ALPHA PRO TECH LTD — Interim / Quarterly Report 1999

Nov 8, 1999

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q ------------------ Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 1999 COMMISSION FILE NO. 0-19893 ALPHA PRO TECH, LTD. (exact name of registrant as specified in its charter) DELAWARE, U.S.A. 63-1009183 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) Suite 112, 60 Centurian Drive MARKHAM, ONTARIO, CANADA L3R 9R2 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (905) 479-0654 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 3 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock , as of NOVEMBER 1, 1999 Common stock, $.01 par value..... 24,112,449 ALPHA PRO TECH, LTD.

The accompanying notes are an integral part of these consolidated financial statements. 1

The accompanying notes are an integral part of these consolidated financial statements. 2

The accompanying notes are an integral part of these consolidated financial statements. 3

The accompanying notes are an integral part of these consolidated financial statements 4 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - --------------------------------------------------------------------- 1. THE COMPANY Alpha Pro Tech, Ltd. (the Company) manufactures and distributes a variety of disposable mask, shield, shoe cover, apparel products and woundcare products. Most of the Company's disposable apparel, mask and shield products, and woundcare products are distributed to medical, dental, industrial, and clean room markets, predominantly in the United States. 2. BASIS OF PRESENTATION The accompanying financial statements are unaudited but, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 1998. There have been no significant changes since December 31, 1998 in accounting principles and practices utilized in the presentation of these financial statements. 3. INVENTORIES

5 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - --------------------------------------------------------------------- 5. BASIC AND DILUTED NET INCOME PER SHARE Net income per share "EPS" has been computed pursuant to the provisons of Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". The following table provides a reconciliation of both the net income and the number of shares used in the computations of "basic" EPS, which utilizes the weighted average number of shares outstanding without regard to potential shares, and "diluted" EPS, which includes all such shares.

1. PROVISION FOR INCOME TAX The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". This statement requires an asset and liability approach for accounting for income taxes. At December 31, 1998 the Company had net operating loss (NOL) carryforwards of approximately $5,005,000. No provision (benefit) for income taxes has been recorded in the consolidated statements of operations as a result of the Company's net operating loss carryforwards and the fact that the Company's history of recurring losses makes the realization of the benefit of such losses uncertain. 6 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ------------------------------------------------------------------------------ 7. ACTIVITY OF BUSINESS SEGMENTS The Company classifies its businesses into three fundamental segments: Apparel, consisting principally of disposable medical clothing such as coveralls, frocks, lab coats, hoods, bouffant caps, and shoe covers (including the Aqua Track and spunbond shoe covers); Mask and eye shields, consisting principally of medical , dental and industrial masks and eye shields; and Extended Care Unreal Lambskin(R), consisting principally of fleece and other related products which includes a line of pet beds. Segment data excludes charges allocated to head office and corporate sales/marketing departments. The Company evaluates the performance of its segments and allocates resources to them based primarily on net sales and gross margin. The following table shows net sales for each segment for the three and nine months ended September 30, 1999 and 1998:

A reconciliation of total segment net income to total consolidated net income for the three and nine months ended September 30, 1999 and 1998 is presented below:

