ITEM 1. BUSINESS.........................................................1 ITEM 2.
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, 2001, our lease expense was $178,000.
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 Sparks, Nevada; Atlanta, Georgia; Union City, California; Fond Du Lac, Wisconsin, Hanover, Pennsylvania and Baltimore, Maryland. 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 expires in May 2002. The current rental expense for this lease is approximately $30,500 per year, with annual increases of approximately 3.5% per year. In June 2001, we closed our Telesales operations office and are in the process of negotiating a sublease for the office space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 2001 we, and AHPC (jointly the "WRP Defendants"), had a total of 66 latex glove product liability suits pending against us throughout the United States. We were an active defendant in one claim, and AHPC in 40 claims. Additionally, through a series of Private Label Supply and Trademark Licensing Agreements with VHA, Inc. ("VHA"), AHPC agreed to defend and indemnify VHA in 14 suits; AHPC was joined as a third party defendant in five 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.
Subsequent to June 30, 2001, AHPC was served with three additional product liability lawsuits. 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, 2001, AHPC and the Vendors were dismissed from twenty-eight 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 September 24, 2001, 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
The Annual Meeting of the Shareholders of the Company was held on January 30, 2001. The purpose of the Annual Meeting was to consider the vote on the following matters:
1. To elect six Class A directors and two Class B directors to hold office until the next Annual Meeting of Shareholders or otherwise as provided in the Company's by-laws.
Class A Director Nominees
Kamaruddin Taib Richard C.M. Wong Edward J. Marteka Kwong Ann Lew George Jeff Mennen Richard Swanson
Class B Director Nominees
Robert J. Simmons Don L. Arnwine
The nominees for Class A directors received all 1,252,538 votes for their election.
Each of the nominees for Class B directors received the following number of votes:
For 4,778,655 Against 13,375 Abstain 403,617 Non-votes 608,045
2. To concur in the selection of Arthur Andersen LLP as independent auditor for the six months ending June 30, 2001. The vote of the Shareholders was as follows:
For 5,195,645 Against 0 Abstain 448,120 Non-votes 159,927
All of the above matters were approved by the Shareholders. There were no other matters voted on at the meeting.
3. In April 2001, we announced the resignations of Richard CM Wong as Chairman of the Board and Director, 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, and Mr. Eirik Bonde Aslaksrud was appointed a Class A Director.
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: LOW HIGH --- ----
JUNE 30, 2001
4TH QUARTER $ .44 $ .98 3RD QUARTER $ .5938 $1.0625 2ND QUARTER $1.0625 $1.6250 1ST QUARTER $1.0938 $2.000
JUNE 30, 2000
2nd quarter $ 1.13 $ 2.00 1st quarter $ 1.75 $ 2.38
DECEMBER 31, 1999
4th quarter $ 2.00 $ 3.75 3rd quarter $ 3.50 $ 5.88 2nd quarter $ 5.25 $ 7.19 1st quarter $ 4.88 $ 7.88
DECEMBER 31, 1998
4th quarter $ 4.75 $ 7.00 3rd quarter $ 4.28 $ 6.87 2nd quarter $ 5.50 $ 7.37 1st quarter $ 3.06 $ 5.87
There were approximately 330 shareholders of record of our Common Stock as of June 30, 2001. 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, 2001, we purchased 190,000 shares of our Common Stock under this program. Subsequent to June 30 through September 20, 2001, we purchased 35,000 shares of our Common Stock.
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 the Company's stock over $1.00. Prior to the holding of the meeting, the Company's stock price began trading at or about $1.00 per share. On August 16, 2001, we were notified by the Panel that our 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.
In May 2001, we were invited by SYSCO Corporation ("SYSCO") to present a supplier review to the FoodService Disposables Department within SYSCO. This review entailed
detailed discussions regarding how the Company will grow market share, new product offerings, pricing and EDI capabilities, among other things. The outcome of this review is uncertain.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of WRP Corporation presented below for the year ended June 30, 2001, and the six months ended June 30, 2000 and 1999 and for the four calendar years ended December 31, 1999, 1998, 1997 and 1996 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, the Company 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, swelling, 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, 2001, we recorded net glove sales of $51.9 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 24.6% of its production to AHPC during the year ended June 30, 2001. PT Buana recorded glove sales totaling $13.2 million and $10.3 million during the years ended June 30, 2001 and December 31, 1999, respectively. PT Buana's remaining production was primarily sold 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, 2001, the six-month period ended June 30, 1999 and 2000 and for the years ended December 31, 1999 and 1998, include our results of operations and statements of cash flows, as well as for AHPC and PT Buana.
During the six months ended June 30, 2000, several significant events transpired. In January, we announced that the group purchasing organization, Novation, would not renew its glove supply contract with AHPC, which expired on April 30, 2000.
Through June 30, 2001, we have converted and maintained approximately 35% of this business. We are emphasizing our own brand products, which creates brand equity and awareness in the marketplace.
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, 2001, we repurchased 180,406 shares of our Common Stock under this program.
In April 2000, we announced the launch of a surgical glove line. This product launch was soon delayed due to product quality issues. The quality issues have since been resolved and, commencing in May 2001, we re-launched our surgical glove line.
During 2001, we broadened our strategy beyond surgical gloves to include other specialty glove products. These new products include gloves for radiology and chemotherapy markets.
We believe that, by expanding our specialty glove product offerings to include these high value added products, we can take greater advantage of the synergies this creates with our present customer base.
In December 2000, we announced that our President, Edward J. Marteka, resigned from the Company, and Mr. Neil M. Kosterman was appointed President.
In April 2001, we announced the resignations of Richard C.M. Wong as Chief Executive Officer and Chairman of the Board of Directors and Kamaruddin Taib as a Class A Director of the Company.
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 a Class A Director of the Company. Also in April, Mr. Kenneth A.Ling resigned as Chief Financial Officer, and Mr. Alan E. Zeffer was appointed Chief Financial Officer.
