ITEM 1. BUSINESS......................................................... 1 ITEM 2.
ITEM 2. PROPERTIES
Our principal executive and administrative office is located in Itasca, Illinois. The lease term for this location is approximately five years, commenced on March 1, 1995 and expires in May 2000. The 1999 yearly lease cost was approximately $156,000, with an annual increase of approximately 3% per year. We are currently negotiating for an extension of this office space lease due to its expiration in May 2000.
Our executive office was located in Fort Lee, New Jersey prior to its relocation to Itasca, Illinois in 1995. On December 1, 1994, we entered into a five-year lease for this office with an annual lease cost of approximately $78,000 per year. During June 1995, we closed the New Jersey office as part of a restructuring which took place in the second quarter of 1995. Effective July 1, 1995, we entered into a sublease agreement for the New Jersey office space for the remaining lease term at the identical terms as stated in the December 1, 1994 New Jersey lease agreement. This office lease and sublease expired in November 1999.
Our executive office was located in Boca Raton, Florida, prior to its relocation to Fort Lee, New Jersey. We entered into a five-year lease agreement effective February 1994 for approximately 4,000 square feet of space in Boca Raton, Florida. The annual rental expense for this lease was approximately $79,500 per year. Effective December 1, 1996, we entered into a sublease agreement for the Boca Raton office space for the remaining lease term at the identical terms as stated in the February 1994 Florida lease agreement. This office lease and sublease expired in June 1999.
AHPC's Illinois warehouse operations were housed in a 22,000 square-foot facility in Des Plaines, Illinois. The lease term for this location commenced April 1, 1993 and expired on March 31, 1998. During early 1998, we obtained an extension of this lease through July 31, 1999. The yearly cost of the lease was approximately $126,600 per year. This warehouse lease terminated in July 1999 and AHPC moved its Illinois warehouse operations to a larger warehouse, which provides additional needed warehousing space.
In May 1999, we entered into a five-year lease agreement for a 55,000 square-foot warehouse facility located in Itasca, Illinois. The lease term for this location commenced on August 1, 1999 and expires in July 2004. The annual rental expense for this lease is approximately $316,700 per year.
AHPC also uses public warehouse facilities to store its inventory in Sparks, Nevada; Atlanta, Georgia; Union City, California; Fond Du Lac, Wisconsin; and Baltimore, Maryland, as needed. Public warehouse charges are dependent upon the volume of products stored and the frequency of shipping or receiving products.
In February 1999, AHPC entered into a three-year lease agreement for 1,877 square feet of office space located in San Diego, California to service our tele-sales operations office. The lease term for this office space commenced on June 1, 1999 and expires in May 2002. The current rental expense for this lease is approximately $30,500 per year, with annual increases of approximately 3.5% per year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1999, we, AHPC, and PT Buana, (jointly the "WRP Defendants") had a total of 54 latex glove product liability suits pending against them throughout the United States. We were an active defendant in three claims, AHPC in 31 claims, and PT Buana in three claims. Additionally, through a series of Private Label Supply and Trademark Licensing Agreements with VHA, Inc. ("VHA"), AHPC agreed to defend and indemnify VHA in 14 suits. AHPC was joined as a third party defendant in three claims by a distributor of AHPC latex gloves.
All of the claims involve plaintiffs that have worked in the medical and health industries and who allege injuries associated with the continued use and/or exposure to latex glove products. In each of the claims the WRP Defendants are one of several glove distributors and manufacturers named in the suits. Each of the claims allege damages of an unspecified amount and is in a different stage of discovery or other pre-trial proceeding. One of the claims is scheduled for trial in California in April 2000. It is not currently possible to determine a
favorable or unfavorable outcome for the WRP Defendants in any of the claims.
Subsequent to December 31, 1999, AHPC was served with four additional product liability lawsuits, joined in three and agreed to defend and indemnify VHA in one additional suit. In each of the claims the plaintiff alleged damages associated with the use of or exposure to latex gloves. AHPC is one of several defendants named in each of the suits.
AHPC possesses product liability insurance coverage which covers the defense costs and certain damage awards associated with the product liability claims against AHPC and the indemnity of AHPC's customers to the limits of the policies. However, there is no assurance that AHPC's insurance will be sufficient to meet all damages for which AHPC may be held liable. Likewise, there is no assurance that the outcome of these suits will not adversely affect our operations or financial condition. We do not currently possess our own product liability insurance to cover claims asserted directly against us as a distributor, manufacturer or supplier of latex gloves. However, coverage is afforded us through the AHPC policy, where our liability arises solely from our relationship as a shareholder of AHPC. PT Buana does not possess product liability insurance coverage and is currently seeking commercial product liability coverage.
AHPC will vigorously contest any latex claim initiated against it, but will enter into a settlement agreement, where, after careful consideration, our management determines that our best interests will be served by settling the matter. In 1999, AHPC settled one latex glove related product liability claim for a nominal sum and was dismissed from one such claim. We were dismissed from two latex glove product liability claims in 1999.
From time to time we are involved in other litigation relating to claims arising out of our operations in the normal course of business. At March 29, 2000, we are not a party to any other legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material adverse effect on our financial condition. Management believes all legal claims are adequately provided for, and if not provided for, are without merit, or involve such amounts that would not materially adversely affect the Company.
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 July 25, 1999. The purpose of the Annual Meeting was to consider the vote on the following matters:
1. To elect six Class A directors and two Class B directors to hold officer until the next annual meeting of Shareholders or otherwise as provided in the Company's By-Laws.
Class A Director Nominees -------------------------
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 5,144,251 Against 0 Non-votes 529,441
2. To concur in the selection of Arthur Andersen LLP as independent auditor for the fiscal year ending December 31, 1999. The vote of the Shareholders was as follows:
For 6,412,525 Against 7,693 Non-votes 506,012
All of the above matters were approved by the Shareholders. There were no other matters voted on at the meeting.
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
FISCAL YEAR ENDED:
There were approximately 350 record holders of Common Stock as of March 29, 2000. We believe that there are approximately an additional 2,000 holders whose stock is held in "street name."
We have not paid a dividend with respect to the Common Stock. We expect to reinvest our earnings for expansion of our operations and does not intend to pay a dividend in the foreseeable future.
In March 2000, we announced that our Board of Directors had authorized a program to repurchase up to 10% of our public Common Stock. These purchases may be made in the open market and in block transactions over a two-year period. The program is subject to market conditions and its impact on share price as well as other investment options that we may consider to enhance shareholder value.
During 2000, our Board of Directors also approved a change in our fiscal year-end from December 31 to June 30, which corresponds to the year-end of our majority shareholder, WRP Asia. This fiscal year-end change will be effective June 30, 2000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five calendar years ended December 31, 1999 should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
*The 1995 through 1997 figures have been restated to reflect rebates as a reduction of net sales to conform to the 1999 and 1998 presentation for comparability purposes.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(2)
Our wholly owned subsidiary, American Health Products Corporation ("AHPC"), is engaged in the marketing and distribution of high quality medical grade examination gloves in the United States and we have been in the glove business since our incorporation in January 1989. We recorded record annual net glove sales in 1999 of over $65.2 million.
Our 70% owned subsidiary, PT WRP Buana Multicorpora ("PT Buana"), owns an Indonesian glove manufacturing plant which commenced operations in April 1996. PT Buana manufactures high quality, powdered latex exam gloves and in the second quarter of 1999 began installing manufacturing equipment to produce powder-free latex exam gloves. During 1999, PT Buana sold only a limited quantity of powder-free gloves to the European market on a test market basis before sales are going to be made to the U.S. marketplace.
PT Buana sold approximately 17% of its production to AHPC during 1999 as compared to 47% during the same period in 1998. PT Buana recorded glove sales totaling $10.3 million and $13.0 million during the years ended December 31, 1999 and 1998, respectively. AHPC reduced its purchases from PT Buana as a result of our fulfillment of certain glove purchase obligations with an independent supplier pursuant to a preexisting contract requirement. PT Buana's remaining production was primarily sold to WRP Asia. All significant inter-company transactions and sales have been eliminated in consolidation.
Through our Playboy license rights and condom distribution agreement, we distributed Playboy(R) brand condoms through June 30, 1997 in accordance with the negotiated termination agreement with Playboy Enterprises, Inc. As such, we have accounted for the Playboy(R) condom business as a discontinued operation effective December 31, 1996.
This analysis of our results of operations and financial condition should be viewed in conjunction with the financial statements and other information concerning us included throughout this Annual Report. The consolidated financial statements for the years ended December 31, 1999 and 1998 include our results of operations and statements of cash flows, as well as for AHPC and PT Buana, our 70% owned subsidiary.
We faced several issues during 1999. First, the price of latex during the middle of the year dropped to its lowest levels in five years, which caused pricing instability in the marketplace. As previously announced, we changed to a consignment inventory arrangement with a key customer which reduced sales in the second quarter of 1999 by $2.3 million. The volatile Indonesian rupiah fluctuated against the U.S. dollar which caused PT Buana to record significant income tax adjustments on a quarterly basis in 1999. Finally, we reported in early
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(2) Forward looking statements in this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding new products and markets, gross margins, selling, general and administrative expenses, liquidity and cash needs, and 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.
2000 that the group purchasing organization, Novation, will not renew its contract with AHPC, which expires April 2000.
We were pleased to announce that we were awarded an exclusive five-year contract to supply the AmeriNet, Inc. membership with its glove products. AmeriNet is the largest membership-based group purchasing organization in the U.S., representing 9,100 member facilities in all 50 states and includes hospitals, medical group practices, nursing homes, surgery centers, managed care organizations, pharmacies and integrated delivery networks. This membership represents more than 326,000 healthcare beds. The launch of the AmeriNet Choice private label glove products took place in late July 1999. During 1999, AmeriNet sales totaled over $1.0 million.
