ITEM 2. PROPERTIES
Our principal executive and administrative office is located in Itasca, Illinois. The lease for this location was renewed on April 9, 2001, for a term of five years. For the year ended June 30, 2002, our lease expense was $216,600.
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, as needed, to store its inventory in Reno, Nevada; Union City, California; Fond Du Lac, Wisconsin and Hanover, Pennsylvania. 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 TeleSales operations office. The lease term for this office space commenced on June 1, 1999 and expired in May 2002. In June 2001, we closed our Telesales operations office. As of June 30, 2002, AHPC is no longer leasing this facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 2002, we, and AHPC (jointly the "WRP Defendants"), had a total of 65 latex glove product liability suits pending against us throughout the United States. We were an active defendant in one claim, and AHPC in 35 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 12 suits; AHPC was joined as a third party defendant in 7 claims by distributors of AHPC latex gloves (collectively the "Vendors") and in three claims by other suppliers of 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 gloves 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 alleges damages of an unspecified amount and is in a different stage of discovery or other pre-trial proceeding.
It is not currently possible to determine a favorable or unfavorable outcome for the WRP Defendants in any of the claims.
In each of these 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.
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. During the year ended June 30, 2002, AHPC and the Vendors were dismissed from twelve latex gloves product liability claims.
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 October 15, 2002, we were not 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 us.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of the Shareholders of was held on June 24, 2002. The purpose of the Annual Meeting was to consider the vote on the following matters:
1. To elect five Class A directors and two Class B directors to hold office until the next Annual Meeting of Shareholders or otherwise as provided in our by-laws.
Class A Director Nominees
Eirik Bonde Aslaksrud Robert Woon Lew Kwong Ann George Jeff Mennen Richard J. Swanson
Class B Director Nominees
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:
The above matter was approved by the Shareholders. There were no other matters voted on at the meeting.
PART II
ITEM 5.
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 PRICES
PERIOD ENDED:
There were approximately 320 shareholders of record of our Common Stock as of June 30, 2002. 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 do 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 the year ended June 30, 2002, we purchased 44,800 shares of our Common Stock under this program. Subsequent to June 30, 2002 through September 20, 2002, we purchased 10,000 shares of our Common Stock. As of the year ended June 30, 2002, there were up to an additional 311,561 shares available for repurchase.
The trading of our common stock on the Nasdaq SmallCap Market is conditioned upon meeting certain asset, capital and surplus, earnings and stock price tests. To maintain eligibility on the Nasdaq SmallCap Market, we must, among other things, maintain an average bid price of our Common Stock of at least $1.00 per share.
Nasdaq notified us on May 3, 2001, that the average bid price of our Common Stock has been below $1.00 per share for 30 consecutive days, and that our Common Stock would be delisted as of the opening of business on May 11, 2001. However, we requested an appeal of Nasdaq's determination; this appeal stayed the delisting of our Common Stock pending the decision of the Nasdaq Listing Qualification Panel. On June 14, 2001, we presented our request for continued inclusion on the Nasdaq SmallCap Market pursuant to an exception to the bid price requirement via an oral hearing before the Nasdaq Listing Qualifications Panel (the "Panel").
The Panel was of the opinion that we presented a definitive plan that would enable it to evidence compliance with all requirements for continued listing on The Nasdaq SmallCap Market within a reasonable period of time and to sustain compliance with those requirements over the long term. Specifically, the Panel acknowledged our willingness to effect a reverse stock split in an effort to evidence compliance with the minimum bid price requirement within the near term. Accordingly, the Panel determined to continue the following exceptions to avoid delisting. On or before July 30, 2001, we were required to file proxy materials with the SEC and Nasdaq, evidencing our intent to seek shareholder approval for a reverse stock split. In addition, on or before August 30, 2001, we were required to evidence a closing bid price of at least $1.00 per share. Immediately thereafter, we were required to demonstrate a closing bid price of at least $1.00 per share for a minimum of ten consecutive trading days and demonstrate compliance with all other requirements for continued listing on The Nasdaq SmallCap Market.
On July 22, 2001, we filed a Proxy Statement, notifying shareholders of a special meeting scheduled to take place on August 27, 2001. The purpose of the meeting was to vote on a proposed reverse stock split intended to bring the minimum bid price of our stock over $1.00. Prior to the holding of the meeting, our stock price began trading at or about $1.00 per share. On August 16, 2001, we were notified by the Panel that its stock had evidenced the required closing bid price of at least $1.00 per share for a minimum of ten consecutive trading days, and that the delisting proceedings were terminated. Accordingly, we canceled the Special Meeting of Shareholders scheduled for August 27, 2001, and are no longer considering a reverse stock split.
On February 14, 2002, we were again notified that the average bid price on our Common Stock has been below $1.00 per share for 30 consecutive trading days and that we were provided 180 calendar days, or until August 13, 2002, to regain compliance with this rule. On August 14,
2002, Nasdaq notified us that we had not regained compliance with the minimum bid requirement, but that we do meet initial listing requirements for the Nasdaq SmallCap Market. Specifically, we qualify with the $5,000,000 stockholders equity requirement. Therefore, we were provided an additional 180 days, or until February 10, 2003, to regain compliance.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of WRP Corporation presented below for the year ended June 30, 2002 and 2001, the six months ended June 30, 2000 and for the three calendar years ended December 31, 1999, 1998 and 1997 should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
* The 1997 figures have been restated to reflect rebates as a reduction of net sales to conform to the 2000, 1999 and 1998 presentation for comparability purposes.
(1) In 2000, we elected to change its reporting period from a calendar year ending December 31 to a fiscal year ending June 30. As a result, 2000 represents a six-month transition period.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
In February 2000, we changed our fiscal year to June 30, effective June 30, 2000, resulting in a six-month transition period ended June 30, 2000. Our year ended June 30, 2001, reflects our first full year of activity under this fiscal year-end.
Our wholly owned subsidiary, American Health Products Corporation ("AHPC"), is engaged in the marketing and distribution of high quality medical grade examination and surgical gloves and foodservice gloves in the United States. We have been in the glove business since our incorporation in January 1989. For the year ended June 30, 2002, we recorded net glove sales of $39.0 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, disposable powdered and powder-free latex examination gloves.
PT Buana sold approximately 39.6% of its production to AHPC during the year ended June 30, 2002. PT Buana recorded glove sales totaling $13.8 million and $13.2 million during the years ended June 30, 2002 and June 30, 2001, respectively. PT Buana's remaining production was sold primarily to WRP Asia. All significant intercompany transactions and sales have been eliminated in consolidation.
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 year ended June 30, 2002 and 2001 and the six-month period ended June 30, 1999 and 2000 and for the year ended December 31, 1999; include our results of operations and statements of cash flows, as well as for AHPC and PT Buana.
During the year ended June 30, 2002, several significant events transpired.
On March 1, 2002, we announced that our subsidiary, American Health Products Corp, had entered into a Transition Services Agreement with Maxxim Medical, Inc., ("MAXXIM"), whereby MAXXIM would service certain of our acute-care medical customers. As a result of this transition, we have substantially reduced our personnel in our medical division and have transitioned our business with respect to most of our customers in the medical division to MAXXIM. We have incurred severance costs of approximately $256,000 associated with the reduction in personnel. We are in the process of selling off our remaining inventory related to the acute-care medical business, during the transition period.
In February 2002, we announced the appointment of Robert Woon as a Class A Director.
In June 2001, we announced that Mr. Neil M. Kosterman would transition from his position as President to a consulting capacity. At that time, we established an Executive Committee comprised of four directors: Lew Kwong Ann (Chairman), Eirik Bonde Aslaksrud, Jeff Mennen and Robert Simmons.
In April 2001, we announced the resignation of Richard C.M. Wong as Chief Executive Officer and Chairman of the Board of Directors and Kamaruddin Taib as a Class A Director.
At that time, Mr. Lew Kwong Ann was appointed Chief Executive Officer and Chairman of the Board of Directors, and Mr. Eirik Bonde Aslaksrud was appointed as one of our Class A Director. Also in April 2001, Mr. Kenneth A. Ling resigned as Chief Financial Officer, and Mr. Alan E. Zeffer was appointed Chief Financial Officer/Vice President of Finance & Operations.
In March 2000, we announced that our Board of Directors had authorized a program to repurchase up to 10% of our publicly traded 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 as well as other investment options that we may consider to enhance shareholder value. During the year ended June 30, 2002, we repurchased 44,800 shares of our Common Stock under this program.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net sales for the periods indicated.
YEAR ENDED JUNE 30, 2002 COMPARED TO THE YEAR ENDED JUNE 30, 2001.
