<PAGE>
Registration No. 333-26605
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT*
UNDER
THE SECURITIES ACT OF 1993
ALPHA PRO TECH, LTD.
(Exact name of registrant as specified in its charter)
________
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3842 63-1009183
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Alpha Pro Tech, Ltd. Sheldon Hoffman, CEO
Suite 112, 60 Centurian Drive Suite 112, 60 Centurian Drive
Markham, Ontario L34 9R2 Markham, Ontario L34 9R2
(905) 479-0654 (905) 479-0654
(Name, address, including zip code and (Name, address, including zip code
telephone number, including area code and telephone number, including
of registrant's principal executive area code, of agent for service)
office)
</TABLE>
Copy to:
Peter Landau, Esq.
Opton Handler Feiler and Landau, LLP
52 Vanderbilt Avenue, New York, N.Y. 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 /.
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AGGREGATE AGGREGATE
FEE AMOUNT TO BE OFFERING OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER SHARE PRICE REGISTRATION
- ---------------------------- ----------------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Common Stock................ 300,000 Shares $ 1.55 $ 465,000 $ 160.33
- ---------------------------------------------------------------------------------------------------
Common Stock Issuable
Upon Exercise
of Stock Options............ 630,000 Shares $ 1.55 (1) $ 976,500 $ 336.70
- ---------------------------------------------------------------------------------------------------
TOTAL $ 497.03
- ---------------------------------------------------------------------------------------------------
</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 dates of the date of
filing of this Registration Statement.
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
<TABLE>
<C> <S>
Registration Statement
1. Forepart of the Registration Forepart of the Registration Statement
Statement and Outside Front Cover Outside of Front Cover Page of
Prospectus Prospectus
2. Inside Front and Outside Back Inside Front and Outside pages of
Prospectus Cover Pages of Prospectus and Outside
Back Cover of Prospectus
3. Summary Information, Risk Prospectus Summary; Risk Factors
Factors and Ratio of Earnings to
Fixed Charges
4. Use of Proceeds
5. Determination of Offering Price Outside front Cover Page of
Prospectus; 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 to Cover Page of Prospectus, Prospectus
the Registrant Summary; The Company; Risk Factors;
Price Range of Securities; Dividend
Policy; Selected Financial Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Principal
Shareholders; Certain Transactions,
Legal Proceedings, Legal Matters;
Financial Statements
<PAGE>
12. Disclosure of Commission Part II, Item 14
Position on Indemnification for
Securities Acts Liabilities
</TABLE>
- ------------------------
* Omitted because answer is negative or item is otherwise not applicable.
<PAGE>
PROSPECTUS
Subject to completion
dated July , 1997
Alpha Pro Tech, Ltd.
3,626,935 Shares of Common Stock
------
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 option ("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, 759,221 shares were issued in
connection with private placements and 1,610,333 shares were issued in
connection with the settlement of certain debt obligations of the Company,
and 195,000 shares were issued in connection with the exercise of
consultants' options, all pursuant to Section 4(2) of the Securities Act of
1933, as amended. 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 a 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 July 2, 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 $ 1.50.
INVESTMENT IN THE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------
The date of this Prospectus is July , 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Available Information................................................................. 3
Additional Information................................................................ 3
Prospectus Summary.................................................................... 4
Summary Financial Data................................................................ 6
Risk Factors.......................................................................... 7
The Company........................................................................... 14
Recent Developments................................................................... 15
Use of Proceeds....................................................................... 22
Dividend Policy....................................................................... 22
Capitalization........................................................................ 23
Dilution.............................................................................. 23
Price Range of Securities............................................................. 24
Selected Financial Data............................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 27
Business.............................................................................. 37
Management............................................................................ 44
Principal Stockholders................................................................ 47
Executive Compensation................................................................ 51
Certain Transactions.................................................................. 55
Selling Stockholders.................................................................. 58
Plan of Distribution.................................................................. 60
Description of Securities............................................................. 60
Taxation.............................................................................. 63
Legal Proceedings..................................................................... 64
Legal Matters......................................................................... 65
Experts............................................................................... 65
Index to Financial Statements......................................................... F-1
Consolidated Financial Statements..................................................... F-3
For the three years ended December 31, 1996
For the three months ended March 31, 1997 and 1996
</TABLE>
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 1204, 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 wit 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>
<TABLE>
<CAPTION>
<S> <C>
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 upon the
exercise of stock options. Of the
2,564,554 remaining shares being offered
hereby, 759,221 shares were issued in
connection with private placements, and
1,610,333 shares were issued on
connection with the settlement of certain
debt obligations of the Company and
195,000 shares were issued in connection
with the exercise of consultants options,
all pursuant to Section 4(2) of the
Securities Act of 1933, as amended. See
"Selling Stockholders".
Common Stock Outstanding and to be 23,730,116 shares of Common
Outstanding Stock at March 31, 1997 and 24,792,497
shares as adjusted for this Offering (1)
(2).
Warrants and Options 436,381 Warrants and 3,080,000 Options at
March 31, 1997 Outstanding and 184,000
Warrants and 2,375,000 Options to be
outstanding as adjusted for this
Offering.
Use of Proceeds This Offering is 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
</TABLE>
(1) Does not include as outstanding 436,381 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 to be 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.