During 1999, we began offering a medical examination glove made of nitrile, a non-latex material. We have plans to develop and introduce other new products in the near future as well, including surgical gloves, and possibly other infection control products besides gloves.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net sales for the periods indicated.
Fiscal 1999 compared to Fiscal 1998. The results of operations for 1999 and 1998 include only the revenue and expenses of the glove business. Net sales include glove sales from AHPC's examination glove product line and external exam glove sales from PT Buana. Net sales totaled $65,280,104 and $64,968,401 for the years ended December 31, 1999 and 1998, respectively. This increase represents less than a 1% increase in glove sales in 1999 over 1998. Sales for the year ended December 31, 1999 were reduced by $2.3 million, as we changed to a consignment inventory arrangement with a key food service customer in the second quarter. The medical division experienced average sale price reductions of 8% during 1999 due to a sharp decline in the price of raw material latex and competitive forces. The medical division experienced a
16.1% increase in case volume over 1998, and product mix continues to reflect increased powder-free latex and synthetic glove sales. Our net sales are derived from the sale of finished products, net of allowable rebates, discounts and returns.
During the month of December 1999, AHPC recorded record sales as customers were preparing for the year 2000 and planning for any unknown events associated with the new millennium. This increased sales volume towards the end of 1999 led to a decline in sales for the month of January 2000.
Cost of goods sold includes all costs to manufacture and purchase the finished product plus the related costs associated with ocean freight, customs duty and warehousing. Cost of goods sold increased 3.8% from $46,857,229 for the year ended December 31, 1998 to $48,645,076 for the year ended December 31, 1999. As a percentage of net sales, cost of goods sold increased from 72.1% for the year ended December 31, 1998 to 74.5% for the same period in 1999. The primary factors associated with the increase in cost of goods sold as a percentage of net sales were lower average selling prices, increased warehousing cost associated with higher inventory levels, the change to consignment inventory and increased ocean freight rates, partially offset by an increased mix of higher margin powder-free glove sales and reductions in glove purchase prices from manufacturers.
AHPC is continuing to strive for reduced glove purchase prices from its suppliers to counteract the impact of reductions in its selling prices. We believe that the existing selling prices in the U.S. will not remain at their low levels for an extended period of time as the price of latex has begun to rise in 2000.
As a result of the above factors, our gross profit decreased 8.2% from $18,111,172 for the year ended December 31, 1998 to $16,635,028 for the year ended December 31, 1999. We expect our gross margins to continue to be affected by changes in product mix, competition, the price of latex and other factors.
During the third quarter of 1999, the Indonesia factory, PT Buana, completed its installation of chlorination equipment used for the manufacturing of latex powder-free gloves, which produce a higher gross profit margin than powdered gloves. PT Buana produced only a small quantity of powder-free gloves in the second half of 1999, as it is selling on a trial basis its product in the European market before sales to the U.S. are made.
The domestic market for exam gloves is converting rapidly from latex powdered to latex powder-free gloves and to synthetic gloves. This move is a result of greater user receptivity to powder-free gloves. The chlorination process used to make powder-free gloves reduces the sensitivity to latex and eliminates powder levels, which could carry latex particles in the air. Due to customer demand, we are providing and selling more latex powder-free exam gloves and synthetic gloves. We expect that this trend will continue. Our sales of latex powder-free exam gloves and synthetic gloves were approximately 73% of sales in 1999 versus 63% in 1998.
Selling expenses include all salaries for sales and marketing staff together with other related expenses such as sales commissions, travel costs, trade shows, advertising and delivery costs. Selling, general and administrative ("SG&A") expenses increased by 23.5% from $9,954,785 in 1998 to $12,295,192 in 1999. As a percentage of 1999 net sales, SG&A expenses
increased to 18.8% in 1999 compared with 15.3% in 1998. This increase of $2,340,407 in SG&A expenses is primarily attributable to an increase in selling compensation related costs of $1,298,900 due to the planned expansion of our tele-sales and medical sales force, additional travel, telephone and sample expense of $321,000 associated with the larger sales staff, and an increase in depreciation expense and consulting fees of $362,000 associated with our recently implemented computer system.
Income from operations decreased by 46.8% from $8,156,387 for 1998 to $4,339,836 for 1999. Operating margins decreased from 12.6% in the 1998 period to 6.7% in the 1999 period.
Interest expense decreased from $1,192,405 during 1998 to $984,159 in 1999. This decrease in interest expense of $208,246 is due to (i) approximately $7.5 million of PT Buana's debt having been repaid in 1998 as Indonesian rates were very high and (ii) our new debt agreement entered into on December 1, 1998 carries a lower rate than the previous debt facility, offset by increased borrowings in 1999 on the line of credit used to finance its increased inventory levels and capital expenditures. The 1998 PT Buana debt repayments were made with our proceeds from the sale of Common Stock to WRP Asia on March 31, 1998. All inter-company interest income and interest expense is eliminated in consolidation.
Other income consists of rental income, interest expense and miscellaneous income. Other income for the year ended December 31, 1999 was $166,155 compared to $461,386 for the comparable period in 1998. This decrease in other income of $295,231 is primarily due to the disposal of the investment in LSAI in 1998, which generated a gain of $168,375.
The provision for income taxes increased from $952,146 for the year ended December 31, 1998 to $1,166,121 for the year ended December 31, 1999. The 1998 income tax provision is less than the U.S. statutory rates. During the first quarter of 1998, we had net operating loss carry-forwards ("NOL's") which were used to reduce taxable income for that period. In accordance with tax regulations, usage of the NOL's is subject to limitations if certain ownership changes occur. Due to the WRP Asia ownership change on March 31, 1998, our NOL's became limited and subsequent to that date, we began recording a provision for income taxes. At December 31, 1998, we had NOL's of approximately $2.7 million, which will be available to reduce federal taxable income in the U. S. in future periods not to exceed approximately $1.3 million per year.
The minority interest in loss (income) of subsidiary represents the non-owned 30% profit or loss from PT Buana. The minority interest in loss (income) of PT Buana was ($594,062) during 1998 compared to $97,033 in 1999. During 1999, PT Buana's profitability decreased primarily due to the reductions in its gross profit triggered by lower selling prices for powdered latex exam gloves in the marketplace as well as due to reduced production output. Net income decreased by $3,426,416 or 58.3% from $5,879,160 for the year ended December 31, 1998 to $2,452,744 for the year ended 1999 due to the previously mentioned factors. The diluted earnings per share was $.35 in 1999 compared to $.93 in 1998.
Fiscal 1998 compared to Fiscal 1997. The results of operations for 1998 and 1997 include only the revenue and expenses of the glove business. The discontinued operations of the Playboy(R) condom business are reflected in the net loss from discontinued operations as separate line items in the consolidated statements of operations.
Net sales include glove sales from AHPC's examination glove product line and external powdered exam glove sales from PT Buana. Net sales totaled $64,968,401 and $51,402,691 for the years ended December 31, 1998 and 1997, respectively. This increase represents a 26.4% increase in glove sales in 1998 over 1997. This increase is attributable to AHPC's more developed customer relationships and increased PT Buana sales to external customers, the introduction of new products, growth in markets for its products, and a shift in the product mix toward higher priced products, particularly powder-free exam gloves. Our net sales are derived from the sale of finished products, net of allowable rebates, discounts and returns.
Revenues from the Playboy(R) condom business were $376,422 for the year ended December 31, 1997. These revenues are included in the net loss from discontinued operations in the consolidated statements of operations. Under our exit plan, we sold Playboy(R) condoms through June 30, 1997.
Cost of goods sold includes all costs to manufacture and purchase the finished product plus the related costs associated with ocean freight, customs duty and warehousing. Cost of goods sold increased 15.0% from $40,760,146 for the year ended December 31, 1997 to $46,857,229 for the year ended December 31, 1998. As a percentage of net sales, cost of goods sold decreased from 79.3% for the year ended December 31, 1997 to 72.1% for the same period in 1998.
This reduction in the cost of goods sold and continued improvement in gross margin is attributed to: (i) more favorable glove purchase prices obtained in 1998 due to a continued reduction in raw material latex prices; (ii) an increase in sales of higher profit margin glove products, particularly powder-free examination gloves; (iii) improved operating efficiency in the Indonesian facility, and (iv) reduced duty importation fees associated with examination gloves in 1998. We currently expect our gross margin to continue to be affected by changes in product mix, competition, the price of latex and other factors. As a result of the above, gross profit increased by 70.2% from $10,642,545 for the year ended December 31, 1997 to $18,111,172 for the year ended December 31, 1998.
The market for exam gloves is converting from latex powdered to latex powder-free gloves and to non-latex gloves. The chlorination process used to make latex powder-free gloves reduces the sensitivity to latex and reduces the powder levels which emit latex particles in the air. Being customer driven, we are providing and selling more latex powder-free exam gloves and expect that this trend will continue in the future. Our sales of latex powder-free exam gloves were approximately 44% of net sales in 1998 versus 37% in 1997.
Selling expenses include all salaries for sales and marketing staffs together with other related expenses such as sales commissions, travel costs, trade shows, advertising, and delivery costs. Selling, general and administrative ("SG&A") expenses increased 21.0% from $8,226,945 in 1997 to $9,954,785 in 1998. The increase is attributable to an increase in AHPC's delivery and selling expenses commensurate with its sales growth and the expansion of our sales force. As a percentage of 1998 net sales, SG&A expenses decreased to 15.3%, compared with 16.0% in 1997. We currently expect to make additional investments in sales and marketing to further develop established markets and to introduce new products to the marketplace. Accordingly, we currently expect that its SG&A expense will continue to increase in absolute dollars and may
possibly increase as a percentage of net sales in the future.