In June, 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. We also announced the hiring of Thomas P. Kennedy as Vice President of Sales.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net sales for the periods indicated.
YEAR ENDED JUNE 30, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999.
The Company's 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. The Company's 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. The Company continues to expect its 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 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. The Company 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
The Company's 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. The Company's 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. The Company continues to expect its 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 the Company 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
The results of operations for 1999 and 1998 include only the revenue and expenses of the glove business. Net sales include glove sales from AHPC's examination glove product line and external exam glove sales from PT Buana. Net sales totaled $65,280,104 and $64,968,401 for the years ended December 31, 1999 and 1998, respectively. This increase represents less than a 1% increase in glove sales in 1999 over 1998. Sales for the year ended December 31, 1999 were reduced by $2.3 million, as we changed to a consignment inventory arrangement with a key food service customer in the second quarter. The medical division experienced average sale price
reductions of 8% during 1999 due to a sharp decline in the price of raw material latex and competitive forces. The medical division experienced a 16.1% increase in case volume over 1998 and product mix continues to reflect increased powder-free latex and synthetic glove sales.
Cost of goods sold increased 3.8% from $46,857,229 for the year ended December 31, 1998 to $48,645,076 for the year ended December 31, 1999. As a percentage of net sales, cost of goods sold increased from 72.1% for the year ended December 31, 1998 to 74.5% for the same period in 1999. The primary factors associated with the increase in cost of goods sold as a percentage of net sales were lower average selling prices, increased warehousing costs associated with higher inventory levels, the change to consignment inventory and increased ocean freight rates, partially offset by an increased mix of higher margin powder-free glove sales and reductions in glove purchase prices from manufacturers. As a result of the above factors, our gross profit decreased 8.2% from $18,111,172 for the year ended December 31, 1998 to $16,635,028 for the year ended December 31, 1999.
During the third quarter of 1999, the Indonesian factory, PT Buana, completed its installation of chlorination equipment used for the manufacturing of latex powder-free gloves, which produce a higher gross profit margin than powdered gloves. PT Buana produced only a small quantity of powder-free gloves in the second half of 1999, as it was selling on a trial basis its product in the European market before sales to the U.S. are made.
The domestic market for exam gloves is converting from latex powdered to latex powder-free gloves and to synthetic gloves. This move is a result of greater user receptivity to powder-free gloves. The chlorination process used to make powder-free gloves reduces the sensitivity to latex and eliminates powder levels, which could carry latex particles in the air. Due to customer demand, we are providing and selling more latex powder-free exam gloves and synthetic gloves. We expect that this trend will continue. Our sales of latex powder-free exam gloves and synthetic gloves were approximately 73% of sales in 1999 versus 63% in 1998.
Selling, general and administrative ("SG&A") expenses increased by 23.5% from $9,954,785 in 1998 to $12,295,192 in 1999. As a percentage of 1999 net sales, SG&A expenses increased to 18.8% in 1999 compared with 15.3% in 1998. This increase of $2,340,407 in SG&A expenses is primarily attributable to an increase in selling compensation related costs of $1,298,900 due to the planned expansion of our telesales and medical sales force, additional travel, telephone and sample expense of $321,000 associated with the larger sales staff and an increase in depreciation expense and consulting fees of $362,000 associated with our recently implemented computer system.
Income from operations decreased by 46.8% from $8,156,387 for 1998 to $4,339,836 for 1999. Operating margins decreased from 12.6% in the 1998 period to 6.7% in the 1999 period.
Interest expense decreased from $1,192,405 during 1998 to $802,159 in 1999. This decrease in interest expense of $390,246 is due to (i) approximately $7.5 million of PT Buana's debt having been repaid in 1998 as Indonesian interest rates were very high and (ii) our new debt agreement entered into on December 1, 1998 carries a lower rate than the previous debt facility, offset by increased borrowings in 1999 on the line of credit used to finance its increased inventory levels and capital expenditures. The 1998 PT Buana debt repayments were made with
our proceeds from the sale of Common Stock to WRP Asia on March 31, 1998. All inter-company interest income and interest expense is eliminated in consolidation.
Other income consists of rental income, interest income and miscellaneous income. Other income for the year ended December 31, 1999 was $166,155 compared to $461,386 for the comparable period in 1998. This decrease in other income of $295,231 is primarily due to the disposal of the investment in LSAI in 1998, which generated a gain of $168,375.
The provision for income taxes increased from $952,146 for the year ended December 31, 1998 to $1,348,121 for the year ended December 31, 1999. The 1998 income tax provision is less than the U.S. statutory rates. During the first quarter of 1998, we had net operating loss carry-forwards ("NOL's") which were used to reduce taxable income for that period. In accordance with tax regulations, usage of the NOL's is subject to limitations if certain ownership changes occur. Due to the WRP Asia ownership change on March 31, 1998, our NOL's became limited and subsequent to that date, we began recording a provision for income taxes. At December 31, 1999, we had NOL's of approximately $1.975 million, which will be available to reduce federal taxable income in the U.S. in future periods not to exceed approximately $1.3 million per year.
The minority interest in loss (income) of subsidiary represents the non-owned 30% profit or loss from PT Buana. The minority interest in loss (income) of PT Buana was ($594,062) during 1998 compared to $97,033 in 1999. During 1999, PT Buana's profitability decreased primarily due to the reductions in its gross profit triggered by lower selling prices for powdered latex exam gloves in the marketplace as well as due to reduced production output.
Net income decreased by $3,426,416 or 58.3% from $5,879,160 for the year ended December 31, 1998 to $2,452,744 for the year ended 1999 due to the previously mentioned factors. The diluted earnings per share were $.35 in 1999 compared to $.93 in 1998.
SEGMENT INFORMATION
Year Ended June 30, 2001 and Years Ended December 31, 1999 and 1998. During the year ended June 30, 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 disposablegloves. 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. The operations of the distribution segment are located entirely within the U.S.