Our net sales are derived from the sales of finished product; net of allowable rebates, discounts and returns. Net sales include glove sales from AHPC's glove product line and exam glove sales from PT Buana, exclusive of its sales to AHPC. Consolidated net sales for the year ended June 30, 2002 were $47,357,076, which represents an 8.7% decrease over the year ended June 30, 2001, with consolidated net sales of $51,888,852. The decrease in net sales is attributable to AHPC exiting the acute-care medical market in March 2002, along with certain customer price decreases, effective February 1, 2002.
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 decreased from $37,190,499 for the year ended June 30, 2001 to $35,777,460 for the year ended June 30, 2002. As a percentage of net sales, cost of goods sold increased from 71.7% for the year ended June 30, 2001 to 75.5% for the year ended June 30, 2002; the gross profit percentage decreased from 28.3% in the 2001 period to 24.5% in the 2002 period. Our gross profit margin was negatively impacted by increase glove purchase prices, product mix and lower selling prices. We continue to expect our gross margins to be affected by the price of latex, changes in product mix, competition, manufacturing capacity levels and other factors.
Selling expenses include all salaries and payroll related costs for sales and marketing staff together with other sales related expenses such as sales commissions, travel costs, trade shows, advertising, promotions and delivery costs. Selling, general and administrative ("SG&A") expenses increased from $13,784,354 for the year ended June 30, 2001 to $17,640,474 for the year ended June 30, 2002. As a percentage of net sales, SG&A expenses increased from 26.6% for the year ended June 30, 2001, to 37.2% for the year ended June 30, 2002. This increase of $3,856,120 in SG&A expenses was solely attributable to the reduction of our sales force due to
AHPC transitioning out of the acute-care medical business and a reserve for the intercompany receivable balances between PT Buana and WRP Asia assigned to WRPC.
Income from operations decreased by 763.1% from $913,999 for the year ended June 30, 2001, to $(6,060,858) for the year ended June 30, 2002. This decrease was primarily attributed to the receivable reserve from WRP Asia. Operating margins decreased from 1.7% in the 2001 period to (12.8%) in the 2002 period. For the year ended June 30, 2001 and June 30, 2002 EBITDA were $2,182,211 and $(5,322,547), respectively.
Interest expense decreased during fiscal 2002 to $384,609 compared to $719,954 in the 2001 period. This 46.6% decrease is attributable to decreased financing requirements due to lower inventory levels caused by the reduction in revenue and a decrease in interest rates.
Other income consists of rental, interest and miscellaneous income. Other income decreased from $249,311 for the 2001 period to $99,448 for the 2002 period. In fiscal 2001, we received $125,000 of commission for EMed Express.
We recorded a foreign currency exchange gain of $42,646 in 2002 versus a foreign exchange loss of $45,031 in the comparable period in 2001, from our Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and depending upon the mix of assets and liabilities in PT Buana's books in Indonesian Rupiah, an exchange gain or loss will be incurred. Foreign currency exchange gains and losses are reported as a component of the SG&A expense category in the consolidated statements of operations. PT Buana continues to be exposed to foreign currency exchange rate fluctuations and may incur exchange gains or losses in the future. PT Buana's functional currency is the U.S. dollar.
Indonesia continues to be exposed to economic and political instability, which is characterized with fluctuations in its foreign currency exchange rate, interest rates, stock market and inflation rate. Our financial statements do not include any adjustment that might result from these uncertainties and any related effects will be reported in the financial statements as they become known and estimable.
The benefit from income taxes for the year ended June 30, 2002 and June 30, 2001 was $(1,851,517) and $(271,478), respectively. This decline in income tax expense of $1,580,039 is primarily due to an increase of deferred tax benefit generated from reserving for the receivable balance of WRP Asia. At June 30, 2002, we had NOL's of approximately $1.5 million, which will be available to reduce future U.S. federal taxable income.
For the year ended June 30, 2002, our net loss was $(4,292,981) compared to net income of $529,397 in the 2001 period. Diluted earnings per share for the year ended June 30, 2002 and June 30, 2001, were $(0.65) and $0.08, respectively.
YEAR ENDED JUNE 30, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999.
Our net sales are derived from the sales of finished product; net of allowable rebates, discounts and returns. Net sales include glove sales from AHPC's glove product line and exam glove sales from PT Buana, exclusive of its sales to AHPC. Net sales for the year ended June 30, 2001 were $51,888,852, which represents a 20.5% sales decrease over the year ended December 31, 1999, with net sales of $65,280,104. The decrease in net sales is attributed to loss of the Novation contract in April 2000, partially offset by increases in sales to the AmeriNet group purchasing organization and foodservice product sales.
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 decreased from $48,645,076 for the year ended December 31, 1999 to $37,190,499 for the year ended June 30, 2001. As a percentage of net sales, cost of goods sold decreased from 74.5% for the year ended December 31, 1999 to 71.7% for the year ended June 30, 2001; the gross profit percentage increased from 25.5% in the 1999 period to 28.3% in the 2001 period. Our gross profit margin was favorably impacted by reduced glove purchase prices, improved manufacturing margins obtained from full capacity operating efficiencies at PT Buana during the second half of 2001, and a more favorable product mix, offset by lower selling prices. We continue to expect our gross margins to be affected by the price of latex, changes in product mix, competition, manufacturing capacity levels and other factors.
Selling expenses include all salaries and payroll related costs for sales and marketing staff together with other sales related expenses such as sales commissions, travel costs, trade shows, advertising, promotions and delivery costs. Selling, general and administrative ("SG&A") expenses increased from $12,295,192 for the year ended December 31, 1999 to $13,784,354 for the year ended June 30, 2001. As a percentage of net sales, SG&A expenses increased from 18.8% for the year ended December 31, 1999, to 26.6% for the year ended June 30, 2001. This increase of $1,489,162 in SG&A expenses is primarily attributable to an increase in selling compensation with the 1999 expansion of our sales force.
Income from operations decreased by 78.9% from $4,339,836 for the year ended December 31, 1999 to $913,999 for the year ended June 30, 2001. Operating margins decreased from 6.7% in the 1999 period to 1.7% in the 2001 period. For the year ended December 31, 1999 and June 30, 2001 EBITDA were $1,532,818 and $2,182,211, respectively.
Interest expense decreased during fiscal 2001 to $719,954 compared to $802,159 in the 1999 period. This 10.2% decrease is attributable to decreased financing requirements due to lower inventory levels caused by the reduction in revenue and a decrease in interest rates.
Other income consists of rental income, interest income and miscellaneous income. Other income increased from $166,155 for the 1999 period to $249,311 for the 2001 period.
We recorded a foreign currency exchange loss of $45,031 in 2001 versus a foreign exchange gain of $3,563 in the comparable period in 1999, from our Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and depending upon the mix of assets and liabilities in PT Buana's books in Indonesian Rupiah, an exchange gain or loss will be incurred.
Foreign currency exchange gains and losses are reported as a component of the SG&A expense category in the consolidated statements of operations. PT Buana continues to be exposed to foreign currency exchange rate fluctuations and may incur exchange gains or losses in the future.
Indonesia continues to be exposed to economic and political instability, which is characterized with fluctuations in its foreign currency exchange rate, interest rates, stock market and inflation rate. Our financial statements do not include any adjustment that might result from these uncertainties and any related effects will be reported in the financial statements as they become known and estimable.
The (benefit) provision for income taxes for the year ended June 30, 2001 and December 31, 1999 was $(271,478) and $1,348,121, respectively. This decline in income tax expense of $1,619,599 is primarily due to a reduction of pre-tax income generated in the U.S. during the fiscal year 2001 compared to 1999. At June 30, 2001, we had NOL's of approximately $1.3 million, which will be available to reduce future U.S. federal taxable income. During 2001, we finalized our tax returns for 1999 and the six months ended June 30, 2000. We will be receiving the benefit of foreign tax credits in the amount of $351,000, to offset our income tax expenses for the period.
For the year ended June 30, 2001, our net income was $529,397 compared to net income of $2,452,744 in the 1999 period. Diluted earnings per share for the year ended June 30, 2001 and December 31, 1999 were $0.08 and $0.35, respectively.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Our net sales are derived from the sales of finished product; net of allowable rebates, discounts and returns. Net sales include glove sales from AHPC's glove product line and exam glove sales from PT Buana, exclusive of its sales to AHPC. Net sales for the six months ended June 30, 2000 were $31,737,482, which represents a 2.6% sales growth over the comparable 1999 period with net sales of $30,946,476. The increase in net sales is attributed to an increase in external sales by PT Buana, our Indonesian manufacturing plant, a better than expected retention of glove sales from the Novation contract medical facilities after its expiration in April 2000, as well as an increase in the AmeriNet group purchasing organization and foodservice product sales, which commenced in the third quarter of 1999. Additionally, the 1999 six-month period included a nonrecurring sales reduction of approximately $2.3 million associated with a change to an inventory consignment arrangement with a major foodservice customer.
