ALPHA PRO TECH LTD — Interim / Quarterly Report 1999

May 14, 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 March 31, 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 May 7, 1999 Common stock, $.01 par value..... 24,112,449 Alpha Pro Tech, Ltd. Table of Contents PART I. FINANCIAL INFORMATION ITEM 1 Consolidated Financial Statements (Unaudited) Page No. a) Consolidated Balance Sheet - March 31, 1999 (unaudited) and December 31, 1998 1 b) Consolidated Statement of Operations for the three months ended March 31, 1999 and March 31, 1998 (unaudited) 2 c) Consolidated Statement of Shareholder's Equity for the three months ended March 31, 1999 (unaudited) 3 d) Consolidated Statement of Cash Flows for the three months ended March 31, 1999 and March 31, 1998 (unaudited) 4 e) Notes to Consolidated Financial Statements 5-7 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 SIGNATURES 12 Alpha Pro Tech, Ltd. Consolidated Balance Sheet - --------------------------------------------------------------------------------

1 Alpha Pro Tech, Ltd. Consolidated Statement of Operations (Unaudited) - --------------------------------------------------------------------------------

2 Alpha Pro Tech, Ltd. Consolidated Statement of Shareholders' Equity (Unaudited) - --------------------------------------------------------------------------------

3 Alpha Pro Tech, Ltd. Consolidated Statement of Cash Flows (Unaudited) - -------------------------------------------------------------------------------- For the three months ended March 31, 1999 1998 Cash Flows From Operating Activities: Net income $ 272,000 $ 83,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 107,000 98,000 Changes in assets and liabilities: Restricted cash (1,000) 4,000 Accounts receivable (171,000) (113,000) Inventories (449,000) 29,000 Prepaid expenses and other assets 6,000 59,000 Accounts payable and accrued liabilities 421,000 (472,000) --------- --------- Net cash provided by (used in) operating activities: 185,000 (312,000) --------- --------- Cash Flows From Investing Activities: Purchase of property and equipment (68,000) (128,000) cost of intangible assets (7,000) (15,000) --------- --------- Net cash used in investing activities (75,000) (143,000) --------- --------- Cash Flows From Financing Activities: Net proceeds from loans payable 237,000 247,000 Net (payments) proceeds on capital leases (27,000) 20,000 --------- --------- Net cash provided by financing activities 210,000 267,000 --------- --------- Increase (decrease) in cash during the period 320,000 (188,000) Cash, beginning of period $ 43,000 $ 490,000 Cash, end of period $ 363,000 $ 302,000 --------- --------- 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 unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for the fair presentation of the financial position of the Company as of March 31, 1999 and the results of its operations and cash flows for the three months ended March 31, 1999 and 1998, in conformity with generally accepted acccounting principles for interim financial statements. All such adjustments made are of a normal recurring nature. 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 March 31, December 31, 1999 1998 Raw materials $1,836,000 $1,699,000 Work in process 275,000 95,000 Finished goods 1,337,000 1,205,000 ---------- ---------- $3,448,000 $2,999,000 ========== ========== 4. Accrued Liabilities March 31, December 31, 1999 1998 Professional fees $ 134,000 $ 105,000 Payroll and payroll taxes 195,000 122,000 Other 163,000 247,000 ---------- ---------- $ 492,000 $ 474,000 ========== ========== 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 In 1998 the Company adopted Statement of Fianancial Accounting Standards No. 131 (SFAS 131) "Disclosures About Segments of an Enterprise and Related Information". In accordance with SFAS 131, the prior year's segment information has been restated to present comparable information concerning the Company's reportable 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 spunbound 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 months ended March 31, 1999 and 1998: For the three months ended March 31, 1999 March 31, 1998 Apparel $2,703,000 $3,160,000 Mask and shield 1,127,000 995,000 Fleece 659,000 587,000 ---------- ---------- Consolidated sales $4,489,000 $4,742,000 ========== ========== A reconciliation of total segment net income to total consolidated net income for the three months ended March 31, 1999 and 1998 is presented below: For the three months ended March 31, 1999 March 31, 1998 Apparel $ 508,000 $ 502,000 Mask and shield 152,000 (48,000) Fleece 160,000 181,000 ---------- ---------- Total segment net income 820,000 635,000 Unallocated corporate overhead expenses (548,000) (552,000) ---------- ---------- Consolidated net income $ 272,000 $ 83,000 ========== ========== 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal 1999 compared to Fiscal 1998 Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported net income for the three months ended March 31, 1999 of $272,000 as compared to net income of $83,000 for the three months ended March 31, 1998, representing an improvement of $189,000 or 227.7%. The net income increase is attributable primarily to a decrease in selling, general and administrative expenses and a decrease in net interest expense. Sales Consolidated net sales for the three months ended March 31, 1999 decreased to $4,489,000 from $4,742,000 for the comparable three months in 1998, representing a decrease of $253,000 or 5.3%. Net sales for the Apparel Division for the three months ended March 31, 1999 were $2,703,000 as compared to $3,160,000 for the same period of 1998. The Apparel Division sales decrease of $457,000 or 14.5% was primarily due to decreased sales to the Company's largest distributor in the first two months of 1999. Sales have strengthened since and are expected to stay strong for the balance of 1999. Mask and eye shield sales increased by $132,000 or 13.3% to $1,127,000 for the first quarter of 1999 from $995,000 in the first quarter of 1998. This increase is primarily the result of an improvement in medical & industrial mask sales, partially offset by decreases in dental mask sales. Sales of mask and eye shields should continue to strengthen in 1999 with the introduction of the Medical Division and the introduction of a new line of masks and eye shields. Sales from the Company's Extended Care Unreal Lambskin(R) and other related products, which includes a line of pet beds, increased by $72,000 or 12.3% to $659,000 in the first quarter of 1999 compared to $587,000 in the same period in 1998. The increase in sales of $72,000 is primarily the result of increases in medical fleece sales of $221,000. Cost of Goods Sold Cost of goods sold decreased to $2,596,000 for the three months ended March 31,1999 from $2,846,000 for the same period in 1998. As a percentage of net sales, cost of goods sold decreased to 57.8% in 1999 from 60.0% in 1998. Gross profit margin increased to 42.2% for the three months ended March 31, 1999 from 40.0% for the same period in 1998. The improvement in gross profit margin to 42.2% from 40.0% is a result of the Company's strategic emphasis on developing innovative products, especially for its largest customer, and improved manufacturing processes and efficiency. Management expects gross profit margin to continue to remain strong, but there can be no assurance that the Company's margin improvements will be sustained. 