LIQUIDITY AND CAPITAL RESOURCES
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 $1,639,376 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.
On May 11, 2001, Sysco, the company's largest customer (44.7% of sales in 2001) advised us that they would be performing supplier reviews for all of the disposable products purchased by their Food Service Group. Although a majority of our sales to Sysco are used by food service customers, these products are purchased by the Medical Group at Sysco. While Medical group suppliers are not being specifically reviewed, we have been asked to participate. This review is being performed in order to ascertain suppliers' future commitments to partnering with Sysco. This review by Sysco's food service group could have an impact on the product being sold to and through the Sysco organization as a whole. As of September 28, 2001, this review is ongoing.
As of June 30, 2001 the company has 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.
WRP Asia has undertaken a restructuring plan during 2001, the objective of which is to improve cash flows and profitability and to assure longer term financial viability. This plan includes a restructuring of the company's debt facility and additional investment from outside sources. Management of WRP Asia believes this plan will generate adequate cash flow to meet WRP Asia's needs through at least December 31, 2002.
As indicated below in 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. These factors could significantly disrupt both the source of our 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 upon international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partner. 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 upon 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, their ability to continue to purchase the quantities projected in their restructuring plan from PT Buana and their ability to pay the amounts due to PT Buana and AHPC. Management believes that all amounts outstanding from WRP Asia at June 30, 2001 are fully realizable at this time.
Net inventories at June 30, 2001 decreased by 29.0% to $7,187,386 from $10,124,411 at June 30, 2000. This decline of $2,937,025 is due to the reduction in NovaPlus brand inventory levels associated with the loss of the Novation group purchasing organization supply contract and with improved inventory management procedures.
During the year ended June 30, 2001, the cash generated from operations was used primarily to reduce long-term debt and fund capital expenditures. We used cash in financing activities of $1,010,430 during the period.
During the year ended June 30, 2001, we used cash in net investing activities of $729,259. We spent $928,206 for capital expenditures during that period primarily at PT Buana, our Indonesian manufacturing plant, for capital improvements.
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 2.75% (6.69% at June 30, 2001). At June 30, 2001, we had outstanding $2,737,138 on the revolving line of credit and $1,252,814 of letter of credit liabilities under the credit facility. The Company was not in compliance with certain of its covenants and has obtained waivers of these covenant violations from the financial institution. On September 28, 2001, we received a letter of commitment to renew and extend this credit facility for an additional term of three (3) years, with terms and conditions similar to the existing facility.
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. For the year ended June 30, 2001, we repaid $800,000 against this debt. We anticipate repayments of $550,000 within the next twelve months and have classified this amount as current portion of long-term obligations at June 30, 2001.
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.
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 month 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 in financing activities of $5,402,813 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.
YEAR ENDED DECEMBER 31, 1999
Cash and cash equivalents at December 31, 1999 decreased $508,263 from December 31, 1998 levels. We experiences this decline in cash flow in 1999 due to cash used in operations, the funding of capital expenditures and net repayments of letter of credit obligations.
Our operations used cash of $1,182,339 in 1999 as a result of an increase in accounts receivable, inventories and amounts due from affiliate, offset by net income of $2,452,744 and non-cash depreciation expenses of $1,750,261. In 1999, we used cash of $2,972,837 for the purchase of capital expenditures. Capital expenditures were made in 1999 for the acquisition of $2,084,939 of manufacturing equipment by PT Buana primarily to product latex powder-free exam gloves and by AHPC of $887,898 primarily to install and implement a new enterprise wide computer system. We experienced increased cash flow from financing activities of $3,743,556. The generation of cash for financing purposes was from net borrowings on the line of credit facility of $5,657,396, offset by net reductions in letter of credit obligations.
Net inventories at December 31, 1999 increased 9.0% to $12,930,569 compared with $11,860,855 at December 31, 1998 due to the addition of several inventory product lines. Net trade accounts receivable at December 31, 1999 increased by 44% to $7,969,369 from $5,532,405 at December 31, 1998 due to a record sales month in December 1999 and a strong collection effort made at the end of 1998.
NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses the accounting and reporting for business combinations and supercedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." The Company will adopt this standard for all business combinations initiated after June 30, 2001.
Also in June 2001, the 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." The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001. The Company anticipates that future earnings will increase without amortization expense; however, the Company must assess its existing goodwill for impairment.
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 in 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, 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, 2001, approximated its fair value. For the year ended June 30, 2001, the foreign exchange included in the determination of net income was approximately $45,031.
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. On September 28, 2001, we received a letter of commitment to renew and extend our credit facility for an additional term of three (3) years with terms and conditions to the existing 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. We have introduced several new glove products, including radiological and chemotherapy and an improved surgical glove. We are planning to distribute other safety and infection control products besides gloves, including other high-volume, disposable foodservice products. These products complement our strategy to focus on safety and infection control in the foodservice industry. There is no assurance that these development efforts will be successful or that, if successfully developed, these products will achieve commercial success.
Growth Dependencies. In general, our future growth is dependent on our ability to successfully and timely enhance existing products, develop and introduce new products, establish new distribution channels, develop affiliations with leading market participants and continue to develop our relationships with our existing customer base.
The failure to achieve these and other objectives could limit future growth and have an adverse effect on both the Company 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 the Company and our future operating results.
Competition. The various markets in which we operate are becoming increasingly competitive as a number of other companies develop and sell products that compete with our products in these markets. Certain of these competitors have significantly more financial and technical resources than us. We face additional competitive factors besides price, such as product quality, 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 us and our future operating results.