Prior to July 1, 1997, the financial statements and transactions of our Indonesian subsidiary, PT Buana, were maintained in the functional currency, Indonesian rupiahs, and translated into U.S. dollars. Due to our business and operating facility in Indonesia, we experienced transaction and translation gains and losses because of currency fluctuations. Assets and liabilities were translated at the current exchange rate in effect at the balance sheet date and shareholders' equity was translated at historical exchange rates. Revenues and expenses were translated at the average exchange rate for each period. Translation adjustments, which result from the process of translating Indonesian rupiahs into U.S. dollars, were accumulated in a separate component of shareholders' equity in accordance with Statement of Financial Accounting Standards No. 52. Such adjustments were unrealized.
Effective July 1, 1997, in accordance with Statement No. 52, PT Buana changed its functional currency for financial statements reporting purposes from the Indonesian rupiah to the U.S. dollar. The net effect of this change in functional currency resulted in a positive $277,035 foreign currency translation adjustment by PT Buana which is recorded in 1997 as a component of cost of goods sold.
Interest expense decreased from $1,481,467 in 1997 to $1,192,405 in 1998. This decrease is attributable to the repayment of all of PT Buana's debt in 1998. The funds for these debt payments were primarily from the proceeds from our sale of Common Stock to WRP Asia on March 31, 1998.
Other income increased by $168,024 from $293,362 for the year ended December 31, 1997 to $461,386 for the year ended December 31, 1998. The increase is primarily due to the disposal of the investments in LSAI which generated a gain of $168,375 in 1998.
We did not record income taxes in 1997 or in 1996 due to net operating loss carryforwards (NOL's) which were generated in prior years. During 1998, the WRP Asia ownership change limited the NOL's which are available to reduce taxable income in current and future years. Because of these NOL limitations, we began recording a provision for income taxes in 1998. We did not record any taxes to be paid for our foreign subsidiary in Indonesia (PT Buana). PT Buana, based on Indonesian tax reporting, has generated losses and thus has no current tax provision. As a result, we have generated tax NOL's in Indonesia that can be utilized in the future. During 1998, we have also reviewed the adequacy of the valuation allowance it had recorded for deferred tax assets that were generated during the current and prior years. As a result of this assessment and our continued profitability, we recorded a reduction in our deferred tax valuation allowance of $412,646. This amount has been reflected as a reduction in the current year's tax provision. The income tax provision recorded in 1998 of $952,146 is less than statutory rates due to the utilization of NOL's in 1998 and to the reduction of the valuation allowance for deferred tax assets which were recorded in 1998.
At December 31, 1998 we had NOL's of approximately $2.7 million which will be available to reduce federal taxable income in the U.S. in future periods, subject to limitations.
For the year ended December 31, 1998, our net income was $5,879,160, compared to a net income of $465,722 in 1997. The overall diluted earnings per share was $.93 in 1998
compared to $.11 in 1997.
SEGMENT INFORMATION
1999 and 1998. During 1999 and 1998, we were engaged solely in the business of manufacturing and distributing examination gloves. We have two business segments, manufacturing and distribution. These segments are managed as separate strategic business units. The manufacturing segment, which represents the Indonesian operations of PT Buana, manufactures powdered and powder-free latex gloves and sells them primarily to AHPC and WRP Asia. The distribution segment involves the procurement and sale of gloves purchased from the manufacturing segment and other glove manufacturers and then sold to national and regional healthcare, food service, retail and other distributors within the U.S. The operations of the distribution segment are located entirely within the U.S.
1997. At December 31, 1997, we were in the business of manufacturing and distributing examination gloves in the U.S. We also distributed Playboy(R) condoms through June 30, 1997 in accordance with the termination agreement with Playboy(R) Enterprises Inc. As such, the Playboy(R) condom business is reported as a discontinued operation.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1999 decreased $508,263 from December 31, 1998 levels. We experienced this decline in cash flow in 1999 due to cash used in operations, the funding of capital expenditures and net repayments of letter of credit obligations.
Our operations used cash of $1,182,339 in 1999 as a result of an increase in accounts receivable, inventories and amounts due from affiliate, offset by net income of $2,452,744 and non-cash depreciation expenses of $1,750,261. In 1999, we used cash of $2,972,837 for the purchase of capital expenditures. Capital expenditures were made in 1999 for the acquisition of $2,084,939 of manufacturing equipment by PT Buana primarily to produce latex powder-free exam gloves and by AHPC of $887,898 primarily to install and implement a new enterprise wide computer system. We experienced increased cash flow from financing activities of $3,743,556. The generation of cash for financing purposes was from net borrowings on the line of credit facility of $5,657,396, offset by net reductions in letter of credit obligations.
On December 1, 1998, we obtained a new, domestic three-year credit facility from a large commercial credit company, G.E. Capital. This asset-based lending facility included a $10,000,000 revolving line of credit with a $7,000,000 letter of credit subfacility. The line of credit borrowings carry an interest rate of commercial paper plus 2.75% (8.30% at December 31, 1999). On March 31, 1999, AHPC amended its loan and security agreement by increasing the maximum credit loan limit from $10,000,000 to $15,000,000. As part of the amendment, the letter of credit subfacility was increased from $7,000,000 to $11,000,000. At December 31, 1999, AHPC had outstanding $7,423,064 on the revolving line of credit and $1,328,410 of letter of credit liabilities under the credit facility.
Net inventories at December 31, 1999 increased 9.0% to $12,930,569 compared with $11,860,855 at December 31, 1998 due to the addition of several inventory product lines. Net trade accounts receivable at December 31, 1999 increased by 44% to $7,969,369 from
$5,532,405 at December 31, 1998 due to a record sales month in December 1999 and a strong collection effort made at the end of 1998.
In October 1994, pursuant to two debenture and warrant purchase agreements between us and two trusts affiliated with one of our directors, we issued, and each trust purchased, a convertible subordinated debenture in the amount of $1,000,000 payable in seven years with interest at 1.5% over the prime rate. Each debenture is convertible into our Common Stock at a conversion price of $25.00 per share. In addition, each trust received a warrant exercisable over five years to purchase 3,750 shares of our Common Stock at an exercise price of $22.20 per share. At December 31, 1999 and 1998, total debt of $1,700,000 and $2,000,000, respectively, was outstanding as a result of this transaction. We anticipate repayments of $600,000 in 2000 on this debt and have classified only $1,100,000 of this debt as long-term at December 31, 1999.
We currently expect to have cash needs during 2000 in addition to funding the expected growth in the glove business. These cash needs may arise in connection with various events such as for: (i) the expansion into new glove products and other infection control products; (ii) the continued hiring of marketing staff; (iii) the hiring of additional support staff; (iv) the continuing expansion of the manufacturing facility in Indonesia; (v) paying off debt obligations; (vi) purchasing our Common Stock in connection with our stock repurchase program; (vii) the possible funding of Indonesian income taxes created by foreign currency fluctuations; and (viii) possible acquisitions. We believe that our present cash and cash to be generated from future operations plus our credit facility will be sufficient to fund our ongoing operations.
YEAR 2000
In preparation for the rollover to the year 2000, we initiated a year 2000 readiness project, the scope of which included the following steps: ensuring the compliance of all applications, operating systems and hardware on mainframe, personal computer, local area network and wide area network platforms; addressing issues related to non-IT imbedded software and equipment; and addressing the compliance of key suppliers and customers. We did not experience any significant malfunctions or errors in our operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, we do not expect any significant impact to our ongoing business operations as a result of the Year 2000 issue. However, Year 2000 compliance has many elements and potential consequences, some of which may not be foreseeable or may be realized in future periods. Consequently, there can be no assurance that unforeseen circumstances may not arise, or that the we will not in the future identify equipment or systems which are not Year 2000 compliant. We are currently not aware of any significant Year 2000 or similar problem that may have arisen with our key customers, suppliers or other significant third parties.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market value of investments. We have not entered into interest rate caps of collars or other hedging instruments.
Exposure to changes in interest rates is limited to borrowings under revolving credit and debt agreements, which have variable interest rates tied to the prime and commercial paper rates. We estimate that the fair value of each debt instrument approximated its market value at December 31, 1999.
We are subject to fluctuations in the value of the Indonesian Rupiah vis-a-vis the U.S. dollar. The investment in the Indonesian subsidiary is remeasured into the U.S. dollar and the book value of the assets and liabilities of this operation at December 31, 1999 approximated its fair value.
RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES
In addition to those matters already set forth in Item 1, Business, and this Item 7, the following may result in us not achieving certain results included in any statement that may be considered a forward looking statement. We caution the reader that the following risks may not be exhaustive.
Variations in Quarterly Results. Our quarterly operating results are subject to various risks and uncertainties, including risks and uncertainties related to: local and international political and economic conditions; foreign currency volatility; competitive pressures; the composition, timing and size of orders from and shipments to major customers; variations in product mix and the size mix between sales; variations in product cost; infrastructure costs; obsolescence of inventory; and other factors as discussed below. Accordingly, our operating results may vary materially from quarter to quarter.
We operate with little backlog and, as a result, net sales in any quarter are substantially dependent on the orders booked and shipped in that quarter. Because our operating expenses are based on anticipated revenue levels and because a high percentage of our expenses are relatively fixed, if anticipated shipments in any quarter do not occur as expected, our operating results may be adversely affected and may fall significantly short of expectations. Any other unanticipated decline in the growth rate of our net revenues, without a corresponding and timely reduction in the growth of operating expenses, could also have an adverse effect on us and our future operating results.
