant based on
the Black-Scholes option pricing model using the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-------------------------------
ASSUMPTION 1999 1998 1997
---------- ---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates 5.43% 5.26% 6.12%
Dividend yield - - -
Expected volatility 84.74% 96.00% 90.00%
Expected life 4 years 4 years 3 years
======= ======= =======
</TABLE>
Options outstanding at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT DECEMBER REMAINING EXERCISE AT DECEMBER EXERCISE
PRICES 31 ,1999 LIFE PRICE 31, 1999 PRICE
------ -------- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$2.63-$3.66 108,600 4-7 years $3.12 108,600 $3.12
4.75-7.19 375,000 8-10 years 6.34 289,011 6.31
------- ---------- ----- ------- -----
$2.63-$7.19 483,600 4-10 years $5.62 397,611 $5.44
======= ========== ===== ======= =====
</TABLE>
11. INCOME TAXES
The components of the Company's income tax provision (benefit) from
continuing operations consisted of:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Current-
Federal $ 285,482 $1,446,909 $ (25,006)
State 153,295 162,556 (2,809)
Foreign 55,280 - -
------------ ---------- ----------
Total current 494,057 1,609,465 (27,815)
============ ========== ==========
Deferred-
Federal 408,690 (640,720) -
State 67,324 (90,696) -
Foreign 196,050 74,097 (294,227)
------------ ---------- ----------
Total deferred 672,064 (657,319) (294,227)
------------ ---------- ----------
Total income tax provision
(benefit) $ 1,166,121 $ 952,146 $ (322,042)
============ ========== ==========
</TABLE>
F-19
<PAGE> 56
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>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate
of 34% $1,197,423 $2,322,644 $ 48,851
State income taxes, net of federal income
tax provision 169,048 257,811 -
Foreign tax rate difference 383,035 (422,385) (322,042)
Increase (decrease) in deferred tax asset
valuation allowance (198,710) (412,646) 6,702
Utilization of loss carryforwards (454,897) (836,538) (82,890)
Goodwill amortization and other 70,222 43,260 27,337
---------- ---------- ----------
Total income tax provision
(benefit) $1,166,121 $ 952,146 $ (322,042)
========== ========== ==========
</TABLE>
The Company has net operating loss carryforwards at December 31, 1999, of
approximately $1.3 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, 1999 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, 1999, 1998 and 1997.
F-20
<PAGE> 57
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current-
Accruals not deductible until paid $ 238,741 $ 350,589
Net operating loss carryforwards--U.S. 671,539 1,041,921
Net operating loss carryforwards--PT Buana -- 216,520
Inventory 347,813 301,961
Allowance for doubtful accounts 104,760 93,120
Valuation allowance (671,539) (1,041,921)
----------- -----------
Total net current deferred tax
assets $ 691,314 $ 962,190
=========== ===========
Noncurrent-
Difference between book and tax basis of property,
plant and equipment $ (435,912) $ (14,254)
Other noncurrent assets--PT Buana (117,313) (137,783)
----------- -----------
Total noncurrent deferred tax
liabilities $ (553,225) $ (152,037)
=========== ===========
</TABLE>
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, 1999, 1998 and 1997, was $690,496, $1,286,619 and $1,488,211,
respectively.
Cash paid for income taxes during the years ended December 31, 1999 and
1998, was $780,000 and $1,270,000, respectively. There were no income
taxes paid during 1997.
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.