- ------------------------
See "The Company",--"Recent Developments"--"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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Sales............................................... $ 8,129 $ 9,439 $ 11,966 $ 13,031 $ 14,863 $ 3,586 $ 3,985
Gross profit........................................ 3,177 3,500 4,247 4,469 5,198 1,287 1,540
Total expenses...................................... 3,752 6,126 4,905 10,440 7,343 1,241 1,474
Net income/(loss)................................... (575) (2,626) (658) (5,971) (2,145) 46 66
Net income/(loss) per share......................... (.06) (.22) (.05) (0.36) (0.12) 0.00 0.00
Weighted average shares............................. 9,616 11,765 13,437 16,533 17,841 19,964 22,217
Balance Sheet Data
Working capital..................................... 1,694 2,200 1,813 4,451
Total assets........................................ 6,410 7,481 6,887 9,247
Long term liabilities............................... 240 217 215 270
Shareholders' equity................................ 3,004 3,850 3,203 6,164
</TABLE>
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. For the three months ended March 31, 1997 and 1996, the Company
had net income of $66,000 and $46,000, respectively. As of March 31, 1997 the
Company had an accumulated deficit of $17,947,000. 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 away from mask,
shield and wound care products and toward clean room and food service
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 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, net working
capital of $2,200,000 as of December 31, 1996, and net working capital of
$4,451,000 as of March 31, 1997.
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.
7
<PAGE>
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
Development--Alpha Pro Tech Acquisition", 'Consolidated Financial
Statements--Consolidated Statements of Operations" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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 an marker 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.
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 WITH 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 regularity
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 directory 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 many 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
8
<PAGE>
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 its 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 with the BCSC--Settlement with BCSC" and "Market for
Common Stock."
8. MARKET FOR THE COMPANY'S COMMON STOCK
The Company's Common Stock is traded on the NASD Over-The-Counter (OTC)
Bulletin Board under the symbol "APTD". Pursuant to the Penny Stock Reform Act,
the Commission in 1993 adopted rules making it unlawful for broker-dealers to
effect a penny stock transaction without first providing the customer with a
standardized disclosure document that (a) discusses the principal risks inherent
in investing in penny stocks, (b) outlines the broker-dealer's disclosure
obligations and the customer's rights and remedies, and (c) describes
significant characteristics of the penny stock market and defines important
terms. The term "penny stock" generally refers to a speculative stock priced at
under five dollars per share and traded mainly in the over-the-counter market.
These rules do not currently apply to the Company inasmuch as the Company is
subject to the exclusion available for the securities of issuers that meet
certain financial standards, as follows:
- - Issuers that have been in continuous operation for at least three years,
having net tangible assets in excess of $2 million;
- - Issuers that have an average revenue of at least $6 million for the last
three years. (To satisfy this requirement, an issuer must have had total
revenue of $18 million by the end of a three-year period).
The Company has been in continuous operation since 1992 and had net
assets in excess of $2 million and revenues of at least $6 million for each
fiscal year, commencing with the fiscal year ending December 31, 1992. For
the year ended December 31, 1996, the Company reported net tangible assets of
$7,262,000 and revenues of $14,863,000. The penny stock rules may apply in
the future if the Company does not meet the financial standards set forth
above and the shares of the Company's Common Stock trade at less than five
dollars per share. See "The Company--Recent Development--Matters with BCSC",
"Market for Common Stock" and "Financial Statements".
9. 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
9
<PAGE>
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.
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. The determination to
issue the shares was made by the entire Board, including Messrs. Millar,
Hoffman, and Isaly who are interested directors. 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.
Under Delaware law, a transaction between a corporation and one or more of
its directors or officers in which one or more of its directors or officers have
a financial interest, shall not be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the board which authorizes the transaction, or solely because his or
their votes are counted for such purpose, if; the material facts as to his
relationship or interest as to the transaction are disclosed or are known to the
board of directors, and the board in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum.
Interested directors may be counted in determining the presence of a quorum at a
meeting of the board of directors which authorizes the transaction.
While the standard of conduct for directors has not been codified in
Delaware, a "business judgment rule" has evolved out of a 1984 landmark case in
Delaware, "Aronson v. Lewis" in which the Supreme Court of Delaware declared
that the business judgment rule "is a presumption that in making a business
decision the directors of a corporation acted on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests
of the company. Absent an abuse of discretion, that judgment will be respected
by the courts. The burden is on the party challenging the decision to establish
facts rebutting the presumption."
Stockholders of Delaware corporations, as well as stockholders of
corporations organized in virtually all jurisdictions in the Untied States may
bring a stockholders "derivative action" against a corporations management
asserting a claim belonging to the corporation challenging a variety of actions
taken by directors, including those involving interested directors. Such an
action in the nature of (1) a suit to compel the corporation to sue, and (2) a
suit by the corporation asserted by stockholders in its behalf against those
allegedly liable to it. The Company believes that the directors decision in the
transaction has met the standard of conduct set forth in the "business judgment
rule" in Delaware.
10
<PAGE>
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, and this
transaction had no effect on the Exchanging Shareholders percentage ownership of
the Company inasmuch as the Escrow Shares had been treated as issued and
outstanding. 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. The shares issued in exchange for the Escrow Shares may now be sold
pursuant to an applicable exemption or pursuant to Rule 144. See "Certain
Transactions."
10. 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 Arrangements" and "The Company--Recent Developments."
11. DEPENDENCE ON SIGNIFICANT CUSTOMER
Sales to one customer of the Company, VWR Scientific Products, represent
42.9% of total sales in 1996 and 46% for the three months ended March 31,
1997. 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."
12. DEPENDENCE ON FOREIGN EMPLOYEES
The Company's operations are substantially dependent upon its approximately
473 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."
13. 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
"Management", "Principal Stockholders" and "Selling Stockholders."
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14. DILUTION
As of March 31, 1997, there were outstanding (a) employee stock options to
purchase 2,132,000 shares of Common Stock and (b) options and warrants to
purchase 1,334,381 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 Conditions 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".
15. 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, by
there can be no assurance that any patents, issued or in process, will not be
circumvented or validated. The Company relies on trade secrets and proprietary
know-how to maintain and develop int commercial position. See "Business--Patents
and Trademarks."
16. 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
Technol, Inc. of Fort Worth, Texas, as well as several other large competitors.