7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported net income for the three months ended September 30, 1999 of $241,000 as compared to net income of $41,000 for the three months ended September 30, 1998, representing an improvement of $200,000 or 487.8%. For the nine months ended September 30, 1999 net income rose to $792,000 from $215,000 for the same period in 1998, representing an increase of $577,000 or 268.4%. The year to date net income increase of $577,000 is attributable primarily to an increase in gross profit of $472,000, a decrease in selling, general and administrative expenses of $105,000, and a decrease in net interest expense of $26,000, partially offset by an increase in depreciation and amortization of $26,000. SALES Consolidated net sales for the three months ended September 30, 1999 increased to $5,176,000 from $4,231,000 for the comparable three months in 1998, representing an increase of $945,000 or 22.3%. Net sales for the Apparel Division for the three months ended September 30, 1999 were $3,337,000 as compared to $2,646,000 for the same period of 1998. The Apparel Division sales increase of $691,000 or 26.1% was primarily due to increased sales to the Company's largest distributor. Mask and eye shield sales increased by $246,000 or 22.9% to $1,320,000 for the third quarter of 1999 from $1,074,000 in the third quarter of 1998. This increase is primarily the result of growth in industrial mask sales, partially offset by a decline of sales in the dental distributor market. Sales of mask and eye shields are expected to continue to strengthen in 1999 and 2000 with the introduction of a new line of masks and eye shields by the newly created Medical Division. Sales from the Company's Extended Care Unreal Lambskin(R) and other related products, which includes a line of pet beds, increased slightly by $8,000 or 1.6% to $519,000 in the third quarter of 1999 compared to $511,000 in the same period in 1998. The increase in sales of $8,000 is primarily the result of increases in sales of pet products, partially offset by decreased medical fleece sales. Consolidated sales were $14,888,000 and $13,674,000 for the nine months ended September 30, 1999 and 1998 respectively, representing an increase of $1,214,000 or 8.9%. Net sales for the Apparel Division for the nine months ended September 30, 1999 were $9,537,000 as compared to $8,997,000 for the same period of 1998, an increase of 6.0% which is primarily due to increased sales to the Company's largest distributor. The Company's largest distributor has seen sales increases for five consecutive quarters. The expectation is that growth should continue, and as a result the Company's sales to this distributor should also remain strong. Mask and eye shield sales increased by $579,000 or 18.5% to $3,715,000 for the nine months ended September 30, 1999 from $3,136,000 in the same period of 1998. The increase is primarily the result of an improvement in industrial mask sales, partially offset by decreases in dental mask sales. Sales from the Company's Extended Care Unreal Lambskin(R) and other related products increased by $95,000 or 6.2% to $1,636,000 for the nine months ended September 30, 1999 compared to $1,541,000 in the same period in 1998. The increase in sales is the result of increases in medical and consumer fleece sales. 8 COST OF GOODS SOLD Cost of goods sold increased to $3,247,000 for the three months ended September 30,1999 from $2,534,000 for the same period in 1998. As a percentage of net sales, cost of goods sold increased to 62.7% in 1999 from 59.9% in 1998. Gross profit margin decreased to 37.3% for the three months ended September 30, 1999 from 40.1% for the same period in 1998. For the nine months ended September 30, 1999 as compared to 1998, cost of goods sold increased to $9,006,000 from $8,264,000. As a percentage of net sales for the nine months, cost of goods remained constant at 60.5% from 60.4%. Therefore, gross profit margin also remained constant at 39.5% from 39.6% for the nine months ended September 30, 1999 and 1998, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased by $25,000 to $1,537,000 for the three months ended September 30, 1999 from $1,512,000 for the three months ended September 30, 1998. The increase in selling, general and administrative expenses primarily consists of increased payroll related costs of $85,000; increased professional fees of $68,000; increased factory expenses of $15,000; partially offset by decreased marketing, commissions and travel expenses of $129,000; decreased public company expenses of $13,000, including investor relations, options/warrants issued for services, annual report and annual meeting costs, stock transfer costs, and costs associated with SEC reporting requirements. As a percentage of net sales, selling, general and administrative expenses decreased to 29.7% in the third quarter of 1999 from 35.7% in the same period of 1998. For the third consecutive quarter, selling, general and administrative expenses have decreased as a percentage of net sales. Selling, general and administrative expenses decreased by $105,000 or 2.2%, to $4,643,000 for the nine months ended September 30, 1999 from $4,748,000 for the nine months ended September 30, 1998. The decrease in selling, general and administrative expenses primarily consists of decreased public company expenses of $108,000, including investor relations, options/warrants issued for services, annual report and annual meeting costs, stock transfer costs, and costs associated with SEC reporting requirements; decreased telecommunications expense of $27,000 and decreased marketing, commissions and travel expenses of $272,000; partially offset by increased payroll related costs of $149,000; increased professional fee expenses of $58,000; and increased insurance, general office and factory expenses of $82,000. As a percentage of net sales, selling, general and administrative expenses decreased to 31.2% in the nine months ended September 30, 1999 from 34.7% in the same period of 1998. Management expects selling, general and administrative expenses as a percentage of net sales to decrease as sales increase. DEPRECIATION & AMORTIZATION Depreciation and amortization expense increased by $8,000 to $110,000 for the three months ended September 30, 1999 from $102,000 for the same period in 1998 and increased by $26,000 to $326,000 from $300,000 for the nine months ended September 30, 1999 compared to 1998. This increase is primarily attributable to an increase in the purchase of equipment through capital leases. INCOME FROM OPERATIONS Income from operations increased by $199,000 to $282,000 for the three months ended September 30, 1999 as compared to income from operations of $83,000 for the three months ended September 30, 1998. The increase in income from operations is due to an increase in gross profit of $232,000, partially offset by an increase in selling, general and administrative expenses of $25,000 and an increase in depreciation and amortization of $8,000. Income from operations increased by $551,000 to $913,000 for the nine months ended September 30, 1999 as compared to income from operations of $362,000 for the nine months ended September 30, 1998. The increase in income from operations is due to an increase in gross profit of $472,000, and a decrease in selling, general and administrative expenses of $105,000, partially offset by an increase in depreciation and amortization expense of $26,000. 