F-21
<PAGE> 58
The following represents significant related-party operating transactions
during the years ended December 31, 1999, 1998 and 1997, which are
included in the consolidated statements of cash flows as amounts due to
affiliates under the cash flows from operating activities.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- --------
<S> <C> <C> <C>
Operating cash transactions-
Purchases from affiliates $18,409,600 $18,629,717 $240,654
Sales to affiliates (9,512,942) (6,421,590) -
Cash payments (19,491,663) (16,501,784) (796,317)
Cash receipts 7,949,336 6,709,352 859,503
----------- ----------- --------
Amounts due (from)/to affiliates $(2,645,669) $ 2,415,695 $303,840
=========== =========== ========
</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 rates, 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 the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING ACCOUNTS ADDITIONS AT END
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF PERIOD WRITTEN OFF TO ACCOUNT OF YEAR
------------------------------- --------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts activity for the
year ended December 31, 1997 $ 73,000 $ (11,735) $133,735 $195,000
Allowance for doubtful accounts activity for the
year ended December 31, 1998 195,000 (12,199) 57,199 240,000
Allowance for doubtful accounts activity for the
year ended December 31, 1999 240,000 - 30,000 270,000
========= ========== ======== ========
</TABLE>
F-22
<PAGE> 59
<TABLE>
<CAPTION>
BALANCE AT BALANCE
RESERVE FOR EXCESS AND BEGINNING INVENTORY ADDITIONS AT END
OBSOLETE INVENTORY OF YEAR WRITE-OFFS TO ACCOUNT OF YEAR
------------------ ------- ---------- ---------- -------
<S> <C> <C> <C> <C>
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 (66,870) 486,870 770,000
Reserve for excess and obsolete inventory
activity for the year ended December 31, 1999 770,000 (180,261) 155,000 744,739
========= ========== ======== ========
</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 latex
gloves and sells them primarily to the Company and WRP Asia. All
operations of the Manufacturing Segment are located in Indonesia. The
Distribution Segment involves the procurement and sale of gloves purchased
from the Manufacturing Segment and other glove vendors and then sold to
national and regional healthcare, food service, retail and other
distributors. The 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 ("Pretax income (loss)"). Management
believes transactions between operating segments are made at prevailing
market rates.
F-23
<PAGE> 60
The following tables provide financial data for the years ended December
31, 1999, 1998 and 1997, for these segments:
<TABLE>
<CAPTION>
1999 MANUFACTURING DISTRIBUTION ELIMINATIONS CONSOLIDATED
---- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 8,610,232 $56,669,872 $ - $65,280,104
Revenues from other operating segments 1,726,945 - (1,726,945) -
Pretax income (loss) (88,115) 3,609,947 - 3,521,832
Depreciation and amortization expense 1,465,593 351,900 - 1,817,493
Interest income 5,949 912,553 (912,004) 6,498
Interest expense 1,128,629 767,534 (912,004) 984,159
Total assets 15,420,491 24,773,680 - 40,194,171
Capital expenditures 2,084,939 887,898 - 2,972,837
Long-lived assets, net 12,060,563 3,040,598 - 15,101,161
=========== =========== ============ ===========
<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) -
Pretax income 2,054,301 5,371,067 - 7,425,368
Depreciation and amortization expense 1,162,918 151,425 - 1,314,343
Interest income 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, net 11,402,620 2,554,562 - 13,957,182
=========== =========== ============ ===========
<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) -
Pretax income 856,259 371,236 - 1,227,495
Depreciation and amortization expense 787,277 152,612 - 939,889
Interest income 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, net 11,590,157 1,768,055 - 13,358,212
=========== =========== ============ ===========
</TABLE>
16. SUBSEQUENT EVENTS
During January, 2000, Novation, a GPO associated with the Company, did not
renew its contract with the Company. The Novation GPO Nova-Plus product
sales totaled nearly one half of the total Company sales in 1999. The
current contract expires in April, 2000. The Company is focusing on
converting the end-users of the Novation GPO Nova-Plus products to the
Company's own branded product label.
F-24
<PAGE> 61
The Company's Board of Directors approved a change in the Company's fiscal
year-end to June 30 which corresponds to the year-end of WRP Asia. The
fiscal year-end change will be effective June 30, 2000.
The Company plans to repurchase up to 10% of the Company's public common
stock. These purchases may be made in the open market and in block
transactions over a two-year period. The program is subject to market
conditions and its impact on share price as well as other investment
options that the Company may consider to enhance shareholder value.
F-25
<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
EX 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in the Form 10-K into the Company's previously filed
Registration Statements Nos. 333-23630 and 333-28003.
Arthur Andersen LLP
Chicago, Illinois
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 171
<SECURITIES> 0
<RECEIVABLES> 8,239
<ALLOWANCES> (270)
<INVENTORY> 12,931
<CURRENT-ASSETS> 25,093
<PP&E> 18,102
<DEPRECIATION> (4,407)
<TOTAL-ASSETS> 40,194
<CURRENT-LIABILITIES> 17,439
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 19,404
<TOTAL-LIABILITY-AND-EQUITY> 40,194
<SALES> 65,280
<TOTAL-REVENUES> 65,280
<CGS> 48,645
<TOTAL-COSTS> 12,265
<OTHER-EXPENSES> (263)
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 984
<INCOME-PRETAX> 3,619
<INCOME-TAX> 1,166
<INCOME-CONTINUING> 2,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,453
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.35
</TABLE>
