ALPHA PRO TECH LTD — Interim / Quarterly Report 2000

May 1, 2000

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, 2000 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 APRIL 24, 2000 Common stock, $.01 par value..... 24,218,616 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, 2000 (unaudited) and December 31, 1999 1 b) Consolidated Statement of Operations for the three months ended March 31, 2000 and March 31, 1999 (unaudited) 2 c) Consolidated Statement of Shareholder's Equity for the three months ended March 31, 2000 (unaudited) 3 d) Consolidated Statement of Cash Flows for the three months ended March 31, 2000 and March 31, 1999 (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 - --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements. 1 Alpha Pro Tech, Ltd. Consolidated Statement of Operations (Unaudited) - --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements 2 ALPHA PRO TECH, LTD. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) - --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements 3 ALPHA PRO TECH, LTD. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------

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, 1999. There have been no significant changes since December 31, 1999 in accounting principles and practices utilized in the presentation of these financial statements. 3. INVENTORIES

1. ACCRUED LIABILITIES

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, 1999 the Company had net operating loss (NOL) carryforwards of approximately $3,402,000. 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. Taxable income for the period ended March 31, 2000 will be offset by the utilization of such NOL's. The Company will continue to assess the valuation allowance on a quarterly basis. 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 ended March 31, 2000 and 1999:

A reconciliation of total segment net income to total consolidated net income for the three months ended March 31, 2000 and 1999 is presented below:

7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported net income for the three months ended March 31, 2000 of $412,000 as compared to net income of $272,000 for the three months ended March 31, 1999, representing an improvement of $140,000 or 51.5%. The net income increase of $140,000 is attributable primarily to an increase in gross profit of $159,000, due to a 10.0% increase in sales, a decrease in depreciation and amortization of $5,000, and a decrease in net interest expense of $53,000, partially offset by an increase in selling, general and administrative expenses of $77,000. Management expects strong sales and net income in 2000. SALES Consolidated net sales for the three months ended March 31, 2000 increased to $4,940,000 from $4,489,000 for the three months ended March 31, 1999, representing an increase of $451,000 or 10.0%. Net sales for the Apparel Division for the three months ended March 31, 2000 were $2,854,000 as compared to $2,703,000 for the same period of 1999. The Apparel Division sales increase of $151,000 or 5.6% was due to increased sales to the Company's largest distributor. This distributor has reported sales increases of the Company's products for six consecutive quarters. Management's 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 $323,000 or 28.7% to $1,450,000 for the first quarter of 2000 from $1,127,000 in the first quarter of 1999. This increase is primarily the result of significant growth in industrial mask sales, and to a lesser extent dental medical mask sales, partially offset by a decline in medical mask & shield sales. The industrial mask sales increase is primarily the result of sales to the Company's largest distributor. Sales from the Company's Extended Care Unreal Lambskin(R) and other related products, which includes a line of pet beds, decreased slightly by $23,000 or 3.5% to $636,000 in the first quarter of 2000 compared to $659,000 in the same period in 1999. The slight decrease in sales of $23,000 is primarily the result of decreased medical fleece sales partially offset by increased pet product sales. In 1999, the Company implemented a pet products telemarketing campaign and feels that sales should strengthen in 2000 as a result. Management believes that the Company is well positioned to continue to grow revenue in its current markets as well as the new Food Service market. The Company has recently signed a Vendor Supply Agreement with McDonald's Corporation to market its line of proprietary Food Service Safety Products to the McDonald's system of more than 25,000 restaurants in 119 countries worldwide. To formally launch this program, the Company displayed its products at McDonald's Worldwide Convention in Orlando, Florida on April 16-18. Based on the positive response at the Convention, the future growth of the Food Service product line appears to be very optimistic. The Company has also been invited to display its products at a series of McDonald's ROA meeting to be held throughout the remainder of 2000. 8 COST OF GOODS SOLD Cost of goods sold increased to $2,888,000 for the three months ended March 31,1999 from $2,596,000 for the same period in 1999. As a percentage of net sales, cost of goods sold increased to 58.5% in 2000 from 57.8% in 1999. Gross profit margin decreased to 41.5% for the three months ended March 31, 2000 from 42.2% for the same period in 1999. Although gross profit margin declined in the first quarter 2000 as compared to the same period of 1999, management expects gross profit margin for fiscal 2000 to be stronger than fiscal 1999, due to a continuing focus on improving manufacturing processes and efficiency. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased by $77,000 to $1,550,000 for the three months ended March 31, 2000 from $1,473,000 for the three months ended March 31, 1999. As a percentage of net sales, selling, general and administrative expenses decreased to 31.4% in 2000 from 32.8% in 1999. The increase in selling, general and administrative expenses primarily consists of increased payroll related costs of $125,000; increased travel expenses of $24,000; increased factory expenses of $18,000 and increased public company expenses of $11,000, including investor relations, warrants issued for services, annual report and annual meeting costs, stock transfer costs, and costs associated with SEC reporting requirements. This is partially offset by decreased marketing and commissions of $16,000; decreased rent of $8,000 and decreased general & office expenses of $71,000. Management expects selling, general and administrative expenses as a percentage of net sales to decrease as sales increase. DEPRECIATION & AMORTIZATION Depreciation and amortization expense decreased by $5,000 to $102,000 for the three months ended March 31, 2000 from $107,000 for the same period in 1999. This decrease is primarily attributable to assets in the mask division being fully depreciated. INCOME FROM OPERATIONS Income from operations increased by $87,000 or 27.8%, to $400,000 for the three months ended March 31, 2000 as compared to income from operations of $313,000 for the three months ended March 31, 1999. The increase in income from operations is due to an increase in gross profit of $159,000, a decrease in depreciation and amortization of $5,000, partially offset by a modest increase in selling, general and administrative expenses of $77,000. NET INTEREST Net interest expense decreased by $53,000, to net interest income of $12,000 for the three months ended March 31, 2000 from net interest expense of $41,000 for the three months ended March 31, 1999. The decrease in net interest expense is due to lower borrowings, decreased interest on capital leases and increased interest income. Interest income increased by $32,000, to $40,000 for the three months ended March 31, 2000 from $8,000 in the same period. NET INCOME Net income for the three months ended March 31, 2000 was $412,000 compared to net income of $272,000 for the three months ended March 31, 1999, an improvement of $140,000 or 51.5%. The net income increase of $140,000 is comprised of an increase in income from operations of $87,000 and a decrease in interest expense of $53,000. 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 $46,000 has been accrued in 2000 as compared to $30,000 in 1999. 9 LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2000, the Company had cash of $1,182,000 and working capital of $5,096,000. During the three months ended March 31, 2000, cash increased by $397,000 and accounts payable and accrued liabilities increased by $61,000. The increase in the Company's cash is primarily due to net income, the exercise of options and an increase in borrowings from its asset-based lender, partially offset by increases in accounts receivable and inventory. 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 that expires in December 2001. At March 31, 2000, the unused line of credit from its asset-based lender was $1,036,000. Net cash used in operations was $58,000 for the three months ended March 31, 2000 compared to net cash provided from operations of $185,000 for the same period of 1999. The Company's use of cash from operations of $58,000 for the three months ended March 31, 2000 is due primarily to increases in accounts receivable and inventory partially offset by net income, a decrease in restricted cash, an increase in accounts payable and accrued liabilities and a decrease in prepaid expenses and other assets. The Company's investing activities have consisted primarily of expenditures for fixed assets of $72,000 and increases in intangible assets of $6,000 for a total of $78,000 for the three months ended March 31, 1999. The Company anticipates that its mask manufacturing capabilities are to be further improved in 2000 at an estimated cost of $150,000. Based on strong continuing demand for shoecovers, the Company expects to spend approximately $300,000 to develop an extrusion coating machine and approximately $200,000 on automated shoecover equipment. The Company intends to lease equipment whenever possible. During the three months ended March 31, 2000, the Company's cash provided by financing resulted primarily from net increases in the asset-based loan of $480,000, decreases in capital leases of $34,000, proceeds of $168,000 from the exercise of 180,167 options of the Company's common shares and a buy-back of 30,000 of the Company's common shares at a cost of $81,000. The Company announced in December 1999 that it was authorized to buy-back up to $500,000 of its own shares. As of March 31, 2000, the Company has bought back 62,500 common shares at a cost of $106,000. 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 CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q contains forward looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements, annual reports and other periodic reports and filings of the Company filed with the Securities and Exchange Commission. 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, can be identified as forward-looking statements. As a result, there can be no assurance that the Company's future results will not be materially different from those described herein as "believed," "anticipated," "estimated" or "expected," which reflect the current views of the Company with respect to future events. We caution readers that these forward-looking statements speak only as the date hereof. The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which such statement is based. 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: APRIL 24, 2000 BY: SHELDON HOFFMAN -------------------- ----------------------- SHELDON HOFFMAN CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER PRINCIPAL FINANCIAL OFFICER 12