The Company believes that the quality of its products, along with the price and
service provided will allow it to remain competitive on the disposable apparel
market. See "Business-- Competition."
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17. 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."
18. 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.
19. 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 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. 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."
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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), and 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.
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.
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RECENT DEVELOPMENTS
MATTERS WITH THE BRITISH COLUMBIA SECURITIES COMMISSION
As a result of concerns raised by the British 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 Reider, 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.
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 3, 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
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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 as 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 $25,000; 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.
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.
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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.
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 United States 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.
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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 for 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 18, 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.
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
woundcare 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.
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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 in Huntsville, Alabama. The facility was
consolidated into Alpha's facilities in North Sale Lake, Utah effective
January 1, 1994.
ACQUISITION OF LICENSE AGREEMENT AND PATENTS
In April 1993, The Company also acquired a license agreement for
Inflation Control for Air Supports Device and the patents for a Delta Foam
Support System (Delta) from Marilyn 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, 19934 was paid by the issuance of an additional
50,000 shares of the Company's Common Stock and payment of $4,000 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 products 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. The 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.
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 Untied 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.
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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 was paid
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-transferable 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-transferable 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.
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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 receive 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 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.
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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."
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 State 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.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997. All information set forth below should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
(IN THOUSANDS)
--------------
<S> <C>
Long-term liabilities, less current portion................................... $ 270
Stockholders Equity:
Common Stock $.01 par value; 50,000,000 shares authorized; 23,730,116 issued
and outstanding (1)....................................................... 237
Additional paid-in capital.................................................... 23,874
Accumulated deficit........................................................... (17,947)
-------
Total stockholders' equity.................................................... 6,164
-------
Total capitalization.......................................................... 6,434
</TABLE>
(1) Excludes 3,516,381 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."
(2) See "Note 13" of "Notes to Consolidated Financial Statements" with respect
to future lease obligations.
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.
23
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
MARKET OR OUTSTANDING
EXERCISE OF RESERVED
SECURITY PRICE FOR ISSUANCE
- -------- ------------ --------------
<S> <C> <C>
Common Stock.................................................... 1.445(1) 23,730,116
Employee Stock Options.......................................... 1.045(2) 3,080,000
Warrants........................................................ 1.023(2) 436,381
------------ --------------
TOTAL........................................................... 27,246,497
</TABLE>
(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 June 25, 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 changes
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:
24
<PAGE>
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
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 07/02/97)............... 1-15/32 1-1/2
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 31, 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 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 the 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.
25
<PAGE>
SELECTED FINANCIAL DATA
Alpha Pro Tech, Ltd.
Selected Financial Data
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, Year Ended December 31,
------------------------ -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995(1) 1994(2) 1993 1992(3)
Historical Statement of Operations Data
Operating Revenues.................... $ 3,985,000 $ 3,586,000 $14,863,000 $13,031,000 $11,966,000 $9,439,000 $8,129,000
Gross Profit.......................... 1,540,000 1,287,000 5,198,000 4,469,000 4,247,000 3,500,000 3,177,000
Selling, general and administrative
expenses............................ 1,323,000 1,115,000 4,610,000 4,342,000 3,562,000 4,852,000 3,236,000
Interest expense...................... 81,000 81,000 279,000 563,000 898,000 450,000 99,000
Impairment loss on intangible
assets.............................. - - - 4,922,000 - - -
Exchange of escrowed shares for
new shares.......................... - - 2,204,000 - - - -
Other expenses, net................... 70,000 45,000 250,000 613,000 445,000 824,000 417,000
---------- ---------- ---------- ---------- ---------- --------- ---------
Total expenses including provision
(benefit) for income taxes.......... 1,474,000 1,241,000 7,343,000 10,440,000 4,905,000 6,126,000 3,752,000
---------- ---------- ---------- ---------- ---------- --------- ---------
Net income (loss)..................... $ 66,000 $ 46,000 $(2,145,000) $(5,971,000) $ (658,000) $(2,626,000) $ (575,000)
---------- ---------- ---------- ---------- ---------- ---------- ---------
Gain(loss) per share.................. $ 0.00 $ 0.00 $ (0.12) $ (0.36) $ (0.05) $ (0.22) $ (0.06)
---------- ---------- ---------- ---------- ---------- ---------- ---------
Weighted average shares used
in gain (loss) per share............ 22,216,718 19,963,963 17,841,547 16,533,294 13,437,198 11,764,871 9,615,921
Historical Balance Sheet Data
Current assets........................ $ 7,264,000 $ 5,282,000 $ 5,614,000 $ 4,860,000 $ 4,715,000 $ 2,749,000 $ 4,126,000
Total assets.......................... $ 9,247,000 $ 6,887,000 $ 7,481,000 $ 6,410,000 $11,192,000 $ 9,578,000 $11,100,000
Current liabilities................... $ 2,813,000 $ 3,469,000 $ 3,414,000 $ 3,166,000 $ 3,879,000 $ 2,885,000 $ 4,847,000
Long-term liabilities................. $ 270,000 $ 215,000 $ 217,000 $ 240,000 $ 1,154,000 $ 278,000 $ 654,000
Stockholders' equity.................. $ 6,164,000 $ 3,203,000 $ 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 15 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 14 in Notes to the Consolidated
Financial Statements.
(3) Includes the operations of Alpha Pro Tech, Inc. which was acquired on
May 14, 1992.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997, COMPARED TO MARCH 31, 1996
Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported net income for
the three months ended March 31, 1997 of $66,000 as compared to net income of
$46,000 for the three months ended March 31, 1996, representing an
improvement of $20,000 or 43.5%.