We aim to prudently control our operating expenses. However, there is no assurance that, in the event of any revenue, gross margin or other shortfall in a quarter, we will be able to control expenses sufficiently to meet profitability objectives for the quarter.
Financing. Our current credit facility expires in December 2001. There can be no assurances that it will be renewed, extended or sufficient to finance continued growth of the Company.
Dependence on Gloves. We are exclusively engaged in the manufacture and sale of disposable gloves. Accordingly, our results of operations and financial condition are highly dependent on the level of supply of and demand for disposable gloves. There can be no assurance that the supply of or demand for disposable gloves will continue at current levels or that changes in such supply or such demand will not have a material adverse effect on our results of operations or financial condition. In addition, we currently have a long-term supply contract with
an unrelated Malaysian glove manufacturing company for the purchase of powdered gloves. Should the demand for powdered gloves continue to decline, we will continue to be subject to the aforementioned commitments or, if such commitments cannot be fulfilled, we will be subject to certain penalty provisions within the supply contract.
Dependence on Rubber Harvest and Latex Concentrate. Our ability to produce and purchase ours products profitably is entirely dependent upon the consistent availability, at competitive prices, of raw rubber harvested by independent growers in Malaysia and Indonesia and locally processed by us and others into latex concentrate. Any disruption in the consistent supply of rubber for latex concentrate due to weather or other natural phenomena, labor or transportation stoppages, shortages or other factors, could cause significant adverse effects to our results of operations and financial condition. In addition, rubber is a commodity traded on world commodities exchanges and is subject to price fluctuations driven by changing market conditions over which we have no control. Increases in the price of latex concentrate have adversely affected our raw material costs in the past and could continue to do so.
Asia Pacific Risk Factors. Social, political and economic instability may be significantly greater in many of the Asian-Pacific countries than that typically associated with the United States and other industrialized countries. Varying degrees of social, political and economic instability could significantly disrupt the source of our supply of glove products.
Currencies of several Asian-Pacific countries, including Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, have experienced significant fluctuations against the U.S. dollar. Our Indonesian factory maintains its books in the Indonesian currency, the rupiah, and reports its Indonesian income taxes with rupiah financial reports. The Indonesian rupiah experienced volatile currency fluctuations against the U.S. dollar which caused significant income tax adjustments in 1999. Foreign currency exchange volatility may continue and could cause us to incur significant income tax adjustments in the future.
In the past, interest rates in many Asian-Pacific countries have risen sharply and credit availability was reduced. Companies in these countries, with significant indebtedness or costs denominated in foreign currencies that have appreciated in relation to the local currency, may have difficulty passing on increased local currency costs to their customers and may face financial difficulties and losses and may be unable to meet their obligations.
The economies of most of the Asian-Pacific countries are heavily dependent upon international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners, principally, the United States, Japan, China and the European Union. The enactment by the United States or other principal trading partners of protectionist trade legislation, reduction of foreign investment in the local economies and general declines in the international securities markets could have a significant adverse effect upon the economies of the Asian-Pacific countries.
Governments in certain of the Asian-Pacific countries participate to a significant degree, through ownership interests or regulation, in their respective economies. Action by these governments could have a significant adverse effect on the economies of such countries.
Changes in Gross Margins. Certain of our net product sales are derived from products
and markets which typically have lower gross margins compared to other products and markets, due to higher costs and/or lower prices associated with the lower gross margin products and markets. We currently expect that our net product sales from powder-free and synthetic gloves will continue to increase as a percentage of total net product sales. In addition, we are currently experiencing pricing pressures due to a number of factors, including competitive conditions, consolidation within certain groups of suppliers, excess supply of products, changing technologies in the production of powder-free gloves and increasing demand for new glove products. Additionally, we may not be able to pass on price increases to our customers in a timely manner, or at all. To the extent that these factors continue, our gross margins could decline, which would adversely affect us and our future operating results.
Downward pressure on our gross margins may be mitigated by other factors, such as a reduction in product costs and/or an increased percentage of new product sales from higher gross margin products, such as powder-free and synthetic gloves. We are aiming to reduce our product costs and to increase our percentage of net product sales from powder-free and synthetic gloves. However, there is no assurance that these efforts will be successful.
New Products. We are planning to distribute new glove products, including surgical gloves. We may begin to distribute other infection control products besides gloves. There is no assurance that these development efforts will be successful or that, if successfully developed, these products will achieve commercial success.
Growth Dependencies. In general, our future growth is dependent on our ability to successfully and timely enhance existing products, develop and introduce new products, establish new distribution channels, develop affiliations with leading market participants and continue to develop our relationships with our existing customer base.
The failure to achieve these and other objectives could limit future growth and have an adverse effect on us and our future operating results. In addition, the pressure to develop and enhance products and to establish and expand markets may cause our SG&A expenses to increase substantially, which could also have an adverse effect on us and our future operating results.
Manufacturing in Indonesia - International Operations. Our international manufacturing operation has grown substantially and, thus, we are increasingly affected by the risks associated with international operations. Such risks include: managing an organization in Indonesia; fluctuations in currency exchange rates; the burden of complying with international laws and other regulatory and product certification requirements; changes in such laws and requirements; tariffs and other trade barriers; import and export controls; international staffing and employment issues; and political and economic stability. The inability to effectively control and manage these and other risks could adversely affect us and our future operating results.
Competition. The various markets in which we operate are becoming increasingly competitive as a number of other companies develop and sell products that compete with our products in these markets. Certain of these competitors have significantly more financial and technical resources than us. We face additional competitive factors besides price, such as product quality, consistency, timeliness of delivery, service, and the size and reliability of the manufacturer. These competitive factors may result in, among other things, price discounts by us
and sales lost by us to competitors that may adversely affect us and out future operating results.
Reliance Upon Distributors. We use various channels to market and distribute our products primarily by sales to end-users via third-party distributors. Third-party distributors are a substantial channel for distribution to medical facilities. Accordingly, our ability to market and distribute its products depends significantly on our relationship with third-party distributors, as well as the performance and financial condition of these distributors. In the event that our relationship with its distributors deteriorates, or the performance or financial condition of the distributor becomes unsatisfactory, us and our future operating results could be adversely affected.
Reliance Upon Significant Contracts and Customers. A significant portion of our acute care and medical division business had been obtained through the achievement of being selected to supply group purchasing organizations and integrated delivery networks ("IDN's") in the U.S. These group purchasing organizations and IDN's, made up of a few or thousands of health care facilities, centralize medical product purchases and offer its members the ability to enjoy larger purchasing power discounts than an individual hospital or member might enjoy independently. We reported in early 2000 that the group purchasing organization, Novation, will not renew its supply contract with AHPC, which expires in April 2000. Our sales of Novation products to Novation members accounted for over half of our sales in 1999. We will strive to convert these NovaPlus accounts to our branded products upon the expiration of the Novation contract. There can be no assurance that we will be successful in our attempts to maintain this business and our inability to retain a significant portion of this business would materially adversely affect our sales, results of operations, and financial condition.
In addition, during 1999, two of AHPC's customers accounted for 69% of net sales. The loss of either of such customers would have a materially adverse effect on us and our operating results.
Excess or Obsolete Inventory. Managing our inventory of various size mix and product mix is a complex task. A number of factors, including the need to maintain a significant inventory of certain sizes or products which are in short supply or which must be purchased in bulk to obtain favorable pricing, the general unpredictability of demand for specific products and customer requests for quick delivery schedules, may result in us maintaining excess inventory. Other factors, including changes in market demand and technology, may cause inventory to become obsolete. Any excess or obsolete inventory could result in price reductions and inventory write-downs, which, in turn, could adversely affect us and our operating results.
Hiring and Retention of Employees. Our continued growth and success depend to a significant extent on the continued service of senior management and other key employees and the hiring of new qualified employees. Competition for highly skilled business, technical, marketing and other personnel is intense, particularly in the strong economic cycle currently prevailing. The loss of one or more key employees or our inability to attract additional qualified employees or retain other employees could have an adverse effect on us and our future operating results. In addition, we may experience increased compensation costs in order to compete for skilled employees.
Product Liability Insurance. Participants in the medical supplies business are potentially
subject to lawsuits alleging product liability, many of which involve significant damage claims and defense costs. A successful claim against us in excess of our insurance coverage could have a material adverse effect on our results of operations or financial condition. Claims made against us, regardless of their merit, could also have a material adverse effect on our reputation. There is no assurance that the coverage limits of our insurance policy will be adequate or that present levels of coverage will be available at affordable rates in the future. While we have been able to obtain product liability insurance in the past, such insurance varies in cost, is difficult to obtain and may not be available in the future on acceptable terms or at all. We are subject to a number of lawsuits filed against it and other manufacturers. This litigation is still in the early stages and there can be no assurance that our insurance will be sufficient to meet any recovery for which we may be found liable, that the outcome of such suits will not materially adversely affect the our results of operations or financial condition or that our deductible obligation (to fund a portion of the initial cost of defense and/or liability of each such lawsuit) will not prove burdensome.
Stock Market Fluctuations. In recent years, the stock market in general, including our Common Stock, have experienced extreme price fluctuations. The market price of the our Common Stock may be significantly affected by various factors such as: quarterly variations in our operating results; changes in our revenue growth rates; the loss of a significant customer or sales contract; changes in earnings estimates by market analysts; the announcement of new products or product enhancements by us or our competitors; speculation in the press or analyst community; the inability of the market to absorb selling pressure from one or more large institutional shareholders; and general market conditions or market conditions specific to particular industries. There can be no assurance that the market price of our Common Stock will not experience significant fluctuations in the future.
