SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
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Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1993
ALPHA PRO TECH, LTD.
(Exact name of registrant as specified in its charter)
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Delaware 3842 63-1009183
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
Alpha Pro Tech, Ltd. Sheldon Hoffman, CEO
Suite 112, 60 Centurian Drive Suite 112, 60 Centurian Drive
Markham, Ontario L34 9R2 Markham, Ontario L3R 9R2
(905) 479-0654 (905) 479-0654
(Name, address, including zip (Name, address, including zip
code and telephone number, code, telephone number,
including area code, of including area code, of agent
registrant's principal for service)
executive office)
Copy to:
Peter Landau, Esq.
Opton Handler Gottlieb Feiler & Katz
52 Vanderbilt Avenue, New York, NY 10017
Approximate date of commencement of proposed sale to public as soon as
practicable after effective date of Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class Aggregate Aggregate Amount of
of Securities to be Amount to be Offering Offering Registration
Registered Registered (1) Price Per Share Price Fee
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<S> <C> <C> <C> <C>
Common Stock 300,000 Shares $1.55 $ 465,000 $ 160.33
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Common Stock Issuable
Upon Exercise of 630,000 Shares (2) $1.55 (1) $ 976,500 $ 336.70
Stock Options
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TOTAL $ 497.03
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 (c) on the basis of the average of the high and low
closing sale price on April 24, 1997 in the over-the-counter market as
reported by the NASD, a date within five business days of the date of
filing of this Registration Statement.
(2) Pursuant to Rule 416, there are also being registered an indeterminate
number of shares of the Registrant's Common Stock which may become issuable
pursuant to the antidilution provisions of the various options and
warrants.
The registrant hereby amends the Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
* This Registration Statement also serves as a Post-Effective Amendment to
Registrant's Registration Statement No. 33-93894 filed on June 22, 1995,
relating to shares of Common Stock to be sold for the accounts of Selling
Stockholders of Registrant.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K and Rule 404(a)
Item No. and Heading in Form S-1 Caption or Location in Prospectus
Registration Statement
1. Forepart of the Registration Forepart of the Registration Statement
Statement and Outside Front Cover Outside of Front Cover Page of
Page of Prospectus Prospectus
2. Inside Front and Outside Back Inside Front and Outside pages of
Cover Pages of Prospectus Prospectus and Outside Back Cover
Prospectus
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings to Fixed Charges
4. Use of Proceeds
5. Determination of Offering Outside front Cover Page of Prospectus;
Price Plan of Distribution
6. Dilution Dilution
7. Selling Security Holders Outside Front Cover Page of Prospectus;
Selling Stockholders
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Plan of Distribution
9. Description of Securities Description of Securities
to be Registered
10. Interests of Named Experts and *
Counsel
11. Information with Respect Cover Page of Prospectus, Prospectus
to the Registrant Summary; The Company; Risk Factors;
Price Range of Securities; Dividend
Policy; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Principal Shareholders; Certain
Transactions; Legal Proceedings; Legal
Matters; Financial Statements
12. Disclosure of Commission *
Position on Indemnification for Securities Acts Liabilities
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* Omitted because answer is negative or item is otherwise not applicable.
<PAGE>
PROSPECTUS Subject to completion
dated April 30, 1997
AlphaProTech, Ltd.
3,626,935 Shares of Common Stock
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All of the shares (collectively, the "Shares") of Alpha Pro Tech, Ltd. (the
"Company") offered hereby are to be sold for the accounts of the selling
stockholders set forth herein (the "Selling Stockholders"). The Company has
registered the Shares, at its expense, pursuant to certain registration rights,
and other contractual obligations incurred by the Company in connection with the
original issuance of such Shares. The Company will not receive any of the
proceeds from the sale of the Shares by the Selling Stockholders. The Company
will receive the exercise prices with respect to the exercise of any of the
warrants (the "Warrants") and certain stock options ("Options") described
herein. The Company estimates that its expenses will be approximately $43,000 in
connection with the offering (the "Offering") of the Shares. See "Selling
Stockholders" and "Plan of Distribution".
Of the 3,626,935 shares of the Common Stock, Par Value $ .01, Per share
(the "Common Stock"), being offered hereby, 252,381 shares of Common Stock are
to be issued from time to time upon the exercise of certain Warrants described
herein and 810,000 shares of Common Stock are to be issued from time to time
upon the exercise of certain stock Options. Of the 2,564,554 remaining shares
being offered hereby, 692,554 shares were issued in connection with private
placements, 1,677,000 shares were issued in connection with the settlement of
certain debt obligations of the Company, under Section 4(2) of the Securities
Act of 1933, as amended and 195,000 shares were issued in connection with the
exercise of consultants options. See "The Company -- Selling Stockholders" and
"Recent Developments".
The Selling Stockholders may sell the Shares to or through underwriters,
and also may sell the Shares directly to other purchasers or through agents from
time to time in the over-the-counter market at prevailing prices in such market.
See "Plan of Distribution".
The Common Stock of the Company is traded on the National Association of
Securities Dealers' (NASD) Over the Counter (OTC) Bulletin Board under the
symbol "APTD".
On April 24, 1997 the average of the last reported bid and asked prices of
the Company's Common Stock in the over-the-counter market as reported by NASD
was $ 1.55.
INVESTMENT IN THE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS".
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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The date of this Prospectus is April __, 1997
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<PAGE>
TABLE OF CONTENTS
PAGE
----
Available Information ................................................... 3
Additional Information .................................................. 3
Prospectus Summary ...................................................... 4
Summary Financial Data .................................................. 6
Risk Factors ............................................................ 7
The Company ............................................................. 11
Recent Developments ..................................................... 12
Use of Proceeds ......................................................... 19
Dividend Policy ......................................................... 19
Capitalization .......................................................... 19
Dilution ................................................................ 20
Price Range of Securities ............................................... 20
Selected Financial Data ................................................. 21a
Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................... 22
Business ................................................................ 28
Management .............................................................. 34
Principal Stockholders .................................................. 36
Executive Compensation .................................................. 38
Certain Transactions .................................................... 43
Selling Stockholders .................................................... 46
Plan of Distribution .................................................... 48
Description of Securities ............................................... 49
Taxation ................................................................ 51
Legal Proceedings ....................................................... 52
Legal Matters ........................................................... 53
Experts ................................................................. 53
Index to Financial Statements ........................................... F-1
Consolidated Financial Statements ....................................... F-3
For the three years ended December 31, 1996
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
accordingly, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission are available for
inspection and copying at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at Citicorp Center, 500 W. Madison
Street, Suite 1400 Chicago, Illinois 60661-2511, at 75 Park Place, New York, New
York 10007, and at 5757 Wilshire Boulevard, Los Angeles, California 90024.
Copies of such material also may be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington D.C.
20549 at prescribed rates and are also available on the Commission's web site at
http://www.sec.gov.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement with the Commission under
the Securities Act with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and in the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to such Registration Statement and to the exhibits and
schedules thereto.
The Registration Statement and any amendments thereto, including exhibits
filed as a part thereof, are available for inspection and copying as set forth
above.
The Company distributes annual reports containing audited financial
statements to its stockholders.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offering herein contained, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy by any person in any jurisdiction in which it is
unlawful for such person to make such an offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that the information contained herein is correct as of any
date subsequent to the date hereof.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements contained elsewhere in this
Prospectus. Investors should carefully consider information set forth under the
heading "Risk Factors."
THE COMPANY
The Company develops, manufactures and markets disposable protective
apparel, food industry, infection control, wound care and consumer products for
the cleanroom, food services, industrial, medical, dental and consumer markets.
The Company operates through four divisions: apparel; food industry; mask and
shield; and wound care. The Company's products are primarily sold under the
"Alpha Pro Tech" brand names but are also sold for use under private label.
The Company's products are classified into five groups: Disposable
protective apparel consisting of a complete line of shoecovers, headcovers,
gowns, coveralls and labcoats; food industry apparel consisting of a line of
automated shoecovers, sleeve protectors, aprons, coveralls and bus boy jackets;
Infection control products consisting of a line of facial masks and facial
shields; wound care products consisting of a line of mattress overlays,
wheelchair covers, geriatric chair surfaces, operating room table surfaces and
pediatric surfaces; consumer products consisting of a line of pet bedding and
pet toys.
The Company's strategy is to grow its cleanroom division through its
exclusive Agreement with VWR Scientific Products ("VWR") (formerly Baxter
Scientific), by increasing its manufacturing capabilities to meet VWR's needs.
The Company entered into an exclusive distribution agreement with a major
supplier to the food industry to launch a line of innovative new products to
help solve a major problem in the food industry: accidents that occur because of
employees slipping and falling on wet slippery surfaces found in restaurants and
food processing plants and to help decrease the number of burns caused by frying
and grilling. The Company intends to also maintain its core business in the
medical, dental, industrial and health related markets by using its existing
distributors.
The Company's products are used primarily in hospitals, clean rooms,
laboratories and dental offices and are distributed principally in the United
States through a network presently consisting of four purchasing groups, ten
major distributors, approximately 200 additional distributors, approximately 30
independent sales representatives and a Company sales force of 7 people.
4
<PAGE>
The Offering
Securities Offered
Common Stock 3,626,935 shares of Common Stock. See
"Description of Securities". Of the
3,626,935 shares of Common Stock $ .01 Par
Value per Share being offered hereby,
252,381 shares are to be issued from time to
time upon the exercise of certain Warrants
described herein and 810,000 shares of
Common Stock are to be issued from time to
time upon the exercise of stock options. Of
the 2,564,554 remaining shares being offered
hereby, 692,554 shares were issued in
connection with private placements,
1,677,000 shares were issued in connection
with the settlement of certain debt
obligations of the Company under Section
4(2) of the Securities Act of 1933, as
amended and 195,000 shares were issued in
connection with the exercise of consultants
options. See "Selling Stockholders".
Common Stock Outstanding 23,731,616 shares of Common Stock at March
and to be Outstanding 31, 1997 and 24,958,997 shares as adjusted
for this Offering. (1) (2).
Warrants and Options Outstanding 436,351 Warrants and 3,080,000 Options at
March 31, 1997 and 184,000 Warrants and
2,375,000 Options to be outstanding as
adjusted for this Offering.
Use of Proceeds This Offering is being made by Selling
Stockholders and the Company will not
receive any of the proceeds of such sales.
See "Use of Proceeds" and "Selling
Stockholders".
Risk Factors This Offering involves certain risks. See
"Risk Factors".
NASD Symbol Common Stock......APTD
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(1) Does not include as outstanding 436,361 shares reserved for issuance upon
the exercise of Warrants and 3,080,000 shares reserved for issuance upon
the exercise of certain Options and treats as outstanding the 252,381
shares and 810,000 shares being registered hereby to be issued upon the
exercise of Warrants and Options respectively.
(2) Does not include 100,000 additional shares reserved for issuance under the
Company's stock option plan for directors as of March 31, 1997.
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See "The Company," -- "Recent Development`s" -- "Private Placements,"
"Management-Stock Option Plans," "Description of Securities" and Note 10 of
Notes to Consolidated Financial Statements.
5
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31
1992 1993 1994 1995 1996
Statement of Operations:
Sales $8,129 $9,439 $11,966 $13,031 $14,863
Gross profit 3,177 3,500 4,247 4,469 5,198
Total expenses 3,752 6,126 4,905 10,440 7,343
Net loss (575) (2,626) (658) (5,971) (2,145)
Net loss per share (.06) (.22) (.05) (0.36) (0.12)
Weighted average shares 9,616 11,765 13,437 16,533 17,841
Balance Sheet Data
Working capital 836 1,694 2,200
Total assets 11,192 6,410 7,481
Long term liabilities 1,154 240 217
Shareholders' equity 6,159 3,004 3,850
6
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. In analyzing this offering, prospective purchasers should carefully
consider the following factors, among others:
1. History of Losses
The Company has operated at a net loss during each of its last three fiscal
periods. Its net loss for the fiscal year ended December 31, 1994 was $658,000;
its net loss for the fiscal year ended December 31, 1995 was $5,971,000; and its
net loss for the fiscal year ended December 31, 1996 was $2,145,000. As of
December 31, 1996 the Company had an accumulated deficit of $18,013,000. There
can be no assurance that the operations of the Company will be profitable in
future periods. See "Financial Statements", "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
2. Change in Business Strategy
In early 1996, the Company modified its business strategy by focusing on
clean room and food service products while still maintaining its mask, shield
and wound care products. This shift in strategy subjects the Company to all the
risks of any new business venture including the problems, expenses,
difficulties, and competition frequently encountered in the development of a new
business. Furthermore, in April, 1996, the Company entered into a three year
agreement with respect to the exclusive distribution of the Company's line of
Aqua Trak Black(TM) shoe covers for use principally for the restaurant food
service and food processing businesses. While there are certain minimum
requirements to maintain this exclusivity, unfavorable sales results would have
a material adverse effect on the success of this shift in strategy. See
"Business-Distribution."
3. Need For Working Capital -- Dependence On Private Sales of Securities
While the Company has incurred a deficiency in net cash flow from operating
activities for each of the three years ended December 31, 1996 it had net
working capital of $1,694,000 as of December 31, 1995 and net working capital of
$2,200,000 as of December 31, 1996.
The Company has been dependent for the financing of its working capital
requirements on private sales of its securities to individual investors and
groups of investors and the receipt of proceeds from the exercise of outstanding
warrants and options. The Company intends to continue its practice of funding
its working capital requirements through private sales of securities to the
extent that it is unable to meet its working capital requirements by generating
sufficient income from operations.
In addition management has addressed the Company's working capital position
by the conversion of Notes Payable into shares of Common Stock and obtaining a
new line of credit facility. While there can be no assurance with respect to the
Company's continuing ability to sell its securities privately or that additional
warrants or options will be exercised, management believes that its available
cash together with expected proceeds from the various sources noted above will
be sufficient to finance its working capital and capital requirements for at
least a 24 month period. See "Recent Developments - Recent Private Placements."
4. Write off of Goodwill
In the fourth quarter of 1995, the Company evaluated the carrying value of
goodwill associated with its May, 1992 acquisition of Alpha Pro Tech, Inc.,
based on current operating results and forecasts of future operations of this
business. As a result of this analysis, coupled with the change in its business
strategy, management concluded that goodwill should be written off. This
write-off (recorded in the fourth quarter of 1995) amounted to $ 4,922,000 and
is reported in the income statement as a component of expenses under the caption
"Impairment Loss on Intangible Assets." See "Recent Developments - Alpha Pro
Tech Acquisition", "Consolidated Financial Statements - Consolidated Statements
of Operations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
7
<PAGE>
5. Potential Fluctuation in Quarterly Results
The Company's quarterly operating results have varied significantly as a
result of a number of factors, including the timing of significant orders from
and shipments to customers and the timing and market acceptance of new products.
The Company expects that its operating results will fluctuate in the future as a
result of these factors, as well as its recent change in business strategy away
from health care and toward cleanroom and the food service industry and other
factors including its product mix, success in developing, introducing and
shipping new products and the level of competition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
6. Dividends
The Company has not paid any dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. See "Dividend
Policy".
7. Regulatory Matters Before The British Columbia Securities Commission
("BCSC")
In March 1992 the British Columbia Superintendent of Brokers
("Superintendent") raised certain concerns with respect to the adequacy of
public disclosure relating to the Company's affairs including allegations
relating to an agreement to perform certain promotional services for BFD, prior
press releases issued by the Company, trading activities of directors of the
Company and other technical regulatory issues. In November of 1992 certain
additional concerns were raised relating to potential regulatory non-compliance
in respect of the issuance of securities pursuant to various private placements.
Included among those persons named as respondents with respect to those matters
were Sheldon Hoffman, Chief Executive Officer and a director of the Company and
Alexander W. Millar, President and a director of the Company. The issues
relating to the concerns raised by the Superintendent with respect to the
Company and its officers and directors were resolved in November, 1993 and
November, 1995, respectively. The November, 1995 settlement provides that
Messrs. Hoffman and Millar may not sell shares of the Company owned by them in
British Columbia for 2 years; each shall be prohibited from becoming or acting
as a director or officer of any British Columbia reporting issuer, other than
the Company, until such time as they have completed a course of study
satisfactory to the Superintendent concerning the duties of directors and
officers of reporting issuers; full payment shall have been made of $ 29,000 as
to Hoffman and $ 14,500 as to Millar, and the Superintendent consents to their
acting in the capacity of a director or officer of a British Columbia reporting
issuer. The consequent effect of the settlement was that it's application for
listing its securities on the NASDAQ Stock Market was denied, at least in part
on the involvement of the Company's officers in the BCSC proceeding. See "The
Company -- Recent Developments -- Matters before the BCSC - Settlement with
BCSC" and "Market for Common Stock."
8. Exchange of Escrow Shares
On December 30, 1996 the Board of Directors of the Company authorized the
issuance of 2,475,000 shares of its Common Stock in exchange for all rights to
the 2,475,000 shares (the "Escrow Shares") of Company Common Stock owned by Al
Millar, President, Sheldon Hoffman, CEO, the Hoffman Family Trust, Irving
Bronfman and Robert Isaly, respectively a director and former director of the
Company ("Exchanging Shareholders").
The Escrow Shares are subject to an escrow agreement made in June 1989
between the National Trust Company, the Company and the Exchanging Shareholders
(the "Escrow Agreement")and was a condition of an agreement relating to the
purchase of certain assets by the Company to commence the manufacturing and
marketing of its products, and a requirement of the Vancouver Stock Exchange.
The Escrow Shares were issued to the Exchanging Shareholders in exchange for the
sale of assets to the Company in June 1989, and were valued at $ .50 per share
for an aggregate value of $ 1,237,500.
8
<PAGE>
The Escrow Agreement also provides that the shares now held in escrow would
be released to the shareholders pro rata if certain performance criteria are
met, and that any shares not so released before April 5, 1999 would be
surrendered to the Company for cancellation at that time.
The Board issued the shares free of any escrow agreement and did not seek
shareholder approval with respect to this transaction. It is the Board's belief
that the escrow terms do not give any weight to certain achievements the Company
has attained since these conditions were imposed, notwithstanding that the
Company has failed to record profits or to increase stockholders equity in any
material amount in the last several years.Neither the laws of the Company's
state of incorporation (Delaware) nor any federal laws require shareholder
approval. The issuance of the shares to the Exchanging Shareholders does not
change any of the rights and privileges of the Exchanging Shareholders nor
increase their beneficial ownership nor is there any effective change to the
capitalization of the Company. The number of shares issued and outstanding after
the issuance is the same as that outstanding prior to the transaction. The fair
value of the newly issued shares, $ 2,204,000 (based on the average between the
closing bid and asked price of the Common Stock in the over-the-counter market
on December 30, 1996) is, however, a charge to earnings for 1996 which resulted
in an increase to accumulated deficit. During the last three Fiscal years, each
of the Escrowees would not have been eligible to receive any shares out of
Escrow applying the formula in the Escrow Agreement. See "Certain Transactions."
9. Dependence Upon Key Personnel
The Company is dependent upon the experience and ability of certain key
personnel, including Sheldon Hoffman, Chief Executive Officer, and Alexander W.
Millar, President. The loss of the services of either of those individuals could
have an adverse effect on BFD. See "Management -- Directors and Executive
Officers -- Employment Arrangments" and "The Company -- Recent Developments".
10. Dependence on Significant Customer
The Company has one customer whose sales represent 28.2% of total sales in
1995 and 42.9% in 1996. Sales to this customer are made on credit terms and
management believes that adequate provision has been made for any risk of loss.
The loss of this customer would have a materially adverse effect on the
Company's business. See "Business Distribution" and "Notes to Consolidated
Financial Statements."
11. Dependence on Foreign Employees
The Company's operations are substantially dependent upon its approximately
480 employees in Mexico. While the Company considers their relations with the
union representing these employees and the employees themselves to be good, any
unforeseen work stoppages would have an adverse effect on the Company's
business. See "Business -- Employees."
12. Control By Directors And Officers
The Company's current directors and officers and their affiliates
beneficially own approximately 15.6% of its outstanding Common Stock. As a
result of their Common Stock ownership, the Company's current directors and
officers and their affiliates will have significant influence over all matters
requiring approval by the Company's stockholders, including the election of
directors. Through any directors that they nominate and elect, they may have the
ability to direct policy and influence the Company's day-to-day operations. See
"Principal Stockholders, Management, and Selling Stockholders".
9
<PAGE>
13. Dilution
As of March 31, 1997 there were outstanding (a) employee stock options to
purchase 1,334,381 shares of Common Stock and (b) options and warrants to
purchase 2,182,000 shares of Common Stock.
The sale by the Company of Common Stock, securities convertible into or
exchangeable for Common Stock or warrants and options exercisable for Common
Stock, and the exercise of the rights of holders of such convertible securities,
warrants and options may result in dilution of the investments of present and
future holders of Common Stock. See "Financial Statements", "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Dilution", and the "Company - Recent Developments Private Placements."
Any exercise of options or warrants will usually take place at a time when
the Company would be able, in all likelihood, to obtain funds from the sale of
the Company's Common Stock at prices higher than the exercise prices thereof. As
a result, investors in the securities offered hereby may incur substantial
dilution of their investments as the issuance of such a significant number of
additional securities, or even the possibility thereof, may depress the price of
such securities. See "Dilution".
14. Patent Protection
The Company's policy is to protect its intellectual property rights,
products, designs and processes through the filing of patents in the United
States and, where appropriate, in Canada and other foreign countries. The
Company also registers trademarks and trade names.
The Company believes that its patents may offer a competitive advantage,
but there can be no assurance that any patents, issued or in process, will not
be circumvented or invalidated. The Company relies on trade secrets and
proprietary know-how to maintain and develop its commercial position. See
"Business -- Patents and Trademarks".
15. Competition
The Company faces substantial competition from numerous other companies,
including companies with greater marketing and financial resources in each of
the five markets in which it operates. The Company's major competitor is TECNOL
INC. of Fort Worth, Texas as well as several other larger competitors. The
Company believes that the quality of its products, along with the price and
service provided will allow it to remain competitive in the disposable apparel
market. See "Business -- Competition."
16. Potential Future Sales Pursuant to Rule 144
Future sales of shares by existing stockholders under Rule 144 of the
Securities Act, or the issuance of shares of Common Stock upon exercise of
options, warrants or otherwise could have a negative impact on the market price
of the Common Stock. The Company estimates that up to 4,139,000 shares may be
sold under Rule 144. This will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors. Any
sale of substantial amounts of Common Stock in the open market may adversely
affect the market price of the Common Stock offered hereby. See "Shares Eligible
For Future Sale".