Reliance Upon Distributors. We use various channels to market and distribute our products primarily by sales to end-users via third-party distributors. Third-party distributors are a substantial channel for distribution to medical facilities. Accordingly, our ability to market and distribute 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. 44.7% of our total revenues come from purchases by SYSCO. In May 2001, we were invited by SYSCO to present a supplier review to the Food Service Disposable Department. This review entailed detailed discussions regarding how the Company will grow market share, new product offerings, pricing and EDI capabilities, among other things. The outcome of this review process is uncertain. Although we believe this review presents an opportunity to grow our business and to expand our offerings beyond gloves, there can be no assurance that we will be successful in growing this segment of our business. If we were unable to maintain a significant portion of the SYSCO business, it would have a material adverse affect on our sales results of operations and financial condition. A significant portion of our acute care and medical division business has been obtained through the achievement of being selected to supply group purchasing organizations and integrated delivery networks ("IDN's") in the U.S. These group purchasing organizations and IDN's, made up of thousands of health care facilities, centralize medical product purchases and offer their members the ability to enjoy larger purchasing power discounts than an individual hospital or member might enjoy independently. We reported in early 2000 that the group purchasing organization, Novation, did not renew its supply contract with AHPC, which expired in April 2000. Our sales of NovaPlus products to Novation members accounted for over half of our sales in 1999. We have converted about 35% of NovaPlus accounts to our branded products. There can be no assurance that we will be successful in our attempts to maintain this business and our inability to retain a significant portion of this business could materially adversely affect our sales, results of operations and financial condition.
In addition, for the year ended June 30, 2001, three of AHPC's customers accounted for 82%of net sales. The loss of one of these customers would have a materially adverse effect on us and our operating results.
Excess or Obsolete Inventory. Managing our inventory of various size mix and product mix is a complex task. A number of factors, including the need to maintain a significant inventory of certain sizes or products which are in short supply or which must be purchased in bulk to obtain favorable pricing, the general unpredictability of demand for specific products and customer requests for quick delivery schedules, may result in us maintaining excess inventory. Other factors, including changes in market demand and technology, may cause inventory to become obsolete. Any excess or obsolete inventory could result in price reductions and inventory write-downs, which, in turn, could adversely affect the Company and 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, particularly in the strong economic cycle currently prevailing in the U.S. 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 both the Company and our operating results. In addition, we may experience increased compensation costs in order to compete for skilled employees.
Product Liability Insurance. Participants in the medical supplies business are potentially 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.
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 40 Chairman and Chief Executive Officer
Alan Zeffer 48 CFO, Secretary and Treasurer
Biographies for Messrs. Lew, and Zeffer are included below.
At September 20, 2001, 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 38 2001
Kwong Ann Lew 40 1997 George Jeff Mennen 61 1994 Richard Swanson 66 1998 Thomas Kennedy 39 2001
Class B Directors
Name Age Director Since ---- --- -------------- Robert J. Simmons 58 1995 Don L. Arnwine 68 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 the Company in April 2001. He was elected Class A Director of the Company 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 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 the Company 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 the Company. He joined the Company in April 2001. Prior to joining the Company, 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.
THOMAS P. KENNEDY, Vice President Sales & Marketing - Medical, has been with the Company since May 2001. Prior to joining the Company, he managed Maxxim Medicals glove business.
BOARD MEETINGS AND COMMITTEES
During the year ended June 30, 2001, our Board of Directors held six 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, 2001, 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, 2001, 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 (1) an annual Board member retainer of $5,000, (2) compensation of $1,000 for each Board meeting attended, (3) $500 for each committee meeting attended, and (4) an annual Committee member retainer of $1,000. Each new Director is presently entitled to receive stock options under the Plan to purchase 2,000 shares of our Common Stock in connection with his election and 1,000 share 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 the Company for services rendered in all capacities to the Company during the year ended June 30, 2001 and the transition period ended June 30, 2001 and fiscal years ended December 31, 1999 and 1998 to (i) the Company's President and (ii) the Company's 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 and automobile costs associated with Mr. Ling's relocation to the U.S.
EMPLOYMENT AGREEMENTS
On April 1, 1994, we entered into an employment agreement with Edward J. Marteka (the "Marteka Agreement"). The Marteka Agreement, as amended on June 30, 1995 and on July 22, 1996, provides for: (i) Mr. Marteka to serve as our President (since May 31, 1995) and AHPC; (ii) base salary; (iii) non-qualified stock options to purchase 35,000 shares of Common Stock under the Plan; and (iv) life and medical insurance, automobile allowance and other additional customary benefits. The amended Marteka Agreement also granted to Mr. Marteka additional non-qualified stock options to purchase 14,000 shares of Common Stock.
As approved by the Compensation Committee, all of Mr. Marteka's options outstanding, totaling 101,000 stock options at February 29, 2000, were repriced to $2.07, the closing price on that date. Effective January 1, 2000, Mr. Marteka's base salary was increased to $225,000 per year as approved by the Compensation Committee.
In December 2000, we announced that Mr. Marteka resigned from the Company. As part of the Marteka Agreement, we made severance, and other related payments, of $131,250 during period.
On April 12, 2000, we entered into an employment agreement with Kenneth Ling (the "Ling Agreement"). The Ling Agreement provided for (i) Mr. Ling to serve as our CFO, Acting COO, Secretary and Treasurer; (ii) a base salary of $120,000 per annum; (iii) housing costs associated with his relocation to the U.S.; (iv) non-qualified stock options to purchase 30,000 shares of Common Stock; and (v) an automobile provided for his use. Mr. Ling was issued 30,000 stock options at $1.44, the exercise price of the closing price of the Common Stock on April 17, 2000, the date of the grant. Mr. Ling's stock options are immediately exercisable for a period of ten years from the date of grant. In April 2001, we announced the resignation of Mr. Ling.
In December 2000, we entered into an employment agreement with Neil M. Kosterman (the "Kosterman Agreement"). The Kosterman Agreement provided for (i) Mr. Kosterman to serve as our President; (ii) a base salary of $225,000 per annum; (iii) housing costs for an initial six (6)-month period; (iv) nonqualified stock options to purchase 90,000 shares of Common Stock; and (v) a $600.00 per month automobile allowance.
In May 2001, we announced the resignation of Mr. Kosterman from the Company.