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 decreased 0.7% from $22,858,509 for the six-month period ended June 30, 1999 to $22,697,004 for the six months ended June 30, 2000. As a percentage of net sales, cost of goods sold decreased from 73.9% for the six months ended June 30, 1999 to 71.5% for the six months ended June 30, 2000; the gross profit percentage increased from 26.1% in the first half of 1999 to 28.5% in the same period of 2000. Our gross profit margin was favorably impacted by reduced glove purchase prices, improved manufacturing margins obtained from full capacity operating efficiencies at PT Buana during the first half of 2000, and a more favorable product mix, offset
by lower selling prices. We continue to expect our gross margins to be affected by the price of latex, changes in product mix, competition, manufacturing capacity levels and other factors.
Selling expenses include all salaries and payroll related costs for sales and marketing staff together with other sales related expenses such as sales commissions, travel costs, trade shows, advertising, promotions and delivery costs. Selling, general and administrative ("SG&A") expenses increased by 27.6% from $5,484,190 for the six months ended June 30, 1999 to $6,996,574 for the six months ended June 30, 2000. As a percentage of net sales, SG&A expenses increased from 17.7% for the six months ended June 30, 1999 to 22.1% for the six months ended June 30, 2000. This increase of $1,512,384 in SG&A expenses is primarily attributable to an increase in selling compensation related costs of $968,300 associated with the 1999 expansion of our sales force. We made an investment in our sales force in 1999 to support our expansion plans. Because of the loss of the Novation contract, we are strategically planning and evaluating our manpower needs to maximize sales productivity per sales representative. We also incurred increased selling expenses from higher levels of advertising, marketing, promotions and tradeshow costs of $289,300, as well as travel costs, which increased, by $89,400. There was also an increase in depreciation expense of $47,300 associated with our computer system placed in service in 1999.
Income from operations decreased by 21.5% from $2,603,777 for the six months ended June 30, 1999 to $2,043,904 for the six months ended June 30, 2000. Operating margins decreased from 8.4% in the 1999 period to 6.4% in the 2000 period. For the six months ended June 30, 2000 and 1999, EBITDA was $3,073,637 and $3,577,201, respectively.
Interest expense decreased in the first half of 2000 to $332,429 compared to $374,692 in the first half of 1999. This 11.3% decrease is due to lower borrowings under our line of credit.
Other income consists of rental income, interest income and miscellaneous income. Other income decreased by $103,537 from the first half of 1999 compared to the first half of 2000. This decrease is due to the expiration in 1999 of all rental leases and subleases associated with previous executive offices.
We recorded a foreign currency exchange loss of $6,223 in the first half of 2000 versus a foreign exchange gain of $9,021 in the comparable period in 1999, from our Indonesian subsidiary, PT Buana. As currency exchange rates fluctuate and depending upon the mix of assets and liabilities in PT Buana's books in Indonesian Rupiah, an exchange gain or loss will be incurred. Foreign currency exchange gains and losses are reported as a component of the SG&A expense category in the consolidated statements of operations. PT Buana continues to be exposed to foreign currency exchange rate fluctuations and may incur exchange gains or losses in the future.
Indonesia continues to be exposed to economic and political instability, which is characterized with fluctuations in its foreign currency exchange rate, interest rates, stock market and inflation rate. Our financial statements do not include any adjustment that might result from these uncertainties and any related effects will be reported in the financial statements as they become known and estimable.
The provision for income taxes for the six months ended June 30, 2000 and 1999 was $106,770 and $1,159,051, respectively. This decline in income tax expense of $1,052,281 is primarily due to a reduction of pre-tax income generated in the U.S. during the first half of 2000 compared to the same period in 1999. Also, PT Buana recorded deferred tax assets during the first half of 2000 associated with its prior period tax losses and recorded a tax benefit of $161,979 during the period. In addition, we were able to utilize prior year net operating loss carry-forwards (NOL's) of approximately $650,000 during the six months ended June 30, 2000 and 1999. Lastly, PT Buana recorded a significant income tax expense of $480,051 during the first half of 1999 as a result of the Indonesian Rupiah strengthening against the U.S. dollar, which created a large unrealized foreign currency gain on PT Buana's tax reporting Rupiah financial statements. Due to this additional income tax expense, the effective tax rate in the first half of 1999 is greater than U.S. statutory corporate income tax rates. At June 30, 2000, we had NOL's of approximately $1.3 million, which will be available to reduce future U.S. federal taxable income.
For the six months ended June 30, 2000, net income for us was $1,420,262 compared to net income of $1,324,270 in the same period of 1999. Diluted earnings per share for the six months ended June 30, 2000 and 1999 were $0.21 and $0.19, respectively.
SEGMENT INFORMATION
During the year ended June 30, 2002 and 2001, the six-month period ended June 30, 2000 and during the years ended December 31, 1999 and 1998, we were engaged solely in the business of manufacturing and distributing disposable 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, foodservice, retail and other distributors within the U.S. Discussion of the operations of each segment are included throughout the Results of Operations and Liquidity and Capital Resources sections.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED JUNE 30, 2002
Cash and cash equivalents, at June 30, 2002, were $451,948, an increase of $328,207 from $123,741 at June 30, 2001. We experienced an increase in cash flows for the year ended June 30, 2002, primarily from an increase in net cash used in financing activities. Our operations used cash of $1,845,622 during the 2002 fiscal year as a result of a net loss of $(4,292,981) plus noncash depreciation and amortization of $1,985,536, as well as a decline in accounts receivable and a decrease accounts payable trade. Net inventories were $8,506,652, an increase of $1,319,266 from $7,187,386 at June 30, 2001.
Net trade accounts receivable at June 30, 2002, decreased by 1.5% to $4,846,396 from $4,919,062 at June 30, 2001. This decline of $72,666 is primarily due to a decrease in revenues and improved collections of past due amounts.
The outstanding accounts receivable from WRP Asia results primarily from sales of product to WRP Asia (powder-free exam gloves produced by PT Buana), cash advances, charges for obtaining FDA approval of the gloves imported from WRP Asia and other items. AHPC purchased virtually all of its latex powder-free exam gloves from WRP Asia in 2002, 2001, 2000 and 1999. Management believes transactions between operating segments are made at prevailing rates. AHPC purchases its powdered latex gloves from its 70% subsidiary, PT Buana, as well as from third-party suppliers other than WRP Asia.
As of June 30, 2002, we have outstanding accounts receivable from WRP Asia of approximately $8,954,000 (which has increased by approximately $690,000 since June 30, 2001). This amount includes amounts due to PT Buana as June 30, 2002 of approximately $5,586,000 and amounts due to WRPC and AHPC of $3,368,000. Subsequent to June 30, 2002, the amounts due to PT Buana of $5,586,000, were assigned to WRPC in partial satisfaction of intercompany amounts due from PT Buana to WRPC.
As of June 30, 2002, we have accounts payable to WRP Asia of approximately $2,657,000 (which has increased by $203,671 since June 30, 2001), primarily resulting from the purchase of inventories from WRP Asia.
The net amount due from WRP Asia, before allowance for doubtful accounts at June 30, 2002 was approximately $6,297,000, against which we have provided an allowance for doubtful accounts of approximately $5,860,000 (representing all amounts due for the sale of product from PT Buana to WRP Asia at June 30, 2002) due to the uncertainty of the finalization of their refinancing plan, which has been ongoing for over 15 months, without completion.
Subsequent to June 30, 2002, we entered into a formal agreement with WRP Asia to provide for full and complete right of offset of any trade payables due against amounts they owe to WRPC and AHPC. We continue to purchase gloves from WRP Asia, and believe that the unreserved amounts due from WRP Asia to WRPC and AHPC of approximately $711,000 at June 30,2002, are realizable based upon the agreement granting right of offset and ongoing purchases from WRP Asia. In management's opinion, while WRP Asia does not currently intend to seek protection from creditors, should such action take place, we would have to reevaluate the ability to offset payables to WRP Asia against our receivables from them.