SALES Consolidated net sales for the three months ended March 31, 1997
increased to $3,985,000 from $3,586,000 in 1996, representing an increase of
$399,000 or 11.1%. Net sales for the Apparel Division for the first quarter
ended March 31, 1997 were $2,280,000 as compared to $1,566,0000 for the same
period of 1996. The Apparel Division sales increase of $714,000 or 45.6% was
primarily due to increased sales to its largest customer. Mask and eye shield
sales decreased by 21.9%, to $1,078,000 for the first quarter 1997 from
$1,381,000 in the first quarter 1996. 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-Registered Trademark- and other
related products which includes a line of pet beds, remained relatively constant
at $627,000 in the first quarter 1997 compared to $639,000 in the same period
1996. The Company's Unreal Lambskin-Registered Trademark- line of products is a
mature line which is no longer an area for significant growth although sales of
pet products are excepted to improve.
COST OF GOODS SOLD Cost of goods sold increased to $2,445,000 for the three
months ended March 31,1997 from $2,299,000 for the same period in 1996. As a
percentage of net sales, cost of goods sold decreased to 61.4% from 64.1%. Gross
profit margin increased to 38.6% for the three months ended March 31, 1997 from
35.9% for the three months ended March 31, 1996.
27
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses increased by $208,000 to $1,323,000 for the three months
ended March 31,1997 from $1,115,000 for the three months ended March 31, 1996.
As a percentage of net sales, selling, general and administrative expenses
increased to 33.2% in the first quarter of 1997 from 31.1% in the same period in
1996. The increase in selling, general and administrative expenses is primarily
in the areas of payroll related costs of $186,000 and travel expenses of
$30,000, offset by a decrease in commission expenses of $17,000. Of the $186,000
increase in payroll related costs, $166,000 is due to the Apparel Division which
had an increase in sales of 45.6%. As a percentage of net Apparel Division
sales, selling, general and administrative expenses for the Apparel division
increased to 22% for the first quarter of 1997 as compared to 20% in the first
quarter of 1996.
DEPRECIATION & AMORTIZATION Depreciation and amortization expense increased
by $12,000, to $70,000 for the three months ended March 31, 1997 from $58,000
for the same period in 1996. This increase is primarily attributable to an
increase in the purchase of equipment through capital leases.
NET INTEREST Interest expense of $81,000 remained the same for the three
months ended March 31, 1997 and 1996. Borrowings were relatively constant for
both of these periods.
INCOME FROM OPERATIONS Income from operations increased by $33,000 to
$147,000 for the three months ended March 31, 1997 from $114,000 for the three
months ended March 31, 1996. The increased income from operations is primarily
due to the increase in gross profit of $253,000 offset by an increase in
selling, general and administrative expenses of $208,000 and an increase in
depreciation and amortization of $12,000
NET INCOME Net Income for the three months ended March 31, 1997 was
$66,000 compared to net income of $46,000 for the three months ended March
31, 1996, an increase of $20,000. The net income increase of $20,000 is
comprised of an increase in income from operations of $33,000 offset by a
decline in other income from 1996 of $13,000.
The Company does not have any pension, profit sharing or similar plans
established for its employees, however, the chief executive officer and
president are entitled to a combined bonus equal to 10% of the pre-tax profits
of the company. No bonus was earned in 1996 or 1997.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS 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 $2,204,000 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-Registered Trademark- and other related
products which includes a line of pet beds, decreased by 18.1% to $2,353,000 in
1996 from $2,873,000 in 1995. The decrease in the Unreal
Lambskin-Registered Trademark- 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-Registered Trademark- 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
29
<PAGE>
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 facilties but there can be no assurance that these improvements
will be attained.
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 & 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 Divison fixed asset additions in
1996 and the amortization of goodwill recorded in connection with the Ludan
acquisition.
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
acquistion 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.
EXCHANGE OF ESCROW SHARES
30
<PAGE>
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 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.
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 $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.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 ProTech, 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 $3,148,000 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
similarily 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.
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 efficiences associated with re-locating shield
manufacturing to Mexico. Gross profit margin for the year ended December 31,
1995 eliminating the re-location 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
32
<PAGE>
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 $86,000. 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 expenses 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
expenses for the Apparel division remained constant at 20% for both 1995 and
1994.
DEPRECIATION & 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.
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
acquistion 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 $5,413,0000 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 expenses of $780,000 less the improved gross profit of
$222,000.
33
<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.
34
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had cash of $1,613,000 and working capital
of $4,451,000. During the three months ended March 31, 1997, cash increased
by $1,338,000 and accounts payable and accrued liabilities decreased by
$647,000. The improvement of the company's cash and working capital is
primarily due to the exercise of warrants and options for a total equity
infusion of $2,191,000. 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
March 31, 1997, the maximum line of credit available was $1,455,000 for
accounts receivable, inventory and equipment.
Net cash used for operations was $766,000 for the three months ended March
31, 1997 and $59,000 for the same period of 1996. The Company's use of cash
from operations for the three months ended March 31, 1997 have been due
primarily to increases in accounts receivable, inventories, prepaid and other
assets and a decrease in accounts payable and accrued liabilities.
The Company's investing activities have consisted primarily of expenditures
for fixed assets and intangible assets which totalled $186,000 for the three
months ended March 31, 1997 and $113,000 for the same period of 1996.
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 the three months ended March 31, 1997, the Company's financing
activities consisting primarily of the exercise of warrants and options, and
increases in the asset based loan of $35,000 and capital leases of $88,000
offset by repayments of borrowings totaling $24,000 which resulted in the net
cash provided by financing activities of $2,290,000.
With the exercise of warrants and options, accounts payable and accrued
liabilities were reduced significantly to a level that is expected to remain
constant. Management believes that it has available cash and borrowings to
finance all known financial commitments for at least 24 months.
35
<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 for 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. Had SFAS 128 been applied to the Company's historical financial
statements, earnings per share would not differ materially from those reported.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 ("Act) provides a safe
haror 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. Such statetements
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.
36
<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; 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 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.