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<PAGE>
17. Registration Rights
The Company has not granted any demand and piggy-back registration rights
to purchasers of shares of Common Stock and Warrants offered and sold by the
Company in private sales of its securities other than for those included in this
Prospectus. See "Selling Stockholders." The Company expects that purchasers of
securities in future private sales might receive registration rights at the
Company's cost and expense. Such registration rights require the Company to
register such securities with the Securities and Exchange Commission and state
securities commissions for resale by the selling securityholders, and enable
such securityholders to sell the securities to or through underwriters or to
other purchasers in market transactions at prevailing market prices. In the
absence of such registration, the securities acquired in private placements are
restricted securities and can be sold only under Rule 144 under the Securities
Act after a holding period of one year from the date of purchase or pursuant to
another available exemption from the registration requirements under the
Securities Act.
The approximate cost of registering the securities offered hereby is $
43,000.
18. Effect of Delaware Law and Certain Charter and By-Law Provisions
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits certain publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder", unless the
business combination is approved in a prescribed manner. This statute as well as
certain charter and By-law provisions may make it more difficult for a third
party to acquire, or discourage future acquisition bids for the Company. See
"Description of Capital Stock -- Delaware Law and Certain Charter and By-Law
Provisions."
THE COMPANY
ALPHA PRO TECH, LTD. (referred to herein as "the Company") was incorporated
on February 17, 1983 pursuant to the British Columbia Company Act R.S.B.C. 1979,
Chapter 59 (the "Company Act (British Columbia)" under the name Princeton
Resources Corp. The Company subsequently changed its name to Canadian Graphite
ltd. on July 27, 1988 and further changed its name to BFD Industries Inc. on
July 4, 1989. Effective July 1, 1994 the Company changed it's corporate domicile
from Canada to the State of Delaware in the United States and changed it's name
to Alpha Pro Tech, Ltd. At that time all of the Company's operating assets were
transferred to it's wholly owned subsidiary Alpha Pro Tech, Inc.
Historical Development
In April 1989 the Company purchased all the assets, patents, trade secrets,
inventory, goodwill and other properties to manufacture, among other items,
certain transparent eye protection products utilizing an optical-grade polyester
film from John Russell (the inventor of certain products currently being
manufactured, marketed and distributed by the Company), Al Millar (currently
president and a director of the Company), Sheldon Hoffman (currently chief
executive officer and a director of the Company), Robert Isaly, (currently a
director of the Company) and Irving Bronfman, a former director of the Company),
BFD Inc. (an Alabama corporation), 779177 Ontario Inc. (a corporation owned by
Messrs. Hoffman and Bronfman), Milmed International Distributors Limited (a
company owned by Al Millar). None of the persons or entities referred to above
were officers, directors or affiliated with the Company in any way prior to the
transaction.
11
<PAGE>
From April 1, 1990 to August 30, 1991, the business currently being carried
on by the Company, was operated by the BFD Industries Limited Partnership, an
Ontario limited partnership (the "BFD Limited Partnership"), of which a
wholly-owned subsidiary of the Company was the general partner, and of which
there was only one limited partner. Pursuant to an agreement between the Company
and the sole limited partner of the Company's Limited Partnership dated June 21,
1991, the Company purchased the limited partner's 50% interest in the BFD
Limited Partnership for a purchase price of $1,000,000.00 The BFD Limited
Partnership was dissolved on August 30, 1991 and the business and operations
have continued to be carried on by the Company directly.
Prior to its acquisition of the business currently being conducted by it,
the Company was involved in mining and exploration. However, for the fiscal
years ended May 31, 1987, 1988, 1989 and 1991 the Company generated no revenues.
The Company's executive offices are located at 60 Centurian Drive, Suite
112, Markham Ontario, Canada L3R 9R2, and its telephone number is (905)
479-0654.
RECENT DEVELOPMENTS
Matters Before the British Columbia Securities Commission
As a result of concerns raised by the Brish Columbia Superintendent of
Brokers (the "Superintendent") with respect to the adequacy of public disclosure
relating to the Company's affairs, the Superintendent, on March 3, 1992, issued
a Temporary Order and Notice of Hearing naming as respondents among others, the
Company and Messrs. Al Millar, Sheldon Hoffman, Irving Bronfman, Robert Henry
Isaly, James S. Lewis, and Hans Rieder, and ordered that all trading in the
securities of the Company cease for a period originally expiring on March 18,
1992. The Superintendent also set a hearing for March 18, 1992 to give the
respondents an opportunity to be heard before the British Columbia Securities
Commission (the "Commission"). The Notice of Hearing contained a variety of
allegations including those relating to prior press releases issued by the
Company, trading activities of directors of the Company and other technical
regulatory issues. Messrs. Millar, Hoffman and Isaly are presently directors.
Messrs. Lewis, Bronfman and Reider are former directors.
With respect to trading activities by directors of the Company, the
Superintendent alleged that Messrs. Millar, James B. Lewis (a former director)
and Isaly, traded in the securities of the Company with knowledge of a material
change in the Company which they knew had not been generally disclosed and that
on or before January 28, 1992, the directors of the Company reserved incentive
stock options for 435,000 of the Company's Common Shares while they had
knowledge of the material change which they knew had not been generally
disclosed
The Company and the other respondents all denied any wrongdoing with
respect to the above allegations related to the Company. The Company and its
directors cooperated fully with the Superintendent's office with regard to the
matters in the Notice of Hearing which was adjourned by consent.
12
<PAGE>
On April 10, 1992 the Company issued a comprehensive news release providing
disclosure to the public concerning its affairs and matters related to the
Temporary Order and Notice of Hearing. Contemporaneously the Company submitted a
Filing Statement to the Vancouver Stock Exchange containing information similar
to that contained in the news release. On April 13, 1992 citing that the Company
had issued the April 10, 1992 news release and that the directors of the Company
had consented to an order that they cease all trading in the securities of the
Company until a hearing is held and a decision rendered, the Superintendent
issued a Variation of Order revoking the Cease Trade Order against the Company.
On April 14, 1992 the Company's securities resumed trading on the Vancouver
Stock Exchange.
On November 13, 1992 the Superintendent issued a Cease Trade Order in
respect of all of the securities issued pursuant to two private placements of
the Company's securities pending resolution of concerns relating to potential
regulatory non-compliance in respect of the issuance of these securities.
Between November 13, 1992 and late January of 1993, extensive discussions
ensued and a substantial amount of documentation was compiled and provided to
the staff at the office of the Superintendent with respect to the details
surrounding those private placements. As a result of providing such information,
an agreement in principle was reached with the Superintendent whereby the
Superintendent would consider a revocation of the Cease Trade Order issued
November 13, 1992, such revocation being conditional upon, among other things,
the Company preparing and disseminating a news release setting out further
details with respect to those private placements, the provision to each
purchaser under those private placements who was affected by the Cease Trade
Order of additional corporate disclosure documentation, specifically the
Company's Form 10-Q for the periods ending September 30, 1992 and a right to
rescind their subscription and have returned to them any subscription funds
previously provided by such purchaser to the Company pursuant to their
subscription.
In accordance with the above a news release was issued by the Company on
January 28, 1993 which outlined these matters and on February 11, 1993, a
complete package of documentation was prepared and sent to each purchaser of
securities affected by the Cease Trade Order issued November 13, 1992. On
February 23, 1993 the Superintendent revoked the November 13, 1992 Cease Trade
Order as to all persons other than the officers and directors of the Company.
Settlements with British Columbia Securities Commission
On November 23, 1993 the Company signed an agreement with the British
Columbia Securities Commission resolving all outstanding issues with respect to
the Company. The Company agreed and consented to the following:
1. The Company will seek professional counsel or take such other steps as may
be reasonably necessary to ensure that its future activities are in
compliance with applicable securities legislation and policies; and
2. The Company will pay to the Minister of Finance and Corporate Relations the
sum of 425,000; and
3. The Company waives any right it may have, under the Act or otherwise, to a
hearing, hearing and review, judicial review or appeal related to, in
connection with or incidental to this agreement.
13
<PAGE>
On November 10, 1995, Sheldon Hoffman a Director and CEO of the Company and
Alexander Millar, a Director and President of the Company settled all
outstanding matters pending before the British Columbia Securities Commission
(the "BCSC"), which were commenced in March 1992 by the British Columbia
Superintendent of Brokers ("Superintendent"). The settlement provides that as to
each of Messrs. Hoffman and Millar: a Cease Trade Order as to sales by them of
the Company's securities in British Columbia shall remain in effect for 2 years;
each shall be prohibited from becoming or acting as a director or officer of any
British Columbia reporting issuer, other than the Company, until such time as
they have successfully completed a course of study satisfactory to the
Superintendent concerning the duties of directors and officers of reporting
issuers; full payment to the BCSC shall have been made of $29,000 as to Hoffman
and $14,500 as to Millar; and the Superintendent consents to their acting in the
capacity of a director or officer of a British Columbia reporting issuer. All
matters pending as to Robert Isaly, a Director of the Company, were dropped.
Alpha Pro Tech Acquisition
In May 1992 the Company acquired Alpha Pro Tech, Inc., ("Alpha"), from
William C. Klintworth Jr., the principal shareholder of Alpha acting on behalf
of himself and all other shareholders.
Alpha is in the business of manufacturing and selling medical and dental
surgical face masks, bed patient monitoring systems, Unreal Lambskin decubitus
products (used to prevent bedsores) and pet bedding products. Unreal Lambskin is
a material made from durable synthetic fleece fabric which has the
characteristics and attributes of real lambswool. Alpha's corporate office and
manufacturing facility is located at 903 West Center Street, Bldg. E. North Salt
Lake, Utah 84054. A second manufacturing facility is located at 1145 Norwood
Road, Janesville, Wisconsin.
The purchase price of $7,200,000 (plus closing adjustments) was paid as
follows: a $100,000 deposit upon the execution of the Agreement, $3,600,000 paid
at closing with the balance of $3,500,000 paid by a promissory Note ("Note")
payable in one year and convertible in whole or in part at any time during the
year, at the option of the holder, into Common Shares of the Company at a deemed
price per share of $3.50. No interest accrued on the Note for the first 120 days
after closing, but interest thereafter accrued at the rate of 8 1/2% per annum,
due and payable at the maturity date of the Note. If a holder of the Note
elected to be paid in cash, such holder had to give the Company at least 120
days advance written notice of such election prior to April 29, 1993. The Note
was secured by all of the issued and outstanding shares of Alpha pursuant to a
pledge agreement.
As part of the transaction, Mr. Klintworth, the principal shareholder and
president of Alpha entered into a Confidentiality Agreement with the Company in
consideration of a total payment of $300,000 paid at closing. Pursuant to this
agreement, Mr. Klintworth provided consulting services to the Company and
covenanted not to compete, directly or indirectly, with the Company or Alpha
during the term of the agreement and for a period of 18 months following the
termination thereof. This agreement was for a term of 3 years.
Alpha also entered into an Employment Agreement with Mr. Klintworth for a
three year term at a salary of $115,000 per annum which could be terminated
without cause, upon 6 months notice after the above referenced Note was
satisfied. Alpha also entered into an employment agreement with Elvin Boyce at a
salary of approximately $3,000 per month. The employment agreement with Mr.
Boyce was generally in accordance with his existing Independent Consulting
Agreement with Alpha dated January 1, 1990 which was for a term of 10 years. Mr.
Boyce was the inventor of certain products now produced by Alpha and continues
to be involved in the manufacturing operations of Alpha.
14
<PAGE>
The transaction was subject to approval of the Vancouver Stock Exchange and
required a report and commentary with respect to the purchase price to be paid.
The Company engaged Deloitte & Touche for this purpose. Their comments concluded
that the proposed purchase price was determined as a result of arm's length
negotiations and that while the price earning multiples and price to book value
ratios inherent in the net purchase price appear higher than Canadian "norms"
for smaller manufacturing companies, they do not appear out of line with such
ratios inherent in initial public offerings in the U.S. and with current trading
data in the med-tech industry.
They also noted that the opportunity existed for the Company to increase
the value of Alpha in particular, due to the potential synergetic benefits
associated with selling Alpha's products through the Company's hospital buying
group agreements.
Finally, they commented that based upon the scope of their review, analysis
and assumptions used, the proposed cash equivalent purchase price of $7.2
million, at January 1, 1992 for all the issued and outstanding shares of Alpha
Pro Tech, Inc. would not be unreasonable. The Company financed this acquisition
with the proceeds of private placements.
Gross revenues of Alpha for each of the three fiscal years ending December
31, were as follows:
1991 $5,508,000
1990 $5,197,000
1989 $3,886,000
On January 26, 1993, the holders of the Notes notified the Company of their
election to receive payment in cash.
On May 14, 1993 the Company paid the noteholders the principal sum of
$3,500,000 together with approximately $199,000 of accrued interest. Of this
amount $550,000 was provided by a loan from Harberton Trading, Ltd.,
("Harberton") a European merchant bank, $1,104,000 was provided by a credit
facility secured by accounts receivable, inventory and equipment from Allstate
Financial Corporation of Arlington, Virginia, with the balance of $2,045,000
from the Company's working capital. The Harberton loan was initially for a
nine-month term, bearing a monthly compound interest rate of 1.13% and secured
by a pledge of all of the shares of Alpha as well as a general security interest
(subordinate to that of Allstate's Financial Corporation) on all personal
property, including accounts receivable, inventory and equipment. Harberton was
also issued 40,000 shares of the Company's Common Stock as a bonus and a
finder's fee of $ 47,250 was paid to an unaffiliated third party. On February
18th 1994, this loan was extended for an additional nine month period. In
connection with such extension an additional fee of approximately $55,000 and an
additional bonus of approximately $125,000 were paid by the Company. In 1995
this loan was converted into 487,000 shares of the Company's Common Stock.
Contemporaneously with the payment of the Note, Mr. Klintworth resigned as
an officer and director of Alpha Pro Tech and his employment contract was
terminated effective August 14, 1993.
15
<PAGE>
In the fourth quarter of 1995 the Company evaluated the carrying value of
goodwill associated with the May, 1992 acquisition of Alpha based on historical
operating results and forecasts of future operations of the masks, shields and
wouncare product lines which are marketed primarily to the healthcare industry.
The Analysis showed that historical sales levels had declined and future sales
are expected to decrease over the next five years as the Company continues to
focus its efforts and resources on manufacturing and promoting sales of its
automated shoe cover and disposable apparel products to the clean room and food
service industries. As a result of the analysis performed coupled with the
change in business strategy, management elected to shorten the life of goodwill
related to the purchase of Alpha from 20 years to eight years and to shorten the
useful lives of patents related to masks and shields from 17 years to eight
years.
Additionally, the Company conducted an impairment analysis that determined
the fair value of the assets based on discounted cash flows. From the analysis,
the Company determined that the carrying values of the Alpha goodwill and
patents related to the Company's line of disposable mask and shield products and
woundcare products should be reduced by $ 4,922,000 at December 31, 1995. This
write-off (recorded in the fourth quarter of 1995) is reported in the income
statement as a component of expenses under the caption "Impairment Loss on
Intangible Assets". See "Consolidated Financial Statements -- Consolidated
Statements of Operations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Acquisition of Assets of Gem Non-wovens
In October 1992, the Company acquired the assets of Gem Non-wovens, Inc.
("GEM"), an automated manufacturer of disposable surgical head and shoe covers,
located in Huntsville, Alabama in exchange for approximately $330,000, and the
assumption of approximately $50,000 of GEM's liabilities to unsecured creditors.
Included in the assets acquired were cash and accounts receivables the
collection of which equalled substantially all of the liabilities assumed. GEM
manufactured its products in a leased facility of approximately 8,500 square
feet at in Huntsville, Alabama. The facility was consolidated into Alpha's
facilities in North Salt Lake, Utah effective January 1, 1994.
Acquisition of License Agreement and Patents
In April 1993, the Company also acquired a license agreement for an
Inflation Control for Air Supports Device and the patents for a Delta Foam
Support System (Delta) from Ms. Hutchens for an aggregate of $200,000 ($175,000
for the Patents and $25,000 for the license). The $200,000 originally due
December 24, 1993 was paid by the issuance of an additional 50,000 shares of the
Company's Common Stock and payment of $4000 per month for 24 months, commencing
March 31, 1994. The license and patents relate to a line of therapeutic
mattresses and overlays used in the prevention and treatment of pressure ulcers.
The Company was obligated to pay a royalty to Ms. Hutchens and two co-inventors
of the Delta Support System on all Delta and Inflation Control Device sales, up
to a maximum royalty of $250,000 per year, for the life of the patent.
As part of the Delta agreement, the Company was required to sell $1 million
worth of the product within two years of its first sale, and $1 million per year
thereafter until the patents expire. If they did not attain these levels all
rights to the product and the patents were to revert back to Ms. Hutchens. These
sales levels were not attained. These rights have reverted back to Ms. Hutchens
and as a result the patent was written off at December 31, 1994 and the license
agreement was surrendered in 1995.
16
<PAGE>
Acquisition of Assets of Disposable Medical Products, Inc.
On March 25, 1994, the Company, through its wholly owned subsidiary Alpha,
entered into an agreement to purchase approximately $105,000 of inventory and
$228,000 of capital equipment of Disposable Medical Products, Inc. ("DMPI"), a
debtor in possession pursuant to a Chapter 11 proceeding in the United States
bankruptcy court in New Orleans, Louisiana. The inventory was purchased
immediately, but the acquisition of the capital equipment was to take place upon
approval of the sale by the bankruptcy court which occurred on July 29, 1994 and
upon payment of the purchase price, which occurred on March 3, 1995.
Between the period of March 25, 1994 and March 3, 1995, under a
post-petition financing agreement Alpha was responsible for the operation of
DMPI and had all of the risks and rewards of the business. The post-petition
financial results of the operation of DMPI have been included in the Company's
consolidated financial statements effective April 1, 1994.
Under the post-petition financing agreement, Alpha Pro Tech, was to supply
DMPI with a $450,000 line of credit until the date the agreement was finalized.
As collateral for the entire amount, DMPI assigned its post-petition accounts
receivable and all other assets to be acquired, to Alpha Pro Tech, In connection
with the asset purchase agreement, employment contracts were entered into with
five employees of DMPI.
Acquisition of Ludan Corporation
Effective April 1, 1995 the Company acquired an 80% interest in Ludan
Corp., a Georgia based materials laminating company, for $29,000 cash plus the
assumption of $ 23,000 of net liabilities. In addition, a note payable of
$20,000 was converted to 20,000 Common Shares of the Company in March 1995. On
June 30, 1996, the Company acquired the outstanding 20% interest in Ludan
Corporation from the minority shareholder for $68,000. The Company paid $49,000
of the purchase price in July 1996 and the remaining $19,000 is due in March
1997.
Recent Private Placements
The Company has been dependent for the financing of its working capital
requirements on private sales of its securities to individual investors and
groups of investors and the receipt of proceeds from the exercise of outstanding
warrants and options. The Company intends to continue its practice of funding
its working capital to the extent that it is unable to meet its working capital
requirements by generating sufficient cash flow from operations. In April 1993
the Company sold 119,048 units at a price of $3.70 Canadian ("CDN") for a total
of $440,478 CDN to a private investor. Each unit consists of one common share
and one non-transferrable share purchase warrant exercisable within twelve
months at a price of $3.70 CDN per share. The net proceeds from this private
placement were added to the Company's working capital. A finder's fee of 9,319
common shares was paid to an unaffiliated third party in connection with this
transaction.
In June 1993, the Company sold 100,000 units at a per unit price of $2.38
CDN for a total of $238,000 CDN to a private investor. Each unit consists of one
common share and one non-transferrable share purchase warrant exercisable within
twelve months at a price of $2.38 CDN per share. The net proceeds from this
private placement were added to working capital. A finders fee of 8,500 common
shares was paid to an unaffiliated third party.
In July 1993, the Company sold 233,697 units at a per unit price of $2.64
CDN for a total of $616,960 to a group of four private investors. Each unit
consists of one common share and one non-transferrable share purchase warrant
exercisable within twelve months at a price of $2.64 CDN per share. The net
proceeds from this private placement were used for working capital. A finders
fee of 12,555 common shares, valued at $ 33,145, was paid to an unaffiliated
third party.
17
<PAGE>
In March, 1994 the Company commenced a private offering pursuant to which a
minimum of 500,000 Units to a maximum of 3,000,000 Units were to be issued at a
price of $1.00 per Unit. Each Unit consisted of one share of Common Stock, and
one Class A Stock Purchase Warrant. Each Warrant entitled the holder to
immediately purchase one share of Common Stock at a price of $2.00 subject to
adjustment in certain circumstances, until their expiration on February 28,
1996. Subsequently the agreement with the dealer manager to offer the Units was
terminated, no Units having been sold. The Company continued to offer Units,
under revised terms, to investors. During the year ended December 31, 1995, the
Company had sold 1,802,649 Units at $.75 per Unit, each Unit consisting of one
share of Common Stock and a two year Warrant to purchase one share of Common
Stock at $.75 per share, for which it has received aggregate proceeds of
$1,352,000. During the period January 1, 1997 to March 31, 1997 the Company
issued 3,976,153 shares of Common Stock for which it received net proceeds of $
2,193,000 from the exercise of warrants and options, principally from those
persons who purchased Units in the private offering commenced in March, 1994 and
from persons and entities who received Units in exchange for debt.
Exchange of Escrow Shares
On December 30, 1996 the Board of Directors of the Company authorized the
issuance of 2,475,000 shares of its Common Stock in exchange for all rights to
the 2,475,000 shares (the "Escrow Shares") of Company Common Stock owned by Al
Millar, President, Sheldon Hoffman, CEO, the Hoffman Family Trust, Irving
Bronfman and Robert Isaly, respectively a director and former director of the
Company ("Exchanging Shareholders").
The Escrow Shares are subject to an escrow agreement made in June 1989
between the National Trust Company, the Company and the Exchanging Shareholders
(the "Escrow Agreement") and was a condition of an agreement relating to the
purchase of certain assets by the Company to commence the manufacturing and
marketing of its products, and was a requirement of the Vancouver Stock
Exchange. The Escrow Shares were issued to the Exchanging Shareholders in
exchange for the sale of assets to the Company in June, 1989, and were valued at
$.50 per share for an aggregate value of $ 1,237,500.
The Escrow Agreement also provides that the shares now held in escrow would
be released to the shareholders pro rata if certain performance criteria are
met, and that any shares not so released before April 5, 1999 would be
surrendered to the Company for cancellation at that time.