Governmental Regulations. Our products are subject to regulation by numerous governmental authorities in the United States and other countries, particularly to safety and adherence to Quality System Regulations ("QSR's") for medical devices. In the United States, examination gloves are classified as a Class I medical device product regulated by the FDA. Noncompliance with these FDA regulations can result in administration enforcement, such as warning letters, import alerts, and administrative detention or in civil penalties, product bans and recalls. Periodically, the FDA inspects shipments of medical gloves as they arrive in the United States ports.
The FDA inspections and reviews may cause delays in product delivery and this can result in a loss or delay in recognition of income by us. In addition, the FDA may inspect the manufacturing facilities for compliance with QSRs, which incorporate pre-production design and development to achieve consistency with quality system requirements worldwide. Failure to comply with regulatory requirements could have a material adverse effect on our business financial condition and results of operations.
ITEM 8.
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:
Biographies for Messrs. Wong, Marteka, Lew and Carter are included below.
At March 29, 2000, our directors consist of six Class A Directors and two Class B Directors are as follows:
Class A Directors
Name Age Director Since - ---- --- -------------- Kamaruddin Taib 42 1998 Richard C. M.Wong 55 1997 Edward J. Marteka 62 1995 Kwong Ann Lew 39 1997 George Jeff Mennen 59 1994 Richard Swanson 64 1998
Class B Directors
Name Age Director Since - ---- --- -------------- Robert J. Simmons 57 1995 Don L. Arnwine 67 1995
The following sets forth brief statements of the principal occupations and other biographical information of each of the directors and executive officers.
Kamaruddin Taib was elected Class A Director on April 1, 1998. Kamaruddin Taib is currently the Deputy Executive Chairman of WRP Asia. He formerly served as the Group Managing Director of various Malaysian publicly listed companies. Mr. Taib holds a Bachelor of Science (Mathematics) degree from the University of Salford, United Kingdom. Upon completing his studies, he joined a leading local Merchant Bank for three years (1980-1983)
where he had extensive exposure in corporate and financial advisory work.
Richard C. M. Wong was elected Class A Director of the Company on May 20, 1997. Mr. Wong currently serves as Chairman of the Board and Chief Executive Officer of the Company. Mr. Wong is the President and Chief Executive Officer of WRP Asia. In addition, he is also a Deputy Chairman of Nylex Malaysia Bhd., and a director of two other publicly listed companies in Malaysia. Mr. Wong is the founder of TEC Asia Centre, an international organization of Chief Executive Officers who share ideas to manage change and remain competitive.
Edward J. Marteka was the founder and is the President and Director of our subsidiary, AHPC since its incorporation in 1989. In May 1995, Mr. Marteka was appointed to the Board of Directors and as our President. Mr. Marteka is responsible for our overall operations and of AHPC. Mr. Marteka had held various positions with Baxter Healthcare Corporation, and served as Vice President of its International Division.
Kwong Ann Lew was elected a Class A Director of the Company on May 20, 1997. Mr. Lew currently serves as our Chief Financial Officer and Secretary. Mr. Lew is an Executive Director and Chief Financial Officer of WRP Asia. He is a member of the Malaysian CPA Society and Institute of Taxation and was with Arthur Andersen & Co. from 1988 to 1991. Prior to joining WRP Asia, he held various key management positions in two public listed companies, primarily in the corporate and judicial advisory areas.
George Jeff Mennen was elected to the Board of Directors on October 12, 1994. Mr. Mennen heads the G.J. Mennen Group, a consulting firm specializing in family owned businesses. Mr. Mennen had a distinguished career at The Mennen Company including being the Vice Chairman of that company. The Mennen Company was founded by Mr. Mennen's great grandfather in 1878 and remained privately owned until it was sold in 1992 to Colgate-Palmolive.
Richard Swanson was elected a Class A Director on June 12, 1998. Mr. Swanson is presently a consultant with The Executive Committee, an international company which focuses on strategic coaching and corporate troubleshooting for CEO's of public and private companies. Also, since 1980, Mr. Swanson has been the president of two Denver, Colorado based companies, Investment Partners, Inc. and Real Estate Associates, Inc. Investment Partners is engaged in the restructuring and recapitalization of troubled companies, and Real Estate Associates focuses on the acquisition and development of real estate projects.
Robert J. Simmons was elected to the Board of Directors in December 1995. He is currently President of RJS Healthcare, Inc., a healthcare consulting company, founded in 1990. He served as Executive Vice President at Baxter International, Inc., from 1987 until founding RJS in 1990. Mr. Simmons joined Baxter after serving over 20 years at American Hospital Supply Corporation. His last position at American Hospital Supply was Vice President of Corporate Marketing.
Don L. Arnwine was elected to the Board of Directors in December 1995. He is currently President of Arnwine Associates, a company he founded in 1989 to provide specialized advisory services to the health care industry. From 1961 to 1972, Mr. Arnwine served as Director of the
Hospital at the University of Colorado Medical Center. From 1972 to 1982, he served as President and CEO of the Charleston Area Medical Center. In 1982, Mr. Arnwine became President and CEO of Voluntary Hospitals of America and was named its Chairman and CEO in 1985, in which capacity he served until founding Arnwine Associates.
Robert C. Carter joined us in March 1992 and has served as the Controller of AHPC since that time. He was appointed our Assistant Secretary in May 1995. Previously, Mr. Carter was employed by Clifton, Gunderson & Co. and Arthur Andersen LLP. Mr. Carter holds a B.S. in accounting from the University of Denver and became a certified public accountant in 1988.
BOARD MEETINGS AND COMMITTEES
During the 1999 fiscal year, our Board of Directors held four meetings and all other actions by the Board of Directors were taken by unanimous written consent without a meeting.
The Board of Directors has a Compensation Committee for the purpose of administering our Omnibus Equity Compensation Plan (the "Plan"). The Board has not delegated its functions to any other standing committees except for the Audit Committee which was formed in 1997. During 1999, the Compensation Committee and Audit Committee each held one meeting and all other actions were taken by unanimous written consent without a meeting.
COMPENSATION OF DIRECTORS
Effective January 1, 1998, all directors, who were not also executive officers, which group is comprised of Kamaruddin Taib, George Jeff Mennen, Richard J. Swanson and the Class B Directors, receive (1) an annual Board member retainer of $5,000, (2) compensation of $1,000 for each Board meeting attended, (3) $500 for each committee meeting attended and (4) an annual Committee member retainer of $1,000. Each new Director is presently entitled to receive stock options under the Plan to purchase 2,000 shares of our Common Stock in connection with his election and 1,000 shares of our Common Stock per Board meeting attended, up to a maximum of 5,000 shares for Board meetings attended. Under the terms of the Plan, the Compensation Committee shall determine the exercise price of a Director Option, provided that the exercise price shall not be less than the lowest fair market value of our Common Stock during the six months preceding the election and qualification of such Director. All Director options are immediately exercisable for a period of ten years from the date of grant. All directors will be reimbursed for expenses incurred in attending meetings of the Board and meetings of Committees.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires certain officers, directors and beneficial owners of more than 10% of our Common Stock to file reports of ownership and changes in their ownership of our equity securities with the Securities and Exchange Commission and Nasdaq. Based solely on a review of the reports and representations furnished to us during the last fiscal year, we believe that each of these persons is in compliance with all applicable filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation awarded to or earned by the President, who is the only executive officer whose aggregate annual salary and bonus exceeded $100,000 during our last three fiscal years:
There is no other long-term compensation for the executive listed above in 1997 through 1999.
EMPLOYMENT AGREEMENTS
On April 1, 1994, we entered into an employment agreement with Edward J. Marteka (the "Marteka Agreement"). The Marteka Agreement, as amended on June 30, 1995 and on July 22, 1996, provides for: (i) Mr. Marteka to serve as our President (since May 31, 1995) and AHPC; (ii) a base salary; (iii) non-qualified stock options to purchase 35,000 shares of Common Stock under the Plan, 5,000 shares exercisable commencing April 1, 1994, 20,000 shares April 1, 1995 and 10,000 shares April 1, 1996 at an exercise price of $11.875, the closing price of the Common Stock as reported on the Nasdaq SmallCap Market on the day the options were granted by the Compensation Committee; and (iv) life and medical insurance, automobile allowance and other additional customary benefits. The amended Marteka Agreement also granted to Mr. Marteka additional non-qualified stock options to purchase 14,000 shares of Common Stock, 7,000 shares exercisable commencing July 21, 1995 and 7,000 shares July 21, 1996, at an exercise price of $7.80, the closing price of Common Stock as reported on the Nasdaq SmallCap Market on the day the options were granted by the Compensation Committee. Mr. Marteka also received options to purchase 1,000 shares of our Common Stock upon his appointment as Class A Director in 1995.
As approved by the Compensation Committee, all of Mr. Marteka's options outstanding in 1996 were repriced effective July 23, 1996 to $2.75, the closing price on that date. During 1998, Mr. Marteka's base salary was increased to $200,000 per year effective January 1, 1998 as approved by the Compensation Committee.
OPTION GRANTS IN FISCAL 1999
During 1999, there were no stock options granted to the president of the Company.
On July 12, 1998, we issued options under our Omnibus Equity Compensation Plan to certain employees and directors to purchase 359,000 shares of our Common Stock at an exercise price of $6.3125 per share, the closing price of the Common Stock as reported on NASDAQ on the date the options were granted by the Compensation Committee. The options are exercisable for ten years from the date of grant.