PRODUCTS
The Company's product groups and products are as follows:
Disposable Protective Apparel
*Shoecovers
*Headcovers
37
<PAGE>
*Gowns
*Coveralls
*Lab Coats
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.
38
<PAGE>
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.
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 lightweight, 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
chance 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 tells 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 Products 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.
39
<PAGE>
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 and Minor
*Stuart Drug and 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.
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 business 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 and 46% of
total sales for the three months ended March 31, 1997. The loss of this
customer would have a material adverse effect on its business.
40
<PAGE>
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 shoe cover
facility is located in a leased 26,800 square foot building at 903 West
Center Street, Bldg. E North Salt Lake, Utah. Approximately 3,000 square feet
of this building is used for corporate offices. A 19,500 square foot facility
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 square foot 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 square foot 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.
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 Forth Worth, Texas. Other large competitors would include Minnesota Mining
and Manufacturing Corporation (3M), Johnson & Johnson, 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.
41
<PAGE>
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 Untied
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
ad 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.
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.
42
<PAGE>
EMPLOYEES
As of June 13, 1997, the Company had 583 employees, including eight persons
at its head office in Markham, Ontario, Canada; 28 persons at its facemask
production facility in Salt Lake City, Utah, and 17 persons at its Unreal
Lambskin production facility in Janesville, Wisconsin; 38 persons at its
cutting, warehouse and shipping facility in Nogales, Arizona; 168 persons at
its shield assembly and sewing operation in Nogales, Mexico; 305 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 expires July 31, 1999.
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 ant that other premises, if required, are readily available.
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<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 fort thereafter.
<TABLE>
<CAPTION>
DIRECTOR OR EXECUTIVE
NAME AGE OFFICER SINCE POSITION WITH THE COMPANY
- ----------------------------------------- --- ---------------------- -------------------------
<S> <C> <C> <C>
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
</TABLE>
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 1995 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.
44
<PAGE>
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
from 1981 to the present time has been operating a general dentistry
practice, Ritota and Ritota, with his brother in Del Ray Beach, Florida.
DONALD E. BENNETT, JR. joined the Company on March 24, 1994 as President of
its newly formed Apparel Division which as 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.
45
<PAGE>
SETTLEMENT WITH BRITISH COLUMBIA SECURITIES COMMISSION
On November 10, 1995, Sheldon Hoffman a Director and CEO of the Company and
Alexander W. 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 with 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.
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<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 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.
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS NUMBER OF SHARES
AND 5% SHAREHOLDERS BENEFICIALLY OWNED PERCENT OF CLASS
- ----------------------------- ------------------ ----------------
<S> <C> <C>
Cede & Co. 13,166,377 55.5%
Box 20 Bowling Green Sta.
New York, NY
U.S.A. 10004
Al Millar, President and 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 and 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 Officer 4,037,665 15.6%
as a Group (7 persons)
</TABLE>
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<PAGE>
* This company is nominee for beneficial owners of these shares whose
identity is unknown to the Company.
** Less than 1 %
(1) Includes 300,000 currently exercisable options 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 currently
exercisable options 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 currently exercisable options at
$ 1.34 per share, expiring December 21, 2000; 100,000 currently exercisable
options 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. The trust is irrevocable and 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
currently exercisable options at $ 1.34 per share expiring December 21,
2000; and 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 currently exercisable options at $ 0.75 per share,
expiring October 27, 1998, 25,000 currently exercisable options 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 is pecuniary interest therein.* See "Certain
Transactions."
48
<PAGE>
(6) Includes 100,000 currently exercisable options 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; 6,667 Warrants currently exercisable at
$ .75 per share expiring March 1, 1999*, and 100,000 currently exercisable
options at $ .97 per share, expiring January 4, 2002.*
(7) Includes 100,000 currently exercisable options 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 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 23,730,116 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
25,848,116 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.
49
<PAGE>
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 matters 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
Directors 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 Company ("Outside
Directors") are reimbursed for their direct expenses incurred in attending a
meeting. In addition, pursuant to the Company's 1993 Stock Option Plan for
Directors (the "Directors Plan"), the Company has reserved 1,000,000 shares
of its Common Stock for Directors who are not employees of the Company or any
of its subsidiaries. The Board of Directors or a committee thereof
administers the Directors Plan to award options, determine the option
exercise price (at a price not less than the fair market value of the Common
Stock when granted) and fix the vesting schedule and other terms thereof.
During 1996, no options were awarded under the Directors Plan. See "Directors
Stock Option Plan".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Membership of the Compensation Committee consists of the entire Board of
Directors of the Company. 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.
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 2,475,000 shares of 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 which are held in
escrow by the National Trust Company, Vancouver, B,.C. See "Certain
Transactions - Exchange of Escrow Shares."
50
<PAGE>
EXECUTIVE COMPENSATION
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
$100,000 in salary and bonus ("Named Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- -----------------------------
<CAPTION> OTHER SHARES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS COMPENSATION OPTIONS # COMPENSATION ($)
- ---------------------------------------------- --------- ------------ ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Sheldon Hoffman............................... 1996 141,000 -- -- -- 4,500(1)
CEO........................................... 1995 115,000 -- -- 200,000 4,500(1)
1994 100,000 -- -- -- 4,500(1)
Al Millar..................................... 1996 131,000 -- -- -- 7,500(2)
President..................................... 1995 115,000 -- -- 200,000 7,500(2)
1994 100,000 -- -- -- 7,500(2)
</TABLE>
- ------------------------
(1) Represents annual car allowance
(2) Represents annual car allowance
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.