The Board issued the shares free of any escrow agreement and did not seek
shareholders approval with respect to this transaction. It is the Board's belief
that the escrow terms do not give any weight to certain achievements the Company
has attained since these conditions were imposed, notwithstanding that the
Company has failed to record profits or to increase stockholders equity in any
material amount in the last several years. Neither the laws of the Company's
state of incorporation (Delaware) nor any federal laws require shareholder
approval. Furthermore, no regulatory approval was obtained or required with
respect to the transaction in either the United States or Canada. The issuance
of the shares to the Exchanging Shareholders does not change any of the rights
and privileges of the Exchanging Shareholders nor increase their beneficial
ownership nor is there any effective change to the capitalization of the
Company. The number of shares issued and outstanding after the issuance is the
same as that outstanding prior to the transaction. During the last three fiscal
years, each of the Escrowees would not have been eligible to receive any shares
out of Escrow applying the formula in the Escrow Agreement. The fair value of
the newly issued shares, $ 2,204,000 (based on the average between the closing
bid and asked price of the Common Stock in the over-the-counter market on
December 30, 1996) is, however, a charge to earnings for 1996 which resulted in
an increase to accumulated deficit. See "Certain Transactions."
18
<PAGE>
USE OF PROCEEDS
Since all of the Shares offered hereby are to be sold for the account of
Selling Stockholders, the Company will not receive any cash proceeds pursuant to
this Offering.
The Company may, however, receive cash proceeds to the extent outstanding
Warrants and Options are exercised by a Selling Stockholder. If the Warrants and
Options are exercised in full, as to which there can be no assurance, the net
proceeds would be approximately $ 1,500,000. The Company would use these
proceeds, if any, for general corporate purposes including working capital. See
"Selling Stockholders."
Pending the ultimate application of the proceeds of any financing the
Company makes temporary investments in interest bearing savings accounts,
certificates of deposit, United States Government obligations or money market
certificates.
United States government obligations are not necessarily those backed by
the full faith and credit of the United States government. Company policy does
not require temporary investments to be investment grade as determined by a
nationally recognized statistical rating organization nor does it require that
such investments have any additional safety feature such as insurance.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The current
policy of the Board of Directors is to retain any earnings to provide for the
development and growth of the Company. Consequently, no cash dividends are
expected to be paid in the foreseeable future.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996. All information set forth below should be read in conjunction
with the financial statements and notes thereto included elsewhere in this
Prospectus.
December 31, 1996
(in thousands)
Long-term liabilities, less current portion $ 227
Stockholders Equity:
Common stock $.01 par value; 50,000,000
shares authorized; 20,755,463 issued
and outstanding(1) 207
Additional paid-in capital 21,656
Accumulated deficit (18,013)
--------
Total stockholders' equity 3,850
-------
Total capitalization 4,077
(1) Excludes 5,901,918 shares of Common Stock issuable upon the exercise of
outstanding options and warrants. See "Management-1993 Stock Option Plan"
and "Shares Eligible for Future Sale," and "Note 9" of Notes to
Consolidated Finacial Statements."
(2) See "Note 11" of "Notes to Consolidated Financial Statements" with respect
to future lease obligations.
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<PAGE>
DILUTION
The following table sets forth the number of shares of Common Stock
outstanding as of March 31, 1997 as well as the number of shares of Common Stock
that would be outstanding if all of the outstanding options and warrants were
exercised. Any exercise of options or warrants will take place at a time when
the Company would be able, in all likelihood, to obtain funds from the sale of
the Company's Common Stock at prices higher than the exercise prices of the
options and warrants. As a result, investors in the Shares offered hereby may
incur substantial dilution of their investment as the issuance of a significant
number of additional shares of Common Stock, or even the possibility thereof,
may depress the price of the Shares being offered hereby.
Common Stock
Market or Outstanding
Exercise or Reserved
Security Price for Issuance
- -------- ----- ------------
Common Stock 1.53(1) 23,731,616
Employee Stock Options 1.045(2) 3,080,000
Warrants 1.023(2) 436,381
----------
TOTAL 27,247,997
(1) Based on the average of the last reported bid and asked price of the
Company's Common Stock in the over-the-counter market as reported by the
NASD on April 21, 1997.
(2) Based on the average of exercise prices ranging from $.75 to $2.75 per
share.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF SECURITIES
From January 1, 1991 through July 16, 1993 the Common Shares were traded on
the Vancouver Stock Exchange under the symbol BFI, at which time the Common
Shares were de-listed from the Vancouver Stock Exchange at the Company's
request.
On March 8, 1993 the Common Shares of the Company were cleared for
quotation on the National Association of Securities Dealers (NASD) Over the
Counter (OTC) Bulletin Board under the symbol "BFDIF". When the Company changed
its name to Alpha Pro Tech Ltd. on July 1, 1994, its symbol was changed to APTD.
The high and low range of bid prices for the Common Shares of the Company
for the quarters indicated as reported by the NASD were as follows:
Low High
--- ----
1994 First Quarter 5/8 1-7/8
Second Quarter 1-3/16 1-7/16
Third Quarter 31/32 1-3/16
Fourth Quarter 13/16 1-1/16
1995 First Quarter 3/4 3-1/8
Second Quarter 1-7/8 2-5/8
Third Quarter 1-5/8 2-1/2
Fourth Quarter 1-7/16 2-1/16
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<PAGE>
1996 First Quarter 1-1/32 1-31/32
Second Quarter 1-1/4 2-3/16
Third Quarter 1-1/32 1-11/32
Fourth Quarter 15/16 1-5/16
1997 First Quarter 7/8 2-3/16
Second Quarter (thru 04/21/97) 1-7/16 1-5/8
Such over the counter market quotations reflect interdealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
As at March 1, 1997 there were approximately 625 shareholders of record.
In the period 1993 through 1995 the Company made several efforts to list
its Common Stock on the NASDAQ SmallCap Market. Each time the Company received
notification that its request for listing on the NASDAQ Stock Market had been
denied based on the Company's inability to meet NASDAQ's minimum bid price
criterion of $3.00 per share and/or the fact that there was a pending proceeding
with British Columbia Securities Commission.
As noted above, the Company's officers and directors agreed to a settlement
with the BCSC in October 1995 which was actually signed as of November 10, 1995.
The Company reapplied for listing on NASDAQ in October 1995 and was again
advised by the NASDAQ staff on January 2, 1996 that its application was not
approved because of the failure to satisfy the minimum bid price requirement of
$3.00 and the fact that the involvement of the Company's officers in the BCSC
proceeding was sufficient to support a denial of the listing application. The
Company requested a review of this decision by the NASDAQ Review Committee. This
Committee upheld the staff's decision.
Dividend Policy
The holders of the Company's Common Shares are entitled to receive such
dividends as may be declared by the directors of the Company from time to time
to the extent that funds are legally available for payment thereof. The Company
has never declared nor paid any dividends on any of its Common Shares. It is the
current policy of the Board of Directors to retain any earnings to provide for
the development and growth of the Company. Consequently, the Company has no
intention to pay cash dividends in the foreseeable future.
21
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SELECTED FINANCIAL DATA
Alpha Pro Tech, Ltd.
Selected Financial Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years
Ended
December 31,
------------------------------------------------------------------------
1996 1995(1) 1994(2) 1993 1992(3)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Operating revenues $ 14,863,000 $ 13,031,000 $ 11,966,000 $ 9,439,000 $ 8,129,000
Gross profit 5,198,000 4,469,000 4,247,000 3,500,000 3,177,000
Selling, general and administrative
expenses 4,610,000 4,342,000 3,562,000 4,852,000 3,236,000
Interest expense 279,000 563,000 898,000 450,000 99,000
Impairment loss on intangible assets -- 4,922,000 -- -- --
Exchange of escrowed shares for
new shares 2,204,000 -- -- -- --
Other expenses 250,000 613,000 445,000 824,000 417,000
------------ ------------ ------------ ------------ ------------
Total expenses including provision
(benefit) for income taxes 7,343,000 10,440,000 4,905,000 6,126,000 3,752,000
------------ ------------ ------------ ------------ ------------
Net loss $ (2,145,000) $ (5,971,000) $ (658,000) $ (2,626,000) $ (575,000)
============ ============ ============ ============ ============
Loss per share $ (0.12) $ (0.36) $ (0.05) $ (0.22) $ (0.06)
============ ============ ============ ============ ============
Weighted average shares used
in loss per share 17,841,547 16,533,294 13,437,198 11,764,871 9,615,921
Balance Sheet Data
Current assets $ 5,614,000 $ 4,860,000 $ 4,715,000 $ 2,749,000 $ 4,126,000
Total assets $ 7,481,000 $ 6,410,000 $ 11,192,000 $ 9,578,000 $ 11,100,000
Current liabilities $ 3,414,000 $ 3,166,000 $ 3,879,000 $ 2,885,000 $ 4,847,000
Long-term liabilities $ 217,000 $ 240,000 $ 1,154,000 $ 278,000 $ 654,000
Common stockholders' equity $ 3,850,000 $ 3,004,000 $ 6,159,000 $ 6,415,000 $ 5,599,000
</TABLE>
(1) Includes the operations of Ludan Corporation which was acquired effective
April 1, 1995. See footnote 13 in Notes to the Consolidated Financial
Statements.
(2) Includes the operations of Disposable Medical Products, Inc. which was
acquired on March 25, 1994. See footnote 12 in Notes to the Consolidated
Financial Statements.
(3) Includes the operations of Alpha Pro Tech, Inc. which was acquired on May
14, 1992.
21a
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULT OF OPERATIONS
Fiscal 1996 compared to Fiscal 1995
Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported a net loss for the year
ended December 31,1996 of $2,145,000 as compared to a net loss of $5,971,000
for the year ended December 31, 1995, representing an improvement of $
3,826,000. The 1996 loss was attributable to a $2,204,000 non cash charge to
earnings resulting from the issuance of 2,475,000 shares of Common Stock in
exchange for a like amount of shares of the Company's Common Stock held in
escrow. Simultaneously, there was an increase to paid in capital resulting in
shareholders equity remaining unchanged. The net income for 1996, excluding the
non-cash escrow share exchange valued at $2,201,000 was $59,000, as compared
to a net loss of $1,049,000 for 1995, excluding an impairment loss on
intangible assets of $4,922,000. This represents an improvement of $1,108,000,
excluding the above mentioned items.
Sales Consolidated net sales for the year ended December 31, 1996 increased to
$14,863,000 from $13,031,000 in 1995, representing an increase of $1,832,000 or
14.1%. Net sales for the Apparel Division for the year ended December 31, 1996
were $7,475,000 as compared to $4,953,000 for the same period of 1995. The
Apparel Division sales increase of $2.522.000 or 50.9% was primarily due to
increased sales to its largest customer which was made possible by the
completion in the first quarter of 1996 of the new manufacturing facility in
Nogales, Mexico. Mask and eye shield sales decreased by 3.3%, to $5,035,000 in
1996 from $5,205,000 in 1995. Mask and eye shield sales to dentists were
virtually unchanged while the decrease can be attributed to lower medical sales.
Sales from the Company's Unreal Lambskin(R) and other related products which
includes a line of pet beds, decreased by 15.1% to $2,353,000 in 1996 from $
2,873,000 in 1995. The decrease in the Unreal Lambskin(R) sales is the result of
a decline in medical pad sales combined with the loss of a major pet bed
distributor and the loss of business due to competitive pricing of rolled good
products. The Company's Unreal Lambskin(R) line of products is a mature line
which is no longer an area for significant growth.
Cost of Goods Sold Cost of goods sold increased to $9,665,000 for the year
ended December 31, 1996 from $8,562,000 for the same period in 1995. As a
percentage of net sales, cost of goods sold decreased to 65% from 65.7%. Gross
profit margin increased slightly to 35.0% for the year ended December 31, 1996
from 34.3% for the year ended December 31, 1995. Management expects the gross
profit margin to continue to improve through the streamlining of its
manufacturing facilities but there can be no assurance that these improvements
will be attained.
22
<PAGE>
Selling, General and Administrative Expenses Selling, general and administrative
expenses increased by $268,000 to $4,610,000 for the year ended December 31,
1996 from $4,342,000 for the year ended December 31, 1995. As a percentage of
net sales, selling, general and administrative expenses decreased to 31 % in
1996 from 33% in 1995. The increase in selling, general and administrative
expenses is primarily in the areas of payroll related costs of $311,000;
tradeshows expenses of $36,000 and travel expenses of $32,000 offset by
decreases in commission expenses of $46,000 and professional fees of $45,000. Of
the $311,000 increase in payroll related costs, $296,000 is due to the Apparel
Division which had an increase in sales of 50.9%. As a percentage of net Apparel
Division sales, selling, general and administrative expenses for the Apparel
division remained constant at 20% for 1996 and 1995.
Depreciation and Amortization Depreciation and amortization expense decreased by
$364,000 to $254,000 for the year ended December 31, 1996 from $618,000 for the
same period in 1995. This decrease is primarily attributable to the write off at
the end of 1995 of the remaining intangible assets acquired on the acquisition
of its wholly-owned subsidiary, Alpha Pro Tech Inc. This is partially offset by
Apparel Division fixed asset additions in 1996 and the amortization for the
entire year of goodwill recorded in connection with the Ludan acquisition made
in April 1995.
Impairment Loss on Intangibles At the end of 1995, the Company decided to write
off the remaining intangible assets of $4,922,000 acquired on the acquisition
of its wholly-owned subsidiary, Alpha Pro Tech, Inc. During the fourth quarter
of 1995, it became apparent to management that cash flows from the mask, shield
and wound care products manufactured and distributed through Alpha Pro Tech,
Inc. had declined for each of the past four years and would decline in the
future. Dramatic changes have taken place in the health care market with
downsizing, cost containment pressure and changing of buying practices for
medical products. A significant investment would have to be made to change the
Company's manufacturing equipment and facilities to continue to aggressively
attack these markets. As a result, the Company has modified its strategy in
order to maximize sales and profit by focusing on increased demand for its
apparel cleanroom products and foods service industry products.
Exchange of Escrow Shares
Pursuant to an agreement dated April 5,1989, the Company purchased all of the
assets of BFD Inc. from certain individuals. The purchase price of $625,000
Canadian was settled by the issuance of 3,500,000 common shares and the
assumption of liabilities of $520,000 Canadian. Of the shares issued, 3,150,000
were subject to an escrow agreement. On December 30, 1996, all of the escrowed
shares, except for the shares canceled in connection with the settlement with
John P. Russell, were exchanged for new shares. The 2,475,000 new shares were
valued at the, fair market value of the shares on the date of the exchange which
resulted in a $2,204,000 charge to earnings that was recorded during the fourth
quarter of 1996. Additionally, the paid in capital increase $2,204,000 resulted
in no net change to stockholders equity. The 2,475,000 F shares held in escrow
were cancelled effective December 30, 1996.
Net Interest Interest expense decreased by $284,000, to $279,000 for the year
ended: December 31,1996 from $563,000 for the year ended December 31, 1995.
This decrease is' primarily due to the following factors: a reduction in the
interest paid on notes payable of $50,000; costs related to financing through
Allstate at higher interest rates of $52,000 and the termination costs of
Allstate at $45,000 in the first quarter of 1995; costs of $63,000 in 1995 in
relation to recording the fair value of options and warrants granted to third
parties; and in 1996, the Company earned an additional $40,000 in interest
revenue.
23
<PAGE>
Loss from Operations Loss from operations decreased by $3,543,000 to a loss of
$1,870,000 for the year ended December 31, 1996 from a loss from operations of
$5,413,000 for the year ended December 31, 1995. The decreased loss from
operations is primarily due to the increase in gross profit of $729,000; the
decrease in depreciation and amortization of $364,000; the increased selling,
general and administrative expenses of $268,000 and the non cash transactions
of the exchange of escrow shares of $2,204,000 in 1996 offset by the impairment
loss on intangible assets of $4,922,000 in 1995. Income from operations
excluding the 1996 and 1995 non cash transactions was $334,000 in 1996 compared
to a loss of $491,000 in 1995, a net increase in income from operations of $
825,000.
Net Loss Net Loss for the year ended December 31, 1996 was $2,145,000 compared
to a net loss of $5,971,000 for the year ended December 31,1995, a decrease of
$3,826,000. The net loss decrease of $3,826,000 is comprised of a decreased loss
from operations of $3,543,000 as described above, and a decrease in interest
expense of $284,000. Excluding the escrow shares exchange, net income for the
year ended December 31, 1996 was $59,000 as compared to a net loss in 1995 of
$1,049,000 excluding the impairment loss on intangible assets, an increase in
net income of $1,108,000.
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. No bonus was earned in 1996 or 1995.
Fiscal 1995 compared to Fiscal 1994
Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported a net loss for the year
ended December 31, 1995 of $5,971,000 as compared to a net loss of $658,000
for the year ended December 31, 1994. The principal components of the loss
consist of a write-off of $4,922,000 of intangible assets associated with
masks, shields, and wound care products manufactured and distributed through its
wholly-owned subsidiary, Alpha Pro Tech, Inc. and an increase of $780,000 in
selling, general and administrative expenses.
Sales Consolidated net sales for the year ended December 31, 1995 increased to
$13,031,000 from $11,966,000 in 1994, representing an increase of $1,065,000 or
8.9%. Net sales for the Apparel Division for the year ended December 31, 1995
were $4,953,000 as compared to $3,145,000 for the same period of 1994. The
Apparel Division sales increase of $1,805,000 or 57% was primarily due to
increased sales to its largest customer and the fact that Alpha began including
the results of the Apparel Division on April 1, 1994. Virtually all of the 1995
overall sales increase came from the Apparel Division and this trend is expected
to continue into the future. The Company similarly sees its newly launched food
service industry product line as a revenue source beginning in 1996. Mask and
eye shield sales decreased by 13.9%, to $5,205,000 in 1995 from $6,042,000 in
1994, due primarily to a softening in medical sales. Sales from the Company's
Unreal Lamb's Wool and other related products increased by 3.5% to $2,873,000
in 1995 from $2,776,000 in 1994. The Company's Unreal Lamb's Wool line of
products is a mature line which is no longer an area for significant growth.
24
<PAGE>
Gross profit Gross profit margin decreased to 34.3% for the year ended December
31, 1995 from 35.5% for the year ended December 31,1994. The gross profit margin
decline was primarily due to both the initial training costs and the initial
lost efficiencies associated with relocating shield manufacturing to Mexico.
Gross profit margin for the year ended December 31, 1995 eliminating the
relocation start up costs would have been 35.1%. Management plans to improve
margins through the streamlining of its Mexican operations and there can be no
assurance that these improvements will be attained.
Selling, General and Administrative Expenses Selling general and administrative
expenses increased by $780,000 to $4,342,000 for the year ended December 31,
1995 from $3,562,000 for the year ended December 31, 1994. As a percentage of
net sales, selling, general and administrative expenses increased to 33% in 1995
from 30% in 1994. The increase in selling, general and administrative expenses
is primarily in the areas of Apparel Division costs $386,000; payroll related
costs $169,000; investor relations $79,000; professional fees $49,000;
marketing $46,000; and travel expenses $56,000. Approximately half of the $
386,000 selling, general and administrative expense increase for the Apparel
Division is related to increased 1995 sales. The other half of the increase in
the Apparel Division selling, general and administrative expense is due to
comparing twelve months of expenses in 1995 compared to 9 months in 1994 since
the acquisition of the Apparel Division took effect April 1, 1994. As a
percentage of net Apparel Division sales, selling, general and administrative
expense for the Apparel Division remained constant at 20% for both 1995 and
1994.
Depredation and Amortization Depreciation and amortization expense decreased by
$116,000, to $618,000 for the year ended December 31, 1995 from $734,000 for
the same period in 1994. This decrease is primarily attributable to the write
off in 1994 of unamortized Delta patents offset by fixed asset additions in 1995
and the amortization of goodwill recorded in connection with the Ludan
acquisition.
Ipairment Loss on intangibles At the end of 1995, the Company decided to write
off the remaining intangible assets of $4,922,000 acquired on the acquisition
of its wholly-owned subsidiary, Alpha ProTech, Inc. During the fourth quarter of
1995, it became apparent to management that cash flows from the mask, shield and
wound care products manufactured and distributed through Alpha ProTech, Inc. had
declined for each of the past four years and would decline in the future.
Dramatic changes have taken place in the health care market with downsizing,
cost containment pressure and changing of buying practices for medical products.
A significant investment would have to be made to change the Company's
manufacturing equipment and facilities to continue to aggressively attack these
markets. As a result, the Company has modified its strategy in order to maximize
sales and profit by focusing on increased demand for its apparel cleanroom
products and food service industry products.
Interest Interest expense decreased by $335,000, to $563,000 for the year ended
December 31, 1995 from $898,000 for the year ended December 31, 1994. This
decrease is due to the Company obtaining asset based financing at lower interest
rates, as well as due to $830,000 of notes payable being converted to common
stock.
Loss from Operations Loss from operations increased by $5,364,000 to a loss of
$5,413,000 for the year ended December 31, 1995 from a loss from operations of
$49,000 for the year ended December 31, 1994, primarily due to the impairment
loss of $4,922,000 and the increased selling, general and administrative expense
of $780,000 less the improved gross profit of $222,000.
25
<PAGE>
Net Loss Net Loss for the year ended December 31, 1995 was $5,971,000 compared
to a net loss of $658,000 for the year ended December 31, 1994, an increase of
$5,313,000. The net loss increase of $5,313,000 is comprised of the increased
loss from operations of $5,364,000, as described above, a 1994 $285,000
benefit for income taxes offset by a decrease in interest expense of $335,000.
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 combined bonus equal to 10% of the pre-tax profits of
the company. No bonus was earned in 1995 or 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash of $275,000 and working capital of
$2,200,000. The Company currently has a secured asset based lender's line of
credit of $3,000,000, based upon the level of eligible accounts receivable,
inventory and equipment which expires in March 1998. At December 31, 1996, the
maximum line of credit available was $1,331,000 for accounts receivable,
inventory and equipment.
Net cash used for operations was $298,000 for the year ended December 31,1996
and $480,000 in 1995. The Company's use of cash from operations in 1996 was
due primarily to increases in accounts receivable, and inventory partially
offset by increases in accounts payable and accrued liabilities. The Company's
use of cash for operating activities has improved for the past three years going
from $1,015,000 in 1994, $480,000 in 1995 and $298,000 in 1996. This trend is
expected to continue as the Company's sales to the food service and clean room
industries increases.
The Company's investing activities have consisted primarily of expenditures for
fixed assets and the acquisition of businesses which totalled $460,000 for the
year ended December 31,1996 and $417,000 for 1995.
The Company has no significant capital commitments but currently anticipates
that additions to property and equipment for 1997 could be approximately
$600,000 depending on the Company's success in the food industry.
During 1996 the Company's financing activities consisted primarily of equity
infusion of $719,000, $124,000 of related party proceeds and an increase in
the asset based loan of $136,000 offset by repayment of borrowings and capital
leases totaling $290,000 which resulted in the net cash provided by financing
activities of $689,000.