As approved by the Board of Directors, all outstanding stock options at February 29, 2000 to current employees and directors were re-priced effective February 29, 2000 to $2.07, the
closing price on that date.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal 1999 by the executive officer named in the summary compensation table and the value of such officer's unexercised stock options as of December 31, 1999.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is currently comprised of the following four (4) Class A Directors: Kamaruddin Taib, Richard Wong, George Jeff Mennen and Richard Swanson, each of whom were appointed by the Board of Directors. The Committee oversees administration of our Omnibus Equity Compensation Plan. The purpose of the Plan is to attract and retain capable and experienced officers and employees by compensating them with equity-based awards whose value is connected to our continued growth and profitability. Under the Plan, awards may be made in the form of stock options or restricted stock. In general, we compensate executive officers and senior management through salary, bonus (where appropriate) and the grant of stock options. During fiscal 1999, all action of the Compensation Committee was made during the one meeting held in 1999 or was taken by the Committee by unanimous written consent without a meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Kamaruddin Taib, Richard Wong, and Kwong Ann Lew are executive directors and officers of WRP Asia. Accordingly, these members should not be considered as independent Directors when serving on the Board of Directors, the Compensation Committee, nor the Audit Committee.
STOCK PERFORMANCE CHART
The following graph compares the yearly percentage change in the cumulative total shareholder return on our Common Stock for each of our last five fiscal years with the cumulative total return (assuming reinvestment of dividends) of (i) the NYSE/AMEX/Nasdaq Stock Market - U.S. Index and (ii) a peer group selected by us, in good faith. The peer group consists of American Shared Hospital Services, Daxor Corp., DVI, Inc., Hemacare Corp., Medical Sterilization Inc., National Home Health Care Inc., Prime Medical Services Inc. and Psicor Inc.
[LINE GRAPH]
* $100 invested on December 31, 1994 in stock or Index - including reinvestment of dividends. Fiscal year ending December 31.
CUMULATIVE TOTAL RETURN
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 29, 2000, with respect to the beneficial ownership of our Common Stock and Series A Common Stock by (i) each shareholder known by us to be the beneficial owner of more than 5% of our Common Stock and Series A Common Stock, (ii) each director, nominee and certain executive officers, and (iii) all directors and executive officers, as a group. Unless otherwise indicated, the shareholders named below have sole voting and investment power with respect to such shares of Common Stock and Series A Common Stock beneficially owned by them.
- -------------- * Represents less than 1% (1) WRP Asia Pacific Sdn. Bhd. (formerly known as Wembley Rubber Products (M) Sdn. Bhd.) ("WRP Asia") is located at 28th Floor, Wisma Denmark, 86, Jalan Ampang, 50450, Kuala Lumpur, Malaysia. (2) White Rock Capital Group consists of White Rock Capital Partners L.P., White Rock Capital Management L.P., White Rock Capital, Inc., Thomas V. Barton, and Joseph V. Barton. The address of the White Rock Capital Group is 3131 Turtle Creek Blvd., Suite 800, Dallas, Texas 75219. (3) Represents shares to be issued upon exercisable options granted under our Omnibus Equity Compensation Plan. (4) Percent of class is based upon the combined number of shares of Series A Common Stock and Common Stock outstanding on March 3, 2000. (5) Heartland Advisors, Inc. are located at 789 North Water Street, Milwaukee, Wisconsin 53202.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, we purchased latex powder-free exam gloves amounting to $18.4 million from our majority shareholder, WRP Asia. In addition, our Indonesian factory sold approximately $8.3 million of powdered latex exam gloves to WRP Asia in 1999. We believe the prices charged by each related entity are as favorable as those that could be negotiated with unaffiliated third parties.
During 1999, we received consulting services from Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by Robert Simmons, one of our directors. We engaged Alliance to assist us in marketing our products with the expressed purpose of negotiating and executing a purchase agreement with various healthcare group purchasing organizations. We paid Alliance $66,160 in 1999 for its services.
See Note 5 of the Notes to Consolidated Financial Statements for additional information on related party transactions.
PART IV
ITEM 14.
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. 3.3 to the Company's Form S-18 Registration Statement (Registration No. 33-23164-FW).
3.5 Amendment to Bylaws of the Company, incorporation herein by reference to Exhibit 3.5 to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1991 (File No. 0-17458).
4.2 Warrant Agreement with The Liberty National Bank & Trust Company, incorporated by reference to Exhibit No. 4.2 to the Company's Form S-1 Registration Statement (Registration No. 33-36206).
4.3 Warrant, incorporated by reference to Exhibit No. 4.3 to the Company's Form S-1 Registration Statement (Registration No. 33-36206).
10.37 Debenture and Warrant Purchase Agreement dated October 12, 1994 between the Company and Wilmington Trust Company and George Jeff Mennen as Co-Trustees U/A dated 11/25/70 with George S. Mennen for Christina M. Andrea incorporated herein by reference to Exhibit 10.37 included in the Company's Form 10K Annual Report for the fiscal year ended December 31, 1994 (File No. 0-17458).
10.38 Debenture and Warrant Purchase Agreement dated October 12, 1994 between the Company and Wilmington Trust Company and George Jeff Mennen as Co-Trustees U/A dated 11/25/70 with George S. Mennen for John Henry Mennen Andrea incorporated herein by reference to Exhibit 10.38 included in the Company's Form 10K Annual Report for the fiscal year ended December 31, 1994 (File No. 0-17458).
10.42 Articles of Amendment to Certificate of Incorporation, incorporated herein by reference to Exhibit 10.42 included in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1997 (File No. 0-17458).
10.43 Amended and Restated Omnibus Equity Compensation Plan, incorporated herein by reference to Exhibit 10.43 included in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1997 (File No. 0-17458).
10.44 Loan and Security Agreement dated as of December 1, 1998 between General Electric Capital Corporation and American Health Products Corporation, incorporated herein by reference to Exhibit 10.44 included in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1998 (File No. 0-17458).
21 Subsidiaries of the Company (1).
23.1 Consent of Arthur Andersen LLP (1).
27 Financial Data Schedule (1).
(b) During the last quarter of 1999, the Company did not file any reports on Form 8-K.
(1) Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT: WRP CORPORATION
Date: March 29, 2000 By: /s/ Edward J. Marteka ----------------------------- Edward J. Marteka, President
Date: March 29, 2000 By: /s/Kwong Ann Lew ----------------------------- Kwong Ann Lew, Chief Financial Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 29, 2000 By: /s/ Richard Wong ----------------------------- Richard Wong, Chief Executive Officer and Chairman of Board of Directors
Date: March 29, 2000 By: /s/ Kamaruddin Taib ----------------------------- Kamaruddin Taib, Director
Date: March 29, 2000 By: /s/ Edward J. Marteka ----------------------------- Edward J. Marteka, Director
Date: March 29, 2000 By: /s/ Kwong Ann Lew ----------------------------- Kwong Ann Lew, Director
Date: March 29, 2000 By: /s/ George Jeff Mennen ----------------------------- George Jeff Mennen, Director
Date: March 29, 2000 By: /s/Richard Swanson ----------------------------- Richard Swanson, Director
Date: March 29, 2000 By: /s/ Robert J. Simmons ----------------------------- Robert J. Simmons, Director
Date: March 29, 2000 By: /s/ Don L. Arnwine ----------------------------- Don L. Arnwine, Director
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998 TOGETHER WITH AUDITORS' REPORT
WRP CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
PAGE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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) AND SUBSIDIARIES as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WRP Corporation and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois February 4, 2000
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
WRP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
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 DECEMBER 31, 1999, 1998 AND 1997
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 DECEMBER 31, 1999, 1998 AND 1997
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 DECEMBER 31, 1999, 1998 AND 1997
The accompanying notes to consolidated financial statements are an integral part of these statements.
WRP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
WRP Corporation and Subsidiaries (the "Company") is a manufacturer and distributor of high quality, disposable medical examination gloves and markets examination gloves in the United States through its wholly owned subsidiary, American Health Products Corporation ("AHPC"). The Company sells its gloves primarily to the medical, dental, food service and retail markets.
The Company's, through its subsidiary in Indonesia, PT WRP Buana Multicorpa ("PT Buana") manufactures medical examination gloves.
In November, 1996, the Company adopted a plan to discontinue its condom operations and has reflected it as such in the accompanying consolidated financial statements. The Company continued to distribute condoms through June 30, 1997 (Note 4).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of WRP Corporation, AHPC and PT Buana, a 70% owned Indonesian glove manufacturing subsidiary. All significant intercompany transactions have been eliminated.
WRP Asia Pacific Sdn. Bhd. (formerly known as Wembley Rubber Products (M) Sdn. Bhd.), a Malaysian corporation ("WRP Asia"), owns the Series A common stock of the Company and is the majority shareholder of the Company.
CASH AND CASH EQUIVALENTS
The Company considers cash in banks and highly liquid debt instruments with a maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are accounted for on a first-in, first-out ("FIFO") basis and are valued at the lower of actual cost or market. Inventories consist of the following at December 31, 1999 and 1998:
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and amortization are provided by both the straight-line and accelerated methods over lives ranging from 3 to 20 years. Building improvements are amortized on a straight-line basis over their estimated useful lives or lease terms, whichever is shorter. Accumulated construction in progress costs are reclassified to the appropriate property, plant, and equipment account when completed. The useful lives of property, plant and equipment at December 31, 1999 and 1998, are as follows:
When property or equipment is retired or otherwise disposed of, the net book value of the asset is removed from the Company's books and the net gain or loss is included in the determination of income.