51
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth, for each person named in the Summary
Compensation Table above, information regarding the exercise of stock options
during the fiscal year ended December 31, 1996 and the year-end value of
unexercised options. No options were exercised by the Named Executive
Officers during 1996:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
--------------------------------------- IN-THE-MONEY
SHARES OPTIONS AT YEAR-END OPTIONS AT YEAR END(1)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sheldon Hoffman................... 0 $0 500,000 0 $37,500 $0
Al Millar......................... 0 $0 500,000 0 $37,500 $0
</TABLE>
- ------------------------
(1) Calculated on the basis of the fair market value of the Common Stock at
December 31, 1996 of $.875 per share, minus the per share exercise price,
multiplied by the number of shares underlying the option.
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 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 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. Scheerer 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.
52
<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:
<TABLE>
<CAPTION>
ACTUAL EARNINGS NUMBER OF
AS A % OF PROJECTED EARNINGS OPTIONS
- ----------------------------- -----------
<S> <C>
80%........................................ 60,000
90%........................................ 80,000
100%........................................ 100,000
</TABLE>
STOCK OPTION 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 on 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. No options were
granted in 1996. At the Company's Annual Meeting of Shareholders held on June
20, 1997, shareholders approved an increase in the number of shares reserved
for grant to 3,000,000.
Included in those employees to whom options were granted are the
following executive officers:
<TABLE>
<CAPTION>
NAME NUMBER OF OPTIONS GRANTED
- ------------------------------------------------------------------- -------------------------
<S> <C>
Al Millar, President............................................... 500,000
Sheldon Hoffman, CEO............................................... 500,000
Donald Bennett, President.......................................... 150,000
Apparel Division
</TABLE>
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.
53
<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, 1995 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:
<TABLE>
<CAPTION>
NAME OPTION DATE EXPIRATION DATE NUMBER OF SHARES
- ------------------------------------------------------- ----------- --------------- -----------------
<S> <C> <C> <C>
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 06/22/2000 25,000
Jim Rothstein***....................................... 12/22/95 12/21/2000 25,000
</TABLE>
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
54
<PAGE>
CERTAIN TRANSACTIONS
Transactions with Management and Others
As of January 31, 1996 Messrs. Millar and Sheldon Hoffman loaned $ 48,245
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 aggregating $98,245 and
accrued interest aggregating $15,503 were repaid in the first quarter of 1997.
Exchange of Escrow Shares
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
secretes, 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.
55
<PAGE>
"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;
(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.
The shareholders participating on 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 which 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 if 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
56
<PAGE>
rights and privileges of the Exchanging Shareholders nor increase their
beneficial ownership nor would there be 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.
Simultaneously, there was a credit (increase) to paid in capital resulting in
shareholders equity remaining unchanged.
The Escrow Agreement also provides that the shares 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 escrow terms did 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 as at December 31, 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.
The issuance of the shares has the effect of permitting the Escrowees to
alienate their shares at such time as they were issued to the Exchanging
Shareholders. As to Messrs. Hoffman and Millar, pursuant to the above
referenced settlement with 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 Escrow 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
57
<PAGE>
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 of 1933, and the shares issued in this transaction are subject
to Rule 144 other than for the one year holding period. In general, 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.
58
<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
NATURE OF NUMBER OF SHARES
BENEFICIAL PERCENT OF OF SHARES TO BE OWNED PERCENT OF
NAME OWNERSHIP(1) CLASS (5) TO BE SOLD AFTER 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 2.0 416,666 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....................................... 40,887 * 40,887 0 0
Michael Morissett............................... 80,000 * 30,000 50,000 *
William Lykken (4).............................. 695,000 3.5 285,000 410,000 1.7
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
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>
59
<PAGE>
- ------------------------
* 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 least 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. 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 "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.
60
<PAGE>
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"), 2,475,000
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 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 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 a current prospectus covering the Warrrants
or the shares of Common Stock issuable upon exercise of such Warrant is then
in effect.
Transfer and Warrant Agent
The transfer agent for the Common Stock and Warrants is American Stock
Transfer and Trust Company, New York, New York.
61
<PAGE>
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 duly called meeting of
stockholders or by 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.
62
<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.
63
<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.
64
<PAGE>
In June, 1996, an action was commenced against the Company in the
Superior Court of the State of Arizona, in 2and 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. The matter is still in the early stages of litigation,
and the Company 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 Feiler & Landau, 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.
65
<PAGE>
ALPHA PRO TECH, LTD.
INDEX TO FINANCIAL STATEMENTS
UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
1996.
Consolidated Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996................................................... F-2
Consolidated Statements of Operations for three months ended
March 31, 1997 and 1996 (unaudited)..................................... F-3
Consolidated Statement of Shareholders' Equity for three months
ended March 31, 1997 (unaudited)........................................ F-4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 (unaudited)..................................... F-5
Notes to Consolidated Financial Statements (unaudited).................... F-6
AUDITED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996.