WRP Asia is continuing its restructuring initiative, the objective of which is to improve cash flows and profitability and to assure longer-term financial viability. This initiative includes a restructuring of WRP Asia's debt facility and additional investments from strategic investors and other outside sources. Management of WRP Asia has advised us that it believes, but cannot guarantee, that this initiative will be successfully concluded and will generate adequate cash flow to meet WRP Asia's needs for its ongoing and future business. In March 2002, WRP Asia had advised us that it anticipated this initiative would be completed by July 2002. As of October 15, 2002, this restructuring initiative has not been completed. WRP Asia believes this initiative will now be completed in November 2002 and attributes the delays to extensive due diligence being
performed by potential strategic investors. While we are hopeful that a portion of the amount due from WRP Asia will be repaid from the refinancing, we have established a reserve for the trade receivables due of $5,586,000 in the event that WRP Asia is ultimately unable to complete its restructuring and financing.
On September 18, 2002, our Board of Directors passed a resolution that limits the net intercompany amount due from WRP Asia exceeding the balance of $6,200,000 on a consolidated basis. In the event that WRP Asia desires to purchase product from PT Buana, and the effect of this sale would be to increase the net amount due beyond $6,200,000, WPR Asia will be required to support these purchases by payment of cash in advance or tender of an irrevocable letter of credit to PT Buana to cover the purchase price of the order to the extent such amount exceed $6,200,000.
On July 24, 2002, our Board of Directors approved a proposal submitted by the independent directors to form a Special Evaluation Committee (the "Committee"). The Committee is comprised of our "B" Directors, Robert Simmons and Don L. Arnwine as well the independent "A" Directors, G. Jeffery Mennen and Richard Swanson. The purpose of the Committee is to examine the WRP Asia restructuring process as well as the options and alternatives available to us.
Interest rates in many Asian-Pacific countries have been heavily dependent upon international trade and are, accordingly, affected by protective trade barriers and the economic conditions of their trading partner. The enactment by the government of principal trading partners of protectionist trade legislation, reduction of foreign investment or general declines in the international securities markets could have a significant adverse effect upon the economies of the Asian-Pacific countries.
Net inventories at June 30, 2002 increased by 18.4% to $8,506,652 from $7,187,386 at June 30, 2001. This increase of $1,319,266 is due to new inventory purchases from nonaffiliated parties and increases in safety stock levels.
During the year ended June 30, 2002, we used cash to fund operations, increases in inventories and reduction in accounts payable. We used cash in investing activities of $638,142 during the period.
During the year ended June 30, 2002, we used cash in net investing activities of $638,142. We spent $444,336 for capital expenditures during that period primarily at PT Buana, our Indonesian manufacturing plant, for capital improvements. These expenditures included equipment purchases and upgrades to expand our capacity to manufacture higher-margin products, including powder-free latex gloves.
During the year ended June 30, 2002, we obtained funds from borrows under our line of credit and other notes. On December 1, 1998, we obtained a domestic three-year credit facility from GE Capital, a large commercial credit company. This asset based lending loan and security agreement included a $10,000,000 revolving line of credit with a $7,000,000 letter of credit sub-facility. On March 31, 1999, we amended our Loan and Security Agreement by increasing the maximum credit loan limit from $10,000,000 to $15,000,000 subject to availability, based on a
formula using accounts receivable and inventory. As part of the amendment, the letter of credit subfacility was increased from $7,000,000 to $11,000,000. The line of credit borrowings carry an interest rate of commercial paper plus 4.5% (1.77% at June 30, 2002). At June 30, 2002, we had outstanding $4,513,996 on the revolving line of credit and $440,209 of letter of credit liabilities under the credit facility. As of June 30, 2002, we were not in compliance with certain of our covenants and have obtained waivers of these covenant violations from the financial institution.
In conjunction with the waiver of the covenant violations as of June 30, 2002, the existing credit facility agreement was amended to expire on December 1, 2003.
We utilize the facility of WRP Asia to discount PT Buana's receivables from AHPC. Amounts available under this arrangement are $2,631,601 (MLR 10,000,000) of which $2,420,205 is outstanding as of June 30, 2002. PT Buana has guaranteed to WRP Asia's lender the payment of the discounted receivables in the event that AHPC does not remit payment.
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 June 30, 2001 the total outstanding debt associated with these debentures was $550,000. During the year ended June 30, 2002, we repaid the remaining amount of $550,000 against this debt.
We currently expect to have cash needs in order to continue funding the growth of the existing glove business. These cash needs may arise in connection with various events such as for: (i) the expansion into new products; (ii) paying off debt obligations, particularly the remaining long-term debt; (iii) the expansion of the manufacturing facility in Indonesia; (iv) purchasing our Common Stock in connection with our stock repurchase program; and (v) possible acquisitions. We believe that our cash and cash generated form future operations plus our credit facility will be sufficient to fund our ongoing operations.
YEAR ENDED JUNE 30, 2001
Cash and cash equivalents, at June 30, 2001, was $123,741, a decrease of $100,313 from $224,054 at June 30, 2000. We experienced a decrease in cash flows for the year ended June 30, 2001 primarily from a reduction in cash provided by operations and an increase in net cash used in investing activities.
Our operations generated cash of $1,639,377 during the 2001 fiscal year as a result of net income of $529,397 plus noncash depreciation and amortization of $2,018,535, as well as a decline in inventories and accounts receivable.
Net trade accounts receivable at June 30, 2001 decreased by 12.5% to $4,919,062 from $5,621,417 at December 31, 1999. This decline of $702,355 is primarily due to a decrease in revenues and improved collections of past due amounts.
As of June 30, 2001, we have outstanding accounts receivable from WRP Asia of $8,262,937, resulting primarily from sales of product to WRP Asia ($9,714,384 in 2001), cash advances to WRP Asia, charges for obtaining FDA approval of the gloves imported from WRP Asia and others items. Of this amount approximately $5,287,413 is due to PT Buana and $2,975,524, is due to WRP USA and AHPC. The amount of this receivable has increased by $4,392,622 since June 30, 2000. WRP USA and AHPC have accounts payable to WRP Asia of $2,453,608 at June 30, 2001, primarily resulting from the purchase of inventories from WRP Asia. This amount has increased by $840,423 since June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2000
Cash and cash equivalents at June 30, 2000 was $224,054, an increase of $52,592 from $171,462 at December 31, 1999. We experienced an increase in cash flows in the first half of 2000 primarily from cash provided by operating activities, offset by uses of cash in financing and investing activities.
Our operations generated cash of $5,670,575 during the first half of 2000 as a result of net income of $1,420,262 plus non-cash depreciation of $973,685 and a decline in inventories and accounts receivable, offset by net reductions in the amount owed to our majority shareholder, WRP Asia.
Net trade accounts receivable at June 30, 2000 decreased by 29% to $5,621,417 from $7,969,369 at December 31, 1999. This decline of $2,347,952 is primarily due to a record sales w4w4month in December 1999 as customers were preparing for the year 2000 rollover and any unknown events associated with it, as well as to a reduction in May and June 2000 sales caused by the loss of the Novation contract which expired on April 30, 2000.
Net inventories at June 30, 2000 decreased by 24% to $10,124,411 from $12,930,569 at December 31, 1999. This decline of $2,806,158 is primarily due to the reduction in NovaPlus brand inventory levels associated with the loss of the Novation group purchasing organization supply contract.
During the six months ended June 30, 2000, the cash generated from operations was used primarily for debt repayments. We used cash of $5,402,813 in financing activities during the first half of 2000 comprised of net reductions on notes payable and line of credit debt of $5,258,659 and for repurchasing 47,500 shares of our Common Stock totaling $68,558 under our stock repurchase program.
During the six months ended June 30, 2000, we used cash in net investing activities of $215,170. We spent $448,610 for capital expenditures during the first six months of 2000 primarily at PT Buana, our Indonesian manufacturing plant, for capital improvements.
CRITICAL ACCOUNTING POLICIES
While all of our accounting policies are important in assuring that WRP Corporation adheres to current accounting standards, certain policies are particularly important to their impact on our financial statements. These are described in detail below.
Reserves for Accounts Receivable and Inventory. We review on an ongoing basis the realizability of our trade and inter company receivables and the need for establishing reserves. As of June 30, 2002, we have established reserves of $5,736,271 in relation to trade and inter company receivables.
Goodwill. The excess of purchase price over the fair market value of the net assets purchased is recorded as goodwill. Prior to SFAS 142, the company amortized the goodwill using the straight-line method over a period of 25 years. Beginning with fiscal 2003, the company will implement SFAS 142 and will no longer amortize the balance of goodwill.
On an ongoing basis, we review goodwill for impairment. During 2002, we evaluated the realizability of the goodwill through the use of an independent appraisal firm, which utilized the present value of expected future cash flows. The valuation indicated adequate value to support the recorded goodwill as of June 30, 2002.