GOODWILL
The excess purchase price over the value of the net assets of AHPC acquired in February, 1992, was recorded as goodwill in the accompanying consolidated balance sheets and is being amortized using the straight-line method over 40 years.
On an ongoing basis, the Company reviews goodwill and other long-lived assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. To date, no such events or changes in circumstances have occurred. If such events or changes in circumstances occur, the Company will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the asset (or acquired business) are less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped from the Company's warehouse, or upon the customer's receipt of the goods, depending upon the terms of the sale. Product sales are stated net of rebates, sales returns, and sales discounts and allowances.
INCOME TAXES
The Company records income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on the changes in the deferred tax asset or tax liability from period to period.
NET INCOME PER COMMON SHARE
Basic EPS amounts are based on the weighted-average number of shares of common stock outstanding during each year, while diluted EPS amounts are based on the weighted-average number of shares of common stock outstanding during the year and the effect of any dilutive stock options and warrants (common stock equivalents). The weighted-average number of common shares and common share equivalents outstanding for the years ended December 31, 1999, 1998 and 1997, are as follows:
The Company had additional stock options and warrants of 455,000, 492,324 and 229,324 at December 31, 1999, 1998 and 1997, respectively, which were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:
a. CURRENT ASSETS AND CURRENT LIABILITIES--The carrying amount approximates fair value due to the short maturity of these items;
b. LONG-TERM OBLIGATIONS--The fair value of the Company's long-term debt is based on secondary market indicators. Since the Company's debt is not quoted, estimates are based on each obligation's characteristics, including maturities, interest rate, credit rating, collateral, amortization schedule and liquidity. The carrying amount approximates fair value; and
c. AMOUNTS DUE TO/DUE FROM AFFILIATE--Amounts due to/due from affiliate are non-interest-bearing and do not specify maturity dates and, therefore, it is not practicable to estimate the fair value of these financial instruments.
FOREIGN CURRENCY TRANSLATION
PT Buana's financial statements have been prepared from the records maintained in the Republic of Indonesia, the country in which PT Buana was established and operates. On July 1, 1997, the Company changed its functional currency from the Indonesia rupiah to the United States dollar. This change in functional currency is primarily the result of the PT Buana operations becoming more dependent on U.S. dollar denominated transactions and economic trends. In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52"), the Company recorded a gain of $277,035 during 1997 as a component of cost of goods sold as a result of remeasuring the foreign currency of record (rupiah) into the functional currency (U.S. dollar).
Gains and losses from foreign currency transactions are included in net income in the period in which they occur. For the years ended December 31, 1999, 1998 and 1997, the foreign exchange gain (loss) included in the determination of net income is $3,563, $(30,292) and $205,457, respectively.
The Company does not use any derivative or financial instruments to manage its foreign exchange exposures. The Company is subject to foreign currency fluctuation risk in the regular course of business on sales, raw materials and fixed asset purchase transactions denominated in a foreign currency.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), related to options and warrants issued to employees and directors.
INTERNAL USE SOFTWARE COSTS
In March, 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance on the financial reporting of costs associated with purchased or developed software for internal use. As the Company has adopted the provisions of this SOP, the Company has capitalized or expensed as incurred certain of these software costs as appropriate.
2. MAJORITY SHAREHOLDER TRANSACTION
On March 31, 1998, WRP Asia entered into the following two agreements, which transferred majority ownership in the Company to WRP Asia:
a. MBf International, Ltd. ("MBf International") sold all of the Company's Series A common stock (1,252,538 shares), which was owned by MBf International, to WRP Asia for $5.00 per share for a total of $6,262,690; and
b. WRP Asia purchased 2,500,000 shares of the Company's unregistered common stock for $2.70 per share for a total of $6,750,000. The purchase price of $2.70 per share reflected a 12% discount from the average stock price over a seven consecutive business day range ended May 9, 1997, as detailed by a fairness opinion received from an independent valuation firm.
These transactions provided WRP Asia with a 55% ownership interest in the Company at March 31, 1998. At December 31, 1999, WRP Asia has a 54.2% ownership interest in the Company.
At December 31, 1998, MBf International owned 1,682,275 shares of the Company's common stock which represented a 24.4% ownership interest in the Company.
In January, 1999, MBf International sold its 1,682,275 shares to several U.S. institutional investors, thus eliminating its entire ownership interest in the Company.
WRP Asia owns one of the largest glove manufacturing plants in Malaysia and principally manufactures high quality powder-free latex exam gloves. During the years ended December 31, 1999, 1998 and 1997, total purchases of gloves from WRP Asia were $18,409,600, $18,629,717 and $11,150,721, respectively.
3. COMMON STOCK
Each share of Series A common stock is convertible into one share of the Company's common stock, $.01 par value. The Company has reserved 1,252,538 shares of common stock for issuance upon conversion of the Series A common stock. The terms of the Series A common stock are substantially the same as the Company's common stock except that Series A common stock entitles WRP Asia, the majority shareholder of the Company, to elect all Class A directors, which represent a majority of the Company's Board of Directors and to vote
with the holders of common stock as a single class with respect to any matters subject to a vote of the shareholders. (see Note 9 for further information on the Company's shareholder's equity):
4. CORPORATE DEVELOPMENT
DISTRIBUTION AGREEMENT
Effective July 12, 1995, the Company entered into a five-year distributor agreement with PIE Healthcare Products Sdn. Bhd. ("PIE") that requires the Company to purchase a certain quantity of gloves from PIE each year. The Company's net sales include glove products that are purchased under the terms of this agreement. As of December 31, 1999 the Company is in compliance with the agreement. In connection with the loss of the Novation contract as discussed in Note 16, the Company is in the process of re-negotiating the PIE contract to allow the Company to satisfy its remaining purchase obligations over a longer period of time. If the Company is unable to successfully re-negotiate the PIE contract, it may be obligated to purchase quantities of gloves in excess of customer demand or may be subject to certain penalties under the terms of the existing agreement. The potential exposure to the Company related to this matter cannot be quantified at this time.
DISCONTINUED OPERATIONS
In November, 1996, the Company reached a settlement with Playboy Enterprises, Inc. to terminate their license agreement under which the Company distributed Playboy(R) brand condoms in 15 countries. Under the negotiated agreement, until June 30, 1997, the Company continued to sell Playboy(R) condoms in the countries where it had launched the product.
In accordance with the termination agreement with Playboy Enterprises, Inc., the Company's Playboy(R) condom operations ceased on June 30, 1997. As such, the Company has accounted for the Playboy(R) condom business as a discontinued operation effective December 31, 1996. At December 31, 1999 and 1998, there were no assets or liabilities recorded which were associated with the condom discontinued operations.
Revenues from the Company's discontinued condom business were $376,422 for the year ended December 31, 1997.
During 1997, the Company revised its estimate of costs to dispose of its condom operations. This change resulted in the Company recording additional costs of $783,670 equal to $0.18 basic and diluted loss per common share for the year ended December 31, 1997.
INVESTMENT IN LSAI
During 1998, the Company liquidated its investment in Laboratory Specialists of America, Inc. ("LSAI"). The Company sold all of its remaining shares of LSAI and discounted its notes receivable from LSAI which resulted in a net gain on sales of the investments in LSAI of $168,375 in 1998. During 1997, the Company sold 68,000 shares of LSAI which resulted in a gain of $79,483.
The Company has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), which requires that equity securities that have readily determinable fair values shall be classified as
"available-for-sale" if not held for the objective of generating profits on short-term differences in price. Accordingly, the Company's common stock investment in LSAI was classified and treated as available for sale.
SFAS No. 115 further requires that unrealized holding gains and losses related to available-for-sale securities shall be excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized.
5. RELATED-PARTY TRANSACTIONS
At December 31, 1999 and 1998, amounts due from/to affiliates consist of the following:
The amount due from WRP Asia primarily represents trade receivables from WRP Asia for the sale of inventories from PT Buana to WRP Asia. The liability to WRP Asia represents amounts owed to WRP Asia primarily for inventory purchases by AHPC of latex powder-free exam gloves that are manufactured by WRP Asia. AHPC purchased virtually all of its latex powder-free exam gloves from WRP Asia in 1999 and 1998. Management believes transactions between operating segments are made at prevailing rates.
In January, 1997, the Company entered into a consulting and services agreement with Healthcare Alliance, Inc. ("Alliance"), a company 60% owned by a director of the Company. The agreement engaged Alliance to assist the Company in marketing its products with the expressed purpose of negotiating and executing a purchase agreement with various healthcare group purchasing organizations. The Company paid Alliance $66,160, $36,000 and $48,000 in the years ended December 31, 1999, 1998 and 1997, respectively, for its services.
6. TRADE NOTES PAYABLE TO BANKS
Trade notes payable to banks consist of amounts financed through letter of credit arrangements which totaled $1,328,410 and $3,322,882 at December 31, 1999 and 1998, respectively. These bank obligations are secured by the inventory and accounts receivable of AHPC.
At December 31, 1997, AHPC had letter of credit facilities with two banks. One of these banks, MBf Bank of Tonga ("MBf Bank"), was an affiliated entity and a subsidiary of MBf Holdings, the parent company of MBf International. The MBf Bank letter of credit facility was for T$ $5.75 million or approximately U.S. $4.6 million and was unsecured and guaranteed by MBf Holdings. During 1998, the MBf Bank facility was canceled and all obligations to MBf
Bank were repaid. There was no letter of credit liabilities due to MBf Bank at December 31, 1999 and 1998.