OPTION GRANTS DURING THE YEAR JUNE 30, 2001
There were no options granted to the persons named in the Summary Compensation Table made during the year ended June 30, 2001.
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, 2001 AND FISCAL PERIOD-END OPTION VALUES
There were no options exercised during the year ended June 30, 2001 by the executive officers named in the Summary Compensation Table.
(1) Represents the total gain which would have been realized if all such options had been exercised on June 30, 2000.
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, 2001, 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., Hemacare Corp., National Home Health Care 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.
[PERFORMANCE CHART]
* $100 invested on June 30, 1995 in stock or Index - including reinvestment of dividends. Fiscal year ending June 30.
CUMULATIVE TOTAL RETURN
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 2001, 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 September 24, 2001.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2001, we purchased latex powder-free exam gloves amounting to $10.9 million from our majority shareholder, WRP Asia. In addition, our Indonesian factory sold approximately $9.7 million of powdered latex exam gloves to WRP Asia during the period.
During the year ended June 30, 2001, 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 $112,290 during the year ended June 30, 2001 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).
21 Subsidiaries of the Company (1).
23.1 Consent of Arthur Andersen LLP (1).
(b) During the 3 months ended June 30, 2001, the Company did not file any reports on Form 8-K.
(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: September 24, 2001 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 and in the capacities and on the dates indicated.
Date: September 24, 2001 By: /s/ Lew Kwong Ann ----------------- Lew Kwong Ann, Chief Executive Officer and Chairman of the Board of Directors
Date: September 24, 2001 By: /s/ Eirik Bonde Aslaksrud ------------------------- Eirik Bonde Aslaksrud, Director
Date: September 24, 2001 By: /s/ Thomas P. Kennedy --------------------- Thomas P. Kennedy, Director
Date: September 24, 2001 By: /s/ George Jeff Mennen ---------------------- George Jeff Mennen, Director
Date: September 24, 2001 By: /s/ Richard Swanson ------------------- Richard Swanson, Director
Date: September 24, 2001 By: /s/ Robert J. Simmons --------------------- Robert J. Simmons, Director
Date: September 24, 2001 By: /s/ Don L. Arnwine ------------------ Don L. Arnwine, Director
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: September 24, 2001 By: ____________________ 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 and in the capacities and on the dates indicated.
Date: September 24, 2001 By: ____________________ Lew Kwong Ann, Chief Executive Officer and Chairman of the Board of Directors
Date: September 24, 2001 By: ____________________ Eirik Bonde Aslaksrud, Director
Date: September 24, 2001 By: ____________________ Thomas P. Kennedy, Director
Date: September 24, 2001 By: ____________________ George Jeff Mennen, Director
Date: September 24, 2001 By: ____________________ Richard Swanson, Director
Date: September 24, 2001 By: ____________________ Robert J. Simmons, Director
Date: September 24, 2001 By: ____________________ Don L. Arnwine, Director
WRP CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements As of June 30, 2001, 2000 and 1999, and December 31, 1999 and 1998 Together With Auditors' Report
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999, AND DECEMBER 31, 1999 AND 1998
INDEX
PAGE ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS: Consolidated Balance Sheets as of June 30, 2001 and 2000
Consolidated Statements of Operations 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
Consolidated Statements of Shareholders' Equity 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
Consolidated Statements of 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of WRP Corporation:
We have audited the accompanying consolidated balance sheets of WRP CORPORATION (a Maryland corporation, 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WRP Corporation and Subsidiaries as of 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.
Chicago, Illinois September 28, 2001
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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
The accompanying notes to consolidated financial statements are an integral part of these statements.
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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
The accompanying notes to consolidated financial statements are an integral part of these statements.
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF 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
The accompanying notes to consolidated financial statements are an integral part of these statements.
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
1. 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 our wholly owned subsidiary, American Health Products Corporation ("AHPC"). WRP Corporation is also a manufacturer of high-quality disposable latex examination and food service gloves through our 70% owned Indonesian manufacturing facility. We were reincorporated in Maryland in December 1995 and have been involved in several business operations.
The Company, through its subsidiary in Indonesia, PT WRP Buana Multicorpa ("PT Buana") manufactures medical examination gloves.
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 Pacific Sdn. Bhd. (formerly known as Wembley Rubber Products (M) Sdn. Bhd.), a Malaysian corporation ("WRP Asia"). The new fiscal year commenced July 1, 2000.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of WRP Corporation, AHPC and PT Buana, a 70% owned Indonesian glove manufacturing subsidiary. All significant intercompany transactions have been eliminated.
WRP Asia owns the Series A common stock of the Company and is the majority shareholder of the Company.
CASH AND CASH EQUIVALENTS
The Company considers cash in banks and highly liquid debt instruments with a maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are accounted for on a first-in, first-out ("FIFO") basis and are valued at the lower of actual cost or market. Inventories consist of the following at June 30, 2001 and 2000:
2001 2000 ------------ ------------- Raw materials $ 46,516 $ 79,232 Work in process 359,380 351,825 Finished goods 7,199,253 10,230,169 Reserves (417,763) (536,815) ------------ ------------ Total $ 7,187,386 $ 10,124,411 ============ ============
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, 2001 and 2000, are as follows:
USEFUL LIVES ------------ Land rights and land improvements 20 years Equipment, furniture and fixtures 3-15 years Building improvements 5-20 years Vehicles 5 years ============
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 AHPC is recorded as goodwill in the accompanying consolidated balance sheets and is being amortized using the straight-line method over 25 years.
On an ongoing basis, the Company reviews goodwill and other long-lived assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. To date, no such events or changes in circumstances have occurred. If such events or changes in circumstances occur, the Company will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the asset (or acquired business) are less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped from the Company's warehouse, or upon the customer's receipt of the goods, depending upon the terms of the sale. Product sales are stated net of rebates, sales returns, and sales discounts and allowances.