Sales Incentives. Certain customers are granted discounts, rebates or other allowances which are intended to assist in the promotion of our products. We record these discounts and rebates as our customers earn them or when they are paid, depending on the nature of the item. All discounts, rebates and allowances are shown as a deduction from gross sales to arrive at Net Sales in the consolidated statements of income.
Deferred Tax Asset. Deferred taxes result from the effect of transactions that are recognized in different periods for financial and tax reporting purposes. A valuation allowance is established when it is more likely than not that any portion of the deferred tax assets will not be realized. The valuation allowance is adjusted if the realization of deferred tax assets becomes more likely than not. Should our income projections result in the conclusion that realization of deferred tax assets is more likely than not, further adjustments to the valuation are made. The recorded valuation allowance on deferred tax assets reflects the questionable realizability of certain net operating loss carryforwards which are limited due to changes in control within the shareholder group.
CONTRACTUAL OBLIGATIONS
NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142. This pronouncement provides guidance on financial accounting and reporting for acquired goodwill and other intangible assets. This statement supercedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 will require that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. We anticipate that future earnings will increase without amortization expense; however, we will assess its existing goodwill for impairment.
In June 2001, the FASB No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement amends FASB statement No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies." The provisions in this statement are effective for financial statements issued for fiscal years beginning after June 15, 2002. Although early adoption is encouraged, it is not required. We will adopt the provisions in this statement for all tangible long-lived assets retirements initiated after June 30, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of ling-lived assets. This statement supersedes FASB statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operation - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This statement also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the exception of consolidation for a subsidiary for which control is likely to be temporary. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Although early adoption is encouraged, it is not required. We will adopt the provisions in this statement for fiscal years beginning after June 30, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Disposal Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit and disposal activities that are initiated after December 31, 2002, with early adoption encouraged. We plan to adopt the provision set forth in this statement for all exit and disposal activities initiated after December 31, 2002.
ITEM 7A.
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 or collars or other hedging instruments.
Exposure to changes in interest rates is limited to borrowings under revolving credit and debt agreements, which have variable interest rates, tied to the prime and commercial paper rates. We estimate that the fair value of each debt instrument approximated its market value at June 30, 2002 and 2001.
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 June 30, 2002 and 2001, approximated its fair value. For the year ended June 30, 2002 and 2001, the foreign exchange included in the determination of net income was approximately $42,646 and $45,031, respectively.
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 credit facility, which was due to expire in December 2001, has been renewed and extended until December 1, 2003. The terms and conditions are similar to those in the current credit facility.
Dependence on Gloves. We are currently almost 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.
Dependence on Rubber Harvest and Latex Concentrate. Our ability to produce and purchase our products profitably is entirely dependent upon the consistent availability, at competitive prices, of raw rubber harvested by independent growers in Malaysia, Thailand and Indonesia and locally processed by others and us 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 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 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. The foodservice, industrial and retail industries look at our current line of product offerings as just one of a bundle of safety products used by their customers. Developing a profitable line of additional products will be important to the future success of our business. During 2003, we will be diversifying our product offerings with additional synergistic product lines that address the current safety requirements of our markets. These additional product offerings include polygloves, heavy-duty gloves, headwear, aprons and bibs, food storage bags and educational services. These products will be offered under our SafePrep brand and under private label.
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 both 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, 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 both our future operating results and us.
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, 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 and sales lost by us to competitors that may adversely affect on our future operating results and us.
Reliance Upon Distributors. We use various channels to market and distribute our products to end-users via third-party distributors. Third-party distributors are a substantial channel for distribution to end-users. Accordingly, our ability to market and distribute our 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 these distributors deteriorates or the performance or financial condition of the distributor becomes unsatisfactory, our future operating results could be adversely affected.
Reliance Upon Significant Contracts and Customers. During the year ended June 30, 2002, 64.5% of net sales came from three of our customers: SYSCO Corporation, Owens & Minor, Inc., and Maxxim Medical, Inc. The loss of any of these customers could have a materially adverse impact on us, with the exception of Maxxim Medical.
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 on our operating results.
Hiring and Retention of Employees. Our continued growth and success depends 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. 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 our operating results and us. 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 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 and 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 us 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 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 financially burdensome.
Stock Market Fluctuations. In recent years, the stock market in general, including our Common Stock, has experienced extreme price fluctuations. The market price of 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 analysis; 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 administrative enforcement, such as warning letters, import alerts, 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 sales and 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.
West Coast Longshoreman Work Stoppage. On September 29, 2002, the Pacific Maritime Association (PMA), which represents international shipping lines, indefinitely locked out the longshoremen, effectively stopping all import and export activity on 29 West coast ports. This followed a 36-hour lockout that began on September 27, 2002. These shutdowns were in reaction to work slowdowns by the International Longshoremen's & Warehouse Union (ILWU), which were taking place over the last several weeks. On October 1, 2002 the U.S. District Court in San Francisco issue a temporary restraining order under the authority of the Taft-Hartley Act that requires the ports to reopen. On October 2, 2002 the ports reopened.
We depend heavily on U.S. seaports, especially West coast ports where all of our imports are entered. We have contingency plans in place in the event another work stoppage should occur. These plans include, among other things, airfreighting product, locating alternative sources and redirecting existing inventory.
ITEM 8.
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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position - ---- --- --------
Lew Kwong Ann 41 Chairman and Chief Executive Officer
Alan Zeffer 49 Chief Financial Officer, Secretary and Treasurer
Biographies for Messrs. Lew and Zeffer are included below.
At October 15, 2002, our directors consist of six Class A Directors and two Class B Directors are as follows:
Class A Directors
Name Age Director Since - ---- --- --------------
Eirik Bonde Aslaksrud 39 2001 Lew Kwong Ann 41 1997 George Jeff Mennen 62 1994 Richard J. Swanson 67 1998 Robert Woon Yee Woh 54 2002
Class B Directors
Name Age Director Since - ---- --- --------------
Robert J. Simmons 59 1995 Don L. Arnwine 69 1995
The following sets forth brief statements of the principal occupations and other biographical information of each of the directors and executive officers.
LEW KWONG ANN was appointed Chairman and Chief Executive Officer of us in April 2001. He was elected Class A Director of us on May 20, 1997. Mr. Lew was our Chief Financial Officer, Secretary and Treasurer from 1997 through March 2000. 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 LLP 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. For over five years, Mr. Mennen has headed 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 J. SWANSON was elected Class A Director on June 12, 1998. Mr. Swanson is presently a consultant with The Executive Committee, an international company that 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 formed in 1989 to provide specialized advisory services to the health care industry. From 1961 to 1972, Mr. Arnwine served as Director of the Hospital at the University of Colorado Medical Center. From 1972 to 1982, he served as President and CEO of the Charleston Area Medical Center. Mr. Arnwine became President and CEO of Voluntary Hospitals of America (VHA) in 1982 and was named Chairman and CEO in 1985, in which capacity he served until founding Arnwine Associates.
EIRIK BONDE ASLAKSRUD was appointed a Class A Director of us in April 2001. Mr. Aslaksrud is an Executive Director and Executive Vice President, Global Markets, for WRP Asia Pacific. He has been with WRP since 1991.
ALAN E. ZEFFER is the Chief Financial Officer, Secretary/Treasurer for us. He joined us in April 2001. Prior to joining us, Mr. Zeffer was Managing Partner for Quest Capital Corporation, a corporate finance advisory firm that he founded in 1993. He also served as Treasurer for Sybron International Corp from 1987 until 1993.
ROBERT WOON YEE WOH was appointed a Class A director of us in February 2002. He is currently Group Company Secretary for WRP Asia and has served in that capacity since May 1996. From 1992 to 1996, Mr. Woon served as Group Company Secretary and Share Registrar for Damansara Realty Berhad, PLC.
BOARD MEETINGS AND COMMITTEES
During the year ended June 30, 2002, 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 the year ended June 30, 2002, the Compensation Committee held one meeting and the Audit Committee each held four meetings and all other actions were taken by unanimous written consent without a meeting. At June 30, 2002, our Audit Committee consists of Don Arnwine, Richard Swanson, and George Jeff Mennen.
COMPENSATION OF DIRECTORS
All directors who are not also executive officers, which group is comprised of George Jeff Mennen, Richard J. Swanson and the Class B Directors, receive (i) an annual Board member retainer of $5,000, (ii) compensation of $1,000 for each Board meeting attended, (iii) $500 for each committee meeting attended, and (iv) 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 report and representations furnished to us, we believe that each of these persons is in compliance with all applicable filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation paid by us for services rendered in all capacities to us during the year ended June 30, 2002 and the transition period ended June 30, 2001 and fiscal years ended December 31, 1999 and 1998 to (i) our President and (ii) our executive officers at June 30, 2001 whose aggregate annual salary and bonus are expected to exceed $100,000 for the 2001 calendar year.