Report of Independent Accountants........................................ F-8
Consolidated Balance Sheets at December 31, 1996 and 1995................ F-9
Consolidated Statements of Operations for the three years ended
December 31, 1996...................................................... F-10
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1996................................................ F-11
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996...................................................... F-12
Notes to Consolidated Financial Statements............................... F-14
F-1
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash.................................. $ 1,613,000 $ 275,000
Marketable securities--restricted..... 22,000 39,000
Accounts receivable, net of allowance
for doubtful accounts of $122,000
and $122,000........................ 2,234,000 2,170,000
Income taxes receivable............... 5,000 5,000
Inventories........................... 3,136,000 2,942,000
Prepaid expenses and other assets..... 254,000 183,000
---------- ----------
7,264,000 5,614,000
Property and equipment, net of
accumulated depreciation and
amortization of $899,000 and
$836,000.............................. 1,729,000 1,615,000
Intangible assets, net of accumulated
amortization of $62,000 and $55,000... 221,000 219,000
Other................................... 33,000 33,000
---------- ----------
$ 9,247,000 $ 7,481,000
---------- ----------
---------- ----------
Liabilities & Shareholders' Equity
Current liabilities:
Accounts payable...................... $ 1,091,000 $ 1,600,000
Accrued liabilities................... 509,000 647,000
Due to related parties................ 19,000 19,000
Notes payable, current portion........ 7,000 31,000
Loans payable, current portion........ 1,129,000 1,081,000
Capital leases, current portion....... 58,000 36,000
---------- ----------
2,813,000 3,414,000
Loans payable, less current portion..... 99,000 112,000
Capital leases, less current portion.... 171,000 105,000
---------- ----------
3,083,000 3,631,000
---------- ----------
Shareholders' equity:
Common stock, $.01 par value, 50,000,000
shares authorized, 23,730,116 and
20,755,463 issued and outstanding at
March 31, 1997 and December 31, 1996 237,000 207,000
Additional paid-in capital............ 23,874,000 21,656,000
Accumulated deficit................... (17,947,000) (18,013,000)
---------- ----------
6,164,000 3,850,000
---------- ----------
$ 9,247,000 $ 7,481,000
---------- ----------
---------- ----------
</TABLE>
F-2
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statements of Operations (Unaudited)
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
For the three months
ended March 31,
-------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Sales................................... $3,985,000 $3,586,000
Cost of goods sold, excluding
depreciation.......................... 2,445,000 2,299,000
----------- -------------
1,540,000 1,287,000
Expenses
Selling, general and administrative..... 1,323,000 1,115,000
Depreciation and amortization........... 70,000 58,000
----------- -------------
Income from operations.................. 147,000 114,000
Interest.............................. 81,000 81,000
Other................................. 0 (13,000)
----------- -------------
81,000 68,000
----------- -------------
Income before provision for income
taxes................................. 66,000 46,000
Provision for income taxes.............. 0 0
------------ -------------
Net Income.............................. $66,000 $46,000
------------ -------------
------------ -------------
Net Income per share.................... $ 0.00 $ 0.00
------------ -------------
------------ -------------
Weighted average number of shares
outstanding........................... 22,216,718 19,963,963
------------ -------------
------------ -------------
</TABLE>
F-3
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statement of Shareholders' Equity (Unaudited)
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Additional Accumulated
Shares Stock Paid-In Capital Deficit Total
---------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996...... 20,755,463 207,000 $21,656,000 $(18,013,000) $3,850,000
Stock issued for
cash.................... 2,974,653 30,000 2,161,000 2,191,000
Options/warrants
issued for services.... 57,000 57,000
Net Income............... 66,000 66,000
---------- --------- ----------- ------------- -----------
Balance at
March 31, 1997........ 23,730,116 $237,000 $23,874,000 $(17,947,000) $6,164,000
---------- --------- ----------- ------------- -----------
---------- --------- ----------- ------------- -----------
</TABLE>
F-4
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statements of Cash Flows (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
Operating Activities:
Net Income....................................... $66,000 $46,000
Adjustments to reconcile net income to cash
used for operating activities:
Depreciation and amortization.................. 70,000 58,000
Changes in assets and liabilities:
Accounts receivable........................... (64,000) (247,000)
Marketable securities......................... 17,000 (3,000)
Inventories................................... (194,000) (135,000)
Prepaid and other assets...................... (14,000) 8,000
Accounts payable and accrued liabilities...... (647,000) 214,000
----------- ----------
Net cash provided by (used for) operating
activities:..................................... (766,000) (59,000)
----------- ----------
Investing Activities:
Purchase of property and equipment............ (177,000) (96,000)
Purchase of intangible assets (9,000) (17,000)
----------- ----------
Net cash used for investing activities (186,000) (113,000)
----------- ----------
Financing Activities:
Issuance of common stock(1)................... 2,191,000 153,000
Net proceeds (payments) on loans payable...... 35,000 (3,000)
Net proceeds (payments) on notes payable...... (24,000) 73,000
Net proceeds (payments) on capital lease...... 88,000 (6,000)
----------- ----------
Net Cash provided by financing activities........ 2,290,000 217,000
----------- ----------
Increase (decrease) in cash during the period.... 1,338,000 45,000
Cash, beginning of period........................ $275,000 $344,000
----------- ----------
Cash, end of period.............................. $1,613,000 $389,000
----------- ----------
</TABLE>
- -----------------
(1) Non-cash item:
Options and warrants with fair values totalling $57,000 were issued to
consultants for future services. This is reflected on the Cash Flow
Statement as a deduction in common stock and prepaid expenses.
F-5
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
1. The Company
Alpha Pro Tech, Ltd. (the Company) manufactures and distributes a variety
of disposable mask, shield, shoe cover, and apparel products, and woundcare
products. Most of the Company's disposable apparel, mask and shield
products, and woundcare products are distributed to medical, dental,
industrial, and clean room markets, predominantly in the United States.
2. Basis of Presentation
The unaudited interim financial statements reflect all adjustments which
are in the opinion of management necessary for a fair presentation of the
results for the interim period presented. All such adjustments made are
of a normal recurring nature.
There have been no significant changes since December 31, 1996 in accounting
principles and practices utilized in the presentation of these financial
statements.