During the period January 1,1997 to March 31,1997 the Company has received net
proceeds of $2,193,000 from the exercise of warrants and options. Management
believes with its trend of using less cash from operating activities along with
its available cash and borrowings as discussed above, the Company has available
cash to finance all known financial commitments for at least 24 months.
26
<PAGE>
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued statement of financial
accounting standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of'. SFAS No. 121
requires that long-lived assets and certain identifiable intangible assets be
reviewed or impairment whenever events indicate that the carrying amount of an
asset may not be recoverable. The Company adopted SFAS No. 121 effective January
1, 1996.
The Financial Accounting Standards Board issued a statement in October 1995
entitled "Accounting for Stock-Based Compensation" which the Company adopted
January 1,1996. This statement establishes an accounting method based on fair
market value of equity instruments awarded to employees as compensation,
however, companies are permitted to continue applying previous accounting
standards in the determination of net income with disclosure in the notes to the
financial statements of the differences between previous accounting measurements
and those formulated by the new accounting standard. Beginning in 1996, the
Company determines net income using previous accounting standards and makes the
appropriate disclosures in the notes to the financial statements as permitted by
the standard.
In February 1997 the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share" which the Company will adopt in the fourth Quarter of
1997. The Company is currently examining the impact of SFAS 128 on its financial
statements.
Cautionary Statements Regarding Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 ("Act") 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
expectation for the future with respect to financial performance or operating
strategies can be identified as forward-looking statements, Forward-looking
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.
27
<PAGE>
BUSINESS
The Company develops, manufactures and markets disposable protective
apparel, food industry, infection control, wound care and consumer products for
the cleanroom, food services, industrial, medical, dental and consumer markets.
The Company operates through four divisions: apparel; food industry; mask and
shield, disposable apparel and wound care. The Company's products are primarily
sold under the "Alpha Pro Tech" brand names but are also sold for use under
private label.
The Company's products are classified into five groups: Disposable
protective apparel consisting of a complete line of shoecovers, headcovers,
gowns, coveralls and labcoats; food industry apparel consisting of a line of
automated shoecovers, sleeve protectors, aprons, coveralls and bus boy jackets;
Infection control, products consisting of a line of facial masks and facial
shields; wound care products consisting of a line of mattress overlays,
wheelchair covers, geriatric chair surfaces, operating room table surfaces and
pediatric surfaces; consumer products consisting of a line of pet bedding and
pet toys.
The Company's strategy is to grow its cleanroom division through its
exclusive Agreement with VWR Scientific Products ("VWR") (formerly Baxter
Scientific), by increasing its manufacturing capabilities to meet VWR's needs.
The Company entered into an exclusive distribution agreement with a major
supplier to the food industry to launch a line of innovative new products to
help solve a major problem in the food industry: accidents that occur because of
employees slipping and falling on wet slippery surfaces found in restaurants and
food processing plants and to help decrease the number of burns caused by frying
and grilling. The Company intends to also maintain its core business in the
medical, dental, industrial and health related markets by using its existing
distributors.
During the fourth quarter of 1995, it became apparent to management that
cash flows from the mask, shield and wound care products manufactured and
distributed through Alpha Pro Tech, Inc. had declined for each of the past four
years and would decline in the future. As a result, the Company has modified its
strategy in order to maximize sales and profit by focusing on increased demand
for its apparel cleanroom products and food service industry products.
The Company's products are used primarily in hospitals, clean rooms,
laboratories and dental offices and are distributed principally in the Untied
States through a network presently consisting of four purchasing groups, ten
major distributors, approximately 200 additional distributors, approximately 30
independent sales representatives and a Company sales force of 7 people.
PRODUCTS
The Company's product groups and products are as follows:
Disposable Protective Apparel
* Shoecovers
* Headcovers
* Gowns
* Coveralls
* Lab Coats
28
<PAGE>
Food Industry
* Automated Shoecovers
* Sleeve Protectors
* Aprons
* Coveralls
* Bus Boy Jackets
Infection Control
* Face Masks
* Eye Shields
Wound Care
* Unreal Lambswool
* Medi-Pads
Consumer Products
* Pet Bedding
* Pet Toys
Disposable Protective Apparel
The Apparel division was established April 1, 1994, for the acquisition of
the assets of DMPI. The products manufactured include many different styles of
shoecovers, headcovers, gowns, coveralls, lab coats, and other miscellaneous
products. These are manufactured in Mexico. See "Recent Developments --
Acquisition of Assets of DMPI"(TM).
Food Industry
Through the acquisition of Gem Nonwovens, Inc. a patented automated shoe
cover machine was required. This prototype machine has been replaced with an
improved new machine which in combination with a patent pending, laminated
material produced by Ludan allowed the Company to develop a shoecover that to
date is being tested by a number of restaurant chains with favorable results and
is to be marketed on an exclusive basis by Chicopee, Inc. The balance of the
food industry products are to be manufactured by the apparel division.
Masks and Face Shields
The facemasks come in a wide variety of filtration efficiencies and styles.
The Company's patented Positive Facial Lock(TM) feature that provides a custom
fit to the face to prevent blow-by for better protection. Combine this feature
with the Magic Arch(TM), that holds the mask away from the nose and mouth and
creates a breathing chamber, and you have a quality disposable facemask.
The term "blow-by" is used to describe the potential for infectious
material entering or escaping a facemask without going through the filter as a
result of gaps or openings in the face mask.
29
<PAGE>
All of the face shields are made from an optical-grade, 7 mil, polyester
film, and have a permanent anti-fog feature. This provides the wearer with
extremely light wright, distortion-free protection that can be worn for hours
and will not fog up from humidity and/or perspiration. An important feature of
all eye and face shields is that they are disposable. This eliminates a change
of cross infection between patients and saves hospitals the expense of
sterilization after every use.
Wound care
The Wound Care Division began with the Company's Unreal Lambswool pressure
sore and bed patient monitoring system product lines. The Unreal Lambswool is
used to prevent decubitus ulcers or bedsores on long term care patients. The bed
patient monitoring system offers nurses an alarm system that tell when patients
try to get out of bed. This helps nursing and other extended and long term care
facilities to comply with the Omnibus Reconciliation Act (OBRA) of 1987 mandate
to work towards using no restraints to control residents or patients in these
facilities.
Consumer Products
The Consumer Product Division uses the Company's existing medical products
and technologies for general consumer purposes. The Unreal Lambswool is being
packaged for the retail pet bed market and pet toys.
Markets
The Company's products are sold to the following markets: Infection Control
Products, (Masks and Shields) and disposable protective apparel are sold to the
Medical and Dental market and the Industrial and Cleanroom markets; Unreal
Lambswool and Medi-Pads are sold to the Wound Care market; Pet Bedding and Pet
Toys are sold to the consumer market; and Automated Shoe Covers are sold to the
Food Industry, Medical, Industrial and Cleanroom market. The Company intends to
expand its marketing efforts for the Food Industry to include apparel, such as
sleeve protectors, aprons, coveralls and bus boy jackets as well as shields,
although no sales of such products to the food industry have been made to date.
Distribution
The Company relies primarily on a network of independent distributors for
the sale of its products including the following:
* VWR Scientific (formerly Baxter Scientific Products)
* Allegiance Health Care
* General Medical
* Medline Industries
* ABCO
* Texwipe
* Owens & Minor
* Stuart Drug & Surgical Supply, Inc.
* Astra Pharmaceutical
* Cottrell, Ltd.
* Henry Schein, Inc.
Of the ten major distributors in the United States to the best of the
Company's knowledge, all sell competing products.
30
<PAGE>
In 1994, the Company entered into an exclusive five year agreement to
supply Scientific Products, a division of Baxter Healthcare Corporation, with
eye and face shields, masks and disposable apparel for sale to the
Industrial/Cleanroom market place. The distribution calls for Baxter to purchase
a minimum of $1 million during the first year to retain exclusive distribution
rights. This minimum figure has been attained for 1994 and 1995. During 1995
Baxter Scientific Products was sold to VWR Scientific Products who has continued
to honor the Agreement. In 1996, a new agreement was entered into with VWR
Scientific Products with required minimum purchases of $ 5,000,000 annually to
retain exclusive distribution rights.
In April, 1996 the Company entered into a three year distribution agreement
with Chicopee, Inc. of Dayton, New Jersey with respect to the distribution of
the Company's line of Aqua Trak black shoe covers.
Chicopee was granted exclusive distribution rights for the restaurant, food
service, food processing and related businesses in the United States, Canada and
Mexico. In order to maintain this exclusivity, Chicopee must purchase $ 11
Million of products during the 18 month period, beginning April 8, 1996. Failure
to meet such minimum purchases could result in termination of exclusivity. The
contract also allows for new products to be added to the agreement with their
own agreed upon minimum purchase amounts in return for similar exclusivity. The
product is still in the introductory stage and sales to date have not been
material.
Sales to the Scientific Products division of Baxter Healthcare ("Baxter")
represent 28.2% of total sales on 1995, and sales to VWR Scientific Products,
the successor to Baxter represented 42.9% of total sales for 1996. The loss of
this customer would have a material adverse effect on its business.
The Company does not generally have backlog orders, as orders are usually
placed for immediate shipment and contract for shipment over a period of time.
The Company anticipates no problems in fulfilling orders as they are placed.
Manufacturing
The Company's mask production, shield production and automated shoecover
facility is located in a leased 26,800 square foot building at 903 West Center
Street, Bldg. E North Salt Lake, Utah. Approximately 3000 square feet of this
building is used for corporate offices. A 19,500 square foot facility is located
at 1145 Norwood Road, Janesville, Wisconsin 53543 is used for the manufacture of
the Company's unreal lambskin products.
The Company's disposable protective apparel's production is located in
three facilities, a 35,000 sq. ft. facility is located at 1180 West Industrial
Park Drive in Nogales, Arizona which is used for cutting, warehousing and
shipping, a 33,000 square foot facility is located at Bustamonte Drive, Nogales,
Mexico which is used for assembly of shields and sewing, and a 30,000 sq. ft.
facility located at Ave. Abolardo L. Rodriguez y Novena, Benjamin Hill, Sonora
83900, is used for sewing.
As a result of the March 1995 acquisition of Ludan Corporation the Company
has a materials coating and automated shoe cover facility of 16,000 square feet
in Valdosta, Georgia.
The Company has multiple suppliers of the materials used to produce its
products. In that regard, the Company currently has no problems, and does not
anticipate any problems, with respect to the sources and availability of the
materials needed to produce its products. The business of the Company is not
subject to seasonal considerations. It is necessary for the Company to have
adequate finished inventory in stock, and the Company generally maintains a one
to two-month supply of product. With respect to the optical grade polyester film
used in its products, it generally must be ordered two months in advance, and
the Company generally carries a three-month supply of film.
31
<PAGE>
Competition
The Company faces substantial competition from numerous other companies,
including some companies with greater marketing and financial resources. The
Company's major competitor in the medical and dental markets is Technol, Inc. of
Fort Worth, Texas. Other large competitors would include Minnesota Mining and
Manufacturing Corporation (3M), Johnson & Johnson, and Isolyser, Inc., American
Threshold and Maxium. The Company's major competitors in the industrial and
cleanroom market are Technol, Inc., 3M, Isolyser, Inc., Kimberly Clark, Kappler
USA, and Allegiance Health Care. In the wound care market, Texten Corp., Glenoit
Mills and Hudson Industries are the principal competitors, and in the consumer
products market, principal competitors include Flexmat Corporation, Lazy Pet
Company and Dogloo, Inc. The Company has entered the food service market with
its new Aqua-Trak shoecover product, and expects competition from companies who
provide floor treatment and manufacturers of safety boots, such as Weinbrenner,
Inc. However, the Company believes that the quality of its products, along with
the price and service provided, will allow it to remain competitive in the
disposable apparel market.
The Company is not required to obtain regulatory approval from the U.S.
Food and Drug Administration ("FDA") with respect to the sale of its products.
The Company's products are however, subject to prescribed "good manufacturing
practices" as defined by the FDA and its manufacturing facilities are inspected
by the FDA every two years to assure compliance with such "good manufacturing
practices." The Company is marketing a new Particulate Respirator that meets the
new O.S.H.A. respirator guidelines and which has been approved by the National
Institute for Safety and Health (NIOSH). This product is designed to help
prevent the breathing in of the tuberculosis virus.
The Company does not anticipate that any federal, state and local
provisions which have been or may be enacted or adopted regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, will have any material effect upon the capital expenditures,
earnings and competitive position of its business.
Patents and Trademarks
Patents
The Company's policy is to protect its intellectual property rights,
products, designs and processes through the filing of patents in the United
States and, where appropriate, in Canada and other foreign countries. At
present, the Company has 13 United States patents relating to its MEDS,
Add-A-Mask, Coverall, 1/2 Coverall, Combo Cone, Combo, Positive Facial Lock and
Shieldmate products and a U.S. patent on the automated shoecover and the
shoecover process. The Company also has a United States patent pending on a
fluid impervious and non-slip fabric for the Company's Aqua-Trak shoe cover. The
Company has foreign patents either issued or pending for its MEDS, 1/2 Coverall,
Combo Cone and Combo products but does not intend to maintain those foreign
patents on products whose sales do not justify the maintenance expense. The
Company believes that its patents may offer a competitive advantage, but there
can be no assurance that any patents, issued or in process, will not be
circumvented or invalidated. The Company also intends to rely on trade secrets
and proprietary know how to maintain and develop its commercial position.
The various United States patents issued have remaining durations of
approximately 10 to 15 years before expiry.
32
<PAGE>
Trademarks
Many of the Company products are sold under various trademarks and trade
names including Alpha Pro Tech and others. The Company believes that many of its
trademarks and trade names have significant recognition in its principal markets
and takes customary steps to register or otherwise protect its rights in its
trademarks and trade names.
Employees
As of February 1, 1997, the Company had 594 employees, including eight
persons at its head office in MArkham, Ontario, Canada; 40 persons at its
facemask production facility in Salt Lake City, Utah, and 20 persons at its
Unreal Lambskin production facility in Janesville, Wisconsin; 25 persons at its
cutting, warehouse and shipping facility in Nogales, Arizona; 200 persons at its
shield assembly and sewing operation in Nogales, Mexico; 280 at its sewing
operation in Benjamin Hill, Mexico; and 21 persons at its coating and automated
shoe cover facility in Valdosta, Georgia.
None of the Company's employees in the United States and Canada are subject to
collective bargaining agreements. However, a collective bargaining agreement
with the Confederation of Mexican Workers, exists for its Mexican employees.
Benefits are reviewed annually by May, and the 1997 agreement has been signed
with moderate benefit increases. Wages are set by the Government of Mexico. The
Company considers its relations with the union and its employees to be good.
Properties
The Company's Head office is located at 60 Centurian Drive, Suite 112,
Markham, Ontario L3R9R2. The approximate monthly costs are $2,500 under a lease
expiring January 31, 1998. Eight (8) employees of the Company, including the
President, Alexander Millar; Chief Executive Officer, Sheldon Hoffman and Vice
President and Controller, Lloyd Hoffman work out of this head office.
The Company manufactures its surgical face masks at 903 West Center Street,
Building C, North Salt Lake, Utah 84054. The monthly rental is $ 6,413 for
32,000 square feet. This lease expires July 1, 1998 with successive 2-year
renewal options at rents based on the U.S. Consumer Price Index.
A second manufacturing facility is located at 1145 Norwood Road,
Janesville, Wisconsin. These premises of 19,500 square feet are leased for $
4,853 monthly. The lease expires June 30, 1997 and there are two, 2-year renewal
options tied to the U.S. Consumer Price Index. The Company's line of Unreal
Lambskin products are manufactured in these facilities.
The Apparel division has its cutting operation, warehousing, and shipping
facility at 1180 West Industrial Park Drive, Nogales, Arizona. The monthly
rental is $ 11,812 for 35,000 square feet. This lease is on a monthly basis.
Shield assembly and sewing is done at Bustamonte Drive in Sonora, Mexico. The
monthly rental is $ 9,900 for 33,000 square feet. This lease expires July 31,
1999. Sewing is done at Ave. Abelardo L. Rodriguez Y. Novena, Benjamin Hill,
Sonora, Mexico. The monthly rental is $ 8,500 for 30,000 square feet. This lease
is on a month to month basis.
The Coating Division has its facility at 2224 Cypress Street, Valdosta,
Georgia. The monthly rental is $ 3,600 for 16,000 square feet.
The Company believes that these arrangements are adequate for its present
needs and that other premises, if required, are readily available.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are listed in the table
below and brief summaries of their business experience and certain other
information with respect to them are set forth thereafter:
Director or
Executive
Name Age Officer Since Position with the Company
- ---- --- ------------- -------------------------
Sheldon Hoffman 59 July 11, 1989 CEO & Director of the Company
and Alpha Pro Tech, Inc.
Al Millar 54 July 11, 1989 President & Director of the
Company and Alpha Pro Tech,
Inc.
Robert Isaly 67 November 15, 1989 Director
John Ritota 45 December 18, 1991 Director
Donald E. Bennett, Jr. 55 June 23, 1994 Director and President of the
Company's Apparel Division
Lloyd Hoffman 35 July 1, 1993 Vice President and Controller
Michael Scheerer 37 January 1, 1997 Senior Vice President-- Sales
and Marketing
SHELDON HOFFMAN is a chartered accountant and has been a director and chief
executive officer of the Company since July 11, 1989. Mr. Hoffman founded and
was president of Absco Aerosols Ltd., a custom manufacturer of aerosols and
liquids, from 1967 to 1985 until that company was sold to CCL Industries Inc.
("CCL"), a manufacturer of aerosol and liquid products and containers. Mr.
Hoffman joined CCL from 1986 to 1987 as director of business development and
then joined CCW Systems Ltd., a water filter manufacturer, as president and
chief executive officer. Mr. Hoffman devotes full time to the Company's
operations.
ALEXANDER W. MILLAR has been a director of the Company since July 11, 1989 and
president since August 1, 1989. Mr. Millar has spent over 20 years as a
professional in sales and marketing including international marketing. Mr.
Millar, in various sales capacities, including vice-president of sales, was
associated with Mr. Hoffman at Absco Aerosols Ltd. from 1971 to 1985, when the
business was sold to CCL. He then joined CCL as manager of business development
for North America. In March, 1988, he formed Milmed International Distributors
Limited to distribute the Company's products internationally. In 1989 Milmed
gave up its rights to distribute these products internationally at which time
Milmed ceased operations. Mr. Millar devotes full time to the Company's
operations.
ROBERT ISALY has been a director of the Company since November 20, 1989. He was
the owner of a nursery, Florida Bedding Plants Inc. from 1986 to 1992 and is
currently an independent businessman.
JOHN RITOTA has been a director of the Company since December 18, 1991 and since
1981 to the present time has been operating a general dentistry practice, Ritota
and Ritota, with his brother in Del Ray Beach, Florida.
34
<PAGE>
DONALD E. BENNETT, JR. joined the Company on March 24, 1994 as President of its
newly formed Apparel Division which was established to acquire the assets of
Disposable Medical Products, Inc. ("DMPI"), a manufacturer of medical apparel
items including bouffant caps, shoe covers, gowns, coveralls and lab coats. Mr.
Bennett owned and operated DMPI for approximately twenty years prior to the
Company's acquisition of its assets.
LLOYD HOFFMAN has been employed by the Company starting November 15, 1991 in the
capacity of accountant and since early 1995 in the capacity of Vice President
and Controller. From 1987 to 1991, Mr. Hoffman was a shareholder and was in
charge of finance and administration at Software Concept Inc., a developer of
software for association and magazine publishers.
MICHAEL SCHEERER joined the Company on January 1, 1997 as Senior Vice
President-Sales and Marketing. From 1990 to October 1992, Mr. Scheerer was
Director of Sales Development and Administration at Baxter Scientific Products.
In October, 1992, he was named Vice President-Sales and Marketing for Baxter's
Critical Environmental Solutions business. In September, 1995 Baxter Scientific
Products was purchased by VWR Scientific Products, Inc. where Mr. Scheerer
served as Vice-President Critical Environmental Solutions and New Business
Ventures until joining the Company.
There are no family relationships between the above persons other than Lloyd
Hoffman who is the son of Sheldon Hoffman.
Settlement with British Columbia Securities Commission
On November 10, 1995, Sheldon Hoffman a Director and CEO of the Company and
Alexander Millar, a Director and President of the Company settled all
outstanding matters pending before the British Columbia Securities Commission
(the "BCSC"), which were commenced in March 1992 by the British Columbia
Superintendent of Brokers ("Superintendent"). See "Recent Developments --
Matters Before the British Columbia Securities Commission." The settlement
provides that as to each of Messrs. Hoffman and Millar: a Cease Trade Order as
to sales by them of the Company's securities in British Columbia shall remain in
effect for 2 years; each shall be prohibited from becoming or acting as a
director or officer of any British Columbia reporting issuer, other than the
Company, until such time as they have successfully completed a course of study
satisfactory to the Superintendent concerning the duties of directors and
officers of reporting issuers; full payment to the BCSC shall have been made of
$29,000 as to Hoffman and $14,500 as to Millar; and the Superintendent consents
to their acting in the capacity of a director or officer of a British Columbia
reporting issuer. All matters pending as to Robert Isaly, a Director of the
Company, were dropped. The payments to the BCSC are being made monthly over a
two year period ending in December, 1997. Messrs. Millar and Hoffman are
enrolled in a course of study scheduled to begin and be completed during the
months of September and October, 1997.
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1997
with respect to shares of Common Stock of the Company beneficially owned by each
director of the Company, each nominee for director, each executive officer of
the Company, by all officers and directors as a group, and by persons known to
the Company to be beneficial owners of more than 5% of the Company's Stock.
Directors, Executive Officers Number of Shares
and 5% Shareholders Beneficially Owned Percent of Class
- ------------------- ------------------ ----------------
Cede & Co. 13,166,337 55.5%
Box 20 Bowling Green Sta.
New York, NY
U.S.A. 10004
Al Millar, President & Director 1,393,067 (1)(8) 5.4%
423 Herridge Circle
Newmarket, Ontario
L3Y 7H7
Canada
Sheldon Hoffman, CEO 1,102,457 (2)(8) 4.3%
and Director
Hoffman Family Trust 420,091 (8) 1.81%
Robert H. Isaly, Director 665,613 (3) 2.6%
John Ritota, Director 190,194 (4) **
Lloyd Hoffman, VP & Controller 323,000 (5) 1.2%
Donald E. Bennett, Jr., Pres., 263,334 (6) 1.0%
Apparel Division of Company
Michael Scheerer 100,000 (7) **
Sr. VP-Sales and Marketing
All Directors and Officers 4,037,665 15.6%
as a Group (7 persons)
* This company is nominee for beneficial owners of these shares whose
identity is unknown to the Company.