As of December 31, 1999 and 1998, the Company was contingently liable for outstanding letters of credit liabilities totaling $355,081 and $788,437, respectively.
7. NOTES PAYABLE
Notes payable and long-term debt as of December 31, 1999 and 1998, consist of the following:
The bank revolving line-of-credit agreement noted above contains covenants which require, among other things, maintenance of financial ratios and limitations on borrowings, investments and capital expenditures. As of December 31, 1999, the Company was in compliance with its covenants.
On December 1, 1998, AHPC entered into a new $10,000,000 three-year bank credit agreement through December 1, 2001. Subsequently, on March 31, 1999, the limit was increased to $15,000,000. The new credit facility includes a $15,000,000 revolving line of credit with a $11,000,000 letter of credit subfacility. The facility carries an interest rate of commercial paper plus 2.75% (8.3% at December 31, 1999). The new bank facility was used to repay all obligations under the previous bank facility.
During 1998, the Company retired all debt obligations of PT Buana. The PT Buana debt consisted of a syndicated loan facility with three Indonesian banks amounting to a total credit facility of $6.5 million. At December 31, 1997, $5,075,000 was outstanding on this debt, which was used for the purchase of assets, construction and the start-up operation of the Indonesian
factory. During September, 1998, this loan facility was paid in full and no liability existed at December 31, 1998.
PT Buana obtained a six-month bridging loan from an Indonesian bank in the amount of $2.0 million in April, 1997. PT Buana was unable to repay the loan when due in November, 1997, and a penalty interest rate of an additional 2% per month was instituted. During April, 1998, this loan was paid in full.
The principal portion of long-term debt becomes due as follows:
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
Over the last several years, numerous product liability lawsuits have been filed against suppliers and manufacturers of latex gloves alleging, among other things, adverse allergic reactions. The Company is one of numerous defendants that have been named in such lawsuits. At December 31, 1999, the Company was involved in a total of 54 lawsuits, either as a named defendant, third party defendant, or an indemnitor. During 1999, the Company fully settled one claim for a nominal sum and was dismissed from three others. Management believes all legal claims are adequately provided for, and if not provided for, are without merit, or involve such amounts that would not materially adversely affect the Company's results of operations or financial condition.
SIGNIFICANT CUSTOMERS
During the year ended December 31, 1999, two diversified distribution companies, Owens & Minor, Inc. and Sysco, accounted for 37.9% and 30.6% of net sales, respectively. These customers together accounted for 63.4% of accounts receivable at December 31, 1999. During the year ended December 31, 1998, these two customers accounted for 36.3% and 35.0% of net sales, respectively. These customers together accounted for 62.0% of accounts receivable at December 31, 1998. During the year ended December 31, 1997, these two customers accounted for 37.6% and 31.0% of net sales, respectively. These customers together accounted for 66.8% of accounts receivable at December 31, 1997.
These two distribution companies distribute the Company's products to numerous medical and food service facilities throughout the U.S. The ultimate end users of the Company's product are these various medical facilities, food service organizations and professionals who purchase the product from these distributors.
OPERATING LEASES
The Company conducts all of its operations in leased facilities. Total rent expense, net of rental income, included in the accompanying statements of income for the years ended December 31, 1999, 1998 and 1997, was $440,441, $291,685 and $296,358, respectively. The following summary presents future minimum rental payments required under the terms of present operating leases:
9. SHAREHOLDERS' EQUITY
In November, 1994, warrants were issued to purchase 7,500 shares of the Company's common stock at an exercise price of $22.20. These warrants expired in November, 1999.
In 1994, warrants to purchase 125,000 shares of the Company's common stock were issued at an exercise price of $15.00. These warrants expired in March, 1999.
A summary of warrant activity since December 31, 1997, is as follows:
At December 31, 1999, the Company had outstanding debt which is convertible at any time at the noteholder's option (see Note 7) into warrants to purchase 80,000 shares of common stock at $25.00 per share. These convertible debentures expire in November, 2001.
10. STOCK OPTION PLAN
On June 12, 1998, the Board of Directors approved an amendment and restatement of the Company's Omnibus Equity Compensation Plan (the "Plan"), which authorized and adjusted the number of shares issuable from 400,000 to 1,400,000. Effective on July 23, 1996, the Board of Directors approved the repricing of all current director and employee options to $2.75, the
closing market price on that date. A summary of options outstanding under the Plan is as follows:
The exercise price of the stock options granted in 1999, 1998 and 1997 was established at the market price on the date of the grants. Of the 483,600 options outstanding at December 31, 1999, 397,611 are currently exercisable, 61,995 become exercisable in 2000, 16,332 become exercisable in 2001 and 7,662 become exercisable in 2002. The Company has reserved common stock for issuance upon conversion of these options.
The Company accounts for employee stock options under APB Opinion 25, as permitted under generally accepted accounting principles. Accordingly, no compensation cost has been recognized in the accompanying financial statements related to these options. Had compensation costs for these options been determined consistent with SFAS No. 123, which is an accounting alternative that is permitted but not required, the Company's net income and net income per share (diluted) would have been $1,780,936, $4,560,341 and $397,292 and $0.26, $0.72 and $0.09 for 1999, 1998 and 1997, respectively.
The pro forma disclosure is not likely to be indicative of pro forma results which may be expected in future years. This primarily relates to the fact that options vest over several years and pro forma compensation cost is recognized as the options vest. Furthermore, the compensation cost is dependent on the number of options granted which may vary in future periods.
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 December 31, 1999, are as follows:
11. INCOME TAXES
The components of the Company's income tax provision (benefit) from continuing operations consisted of:
Following is a reconciliation of income tax expense (benefit) at the United States statutory tax rate to income tax expense (benefit) as reported for financial statement purposes:
The Company has net operating loss carryforwards at December 31, 1999, of approximately $1.3 million which are available to reduce federal taxable income in future periods and will begin expiring in 2004. In accordance with federal tax regulations, usage of the net operating loss carryforwards are subject to limitations in future years as a direct result of certain ownership changes that have occurred. Because of these factors, the utilization of the net operating loss at December 31, 1999 is limited.
The Company's subsidiary in Indonesia has generated tax losses in current and prior years. As a result, the Company does not have any current foreign taxes payable as of December 31, 1999, 1998 and 1997.
Significant components of the Company's deferred tax assets and liabilities are as follows:
The Company establishes valuation allowances in accordance with the provisions of SFAS 109. The Company continually reviews the adequacy of the valuation allowance and is recognizing these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest on debt outstanding for the years ended December 31, 1999, 1998 and 1997, was $690,496, $1,286,619 and $1,488,211, respectively.
Cash paid for income taxes during the years ended December 31, 1999 and 1998, was $780,000 and $1,270,000, respectively. There were no income taxes paid during 1997.
During June, 1997, PT Buana converted debt obligations, owed to its minority shareholders, to equity in the amount of $316,187.
At December 31, 1997, the Company recorded an unrealized gain in shareholders' equity on the market value of the common stock in LSAI exceeding its cost in the amount of $261,979.
The following represents significant related-party operating transactions during the years ended December 31, 1999, 1998 and 1997, which are included in the consolidated statements of cash flows as amounts due to affiliates under the cash flows from operating activities.
13. ASIAN ECONOMIC EVENTS
The Asian Pacific region is currently experiencing an economic situation that has been characterized by reduced activity, illiquidity in certain sectors, volatile foreign currency exchange rates, interest rates, and stock markets. The Company will likely be affected by the region's unstable economy and it is not possible to determine the effect a continuation of the economic crisis may have. The ultimate outcome of this matter cannot presently be determined. The financial statements do not include any adjustment that might result from these uncertainties. Related effects will be reported in the financial statements as they become known and estimable.
14. VALUATION AND QUALIFYING ACCOUNTS
The following tables summarize the activity of the allowance for doubtful accounts and the reserve for excess and obsolete inventory during the years ended December 31, 1999, 1998 and 1997:
15. SEGMENT REPORTING
The Company has two business segments: Manufacturing and Distribution. These segments are managed as separate strategic business units due to the distinct nature of their operations and customer bases. The Manufacturing Segment, which represents the operations of PT Buana, manufactures latex gloves and sells them primarily to the Company and WRP Asia. All operations of the Manufacturing Segment are located in Indonesia. The Distribution Segment involves the procurement and sale of gloves purchased from the Manufacturing Segment and other glove vendors and then sold to national and regional healthcare, food service, retail and other distributors. The Distribution Segment's significant customers include those discussed in Note 8. The operations of the Distribution Segment are located entirely within the U.S.
Accounting policies for measuring segment assets and earnings are substantially consistent with those described in Note 1. The Company evaluates segment performance based on income from continuing operations before provision for (benefit from) income taxes, minority interest and loss from discontinued operations ("Pretax income (loss)"). Management believes transactions between operating segments are made at prevailing market rates.
The following tables provide financial data for the years ended December 31, 1999, 1998 and 1997, for these segments:
16. SUBSEQUENT EVENTS
During January, 2000, Novation, a GPO associated with the Company, did not renew its contract with the Company. The Novation GPO Nova-Plus product sales totaled nearly one half of the total Company sales in 1999. The current contract expires in April, 2000. The Company is focusing on converting the end-users of the Novation GPO Nova-Plus products to the Company's own branded product label.
The Company's Board of Directors approved a change in the Company's fiscal year-end to June 30 which corresponds to the year-end of WRP Asia. The fiscal year-end change will be effective June 30, 2000.
The Company plans to repurchase up to 10% of the Company's public common stock. These purchases may be made in the open market and in block transactions over a two-year period. The program is subject to market conditions and its impact on share price as well as other investment options that the Company may consider to enhance shareholder value.