3. Inventories March 31, December 31,
1997 1996
----------- -------------
Raw Materials................ $1,666,000 $1,511,000
Work in process.............. 109,000 76,000
Finished goods............... 1,361,000 1,355,000
--------- ---------
3,136,000 2,942,000
--------- ---------
--------- ---------
4. Accrued liabilities March 31, December 31,
1997 1996
----------- -------------
Professional fees............ $226,000 $286,000
Payroll and payroll taxes.... 187,000 203.000
Other........................ 96,000 158,000
----------- -------------
$509,000 $647,000
----------- -------------
----------- -------------
F-6
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
5. Notes Payable March 31, December 31,
1997 1996
----------- ------------
Note payable due in monthly installments
of $1,500, interest at 8.0%, maturing
July 31, 1997............................... $5,000 $9,000
Notes payable due in monthly installments
balance due in April, 1997.................. 2,000
Notes payable to related parties, interest
at 6% payable monthly with the remaining
balance due on March 31, 1997............... 14,000
Notes payable to related parties, interest
at 20% payable quarterly, due on demand..... 8,000
------------
$7,000 $31,000
----------- ------------
Less: Current portion...................... $7,000 $31,000
----------- ------------
Notes Payable, less current portion........... $ -- $ --
----------- ------------
6. Net Income per share
Net income per share of common stock is based on the weighted average number
of shares of common stock outstanding during the quarter. Common stock
equivalents have been excluded from the earnings per share calculation as no
material dilutive effect would result.
7. Provision for Income Tax
No provision for income tax has been recorded in the Statement of
Operations for the three months ended March 31, 1997, as taxable income has
been eliminated as a result of the utilization of net operating loss carry
forwards.
F-7
<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-8
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-9
<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-10
<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-11
<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
------------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-12
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
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.......................................... $ -- $ -- $ --
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
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-13
<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-14
<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:
<TABLE>
<S> <C>
Factory equipment................................................ 9-20 years
Office furniture and equipment................................... 7 years
Leasehold improvements........................................... 4-6 years
Vehicles......................................................... 5 years
</TABLE>
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-15
<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-16
<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:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
4. Property and equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Machinery and equipment........................................... $ 2,042,000 $ 1,590,000
Office furniture and equipment.................................... 334,000 302,000
Leasehold improvements............................................ 75,000 67,000
------------ ------------
</TABLE>
F-17
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
2,451,000 1,959,000
Less accumulated depreciation and amortization.................... (836,000) (609,000)
------------ ------------
$ 1,615,000 $ 1,350,000
------------ ------------
------------ ------------
</TABLE>
Included in the above amounts are the following assets under capital lease
obligations:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
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:
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
F-18
<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-19
<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
July 31, 1996................................ $ -- $ 41,000
Note payable due in monthly installments
of $1,500, interest at 8.0%, maturing
July 31, 1997................................ 9,000 26,000
Note payable due in monthly installments
of interest at 6%, with the remaining
$4,000, 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-20
<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-21
<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:
<TABLE>
<CAPTION>
Exercise Price
Shares per Warrant
---------- ----------------
<S> <C> <C>
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 lenders................................... 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.
</TABLE>
F-22
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
Option activity for the three years ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Average
Exercise Price
Shares per Option
---------- ---------------
<S> <C> <C>
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
---------- ---------------
---------- ---------------
</TABLE>
The following summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
Exercise Average Average
Price Shares Price Term
---------------------------------------- ---------- ------------- ----
<S> <C> <C> <C>
$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
</TABLE>
All but 60,000 of the above options are exercisable at December 31, 1996.
The following summarizes the number of options and warrants issued for
services and the respective values assigned for the three years ended
December 31, 1996:
Shares Value
---------- ----------
1994
Options issued for services............... 1,302,500 $70,000
Warrants issued for services.............. 1,064,999 62,000
1995
Options issued for services.............. 540,000 56,000
Warrants issued for services............. 257,000 44,000
1996
Options issued for services (value
includes extension of exercise date for
55,000 options).......................... 19,000 22,000
Warrants issued for services (value
includes extension of exercise date for
119,048 warrants)........................ 214,432 46,000
F-23
<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-24
<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,
---------------------------------------
<S> <C> <C> <C>
1996 1995 1994
----------- ------------- -----------
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-25
<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:
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
For Canadian income tax purposes, these losses will expire as follows:
<TABLE>
<S> <C>
1997............................................................ $ 109,000
1998............................................................ 1,010,000
1999............................................................ 357,000
2000............................................................ 1,729,000
----------
$3,205,000
----------
----------
</TABLE>
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-26
<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:
<TABLE>
<CAPTION>
Year ending Capital Operating
December 31, Leases Leases
------------ ------- ---------
<S> <C> <C>
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
--------
--------
</TABLE>
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-27
<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:
<TABLE>
<CAPTION>
<S> <C>
Inventories........................ $105,000
Prepaid expenses................... 30,000
Machinery and equipment............ 228,000
Accounts payable and accrued
liabilities....................... (27,000)
--------
$336,000
--------
--------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
1994
------------
<S> <C>
Revenue............................. $12,574,000
------------
------------
Loss for the year.................... $ (671,000)
------------
------------
Loss per common share................ $ (0.05)
------------
------------
</TABLE>
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-28
<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:
<TABLE>
<S> <C>
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)
---------
---------
</TABLE>
F-29
<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-30
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following expenses are estimated:
<TABLE>
<S> <C>
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
</TABLE>
* 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, Certificate of
Incorporation, 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 by 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
hem 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
<TABLE>
<S> <C> <C>
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***
(c) 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
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
(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)****
</TABLE>
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 bona
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>
(4) 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
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is 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 by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling procedent, 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.
II-7
<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 , 1997.
ALPHA PRO TECH, LTD.
---------------------------
BY: Sheldon Hoffman
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:
- --------------------------- -----------------------
SHELDON HOFFMAN, ALEXANDER W. MILLAR,
Chief Executive Officer President and Director
Principal Financial Officer Date: , 1997
and Director
Date: , 1997
- --------------------------- -----------------------
JOHN RITOTA, Director ROBERT ISALY, Director
Date: , 1997 Date: , 1997
- --------------------------- -----------------------
LLOYD HOFFMAN DONALD E. BENNETT, JR.
Vice President and Controller Director
Principal Accounting Officer Date: , 1997
Date: , 1997
II-8
<PAGE>
EX-24.(a)
Consent of Independent Accountants
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
July 21, 1997