** Less than l%
36
<PAGE>
(1) Includes 300,000 options currently exercisable at $0.75 per share,
expiring October 27, 1998; 200,000 currently exercisable options at $1.34
per share, expiring December 21, 2000; 100,000 options currently
exercisable at $.97 per share expiring January 5, 2002; and includes
44,198 shares and currently exercisable options to purchase 35,000 shares
at $0.75 per share owned beneficially by Mr. Millar's wife as to which Mr.
Millar denies beneficial ownership.*
(2) Includes 300,000 currently exercisable options at $0.75 per share,
expiring October 27, 1998; 200,000 options currently exercisable at $1.34
per share, expiring December 21, 2000; 100,000 currently exercisable
options to purchase at $.97 per share expiring January 5, 2002; and
includes 42,821 shares owned beneficially by Mr. Hoffman's wife, as to
which Mr. Hoffman denies beneficial ownership. Does not include 420,051
shares held by Hoffman Family Trust, as to which Mr. Hoffman denies
beneficial ownership. The beneficiaries of the Hoffman Family Trust are
Mr. Hoffman's wife and their two children. Mr. Hoffman does not have the
power to vote or dispose of the shares held by the Trust.*
(3) Includes 141,523 shares owned beneficially by Mr. Isaly's wife, as to
which Mr. Isaly denies beneficial ownership; 108,000 currently exercisable
options at $0.75 per share, expiring October 27, 1998; and 50,000 options
currently exercisable at $1.34 per share expiring December 21, 2000;
50,000 currently exercisable options at $ .97 per share, expiring January
5, 2002.*
(4) Includes currently exercisable options to purchase 50,000 shares at $0.75
per share, expiring October 27, 1998; 50,000 currently exercisable options
at $1.34 per share expiring December 21, 2000; and includes 2,000 shares
held by Mr. Ritota's wife as to which Mr. Ritota denies beneficial
ownership; 50,000 currently exercisable options at $.97 per share,
expiring January 5, 2002.*
(5) Includes 135,000 options currently exercisable at $0.75 per share,
expiring October 27, 1998, 25,000 options currently exercisable at $1.34
per share expiring December 21, 2000; 50,000 currently exercisable options
at $.97 per share, expiring January 5, 2002; and 5,000 shares beneficially
owned by Mr. Hoffman's wife, as to which Mr. Hoffman denies beneficial
ownership. Mr. Hoffman disclaims beneficial ownership with respect to any
shares of the Company held in the Hoffman Family Trust (see (2) above),
except to the extent of his pecuniary interest therein.* See "Certain
Relationships and Related Transactions".
(6) Includes 100,000 options currently exercisable at $1.00 per share, 50,000
of which expire on April 29, 1999 and 50,000 of which expire on December
31, 1999; 25,000 currently exercisable options at $2.03 per share,
expiring June 22, 2000; 25,000 options currently exercisable at $1.34 per
share, expiring December 21, 2000; 6667 Warrants currently exercisable at
$.75 per share, expiring March 1, 1999,* and 100,000 options currently
exercisable at $.97 per share, expiring January 5, 2002.*
(7) Includes 100,000 options currently exercisable at $0.875 per share
expiring December 31, 2001. See "Management-- Employee Arrangements."*
(8) Pursuant to an escrow agreement made in June 1989 between the National
Trust Company, the Company and certain shareholders of Alpha Pro Tech,
Ltd. (the "Escrow Agreement"), 3,150,000 of the Company's shares are held
in escrow by the National Trust Company, Vancouver, B.C., and are subject
to certain performance criteria before they are released. The Escrow
Agreement provides that the shares will be released to the shareholders,
pro rata, on the basis of one share for each $ 0.30 of Net Cumulative Cash
Flow (as defined in the Escrow Agreement) in any fiscal period commencing
June 1, 1989. The Escrow Agreement was a condition of an agreement
relating to the purchase of certain assets by the Company to commence the
manufacturing and marketing of its products, and a requirement of the
Vancouver Stock Exchange. The shareholders pursuant to the Escrow
Agreement included the following persons named in the foregoing table in
the following amounts: Al Millar as to 675,000 shares; Sheldon Hoffman as
to 337,500 shares; Hoffman Family Trust as to 337,500 shares; Irving
Bronfman as to 675,000 shares and Robert Isaly, on behalf of various
persons, as to 450,000 shares. In December, 1996 the rights to
37
<PAGE>
those shares were exchanged for 2,475,000 newly issued shares free of the
Escrow Agreement. See "Certain Transactions." The balance of 675,000
shares were owned by John Russell and are deemed to be cancelled.
* A currently exercisable option or warrant is one which is exercisable
within 60 days from the date hereof.
Percentages are based on 23,731,616 Common Shares of the Company outstanding on
March 31, 1997 plus currently exercisable options and warrants for 2,118,000
shares held by directors and officers, for an aggregate total of 25,849,616
shares.
Messrs. Sheldon Hoffman, Al Millar and Lloyd Hoffman are residents of Canada and
Messrs. Ritota, Isaly, Bennett and Scheerer reside in the United States.
Director's Meetings
The Board of Directors of the Company met five (5) times during the year ended
December 31, 1996. In 1996 the Company had no standing nominating or
compensation committees, these maaters being handled by the entire Board of
Directors. In 1993, the Board of Directors of the Company formed an
Administrative Committee for the 1993 Stock Option Plan for Directors consisting
of Messrs. Al Millar and Sheldon Hoffman which recommends granting of
non-qualified stock options to non-employee directors. The Board of Directros
also has an Audit Committee which reviews the scope and plan of the annual
audit, reviews the audit results and report thereon, oversees action taken by
the Company's independent auditors and reviews the Company's internal controls.
The Company's Audit Committee sits for a term of one year and a new audit
committee is formed each year following the annual meeting. In 1996, the Audit
Committee was composed of Messrs. Hoffman, Isaly and Ritota. One meeting of the
Audit Committee was held in 1996.
In addition to participation at Board and Committee Meetings, the Company's
directors discharge their responsibilities throughout the year through personal
meetings and other communications, including considerable telephone contact with
the CEO and others regarding matters of interest and concern to the Company.
Compensation of Directors
Directors who are not officers or employees of the Compant ("Outside Directors")
are reimbursed for their direct expenses incurred in attending a meeting.
EXECUTIVE COMPENSATION
Report of Compensation Committee
In 1996, the Company's executive compensation program was administred by the
Board of Directors. The entire Board makes recommendations on two of the three
key components of the Company's executive compensation program, base salary and
contractual incentive awards, and the Outside directors recommend and award the
long-term incentives.
The Company's executive compensation program is structured to help the Company
achieve its business objectives by:
- providing compensation opportunities that will attract, motivate and
retain highly qualified managers and executives
- linking executives' total compensation to company and individual job
performance
38
<PAGE>
- providing an appropriate balance between incentives focused on
achievement of annual business plans and longer term incentives tied
to increases in shareholder value
The Company's executive compensation program is designed to provide competitive
compensation opportunities for all corporate officers. The Company's total
compensation levels fall in the low to middle of the range of rates paid by
other employers of similar size and complexity, although complete comparative
information is not easily obtainable.
Base Salaries
The Company's salary levels are intended to be consistent with competitive
practices and levels of responsibility, with salary increases reflecting
competitive trends, the overall financial performance of the Company, and the
performance of the individual.
Contractual Incentive Awards
Pursuant to the executive compensation program, the Company has contracted to
provide two of its executive employees with profit participation incentive
compensation. Messrs. Millar and Hoffman are each entitled to a cash incentive
participation equal to 5% of the consolidated annual pre-tax profits of the
Company.
Stock Options
The Company periodically grants incentive and non-qualified stock options to
purchase the Company's Common Stock in order to provide certain Compensation to
key employees of the Company and its subsidiaries with a competitive toal
compensation package and to reward them for their contribution to the Company's
short and long-term stock performance. These stock options are designed to align
the employees' interest with those of the shareholders. All options have an
option price that is not less than the fair market value of the stock on the
date of grant. The term of the options and the dates after which they become
exercisable are established by the Board, with respect to incentive stock
options, within the parameters of the 1993 Incentive Stock Option Plan and by
the Administrative Committee with respect to the 1993 Stock Option Plan For
Directors. The Company does not grant stock appreciation rights.
1996 Compensation
The CEO, President and President of the Company's Disposable Apparel Division
are compensated on a salary and pay-for-performance approach. Taken into
consideration are overall Company performance in attaining annual growth in
revenues, the addition or development of new and enhanced products, pretax
earnings, and the achievement of short and long term goals of the Company's
business as established in its five year plan. Messrs. Hoffman and Millar's
salaries were increased in 1996 from its previous level of $ 115,000 to $
141,000 and $ 131,000, respectively. No contractual incentive awards were paid
for in 1996.
39
<PAGE>
Compliance with Section 162(m) of the Internal Revenue Code of 1986
Deductibility of Compensation Effective January 1, 1994, the Internal Revenue
Service under Section 162(m) of the Internal Revenue Code will generally deny
the deduction of compensation paid to the Chairman and the four other highest
paid executive officers required to be named in the Summary Compensation Table
to the extent such compensation exceed $ 1 million per executive per year
subject to an exception for compensation that meets certain "performance-based"
requirements. Whether the Section 162(m) limitations with respect to an
executive will be exceeded and whether the Company's tax deductions for
compensation paid in excess of the $ 1 million limit will be denied will depend
upon the resolution of various factual and legal issues that cannot be resolved
at this time. As to options granted under the 1993 Incentive Stock Option Plan,
the Committee intends to qualify to the extent practicable, such options udner
the rules governing the Section 162(m) limitation so that compensation
attributable to such options will not be subject to limitation under such rules.
As to other compensation, while it is not expected that compensation to
executives of the Company will exceed the Section 162(m) limitation in the
foreseeable future (and no officer of the Company received compensation in 1994
which resulted under Section 162(m) in the non-deductibility of such
compensation to the Company), various relevant considerations will be reviewed
from time to time, taking into account the interests of the Company and its
Shareholders, in determining whether to endeavor to cause such compensation to
be exempt from the Section 162(m) limitation.
Respectfully submitted,
Sheldon Hoffman, Chief Executive Officer
Al Millar, President
Donald E. Bennett, Jr.
Robert H. Isaly
John Ritota
Compensation Committee Interlocks and Insider Participation
The Membership of the Compensation Committee is set forth under "Report of the
Compensation Commitee." Except with respect to their compensation arrangements,
Mr. Hoffman, CEO and Mr. Millar, President, participated in executive
compensation deliberations and recommendations of the Board of Directors.
40
<PAGE>
Summary Compensation Table
The following table sets forth the aggregate cash and cash equivalent forms of
compensation paid by the Company during the last three fiscal years for services
in all capacities to those persons who were as of December 31, 1996, the Chief
Executive Officer and each of the most highly compensated executive officers (a
total of two persons), to the extent each earned more than $ 100,000 in salary
and bonus ("Named Officers").
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Name and Other Shares
Principal Annual Underlying All Other
Position Year Salary($) Bonus($) Compensation Options (#) Compensation ($)
- -------- ---- --------- -------- ------------ ------- --- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sheldon Hoffman 1996 141,000 -- -- -- -- 4,500
CEO 1995 115,000 -- -- -- 200,000 4,500
1994 100,000 -- -- -- -- 4,500
Al Millar 1996 131,000 -- -- -- -- 7,500
President 1995 115,000 -- -- -- 200,000 7,500
1994 100,000 -- -- -- -- 7,500
</TABLE>
OPTION GRANTS FOR FISCAL YEAR 1996
There were no stock option grants under the 1993 Incentive Stock Option Plan
which were made for the fiscal year ended December 31, 1996 to the Named
Officers.
Employment Arrangements
Messrs. Hoffman and Millar receive annual car allowances of $4,500 and
$7,500, respectively.
Messrs. Hoffman and Millar are also entitled to a combined bonus equal to
10% of the pre-tax net profits of the Company (5% to each). No bonus was earned
with respect to the fiscal years ended December 31, 1994, 1995 or 1996.
Donald E. Bennett, Jr., entered into a three year employment agreement with
the Company in March 1994 as President of the newly formed Apparel Division
providing for an annual salary of $65,000, a $700 per month automobile allowance
and 15% of the Division's net profit before taxes. During 1995 the agreement was
amended to eliminate the 15% of net profits provision and to increase his annual
salary to $100,000.
Michael Scheerer entered into a three (3) year employment agreement with
the Company as of January 1, 1997 as Senior Vice President-Sales and Marketing,
providing for an annual salary of $112,500. Mr. Scheerer is also entitled to a
cash bonus based upon actual earnings for the year as a percentage of projected
net income, ranging from $30,000.00 if 80% of projected earnings are achieved to
$200,000.00 if 200% or more of projected earnings are achieved. If actual
earnings are 100% of projected net income in any year of the agreement, the
agreement shall automatically be extended for an additional two years. Mr.
Sheerer was also granted a five (5) year incentive stock option to purchase up
to 100,000 shares of Common Stock at $.875 per share, the fair market value on
the date of grant.
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<PAGE>
He is also entitled to receive additional incentive stock options in each
year of the agreement based on the actual earnings as a percentage of projected
earnings, as follows:
Actual Earnings Number of
as a % of Projected Earnings Options
---------------------------- -------
80% 60,000
90% 80,000
100% 100,000
Stock Options Plans
Incentive Stock Option Plan
The Company has an Incentive Stock Option Plan (the "Plan") for Officers
and other Key Employees with 2,100,000 shares reserved for grant thereunder. The
Plan, which was adopted by the Board of Directors in October, 1993 was approved
by Shareholders at the Annual Meeting in June 1994. The Plan, is administered by
the Board of Directors which selects the employees to whom the options are
granted, determines the number of shares subject to each option, sets the time
or times when the options will be granted, determines the time when the options
may be exercised and establishes the market value of the shares. The Plan
provides that the purchase price under the option shall be at least 100 percent
of the fair market value of the shares of the Company's Common Stock. The
options are not transferrable. There are limitations on the amount of incentive
stock options that an employee can be granted in a single calendar year. The
terms of each option granted under the Plan is determined by the Board of
Directors, but in no event may such term exceed ten years. Between October 28,
1993 and December 31, 1995, five-year options covering an aggregate of 1,859,000
shares were granted to 32 employees at an average exercise price of $0.957 per
share. 87,000 options were granted to employees in 1996. At the Company's Annual
Meeting of Shareholders, scheduled for June 20, 1997, shareholders are being
asked to increase the number of shares reserved for grant to 3,000,000.
Included in those employees to whom options were granted through 1996 are
the following executive officers:
Name Number of Options Granted
---- -------------------------
Al Millar, President 500,000
Sheldon Hoffman, CEO 500,000
Donald Bennett, President 150,000
Apparel Division
In addition, Donna Millar, an employee of the Company and the wife of Al
Millar, President, was granted an option to purchase 35,000 shares and Lloyd
Hoffman, an officer of the company and the son of Sheldon Hoffman, was granted
an option to purchase 235,000 shares.
42
<PAGE>
Directors Stock Option Plan
The Board of Directors of the Company in October 1993 approved the 1993
Directors Stock Option Plan (the "Directors Plan") covering an aggregate of
600,000 shares of Common Stock. The Board of Directors or a Committee thereof
administers the Directors Plan. Directors of the Company who are not employees
of the Company are eligible to participate in the Plan. Each option granted will
have an exercise price equal to fair market value on the date of grant. As of
December 31, 1996 options covering an aggregate of 400,000 shares had been
granted to 5 directors and two former directors at an average exercise price of
$1.02 per share as follows. No options were granted in 1996:
Name Option Date Expiration Date Number of Shares
Robert Isaly 12/21/95 12/21/2000 50,000
Robert Isaly 10/28/93 10/27/98 108,000
John Ritota 12/21/95 12/21/2000 50,000
John Ritota 10/28/93 10/27/98 50,000
Irving Bronfman** 10/28/93 10/27/98 5,000(1)
Hans Rieder* 10/28/93 10/27/98 42,000(1)
Robert Gayton** 10/28/93 10/27/98 25,000(1)
Jim Rothstein*** 06/23/95 03/31/97 25,000
Jim Rothstein*** 12/22/95 03/31/97 25,000
The Company does not have any pension, profit sharing or similar plans
established for its employees, other than the bonus payable to Messrs. Hoffman,
Millar and Scheerer described above.
- ----------
* Retired as a director on June 24, 1994.
** Retired as a director on June 23, 1995.
*** Did not stand for re-election at June 21, 1996 Annual Meeting
(1) These options were exercised
CERTAIN TRANSACTIONS
Transactions with Management and Others
As of January 31, 1996 Messrs. Millar and Sheldon Hoffman loaned $ 28,245
and $ 50,000 respectively to the Company. The terms of the loan provided for a
Note to each of Messrs. Millar and Hoffman, payable on demand, bearing interest
at 15% per annum, to be secured by and repaid from the proceeds of an
anticipated income tax refund of approximately $ 168,000. In addition, Messrs.
Millar and Hoffman were issued Warrants to purchase 46,840 and 48,544 shares
respectively of the Company's Common Stock at $ 1.03 per share, the fair market
value of the Common Stock on the date of issuance of the Warrant. The Warrants
expired on January 31, 1997. The loans and accrued interest were repaid in the
first quarter of 1997.
Exchange of Escrow Shares
43
<PAGE>
The business currently being conducted by the Company is an outgrowth of an
agreement made as of the 5th day of April, 1989 amongst John Russell (the
inventor of certain products currently being manufactured, marketed and
distributed by the Company), Al Millar (currently president and a director of
the Company), Sheldon Hoffman (currently chief executive officer and a director
of the Company), Robert Isaly, Irving Bronfman, (respectively a current and
former director of the Company), BFD Inc. (an Alabama corporation), 779177
Ontario Inc. (a corporation owned by Sheldon Hoffman and Irving Bronfman),
Milmed International Distributors Limited (a company owned by Al Millar), and
the Company (which was then known as Canadian Graphite Ltd.), pursuant to which
the Company purchased all the assets, patents, trade secrets, inventory,
goodwill and other properties owned by such parties (the "Assets") in exchange
for issuing an aggregate of 3,500,000 shares of its common stock to manufacture,
among other items, certain transparent eye protection products utilizing an
optical-grade polyester film (the "Acquisition Agreement").
Essentially, this was considered a "reverse acquisition" in that the owners
of the assets were in control of the Company after the issuance of the 3,500,000
shares. It was a requirement of the Vancouver Stock Exchange ("VSE") (on which
stock exchange the Company's shares were then listed) in these types of
transactions that a certain percentage of the newly issued shares were to be
held in escrow, the ultimate amount to be determined by the VSE after
negotiations with the owners of the assets.
Consequently, an escrow agreement was entered into in June 1989 between the
National Trust Company, the Company and certain shareholders of Alpha Pro Tech,
Ltd. (the "Escrow Agreement"), pursuant to which 3,150,000 of the Company's
shares were held in escrow by the National Trust Company, Vancouver, B.C., and
are subject to certain performance criteria before they are released. The Escrow
Agreement provides that the shares will be released to the depositing
shareholders, pro rata, on the basis of one share for each $ 0.30 of Net
Cumulative Cash Flow in any fiscal period after June 1, 1989.
"Net Cumulative Cash Flow" is defined as:
(a) the Cash Flow of the Company from the sale of products in fiscal
periods commencing June 1, 1989; from
(b) plus, in the case of fiscal periods later than the 1989 fiscal year of
the Company the aggregate of the Cash Flow in each such fiscal period
from and after the 1989 fiscal year of the Company.
"Cash Flow" means net, after tax, profit for the appropriate period by
adding to the net profit the following add-backs:
(a) depreciation;
(b) depletion;
(c) deferred taxes;
(d) amortization of goodwill;
(e) amortization of research and development costs.
All of the foregoing are to be derived from the Company's audited financial
statements.
44
<PAGE>
The shareholders participating in the Escrow Agreement included the
following persons in the following amounts: Al Millar, President and Director of
the Company as to 675,000 shares; Sheldon Hoffman, CEO and a Director of the
Company as to 337,500 shares; Hoffman Family Trust ( a trust for the benefit of
members of Sheldon Hoffman's family), as to 337,500 shares; Irving Bronfman a
former Director of the Company as to 675,000 shares and Robert Isaly, currently
a Director of the Company, on behalf of various persons, as to 450,000 shares.
The balance of 675,000 shares were owned by John Russell the inventor of certain
products currently being manufactured by the Company, the rights to which were
purchased by the Company in June, 1989. These 675,000 shares were cancelled
pursuant to a Litigation Settlement Agreement dated August 19, 1994, the terms
of which provided for the payment by the Company of $ 260,000 to Mr. Russell and
the cancellation of the 675,000 shares.
On December 30, 1996, the Board of Directors of the Company (including
Messrs. Millar, Hoffman and Isaly who constitute a majority of the board)
authorized the issuance of 2,475,000 shares of its Common Stock in exchange for
all rights to the 2,475,000 shares of Company Common Stock owned by Al Millar,
President, Sheldon Hoffman, CEO, the Hoffman Family Trust, Irving Bronfman and
Robert Isaly, (Exchanging Shareholders"), and which are subject to the existing
Escrow Agreement. The Common Stock issued is identical in all respects to the
rights to the Common Stock surrendered by the Exchanging Shareholders. Common
Stock of the Exchanging Shareholders which is subject to the Escrow Agreement of
June 1989 was treated as issued and outstanding, has full voting rights, is
entitled to receive all dividends but have been excluded in computing earnings
per share because the effect of including them would be anti-dilutive. These
shares are being treated as "cancelled" on the books and records of the Company.
Therefore, the issuance of the shares to the Exchanging Shareholders does not
change any of the rights and privileges of the Exchanging Shareholders nor
increase their beneficial ownership nor would there be an effective change to
the capitalization of the Company. The number of shares issued and outstanding
after the issuance is the same as that outstanding prior to the transaction. The
fair value of the newly issued shares, $2,204,000, (based on the average between
the closing bid and asked price of the Common Stock in the over-the-counter
market on December 30, 1996) is, however, a charge to earnings for 1996 which
will result in an increase to accumulated deficit. Simultaneously, there was an
increase to paid in capital resulting in shareholders equity remaining
unchanged.
The Escrow Agreement also provides that the shares now held in escrow would
be released to the shareholders pro rata if certain performance criteria noted
above, are met, and that any shares not so released before April 5, 1999 would
be surrendered to the Company for cancellation at that time.