8 Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by $188,000 to $1,473,000 for the three months ended March 31, 1999 from $1,661,000 for the three months ended March 31, 1998. As a percentage of net sales, selling, general and administrative expenses decreased to 32.8% in 1999 from 35.0% in 1998. The decrease in selling, general and administrative expenses primarily consists of decreased public company expenses of $63,000, 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 professional fee expenses of $28,000; decreased general office and factory expenses of $19,000; decreased marketing, commissions and travel expenses of $86,000; and decreased telecommunications expense of $18,000; partially offset by increased payroll related costs of $20,000. 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 $9,000 to $107,000 for the three months ended March 31, 1999 from $98,000 for the same period in 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 $176,000 to $313,000 for the three months ended March 31, 1999 as compared to income from operations of $137,000 for the three months ended March 31, 1998. The increase in income from operations is due to a a decrease in selling, general and administrative expenses of $188,000, partially offset by a decrease in gross profit of $3,000 and an increase in depreciation and amortization of $9,000. Net Interest Net Interest expense decreased by $13,000 or 24.1% to $41,000 for the three months ended March 31, 1999 from $54,000 for the three months ended March 31, 1998. The decrease in net interest expense is due to a decrease in required borrowings offset by decreases in interest income. Interest income decreased by $4,000 to $8,000 for the three months ended March 31, 1999 from $12,000 in the same period in 1998. Net Income Net income for the three months ended March 31, 1999 was $272,000 compared to net income of $83,000 for the three months ended March 31, 1998, an improvement of $189,000 or 227.7% . The net income increase of $189,000 is comprised of an increase in income from operations of $176,000 and a decrease in interest expense of $13,000. 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 $30,000 has been accrued in 1999. 9 LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1999, the Company had cash of $363,000 and working capital of $3,908,000. During the three months ended March 31, 1999, cash increased by $320,000 and accounts payable and accrued liabilities increased by $421,000. 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 March 31, 1999, the unused and available line of credit was $1,055,000. Net cash provided by operations was $185,000 for the three months ended March 31, 1999 compared to net cash used in operations of $312,000 for the same period of 1998. The Company's generation of cash from operations for the three months ended March 31, 1999 is due primarily to net income before depreciation and amortization, increases in accounts payable and accrued liabilities and decreases in prepaid expenses and other assets, partially offset by increases in accounts receivable, inventory and restricted cash. The Company's investing activities have consisted primarily of expenditures for fixed assets of $68,000 and increases in intangible assets of $7,000, for a total of $75,000 for the three months ended March 31, 1999. The Company anticipates that its mask manufacturing capabilities are to be further improved in 1999 at an estimated cost of $150,000. Depending on the success of the automated shoe cover approximately $350,000 of additional equipment could be required. The Company intends to lease equipment whenever possible. During the three months ended March 31, 1999, the Company's cash provided by financing activities resulted primarily from net proceeds from the asset based loan of $237,000 and decreases in capital leases of $27,000. 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. NEW ACCOUNTING STANDARDS The Company has adopted SFAS 131 "Disclosures About Segments of an Enterprise and Related Information." The new standard became effective for the Company for the year ended December 31, 1998 and requires that comparative information from earlier periods be restated to conform to its requirements. SFAS 131 establishes standards for disclosures about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. See Note 7 of the Notes to Consolidated financial statements. 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 commenced the process of modifying, upgrading and replacing major computer related systems that have been identified as potentially non-compliant and expects to complete this process by June 1999. 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. OTHER GENERAL BUSINESS EQUIPMENT In additon 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 objective is to complete substantially all remediation and replacement of general business equipment by June 1999. 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 is initiating communications with critical external suppliers to determine the status of their efforts to become Year 2000 compliant and to determine the extent to which the Company is vulnerable as a result of potential supplier non-compliance. Evaluations of critical suppliers will be followed by the development of contingency plans. 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: May 12, 1999 BY: Sheldon Hoffman ------------ ------------------------------ SHELDON HOFFMAN CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER PRINCIPAL FINANCIAL OFFICER 12