INCOME TAXES
The Company records income taxes in accordance with Statement of Financial Accounting Standards ("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 EPS amounts are based on the weighted-average number of shares of common stock outstanding during each year, while diluted EPS amounts are based on the weighted-average number of shares of common stock outstanding during the year and the effect of any dilutive stock options and warrants (common stock equivalents). The weighted-average number of common shares and common share equivalents outstanding for the years ended June 30, 2001, and December 31, 1999 and 1998, 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 370,272, 455,000, 492,324, 483,609 and 127,500 at June 30, 2001, and December 31, 1999 and 1998, and June 30, 2000 and 1999, respectively, which were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:
a. CURRENT ASSETS AND CURRENT LIABILITIES--The carrying amount approximates fair value due to the short maturity of these items;
b. LONG-TERM OBLIGATIONS--The fair value of the Company's long-term debt is based on secondary market indicators. Since the Company's debt is not quoted, estimates are based on each obligation's characteristics, including maturities, interest rate, credit rating, collateral, amortization schedule and liquidity. The carrying amount approximates fair value; and
c. AMOUNTS DUE TO/DUE FROM AFFILIATE--Amounts due to/due from affiliate are non-interest-bearing and do not specify maturity dates and, therefore, it is not practicable to estimate the fair value of these financial instruments.
FOREIGN CURRENCY TRANSLATION
PT Buana's financial statements are prepared from the records maintained in the Republic of Indonesia, the country in which PT Buana was established and operates. On July 1, 1997, the Company changed its functional currency from the Indonesia rupiah to the U.S. dollar. This change in functional currency is primarily the result of the PT Buana operations becoming more dependent on U.S. dollar-denominated transactions and economic trends.
Gains and losses from foreign currency transactions are included in net income in the period in which they occur. 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, the foreign exchange gain (loss) included in the determination of net income is $45,031, $3,563, $(30,292), $(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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses the accounting and reporting for business combinations and supercedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Reacquisition Contingencies of Purchased Enterprises." The Company will adopt this standard for all business combinations initiated after June 30, 2001. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill.
Also in June 2001, the 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 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 must assess its existing goodwill for impairment.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the current year presentation.
2. MAJORITY SHAREHOLDER TRANSACTION
On March 31, 1998, WRP Asia entered into the following two agreements, which transferred majority ownership in the Company to WRP Asia:
a. MBf International, Ltd. ("MBf International") sold all of the Company's Series A common stock (1,252,538 shares), which was owned by MBf International, to WRP Asia for $5.00 per share for a total of $6,262,690; and
b. WRP Asia purchased 2,500,000 shares of the Company's unregistered common stock for $2.70 per share for a total of $6,750,000. The purchase price of $2.70 per share reflected a 12% discount from the average stock price over a seven consecutive business day range ended May 9, 1997, as detailed by a fairness opinion received from an independent valuation firm.
These transactions provided WRP Asia with a 55% ownership interest in the Company at March 31, 1998. At June 30, 2001 and 2000, WRP Asia had a 53.2% and 54.6%, respectively, ownership interest in the Company.
At December 31, 1998, MBf International owned 1,682,275 shares of the Company's common stock which represented a 24.4% ownership interest in the Company. In January, 1999, MBf International sold its 1,682,275 shares to several U.S. institutional investors, thus eliminating its entire ownership interest in the Company.
WRP Asia owns one of the largest glove manufacturing plants in Malaysia and principally manufactures high quality powder-free latex exam gloves. During the years ended June 30, 2001, and December 31, 1999 and 1998, and for the six-month periods ended June 30, 2000 and 1999, total purchases of gloves from WRP Asia were $10,906,263, $18,409,600, $18,629,717, $6,621,531 and $8,813,942, respectively.
3. COMMON STOCK
Each share of Series A common stock is convertible into one share of the Company's common stock, $.01 par value. The Company has reserved 1,252,538 shares of common stock for issuance upon conversion of the Series A common stock. The terms of the Series A common stock are substantially the same as the Company's common stock except that Series A common stock entitles WRP Asia, the majority shareholder of the Company, to elect all Class A directors, which represent a majority of the Company's Board of Directors and to vote with the holders of common stock as a single class with respect to any matters subject to a vote of the shareholders. (See Note 9 for further information on the Company's 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, 2001, 190,000 shares of public common stock have been repurchased by the Company as part of this plan.
4. CORPORATE DEVELOPMENT
DISTRIBUTION AGREEMENT
Effective July 12, 1995, the Company entered into a five-year distributor agreement with PIE Healthcare Products Sdn. Bhd. ("PIE") that requires the Company to purchase a certain quantity of gloves from PIE each year. The Company's net sales include glove products that are purchased under the terms of this agreement. In connection with the loss of the Novation contract as discussed in Note 8, 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 July 1, 2001, the Company was in compliance with the agreement.
INVESTMENT IN LSAI
During 1998, the Company liquidated its investment in Laboratory Specialists of America, Inc. ("LSAI"). The Company sold all of its remaining shares of LSAI and discounted its notes
receivable from LSAI which resulted in a net gain on sales of the investments in LSAI of $168,375 in 1998.
The Company has adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that equity securities that have readily determinable fair values shall be classified as "available-for-sale" if not held for the objective of generating profits on short-term differences in price. Accordingly, the Company's common stock investment in LSAI was classified and treated as available for sale.
SFAS No. 115 further requires that unrealized holding gains and losses related to available-for-sale securities shall be excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized.
5. RELATED-PARTY TRANSACTIONS
At June 30, 2001 and 2000, amounts due from/to affiliates consist of the following:
2001 2000 ----------- ----------- Due from affiliate- Current- WRP Asia $ 8,262,937 $ 3,870,315 =========== =========== Due to affiliate- Current- WRP Asia $(2,453,608) $(1,613,185) =========== ===========
The outstanding accounts receivable from WRP Asia results primarily from sales of product to WRP Asia, cash advances to WRP Asia, charges for obtaining FDA approval of the gloves imported from WRP Asia and others items. As of June 2001, approximately $5,287,413 is due to PT Buana and $2,975,524, is due to WRP USA and AHPC. 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. AHPC purchased virtually all of its latex powder-free exam gloves from WRP Asia in 2001, 2000 and 1999. Management believes transactions between operating segments are made at prevailing rates. See Note 12 for additional related party transactions.