The Board issued the shares free of any escrow arrangement because it is
the Board's belief that the current escrow terms do not give any weight to
certain achievements the Company has attained since these conditions were
imposed, notwithstanding that the Company has failed to record profits or to
increase stockholders equity in any material amount in the last several years,
and that it wrote off $ 4,922,000 of intangible assets and reported a net loss
of $ 5,971,000 for the year ended December 31, 1995. Since the time that the
escrow conditions were imposed, it is the Board's opinion that those persons
whose shares are in escrow including Irving Bronfman, a former director, have
made valuable contributions to the Company's substantial and measurable growth
including seeking out and consummating suitable acquisitions of companies,
assets and products; raising the working capital necessary to fund the
operations of the Company; increasing sales from approximately $ 310,000 per
year in 1991 to $ 13,031,000 in 1995, and $ 14,863,000 for the
year ended December 31, 1996; and expanding the business from one manufacturing
facility and 20 employees in 1989 to approximately 471 employees in six
manufacturing facilities as of December 31, 1996.
45
<PAGE>
The issuance of the shares has the effect of permitting the Escrowees to
alienate their shares at such time as were issued to the Exchanging
Shareholders. As to Messrs. Hoffman and Millar, pursuant to the above referenced
settlement with the BCSC, they cannot sell any shares of the Company's Common
Stock in British Columbia for the two (2) year period ending November 9, 1997.
The Board did not seek shareholders approval with respect to this
transaction. Neither the laws of the Company's state of incorporation (Delaware)
nor any federal laws require shareholder approval. Furthermore, no regulatory
approval was obtained or required with respect to the transaction in either the
United States or Canada. The principal reasons for not seeking shareholder
approval are: any increase in the market value of the Company's Common Stock
would increase the charge to earnings; the calling and holding of a Special
meeting would incur costs of approximately $ 75,000 and waiting for an Annual
Meeting could further subject the transaction to the risk of an increase in per
share market value.
The Escrowed Shares have been treated as cancelled on the books and records
of the Company and its Transfer Agent. The Company does not believe Canadian
regulatory approval is required, and has not sought any approval. The Company
has requested the Escrow Agent to cancel the Escrow Shares on its books and
records which request was also made by the Exchanging Shareholders. Regardless
of whether the Escrow Agent complies with such requests, the Company is entitled
to treat the Escrow Shares as cancelled. Each Exchanging Shareholder has entered
into an agreement with the Company relinquishing all rights, title and interest
of any kind whatsoever they have or ever had to the Escrow Shares.
The Common Stock received by the Exchanging Shareholders are "restricted
securities", as that term is defined under Rule 144 promulgated under the
Securities Act 1933, and the shares issued in this transaction are subject to
Rule 144 other than for the one year holding period. In general under Rule 144
as currently in effect, subject to the satisfaction of certain other conditions
of Rule 144, a person, including an affiliate of the Company (or persons whose
shares are aggregated), who has owned restricted securities of the Company
beneficially for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the total
number of outstanding shares of the same class or, if the Common Stock is quoted
on NASDAQ, a national securities exchange or a consolidated transaction
reporting system, the average weekly trading volume during the four calendar
weeks preceding the sale. A person who has not been an affiliate of the Company
for at least the three-months immediately preceding the sale and who has
beneficially owned restricted shares of Common Stock for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above. The Exchanging Shareholders do not have any
registration rights with respect to the shares issued to them.
During the last three Fiscal years, each of the Escrowees would not have
been eligible to receive any shares out of Escrow applying the formula in the
Escrow Agreement.
SELLING STOCKHOLDERS
This Prospectus is being used for the offering of up to 3,626,935 shares of
Common Stock of the Company by Stockholders of the Company. These securities
were issued in connection with private placements, the settlement of certain
debt obligations of the Company, as well as shares to be issued from time to
time upon the exercise of Warrants and certain Stock Options.
46
<PAGE>
The following table sets forth the number of shares to be sold by each
Selling Stockholder, the number of shares to be owned by them, and their
respective percentages of the class, after the sale. Unless otherwise indicated,
all shares are owned of record and beneficially.
<TABLE>
<CAPTION>
Amounts & Number of Number of
Nature of Number of Shares to be
Beneficial Percent of Shares to be Owned After Percent of
Name Ownership(1) Class (5) Sold Sale After Sale
- ---- ------------ --------- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
Enhanced Storage Co. Inc. 487,000 2.1 487,000 0 0
James C. Rothstein (4) 200,000 * 200,000 0 0
Marilyn Hutchens (5) 61,095 * 50,000 11,095 *
Blake Berkson 135,000 * 75,000 60,000 *
David Venkus 173,334 * 173,334 0 0
Anthony Kamin (5) 133,334 * 133,334 0 0
Howard Kamin 66,666 * 66,666 0 0
Wayne Fritzshe (5) 268,333 2.4 133,333 135,000 *
133,333 (2) 133,333 0 0
100,000 (3) 100,000 0 0
George Markelson 416,666 2.0 416,000 0 0
30,000 (3) 30,000 0 0
Wayne Johnson 183,334 * 133,334 50,000 *
Swanson Farms 50,000 * 50,000 0 0
Roger Moe 100,000 * 80,000 20,000 *
Ray James 40,587 * 40,587 0 0
Michael Morissett 80,000 * 30,000 50,000 *
William Lykken (4) 695,000 3.5 35,000 660,000 2.6
119,048 (2) 119,048 0 0
25,000 (3) 25,000 0 0
C.C.R.I. Corporation (4) 50,000 (3) * 50,000 0 0
Ross Haugen 157,600 * 100,000 57,600 *
F. Bloomberg (4) 72,900 * 60,000 12,900 *
R.K. Harrison & Co. Ltd. 50,000 * 50,000 0 0
Marjorie Atalienti 25,000 (3) * 25,000 0 0
Martin E. Janis & Co. 100,000 (3) * 100,000 0 0
Tom Kosta 100,000 (3) * 100,000 0 0
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Amounts & Number of Number of
Nature of Number of Shares to be
Beneficial Percent of Shares to be Owned After Percent of
Name Ownership(1) Class (5) Sold Sale After Sale
- ---- ------------ --------- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
LLS Ltd. Inc., 300,000 (3) 1.3 300,000 0 0
Dan Schaefer (4) 35,000 (3) * 35,000 0 0
Jack Aaron (4) 35,000 (3) * 35,000 0 0
Robert Rudman (4) 10,000 (3) * 10,000 0 0
</TABLE>
- ----------
* Represents less than one percent
(1) Each of the persons named in the table disclaims beneficial ownership of
the shares of the Company's Common Stock owned by such person's spouse or
by his or her minor children.
(2) Represents shares to be issued upon exercise of Warrants
(3) Represents shares to be issued upon exercise of Options
(4) Each of these persons is currently or has been a consultant to the Company
within the last three years.
(5) All Warrants and Options are currently exercisable and "Percent of Class"
treats as outstanding the shares issuable upon the exercise of the Warrants
and Options.
PLAN OF DISTRIBUTION
The Selling Stockholders may sell the shares being offered hereby: (i)
through dealers or in ordinary broker transactions, in the over-the-counter
market or otherwise, (ii) "at the market" to or through marketmakers or into an
existing market for the shares or warrants, (iii) in other ways not involving
marketmakers or established trading markets, including direct sales to
purchasers or effected through agents, or (iv) in combinations of any such
methods of sale. The shares will be sold at market prices prevailing at the time
of sale or negotiated prices.
If a dealer is utilized in the sale of the shares in respect of which the
Prospectus is delivered, the Selling Stockholders will sell such shares to the
dealer, as principal. The dealer may then resell such shares to the public at
varying prices to be determined by such dealer at the time of resale.
Sales of shares "at the market" and not at a fixed price, which are made
into an existing market for the shares, will be made by the Selling Stockholders
to or through a marketmaker, acting as principal or as agent. Other sales may be
made, directly or through an agent, to purchasers outside existing trading
markets.
48
<PAGE>
A selling broker may act as agent or may acquire the shares, warrants or
interests therein, as principal or pledgee and may, from time to time, effect
distributions of such sales.
The shares offered hereby are eligible for sale only in certain states, and
in some of those states may be offered or sold only to 2"institutional
investors" as defined under applicable state securities law.
No sales or distributions other than as described herein may be effected
until after this prospectus shall have been appropriately amended or
supplemented.
DESCRIPTION OF SECURITIES
The Company's Certificate of Incorporation authorizes 50,000,000 common
shares, par value $ .01 per share, of which 23,731,616 shares were issued and
outstanding as at March 31, 1997.
COMMON STOCK
The holders of common shares of the Company are entitled to one vote per
share for each common share held by them and do not have cumulative voting
rights. Holders of record of common shares are entitled to receive dividends
when and if declared by the board of directors out of legally available funds.
Upon any liquidation, dissolution or winding up of the Company, holders of
common shares are entitled to share pro rata in any distribution to the
shareholders. There are no pre-emptive or conversion rights and no provisions
for redemption, purchase for cancellation, surrender or sinking or purchase
funds. All of the outstanding common shares are fully paid and non-assessable
and duly authorized.
There are no special rights or restrictions of any nature attaching to any
of the common shares of the Company, except that pursuant to an escrow agreement
made in June 1989 between the National Trust Company, the Company and certain
shareholders of the Company (the "Escrow Agreement"), 3,150,000 shares (the
"Escrow Shares") are held in escrow by the National Trust Company (the Company's
registrar and transfer agent) and are subject to certain performance criteria
before they are released. All rights to the Escrow Shares have been transferred
to the Company in exchange for the Company issuing 2,475,000 of its Common Stock
to the owners thereof on December 30, 1996. These shares are treated as
cancelled. See "Certain Transactions."
WARRANTS
The Company has 436,381 Warrants outstanding, each of which entitles the
holder to purchase one share of Common Stock at prices ranging from $.75 to $
1.75 per share, and which expire at various dates through February 1, 1998.
No fractional shares of Common Stock or fractional B Warrants will be
issued upon the exercise of the Warrants and no cash will be paid in lieu
thereof.
The holders of the Warrants do not have any of the rights or privileges of
shareholders of the Company prior to the exercise of the Warrants.
The exercise price and number of shares of Common Stock or other issuable
on exercise of the Warrants are subject to adjustment in certain circumstances,
including issuance of a stock dividend or a recapitalization, reorganization,
merger or consolidation of the Company.
No resale of the Warrants and the underlying Common Stock can be made
unless at the time of such sale current prospectus covering the Warrrants or the
shares of Common Stock issuable upon exercise of such Warrant is then in effect.
49
<PAGE>
Transfer and Warrant Agent
The transfer agent for the Common Stock and Warrants is American Stock
Transfer and Trust Company, New York, New York.
Delaware Law and Certain Charter and By-Law Provisions
Certain anti-takeover provisions
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware, Section 203 prohibits certain publicly held
Delaware Corporations from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder", unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person or entity who, together with affiliates
and associates, owns (or within the preceding three years, did own) 15% or more
of the corporation's voting stock. This statute contains provisions enabling a
corporation to avoid the statute's restrictions if the stockholders holding a
majority of the corporation's voting stock approve an amendment to the
corporation's Certificate of Incorporation or By-Laws.
The Amended Certificate of Incorporation and the By-Laws of the Company
further provide that any action required or permitted to be taken by the
stockholders of the Company may be taken only at a unanimous written consent of
stockholders. These provisions could have the effect of delaying until the next
annual stockholders' meeting, stockholders actions which are favored by the
holders of a majority of the outstanding voting securities of the Company,
especially since special meetings of the stockholders may be called only by the
Board of Directors or any Officer of the Company instructed by the Board of
Directors to call a special meeting. These provisions may also discourage
another person or entity from making a tender offer for the Company's stock,
because such person or entity, even if it acquired a majority of the outstanding
voting securities of the Company, would be able to take actions as a stockholder
(such as electing new Directors or approving a merger) only at a duly called
stockholders meeting or by unanimous written consent.
Elimination of Monetary Liability for Officers and Directors
The Company's Amended Certificate of Incorporation also incorporated
certain provisions permitted under the General Corporation Law of Delaware
relating to the liability of Directors. The provisions eliminate a Director's
liability for monetary damages for a breach of fiduciary duty, including gross
negligence, except in circumstances involving certain wrongful acts, such as
breach of a Directors duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. These provisions do not
eliminate a Director's duty of care nor do they prevent recourse against
Directors through equitable remedies such as injunctive relief. Moreover, the
provisions do not apply to clams against a Director for violations of certain
laws including federal securities laws.
Indemnification of Officers and Directors
The Company's Amended Certificates of Incorporation also contains
provisions to indemnify the Directors, officers, employees or other agents to
the fullest extent permitted by the General Corporation Law of Delaware. These
provisions may have the practical effect in certain cases of eliminating the
ability of shareholders to collect monetary damages from Directors. The Company
believes that these provisions will assist the Company in attracting or
retaining qualified individuals to serve as Directors.
50
<PAGE>
Taxation
During June of 1994, the Company changed its corporate domicile from Canada
to the United States and changed its name from BFD Industries, Inc., to Alpha
Pro Tech, Ltd. As a result of the domicile change, the following general summary
describes the principal Canadian federal income tax consequences to shareholders
of the Company who are resident in Canada and to whom, shares of the Company
constitute capital property for the purposes of the Income Tax Act (the "ITA").
The summary is for the purpose of providing general assistance only and is
not intended to be a substitute for the advice of a prospective investor's own
tax advisors and should not be interpreted as legal or tax advice. Each
prospective investor should satisfy himself as to the tax consequences of his
investment by obtaining advice on tax matters from his own tax advisor.
This description is not exhaustive of all possible Canadian federal income
tax consequences and does not take into account or anticipate any changes in
law, whether by legislative, governmental or judicial action other than the
Proposals, nor does it take into account provincial or foreign tax
considerations which may differ significantly from those discussed herein.
A Canadian shareholder who is an individual will be required to include in
the gross amount of any dividends received from the Company when computing his
income for the year of such receipt. Under the U.S./Canadian Treaty (the
"Treaty"), the rate of U.S. withholding tax which may be levied on such
individuals is limited to 15% of the gross amount of the dividends. The
shareholder will not be entitled to claim the dividend tax credit in respect of
such dividends. A foreign tax credit will be available under the ITA to the
Canadian shareholder to the extent of the lesser of:
1. withholding taxes paid and not deducted in computing income (up to a
maximum of 15% of certain foreign income from property), and
2. the Canadian taxes otherwise payable in respect of that foreign
income.
Alternatively, the Canadian shareholder can claim the foreign withholding
taxes paid as a deduction when computing his income for tax purposes. If the
withholding taxes paid exceed 15% of the foreign income from property, such
excess may be deducted in computing net income.
Dividends paid to a Canadian shareholder which is a corporation that owns
less than 10% of the voting stock of the Company will, in accordance with the
Treaty, also be subject to a U.S. withholding tax of 15%.
A foreign tax credit may be claimed to the extent of the lesser of the
foreign tax paid and not deducted in computing income and the Canadian federal
tax otherwise payable in respect of the shareholder's non-business income
derived from the U.S. Alternatively, the corporate shareholder may elect to
deduct all or any portion of the foreign tax paid when computing its income
under the ITA. If, and to the extent that, such a deduction is claimed an
equivalent, reduction may be made in respect of the foreign tax that will be
eligible for a foreign tax credit.
If the Canadian shareholder is a corporation that owns 10% or more of the
voting stock of the Company, the rate of U.S. tax that can be levied is
restricted under the Treaty to 10%. The gross amount of such dividends must be
included when calculating the net income of the shareholder. However, under
certain circumstances, the shareholder may be allowed to deduct the dividends in
the calculation of its taxable income. In these circumstances, the withholding
taxes previously paid will not be recoverable.
51
<PAGE>
Shares Eligible for Future Sale
In addition to the 3,626,935 shares covered by this Prospectus, an
aggregate of 359,000 shares issuable upon the exercise of certain stock options
(other than those included in a Registration Statement on Form S-8) and warrants
at prices ranging from $.75 to $ 2.03 per share and an aggregate of
approximately 3,780,000 shares of Common Stock issued in private placements (see
"Risk Factors Dilution") including shares owned by officers and directors
whether acquired in private placements or otherwise are "restricted securities",
as that term is defined under rule 144 promulgated under the Securities Act. In
general, under rule 144 as currently in effect, subject to the satisfaction of
certain other conditions of Rule 144, a person, including an affiliate of the
Company (or persons whose shares are aggregated), who has owned restricted
securities of the Company beneficially for at least one year is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class or, if
the Common Stock is quoted on NASDAQ, the average weekly trading volume during
the fourt calendar weeks preceding the sale. A person who has not been an
affiliate of the Company for at least the three months immediately preceding the
sale and who has beneficially owned restricted shares of Common Stock for at
least two years is entitled to sell such shares under Rule 144 without regard to
any of the limitations described above. In addition, the Company has registered
on a registration statement on Form S-8, a total of 2,500,000 shares of Common
Stock subject to outstanding options or reserved for issuance to employees,
directors and consultants under the Company's 1993 Stock Option Plan and the
1993 Directors Stock Option Plan. The Company intends to register an additional
1,300,000 shares for these Plans. As noted above, 3,626,935 shares are included
in this Prospectus on behalf of certain stockholders who have certain
registration rights pursuant to which their securities can be publicly sold
without regard to the limitations set forth in Rule 144. (See "Selling
Stockholders").
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock or the availability of such shares for sale will have on the market
prices of the Company's securities prevailing from time to time. Accordingly,
the possibility exists that substantial amounts of Common Stock may be sold in
the public market which may adversely affect prevailing market prices for the
Company's securities and could impair its ability to raise capital through the
sale of equity securities.
LEGAL PROCEEDINGS
On November 10, 1995, Sheldon Hoffman CEO of the Company and Alexander
Millar, President of the Company settled all outstanding previously disclosed
matters pending before the British Columbia Securities Commission (the "BCSC"),
which were commenced in March 1992 by the British Columbia Superintendent of
Brokers ("Superintendent"). The settlement provides that as to each of Messrs.
Hoffman and Millar: a Cease Trade Order as to sales by them of the Company's
securities in British Columbia shall remain in effect for 2 years; each shall be
prohibited from becoming or acting as a director or officer of any British
Columbia reporting issuer, other than the Company, until such time as they have
successfully completed a course of study satisfactory to the Superintendent
concerning the duties of directors and officers or reporting issuers; full
payment to the BCSC shall have been made of $ 40,000 (CDN), as to Hoffman and $
20,000 (CDN) as to Millar; and the Superintendent consents to their acting in
the capacity of a director or officer of a British Columbia reporting issuer.
All matters pending as to Robert Isaly, a director of the Company, were dropped.
52
<PAGE>
In June, 1996, an action was commenced against the Company in the Superior
Court of the State of Arizona, in and for the County of Maricopa by Neu-Invest,
Inc., an Arizona Corporation (the "Plaintiff"). The complaint alleges that in
the latter part of December 1994, the Plaintiff, through its agent Alfred Bowen,
became aware of a private offering of securities being made by the Company, that
it contacted Al Millar, the Company's President, through Mr. Bowen, and that the
Company, in a letter dated February 14, 1995, offered to sell, to investors
including Plaintiff, a minimum $ 300,000 investment consisting of 400,000 shares
of Common Stock together with equal number of two year Warrants to pruchase an
additional 400,000 shares at $.75 per share, and that on March 22, 1995, Bowen
wrote to Mr. Millar accepting the offer on behalf of Plaintiff, noting that they
intended to request additional materials, and that the unnamed buyers board had
yet to approve the transaction. Plaintiff alleges that it is entitled to damages
equal to the difference between the price of the Company's Stock which was $
2.31 per share on February 14, 1995, the day they allege they accepted an offer
allegedly made by the Company, and the $ .75 per share price, or $ 624,000. In
addition, they allege an equal amount with respect to the Warrants that were to
be included with the shares.
The Company moved to have the case transferred to the United States
District Court for the District of Arizona. The Plaintiff consented to such
removal and the Company filed an answer to the complaint, denying all material
allegations. While the matter is still in the early stages of litigation, the
Company believes that it has meritorious defenses and intends to vigorously
defend the action.
LEGAL MATTERS
Certain legal matters with respect to the offering will be passed upon for
the Company by Opton Handler Gottlieb Feiler & Katz, 52 Vanderbilt Avenue, New
York, NY 10017.
EXPERTS
The consolidated financial statements as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given upon the authority of said firm
as experts in auditing and accounting.
53
<PAGE>
Alpha Pro Tech, Ltd.
Report and Consolidated Financial Statements
December 31, 1996, 1995 and 1994
<PAGE>
Alpha Pro Tech, Ltd.
Table of Contents to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
Financial Statements:
Report of Independent Accountants ................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 ........... F-3
Consolidated Statements of Operations for the three years ended
December 31, 1996 ................................................. F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1996 ............................... F-5
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996 ................................................ F-6
Notes to Consolidated Financial Statements .......................... F-8
Financial Statement Schedules for the three years ended December 31, 1996:
Schedule II - Valuation and Qualifying Accounts ..................... F-24
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F - 1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Alpha Pro Tech, Ltd.