9 NET INTEREST Net interest expense decreased by $1,000 or 2.4% to $41,000 for the three months ended September 30, 1999 from $42,000 for the three months ended September 30, 1998. Net interest expense decreased by $26,000 or 17.7% to $121,000 for the nine months ended September 30, 1999 from $147,000 for the nine months ended September 30, 1998. NET INCOME Net income for the three months ended September 30, 1999 was $241,000 compared to net income of $41,000 for the three months ended September 30, 1998, an improvement of $200,000 or 487.8% . The net income increase of $200,000 is comprised of an increase in income from operations of $199,000 and a decrease in interest expense of $1,000. Net income for the nine months ended September 30, 1999 was $792,000 compared to net income of $215,000 for the nine months ended September 30, 1998, an improvement of $577,000 or 268.4%. The net income increase of $577,000 is comprised of an increase in income from operations of $551,000 and a decrease in interest expense of $26,000. The Company does not have any pension, profit sharing or similar plans established for its employees, however, the chief executive officer and president are entitled to a combined bonus equal to 10% of the pre-tax profits of the company. A bonus of $88,000 has been accrued in 1999. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, the Company had cash of $613,000 and working capital of $4,219,000. During the nine months ended September 30, 1999, cash increased by $570,000 and accounts payable and accrued liabilities increased by $762,000. The Company currently has an asset based lender's line of credit of up to $2,500,000 and a term note of $400,000 which expires in December 2000. At September 30, 1999, the unused and available line of credit was $924,000. Net cash provided by operations was $840,000 for the nine months ended September 30, 1999 compared to net cash provided by operations of $221,000 for the same period of 1998. The Company's generation of cash from operations for the nine months ended September 30, 1999 is due primarily to net income before depreciation and amortization, and increases in accounts payable and accrued liabilities, partially offset by increases in accounts receivable, inventory, restricted cash and in prepaid expenses and other assets. The Company's investing activities have consisted primarily of expenditures for fixed assets of $385,000 and increases in intangible assets of $20,000. The Company anticipates that its mask manufacturing capabilities are to be further improved in 1999 at an estimated cost of $100,000. Depending on the success of the automated shoe cover approximately $350,000 of additional equipment could be required to expand the manufacturing capacity. The Company intends to lease equipment whenever possible. During the nine months ended September 30, 1999, the Company's cash provided by financing activities resulted primarily from net proceeds from the asset based loan of $226,000 and decreases in capital leases of $56,000. The Company believes that cash generated from operations, its current cash balance, and the funds available under its asset based borrowings will be sufficient to satisfy the Company's projected working capital and planned capital expenditures for at least 12 months. 10 YEAR 2000 COMPLIANCE The Year 2000 problem concerns the inability of computer systems, equipment or software to properly recognize and process date-sensitive information beyond January 1, 2000. The Company has assessed its Year 2000 risk in three categories: application software and computer equipment, other general business equipment, and compliance by suppliers. APPLICATION SOFTWARE AND COMPUTER EQUIPMENT The company believes that it has identified substantially all of the major computer equipment, software applications and related equipment used in its internal operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption to its business operations. The Company has completed the process of modifying, upgrading and replacing major computer related systems that have been identified as non-compliant. The Company has purchased and implemented a Year 2000 compliant upgrade to its financial accounting software at a cost of less than $20,000. This system upgrade is considered to be critical to continuing operations into the new millenium. The Company does not anticipant any problems with application software and computer equipment. OTHER GENERAL BUSINESS EQUIPMENT In addition to computers and related systems, the operation of office equipment, such as fax machines, photocopiers, telephone systems and other business equipment may be affected by the Year 2000 problem. The Company's has completed substantially all remediation and replacement of general business equipment. Management does not anticipate any material adverse effect on the Company's business or operational results related to its general business equipment. COMPLIANCE BY SUPPLIERS The Company has received written communications from the majority of its critical external suppliers and has determined the status of their efforts to become Year 2000 compliant. The extent to which the Company is vulnerable as a result of potential supplier non-compliance appears to be limited. The Company expects to complete this process by November 1999. To the extent that supplier responses to Year 2000 readiness surveys are unsatisfactory, the Company intends to change suppliers to those who have demonstrated Year 2000 readiness. However, there can be no assurance that the Company will be successful in finding such alternatives. Management believes that the Company has and is devoting the necessary resources to identify and resolve any significant Year 2000 issues in a timely manner. The Company does not foresee significant risks associated with its Year 2000 compliance at this time. The total cost of the Year 2000 project is expected to be less than $50,000. The Company has not developed a comprehensive contingency plan. However, the Company will continue to monitor the need for such a plan based upon the results of the aforementioned Year 2000 assessments. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking information made on behalf of the Company. All statements, other than statements of historical facts which address the Company's expectations of sources of capital or which express the Company's expectations for the future with respect to financial performance or operating strategies, including statements with respect to year 2000 compliance, can be identified as forward-looking statements. Such statements made by the Company are based on knowledge of the environment in which it operates, but because of the factors previously listed, as well as other factors beyond the control of the Company, actual results may differ materially from the expectations expressed in the forward-looking statements. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has dult caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Alpha Pro Tech, Ltd. DATE: NOVEMBER 5, 1999 BY: /s/ SHELDON HOFFMAN ------------------------- SHELDON HOFFMAN CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER PRINCIPAL FINANCIAL OFFICER 12