(1)Includes housing, automobile and other expenses.
EMPLOYMENT AGREEMENTS
On October 1, 2001, we entered into an employment agreement with Alan E. Zeffer (the "Zeffer Agreement"). The Zeffer Agreement provided for (i) Mr. Zeffer to serve as our Chief Financial Officer, Vice President Finance and Operations; (ii) a base salary of $140,000 per annum; (iii) housing expenses not to exceed $1,200.00 per month; (iv) a $400.00 per month automobile allowance; and (v) nonqualified stock options to be determined by the Compensation Committee.
OPTION GRANTS DURING THE YEAR JUNE 30, 2002
On February 27, 2002 there were 70,000 options granted to Alan Zeffer at $0.75, the exercise price of the closing price of the common stock on February 19, 2002, the date of the grant. Mr. Zeffer's options vest over a three-year period and are exercisable for a period of ten years form 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 repriced effective February 29, 2000 to $2.07, the closing price on that date.
AGGREGATE OPTION EXERCISES DURING THE YEAR ENDED JUNE 30, 2002 AND FISCAL PERIOD-END OPTION VALUES
There were no options exercised during the year ended June 30, 2002 by the executive officers named in the Summary Compensation 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 three (3) Class A Directors: Lew Kwong Ann, 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 experiences 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 the year ended June 30, 2002, all action of the Compensation Committee was made during the one meeting held or was taken by the Committee by unanimous written consent without a meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Lew Kwong Ann and Eirik Bonde Aslaksrud 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 or the Compensation Committee.
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 ended June 30 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. and Prime Medical Services Inc. During the six-month transition period ended June 30, 2000, our peer group was changed to exclude two companies, which were no longer publicly traded.
[LINE GRAPH]
* $100 invested on June 30, 1995 in stock or Index - including reinvestment of dividends. Fiscal year ending June 30.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 2002, 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.
- ------------------------ *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)Represents shares to be issued upon exercisable options granted under our Omnibus Equity Compensation Plan. (3)Percent of class is based on 7,056,230 shares of the combined number of Series A Common Stock and Common Stock outstanding on October 15, 2002.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2002, we purchased latex powder-free exam gloves amounting to $13.5 million from our majority shareholder, WRP Asia. In addition, our Indonesian factory sold approximately $7.4 million of powdered latex exam gloves to WRP Asia during the period.
During the year ended June 30, 2002, 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 $137,772 during the year ended June 30, 2002 for its services.
PART IV
ITEM 14.
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.
(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. 3.4 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).
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 10-K 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 incorporated herein by reference to Exhibit 10.38 included in the Company's Form 10-K 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).
10.45 GE Waivers and Amendments to the Loan and Security Agreement dated as of December 1, 1998.
10.46 Employment Agreement between WRP Corporation and Alan Zeffer dated October 1, 2001 (1).
21 Subsidiaries of the Company (1).
23.1 Consent of Grant Thornton LLP (1).
(b) During the 12 months ended June 30, 2001, the Company filed one report on Form 8-K.
On August 15, 2002, the Company filed a report on Form 8-K, changing its certifying accountant to Grant Thornton LLP.
(c) See item 12(a)(b)
(1) Filed herewith.
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: October 15, 2002 By: /s/ Alan E. Zeffer ------------------ Alan E. Zeffer, Chief Financial Officer
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, in the capacities and on the dates indicated.
Date: October 15, 2002 By: /s/ Lew Kwong Ann ----------------- Lew Kwong Ann, Chief Executive Officer and Chairman of the Board of Directors
Date: October 15, 2002 By: /s/ Eirik Bonde Aslaksrud ------------------------- Eirik Bonde Aslaksrud, Director
Date: October 15, 2002 By: /s/ Robert Woon --------------- Robert Woon, Director
Date: October 15, 2002 By: /s/ George Jeff Mennen ---------------------- George Jeff Mennen, Director
Date: October 15, 2002 By: /s/ Richard J. Swanson ---------------------- Richard J. Swanson, Director
Date: October 15, 2002 By: /s/ Robert J. Simmons --------------------- Robert J. Simmons, Director
Date: October 15, 2002 By: /s/ Don L. Arnwine ------------------ Don L. Arnwine, Director
CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......................
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - OTHER AUDITORS.......................................................
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - PREDECESSOR AUDITOR REPORT...........................................
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS.......................................................
STATEMENTS OF OPERATIONS.............................................
STATEMENT OF SHAREHOLDERS' EQUITY....................................
STATEMENTS OF CASH FLOWS.............................................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...........................
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors WRP Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of WRP Corporation (a Maryland corporation, 53.2% owned by WRP-Asia Pacific Sdn. Bhd.) and Subsidiaries as of June 30, 2002, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. 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 audit. We did not audit the financial statements of PT WRP Buana Multicorpa, a 70%-owned subsidiary, whose statements reflect total assets of 36.4% of the consolidated total assets as of June 30, 2002, and net sales of 17.6% of consolidated net sales for the year then ended. Those statements were audited by other auditors, whose report thereon has been furnished to us and shown elsewhere, and our opinion, insofar as it relates to the amounts included for PT WRP Buana Multicorpa, is based solely on the report of the other auditors. The consolidated financial statements of WRP Corporation and Subsidiaries as of and for the years ended June 30, 2001, and December 31, 1999 and 1998, and for the six-month periods ended June 30, 2000 and 1999, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated September 28, 2001.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit and the report of the other auditors provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of WRP Corporation and Subsidiaries as of June 30, 2002, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Chicago, Illinois October 15, 2002
Report of Independent Certified Public Accountants - Other Auditors
INDEPENDENT AUDITORS' REPORT
Report No. xxxxS - ----------------
The Board of Directors PT WRP BUANA MULTICORPORA
We have audited the accompanying balance sheets of PT WRP Buana Multicorpora (an Indonesian company and subsidiary of WRP Corporation), remeasured into U.S. Dollar, as of June 30, 2002 and 2001, and the related remeasured statements of income, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these remeasured financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. 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.
The remeasured financial statements have been prepared for use in the preparation of the consolidated financial statements of WRP Corporation and, accordingly, they remeasure the assets, liabilities, stockholders' equity and revenues and expenses of PT WRP Buana Multicorpora for that purpose, as explained in Note 3 to the remeasured financial statements. The remeasured financial statements have not been prepared for use by other parties and may not be appropriate for such use.
In our opinion, the remeasured financial statements referred to above present fairly in all material respects, for the purpose described in the preceding paragraph, the financial position of PT WRP Buana Multicorpora as of June 30, 2002 and 2001, and the results of its operations, changes in its stockholders' equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
PRASETIO, SARWOKO & SANDJAJA
Dra. Juanita Budijani License No. 00.1.0714
October 15, 2002
NOTICE TO READERS - -----------------
The accompanying financial statements are not intended to present the financial position and results of operations, changes in stockholders' equity and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than United States of America. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in United States of America.
(1) - This report is a copy of the previously issued report. (2) - The predecessor auditor has not reissued the report.
REPORT OF INDEPENDENT CERTIFIED 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 owned 53.2% by WRP-Asia Pacific Sdn. Bhd.) AND SUBSIDIARIES as of June 30, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended June 30, 2001, and December 31, 1999 and 1998, and for the six-month periods ended June 30, 2000 and 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 June 30, 2001 and 2000, and the results of their operations and their cash flows for the years ended June 30, 2001, and December 31, 1999 and 1998, and for the six-month periods ended June 30, 2000 and 1999, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN Chicago, Illinois September 28, 2001
WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30,
WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED JUNE 30,
The accompanying notes are an integral part of these balance sheets.
WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2002 AND 2001, AND DECEMBER 31, 1999, AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
The accompanying notes are an integral part of these statements.
WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, 2002 AND 2001, AND DECEMBER 31, 1999, AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
The accompanying notes are an integral part of this statement.
WRP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002 AND 2001, AND DECEMBER 31, 1999, AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
The accompanying notes are an integral part of these statements.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
WRP Corporation and Subsidiaries (the "Company") is a leading marketer of medical, surgical and food-service gloves in the United States through its wholly owned subsidiary, American Health Products Corporation ("AHPC"). The Company is a 53.2% controlled subsidiary of WRP-Asia Pacific Sdn. Bhd. ("WRP Asia"). The Company also manufacturers high-quality disposable latex examination and food-service gloves through its 70%-owned Indonesian manufacturing facility, PT WRP Buana Multicorpa ("PT Buana"). The Company was incorporated in Maryland in December 1995 and has been involved in several business operations.