WRP Asia has undertaken a restructuring plan during 2001, the objective of which is to improve cash flows and profitabilty and to assure longer term financial viability. This plan includes a restructuring of the company's debt facility and additional investment from outside sources. Management of WRP Asia believes this plan will generate adequate cash flow to meet the WRP Asia's needs through at least December 31, 2002.
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 upon international trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partner. 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 upon 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, their ability to continue to purchase the quantities projected in their restructuring plan from PT Buana and their ability to pay the amounts due to PT Buana and AHPC. Management believes that all amounts outstanding from WRP Asia at June 30, 2001 are fully realizable at this time.
In January, 1997, the Company entered into a consulting and services agreement with Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by a director of the Company. The agreement engaged Alliance to assist the Company in marketing its products with the expressed purpose of negotiating and executing a purchase agreement with various healthcare group purchasing organizations. The Company paid Alliance $112,290, $66,160, $36,000, $42,216 and $36,000 in the years ended June 30, 2001, and December 31, 1999 and 1998, and the six-month periods ended June 30, 2000 and 1999, respectively, for its services.
6. TRADE NOTES PAYABLE TO BANK
Trade notes payable to bank consist of amounts financed through letter of credit arrangements which totaled $507,937 and $1,252,814 at June 30, 2001 and 2000, respectively. These bank obligations are secured by the inventory and accounts receivable of AHPC.
As of June 30, 2001 and 2000, the Company was contingently liable for outstanding letters of credit liabilities totaling $316,840 and $1,053,324, respectively.
7. NOTES PAYABLE
Notes payable and long-term debt as of June 30, 2001 and 2000, consist of the following:
The bank revolving line-of-credit agreement noted above contains covenants which require, among other things, maintenance of financial ratios and limitations on borrowings, investments and capital expenditures. As of June 30, 2001, the Company was not in compliance with certain of its covenants. The Company has obtained waivers of these covenant violations from the financial institution. On September 28, 2001, the Company received a letter of commitment from the financial institution to extend the credit agreement and modify the covenants contained therein.
On December 1, 1998, AHPC entered into a new $10,000,000 three-year bank credit agreement through December 1, 2001. Subsequently, on March 31, 1999, the limit was increased to $15,000,000. The new credit facility includes a $15,000,000 revolving line of credit with a $11,000,000 letter of credit subfacility. The facility carries an interest rate of commercial paper plus 2.75% (6.69% at June 30, 2001). The new bank facility was used to repay all obligations under the previous bank facility. At September 28, 2001, the Company received a letter of commitment to renew and extend this credit facility for an additional three (3) years with terms and calculations similar to the existing facility.
The principal portion of long-term debt becomes due as follows:
Fiscal year ending June 30, 2002 $12,687 ------- $12,687 =======
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
Over the last several years, numerous product liability lawsuits have been filed against suppliers and manufacturers of latex gloves alleging, among other things, adverse allergic reactions. The Company is one of numerous defendants that have been named in such lawsuits. At June 30, 2001, the Company was involved in a total of 66 lawsuits, either as a named defendant, third-party defendant, or an indemnitor. During the year ended June 30, 2001, the Company was named in 33 lawsuits and was dismissed from 28 lawsuits. The Company carries product liability insurance. Management believes all legal claims are adequately provided for, and if not provided for, are without merit, or involve such amounts that would not materially adversely affect the Company's results of operations or financial condition.
SIGNIFICANT CUSTOMERS
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., and Sysco and the total percentage of Accounts Receivable ("A/R") these two customers accounted for:
DECEMBER 31 JUNE 30 JUNE 30, ------------ ------------ 2001 1999 1998 2000 1999 -------- ---- ---- ---- ---- Owens and Minor sales as a percentage of net sales 17.9% 37.9% 36.3% 30.0% 35.5% Sysco sales as a percentage of net sales 44.7% 30.6% 35.0% 44.8% 32.8% Sysco and Owens and Minor A/R as percentage of total A/R 66.4% 63.4% 62.0% 65.1% 61.0%
These two distribution companies distribute the Company's products to numerous medical and food service facilities throughout the U.S. The ultimate end users of the Company's product are those various medical facilities, food service organizations and professionals who purchase the product from these distributors.
On May 11, 2001, Sysco, the company's largest customer advised the Company that they would be performing supplier reviews for all of the disposable products purchased by their Food Service Group. Although a majority of our sales to Sysco are used by food service customers, these products are purchased by the Medical Group at Sysco. While Medical Group suppliers are not being specifically reviewed at this time, we have been asked to participate. This review is being performed in order to ascertain suppliers' future commitments to partnering with Sysco. This review by Sysco's food service group could have an impact on the product being sold to and through the Sysco organization as a whole. As of September 28, 2001, this review is ongoing.
During January, 2000, Novation, a large customer of the Company, did not renew its GPO contract with the Company; this contract expired in April, 2000. The Novation GPO product sales totaled nearly one half of the total Company sales in 1999 and 28% of sales during the
six-month period ended June 30, 2000. The Company is focusing on converting the end-users of the Novation GPO products to the Company's own branded product labels.
OPERATING LEASES
The Company conducts all of its operations in leased facilities. Total rent expense, net of rental income, included in the accompanying statements of income for the years ended June 30, 2001, and December 31, 1999 and 1998, and for the six-month periods ended June 30, 2000 and 1999, was $605,578, $440,441, $291,685, $289,886 and $169,980, respectively. The following summary presents future minimum rental payments required under the terms of present operating leases:
Fiscal year ending June 30- 2002 $ 596,842 2003 590,462 2004 594,907 2005 630,860 2006 641,281 2007 641,281 ---------- $3,695,633 ==========
9. 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 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 7) into warrants to purchase 54,000 shares of common stock at $25.00 per share. These convertible debentures expire in November, 2001.