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
Alpha Pro Tech, Ltd. and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Salt Lake City, Utah
March 20, 1997
F - 2
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31,
1996 1995
Assets
Current assets:
Cash $ 275,000 $ 344,000
Marketable securities - restricted 39,000 36,000
Accounts receivable, net of allowance for
doubtful accounts of $122,000 and $61,000 2,170,000 2,071,000
Income taxes receivable 5,000 172,000
Inventories 2,942,000 2,098,000
Prepaid expenses and other assets 183,000 139,000
------------ ------------
5,614,000 4,860,000
Property and equipment, net 1,615,000 1,350,000
Intangible assets, net 219,000 167,000
Other 33,000 33,000
------------ ------------
$ 7,481,000 $ 6,410,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,600,000 $ 1,351,000
Accrued liabilities 647,000 751,000
Due to related parties 19,000 --
Notes payable, current portion including $8,000
and $33,000 due to related parties at
December 31, 1996 and 1995 31,000 152,000
Loans payable, current portion 1,081,000 890,000
Capital leases, current portion 36,000 22,000
------------ ------------
3,414,000 3,166,000
Notes payable, less current portion -- 10,000
Loans payable, less current portion 112,000 167,000
Capital leases, less current portion 105,000 49,000
Minority interest -- 14,000
------------ ------------
3,631,000 3,406,000
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000
shares authorized, 20,755,463 and 19,911,130
issued and outstanding at December 31,
1996 and 1995 207,000 199,000
Additional paid-in capital 21,656,000 18,673,000
Accumulated deficit (18,013,000) (15,868,000)
------------ ------------
3,850,000 3,004,000
------------ ------------
$ 7,481,000 $ 6,410,000
============ ============
The accompanying notes are an integral part of these financial statements
F - 3
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Sales $ 14,863,000 $ 13,031,000 $ 11,966,000
Cost of goods sold, excluding depreciation
and amortization 9,665,000 8,562,000 7,719,000
------------ ------------ ------------
5,198,000 4,469,000 4,247,000
Expenses:
Selling, general and administrative 4,610,000 4,342,000 3,562,000
Depreciation and amortization 254,000 618,000 734,000
Impairment loss on intangible assets (Note 6) -- 4,922,000 --
Exchange of escrowed shares
for new shares (Note 9) 2,204,000 -- --
------------ ------------ ------------
Loss from operations (1,870,000) (5,413,000) (49,000)
------------ ------------ ------------
Other (income) expense
Interest, net 279,000 563,000 898,000
Other -- (10,000) (4,000)
------------ ------------ ------------
279,000 553,000 894,000
------------ ------------ ------------
Loss before minority interest in consolidated
subsidiary and provision (benefit) for
income taxes (2,149,000) (5,966,000) (943,000)
Minority interest in operations of consolidated
subsidiary 4,000 (5,000) --
Provision (benefit) for income taxes -- -- (285,000)
------------ ------------ ------------
Net loss $ (2,145,000) $ (5,971,000) $ (658,000)
============ ============ ============
Loss per share $ (0.12) $ (0.36) $ (0.05)
============ ============ ============
Weighted average number of shares
outstanding 17,841,547 16,533,294 13,437,198
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 4
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Cumulative
Common Paid-in Translation Accumulated
Shares Stock Capital Adjustment Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 15,581,730 $ 15,654,000 $ -- $ 139,000 $ (9,378,000) $ 6,415,000
Stock issued for cash 686,364 474,000 -- -- -- 474,000
Stock issued for services 510,000 80,000 -- -- -- 80,000
Options/warrants issued
for services -- 55,000 -- -- -- 55,000
Shares canceled per litigation
settlement (675,000) (307,000) -- -- -- (307,000)
Conversion of note payable to
common stock 100,000 100,000 -- -- -- 100,000
Change to reflect par value
of common stock -- (15,893,000) 15,893,000 -- -- --
Net loss -- -- -- -- (658,000) (658,000)
---------- ------------ ----------- --------- ------------ -----------
Balance at
December 31, 1994 16,203,094 163,000 15,893,000 139,000 (10,036,000) 6,159,000
Stock issued for cash 2,564,088 25,000 1,751,000 -- -- 1,776,000
Stock issued for services 16,949 -- 13,000 -- -- 13,000
Options/warrants issued
for services -- -- 177,000 -- -- 177,000
Conversion of notes payable
to common stock 1,126,999 11,000 839,000 -- -- 850,000
Reclassification to
accumulated deficit -- -- -- (139,000) 139,000 --
Net loss -- -- -- -- (5,971,000) (5,971,000)
---------- ------------ ----------- --------- ------------ -----------
Balance at
December 31, 1995 19,911,130 199,000 18,673,000 -- (15,868,000) 3,004,000
Stock issued for cash 844,333 8,000 711,000 -- -- 719,000
Options/warrants issued
for services -- -- 68,000 -- -- 68,000
Exchange of escrowed shares -- -- 2,204,000 -- -- 2,204,000
Net loss -- -- -- -- (2,145,000) (2,145,000)
---------- ------------ ----------- --------- ------------ -----------
Balance at
December 31, 1996 20,755,463 $ 207,000 $21,656,000 $ -- $(18,013,000) $ 3,850,000
========== ============ =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 5
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows form operating activities:
Net loss $(2,145,000) $(5,971,000) $ (658,000)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 254,000 618,000 734,000
Write-off of impaired intangibles (Note 5) -- 4,922,000 --
Exchange of escrowed shares (Note 9) 2,204,000 -- --
Minority interest (4,000) 5,000 --
Securities issued for services 39,000 190,000 135,000
Changes in assets and liabilities:
Accounts receivable (99,000) (214,000) (869,000)
Income taxes receivable 167,000 -- (117,000)
Inventories (844,000) (59,000) (794,000)
Prepaid and other assets (15,000) 181,000 (189,000)
Accounts payable and accrued
liabilities 145,000 (152,000) 911,000
Deferred income taxes -- -- (168,000)
----------- ----------- -----------
Net cash used for operating activities (298,000) (480,000) (1,015,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of businesses (49,000) (35,000) (32,000)
Purchase of property and equipment (388,000) (349,000) (76,000)
Cost of intangible assets (20,000) (55,000) (66,000)
Purchase of marketable security (3,000) (36,000) --
Proceeds from note receivable -- 58,000 --
----------- ----------- -----------
Net cash used for investing activities (460,000) (417,000) (174,000)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock 719,000 1,776,000 474,000
Purchase and cancellation of common stock -- -- (307,000)
Proceeds from related parties 124,000 -- 15,000
Payments to related parties (149,000) (323,000) --
Net proceeds from loans payable 136,000 -- 309,000
Net principal repayments on loans payable -- (120,000) --
Principal repayments on notes payable (106,000) (420,000) --
Proceeds from notes payable -- -- 598,000
Principal repayments on capital leases (35,000) (12,000) --
----------- ----------- -----------
Net cash provided by financing activities 689,000 901,000 1,089,000
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements
</TABLE>
F - 6
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Year ended December 31,
1996 1995 1994
Increase (decrease) in cash (69,000) 4,000 (100,000)
Cash, beginning of period 344,000 340,000 440,000
--------- -------- ---------
Cash, end of period $ 275,000 $344,000 $ 340,000
========= ======== =========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 317,000 $560,000 $ 777,000
========= ======== =========
Cash paid for income taxes $ -- $ -- $ --
========= ======== =========
Non-cash investing and financing activity:
1996
Effective June 1996, the Company acquired the remaining 20% minority interest
in Ludan Corporation for a $68,000 note payable of which $19,000 is unpaid at
December 31, 1996.
Capital lease obligations of $105,000 were incurred when the Company entered
into leases for machinery and equipment.
1995
Effective April 1995, the Company acquired an 80% interest in Ludan
Corporation for $35,000 in cash including $6,000 of direct acquisition costs,
plus assumption of net liabilities of $23,000. In addition, a note payable
owed by LC to a third party was converted to 20,000 shares of the Company's
common stock.
Notes payable of $830,000 were converted to 1,106,999 shares of common stock
in 1995.
Capital lease obligations of $83,000 were incurred when the Company entered
into leases for office equipment and machinery and equipment.
1994
A $100,000 note payable was converted to 100,000 common shares in 1994.
The Company acquired the assets of Disposable Medical Products, Inc. and
96.8% of the common stock of its subsidiary, DPI De Mexico, in March 1994 for
$32,000 cash and $304,000 of debt, which was unpaid at December 31, 1994.
The accompanying notes are an integral part of these financial statements
F - 7
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. The Company
Alpha Pro Tech, Ltd. (the Company) manufactures and distributes a variety
of disposable mask, shield, shoe cover and apparel products and woundcare
products. Through its 1992 acquisition of Alpha Pro Tech, Inc. (APT), a
wholly-owned subsidiary, the Company began manufacturing and distributing
its line of disposable mask and shield products and woundcare products.
These products accounted for the majority of the Company's revenues until
1994. In March 1994, APT acquired all of the assets of Disposable Medical
Products, Inc. (DMP) (Note 12). DMP manufactures and distributes the
Company's disposable apparel products and has become the primary division
of the Company. In April 1995, the Company, through APT, acquired an 80%
interest in Ludan Corporation (LC). In June 1996, the Company acquired the
minority shareholders 20% interest in LC (Note 13). Through this
acquisition, the Company has developed other applications for existing
products, particularly disposable apparel and automated shoe cover
products, to market to the food service and other industries. 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. Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements of the Company include the accounts
of the Company and its wholly-owned subsidiary, Alpha Pro Tech, Inc. (APT)
as well as APT's wholly-owned subsidiary (80% owned from April 1995 to June
1996), Ludan Corporation (LC), and 96.8% owned subsidiary DPI De Mexico
(DPI). No minority interest has been recorded in these financial statements
for DPI as such amounts are immaterial. All significant intercompany
accounts and transactions have been eliminated. Certain prior year balances
have been reclassified to conform with the current period presentation.
Use of estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles required 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 these
estimates.
Revenue recognition
Revenue is generally recognized when goods are shipped to the customers.
The Company has an agreement with its largest customer whereby revenue is
recognized at cost when goods are shipped. When this customer sells and
ships the goods to third parties, the resulting profits are then recorded
by the Company. Revenues are reduced for anticipated sales returns and
allowances.
F - 8
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Marketable securities
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115) "Accounting for Certain Investments in Debt
and Equity Securities" which requires investment securities to be
classified as either held to maturity, trading or available for sale. The
adoption of SFAS 115 did not have a material impact on the Company's
financial condition or results of operations.
At December 31, 1996, the marketable security is a restricted certificate
of deposit held by a financial institution that serves as a compensating
balance for lines of credit relating to the Company's credit cards. The
Company has classified its short-term security as available for sale and
appropriately recorded it at its fair market value of $39,000.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Advertising
Advertising costs consist primarily of catalog preparation and printing
costs which are charged to expense as incurred. Catalog costs expensed in
1995 were $41,000. No catalog costs were incurred in 1996.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
are depreciated on a straight-line basis over their estimated useful lives
as follows:
Factory equipment 9-20 years
Office furniture and equipment 7 years
Leasehold improvements 4-6 years
Vehicles 5 years
Intangible assets
The excess of purchase price over the fair value of assets acquired and
liabilities assumed has been recorded as goodwill and is being amortized
using the straight-line method over 8 years. Patent rights are recorded at
cost and are amortized on a straight-line basis over their estimated useful
lives of 8-17 years.
During 1995, the Company reduced the useful lives of mask and shield
patents from 17 years to 8 years and the useful life of the APT goodwill
from 20 years to 8 years. These changes in estimate were based on the
Company's analysis which indicated that future sales from masks, shields
and woundcare products would decrease over the next five years as the
Company continues to focus its efforts to manufacture and promote its
automated shoe cover and disposable apparel products. Because the useful
lives of the APT goodwill and the majority of the Company's patents were
based on mask, shield and woundcare products, which are declining areas of
the Company's business, the Company determined the change in useful lives
was appropriate.
F - 9
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At each balance sheet date, the Company reviews its intangible assets and
determines whether an impairment has occurred by evaluating whether the
carrying value of intangible assets exceed their respective future
undiscounted cash flows, excluding interest. If an impairment has occurred,
the Company evaluates the expected fair value of the assets based upon
expectations of future discounted cash flows. As of December 31, 1995, the
Company concluded that an impairment of $4,922,000 existed and recorded
that amount during the fourth quarter of 1995 (Note 6).
Income taxes
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.
Translation of foreign currencies
During 1992, the Company adopted the United States dollar as the functional
currency. Prior to 1992, the Canadian dollar was the functional currency.
Prior to December 31, 1995, the difference of $139,000 in translation for
periods prior to the change in functional currency has been recorded as the
"cumulative translation adjustment" in shareholders' equity. At December
31, 1995, the Company reclassified the cumulative translation adjustment
account to accumulated deficit as the balance is immaterial to overall
shareholders' equity and the account will not change in future years.
Transactions in foreign currencies during the reporting periods are
translated into the functional currency at the exchange rate prevailing at
the transaction date. Monetary assets and liabilities in foreign currencies
at each period end are translated at the exchange rate in effect at that
date and are immaterial in amount. Transactional gains or losses on foreign
exchange are reflected in net loss for the periods presented and are
immaterial in amount.
Loss per share
Prior to 1996, loss per share has been calculated based on the weighted
average number of common and common equivalent shares outstanding, if
dilutive, less shares held in escrow. The 1996 calculation remains the same
as prior years except shares held in escrow are no longer excluded due to
2,475,000 shares being issued to management on December 30, 1996 in
exchange for their shares held in escrow (Note 9). Common equivalent shares
for all years were anti-dilutive and accordingly were excluded from the
loss per share calculations.
Major customer and concentration of credit risk
With the acquisition of the assets and business of Disposable Medical
Products, Inc. (Note 12) in 1994, the Company sells significant amounts of
product to a large distributor on credit terms. Net sales to this
distributor were 42.9%, 28.2% and 14.5% of total net revenue for 1996, 1995
and 1994, respectively. Management believes that adequate provision has
been made for risk of loss on all credit transactions.
F - 10
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Fair value of financial instruments
The fair value of financial instruments including cash, accounts
receivable, accounts payable, accrued professional fees, other accrued
liabilities, due to related parties, notes payable and loans payable
approximate their respective book values at December 31, 1996 and 1995.
Stock for services
Common stock, stock options to purchase common stock and warrants to
purchase common stock that are granted to third parties in exchange for
services are valued at their estimated fair value at the date of grant and
are expensed over the period the services are rendered.
Stock Based Compensation
The Financial Accounting Standards Board issued a statement in October 1995
entitled "Accounting for Stock-based Compensation" which the Company
adopted January 1, 1996. This statement establishes an accounting method
based on the fair value of equity instruments awarded to employees as
compensation. However, companies are permitted to continue applying the
intrinsic value based method prescribed by APB opinion No. 25, "Accounting
for Stock Issued to Employees" with disclosure in the notes to the
financial statements of the differences between previous accounting
measurements and those formulated by the new accounting standard. The
Company has elected to continue valuing stock-based compensation under the
intrinsic value based method but has included proforma disclosure in Note 9
showing the impact on net loss and loss per share had the fair value based
method prescribed by SFAS 123 been utilized for financial reporting.
3. Inventories
Inventories consist of the following:
1996 1995
Raw materials $1,511,000 $1,308,000
Work in process 76,000 140,000
Finished goods 1,355,000 650,000
---------- ----------
$2,942,000 $2,098,000
========== ==========
4. Property and equipment
Property and equipment consist of the
following:
1996 1995
Machinery and equipment $2,042,000 $1,590,000
Office furniture and equipment 334,000 302,000
Leasehold improvements 75,000 67,000
---------- ----------
F - 11
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2,451,000 1,959,000
Less accumulated depreciation and amortization (836,000) (609,000)
---------- ----------
$1,615,000 $1,350,000
========== ==========
Included in the above amounts are the following assets under capital lease
obligations:
1996 1995
Machinery and equipment $ 162,000 $ 57,000
Office furniture and equipment 26,000 26,000
--------- ---------
188,000 83,000
Less accumulated amortization (42,000) (9,000)
--------- ---------
$ 146,000 $ 74,000
========= =========
5. Intangible assets
Intangible assets consist of the following:
1996 1995
Goodwill $ 136,000 $ 78,000
Patents 57,000 40,000
Other 81,000 77,000
--------- ---------
274,000 195,000
Less accumulated amortization (55,000) (28,000)
--------- ---------
$ 219,000 $ 167,000
========= =========
Impairment Loss
The Company acquired all of the common stock of Alpha Pro Tech, Inc. in May
1992 for $7,307,000 including direct acquisition costs of $107,000. The
acquisition was accounted for as a purchase and the purchase price was
ultimately allocated as follows:
Net identifiable assets $ 690,000
Goodwill 5,148,000
Patents 1,012,000
Trademarks 127,000
Non compete agreement 300,000
Other 30,000
----------
$7,307,000
==========
F - 12
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As noted in Note 1, the Company manufactures and distributes its line of
disposable mask and shield products and woundcare products through its
wholly-owned subsidiary, APT. Due to declining sales of these product lines
since the 1992 APT acquisition and due to recent changes in the health care
market, the Company has modified its strategy to focus on increased demand
for its disposable apparel and automated shoe cover products. The above
changes resulted in the Company revising the estimated useful lives of
intangible assets recorded from the APT acquisition (Note 2). Additionally,
the Company conducted an impairment analysis that determined the fair value
of the assets based on discounted cash flows. From the analysis, the
Company determined that the carrying value of the APT goodwill and patents
related to the Company's line of disposable mask and shield products and
woundcare products should be reduced by $4,922,000 at December 31, 1995. At
December 31, 1995, the impairment loss has been recorded in the 1995
statement of operations and relates to the carrying value of the following
assets:
December 31,
1995
Goodwill $ 4,215,000
Patents 586,000
Trademarks 61,000
Other 60,000
------------
$ 4,922,000
============
Delta Foam Patent
In 1993, the Company purchased patent rights for the Delta Foam Support
System. Under the terms of the purchase agreement, the Company was required
to generate cumulative revenues for the product line of $1,000,000 by June
30, 1995 and $1,000,000 per year thereafter until the patent was to expire
in the year 2008. If these revenues were not achieved, the patent rights
reverted back to the seller. Management believed the Company would not
generate sufficient revenues to retain the patent rights and, accordingly,
the unamortized balance of the patent rights, $175,000, was expensed in
1994.
6. Accrued liabilities
Accrued liabilities consist of the following:
1996 1995
Professional fees $ 286,000 $ 439,000
Payroll and payroll taxes 203,000 185,000
Other 158,000 127,000
F - 13
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
---------- ---------
$ 647,000 $ 751,000
========== =========
7. Notes Payable
Notes payable consist of the following:
1996 1995
Note payable due in monthly installments
of $4,900, interest at 7.5%, maturing $ -- $ 41,000
July 31, 1996
Note payable due in monthly installments
of $1,500, interest at 8.0%, maturing 9,000 26,000
July 31, 1997
Note payable due in monthly installments of
$4,000, interest at 6%, with the remaining
balance due March 31, 1997 14,000 62,000
Notes payable to related parties, interest at 20%
payable quarterly, due on demand 8,000 33,000
-------- --------
31,000 162,000
Less: Current portion 31,000 152,000
-------- --------
Notes payable, less current portion $ -- $ 10,000
======== ========
8. Loans Payable
During 1995, the Company, through its wholly owned subsidiary APT, entered
into a three-year credit facility with an asset-based lender. Loans payable
at December 31, 1996 and 1995 represent outstanding amounts against the
facility. Pursuant to the terms of the credit agreement, the Company has a
$3,000,000 line of credit secured by accounts receivable, inventory,
trademarks, patents, property and equipment, and all issued and outstanding
shares of DPI. Borrowings collateralized by machinery and equipment are
limited to $275,000 and borrowings for inventory are limited to the lesser
of $500,000 or 25% of the outstanding balance under the facility. At
December 31, 1996, the maximum line of credit available to the Company was
$1,331,000. The credit facility bears interest at prime plus 5% which was
13.5% at December 31, 1996 and 1995. Interest is payable on the greater of
$1,750,000 or the actual amount of borrowings outstanding. At December 31,
1996 and 1995, $167,000 and $222,000,
F - 14
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
respectively, of the outstanding balance is collateralized by the Company's
machinery and equipment which is payable over five years.
The Company paid $30,000 in loan origination fees to obtain the credit
facility. Under the terms of the agreement, the Company pays a 1% loan fee
annually and is subject to certain other minimum loan fees, unused line
fees and prepayment penalties if the line of credit is repaid early. Total
commitment fees paid on the unused lines of credit were approximately
$84,000 and $76,000 for 1996 and 1995, respectively.
Future maturities for loans payable are as follows:
1997 $1,081,000
1998 55,000
1999 55,000
2000 2,000
----------
$1,193,000
==========
9. Shareholders' Equity
Litigation settlement
In 1990, the Company was named as a co-defendant in a legal action. The
plaintiff, John P. Russell, the Company and other co-defendants have
settled and compromised all claims involved in the litigation pursuant to a
Settlement Agreement dated August 19, 1994. The terms of the Agreement
provided for the payment of $260,000 to Mr. Russell and the cancellation of
675,000 escrowed shares (see below) of the Company's common stock owned by
Mr. Russell. Legal fees directly associated with the settlement totaled
$47,000, resulting in a total charge to shareholders' equity of $307,000.
Escrowed shares
Pursuant to an agreement dated April 5, 1989, the Company purchased all of
the assets and business of BFD Inc. from certain individuals. The purchase
price of $625,000 Canadian was settled by the issuance of 3,500,000 common
shares and the assumption of liabilities of $520,000 Canadian. Of the
shares issued, 3,150,000 were subject to an escrow agreement. On December
30, 1996, all of the escrowed shares, except for the shares canceled in
connection with the settlement with John P. Russell, were exchanged for new
shares. The 2,475,000 new shares were valued at the fair market value of
the shares on the date of the exchange which resulted in a $2,204,000
charge to earnings that was recorded during the fourth quarter of 1996.
Additionally, the paid in capital increase of $2,204,000 resulted in no net
change to shareholders' equity. The 2,475,000 shares held in escorw were
cancelled effective December 30, 1996.
Shares issued for services
During 1995, the Company issued 16,949 shares valued at $13,000 for
services performed relating to the Company's private placement. During
1994, the Company
F - 15
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
issued 510,000 shares valued at $80,000 relating to consulting and advisory
services. No shares were issued for services in 1996.
Private placement activity
During 1995 and 1994, 1,802,649 and 432,964 common shares were subscribed
for under private placements for $1,352,000, and $324,000, respectively.
Costs relating to the private placements were $426,000 and $76,000 for 1995
and 1994, respectively.
Warrant activity
Warrant activity for the three years ended December 31, 1996 is as follows:
Exercise Price
Shares Per Warrant
--------- ---------------
Warrants outstanding, December 31, 1993 452,745 $ 1.75
Granted in connection with private placement 432,964 0.75
Granted to lenders 1,064,999 0.75
--------- ---------------
Warrants outstanding, December 31, 1994 1,950,708 0.75 to 1.75
Granted in connection with private placement 1,819,598 0.75
Granted to lenders 257,000 0.75
Exercised (451,439) 0.75 to 1.75
Expired (80,000) 1.75
--------- ---------------
Warrants outstanding, December 31, 1995 3,495,867 0.75 to 1.75
Granted to employees 95,384 1.03
Exercised (188,333) 0.75 to 1.25
Expired (90,000) 1.25
--------- ---------------
Warrants outstanding, December 31, 1996 3,312,918 $ 0.75 to $1.75
========= ===============
The warrants outstanding at December 31, 1996 entitle the holders to
purchase one common share for the stated price and expire between January
1997 and February 1998.
Option activity
During 1993, the Company adopted stock option plans for employees and
directors of the Company. As of December 31, 1996, 2,700,000 shares were
reserved for issuance under these plans, of which 2,336,000 have been
granted at December 31, 1996. The exercise price of the options is
determined based on the fair market value of the stock on the date of grant
and the options generally vest immediately.
F - 16
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Option activity for the three years ended December 31, 1996 is as follows:
Average
Exercise Price
Shares Per Option
---------- ----------
Options outstanding, December 31, 1993 1,732,000 .80
Granted to employees/directors 100,000 1.00
Granted to lenders 747,500 .90
Granted to consultants 555,000 1.00
Exercised (253,400) .88
Expired (108,600) 1.00
Canceled (85,000) 0.75
---------- ----------
Options outstanding, December 31, 1994 2,687,500 0.82
Granted to employees/directors 784,000 1.36
Granted to consultants 540,000 1.45
Exercised (310,000) 0.85
Canceled (160,000) 1.92
---------- ----------
Options outstanding, December 31, 1995 3,541,500 0.98
Granted to employees 87,000 1.12
Granted to consultants 10,000 1.47
Exercised (656,000) 0.85
Canceled (393,500) 1.06
---------- ----------
Options outstanding, December 31, 1996 2,589,000 $ 1.01
========== ==========
The following summarizes information about stock options outstanding at
December 31, 1996:
Options Outstanding
Exercise Average Average
Price Shares Price Term
$0.75 to $1.00 1,678,000 $ 0.79 1.61
$1.01 to $1.50 739,000 1.32 3.88
$1.51 to $2.00 50,000 2.00 1.25
$2.01 to $2.50 122,000 2.03 2.09
All but 60,000 of the above options are exercisable at December 31, 1996.