During the first half of 2000, the Company's Board of Directors approved a change in the Company's fiscal year-end from December 31 to June 30, which corresponds to the year-end of the Company's majority shareholder, WRP Asia, a Malaysian corporation. The new fiscal year commenced July 1, 2000.
The report on the financial statements of PT WRP Buana Multicorpa ("PT Buana") for 2002 is included on. Those financial statements were prepared utilizing the US Dollar as the functional currency as required by SFAS 12 and are not presented separately herein. The reference in the accompanying auditors report to Note 3 refers to the preparation of those statements using the US Dollar as the functional currency as discussed above.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of WRP Corporation, AHPC and PT Buana. All significant intercompany transactions have been eliminated.
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 purchased with a maturity of three months or less to be cash equivalents.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVENTORIES
Inventories are accounted for on a first-in, first-out basis and are valued at the lower of actual cost or market. Inventories consist of the following at June 30, 2002 and 2001:
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 June 30, 2002 and 2001, are as follows:
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 of purchase price over the fair market value of the net assets of PT Buana is recorded as goodwill in the accompanying consolidated balance sheets and is being amortized using the straight-line method over 25 years.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
GOODWILL - CONTINUED
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. 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. During 2002, the Company evaluated the realizability of the goodwill through the use of an independent appraisal, which utilized the present values of expected future cash flows in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The valuation indicated adequate value to support the recorded amounts of goodwill as of June 30, 2002.
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.
The Company records a liability for rebates and sales discounts in accordance with terms as contracted with certain customers.
INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 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 Earnings per Share ("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).
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NET INCOME PER COMMON SHARE - CONTINUED
The weighted-average number of common shares and common share equivalents outstanding for the years ended June 30, 2002 and 2001, and December 31, 1999, and for the six-month periods ended June 30, 2000 and 1999, are as follows:
The Company had additional vested stock options and warrants outstanding of 476,214, 370,272, 455,000, 483,609 and 127,500 at June 30, 2002 and 2001, December 31, 1999, and June 30, 2000 and 1999, respectively. The options for the periods June 30, 2001, December 31, 1999, June 30, 2000, and June 30, 1999, 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. The impact of stock options has been excluded from the calculation of earnings per share for the year ended June 30, 2002, as their effect would be anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:
1. CURRENT ASSETS AND CURRENT LIABILITIES - The carrying amount approximates fair value due to the short maturity of these items.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
2. 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.
3. AMOUNTS DUE TO/DUE FROM AFFILIATE - Amounts due to/due from affiliate are non-interest bearing and do not specify maturity dates; therefore, it is not practicable to estimate the fair value of these financial instruments.
FOREIGN CURRENCY TRANSLATION
PT Buana's financial statements are prepared from the records maintained in the Republic of Indonesia, the country in which PT Buana was established and operates. Its functional currency is the U.S. dollar. This is primarily the result of the PT Buana operations becoming more dependent on the U.S.-dollar-denominated transactions and economic trends during its fiscal year ended June 30, 1998.
Gains and losses from foreign currency transactions are included in net income in the period in which they occur. For the years ended June 30, 2002 and 2001, and December 31, 1999, and for the six-month periods ended June 30, 2000 and 1999, the foreign exchange (loss) gain included in the determination of net income is $(42,646), $45,031, $3,563, $(6,223) and $9,021, 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.
LITIGATION
The Company is engaged in various lawsuits either as plaintiff or defendant involving product liability. In the opinion of management, the ultimate outcome of these lawsuits will not have a material impact on the Company's consolidated financial statements. The Company expenses legal cost related to such litigation as the costs are incurred.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," related to options and warrants issued to employees and directors.
INTERNAL USE SOFTWARE COSTS
In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("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. As of June 30, 2002 and 2001, the net book value of capitalized software was fully amortized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." This pronouncement provides guidance on financial accounting and reporting for acquired goodwill and other intangible assets. This statement supercedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 will require that goodwill and certain intangibles no longer be amortized but instead tested for impairment at least annually. The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. The Company anticipates that future earnings will increase without amortization expense; however, the Company will annually assess its existing goodwill for impairment.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement amends FASB statement No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies." The provisions in this statement are effective for financial statements issued for fiscal years beginning after June 15, 2002. Although early adoption is encouraged, it is not required. The Company will adopt the provisions in this statement for all tangible long-lived asset retirements initiated after June 30, 2002.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This statement also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary.
The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Although early adoption is encouraged, it is not required. The Company will adopt the provisions in this statement for fiscal years beginning after June 30, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit and disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company plans to adopt the provisions set forth in this statement for all exit and disposal activities initiated after December 31, 2002.
RECLASSIFICATION
Certain prior-period balances have been reclassified to conform with the current-year presentation.
NOTE B - 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.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE B - COMMON STOCK - CONTINUED
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 with the holders of common stock as a single class with respect to any matters subject to a vote of the shareholders. (see note H for further information on the Company's shareholders' equity.)
On February 29, 2000, the Company approved a stock repurchase plan, which may include the repurchase of 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. As of June 30, 2002, 234,800 shares of public common stock have been repurchased by the Company as part of this plan.
NOTE C - 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. In connection with the loss of the Novation contract as discussed in note H, on March 1, 2000, the Company renegotiated the PIE contract to allow the Company to satisfy its remaining purchase obligations through July 31, 2001. The purchase obligations were satisfied at prices similar to prevailing market rates. As of June 30, 2001, the Company was in compliance with the agreement, and as of July 31, 2001, the agreement was terminated.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE D - RELATED-PARTY TRANSACTIONS
At June 30, 2002 and 2001, amounts due from/to affiliates consist of the following:
The outstanding accounts receivable from WRP Asia result primarily from sales of product, cash advances and charges for obtaining FDA approval of the gloves imported from WRP Asia and other items. As of June 30 2002, $8,954,321 is due to the Company. This amount includes amounts due to PT Buana at June 30, 2002, of $5,586,321 and amounts due to AHPC of $3,368,000. Subsequent to June 30, 2002, the amounts due to PT Buana of $5,586,321 were assigned to WRP USA in partial satisfaction of intercompany amounts due from PT Buana to WRP USA. Subsequent to June 30, 2002, the Company entered into a formal agreement with WRP Asia to provide for full and complete right of offset of any trade payables due against amounts they owe to WRPC and AHPC. Included in the WRP Asia receivable is a note receivable of $470,000 as of June 30, 2002 and 2001.
WRP USA and AHPC have accounts payable to WRP Asia of $2,657,279 at June 30, 2002, primarily resulting from the purchase of inventories. AHPC purchased virtually all of its latex, powder-free exam gloves from WRP Asia in 2002, 2001 and 2000. See note K for additional related-party transactions.
The net amount due from WRP Asia, before allowance for doubtful accounts at June 30, 2002, was $6,297,042, against which we have provided an allowance for doubtful accounts of $5,586,000 (representing all amounts due for the sale of product from PT Buana to WRP Asia at June 30, 2002).
The Company continues to purchase gloves from WRP Asia, and believes that the unreserved amounts due from WRP Asia to WRPC and AHPC of approximately $711,000 at June 30,2002, are realizable based on the agreement granting right of offset and ongoing purchases from WRP Asia.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE D - RELATED-PARTY TRANSACTIONS - CONTINUED
On September 24, 2002, the Board of Directors passed a resolution limiting the net receivables due from WRP Asia to $6,200,000. If net receivables exceed this amount, WRP Asia will be required to either prepay for product or issue an irrevocable letter of credit to cover the purchase price.
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 June 30, 2002 and 2001, and December 31, 1999, and for the six-month periods ended June 30, 2000 and 1999, total purchases of gloves from WRP Asia were $13,519,454, $10,906,263, $18,409,600, $6,621,531 and $8,813,942, respectively.
WRP Asia undertook a restructuring plan during 2001, the objective of which was to improve cash flows and profitability and to assure longer-term financial viability. This plan included restructuring of the Company's debt facility and additional investment from outside sources.
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. These factors could significantly disrupt both the source of the Company's supply of glove products as well as product supplied to companies located in that area of the world.
Additionally, interest rates in many Asian-Pacific countries have been heavily dependent on international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners.
The enactment by principal trading partners of protectionist trade legislation, reduction of foreign investment or general declines in the international securities markets could have a significant adverse effect on the economies of the Asian-Pacific countries.