10. STOCK OPTION PLAN
On June 12, 1998, the Board of Directors approved an amendment and restatement of the Company's Omnibus Equity Compensation Plan (the "Plan"), which authorized and adjusted the number of shares issuable from 400,000 to 1,400,000. Effective on 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 2000, 1999, 1998 and 1997 was established at the market price on the date of the grants. Of the 368,600 options outstanding at June 30, 2001, 351,604 are currently exercisable, 13,996 become exercisable in 2002, 2,000 become exercisable in 2003 and 1,000 become exercisable in 2004. The Company has reserved common stock for issuance upon conversion of these options.
The Company accounts for employee stock options under APB Opinion No. 25 and FASB Interpretation No. 44, as permitted under accounting principles generally accepted in the United States. No compensation cost has been recognized in the accompanying financial statements related to these options. Had compensation costs for these options been determined consistent with SFAS No. 123, which is an accounting alternative that is permitted
but not required, the Company's net income and net income per share (diluted) 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, have been $313,052, $1,780,936, $4,560,341, $1,190,558 and $1,098,470 and $0.05, $0.26, $0.72, $0.17 and $0.16, respectively.
The pro forma disclosure is not likely to be indicative of pro forma results which may be expected in future years. This primarily relates to the fact that options vest over several years and pro forma compensation cost is recognized as the options vest. Furthermore, the compensation cost is dependent on the number of options granted which may vary in future periods.
The fair value of each option is estimated on the date of grant based on the Black-Scholes option pricing model using the following assumptions:
Options outstanding at June 30, 2001, are as follows:
11. INCOME TAXES
The components of the Company's income tax provision (benefit) from continuing operations consisted of:
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, 2001.
Significant components of the Company's deferred tax assets and liabilities are as follows:
2001 2000 --------- --------- Deferred income tax asset: Accruals not deductible until paid $ 200,978 $ 377,954 Net operating loss carryforwards- U.S. 666,619 451,442 PT Buana 144,060 252,464 Inventory 216,767 255,529 Allowance for doubtful accounts 58,200 67,900 Valuation allowance (451,442) (451,442) --------- --------- Total net deferred tax assets $ 835,182 $ 953,847 ========= =========
Deferred income tax asset: Difference between book and tax basis of property, plant and equipment $(352,037) $(400,604) Other noncurrent liabilities--PT Buana (187,546) (207,798) --------- --------- Total deferred tax liabilities $(539,583) $(608,402) ========= =========
The Company has net operating loss carryforwards at June 30, 2001, of approximately $1.3 million which are available to reduce federal taxable income in future periods and will begin expiring in 2004. In accordance with federal tax regulations, usage of the net operating loss carryforwards 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 loss at June 30, 2001 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.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest on debt outstanding 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, was $619,479, $690,496, $1,286,619, $321,945 and $228,560, respectively.
Cash paid for income taxes during the years ended June 30, 2001, and December 31, 1999 and 1998, and the six-month periods ended June 30, 2000 and 1999, was $65,000, $780,000, $1,270,000, $30,000 and $740,000, respectively.
The following represents significant related-party operating transactions during the years ended June 30, 2001, and December 31, 1999 and 1998, and the six-month periods ended June 30, 2000 and 1999, and the which are included in the consolidated statements of cash flows as amounts due to affiliate under the cash flows from operating activities.
13. 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 2001, 2000, 1999 and 1998:
14. SEGMENT REPORTING
The Company has two business segments: Manufacturing and Distribution. These segments are managed as separate strategic business units due to the distinct nature of their operations and customer bases. The Manufacturing segment, which represents the operations of PT Buana, manufactures latex gloves and sells them primarily to the Company and WRP Asia. All operations of the Manufacturing segment are located in Indonesia. The Distribution segment involves the procurement and sale of gloves purchased from the Manufacturing segment and other glove vendors and then sold to national and regional healthcare, food service, retail and other distributors. The Distribution segment's significant customers include those discussed in Note 8. The operations of the Distribution segment are located entirely within the U.S.
Accounting policies for measuring segment assets and earnings are substantially consistent with those described in Note 1. The Company evaluates segment performance based on income from operations before provision for (benefit from) income taxes and minority interest ("Pretax 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, 2001, and December 31, 1999 and 1998, and for the six-month periods ended June 30, 2000 and 1999, for these segments:
15. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
3/31/01 6/30/01 ------------------------------- ---------- --------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) Net revenues $ 12,461 $ 12,854 Income from operations (100) 842 Net income (64) 796 Net income per share: Basic $ (0.01) $ 0.12 Diluted (0.01) 0.12
3/31/00 6/30/00 9/30/00 12/31/00 ------------------------------- --------- ------- ------- -------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) Net revenues $17,234 $14,503 $13,865 $12,709 Income from operations 1,146 898 683 (511) Net income 871 549 241 (444) Net income per share: Basic $ 0.13 $ 0.08 $ 0.04 $ (0.07) Diluted 0.13 0.08 0.04 $ (0.07)
3/31/99 6/30/99 9/30/99 12/31/99 ------------------------------- --------- ------- ------- -------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) Net revenues $17,082 $13,865 $17,068 $ 17,265 Income from operations 1,740 873 943 784 Net income 1,214 111 851 277 Net income per share: Basic $ 0.18 $ 0.02 $ 0.12 $ 0.03 Diluted 0.17 0.02 0.12 0.04
3/31/98 6/30/98 9/30/98 12/31/98 ------------------------------- --------- ------- ------- -------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) Net revenues $15,213 $15,685 $16,259 $17,811 Income from operations 1,526 2,204 2,347 2,079 Net income 1,101 1,339 1,420 2,019 Net income per share: Basic $ 0.25 $ 0.20 $ 0.21 $ 0.28 Diluted 0.25 0.19 0.20 0.29