F - 17
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Had compensation cost for the Company's employee/director options been
determined based on the fair value at the grant date consistent with the
requirements of Statements of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss and net loss per share
would have been as follows:
For the Year Ended
1996 1995
Net loss $ (2,208,000) $ (6,598,000)
------------- -------------
Loss Per Share $ (0.12) $ (0.40)
============= =============
The fair value of each employee/director stock option grant has been
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
1996 1995
Risk-free interest rate 7.50% 7.50%
Expected life 5 years 5 years
Expected volatility 70% 60%
Expected dividend yield 0% 0%
The weighted-average grant date fair values of employee/director options
granted during 1996 and 1995 were $0.72 and $0.80, respectively.
10. Income taxes
The provision (benefit) for income taxes consists of the following:
Year ended December 31,
1996 1995 1994
Current $ -- $ -- $(117,000)
Deferred -- -- (168,000)
--------- --------- ---------
$ -- $ -- $(285,000)
========= ========= =========
No current benefit for income taxes has been recorded in the 1996 statement
of operations since the Company's history of recurring losses precludes
anticipation of the benefit of the 1996 loss.
F - 18
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The current income tax benefit in 1994 is a result of the carryback of net
operating losses, generated by the Company's wholly owned United States
subsidiary, APT. This benefit resulted in tax refunds for taxes paid in
prior years.
The deferred income tax benefit of $168,000 in 1994 is the result of a
reduction in the prior year deferred tax liability. The reduction results
from the ability of the Company to utilize excess 1994 operating losses
generated by the U.S. operations to offset deferred tax liabilities.
Deferred tax assets (liabilities) are comprised of the following at
December 31.
1996 1995
Loss carry forwards
U.S $ 2,064,000 $ 2,035,000
Canada 1,428,000 2,082,000
Other 82,000 76,000
----------- -----------
Gross deferred tax assets 3,574,000 4,193,000
Depreciation and amortization (119,000) (55,000)
----------- -----------
Net 3,455,000 4,138,000
Valuation allowance (3,455,000) (4,138,000)
----------- -----------
$ -- $ --
=========== ===========
The provision for income taxes differs from the amount that would be
obtained by applying the United States statutory rate to the loss before
income taxes as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
--------- ----------- ---------
<S> <C> <C> <C>
Recovery of income taxes based on United
States statutory rates (34%) $(729,000) $(2,030,000) $(325,000)
Non-deductible goodwill amortization -- 1,590,000 40,000
Compensation expense for exchange of
escrowed shares for new shares 749,000 -- --
Increase (decrease) in valuation allowance (29,000) 430,000 --
Other 9,000 10,000 --
--------- ----------- ---------
Provision (benefit) for income taxes $ -- $ -- $(285,000)
========= =========== =========
</TABLE>
F - 19
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 1996, the Company has net operating losses for United
States and Canadian tax purposes available to reduce future United States
and Canadian taxable income amounting to approximately $5.5 million and
$3.2 million, respectively.
For United States tax purposes, these losses will expire as follows:
2005 $ 1,400,000
2006 37,000
2007 857,000
2008 184,000
2009 1,632,000
2010 323,000
2011 1,023,000
2012 78,000
------
$ 5,534,000
===========
For Canadian income tax purposes, these losses will expire as follows:
1997 $ 109,000
1998 1,010,000
1999 357,000
2000 1,729,000
---------
$ 3,205,000
===========
11. Lease Commitments and Obligations
The Company leases two manufacturing facilities under month to month
operating leases and certain other office and warehouse facilities under
non-cancelable operating leases expiring between April 1997 and July 2000.
The Company also leases certain manufacturing and office equipment under
capital leases expiring between July 1997 and June 2001.
F - 20
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following summarizes future minimum lease payments required under
capital and non-cancelable operating leases:
Year ending Capital Operating
December 31, Leases Leases
1997 $ 62,000 $ 513,000
1998 50,000 409,000
1999 37,000 87,000
2000 34,000 1,000
2001 10,000 -
---------- -----------
Future minimum lease payments $ 193,000 $ 1,010,000
===========
Less amounts representing interest (52,000)
----------
Present value of future minimum lease payments $ 141,000
Less amounts due within one year (36,000)
----------
Amounts due after one year $ 105,000
==========
Total rent expense incurred by the Company under operating leases for the
year ended December 31, 1996, 1995 and 1994 was $599,000, $447,000 and
$342,000, respectively.
12. Acquisition of Disposable Medical Products, Inc.
On March 25, 1994, the Company, through its wholly owned subsidiary Alpha
Pro Tech, Inc., acquired the assets of Disposable Medical Products, Inc.
(DMP) and 96.8% of the shares of DMP's wholly owned subsidiary DPI for
$336,000, including $32,000 of direct acquisition costs. The Company
recorded a liability of $304,000 at December 31, 1994 for the unpaid
purchase price which was subsequently paid in 1995. This amount was payable
to the previous owners who are now employees of the Company. Prior to the
acquisition, DMP had been operating as a debtor in possession under Chapter
11 of the Bankruptcy Code.
F - 21
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Under the purchase agreement, the Company operated DMP under a post
petition financing agreement through March 1995. In March 1995, the
acquisition was finalized and all related payments were made. Under the
terms of the agreement, the Company was entitled to the risks and rewards
of operating DMP in exchange for providing DMP with sufficient working
capital for continuing operations and, accordingly, DMP's operations have
been consolidated into those of the Company's since April 1, 1994. The
purchase price was allocated as follows:
Inventories $ 105,000
Prepaid expenses 30,000
Machinery and equipment 228,000
Accounts payable and accrued liabilities (27,000)
---------
$ 336,000
=========
Pro forma financial information (unaudited)
The unaudited pro forma results of operations of the Company, as if the
acquisition of DMP had occurred on January 1, 1994, are as follows:
December 31,
1994
Revenue $ 12,574,000
============
Loss for the year $ (671,000)
============
Loss per common share $ (0.05)
============
The unaudited pro forma information does not purport to be indicative of
the results from operations that actually would have been obtained if the
purchase had been consummated January 1, 1994 or of the results of
operations that may be obtained in the future.
13. Acquisition of Ludan Corporation
Effective April 1995, the Company acquired an 80% interest in Ludan
Corporation, a Georgia based materials laminating company, for $35,000 in
cash including $6,000 of direct acquisition costs, plus assumption of net
liabilities of $23,000. In addition, a note payable owed by LC to a third
party of $20,000 was converted to 20,000 shares of the Company's common
stock. The Company recorded $78,000 of goodwill in connection with the
acquisition which is being amortized over 8 years.
In June 1996, the Company acquired the remaining 20% interest in LC for a
$68,000 note payable of which $49,000 was paid in 1996 and the remaining
$19,000 is due at March 31, 1997. The Company recorded $58,000 of goodwill
which is being amortized over 8 years.
F - 22
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. Quarterly Financial Information (Unaudited)
Fourth quarter adjustment affecting prior quarter
During the fourth quarter of 1995, the Company recorded a $412,000
reduction to fourth quarter cost of sales to correct the September 30, 1995
inventory balance which was overstated.
Had this adjustment been recorded in the quarter ended September 30, 1995,
net income (loss) and net income (loss) per share for this quarter would
have been reported as follows:
Net income as reported $ 12,000
===========
Net income per share as reported $ 0.00
===========
Net loss as adjusted $ (400,000)
===========
Net loss per share as adjusted $ (0.02)
===========
F - 23
<PAGE>
Alpha Pro Tech, Ltd. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged Charged Balance at
Beginning to Costs and to Other End of
Description of Period Expenses Accounts(1) Deductions(2) Period
<S> <C> <C> <C> <C> <C>
December 31, 1996
Deducted from
related asset account:
Allowance for
doubtful accounts $ 61,000 $ 80,000 $ -- $ 19,000 $ 122,000
========== ========== ========== ========== ==========
Provision for
inventory $ 32,000 $ 10,000 $ -- $ -- $ 42,000
========== ========== ========== ========== ==========
Valuation allowance
for income taxes $4,138,000 $ -- $ -- $ 683,000 $3,455,000
========== ========== ========== ========== ==========
December 31, 1995
Deducted from
related asset account:
Allowance for
doubtful accounts $ 66,000 $ 18,000 $ -- $ 23,000 $ 61,000
========== ========== ========== ========== ==========
Provision for
inventory $ 22,000 $ 140,000 $ -- $ 130,000 $ 32,000
========== ========== ========== ========== ==========
Valuation allowance
for income taxes $3,487,000 $ $ 651,000 $ $4,138,000
========== ========== ========== ========== ==========
December 31, 1994
Deducted from
related asset account:
Allowance for
doubtful accounts $ 75,000 $ 140,000 $ -- $ (149,000) $ 66,000
========== ========== ========== ========== ==========
Provision for
inventory $ 22,000 $ -- $ -- $ -- $ 22,000
========== ========== ========== ========== ==========
Valuation allowance
for income taxes $3,423,000 $ $ 64,000 $ $3,487,000
========== ========== ========== ========== ==========
</TABLE>
(1) Represents increase to net deferred tax assets and a corresponding increase
to the valuation allowance.
(2) Represents uncollectible accounts and inventory written off.
F - 24
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following expenses are estimated:
SEC Registration Fee $ 4,291.00*
Accounting Fees $ 15,000.00
Legal Fees $ 15,000.00
Printing, Engraving and Mailing $ 5,000.00
Transfer agent and registrar's fees $ 2,000.00
Blue Sky fees and expenses $ 1,000.00
Miscellaneous expenses $ 1,709.00
------------
TOTAL $ 43,000.00
* Actual
Item 14. Indemnification of Directors and Officers
Article Tenth of the Company's Certificate of Incorporation provides
in part as follows:
TENTH: The corporation shall, to the fullest extent permitted by 145 of the
General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have
power to indemnify under said section from and against any and all of the
expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under any By-Law, agreement, vote of stockholders of disinterested
directors or otherwise, both as to action in his official capacity and as
to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, officer, employee, or agent
and shall inure to the benefit of the heirs, executors and administrators
of such a person.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the registrant's By-Laws, the Stock Purchase
Agreements, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission, such indemnifications
against public policy as expressed in the act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment but the Registrant of expenses incurred
or paid by a director, officer, or controlling person in connection with
the securities being registered), the Registrant will, unless in the
opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the following securities were sold or issued
by the Company without registration under the Securities Act of 1933, as
amended (the "Act"):
In September, 1994, the Company issued 215,000 stock purchase warrants
exercisable at $.75 per share to five (5) persons as additional
consideration in connection with loans made to the Company.*
In the period November, 1994 through April 4, 1995, the Company sold
2,235,613 Units at $ .75 per Unit in a private offering which commenced in
March, 1994 (the "1994 Private Placement"). Each Unit consisted of one
common share and two-year non-transferable share purchase warrants
exercisable at $ .75 per share. Total proceeds aggregated $ 1,673,877.
These Units were sold to approximately 80 persons, all of whom the Company
reasonably believes were "accredited" investors as that term is defined in
Regulation D under the Act, and all but one were citizens of the United
States. In connection with this private placement, a finder's fee of
$70,320 and 16,947 Common Shares were issued.*
During the three months ended March 31, 1995 the Company issued 1,107,000
common shares and 1,107,000 warrants exercisable at $ 0.75 per share to
eight (8) persons and one institution, in exchange for $ 830,000 of Notes
Payable.*
In the period June, 1995 through September, 1995 the Company issued 253,697
shares of Common Stock to five (5) persons upon the exercise of Warrants
issued in a 1993 private placement, for which the Company received
$440,000.*
In November, 1995 the Company issued 13,333 shares to one person in
connection with the exercise of the warrants included in the above
referenced units.*
II-2
<PAGE>
In January, 1996, the Company issued 30,000 shares of Common Stock to one
person upon the exercise of warrants purchased as part of a Unit in the
1994 private offering for which the Company received $ 22,500.*
In June, 1996, the Company issued 158,333 shares to four persons upon the
exercise of warrants acquired as consideration for a loan made to the
Company in 1994. Total proceeds received for these shares was $ 118,750.*
In January, 1997 the Company issued 195,000 shares of Common Stock to three
persons in connection with the exercise of options. Total proceeds received
was $ 146,250.*
In the period January through March 31, 1997, the Company issued 1,840,820
shares of Common Stock to 57 persons upon the exercise of warrants issued
to them in connection with the 1994 Private Placement. Total proceeds
received were $ 1,380,615 from which fees of $ 45,000 were paid. In this
same period, the Company issued 940,333 shares to six individuals and two
institutions upon the exercise of warrants issued to them in connection
with the 1995 exchange of $ 830,000 notes payable for Units consisting of
one share of Common Stock and one warrant. Total proceeds received was
$705,250.*
* The above securities were issued in reliance on the exemption from
registration under Section 4 (2) as not involving any public offering.
Claims of such exemptions are based upon the following: (i) all of the
purchasers in such transactions were sophisticated investors with the
requisite knowledge and experience in financial and business matters to
evaluate the merits and risk of an investment in the Company, were able to
bear the economic risk of an investment in the Company, had access to or
were furnished with the kinds of information that registration under the
Act would have provided and acquired securities for their own accounts in
transactions not involving any general solicitations or advertising, and
not with a view to the distribution thereof, and (ii) a restrictive legend
was placed on each certificate evidencing the securities; (iii) each
purchaser acknowledged in writing that he knew the securities were not
registered under the Act or any State securities laws, and are "RESTRICTED
SECURITIES" as that term defined in Rule 144 under the Act, that the
securities may not be offered for sale, sold or otherwise transferred
within the United States except pursuant to an Effective Registration
Statement under the Act and any applicable State securities laws, or
pursuant to any exemption from registration under the Act, the availability
of which is to be established to the satisfaction of the Company.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
16 (a) Exhibits
(3) (a) Certificate of Incorporation dated February 17, 1983
(b) Certificate of Change of Name dated July 27, 1988
(c) Certificate of Change of Name dated July 4, 1989
(d) Memorandum
(e) Articles (equivalent to By-Laws)
(f) Certificate of Incorporation of Alpha Pro Tech, Ltd. dated June
15, 1994*
(g) Application for Certificate of Registration and Articles of
Continuance State of Wyoming - filed June 24, 1995*
(h) Certificate of Registration and Articles of Continuance of
Secretary of State, State of Wyoming, dated June 24, 1994*
(i) Certificate of Secretary of State of Wyoming dated June 24, 1995
(j) Certificate of amendment of Certificate of Incorporation of
Alpha Pro Tech, Ltd. dated June 24, 1994*
(k) Articles of Merger of BFD Industries, Inc., a Wyoming
Corporation and Alpha Pro Tech, Ltd., a Delaware Corporation,
effective July 1, 1994
(l) Certificate of Ownership and Merger which merges BFD Industries
with and into Alpha Pro Tech, Ltd., a Delaware Corporation
effective July 1, 1994*
(4) (a) Form of Common Stock Certificate **
(5) (a) Opinion of Counsel****
(10) (a) Form of Director's Stock Option Agreement
(b) Form of Employee's Stock Option Agreement
(c) Employment Agreement between the Company and Al Millar dated
June, 1989
(c) (i) Employment Agreement between the Company and Donald E.
Bennett, Jr.**
(c) (ii)Employment Agreement between the Company and Michael
Scheerer***
(d) Lease Agreement between White Dairy Company, Inc. and the
Company for lease of the premises situated at 2724-7th Avenue
South, Birmingham, Alabama, 35233, dated March, 1990 and
amendment thereto dated April, 1990
(e) BFD Industries Limited Partnership Agreement between 881216
Ontario Inc. and Bernard Charles Sherman dated May 17, 1990
(f) Asset Purchase Agreement between the Company and the BFD
Industries Limited Partnership dated May 17, 1990
II-4
<PAGE>
(g) Purchase Agreement between the Company, Bernard Charles Sherman
and Apotex, Inc. dated June 21, 1991 and amendment thereto made
August 30, 1991
(h) Professional Services Agreement between the Company and Quanta
Corporation dated September, 1991
(i) Sales and Marketing Agreement between the Company and MDC Corp.,
dated October 4, 1991
(j) National Account Marketing Agreement between the Company and
National Contracts, Inc. dated October 7, 1991
(k) Group Purchasing Agreement between the Company and Premier
Hospitals Alliance, Inc. dated November 1, 1991
(l) Letter of Intent between the Company and the shareholders of
Alpha Pro Tech, Inc. dated December 11, 1991, and amendment
thereto dated February 19, 1992
(m) Group Purchasing Agreement between the Company and AmeriNet
Incorporated dated January, 1992
(n) Group Purchasing Agreement between the Company and Magnet, Inc.
(o) Share Purchase Agreement re Acquisition of Alpha Pro Tech, Inc.
(p) Agreement with Exchanging Shareholders ****
(16) (a) Letter, re: Changes in Certifying Accountant
(24) (a) Consent of Price Waterhouse (included in Part II of
Registration Statement)****
(b) Consent of Counsel (contained in their opinion Exhibit 5(a)
included in Part II of Registration Statement)
(16) (b) Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts (contained on
Page F-24 of the Financial Statements included herein)****
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information is given in
the financial statements or notes thereto
- ----------
Unless otherwise noted, all of the foregoing exhibits are Incorporated by
reference to Form 10 Registration Statement (File No. 0-1983) filed on February
25, 1992
II-5
<PAGE>
* Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 1994 (File No.019893)
** Incorporated by reference to Registration Statement on Form S-1, File No.
33-93894 which became effective August 10, 1995
*** Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-1, File No. 33-93894 which Amendment was filed on
January 30, 1997
**** Filed herewith
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10 (a) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
being offered therein, and the offering of such securities at that
time shall be deemed to be the initial bond fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Markham, Province of
Ontario, Canada on April 29, 1997.
ALPHA PRO TECH, LTD.
/s/ Sheldon Hoffman
-----------------------------
BY:Sheldon Hoffinan
Chief Executive Officer,
Principal Financial Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
/s/ Sheldon Hoffman /s/ Alexander W. Millar
- -------------------------- -------------------------------
SHELDON HOFFMAN, ALEXANDER W. MILLAR,
Chief Executive Officer President and Director
Principal Financial Officer Date: April 29, 1997
and Director
Date: April 29, 1997
/s/ John Ritota /s/ Robert Isaly
- -------------------------- -------------------------------
JOHN RITOTA, Director Robert Isaly, Director
Date: April 29, 1997 Date: April 29, 1997
/s/ Lloyd Hoffman /s/ Donald E. Bennett, Jr.
- -------------------------- -------------------------------
LLOYD HOFFMAN DONALD E. BENNETT, JR.
Vice President and Controller Director
Principal Accounting Officer Date: April 29, 1997
Date: April 29, 1997
II-7
OPTON HANDLER GOTTLIEB FEILER AND KATZ, LLP
Attorneys At Law
52 Vanderbilt Avenue
New York, New York 10017-3808
May 1, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE; Alpha Pro Tech, Ltd.
Registration Statement on Form S-1
Dear Sirs:
In connection with the above referenced Registration Statement filed by Alpha
Pro Tech, Ltd., a Delaware corporation (The "Company") with the Securities and
Exchange Commission (the "Commission"), relating to the 930,000 shares of Common
Stock to be sold by Selling Stockholders and which also serves as a
Post-Effective Amendment to Registration Statement on Form S-1, File No.
33-93894 which relates to the sale of an aggregate of 3,626,935 shares by
Selling Stockholders, including the above referenced 930,000 shares (the
"Post-Effective Amendment"):
We have reviewed the Certificate of Incorporation and By-Laws of the Company, as
amended, records of certain of the Company's corporate proceedings as reflected
in the Company's minute books and have examined such authorities and statutes as
we have deemed relevant to the opinion set forth hereinafter.
Based upon the foregoing it is our opinion that:
The shares of Common Stock presently issued and outstanding are, and the shares
of Common Stock to be issued upon the exercise of Warrants and Options, will be,
when issued in accordance with the terms and conditions set forth in the
Prospectus constituting a part of the above referenced Registration Statement
and the Post-Effective Amendment, legally issued, fully paid and non-assessable.
<PAGE>
Securites and Exchange Commission
May 1, 1997
Page Two
We hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to us under the heading "Legal Matters" in the
Prospectus which forms a part thereof, as well as under the heading "Legal
Matters" in the Prospectus which forms a part of the Post-Effective Amendment.
Very truly yours,
OPTION HANDLER GOTTLIEB FEILER AND KATZ
BY: /s/ PETER LANDAU
-----------------------------
Peter Landau, Counsel
PL:jm
AlphaProTech LTD.
December 30, 1996
Re: Escrow Shares
Dear
The undersigned is one of the shareholders of the Company whose shares arc held
in escrow (the "Escrow Shares") pursuant to an escrow agreement made in June,
1989 between the National Trust Company, the Company and certain other
shareholders of the Company (the Escrow Agreement).
I have been advised that on December 30, 1996 the Board of Directors of the
Company authorized the issuance of 2,475,000 shares of its Common Stock in
exchange for all rights to the 2,475,000 shares of Company Common Stock which
are subject to the Escrow Agreement.
Accordingly, I acknowledge receipt of the number of shares of the Company's
Common Stock set forth below in exchange for a like amount of my Escrow Shares
and this constitutes my agreement to hereby relinquish all right, title and
interest of any kind whatsoever that I may have or ever had in the Escrow
Shares. Further, I agree to request the escrow agent to return the Escrow Shares
to the Company for cancellation. I further agree that the Company may treat the
Escrow Shares as cancelled (whether or not the escrow agent complies with my
request that the escrow agent return the Escrow Shares to the Company for
cancellation), and also agree that effective as of December 30, 1996, the
Company is the only person or entity who has any beneficial interest in the
Escrow Shares.
Very truly yours,
________________________________ ________________________________
Number of Shares
Agreed to and accepted
as of December 30, 1996
ALPHA PRO TECH, LTD.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 20, 1997 to the
financial statements of Alpha Pro Tech, Ltd., which appears in such Prospectus.
We also consent to the application of such report to the Financial Statement
Schedule for the three years ended December 31, 1996 listed under Item 16(b) of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
May 2, 1997