The impact of this potential instability could affect WRP Asia's ability to achieve the restructuring plans discussed above, its ability to continue to purchase the quantities projected in its restructuring plan from PT Buana, and its ability to pay the amounts due to PT Buana and AHPC.
As of October 9, 2002, the restructuring of the debt facility has not been completed, although discussions are ongoing with several sources. Amounts due in the accompanying balance sheet from WRP Asia, net of amounts available for offset of those receivables are $6,297,042 at June 30, 2002. The Company has recorded an allowance of approximately $5,586,000 against these receivables to reflect the uncertainty of collection on these amounts.
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.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE D - RELATED-PARTY TRANSACTIONS - CONTINUED
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 $137,772, $112,290, $66,160, $42,216 and $36,000 in the years ended June 30, 2002 and 2001, and December 31, 1999, and the six-month periods ended June 30, 2000 and 1999, respectively, for its services.
NOTE E - TRADE NOTES PAYABLE TO BANK
Trade notes payable to bank consist of amounts financed through letter of credit arrangements and notes payable, which totaled $2,860,414 and $507,937 at June 30, 2002 and 2001, respectively. These bank obligations are collateralized by the inventory and accounts receivable of AHPC.
The Company utilizes the facility of WRP Asia to discount PT Buana's receivables from AHPC. Amounts available under this arrangement are $2,631,601 (MLR $10,000,000) of which $2,420,205 is outstanding as of June 30, 2002. PT Buana has guaranteed to WRP Asia's lender the payment of the discounted receivables in the event AHPC does not remit payment.
As of June 30, 2002 and 2001, the Company was contingently liable for outstanding letter of credit liabilities totaling $175,558 and $316,840, respectively.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE F - NOTES PAYABLE
Notes payable and long-term debt as of June 30, 2002 and 2001, consist of the following:
The bank revolving line-of-credit agreement noted above contains covenants that require, among other things, maintenance of financial ratios and limitations on borrowings, investments and capital expenditures.
As of June 30, 2002, the Company was not in compliance with certain of its covenants. The Company has obtained waivers for these covenant violations.
The Company's credit facility includes a $15,000,000 revolving line of credit with an $11,000,000 letter of credit subfacility. The facility carries an interest rate of commercial paper plus 4.5% (6.27% at June 30, 2002).
The facility agreement was amended to expire on December 1, 2003.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE G - 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 June 30, 2002, the Company was involved in a total of 65 lawsuits as a named defendant, a third-party defendant or an indemnitor. During the year ended June 30, 2002, the Company was named in 11 lawsuits and was dismissed from 12 lawsuits. The Company carries product liability insurance. Management believes all legal claims are adequately provided for or, if not provided for, are without merit, or involve such amounts that would not materially affect the Company's results of operations or financial condition.
SIGNIFICANT CUSTOMERS
The following summary presents the total percentage of sales the Company made to Owens and Minor Inc., composed of numerous operating branch locations throughout the U.S., Sysco, and Maxxim Medical Inc. (Maxxim) and the total percentage of accounts receivable these three customers accounted for:
These three 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 those various medical facilities, food-service organizations and professionals who purchase the product from these distributors. During the year ended June 30, 2002, the Company entered into a Transition Services Agreement with Maxxim whereby Maxxim would service certain medical customers. The agreement is expected to reduce sales to Maxxim in future years.
OPERATING LEASES
The Company conducts all of its operations in leased facilities.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
OPERATING LEASES - CONTINUED
Total rent expense, net of rental income, included in the accompanying consolidated statements of operations for the years ended June 30, 2002 and 2001, and December 31, 1999, and for the six-month periods ended June 30, 2000 and 1999, was $595,669, $605,578, $440,441, $289,886 and $169,980, respectively. The following summary presents future minimum rental payments required under the terms of present operating leases:
NOTE H - SHAREHOLDERS' EQUITY
In November 1999, warrants to purchase 7,500 shares of the Company's common stock at an exercise price of $22.20 expired.
In March 1999, warrants to purchase 125,000 shares of the Company's common stock at an exercise price of $15.00 expired.
At June 30, 2000, the Company had outstanding debt, which is convertible at any time at the noteholder's option (see note F) into warrants to purchase 54,000 shares of common stock at $25.00 per share. These convertible debentures expired in November 2001.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE I - 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 February 29, 2000, the Board of Directors approved the repricing of all current director and employee options to $2.07, the closing market price on that date. This change will require variable Plan accounting for future appreciation in stock prices. A summary of options outstanding under the Plan is as follows:
The exercise price of the stock options granted in 2002, 2001, 2000, 1999 and 1998 was established at the market price on the date of the grants. Of the 720,193 options outstanding at June 30, 2002, 476,214 are currently exercisable, and 121,989 become exercisable in 2003 and 2004. The Company has reserved common stock for issuance upon conversion of these options.
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE I - STOCK OPTION PLAN - CONTINUED
The Company accounts for employee stock options under APB Opinion No. 25 and FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation an Interpretation of APB No. 25" as permitted under accounting principles generally accepted in the United States of America. 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 (loss) income per share (diluted) for the years ended June 30, 2002 and 2001, and December 31, 1999, and for the six-month periods ended June 30, 2000 and 1999, would have been $(4,496,873), $313,052, $1,780,936, $1,190,558 and $1,098,470 and $(0.68), $0.05, $0.26, $0.17 and $0.16, respectively.
The pro forma disclosure is not likely to be indicative of pro forma results that may be expected in future years. This primarily relates to the fact that options vest over several years and pro forma compensation cost is recognized as the options vest. Furthermore, the compensation cost is dependent on the number of options granted which may vary in future periods.
The fair value of each option is estimated on the date of grant based on the Black-Scholes option pricing model using the following assumptions:
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE I - STOCK OPTION PLAN - CONTINUED
Options outstanding and exercisable at June 30, 2002, were as follows:
NOTE J - INCOME TAXES
The components of the Company's income tax provision (benefit) from continuing operations consisted of:
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE J - INCOME TAXES - CONTINUED
A reconciliation of the statutory U.S. Federal income tax rate to the effective tax rate is as follows:
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 June 30, 2002.
Significant components of the Company's deferred tax assets and liabilities are as follows:
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE J - INCOME TAXES - CONTINUED
The Company has net operating loss carryforwards at June 30, 2002, of approximately $1.5 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 is 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 losses at June 30, 2002, is limited.
The Company establishes valuation allowances in accordance with the provisions of SFAS No. 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.
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest on debt outstanding for the years ended June 30, 2002 and 2001, and December 31, 1999, and for the six-month periods ended June 30, 2000 and 1999, was $275,580, $619,479, $690,496, $321,945 and $228,560, respectively.
Cash paid for income taxes during the years ended June 30, 2002 and 2001, and December 31, 1999, and the six-month periods ended June 30, 2000 and 1999, was $0, $65,000, $780,000, $30,000 and $740,000, respectively.
The following represents significant related-party operating transactions during the years ended June 30, 2002 and 2001, and December 31, 1999, and the six-month periods ended June 30, 2000 and 1999, which are included in the consolidated statements of cash flows as amounts due to affiliate under the cash flows from operating activities:
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE L - 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 2002, 2001, 2000 and 1999:
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE M - 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 H. 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 A. The Company evaluates segment performance based on income from operations before provision for (benefit from) income taxes and minority interest ("Pretax (loss) income"). Management believes transactions between operating segments are made at prevailing market rates.
The following tables provide financial data for the years ended June 30, 2002 and 2001, and December 31, 1999, and for the six-month periods ended June 30, 2000 and 1999, for these segments:
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE M - SEGMENT REPORTING - CONTINUED
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE N - QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
WRP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED JUNE 30, 2002 AND 2001
NOTE N - QUARTERLY FINANCIAL SUMMARY (UNAUDITED) - CONTINUED
CERTIFICATIONS
I, Lew Kwong Ann, certify that:
1. I have reviewed this annual report on Form 10-KSB of WRP Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. Based on my knowledge, the Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 15, 2002, by WRP Corporation and to which this certification is appended (the "Periodic Report") fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934, and the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operation of WRP Corporation.
Date: October 15, 2002
/s/ Lew Kwong Ann -------------------------- Chief Executive Officer
CERTIFICATIONS
I, Alan E. Zeffer, certify that:
1. I have reviewed this annual report on Form 10-KSB of WRP Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. Based on my knowledge, the Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 15, 2002, WRP Corporation and to which this certification is appended (the "Periodic Report") fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934, and the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operation of WRP Corporation.
Date: October 15, 2002
/s/ Alan E. Zeffer -------------------------- Alan E. Zeffer Title: Chief Financial Officer